江森自控 (JCI) 2015 Q3 法說會逐字稿

Welcome to Tyco's third-quarter 2015 earnings call.

(Operator Instructions)

This conference 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.

Ma'am, you may begin.

Good morning and thank you for joining our conference call to discuss Tyco's third quarter results for fiscal year 2015 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 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 George and Arun will refer to, can be found 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.

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

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

Now, let me quickly recap this quarter's results.

Revenue in the quarter of $2.5 billion declined 6% year-over-year on a reported basis, driven by a 7% headwind related to changes in foreign currency exchange rates.

A 1% organic revenue decline was more than offset by the net favorable impact of acquisitions and divestitures.

Earnings per share from continuing operations attributable to Tyco ordinary shareholders was $0.44 and included net charges of $0.15 related to special items.

These special items related primarily to restructuring and repositioning charges.

Earnings per share from continuing operations before special items was $0.59 compared to our guidance of $0.55 to $0.57 per share.

Now let me turn the call over to George.

Thanks, Antonella and good morning, everyone.

Although we were disappointed from an organic growth perspective, we exceeded the high end of our third quarter earnings per share guidance.

Our continued focus on productivity and self-help initiatives drove our operating results this quarter.

As we started to see the top line soften versus our expectation, the teams aggressively executed cost actions and accelerated our pipeline of restructuring initiatives, which we expect to benefit the bottom line in 2015 and will also carry over into 2016.

I am proud of how our teams came together to offset the revenue pressure and exceed our earnings per share commitment.

This is a great example of the benefits of an operating company structure and I am pleased with our solid operational results this quarter.

Turning to slide 4, I am happy to announce that we have continued to strengthen our leadership team to execute on our long-term growth and marketing commitments.

This quarter, we welcomed Girish Rishi to lead our North America Installation and Services segment and global Retail Solutions business.

Most recently, Girish served as Senior Vice President, Enterprise Visibility and Mobility with Zebra Technologies.

Prior to that role, he oversaw product development, product management, and engineering for the Enterprise division of Motorola Solutions.

Girish has deep software and hardware technology expertise that includes delivering solutions through common technology platforms, which is particularly valuable as we seek to build on our strong position in the North America and global retail markets by offering new technology-enabled solutions.

He has a strong record of leadership in transformative environments, as well as guiding complex business integrations, which are key as we continue to integrate our fire and security installation and services businesses in North America.

Additionally, earlier this month, we announced that Johan Pfeiffer has joined Tyco to lead our Rest of World Installation and Services segment.

Johan has an exceptional track record of driving growth through innovation and leading in complex environments in both global and regional roles and across varied businesses.

He has more than 25 years of experience in business and technology leadership roles, including over 20 years with FMC Technologies.

Most recently, he served as Vice President leading their global surface technologies and the energy infrastructure businesses.

Johan's expertise in the global markets, coupled with his proven leadership, will be a significant asset as we position these businesses for future growth and improved profitability.

Both Girish and Johan will work closely with Brian Young, who you may recall, joined us about a year ago from 3M to lead our Global Commercial Sales process.

Over the last year, we have made significant strides in streamlining and strengthening our commercial structure.

Brian has been diligently increasing and upgrading front line sales management talent, improving and standardizing sales processes, and realigning our sales compensation programs toward accelerated growth.

We are seeing the benefits of these actions in our sales force productivity, which has translated into increased orders over the last few quarters.

This will continue to be a top area of focus as we move forward.

Turning to slide 5, let me spend a few minutes on what we are seeing in the macroeconomic environment across the various parts of the globe and how that is impacting our performance.

Starting with North America, the US market continues to trend positively with improved growth in non-residential construction year over year.

We continue to see good order activity, particularly in the commercial, retail, and institutional verticals.

As expected, activity in Canada remains weak, as the market is very much tied to the petrochemical oil and gas industry, which is having a significant impact on Western Canada.

Overall, our North America Install and Service business is performing well.

The teams have done a phenomenal job improving operating margins by over 400 basis points since separation and now with the enhanced commercial structure, the business is well-positioned to drive growth.

The significant actions we have taken in our North America Install and Service business to improve the efficiency of our operations, along with the nice traction in order activity and backlog, position us well for fiscal 2016.

Moving to rest of world, let me start with Europe.

I would characterize the overall environment as soft.

Concerns over the stability of the Eurozone and continued falling in the oil and gas industry and pressure from foreign currency exchange rates have all led to a sluggish environment.

We are seeing nice activity in the general commercial, retail, and manufacturing verticals, while oil and gas and heavy industrial end markets continue to be noticeably soft.

Despite the top line pressures, margin expansion has been strong in Europe, as sourcing, productivity, and cost-out initiatives, combined with the benefits of restructuring, are helping to mitigate the lower volume.

In Australia, the downturn in the industrial and mining sectors are continuing to have a significant impact on the economic environment.

