江森自控 (JCI) 2014 Q3 法說會逐字稿

Welcome to the Tyco Third-Quarter Earnings Conference Call.

All participants have been placed on a listen-only mode until the question-and-answer session.

(Operator Instructions)

Today's call is being recorded.

If you have any objections, please disconnect at this time.

I will now turn the call over to Antonella Franzen, Vice President of Investor Relations.

You may begin.

Good morning, and thank you for joining our conference call to discuss Tyco's third-quarter results for fiscal year 2014, and the press release issued earlier this morning.

With me today are Tyco's Chief Executive Officer George Oliver, and our Chief Financial Officer Arun Nayar.

I would like to remind you that during the course of today's call we will be providing certain forward-looking information.

We ask that you look at today's press release and read through the forward-looking cautionary informational statement that we have included there.

In addition we will use certain non-GAAP measures in our discussions, and we ask that you read through the sections of our press release that address the use of these items.

The press release issued this morning and all related tables, as well as the conference call slides which Arun will refer to, can be found on the Investor Relations portion of our website at on the investor relations portion of our website at Tyco.com.

Please also note that we will be filing our quarterly SEC Form 10-Q later today.

During the fiscal third quarter, the Company decided to sell certain businesses previously reported within the rest of world installation and services operating segment.

These businesses generated $41 million of revenue in FY13 with an operating loss of $11 million.

Current and historical results related to these businesses are now classified as discontinued operations.

Re-casted financial information for the quarters of FY13, as well as the first fiscal quarter and second quarters of 2014, are attached to today's press release.

In discussing our segment operations, when we refer to changes in backlog and order activity, these figures exclude the impact of foreign currency.

Additionally, references to operating margins during the call exclude special items, and this metric is a non-GAAP measure, and is reconciled in the schedule attached to our press release.

Now let me quickly recap this quarter's results.

Revenue in the quarter of $2.7 billion increased 5% over the prior year.

Organic revenue growth of 4%, and a 2% benefit from acquisitions, were partially offset by the impact of divestitures.

Earnings per share from continuing operations attributable to Tyco common shareholders was $0.93, and included a net benefit of $0.39 related to special items.

These special items related primarily to a gain on the sale of our remaining minority interest in Adcor International, partially offset by restructuring and repositioning charges.

Earnings per share from continuing operations before special items was $0.54.

Now let me turn the call over to George.

Thanks Antonella, and good morning everyone.

Overall this was a very good quarter for Tyco.

The uplift in revenue we started to see last quarter has continued, resulting in 4% organic growth.

This was driven by very strong performance in products, coupled with continued growth in service, and supplemented with increased installation revenue for the second consecutive quarter.

Additionally, the momentum in margin expansion continues, with a record high segment operating margin before special items of 14.5%.

This represents an 80-basis-point improvement year-over-year.

The investments we have made to expand our product capabilities, combined with continued improvement in operational execution, drove a 17% increase in earnings per share before special items.

Before I give a brief overview of the performance from each of our segments, I wanted to spend a few minutes on the general economic environment, and what we are seeing geographically in our larger regions.

Starting with North America, demand seems to have picked up a bit from last quarter.

Quoting activity has clearly accelerated, particularly in fire.

We are seeing the impact of that in our North America order rates.

Let me spend a little bit of time on conversion cycles.

Within the fire and security industry, fire is earlier cycle than security.

We get involved in the very early stages of a new building with the architects and contractors.

This is long before the actual construction of the building commences.

Not only is there a lead time to developing an order, but on the fire side of the business there is a longer cycle time from when we receive an order to when the order is converted to revenue.

As each project is different, the cycle time in converting orders to revenue does vary greatly, but averages nine to 12 months.

On the security side, the timing in conversion of orders to revenue is very different.

Typically we are dealing with the end customer, say the tenant in the building, as the security features such as intrusion, access control, and video will be based on the needs of the tenants.

On the security side we typically don't start to see the orders until the construction of the new building is nearing completion.

Unlike fire, these orders tend to convert to revenue much quicker.

Again it does depend -- vary project to project, but I would say orders convert on average in a three- to six-month time frame.

Continuing on to Europe, I would say the environment has been somewhat mixed.

In the UK we are beginning to see a slight pick-up in activity.

As part of our transformation to an operating Company, we have streamlined our business in the UK, and have put the fire and security teams together under one leader.

I recently spent time with our team in the UK, and I can say they are executing very well.

The work we have done over the last few years, coupled with the streamlined structure we have in place, has significantly improved the business performance.

The UK consistently performs at or above the average of our other installation services businesses.

We are well positioned to be able to capitalize on the recovering economy in that region.

