江森自控 (JCI) 2014 Q4 法說會逐字稿

Welcome to the Tyco fourth-quarter earnings conference call.

(Operator Instructions)

Today's conference is being recorded.

If you have any objections please disconnect at this time.

I'll 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 fourth-quarter and full-year results for FY14 and a 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 statements that we've 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 during his financial section, can be found on the Investor Relations portion of our website at www.Tyco.com.

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

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 these metrics are non-GAAP measures and are reconciled in the schedules attached to our press release.

Now let me quickly recap this quarter's results.

Revenue in the quarter was $2.7 billion with organic growth of 3%.

Total revenue growth for the quarter was 4% and included a 1% benefit from acquisitions.

Our reported segment operating income was $383 million and the operating margin was 14.2%.

This included a charge of $10 million or 30 basis points related to a legal matter which Arun will address in a few minutes.

The segment operating margin adjusted for the legal charge was 14.5%.

The loss per share from continuing operations attributable to Tyco common shareholders was $0.17 and included charges of $0.73 related to special items.

These charges related to legacy asbestos liabilities as well as restructuring and separation costs.

Earnings per share from continuing operations before special items was $0.56.

Now let me turn the call over to George.

Thanks, Antonella.

Good morning, everyone.

This was another solid quarter that capped off a great second year as the new Tyco.

Our transformation to an operating Company structure has been a critical aspect of driving significant productivity gains throughout all of the businesses and across the global functions this year.

As we look at the fourth quarter and the full year results, this puts us on track to deliver our three year EPS commitment that we laid out to our investors back in September of 2012.

Focusing on this quarter's results we delivered good top line growth across all three segments.

Organic revenue growth of 3% in the quarter was lead by Global Products which topped off the year with 8% organic growth.

Overall, revenue growth of 4% included a 1% benefit from acquisitions.

Earnings per share before special items increased 19% in the fourth quarter, driven by strong revenue growth along with continued productivity initiatives which together delivered an incremental $0.05 of earnings.

The remaining $0.04 of incremental earnings was driven by below the line items partially offset by a legal charge.

Order activity in the quarter was also very strong and accelerated to 5% growth year over year which gives us good momentum going into 2015.

In North America, install orders in the fourth quarter were up significantly compared to the prior year and I am pleased to note that a number of the large projects booked were in both fire and security.

As I mentioned in the last earnings call, the majority of install order growth this year was on the fire side given it is earlier in the cycle.

Now we are booking large orders in the security space as well and across a range of end markets including general, commercial, retail and government.

More importantly, we continue to see strong activity in the pipeline for both fire and security.

While we look at the ABI Index and a number of other indicators on a regular basis, it is our order activity as well as discussions with customers and my business unit leaders that give me further optimism that the US is continuing its slow but steady recovery.

The commercial construction market is improving and we are well positioned to benefit from this uplift in activity in 2015.

Turning abroad, we continue to closely monitor the economic environment in Europe.

The UK market, which represents about half of our European revenues for installation in services, seem to be somewhat improving although the expected economic rate of improvement for 2015 has been revised downward.

As we entered our fourth quarter we started to see a few larger projects in the pipeline in the oil and gas and retail verticals which is a positive sign.

It gives us comfort in our projections for modest growth in 2015.

On the other hand, Continental Europe is still experiencing uncertainty with much of the region seeing reductions in GDP growth estimates and volatility related to the crisis in the Ukraine and sanctions on Russia.

While our largest exposure in Continental Europe is Germany where we have experienced less volatility, this does temper our outlook for growth in the region in the near term, with our plans assuming flat to nominal growth in Continental Europe for 2015.

In Australia, we continue to see a decline in the service business related to mining, as the industry is still holding off on discretionary spend.

However, we saw our install activity grow for the first time this year in the general commercial and retail end markets.

We also had a nice project win this quarter in the oil and gas vertical.

That, along with the orders booked in the third quarter that I mentioned during the last earning's call, stabilizes the business in 2015 although the mix will be more weighted to install than service.

Turning to Asia, we had good order activity in the fourth quarter related to the investments made in our Beijing Masters and Reliance joint ventures.

Given our relatively small position, we expect continued growth albeit slightly moderating even if the economic growth in the region slows.

Before I turn it over to Arun, I want to comment on the progress we have made in 2014 on our three strategic priorities.

Organic growth, acquisitions, and continuous operational improvement.

For the full year, our organic growth accelerated to 3% from 1% in 2013 with growth across products, installation, and service.

Our historically strong technology position in our product businesses coupled with continuous improvements in R&D to drive new product introductions have allowed us to stay ahead of the market in terms of growth and this year was no exception.