Much of our business in Australia was built up during the mining boom, during which time it doubled, and then over the last two years, it has declined pretty significantly.

Very similar to last quarter, organic revenue is decreasing in the mid-single digit range, driven by a decline in service.

Operationally, we've been able to offset a good portion of that deleverage, but certainly, it has created margin headwinds.

In the growth markets, we are continuing to see growth in the mid to upper single-digit range, led by Latin America.

Order activity in the growth markets is healthy, particularly in the general, commercial, and retail verticals.

As expected, our oil and gas businesses, which represent about 5% of our total revenue, continued to be under significant pressure.

The impact of lower oil prices has caused a considerable slowdown in new project activity, nonessential maintenance, as well as OpEx spend.

Our oil and gas businesses were down about 20% on a year-over-year basis in the third quarter and we expect a similar decline in the fourth quarter.

In line with our previous expectations, we continue to expect our oil and gas vertical to be down about 15% for the full year.

Before I pass it over to Arun to discuss our financials in more detail, I wanted to touch on our portfolio and our M&A strategy.

As I have said many times, we are constantly looking at the portfolio, reviewing market dynamics, and understanding what is going to be required, from a technology standpoint, to not only maintain our position in the market, but also accelerate our growth.

We then redeploy our resources appropriately where we believe we can create the most value and get the highest return.

As we remix the portfolio, we are focused on acquisitions that enhance our technology offerings, expand our product portfolio, broaden our service in vertical solutions, and strengthen our geographic reach.

In line with that strategy, we recently completed the acquisition of FootFall, a global retail intelligence leader.

FootFall provides thousands of retailers and retail property owners with end to end technology, services, and retail analytics solutions to collect, measure, and analyze customer traffic in their stores and property portfolios.

This acquisition positions Tyco as a leading provider of traffic intelligence solutions globally and expands a key capability in our portfolio of information-based store performance solutions.

This enables us to support our retail customers in achieving their core mission by helping them drive revenue, optimize operations, and enhance merchandising.

We expect this acquisition to generate approximately $40 million in revenue on an annualized basis.

Year to date, total capital allocated to acquisitions is approximately $575 million.

We continue to work our pipeline of opportunities.

There are a few transactions in the mid-size range we expect to announce over the next three to six months, which could total between $200 million and $500 million in purchase price.

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 7. Let me start with an overview of our results for the third quarter.

Revenue of $2.5 billion declined 6% year over year on a reported basis, including a 7% headwind related to changes in foreign currency exchange rates.

Acquisitions contributed 2 percentage points of revenue growth, which was partially offset by a 1% organic revenue decline and a modest decline related to the impact of a divestiture.

Excluding FX, service was up 1%, installation was relatively flat, and global products grew 4%.

The organic revenue decline of 1% was below our expectation of 1% to 2% growth, primarily due to general softness in our install and service businesses in Europe and Asia and increased weakness in demand for our heavy industrial high hazard protection products.

Before special items, segment operating income was $369 million and the segment operating margin improved 30 basis points to 14.8%.

It's important to keep in mind that the prior year included a 30 basis point lift, due to the timing of Air-Pak shipments, and the current year margin includes the absorption of 30 basis points of non-cash purchase accounting for intangibles.

Normalizing for these items, underlying operations improved 90 basis points year-over-year.

This year-over-year operating margin expansion was driven by improved execution and the benefits from cost actions, restructuring, and productivity initiatives.

Underlying operations contributed $0.05, which was partially offset by the $0.02 shift in earnings in the prior year related to the Air-Paks.

A $0.05 benefit from the reduced share count was offset by a $0.05 headwind related to FX.

Corporate and other income contributed the remaining $0.02.

Overall, earnings per share before special items increased $0.05 or 9% year over year.

If you normalize for the timing of the Air-Pak shipments in the prior year, earnings per share increased 13%.

Turning to orders on slide 8, as I've often mentioned in previous quarterly calls, it is important to keep in mind that order growth, particularly in our installation business, is lumpy and can be impacted by the timing of large projects.

Order dollars reached an all-time high in the third quarter.

Overall, orders increased 5% year-over-year with 16% growth in products, 3% growth in installation, and 1% growth in service.

Total backlog of $4.7 billion increased 2% on both a year over year and quarter sequential basis.

As a reminder, 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 during the summer months.

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 segments.

Starting first with North America Installation and Services on slide 9, revenue in the quarter of $972 million was relatively flat on a reported basis.

Organic revenue grew 1% with 3% growth in installation and flat service revenue.

FX negatively impacted revenue growth by 1 percentage point.

Before special items, operating income in the quarter was $157 million and the operating margin was 16.2%.

The operating margin improved 240 basis points year over year, driven by increased revenue, improved execution, and the benefits from restructuring cost containment and productivity initiatives.