On the other hand, the environment in continental Europe continues to be sluggish.

Here too we have streamlined the organization under one leader.

Additionally, we have recently made a number of key leadership changes, and are continuing to execute on various other productivity initiatives.

On a relative basis, were are performing pretty well, but at this point I wouldn't expect continental Europe to be a significant contributor to growth.

Moving on to Australia, the softness in mining over the last 12 months to 18 months has certainly had a big impact on the overall economy, including the commercial, industrial, and institutional space.

I am somewhat optimistic that we are beginning to see some improvement.

Although we expect revenue to decline year-over-year for the remainder of FY14, the operating margin has stabilized, given the many actions taken by the team to maintain the fundamentals of the business.

Given order activity in the quarter, which included three sizable wins within the health care, transportation, and oil and gas verticals I feel that we will be well positioned to deliver growth in this region in FY15.

Lastly, the Asian market is very attractive for us.

We have seen a nice pick-up in the commercial, petrochemical, oil and gas, and hospitality verticals.

This region serves as a nice platform for growth for us, and it's important to keep in mind that in most of these countries we are starting off with a relatively small position.

Turning to the performance of our businesses for the quarter, our North America installation and services segment delivered another solid quarter.

Both service and installation contributed to organic revenue growth in the quarter, and our continued full focus on going after the right end markets have played to our strengths, coupled with our productivity initiatives, drove the strong year-over-year operating margin improvement.

In the rest of world installation and services segment, despite some macro pressures we are seeing in particular regions, which I spoke to earlier, the teams delivered 2% organic growth, driven by Asia and our other growth markets.

Moving on to global products, we had a very strong order from both a top line and operational perspective.

All three platforms contributed to the double-digit organic growth, led by life safety.

As you may recall, we received approval from the National Fire Protection Association for our new Scott Air-Pak X3 in late March.

We had been building backlog in anticipation of the approval, and were able to convert that backlog to revenue in the third quarter.

This coupled with a very strong performance in security products and fire protection products resulted in our highest revenue and operating margin quarter.

Overall, I would summarize our third-quarter performance as very strong.

I am proud of our teams across the globe for not only delivering strong operational results, but for all of their efforts in transitioning from a holding Company to an operating Company.

Over the last two years, we have made numerous Management changes, realigned organizational structures, and are in the process of transforming many functional areas.

As we all know, change is not easy.

Despite this, we have continued to deliver quarter after quarter, and we are well positioned to deliver on our three-year EPS CAGR of 15% through FY15.

Turning to capital allocation, we completed the previously announced divestiture of ADT Korea in the sale of our remaining minority interest in Adcor International during the third quarter.

As I outlined during the last quarterly earnings call, the $2.2 billion in proceeds we received from these two transactions are being quickly put to work returning capital to shareholders via share repurchases.

Over the last three months we have repurchased 20 million shares for $876 million, and we expect to continue repurchasing shares throughout the remainder of this fiscal year.

In total, we continue to target 30 million shares being repurchased in the second half of FY14.

It is important to note that while the benefits of share repurchases is being utilized to offset the $0.20 dilution from the divestitures, this does not prevent us from continuing to pursue acquisitions.

Our ability to utilize our strong balance sheet, in addition to our free cash flow generation, gives us this flexibility.

During the quarter we completed the acquisition of a commercial and residential security business in Belgium, and reached a definitive agreement to purchase a residential security business in Brazil for a total of approximately $45 million.

On an annualized basis, these businesses are expected to generate revenue of approximately $35 million.

These acquisitions are good bolt-ons, can easily be integrated, and are quickly accretive as they help to build scale within these regions.

The strength of these businesses, when combined with our existing platforms, position us well to meet the security needs of our customers.

Additionally, technology and innovation are the future of our Company.

We pride ourselves on being a technology leader.

In addition to incremental organic investments in R&D and technology acquisitions, we consistently look for opportunities where our technology and innovative solutions and services can provide near- and long-term proven value for customers' strategic objectives and growth initiatives.

This week we announced our successful RFID inventory visibility project with Inditex, the largest apparel retailer in the world.

At the start of the pilot, Inditex was looking for a technology solution to optimize their inventory controls, improve in-store processes, and increase loss-prevention measures.

Since we partnered with Inditex to implement this solution, Inditex has been able to leverage our products and RFID technology in 700 stores across 22 countries to deliver a significant operational value.

Our RFID technology solutions enabled real-time accurate merchandise insights across all stores, allowing Inditex to better accommodate their customer needs online and in store locations, enhancing their customers' shopping experience.