Global Products grew 6% organically for the year, the fourth consecutive year of very strong organic growth.

On the installation side of the business, we saw a nice turnaround in revenue which grew 2% organically this year compared to a 5% decline last year.

While I would have liked to see service growing at a faster rate, it's important to keep in mind that our service business in Australia was under significant pressure this year with a $35 million decline in service revenue, which impacted our overall service growth by a percentage point.

What is more important is that the teams around the globe are focused on the right projects that play to our strengths and that we execute them efficiently to improve our customer satisfaction and drive our segment margin expansion.

As we look to 2015, I am confident that our service revenue will grow in the 2% to 3% range.

Acquisitions benefited the top line by 2 percentage points this year, driven by the acquisitions of Exacq Technologies and West Fire.

We continue to view acquisitions as our first priority in terms of capital allocation.

We remain disciplined in terms of valuations and we are identifying good opportunities and making progress on the acquisition front.

We have a strong pipeline of acquisitions, all of which are expected to be highly accretive to long term shareholder value.

The third strategic area of focus is continuous operational improvement.

By executing on our strategic sourcing initiatives, typifying our infrastructure in our installation and service businesses and streamlining our functions across the organization, we have generated significant cost savings to date and we expect those savings to continue as we move forward.

We targeted $150 million of gross savings to cover inflation cost, fund smart investments in R&D and sales and marketing, and deliver a net benefit to the bottom line of $50 million.

During the course of the year, we accelerated actions and realized gross savings in excess of $150 million.

Of these savings, $65 million dropped to the bottom line and contributed to the 90 basis points of segment margin expansion for the year.

Overall, I am very pleased with our performance this past year.

We delivered strong results.

We have taken strategic action with our portfolio management with focused acquisitions and divestitures.

We have returned excess cash to shareholders and we are right on track executing on our strategy.

Now let me turn it over to Arun to go through the details of our performance.

Thank you, George, and good morning, everyone.

You can follow my comments on our financial performance starting with Slide 5. Beginning with our full year results, revenue of $10.3 billion grew 3% organically.

As George mentioned, organic growth was lead by Global Products which grew 6%.

Install revenue growth was 2% and service revenue grew 1% on an organic basis.

In total, segment operating margin before special items expanded 90 basis points with margin expansion across all three segments.

Leading the margin improvement for the year was North America installation and services which expanded margins by 110 basis points.

Earnings per share before special items increased 20% in 2014 lead by operations which contributed $0.20 of incremental earnings year over year.

For the full year, orders increased 5% with solid order growth across all segments.

North America installation and service orders increased 4%.

Rest of world installation and service orders increased 3% and global product orders grew 7%.

Now focusing on the quarter, please turn to Slide 7. Revenue grew 4% to $2.7 billion with organic revenue growth of 3%.

Global Products continued to lead the way with 8% organic growth in the quarter.

Before special items, segment operating income was $383 million and the operating margin was 14.2%.

Leverage on increased revenue improved execution and the benefits from productivity initiatives drove the underlying year-over-year improvement in segment operating margin.

Year over year, earnings per share before special items increased 19% versus fourth quarter 2013 results.

Moving to orders in backlog.

Orders in the quarter grew 5% year over year.

Backlog of $4.9 billion increased 4% year over year and due to normal seasonality, declined 1% on a quarter sequential basis.

Now let's get into the details of each of the segments.

Starting first with North America installation and services, on Slide 9. Revenue in the quarter of $1 billion increased 2% on a reported and organic basis.

Installation revenue grew 6% organically and service revenue declined 2% partly driven by a reclass between install and service in the prior year.

Adjusting for this, install revenue grew 4% and service was relatively flat.

Before special items, operating income in the quarter was $134 million and the operating margin was 13.2%.

This included a $10 million charge which Antonella mentioned related to prevailing wage claims that arose back in 2007.

We originally received a favorable decision but now expect it will be overturned on appeal as the New York Department of Labor changed its position on the matter.

This impacted the operating margin by 100 basis points.

Excluding the legal charge the operating margin improved 80 basis points year over year.

The underlying operating margin expansion was driven by increased revenue and the benefits of productivity and restructuring initiatives.

Overall, order growth in North America installation and services was 8% year over year.

This was lead by strong install order growth of 18%.

As I've mentioned many times, order rates can be lumpy in the installation business and can fluctuate from quarter to quarter.

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

Total backlog of $2.5 billion increased 3% year over year.

Given the seasonality of our business, we typically see a decline in backlog in the fourth quarter as a significant amount of electronic fire upgrade work is performed in schools during the summer break.