As George discussed, we have made significant changes in the structure of our North American Install and Services business, and we are seeing the benefit of those changes in the margin expansion.

As growth gains traction, we expect to see a very nice flow-through to operating income.

Overall, orders increased 3% year over year in North America Install and Services.

Service orders increased 1% and installation orders increased 6% off a 10% increase last year, related to several large orders in Fire and Security in both periods.

The strong install order activity this year was driven by the commercial, retail, and institutional verticals.

As we look to the fourth quarter, it's important to keep in mind that we have a tough compare in install order activity, as last year's Q4 install orders increased 18%, driven by several large projects.

Total backlog of $2.5 billion grew 4% year over year and 2% on a quarter sequential basis.

Turning to slide 10, Rest of World Installation and Services, revenue of $842 million decreased 16% year over year, driven by a 13% unfavorable impact related to FX.

Organic revenue declined 2%, with 1% decline in service, and 3% decline in installation revenue.

Acquisitions contributed 1% to revenue growth, which was more than offset by a 2 percentage point decline in revenue related to a divestiture.

As you're aware, we have had our challenges with rest of world this year, with mining and oil and gas having significant pressure on both the top and bottom line.

We are also seeing general softness in Europe and Asia based on the macroeconomic environment.

We are making sure that we are staying disciplined, that the projects we take on meet our fundamentals, and that we continue to execute on our long-term growth strategy.

Before special items, operating income was $93 million.

The operating margin declined 30 basis points year over year to 11% as the benefits of productivity and restructuring initiatives were more than offset by the volume deleverage and the mix of geographies contributing to operating income.

Turning to order activity in rest of world, we saw a nice improvement sequentially in order intake.

Year over year, total ordered increased 1% with 1% growth in both service and installation.

Backlog of $1.9 billion was down 1% on a year-over-year basis, but increased 1% on a quarter sequential basis.

Turning to Global Products on slide 11, revenue declined 3% in the quarter to $675 million.

Organically, revenue declined 3% as nice growth in security products was more than offset by a decline in the life safety and the fire protection products businesses.

Organic growth was impacted by a 5 percentage point headwind from increased shipments of Air-Paks in the prior year.

Normalizing for the Air-Paks, organic revenue increased by 2%.

A 7% benefit to revenue from acquisitions was fully offset by a 7% decrease to revenue related to FX.

Before special items, operating income was $119 million.

As expected, the operating margin decreased 260 basis points to 17.6%.

Productivity initiatives were more than offset by the strength of Air-Pak shipments in the prior year, purchase price accounting for intangibles, and the timing of incremental investments in R&D, which in total, negatively impacted the operating margin by 330 basis points.

Underlying operations improved 70 basis points year over year.

Product orders increased 16% year over year off a relatively easy compare and half the growth was attributable to recent acquisitions.

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

First, corporate expense before special items was $50 million for the quarter, about $5 million lower than we had expected due to the benefit of cost actions.

Similar to prior years, we expect corporate expense in the fourth quarter to increase on a sequential basis to approximately $55 million.

Given the favorability in corporate expense year to date, we now expect corporate expense for the full year to be approximately $210 million.

Next, our effective tax rate, before the impact of special items, was 17.2% for the quarter and we expect a similar tax rate in the fourth quarter.

This would bring our full year tax rate to be approximately 16%, driven by a one-time benefit recorded in the second quarter related to the realization of certain non-US deferred tax assets.

Moving to cash flow, our profile is typically weighted to the second half of the year.

We have made significant progress in the quarter, converting our income to cash with $230 million in adjusted free cash flow, representing a conversion rate of 92%.

We expect a strong Q4 in terms of cash conversion, bringing the full year closer to a 90% conversion rate.

As we look ahead to 2016, we fully expect to be back to the 90% to 100% conversion rate.

Finally, I would like to give an update on our restructuring and reposition activities.

As George mentioned, we have been accelerating restructuring actions and driving strong productivity across the cost base to be well-positioned to deliver on our overall EPS commitment.

To date, we have incurred $169 million of charges related to restructuring and repositioning actions and we now expect these charges to be approximately $225 million for the year.

Before I turn it back over to George, let me provide you a quick update on our legacy liabilities.

Starting with asbestos, we expect to fund the Yarway Trust in the amount of $325 million in the fourth quarter, as we have now received all approvals required for the reorganization plan.

With respect to the tax litigation for the 1997 through 2000 period, a trial in the US Tax Court was originally set to begin in February of 2016.

The IRS subsequently requested an additional year to prepare for trial, which we objected to, and ultimately agreed to a trial date in October 2016.

In the meantime, we continue to explore the possibility of resolution before trial.

Now, let me turn things back over to George.

Thanks, Arun.

Let's turn now to slide 13 for our earnings guidance for the fourth quarter and for the full year.

We expect revenue in the fourth quarter of approximately $2.5 billion with negative 1% to flat organic revenue growth.