This is one of many examples where we are committed to providing our customers with differentiated products and services, focus on solving their most critical needs, and equipping them with technology solutions and future services that can be leveraged to provide additional value as their business needs evolve and grow.

Let me turn it over to Arun to go through the details of our quarterly performance.

Thank you George, and good morning everyone.

You can follow my comments on our financial performance starting with Slide 4. Let me start with an overview of our results for the third quarter.

Revenue of $2.7 billion grew 5% year-over-year.

Organic revenue grew 4%, which is the highest organic revenue growth quarter since separation, with all three segments contributing to this growth.

Products grew 12%, service grew 1%, and installation revenue growth accelerated to 2%, from the 1% growth we saw last quarter.

Acquisitions contributed 2 percentage points of growth, and were partially offset by a 1 percentage point head wind related to divestitures.

Before special items, segment operating income increased 11% to $386 million, and the operating margin improved 80 basis points year-over-year to 14.5%.

Higher revenue improved execution, and the benefits from sourcing, productivity, and restructuring initiatives drove the operating margin improvement.

Overall, earnings per share before special items increased $0.08, or 17% year-over-year, with operations contributing $0.07 of the increase.

Orders in the quarter grew 3% year over year, with 3% growth in service, 4% growth in installation, and 3% growth in products.

As you know, the year-over-year percentage change in orders is impacted by the timing of large installation orders, which can skew the year over year comparisons.

A better indicator of future top-line performance is backlog, which increased 3% year-over-year to $5 billion.

On a quarter sequential basis, backlog was flat, as we shipped a significant amount of new X3 Air-Paks, which have been building in backlog over the last couple of quarters.

Given the seasonality of our business, backlog normally grows sequentially in the first, second, and third quarter.

We typically see a seasonal decline in backlog in the fourth quarter, as a significant amount of electronic fire upgrade work is performed in schools during the summer break.

We expect this trend to continue in the fourth quarter of this year, as well.

Now let's get into the details of each of the segments, starting first with North America installation and services on Slide 7. Revenue in the quarter of $968 million was flat on a reported basis, as organic revenue growth and the benefit of the West Fire acquisition were offset by the divestiture of our Canadian guarding business, and unfavorable changes in the Canadian dollar exchange rate.

Service revenue grew 1% and the installation revenue turned positive, with 1% growth, for total organic revenue growth of 1% in the quarter.

Before special items, operating income in the quarter was $134 million, and the operating margin of 13.8% increased 170 basis points year-over-year.

Improved execution and the benefits of restructuring and productivity initiatives drove the operating margin improvement year-over-year.

Overall, orders grew 5% year-over-year in North America installation and services, with service orders increasing 2%, and installation orders increasing 9%.

As I mentioned earlier, order rates can be lumpy, particularly in the installation business, and can fluctuate from quarter to quarter.

For example, this quarter was favorably impacted by several large orders, both in fire and in security.

Key verticals contributing to the installation order growth included retail, oil and gas, government, and the general commercial space.

Backlog is the key indicator of future revenue growth.

In the third quarter, backlog in North America installation and services reached $2.5 billion.

This represents a 1% increase on both a quarter sequential basis and year-over-year.

Turning to Slide 8, rest of world installation and services, revenue of $1 billion grew 3% year-over-year.

Service revenue grew 1% and installation revenue grew 4%, for a total organic revenue growth of 2% in the quarter.

Increased revenue in Asia and our other growth markets was partially offset by a decline in Australia.

Acquisitions contributed an additional 3 percentage points to growth, and divestitures negatively impacted growth by 2 percentage points.

Before special items, operating income was $112 million, and the operating margin declined 30 basis points year over year to 11.2%.

The benefits of ongoing productivity initiatives were more than offset by the mix of businesses contributing to growth, as well as a lower percentage of higher-margin service revenue.

In the third quarter, overall orders increased 1.5% year-over-year in rest of world installation and services.

A 4% increase in service orders was offset by a 1% decline in installation orders, driven by a tough compare with the prior year.

Backlog of $2.3 billion increased 8% year-over-year, and was flat on a quarter sequential basis.

Turning to global products on Slide 9. Revenue was 15.5% in the quarter, including a 3% benefit from the acquisition of Exact Technologies to $693 million.

Organic revenue grew 12%, with strong growth across life safety, security, and fire protection products.

About five percentage points of growth was related to the timing of shipments of the new Scott Air-Pak X3.

Operating income before special items was $140 million, and the operating margin expanded 40 basis points to 20.2%.

Leverage from increased revenue, as well as productivity benefits, drove the operating margin expansion.

This was partially offset by the timing of incremental investments in R&D, and a head wind from non-cash purchase accounting related to the acquisition of Exact Technologies, which together impacted the operating margin by 150 basis points.