However, given the large install orders we were awarded in the fourth quarter, backlog increased 1% on a quarter sequential basis.

Turning to Slide 10.

Rest of world installation and services, revenue of $1 billion also increased 2% on a reported and organic basis.

Organically, growth in installation revenue of 6% was partially offset by a decline in service revenue of 2% due to continued weakness in Australia.

A 2% benefit from acquisitions was offset by the impact of divestitures.

Before special items, operating income was $118 million and the operating margin was 11.7%.

Underlying operations were relatively flat as the benefits of ongoing productivity initiatives were more than offset by the mix of businesses contributing to the growth as well as a lower percentage of higher margin service revenue.

In the fourth quarter, overall orders declined 1% year over year in rest of world installation and services.

Service orders were relatively flat and installation orders decreased 1.5% driven by the timing of large projects.

Backlog of $2.2 billion increased 6% year over year and due to normal seasonality declined 3% on a quarter sequential basis.

Turning to Global Products on Slide 11.

Revenue grew 9% in the quarter to $681 million including a 1% benefit from the acquisition of Exacq Technologies.

Organically, revenue increased 8% lead by strong double digit growth in the security products business as well as solid mid- single-digit growth from both fire protection products and life safety.

Before special items, operating income was $131 million and the operating margin declined 30 basis points to 19.2%.

The timing of incremental investments in R&D and a headwind from non-cash purchase accounting impacted the operating margin by 220 basis points.

Underlying segment performance was very strong as increased revenue leveraged quite nicely.

The margin expansion also benefited from productivity initiatives.

Additionally product orders increased 11% year over year.

Now let me touch on a few other items on Slide 12.

First, corporate expense before special items was $63 million for the quarter and $230 million for the year.

Looking ahead to FY15, we expect corporate expense to be approximately $225 million.

In line with prior years, we expect corporate expense to be a little higher in the second half of the year compared to the first half.

Next, our effective tax rate before the impact of special items was 17.5% for the quarter and 17.2% for the year.

We expect the effective tax rate for the first quarter and full year 2015 to be in the range of 17% to 18%.

We continue to generate strong cash flow.

For the year, we generated free cash flow of $528 million which included $473 million of cash paid for special items.

Adjusted free cash flow of $1 billion represents a conversion rate of 109% of income from continuing operations before special items.

As it relates to share count, we repurchased 23 million shares for $1 billion during the fourth quarter resulting in a weighted average diluted share count of 447 million shares for the quarter.

For the full year, we repurchased 42 million shares for $1.8 billion resulting in a weighted average diluted share count of 463 million shares for 2014.

Additionally during October, we continued repurchasing shares to offset the expected share dilution for 2015 and completed the repurchases required to fully offset the $0.20 dilution related to the divestitures of the South Korean security business and Atkore which occurred in 2014.

So far in 2015, we have repurchased 10 million shares for $417 million.

We currently have $1 billion remaining on our share repurchase authorization.

The ultimate amount of repurchases as well as the pace throughout the year will primarily depend upon our acquisition activity.

Regarding restructuring and repositioning, with a strong pipeline of projects being executed to simplify our operations, we expect charges in 2015 to be in the range of $100 million to $150 million.

As we are still in our early years as the new Tyco, making significant changes to our structure, these costs will continue to be excluded from our 2015 guidance.

However, beginning in FY16, we will report restructuring charges within our headline EPS number.

Now let me give you an update on the progress we have made in regards to legacy items during the course of the year.

Earlier this year, we resolved all outstanding legacy disputes with former management and were released of any monetary claims allegedly due.

This resulted in a $92 million reversal of previously accrued liabilities.

We have also recovered $18 million to date from our former executives as part of the resolution of the litigation.

Additionally, we settled a legacy dispute with a former subsidiary which resulted in the receipt of net cash of $16 million and a corresponding gain in the P&L.

During the fourth quarter, we took a significant step forward in resolving one of our two remaining legacy matters.

Our legacy asbestos liabilities should be viewed in two buckets.

Yarway which is the asbestos liability related to the flow control business which we had retained as part of the separation and all other asbestos liabilities.

Yarway filed for bankruptcy in 2013 and we have been negotiating with the plaintiffs to fully resolve this liability.

In October, we disclosed the settlement between the Company and the plaintiffs council related to Yarway.

As a result of that settlement, which is subject to quote and creditor approval we incurred a charge of $225 million during the fourth quarter.

Once approved this will put all liabilities related to Yarway behind us.