Changes in foreign currency exchange rates are expected to result in a $195 million or 7% headwind to revenue.

Net acquisition and divestiture activity is expected to contribute a benefit of 1%.

Taking all of these factors into account, we expect revenue in the fourth quarter to decline approximately 6% year over year on a reported basis.

We expect continued solid operational execution with 120 basis points of segment margin expansion year over year, including the absorption of a 30 basis point headwind related to non-cash purchase accounting and a 40 basis point tailwind related to a legal matter in the prior year.

As a result, we expect earnings per share before special items in the fourth quarter to be in the range of a $0.60 to $0.62.

This represents a 7% to 11% increase in earnings per share year over year compared to last year's fourth quarter earnings was $0.56 per share.

With that, we are tightening our full-year guidance range previously provided to $2.23 to $2.25 per share, which represents a 12% to 13% increase year over year, off a base of $2 per share in fiscal 2014.

Thanks for joining us on the conference call this morning and with that, operator, please open the lines for questions.

(Operator Instructions) Our first question comes from the line of Steven Winoker of Bernstein.

Thanks, good morning, all.

Morning, Steve.

Morning, Steve.

Just starting on oil and gas headwind slide, you talked about 20% in Q3 and the same in Q4 and 15% for the year, I guess that means under 1% headwind for the year in total to gross; I think that's 70 to 80 basis points.

When you look out to 2016, just on this aspect, should we continue -- are you thinking about the headwind in the same way for the first half of 2016 or how are you thinking about that?

Steve, the way I'm thinking about that is that we saw the pressure come through the second quarter, third quarter, and it's been pretty much tracking to what we expected and that'll continue through the fourth quarter.

So as we plan for 2016, we will see some additional pressure in the early part of the year.

Who knows how this is going to play out, but we're going to be positioned so that we'll take the additional actions we need to take to make sure that we're positioned to deliver whatever happens on the margin and the EPS commitment that we make.

Okay.

If I think about 2015 more broadly, then, on the new basis of reporting where you're including restructuring, I think the number this year, based on your current guidance, is going to be closer to somewhere around $1.80, $1.85, somewhere in that range.

Then if I think about the big buckets going into next year, I'm still thinking about $0.07 to $0.09 of incremental M&A, $30 million to $40 million of net productivity.

You get back $150 million by going to your normalized restructuring, volume leverage on top of that, that all gets me to about $2.35 still in that range, $2.35 to $2.40 or $2.30 to $2.40.

How are you guys thinking about that relative to what you've been talking about for the last few months?

So the way that I see it, Steve, is that the environment is changing monthly.

We will be providing formal guidance for 2016 in November, but let me share a few thoughts.

I would start with tailwinds.

I think, from a volume standpoint, the work that Brian Young has done over the last year, the way we have remixed our sales team, about 20% of our sales team, we've got a new structure, the different incentives, we're starting to get some real traction, and that's supporting the orders growth that you see.

I'm confident that we'll continue to see volume improvement going into 2016.

The productivity that you mentioned with the actions that we've taken, the accelerated restructuring this year, we took additional $75 million, that's now going to let us increase what we originally projected to be net savings of $30 million to $40 million.

That is looking towards now $50 million to $60 million of net productivity.

The acquisitions that we've done this year, as we have discussed, will contribute about $0.07, and then the continued capital allocation during the course of the year will also benefit.

As we think about the headwinds, we will see continued pressure from foreign exchange in the early part of the year and we're estimating right now, it could be about $0.05.

We will have higher interest expense and then we'll get a more normalized tax rate of about 17% to 18%.

So what I would say as we're planning for 2016, we'll see improvement in revenue from 2015 and that's supported with the orders growth that we're seeing.

With the significant productivity and cost out that we achieved in 2015, that positions us well to continue to expand margins in the range that we had forecasted back during our November investor day, where we could achieve 50 to 70 basis points on an annualized basis over the next three year plan, and that will position us to be able to deliver very nice EPS growth in 2016.

Okay, that's really helpful.

And just before I hand it off, just a quick reminder, when you talk about 5% orders growth this quarter, and obviously it's going to bump around a little bit based on the comps that you talked about, but how long should we about thinking about before that starts to show up on the revenue side of the equation?

So when we look at order conversion, we always say that our orders convert anywhere from nine to 12 months.

Now, with some of the orders we've taken on, they're much larger and there's a longer cycle time to conversion.

That all being said, we've been able to increase orders, as we focus on North America, consecutively now for four quarters.

That has positioned us to be able to increase the backlog by about 4%.

Although we haven't -- we're a little bit disappointed in our ability to convert revenue during the last two quarters, a lot of that is actually impacted by the customer with the other work that's taken place on the customer's site.

And we don't -- we're not able to claim our revenue until we actually complete our project.