The better-than-expected revenue growth stemmed from a somewhat different mix within the business platforms than we had anticipated, which resulted in an operating margin before special items being slightly below our guidance of 20.5%.

Now let me touch on a few other items on Slide 10.

Corporate expense before special items was $58 million for the quarter, and our effective tax rate for the quarter before the impact of special items was 16.9%.

As George mentioned, we started repurchasing shares during the third fiscal quarter, resulting in the weighted average diluted share count of 466 million shares.

We expect to continue repurchasing shares for the rest of the fiscal year, resulting in a weighted average diluted share count of approximately 450 million shares for the fourth quarter, and 465 million shares for the full year.

We expect to exit the year with a diluted share count of approximately 442 million shares.

Now let me turn things back over to George.

Thanks Arun.

Let's turn now to our earnings per share guidance for the fourth quarter, and what that implies for the full year.

We expect revenue in the fourth quarter of approximately $2.73 billion, with organic revenue growth of approximately 3%, and a modest tailwind from favorable changes in foreign currency exchange rates.

We expect continued solid operational execution off a very strong fourth quarter of last year.

Year-over-year, operations are expected to contribute about $0.05 per share of incremental earnings.

Below-the-line items are expected to contribute an additional $0.03 per share, driven by a lower share count.

As a result, we expect earnings per share before special items in the fourth quarter to be in the range of $0.54 to $0.56.

As Arun mentioned, this is based on a weighted average diluted share count of 450 million shares.

This represents a 15% to 19% increase in earnings per share year-over-year, compared to last year's fourth quarter re-casted earnings of $0.47 per share.

With that, we are tightening our full-year guidance range to the high end of our previous estimate of $1.93 to $1.97, and adding a $0.01 benefit related to the discontinued operations report this quarter.

Our revised full-year guidance range is now $1.96 to $1.98 per share, which represents an 18% to 19% increase year-over-year, off a re-casted base of $1.66 per share in FY13.

Thanks for joining us on the conference call this morning.

With that, operator, please open the lines for questions.

Thank you.

(Operator Instructions)

Steven Winoker, Sanford Bernstein

Just on Australia, would you mind clarifying how much does that -- was the impact on the quarter?

Then how does it play into that fourth-quarter guidance of $0.54 to $0.56 you just gave us?

Australia, Steve, as you know is about 20% of our rest of world revenues.

In the quarter the Australian revenues dropped to just in the high single digits year on year.

Our expectation is that as we go into Q4, the drop -- the decline, so it's a declining drop, with the order intake that George referred to in the quarter, we expect that when we go into 2015 we will start to pick up -- we'll start to see the pick-up in our revenue.

Okay.

When you go into FY15 then, that pick-up, is it as early as Q1 or are you thinking more like later in the year for that?

I think Steve, it's going to be flat in the first half and start growing in the second half of FY15.

Okay, great.

George, on -- I'm sorry.

A comment on that, Steve.

We are very optimistic, given the type of projects that we're now in the process of developing, and with the most recent wins that we've had, gives us confidence that we are going to be positioned to be able to deliver growth in 2015.

Okay, great.

Then on the M&A front, George, you talked about that the buy-back was not injuring your ability to move forward on that strategically, and you mentioned Belgium and Brazil deals.

How should we think about that in terms of the kinds and size of the deals from here, your willingness to leverage the Company for a short-term basis to drive some opportunistically, what you're seeing on that front, maybe some help?

Yes Steve, we stay very focused on our priorities, the four priorities that we laid out when we launched the new Company.

Those priorities our technology, number one, continuing to expand our product portfolio, looking to expand our footprint within the high-growth markets, and then being positioned to be able to accelerate service growth.

What I'd say is that when you look at our capital that we have today, our confidence in our earnings being able to continue to increase, and then the cash flow conversion gives us a lot of confidence to be able to continue the buy-backs while we're continuing to support the M&A.

Now the deals that we are looking at today -- we have currently I would say six that are very active.

They range from small technology deals that complement the R&D that we're developing in house, and then they go up to roughly about $200 million that could be potential product acquisitions and/or bolt-ons within our installation and service space.

Certainly the focus is making sure that we've got acquisitions that complement what we're doing and have strategic value, focusing on the converging market dynamics; technology's a big deal, and then making sure that we're going to be positioned to be able to solve our customers' problems while we're positioning to grow.

We are -- we've had to walk away from a couple of deals because of price, as well as, as you get into diligence sometimes things aren't just right; but at the end the day we still feel pretty good about our ability to be able to execute M&As.

Okay, great.

I will pass on.