At the same time, we took another step forward in reserving and funding all other asbestos liabilities.

Our actual re-evaluation now reflects all claims projected through 2056 effectively to the end of time versus our previous methodology which used a 15-year projection.

This resulted in an additional charge of $240 million also recorded in the fourth quarter.

While there can be no guarantees, we fully expect this to resolve our legacy asbestos liabilities.

We are setting up a segregated settlement fund and insurance vehicle to administer the resolution of our remaining asbestos liabilities.

We expect to make cash payments totaling $600 million in the second half of FY15 to fully fund these liabilities.

It is important to note that both the charges which are included in corporate expense and the related cash outflow for all matters pertaining to legacy items are special items and are excluded from our EPS results and adjusted free cash flow.

We believe this gives you better visibility into how our underlying operations are performing.

The remaining legacy item is related to track litigation for the audit periods from 1997 to 2000.

We continue to work with the IRS towards settlement.

To the extent we cannot come to a resolution, the court date has been scheduled for February 2016.

Finally, I would like to touch on foreign exchange.

As you are all aware we have seen significant volatility in FX rates over the last few months.

As the US dollar appreciates against our major currencies, translation puts pressure on both the top and bottom line.

Our 2015 guidance includes a $255 million headwind to revenue which equates to a $0.07 headwind to EPS, related to changes in foreign currency exchange rates.

As we progress further into the year, we will see how FX rates move and provide updates to guidance as necessary.

Now let me turn things back over to George to discuss our outlook for FY15.

Thanks, Arun.

Let's start with guidance for the full year of 2015.

At our initial Investor Day a little over two years ago I stood in front of many of you to lay out our plans as the new Tyco.

At that time we made an aggressive commitment to deliver a 15% 3-year EPS CAGR off a base of $1.60.

Although the economic environment has been more challenging than what we had expected two years ago, we have made significant progress towards achieving that commitment by accelerating our cost saving and productivity initiatives and we will continue to do so in 2015.

Now let me get into the details of what is going to drive our EPS growth in the coming year.

Based on the current exchange rates, we expect total revenue of approximately $10.5 billion.

As Arun mentioned this includes a $255 million headwind related to changes in foreign currency exchange rates.

We expect organic revenue growth to accelerate to approximately 4% from the 2.6% growth we saw this past year.

Going through our expectations for each of the segments, let me start with North America installation services.

Based on current backlog, we expect organic growth of approximately 3% for the full year with continued expansion in the operating margin of approximately 110 to 150 basis points.

In rest of world installation services, we expect organic revenue growth of 3% to 4%.

The operating margin is expected to improve approximately 50 basis points year over year.

In Global Products we continue to expect organic revenue growth in the mid- single-digits.

We expect the operating margin to increase 80 to 110 basis points.

Based on the actions we have taken to date to streamline our operations and the additional actions we are planning for 2015, we expect the revenue increase to leverage quite nicely.

Overall, we expect the segment operating margin before special items to increase approximately 80 to 110 basis points to 14.7% to 15%.

This represents a $0.25 to $0.35 increase in earnings per share solely from segment operations driven by increased volume and the benefits of sourcing, brand simplification and other productivity and restructuring initiatives.

Based on these items and the specific guidance Arun provided for corporate expense and below the line items, we expect EPS before special items to be in the range of $2.35 to $2.45.

This is based on a weighted average share count of approximately 430 million shares and represents an 18% to 23% increase in earnings per share versus FY14.

Adjusting for the $0.07 foreign currency headwind that we expect in 2015 based on current rates, this would represent a 3-year EPS CAGR of 15% to 16% off the original 2012 base of $1.60.

Now let's shift to our guidance for the first quarter.

Consistent with prior years, we expect our earnings per share to be stronger in the second half of the year due to the normal seasonality of our businesses.

Given the timing of large orders converting to revenue and the strong retail performance we had in our first quarter of 2014, we expect organic growth to be a bit lower in the first quarter but you should see the growth rate pick up throughout the course of a year.

Overall, we expect revenue in the first quarter to approach $2.5 billion with organic revenue growth of approximately 2%.

Given current exchange rates we expect about a $70 million headwind to the top line and a $0.02 negative impact to EPS.

Overall, we expect about a 20 basis point improvement in segment operating margin year over year which includes a 40 basis point or $0.02 headwind related to the timing of incremental investments in R&D.

We expect earnings per share from continuing operations before special items in the first quarter to be in the range of $0.47 to $0.49 based off a weighted average share count of approximately 427 million shares.

This represents a 12% to 17% increase in earnings per share compared to the first quarter of 2014.