So this gives me a lot of confidence with the backlog we've built, with the continued progress we're making within our commercial structure, with the orders performance that we're going to start to see revenue continue to improve consecutively here as we go through these quarters as we go through 2016.

Okay, great, George.

Thanks, I'll hand it off.

Thanks, Steve.

Scott Davis of Barclays.

Good morning, guys.

Good morning.

Good morning, Scott.

George, just a quarter ago, you were still fairly -- I wouldn't say bearish on non-res, but you were still pretty unconvinced that it was really going to come back in North America and now you've got the orders up 6% and you just commented on that and some big stuff in there.

But give us a sense of A, the follow-through you're seeing through the summer here in non-res and maybe commentary you're getting from your sales force on some early indications of is this real or is this a head fake or what the sustainability of this is.

There just doesn't seem to be many parts of the economy that are showing some real progress, but this seems to be one that potentially could be.

Scott, I would say that what we're seeing is continued improvement that is supported by -- as we looked at the ABI, that's been improving pretty much over the last couple years and we're beginning to see the projects that are coming through that impacting the segments that we're in.

If you break down the verticals and if you separate it by security and fire, what I would say, in security we're seeing nice strength in the retail, higher education, we talked a little bit about the commercial space, government, banking, as well as telecom.

On the fire side, we've seen significant strength in the commercial space, higher education, healthcare, hospitality, as well as infrastructure.

I think what we're also seeing, Scott, is the benefit of the work that Brian Young has done over the last year.

The way that we've upgraded our sales team, we've got a remix of about 20%, we put in a lot of discipline and accountability, we're getting good productivity, and with that, we're now adding resources.

So the combination of the market improving, the work we've done on the commercial front end, that has given me confidence that we're going to continue to see similar type order growth.

We'll see backlogs continuing and that'll play out with the conversion cycles that we're seeing over the next 12 months.

We'll begin to see some very nice revenue growth.

Okay, good.

Hopefully that happens.

Just when you think about the organization overall, George, and the amount of restructuring and the new bodies you've brought in, what is -- what do you think the real growth rate of this entity is going to be through the cycle?

And I guess one of the reasons why I ask that question, is the pushback we get from investors oftentimes in your stock is that the asset has, over history, been really about a 2% grower and not much more than that.

Do you feel like you've made the proper changes and you're positioned to be a real, call it, a 4% to 5% grower?

Let me reflect on the first three years.

The first three years, we were very much focused on self-help.

The combination of the businesses came together, we saw a tremendous opportunity to drive cost out, to deliver synergies, and that was going to deliver very strong EPS growth for our shareholders.

And over the last year of that three year plan, we very much got focused on improving our commercial processes.

We brought in Brian Young, we've done tremendous work there in that, we're beginning to see lift with the work that's been done.

Now, as we thought about the next three year plan, it was important that we build a leadership team with the depth and expertise to be able to drive growth and that's what drove bringing in Girish in North America and Johan for the rest of the world.

So the way that I look at it, with the investments we're making not only in products, but also now in our service offerings, the combination of the two with normal GDP growth, we should be positioned to deliver on our core 1.5 plus times GDP on the core business.

But then we're working on new business models with new technologies.

That's going to be the accelerator of our growth going forward, to be able to add on new services, services that actually provide very high ROI to our customers, that enable us to not only support the customer delivering more value, but in turn, being able to deliver very nice returns for our shareholders.

So I think we are at that inflection point as we get into our next three year plan.

It'll be very much focused on taking the very strong fundamentals that we built in the first three years and now with the commercial structure we have in place, being able to leverage those fundamentals in addition to the investments that we're making to be able to deliver on the growth strategy.

Okay, good luck, I'll pass it on.

Thanks.

Thanks, Scott.

Jeff Sprague of Vertical Research.

Thank you, good morning, everyone.

Morning, Jeff.

The margin's obviously very solid and George, just picking up where you left off there, obviously, you've been really methodically and steadily improving these North American margins, but there is kind of an appearance of a step change here in the quarter on not very -- not much growth.

Is there something in particular that came through on mix vis-a-vis the project selectivity you've been doing?

Anything else that you could really kind of give us some context about the sustainability here?

And you made a comment about strong leverage from here on additional growth, how do we think about the leverage, particularly in the North American business, going forward?

Yes, Jeff, so looking at North America, when we launched the Company back in September of 2012, as we all knew then, we had tremendous pressure on the commercial security business, a business that was going to be kind of mid-single digit profitability.

And we put together the first three year plan very much focused on improving the fundamentals, getting the business repositioned so that as we focused on growth, we'll be able to deliver on our growth objectives from a margin standpoint.

The team has done a phenomenal job and it's been through not only simplifying the infrastructure we have in North America, streamlining the organization, driving strong productivity, both in gross margins, as well as within the G&A structure, all of that has contributed to us to be able to exceed our original thoughts relative to how we can improve margin rates in North America.