Thanks.

Thanks Steve.

Nigel Coe, Morgan Stanley Deane Dray, Citi Research

First a clarification.

On the products business 12% organic revenue, was that skewed at all by the shipping of all those backlogged Scott Air-Paks?

Yes.

We talked about the 12% growth.

We had very strong performance across all three of our platforms in the quarter.

About 5% of that growth was recovery of the backlog that we built up within our Scott safety business with the X3; but overall even without that we had strong performance across all three platforms.

Similarly, was the margin improvement, the 170 basis points, how much of that might have been because you built the Air-Paks back in the second quarter and took cost -- did you take cost against those?

Was there a bump in margin because of that shipment as well, or did that not impact margins?

No, when you look at our three platforms, we had very strong margins across all three.

Certainly there's a little bit of a higher mix there.

But overall, when you look at the increased revenue that we achieved, it was driven by life safety.

What I would say is that even with that, we were able to offset about 150 basis points of increased investment, as well as the non-cash purchase accounting that was tied to our exact acquisition.

Overall, we continue to perform very well; and we're confident with the investments we're making we'll be able to continue this type of performance going forward.

Great.

Last questions for me relate to the two deals, the Belgian and Brazil businesses.

These are very different from the bolt-on technology assets that you have gone after, back into some of the more traditional installation and services.

How do they stack up in terms of the traditional deal metrics that we would look at, ARPU, multiples of monthly revenue, and so forth?

Deane, first of all we have been looking at these kinds of transaction, so if you look at five or six transactions we have closed over the last 12 or 18 months, there have been a mix of technology as well as in our INS businesses across the rest of world.

It's consistent with what we've done in the past.

In terms of multiples, as you can see that in total the -- we're paying just about one time sales, so it is a fairly very attractively valued acquisitions.

Okay, thank you.

Thanks, Deane.

Scott Davis, Barclays.

This might be tough to answer, but I am trying to get a sense of in North America your install order is up 9%, it's a great number.

What I'm trying to get a sense of is post the selectivity initiative, should we assume that these orders are at a price or a margin that's higher than what you historically had?

How do think about that, because that's -- considering that you're still being relatively selective even though you've anniversaried that, I would assume that these orders would be fairly attractive.

Is that one way to think about it?

Absolutely, Scott.

We've stayed very disciplined, focused on our fundamentals, so that as we're pursuing business that we're going to be able to not only grow but grow profitably.

It's right in line with what our expectations are from a margin standpoint.

We've done a lot of work.

When you think about the work that has been done in TIS over the last two years, it's been phenomenal.

We've been able to separate all of our offices with ADT.

We've co-located half of those offices with our SimplexGrinnell business.

We've been able to re-program almost 0.5 million panels to our monitoring centers.

There's been a tremendous amount of work positioning that business for the future.

We been investing in technology to make sure that we're going to be differentiated with the type of solutions that we can bring to the market.

What I would say is we're right on track with that plan.

The order rate that you have seen over the last couple of quarters is beginning to show the pick-up in the ability to be able to grow the business.

That, combined with continued strong performance in fire, is really what's resulting in that strong order rate.

Right.

Do you get scale off of this?

I know it's a labor-intensive -- can be a labor-intensive part of the business.

Can you get scale off of orders at that level?

We have always said, when you look at the fundamentals of the businesses, on average now, when we grow our product businesses we get good leverage.

We get incremental margins somewhere around 25% to 30%.

In the installation and service space, with the mix of install, we typically get incremental margins somewhere around 15% to 20%.

When you say off of those orders, as those orders come through we begin to then get the leverage of that volume within the introduction that we have across the businesses.

Scott, the one thing I would add is it does add a nice base going forward for future service growth, as well.

Yes, no.

For sure.

I was trying to get a sense if their's a scale above standard G&A, and I think you answered that.

Lastly, it's been a while since we've marked-to-market the cost out.

What inning, if you had to put it in baseball terms, when inning do you think you are in, in the rooftops and the procurement initiatives, and all this other stuff that you've been working on the last couple years?

That's called -- what I'd say there is when we laid out the new Company, we knew we had a tremendous capacity to be able to deliver savings with the merger of two very large segments within the old Tyco.

What I would say is that in the early stages we've been delivering significant operational performance on relatively low volume.

The plan is to as we begin to accelerate that volume, we get more of a contribution from the volume that we generate, versus the cost-out.

What I would tell you is, that even with the pressure on the volume in the first couple of years, we've been able to really execute above the plan on the cost-out.

That's around sourcing, the benefits we're getting out of sourcing, the work we're doing to simplify our field structure, and then the transformation that is happening across all of our functions.