Before we go to questions I wanted to remind everyone that on November 21, which is next Friday, we will be hosting an Investor Day to discuss our long term growth strategy through 2018.

The event will be webcast live and I look forward to seeing many of you there.

With that let me turn it over to our Operator to open the line for questions.

Thank you.

(Operator Instructions)

The first question is from Steve Winoker with Bernstein Research.

Thanks and good morning.

Good morning, Steve.

One thing that would be helpful is just clarifying some of the expectations for services growth excluding the Australia issue that you mentioned.

It's still flat.

You see that accelerating to the 2% to 3% range and if you go back in time maybe refreshing the way we should think about it because you had at one point pre-ADT Korea divestiture talking about how it might accelerate from 3% to 4% to 5% and how should we be thinking about that particularly as it relates to next year?

Let me start Steve by saying that the economic environment we're in today is very different than what we laid out -- when we did our Investor Day back in 2012.

When you look at the compare in North America we had a very large quarter, a very big quarter with fixed service within our fire business a year ago.

And then when you look at Australia within rest of world we've had a pretty significant decline as it relates to the mining industry with the downturn that has been experienced there with the 35% downturn.

So when we look at going forward with the investments we've made with how we're going about executing on our growth strategy we feel good about being positioned to deliver 2% to 3% service growth in 2015.

And with the continued investments that we're making in technology, with the expansion of our footprint that we're making in the growth markets we'll be positioned to be able to continue to accelerate from there.

Okay, but is it a question of the initiatives that you have in service in terms of mining the install base that you've got, expanding the product range that people -- or the services range that folks are going after?

Is there anything that changed in your thinking on that front or your ability to tap into that existing install base?

Not at all, Steve.

We continue to stay focused on projects that play to our strengths, where we can deploy technology which then positions us well to be able to get the recurring revenue tied to those projects so that's continuing to play out well and with the install orders that you're beginning to see that will set us up nicely for future service off that install base.

We continue to invest in new technology to be able to create new services on top of the install base and we'll talk a little bit more about that during our Investor Day next Friday but that will position us well to be able to continue to mine the existing install base to be able to drive service revenue so it doesn't change at all.

I think if you look at our current performance with the decline that we saw especially in Australia, the softness that we see in Europe, the relative performance has been very strong.

We've been able to offset that mix with very strong operational performance which has allowed us to be able to continue to invest and be positioned to accelerate that service growth going forward.

Okay.

And can I just get more in, on the 18% North America installation increase and I was looking at a year ago, it was down 5.5% a year ago the installation orders.

Is this an inflection point as you can see it or is it just saying look we had a few big orders, but the pace, the cadence of this is we should be thinking about it more mid- to high-single digits and non-res really picking up and maybe a little more color on where you're seeing it?

I'd start by saying if you saw the activity in the second half of 2014 it really does tie to the continued recovery in the non-residential space, especially within our early cycle buyer business.

As I said in my prepared remarks we are starting to see also increased activity within our security business.

Now these orders that you saw, they will play out anywhere from three months to could be up over two years.

So as we lay out 2015 if you look at the backlog, our total backlog is up about 4% and in total it's 6% in install.

So that positions us well to be able to execute on those orders especially the latter part of 2015 and continuing out beyond 2015.

So that is what gives us a lot of confidence to be able to deliver what we committed from an organic revenue growth standpoint in 2015.

Okay, I'll pass it on, thanks.

Thanks, Steve.

Thank you.

The next question is from Nigel Coe with Morgan Stanley.

Oh, thanks, good morning guys.

Good morning, Nigel.

Great.

I just want to go back to the service, George and you talked about the tough comp in North America and I think I understand the rest of world with the mining and Australia but still a little bit weaker than what we've seen through 2014.

So was there any change in customer behavior during the quarter and I'm wondering is there an impact from a pickup of installations?

Does that in any way cannibalize the budgets for service?

So I'm wondering if we do see stronger installs does that pinch service in any material way?

Well when you look at the different economies and how they're playing out certainly in Australia with the tough economy there that the customers are facing, certainly there's a pullback, trying to be very tough in the discretionary spend which we see within our service business.

I think even with the decline we've actually been able to hold up pretty well and I'm actually very proud of what the team has done to be able to maintain the fundamentals of the business while we're navigating through the downturn.

As far as the install, there could be some of that where they're reinvesting in service to maintain a current system that then when the capital begins to flow could be replaced with new capital and new equipment, new installations, so there could be some of that playing out.

But I'm not concerned at all relative to our position with our customers being able to continue to deliver value with the service that we perform and then because of that, depending on how these economies play out we'll be well positioned to be able to capitalize on the service growth in each of these economies going forward.