When you look at third quarter, we were up significantly.

Now as we project to roughly 16% or so and as we project fourth quarter, that's going to continue.

We're seeing now sustainability of these margin rates.

We're seeing continued opportunity to be able to drive improvement.

And as we now are positioned to plan for 2016, the progress that we made here, over the last three years, is going to position us to be able to continue to improve North America to be able to support the 50 to 70 basis points that we're committing to on an annualized basis over the next three year plan.

So we're very confident that the fundamentals that we've got in place now with the order growth that we're beginning to see, we're going to be able to leverage that very nicely.

And I'm sure you've been very disciplined on cost, that's your forte, and it sounds like project execution is driving this, but to what extent is price playing a role?

We're seeing a large competitor of yours kind of stumbling around, perhaps not executing the way they could or should in that business.

Is there some opportunity to achieve additional price in this market, even though the overall revenue trends are still kind of on the squishy side?

I would start by saying pricing really depends on the market.

So as we look at the global market from time to time, we do come across competitors that aren't disciplined in terms of pricing and we are seeing one of our competitors being undisciplined.

But that being said, we stay focused on the segment of the market that we believe represents growth and growth that we can leverage our fundamentals to be able to deliver increased earnings growth.

And with the focus and discipline that we've had, we're maintaining that, and from a pricing standpoint, we continue to get increased price.

We net, for the Company, about 50 basis points or greater of price on an annualized basis.

So specific to North America, I think, as we have refocused that business, we're now leveraging technology, we're leveraging all of our depth and expertise to create more value for our customers, and as a result, now we're accelerating our growth with the work that we're doing.

And so I do believe we'll continue to be able to get price.

We'll be able to build fundamentals and with that, we'll be positioned to deliver a lot of value for the customers that we serve, as well as for the shareholders that we support.

Great, thanks a lot.

Steve Tusa, of JPMorgan.

Hey, good morning.

Hi, Steve.

Just on the order outlook for the fourth quarter, first of all, the organic without acquisitions orders this quarter, we're getting to something like 3% instead of the 5%?

Is that right on the organic side?

That's right, Steve, the organic order growth is around 3% for Q3.

Okay.

So that number in -- you're kind of tempering a bit of the enthusiasm for the fourth quarter, I know that can be lumpy.

That'll be positive in the fourth quarter, right, it will just be a little bit less than the three, given the tough comps?

My comment, Steve, was related to the North American install order, which I said in my comments, we have a very tough compare against that install order.

But as I said earlier as well, orders can be lumpy and we may end up getting a few large projects that we got in Q3, for instance, but we don't really know when those orders finally get signed.

So, we just wanted to let you know it was a tough compare for Q4.

Okay.

So could either of those be negative with the way you see it right now?

Either the North America install or the total number?

Steve, I would say that the total number we should have clearly continued positive order growth.

Given that we had the plus-18% in install orders in North America last year, it's very plausible that, in the fourth quarter, our install order numbers could be negative.

But that wouldn't be an indication that the dollar values, per se, that there's a different change in trajectory.

It's really, again, just the timing of when the large orders hit.

Right, clearly the trend is positive.

And just a little color on that, Steve, we have been building the pipeline.

We're building pipeline, we're seeing good conversions on -- so as we go forward, we'll see continued improvement.

Okay.

Now we get into some of these compares, but the pure volume that's being generated through our sales channel is improving.

Right, right.

Then stepping up the restructuring pretty dramatically this year, how do you -- is that focused in kind of the areas that are the greater pressure points, like in rest of world?

Because it's a little bit tough to juxtapose the trend in orders and trying to accelerate growth with continuing to take out cost.

It's growing in a cost out environment is always a bit tricky, is it focused more on kind of the problem child areas like rest of the world?

We have, as we started the Company, launched the Company, have a pretty significant cost base.

And as we laid out our plans for restructuring, repositioning, and cost out, we're attacking every one of our cost buckets across the board.

And we've got a very strong pipeline, in spite of all of the progress we've made in the first three years, we have a very strong pipeline that we're going to continue to execute on that will deliver very nice margin expansion going forward.

All of the restructuring and repositioning that we've done delivers a two year payback.

We're increasing restructuring, repositioning this year by $75 million.

That has enabled us to be able to take our net savings for this year that we originally had projected to be $60 million or $70 million to $80 million.

With the work that we've done this year, that's going to take the net savings, the initial plan for 2016 from $30 million to $40 million in savings to $50 million to $60 million in savings.

It is broad-based.

It's looking at not only simplifying the supply chain on cost of goods and cost of service, but also simplifying infrastructure, simplifying our branch network, as well as the simplification of our functional activities across the globe.

And so although it isn't -- we are focused on the areas where we have some challenges, but the benefits are being derived across the overall enterprise.

That's great color; then one last quick one.