In many cases some of that is further along than others, but I would say we're in the middle innings.

There are still a lot of capacity to be able to continue to improve, drive the Company to an operating Company structure that's built on functional excellence that allows us to put the resource to work on the front end, solving customer problems, and being able to grow the Company while we are freeing up the resources on the back side of the Company.

Great answers, thanks.

Congrats on a good quarter, guys, and I will pass it on.

Thanks, Scott.

Steve Tusa, JPMC

Could you comment a little more deeply on the verticals that you are seeing the most -- the greatest inflection in, on the leading indicator side, on the fire side?

Sure.

Let me start with North America.

What I would say is that we're continuing to see some strength in the mid-size commercial.

We saw some positive results in the first half that is continuing in the second half.

Our government business, where we've had pressure in previous years, we actually started to come back and see some nice growth in the first half of this year, with some nice growth in service.

That's continuing in the second half.

One of the strengths for us in the fire business is the institutional space.

That's where we're seeing a real nice pick-up in the fire business, and will continue to be an area of nice growth.

The retail vertical in North America has been very strong for us.

That's been up nicely.

What I would say Steve in North America, the one soft spot is in the financial space in banking, where there's been a pull-back on capital.

The indications we're getting from our customers is that that might pick up here in the second half

Weakness in financial definitely makes some sense, unfortunately for all of us.

I guess does this -- can this booking number go into -- the specific booking number that's running at the high singles -- can that -- do you think that has a potential to move into the -- solidly into the double digits for an extended period of time?

Is that the kind of wave of biddings you're seeing out there in your pipeline?

What I would say is we look at a lot of different indicators in trying to correlate what is really happening.

We are encouraged by the ABI.

That's continuing to be positive, which suggests the activity will continue.

Like I said in my remarks, I am feeling confident that the pipeline of projects that we're currently working are going to translate to some nice orders going forward.

I wouldn't say though we're in a major acceleration of recovery.

What I would say is that we feel confident with the type of work that we are working on, in how that's going to be able to convert to orders here in the next quarter, and position us for continued organic growth in 2015.

How were orders in -- last question.

I know you mentioned last call that April orders were in the mid-single digits.

It seems like that was consistent throughout the quarter.

Correct me if I'm wrong.

Then how is, maybe a little bit of an update on July on that front?

I would say the orders profile was consistent during the quarter.

When you look at our overall activity, install orders can be lumpy.

Recognize that there is a little bit of that playing out both in North America on the positive side, as well as the rest of world.

But on average we feel very good about the activity in that through the quarter.

That's continuing as we now get into the fourth quarter.

Great.

Thanks a lot.

Thanks, Steve.

Julian Mitchell, Credit Suisse

Hi.

I just had a couple of questions around M&A.

In Asia you talked about a very good cyclical growth outlook, but your exposure there is very small.

Neither of the deals you announced were in Asia.

I'm just wondering how the M&A pipeline is there.

Related to that, the Brazilian business you bought I think was residential.

I wondered how he felt about the desirability of M&A residential versus commercial, and if that differs by region?

I'll comment on that.

On the M&A, when we're looking at our pipeline it's really across the board.

On the four priorities that we've outlined -- technology, expanding our global products portfolio, continuing to position our capabilities within the growth markets, and then looking at bolt-on service acquisitions that will complement the work we're doing in service; what I would say is it's really across all of those priorities, as well as across all of the regions.

For instance, just to reflect on last year, the JVs that we did in China, that positioned us to be able to accelerate the depth and expertise that we have in that market, which combined with what we're investing in organically, has positioned us now to grow very nicely within China.

We will continue to look at those type of opportunities as we position our capabilities to be able to seize the growth markets.

When you look at the overall M&A activity, we're not going to do acquisitions for the sake of acquisitions.

We're staying very disciplined, especially with the current valuations, and how we're executing our acquisitions.

They've got to be strategic, and they've got to be able to deliver the financials that are expected, to be able to be positioned to deliver increased shareholder value.

Julian on the Brazilian piece of your question, it's really building on an existing business that we have in the monitoring of residential security, and this gives us bigger scale.

It's very good synergies there.

Thanks.

Secondly, you talked about how the UK you've made very good progress on the restructuring.

It now seems if continental Europe you're trying to do a similar thing.

Maybe just give a sense of the top, I don't know, 20 or 50 leaders in Europe, let's say.

How much of that has changed in the last 12 months?

Just to give some sense of how radical the change in Europe is?

I would start by saying it's we have launched the new Company.

When we look at our top 300 leaders across the new Tyco, and who is in position today and who was in position when we launched the Company, there's been over 50% change in either having a new leader or leaders in new positions across the Company.