And on the back of the backlog activity you went through in 2013 and 2014 did we with see a pickup in service attachment rates on the back of that?

Yes, when we look at our install we certainly look at projects that play to our strengths with the technology that we deploy positions us well to be able to get the service revenue.

The attach rate because of that we see continued improvement within the attach rate.

Some of it we don't get the service until after the warranty period especially as it relates to our fire business.

Now as we look at more of the subscriber type businesses we're certainly getting a higher mix of that type of business where we get the attached service revenue but on total I would say with the quality of the projects that we're designing, deploying, installing and then ultimately positioning to service we feel good about our ability to be able to continue to do that.

Okay, thanks, George and just one more for Arun.

The decision to absorb restructuring FY16 I think is a wise move.

Any sense about a place holder we can put into our numbers for that year at this stage?

Yes, we are finalizing our thinking on that, Nigel, but I suspect it's going to be around the $75 million range.

Okay, thank you.

On a run rate basis.

That's great.

Thank you very much.

The next question is from Gautam Khanna with Cowen and Company.

Yes, I wanted to just understand a little better what your cash deployment assumptions are in 2015 and the guidance.

Is it just the 10 million shares you've already repurchased or what did you mean to imply in the guidance?

Gautam, let me just start by saying that we will continue to generate strong cash flow in 2015 as we have done in the past couple of years.

Having said that, we also have some incremental debt capacity that we're sitting on.

As George mentioned in his prepared remarks there is a very strong pipeline of acquisition activity that we are looking at and some of these things may be rather imminent as we speak.

So given the 1.8 billion shares we bought back last year, just under 0.5 billion [shares] that we bought back in the first quarter of this year and also Gautam, keep in mind that we'll be out of the market until really the end of Q1 earnings release because of the change in domicile that we're going through.

We can't really be in the market.

So our going in assumption is for planning purposes and guidance purposes, we have said that there is no further buybacks but having said that, we are looking at a number of good opportunities on the M&A front and if those come through great, we will not sit on cash.

They don't come through, we will deploy it in share buybacks.

You mentioned some of these acquisitions may be closer at hand.

Can you give us a sense for what you anticipate spending for M&A?

How big are these deals if you will and how many are you looking at that are realistic?

Gautam, what I'd say is if you look at the acquisitions that we've done since we've launched the new Tyco we've been very disciplined.

They've been very successful and we've been able to execute those as planned.

We've been working this pretty hard in line with our strategy to continue to expand our technology platforms, expand our product portfolio, to really make sure we've got the right footprint in the growth markets to be able to capitalize on the growth that will occur and we continue to execute on that strategy.

What I would say is with that focus, we've been able to work the pipeline pretty hard.

We think there's about half a dozen that are more probable than not and these would be acquisitions that are anywhere, a small technology acquisition up to maybe about $0.5 billion product type business.

So it isn't so much the size as it is the how it fits strategically with what we do, what we're doing organically to be positioned to deliver long term shareholder value.

Okay, and Arun, one last one.

How much incremental debt capacity do you think you have right now given your desire to remain at this credit rating and the legacy payment you have next year?

Yes, as you know, Gautam, the rating agencies look at both qualitative and quantitative measures.

On the qualitative side, clearly having put the asbestos matter behind us, and funding it during the back half of this year, it does improve our situation with the rating agencies.

On the quantitative side, as you know there are three streams of off-balance-sheet items that the rating agencies add back to our gross debt which is essentially the operating leases, the pension funding and the tax legacy matter.

We believe that add back is in the $1.2 billion to $1.3 billion range.

With all that said, we expect that we have incremental capacity of about $1 billion as we look forward.

Okay, thank you very much guys.

You're welcome.

The next question is from Steve Tusa with JPMorgan.

Good morning, Steve.

Hi guys.

The services versus install looked kind of the same for North America and rest of world that you called out.

A mix impact for rest of world.

Was there a mix impact in North America as well?

No, Steve actually North America, you may recall from last year's Q4 earnings call we talked about there was really a reclass between service and install last year that benefited the service organic growth and hurt the install organic growth.

So really this fiscal Q4 you have the inverse of that.

So to make a long story short you have a tough compare on the service side and a easier compare on the install side.

So really if you normalize the fourth quarter in North America, I would say install was relatively flat.

I mean service was relatively flat and install was up about 4 points.

Right okay so I guess in the rest of world, what was the mix impact do you estimate?

I would say the impact of Australia is really what kind of drug us to the negative territory, in service growth.