You mentioned the IRS, October 2016 now is the next milepost.

Again, like, this is a big enough issue to keep you guys from doing something more aggressive with the balance sheet.

I think that's the way you've communicated it.

Is that the right way to look at it?

It is, Steve.

Obviously, while the date has been moved from February 2016 to October 2016, we continue our dialogue with the IRS and we want to settle this thing.

But at the same time, we have a very strong case here and if we can't get to the right settlement, we will continue the litigation.

Yes, okay, great.

Thanks a lot.

Nigel Coe of Morgan Stanley.

Thanks, and good morning.

Morning, Nigel.

Morning.

So since this 4Q compare in North America is going to be a bit of an issue, coming at it from another way, would you expect to build backlog in North America during 4Q?

Nigel, our typical seasonality in backlog is we always have a seasonal decline in backlog in the fourth quarter.

If you think about North America, in particular, I would say the education vertical for us is a very big vertical and typically, there's a lot of fire upgrade-type work that's done in the summer because the schools are closed or out on break.

So despite order activity or the install order number that we'll print in Q4, we typically have a seasonal decline in backlog from Q3 to Q4.

Good point, good point.

Switching back to restructuring, we're taking $75 million of charges and only getting $20 million of incremental benefits.

Seems like a little bit light on the payback, is that the right way to think about?

And the second part of that question is, are we still looking at $0.15 of restructuring charges in 2016?

Nigel, let me say that when we talk about restructuring and repositioning, the restructuring payback always comes in two years or less.

Repositioning has a longer cycle to it, so that's the reason why we kind of raise our number for 2015 to $80 million from a mid-point of $65 million and $20 million for next year, as well.

So as we look at the 2016 number, the $75 million that we had before is still the best place holder for 2016.

Nigel, the only thing I would add on the restructuring front to keep in mind is that a very large portion of the charge that we took in the third quarter is in rest of the world.

So as you would expect, typically actions that you take outside of North America sometimes take a little bit more time before you see the benefit, unlike in North America where when you take a restructuring action, you pretty much see the benefit immediately.

Understood.

And then finally, it looks like the oil and gas headwind is tracking to plan, how is that shaking out between the rest of the world and products?

It feels like it's hitting products a bit harder than rest of the world, is that correct?

And what are you seeing in terms of price within those verticals?

Nigel, I would say that our -- typically, our product businesses do get hit pretty hard the fastest when we get a downturn and that's what we've seen in our fire protection products business with oil and gas.

It is playing out pretty much as we expected.

On the installation and service side, it's a little bit slower because it starts with projects being either delayed or canceled or lack of projects on the install side.

And then on the service side, typically operations continue to operate, they just are reduced output or reduced utilization and that does have an impact on our services.

And so as we have modelled this based on what we believe our customers are going to do with their facilities, we are seeing, this year, a bigger impact in our products than we have seen in our installation and service business.

Okay, and on the price, have you seen price declines?

Well, anytime you get into a downturn like this, depending on your competitors, we always try to focus on our customers and understanding some of their challenges and working with them so that we can align our capabilities to support them and maintain the business.

You do get some undisciplined competitors when these environments come about and therefore, certainly price comes into play.

But we are staying disciplined with the work we're doing.

We're very much focused on continuing to deliver for our customers with the value that we create and that's how we get paid and I haven't seen any significant loss of business as a result.

Okay, I'll follow up offline.

Thanks a lot, guys.

Thanks, Nigel.

Deane Dray of RBC Capital Markets.

Thank you, good morning, everyone.

Good morning, Deane.

There was a big IRS tax settlement with another Ireland-based company.

To the extent that you can, are there any comments, are there any parallels, any implications for Tyco?

Deane, I cannot comment on the specific facts of the Ingersoll Rand case here, but in general, based on what they have disclosed publicly, their tax case involves technical issues regarding withholding tax issues that appeared very different from ours, which is more based on inter-company debt.

And as I've said, we continue to work with the IRS towards hopefully the potentially favorable settlement and we believe strongly in the merits of our case.

Understood.

Second question would be just to clarify on the M&A comments on the pipeline, the $200 million to $500 million, was that a total pipeline comment or the size of the deals in the pipeline?

Yes, Deane, the $200 million to $500 million rate that we gave is really the sum of the few acquisitions that we're looking at that we expect to hopefully close in the next three to six months.

Understood.

And just last question on M&A, maybe you can comment a bit on this acquisition of FootFall.

It's interesting how the line is beginning to get blurred between what's your legacy inventory tracking type of business, Sensormatic, into the realm of what you've called the traffic intelligence, monitoring store traffic, integration of video.

Maybe if you could just size this opportunity and are there more acquisitions, you're looking for more technology, and that would be helpful.

Sure.