As we have transformed the Company from a holding Company to an operating Company, that has required significant leadership change.

What we're doing in Europe is right in line with that, that as we work to make sure we've got the right fundamentals, we've got great structure, we've got the right leadership.

It's all part of that to make sure that we're positioned to be able to invest, and then be able to deliver increased returns with those investments.

Great.

Thank you.

Thank you.

Gautam Khanna, Cowen.

I wanted to follow up on the comment you made about the differences between fire and security in the backlog to the sales conversion.

A, how do you look at the overall North American backlog today?

Has the average duration of that extended?

If so, how does that compare to maybe six or nine or 12 months ago?

Is it a six-month conversion on average, or is it nine months or --?

Recognize that over the last year or 18 months that it has been driven by fire, and fire tends to be a longer cycle, so it's nine to 12 months, with some projects going out as much as two or three years.

Recognize that we are beginning now to see a pick-up in our security side, but the bulk of that increase has been driven by fire.

That conversion will be on average over the next nine to 12 months.

It will position us, as we think about 2015, to be able to continue to accelerate the organic growth that we've been able to achieve here in North America in 2014.

Okay.

You mentioned being in the middle innings of the restructuring initiative that you laid out a few years back, obviously running ahead of those cost-out plans.

What types of new initiatives on the restructuring side are you looking at, and how should we think about the required spend and pay-back as we move into next year?

Gautam, I would start by saying that we're implementing a Tyco business system across the entire enterprise.

This is really focused on looking at all of our key work streams and processes; and then in line with that, really driving functionalization of what we do.

You can imagine the amount of change that's taken place in being able to get to the end state that we believe we can get to, that will lean out the Company, free up resources to be able to re-invest, and continue to grow.

What I would say is that a lot of these, some are further along than others, but there's a lot of this that requires a lot of change to get to that ultimate end state.

I would say that we're going to continue to be able to work the pipeline.

We'll continue to deliver significant savings that will allow us to be able to reinvest in the business while we're continuing to expand margins.

Last one.

How should we think about R&D as a percentage of sales as we move forward into 2015 and beyond?

Do we expect that to remain at the same level?

Well R&D, when you look at R&D this year, we're up 10% year on year.

That's supporting very nice product growth, as well as positioning ourselves to be able to leverage all of this success that we've had in each of our product domains, and really now work towards how do we differentiate our enterprise solutions that we put through our direct channel to really address customer problems and be positioned to be able to create additional value as an enterprise.

When we measure that, it's really measured on the product revenue, which today it's roughly about 10% of the product revenue.

But recognize that some of those investments are enabling the differentiated solutions that we are putting into our direct channel to be able to grow installation and services.

We should expect that to remain at the 10% level?

We've been growing.

If you look back at products over the last few years, we had -- we've more than doubled the reinvestment over the last five or six years.

In the last couple years it's pretty much been in line with the product growth that we have achieved within the segment.

We're going to continue to expand R&D, and it'll be pretty much in line with the product growth that we achieved.

Got it.

Thank you very much, guys.

Thank you.

Nigel Coe, Morgan Stanley

Thanks, good morning.

Nigel, you're back.

I'm back and better than ever.

A couple of questions.

Back in the old Tyco we were trained to believe that North American margins were better than rest of world margins.

It feels like that is happening right now.

I guess intuitively it makes sense as well, given the high density you have in North America versus rest of world.

Do you think structurally as you go forward that North America margins will be better than rest of world?

When we look at the business, when you look at rest of world, in the quarter we're growing very nicely.

The mix that's coming out of that is really coming from the growth markets.

We're achieving strong teens growth year on year.

That has a lower service mix within the revenue that is being achieved in the growth markets.

Where we've had pressure here recently is out of our more mature markets, continental Europe as well as Australia, that has a much higher service mix.

When you look at the fundamentals of the business that we're developing in the growth markets, they're very similar to what we're achieving in the mature markets.

It's really just the mix of service that's putting a little bit of pressure on the margin rate.

When you look at our orders that are being generated, we have a high level of confidence that we'll be positioned to grow across most regions.

You'll see continued margin expansion as a result within the rest of world going forward.

Okay, that's helpful.

Secondly, there's a little bit of noise about ADT's ability to enter the small commercial market towards the end of this year.

I don't expect comment on ADT specifically, but can you maybe talk about the North American commercial security markets, your position in the lower end, the small business side versus the large business side.

Maybe characterize the market share versus characteristics of that market at the low end versus the high end?

Yes, when you look at the security market in North America it's very fragmented.

There's no one that's got any significant share, when you look at the amount of players that compete in that market.