Otherwise rest of world would have been also relatively flat.

But you said there's a lower percentage of high margin service revenue.

What was that impact?

Well in Australia we've had a double-digit decline in service which has been what's driving the rest of world service decline and then in the other large economy that we have a big service business in Europe and that's relatively flat.

Yes I'm just wondering the margin impact.

So you said underlying operations are flat.

Your margin was up but there was a lower percentage of high margin service revenue so I'm wondering on the margin in basis points, what roughly that impact was -- so sorry maybe I'm just not asking the question correctly.

No, I get it, Steve.

You really have to -- because remember when you look at a project you got to look at the margins in total with the service and the install so we don't separately theoretically break out the service versus install margin but from a mix perspective I could tell you that in rest of world the percent of revenue of service versus install, the mix shifted by 2 points.

So install was higher by 2 and service went down by 2 in regards to shift in revenue and then you can make some estimates of how that drops down to a margin perspective.

Okay.

But it wasn't like more than like a 50 BP headwind, something like that?

No and I would tell you the other thing is in regards to the mix clearly when install grows at a higher rate than service it is clearly a margin headwind but given the restructuring and productivity initiatives we've had we've done a really good job of offsetting that.

So what has been -- one other question, I know there's been some I guess dissynergy -- when you look at the restructuring has all of that restructuring, the benefits from that been applied to ops or has there been other stuff that you've had to cover in kind of your GAAP numbers whether it's dissynergies or stuff that you're stripping out.

I guess I'm just asking about the pay back on the recent restructuring and how that's made its way into the operations with the last couple of years.

Steve, the benefits of the restructuring really come through the entire P&L.

So some is in the cost of sales, some of it is SG&A and some of it is in corporate expense so you see it right across the P&L.

Okay.

But it goes through ops?

There's nothing no like GAAP items that you've covered there.

We can think about I think it was $90 million last year, that $90 million is kind of flowed right through the ops?

Yes, I mean our restructuring typically has a two year or less payback period, is the way that you can think about it.

When you talk about other things like offsetting -- I mean as you know at the time of separation we did say we were going to incur significant dissynergy costs in North America and clearly the restructuring benefits over the last couple years have clearly helped to offset those costs.

Anything else beside that, that's been more kind of one-time in nature that's not going to recur as a cost going forward?

Well clearly this quarter in particular in North America we did have a $10 million legal charge that's in the operations number.

Right so it's those onesies, twosies that we got to go back and pull out -- to figure out what the net restructuring benefit has been I guess?

Yes and I'd say it's all included in the net productivity that George spoke to that really hit bottom line.

We're always targeting at least the $50 million range.

Remember that's on a net basis so we did have a significant amount of savings on a gross basis that helps to offset inflationary cost as well as the incremental investments in R & D and we had $65 million that dropped to the bottom line in regards to benefits.

One last quick one.

I recall that historically the services revenue at commercial was not as good as the services revenue from a margin perspective as ADT residential.

Is that correct?

Is that still kind of the case?

Yes, because you have to keep in mind residential is really more based on monitoring; whereas on the commercial side yes there's monitoring but there's a lot of work you do from a customer service perspective.

And there's clearly a lot more of rolling a truck to the customer's site in order to perform that service work.

Awesome.

Thanks a lot.

Appreciate it.

Thank you.

The next question is from Julian Mitchell with Credit Suisse.

Hi, thank you.

Just wanted to touch on the rest of world installation and services revenue outlook.

If I look at your install orders in rest of world have been down for the last couple of quarters.

Looking at the comp they're probably down again in the December quarter as well and your organic growth right now in rest of world overall is about 2%.

So I just wondered about the confidence factor in the 3% guide, 3% to 4% guide you've given for organic growth in FY15?

Yes, it starts, if you look at the backlog in rest of world, that's up nicely, up about 6%, and so although we had a tough compare in orders in the fourth quarter we are positioned with a very nice backlog which will help accelerate the organic growth in 2015.

So we feel really good about that and how it's going to convert and we're going to continue to be able to build on that with the order rates that we're seeing in the current environment.

So we feel very good about being able to deliver on that guidance we provided.

So you think the install orders should start to rebound in sort of three months' time or something?

We see it's a mix because the nature of our projects, we can convert security projects pretty quickly in three months but many of larger projects they convert over, it could be 18 to 24 months but we start to see that building.

For instance in Australia, although we're concerned about the economic environment there we are seeing some activity.

We've been able to get some nice wins in commercial, in healthcare as well as in petrochemical oil and gas, that's positioning us nicely here for the latter part of 2015 to see a pick up there.