So Deane, I've been involved in retail since I've been with Tyco over the last nine-plus years and we've always had a strategy on leveraging the infrastructure that we provide for the anti-theft solutions and being able to create solutions on top of that infrastructure, that creates a lot more value to our retail customers, which would position us to be able to accelerate growth in that vertical.

We started with the development of our RFID solutions, we've done other acquisitions in that space; that has positioned us now to create the inventory solutions as part of our store performance solutions.

This is right down the middle, similar to that capability in how we enhance the solutions that we provide, leveraging our install base, which is across 80% of the top retailers across the globe, and provides a tremendous opportunity to be able to provide high ROI solutions to the retailers, leveraging our current infrastructure that we have across this retail base.

So this is -- we were developing some of these technologies ourselves.

We were able to execute this acquisition very attractively for us.

And the combined capabilities, it's significantly going to enhance our store performance solutions in total.

Are there more specific technologies that you need to add to this package?

We are constantly screening the landscape with the work we're doing across all of our technology organization, making sure that we're going to be positioned with leadership technology that will converge to be positioned to best serve the customer base, as well as being able to create more value with that and supporting the growth of our retail vertical.

Great, thanks for the color.

Gautam Khanna, of Cowen and Company.

Yes, thanks, and good morning.

Good morning, Gautam.

I was hoping you could just elaborate on your backlog comments.

At ROW and global products have you already scrubbed the backlog for potential debookings or kind of deferral requests related to oil and gas or the general weakness you talked about in Asia and Europe, so that the sequential decline in the September quarter, at least at ROW won't be worse than it's been in prior years, prior Q4s?

Then I have a follow-up on that.

Yes, on the issue of backlog, this is something we look at very closely, constantly, not just at any one moment in time and we haven't seen any noticeable cancellations or scale backs.

There may be some timing issue that George referred to his in comments with regards to the pace at which the customer wants to close the project, but other than that, we haven't seen any major cancellations.

Okay.

And just relatedly, can you comment on the -- can you elaborate on the backlog duration change you may have seen?

Where are you seeing it?

Is it just in the ROW pockets that you mentioned?

And how dramatic is that, in fact, so that we can look at growth in back log and correlate it to organic?

How has that relationship changed, if at all?

Well, I would say if you look at the organic backlog growth, the organic backlog growth for the quarter was 2%.

So can you tell the difference between total growth, which part of it is from acquisitions and the rest is organic.

Is the duration of the backlog is not stretching?

No, Gautam, the only comment I would make on the backlog to keep in mind is now that we have some larger projects in there, typically larger projects do convert over multiple quarters.

As we've always talked about, particularly when you have new projects, greenfield projects, we get the fire orders particularly very early in the cycle, long before you even start to break land in some cases.

So there's going to be your general timing of getting an order which immediately goes into backlog to when it would start to convert maybe six to nine months later.

Then on top of that, these larger projects do take multiple quarters in order to complete them.

That was the comment that was being made in terms of the backlog timing.

Got it, and your point is that you're sighing more such large projects in your near-term pipeline and that's --

Particularly in North America where we are seeing some good activity related to non-res, that's where the larger projects are coming from.

Gautam, the way I would summarize that is that we're making a lot of progress with our commercial teams and we're getting traction every day, building pipeline, getting better conversion, which ultimately is creating orders and then orders convert to revenue over an average of a 12-month time period.

And so what I've seen here with the work we've done from a growth standpoint, we're seeing continued progress.

So based on the backlog that we have reported, we'll be able to continue to improve our revenue over the next 12 months with our I&S businesses, specifically North America, in a similar range as you see the backlog today.

Okay, and one last one, could you just update us on your thoughts on Australia?

Looking into fiscal 2016, I know you previously thought it might come back second half.

Where do you stand today on that?

Well, as I said in my prepared remarks, Gautam, it has been tough.

The Australian market has been extremely tough for us.

We built a great business.

The business has -- all of the growth that we achieved has been reversed here over the last two years.

We are down, like I said, mid-single digits this year.

We believe that it is going to stabilize a bit and that's, as we plan going forward, is hard to predict.

But I can assure that you we've taken all of the actions that are necessary to make sure that we're positioned to offset the deleverage from the volume and continue to be able to support the business as the volume starts to come back, being able to deliver growth.

But right now, it's a little bit tough to forecast exactly what we see in 2016, but for total 2015, it was down another 5%.

Okay, thanks a lot, guys, and good luck.

Thanks.

I'd like to call the call back over to George for some closing comments.

I accept that it has been a tough year and we have gone through a lot of change here at Tyco, but I can assure you we've remained focused every step of the way.

We have made significant progress on the commercial front end, as well as in our productivity initiatives.

In spite of the challenges, the work we've done this year puts us in a better position to deliver on our long-term commitment to shareholder value creation.

I look forward to seeing many of you soon.

Operator, that concludes our call.

Thank you and that concludes this call.

You may now disconnect.