Certainly we're one of the bigger players, given the scale and size that we are today.

As we have leaned out the organization and really positioned ourselves, are really looking to now make more investments in how we go to market to be able to capitalize on that market in a much broader way going forward.

There is really no big players.

It's very fragmented.

But I think we like our position within North America and with the structure we have in place today.

We believe we're going to be very successful in being able to capitalize on that market and grow.

Would you say the segmentation is even greater at the lower end than the larger size?

That is correct.

Yes.

Okay, thanks, George.

Thanks, Nigel.

Grace Lee, CLSA.

I would like to dovetail one of the questions that has been asked previously about M&A.

We understand that the non-compete agreement that you had with ADT is expiring later this year.

We've had a sense that one of the acquisitions you made in Brazil is about the residential.

We are wondering to what extent Tyco is planning on entering the residential or small business space once this agreement expires?

Let me begin by explaining the separation.

When we separated the Company we maintained all of the residential businesses outside of North America.

They tend to be small businesses that are embedded within our commercial security operations across many of the countries.

These are businesses that when we look at our portfolio today are very attractive.

They're generating nice returns.

We're getting good returns on the investments we're making.

That's what really stimulated some of the activity in M&A, and being able to really expand those businesses within some of those key growth markets.

When we look at North America, we've been very focused on being able to be positioned to lead commercial security.

There's a reason why we separated the Company as we did, with the residential business that became ADT, as well as now with the commercial business being able to really leverage that capability with what we had within the fire protection platform.

We're very much focused on making sure that we're going to be positioned to take that combined position and accelerate our growth in North America, while we're continuing to make strategic investments in the other portfolio that we have across the globe.

Sure.

Thank you.

Ajay Kejriwall, FBR Capital Markets.

On the fourth quarter, and sorry if I missed this, but what's the organic growth expectation for global products and rest of world segments, please?

We did not -- Ajay, we did not actually give any guidance to any of the segment organic growth.

We give overall guidance for revenue growth to be around 3% range, and a revenue number of $2.73 billion, as George mentioned in his comments.

Ajay, the only thing I would add is for global products we've had skewed organic growth quarter by quarter with the X-3 shipments in life safety.

I would just comment that the fourth quarter goes back to normal activity, where typically we're growing in global products in that mid-single-digit range.

Got it, that's helpful.

Then rest of the world segment, I know there was some comments on Australia.

You're expecting that decline to moderate.

Is the take-away there that organic growth improves a little bit in that segment, or how should we think about that?

I would say I would expect it to be pretty similar to what you saw this quarter.

Maybe one more on restructuring separation costs.

They were $0.05 in the quarter, a little bit higher than last quarter.

Was that in line with your expectation going in?

Then maybe what's baked in to your estimate for the fourth quarter?

Ajay, the charge for restructuring was very much in line with what we expected.

We had guided to an annual charge of $75 million to $100 million.

We still expect to be in that range.

In fact, as we speak, George and I are looking at accelerating some actions initially planned for 2015 into the fourth quarter, so we may actually be a little bit ahead of the initial guidance we had given in the $75 million to $100 million.

So the fourth quarter charge should be more than $0.05, I guess?

Yes.

Got it.

Thanks.

The final question today is from Jeff Kessler with Imperial Capital.

This is actually Brian Dennis filling in for Jeff.

Hi Brian.

Quick question.

Margin across all three segments were nice over year over year, particularly in North America.

What types of cost-cutting measures do you anticipate to deepen that level of margin trajectory within the global product segment?

We look at all of the segments, a lot of the cost or productivity initiatives as we call them are really amongst all three segments.

Clearly, I would say the only one that doesn't impact global products, really, is our branch network optimization, because that's more on the INS side of the business.

But our other productivity initiatives and sourcing initiatives are really across the board, so they help on the product segment, as well.

Clearly, we had specifically said for the third quarter that we would have a margin level in that 20% for Q3, which we did have.

I would say the fourth quarter, just again, it goes back to its more normal level expectation of where we would be for global products, which is in the high teens.

Okay.

All right, great.

That's all for me.

Thanks, guys.

Thanks.

All right, let me wrap up.

Again, I want to thank everyone for joining us this morning.

I do want to take this opportunity to announce that we will be holding an Investor Day on Friday, November 21, in New York City.

During our Investor Day we will provide an update on our strategic priorities, and lay out our three-year outlook post 2015.

The details and registration information related to the Investor Day will be announced in the upcoming months.

I do look forward to seeing many of you soon.

Operator, that concludes our call.

Thank you.

This concludes today's conference.

Thank you for joining.

You may disconnect at this time.