So we are starting to see that even where we are somewhat pressured in the current environment.

Julian, the one thing I would add is although there may also be variability quarter to quarter in regards to the orders number in total.

When you look at it on a full year basis orders in rest of world are up 3% and as George mentioned the backlog which is more important is up 6% year-over-year.

Thank you.

Then just a follow-up on the rest of world mix effect on margins because I guess the text commentary in the slides on that is exactly the same as it was in Q3.

And Antonella, as you said, the actual service mix versus installation deteriorated in Q4 from Q3.

Despite that, your margin was up in rest of world, having been down in Q3.

So was the difference really just a big pull up of cost savings coming through in Q4 because just looking at the service versus installation, you had an 80 BPs difference in growth year on year in Q4 versus only a 30 BPs difference in Q3, and despite that the margin was up 60 BPs.

So as Arun mentioned, the underlying operations were relatively flat from a margin perspective because keep in mind last year, Q4 did include a charge of I believe the number was $7 million last year in Q4.

So when you adjust for that, margins are relatively flat as Arun had mentioned in his prepared remarks.

Got it.

Thank you.

Thank you, the next question is from Jeremie Capron with CLSA

Hi, good morning.

I wanted to come back to the balance sheet question and you mentioned $1 billion of incremental debt capacity.

I'm wondering if you would like to make full use of this in FY15?

Jeremie, like we've said we look at our strong cash flow generation and incremental debt capacity as fungible.

We are going to deploy that cash in the form of investments in R&D -- sorry, investments in acquisitions, discharging our liabilities -- legacy liabilities.

And what's left over if there's cash, we will be deploying that in share buybacks.

Okay, so in total if I do the math right we're looking at an opportunity to deploy around $800 million from the free cash flow and an incremental $1 billion from additional debt.

Yes, I think the way to think about it Jeremie is that we have dividends and we have said that we will grow our dividends in line with earnings.

So there will be a dividend increase coming through in the summer of this year, the main dividend payment.

So there will be the first $300 million-odd that goes towards dividends and then of the $1 billion or so that we expect in cash flow, the rest is available to discharge our $600 million legacy liabilities and everything else that we've talked about here this morning.

Excellent.

Thanks very much.

You're welcome.

Our final question today is from Saliq Khan with Imperial Capital.

Good morning guys.

I'm speaking on behalf of Jeff Kessler.

Hi guys.

Two real quick questions we had for you.

First one is, as you guys are looking at the Exacq acquisition, particularly at the enterprise level, the clients are essentially demanding more interoperability, more functionality, a lot more simplicity as well particularly at the user interface for video, management systems.

Now the ability to be able to provide a VMS system to allows for some sort of migration from the analog to an IP, we believe that's really important even if it's only as a defense against some sort of a customer immediate shift from DVR to VSAT.

What type of acceleration are you seeing or do you envision within the medium and large installations that are happening right now?

When you look at our Exacq acquisition that has performed very nicely, not only with the product with the distribution that they had in place but now being able to serve our direct channel with the type of projects that we design, install and ultimately service in our direct channel.

And so that acquisition is performing extremely well.

We're seeing nice -- very strong double-digit growth as a result, utilizing all of the channels.

We've also opened up the global markets where it was predominantly North America based distribution.

So now we've been deploying that technology globally so we're very excited about that technology and it's been core to as we think about our integration platforms for the Company going forward.

It's going to be a core platform that we're going to utilize to be able to build off of.

Great, thank you.

And the other question is as you looking at the divestiture of ADT that happened a while back we felt that Tyco may not be able make some sort of a bigger push.

Or want to make a bigger push out of the SMB market or the home security market.

How has that thought process truly changed over the last several months or last several quarters?

When we look at our market, it's very fragmented and there's tremendous opportunity that we have to be able to continue to invest and be able to grow in our core market.

Certainly, with now the non-compete over, is there businesses or end markets that we could potentially serve with our technology?

Yes, but I wouldn't say it's significant.

So our goal here is to continue to develop the technology such that we can bring differentiated solutions that create value to our existing customer base and new customer base that will position us to be able to accelerate growth and we're beginning to see that with the deployment of some of the new technology that we've been developing and beginning to launch.

Great, thank you.

Operator before we conclude the call I'd like to pass it back over to George for some closing comments.

Thanks again for joining our call this morning.

As I said I'm very pleased with the significant progress we have made over the past two years and I am even more excited about the opportunity as we look at 2015 and beyond.

So on that Operator, that concludes our call.

Thank you.

This concludes today's call.

Thank you for joining, you may disconnect at this time.