江森自控 (JCI) 2015 Q4 法說會逐字稿

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

(Operator Instructions)

This conference is being recorded.

If you have any objections please disconnect at this time.

I'll turn the call over to Antonella Franzen, Vice President of Investor Relations.

Good morning and thank you for joining our conference call to discuss Tyco's fourth-quarter and full-year results for FY15 and the press release issued earlier this morning.

With me today are Tyco's Chief Executive Officer George Oliver, our Chief Financial Officer Arun Nayar, and Robert Olson, who will be succeeding Arun as CFO following the filing of our Form 10-K, which we expect to do later today.

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.

During the fourth quarter of FY15, we changed the name of our North America installation and services and rest of world installation and services segments to North America integrated solutions and services and rest of world integrated solutions and services to better reflect our focus on providing technology-enabled solutions that are tailored to our customers' needs.

There was no change in the underlying segment structure and no impact to previously disclosed segment information.

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 schedule attached to our press release.

Also, I would like to remind everyone that beginning in FY16, we will be including restructuring and repositioning within our reported earnings per share before special items.

As we are now three years out from the separation, we have completed the bulk of the restructuring and repositioning actions related to that transaction.

Our view of a normal run rate for these charges is approximately $75 million on an annual basis.

Given the current economic environment our guidance for 2016 includes a range of $75 million to $100 million, or $0.14 to $0.19, of restructuring and repositioning charges.

These charges will be shown as a separate line item below segment operating income to allow greater visibility to the underlying segment results.

We have recast the quarters of FY15 to include restructuring and repositioning charges as well as the related tax impact in the appendix to the slides.

Now let me quickly recap this quarter's results.

Revenue in the quarter of $2.5 billion declined 7% year over year on a reported basis driven by a 7% headwind from changes in foreign currency.

The favorable impact of net acquisition and divestiture activity was offset by a 1% organic revenue decline.

Earnings per share from continuing operations attributable to Tyco ordinary shareholders was $0.19 and included net charges of $0.42 related to special items.

These special items related primarily to restructuring and repositioning charges as well as a charge for the early retirement of debt.

Earnings per share from continuing operations before special items was $0.61 compared to our guidance of $0.60 to $0.62 per share.

Now let me turn the call over to George.

Thanks, Antonella.

And good morning, everyone.

This was a solid quarter of operational execution.

Our continued focus on productivity and self-help initiatives across all of the businesses in global functions drove our operating results this quarter.

Overall FY15 was a challenging year.

Macro headwinds coupled with the continued strengthening of the US dollar has put significant pressure on our results this year.

Our team stepped up to the challenge and aggressively executed cost actions and accelerated our pipeline of restructuring initiatives to help mitigate the pressure and drive strong earnings growth both for the fourth quarter and for the year.

I am very proud of how our teams came together and thank them for their leadership.

Starting on slide 4, let me spend a few minutes on what we are seeing in the macroeconomic environment and our expectations for FY16.

Overall, the global industrial economy has come under increased pressure over the last few months.

Although pockets of strength exist in certain verticals, many markets directly or indirectly exposed to commodity linked resources continue to be sluggish.

Starting with North America, the US market remains a relative bright spot with continued growth in non-residential construction year over year.

We continue to see increased activity over prior-year levels with strength in the commercial, retail, and institutional verticals.

As expected, western Canada remains weak as the market is very much tied to the petrochemical, oil and gas industry.

Overall, our North America integrated solutions and services business performed very well in the quarter.

Organic growth accelerated to 2% and the operating margin continued to expand.

When I reflect back on the last three years, this business has been through significant changes.

Although the top line has remained relatively flat on an organic basis, the operating margin before special items improved by 480 basis points to an annual rate of 15.3%, and operating income increased 43% over this period.

This far exceeded the expectation set three years ago to achieve an operating margin of 13% to 14%.

Even more importantly, our work is not done.

We are investing in the business while continuing to improve the efficiency of our operations.

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

In general, the environment remains sluggish.

GDP estimates continue to be revised downward due to economic uncertainty.

Overall, our European businesses have executed well despite softness in the top line.

Our operating margins have been improving as the teams are executing productivity initiatives to reduce our cost structure and drive operational efficiencies.

With that being said, we anticipate relatively flat revenue growth in Europe in 2016 on a year-over-year basis.

In Australia, the industrial and mining sector downturn continues to dampen overall industrial activity in the region.

This macro environment has persisted throughout 2015 and we are planning for a similar environment in 2016.

In the growth markets we continue to see growth in the mid single-digit range and expect this to continue in FY16.

Despite the economic conditions in Latin America, our business, which represents approximately 5% of sales, had solid performance with about 10% organic growth for the fourth quarter and FY15.

Given the impact the oil and gas vertical has had on our results this year, I'd like to take a minute to update you on our performance during the quarter and for the full year.

In aggregate, our oil and gas businesses were down about 20% on a year-over-year basis in the fourth quarter, and down 15% on a full-year basis, both in line with our previous expectations.

Despite representing only about 5% of sales, the mix impact associated with the decline in this vertical created a $0.06 EPS headwind in FY15.

As we continue to the next phase of our journey, we remain intently focused on disciplined growth and continuous operational improvement.

Disciplined growth is focused on ensuring that we provide products and services that our customers value and are willing to pay a premium for, whether it's the products we sell through our distribution channels or the technology embedded in our integrated solutions and services that are delivered by our direct channel.

We are a leader in many of the markets we serve, as the combination of our brands, technology, and reliability make us a premium player in the fire and security industry.

Innovation is at the heart of everything we do.

We live in a world where sensors and devices are gathering increased volumes of data, which creates opportunities for improved analytics that help our clients improve operations, keep customers safe, safeguard their facilities, and comply with codes and standards.

We no longer consider our total addressable market to be limited to the fire and security industry when developing new products and services.

We are now looking at the total customer problem and how our resources, our devices and our factories in the field can help create solutions to solve these problems.

Every customer process, every customer building, every customer business needs data for continuous improvement.

The right real-time data leads to the operational insights, customers need to optimize performance.

For example, the combination of our store performance solutions with our creative systems and [football] acquisitions provides a full view of inventory, traffic, and other analytics to fundamentally change the retailers' operations.

Retailers can plan better around store hours, figure out when to restock their stores, lead customers directly to inventory on the shelves, and upsell them more effectively when they choose to try on clothes.

The combination of our investments, along with the changes made to the sales team to better align to our strategy has resulted in a mid single-digit increase in our retail business in FY15.

Although this is only a piece of our portfolio, it lays the path of what can be done across the enterprise.

This requires making the right decisions around resource allocation as well as making smart investments in R&D and sales and marketing.

Over the past three years, we have been focused on streamlining operations.

While we will continue doing so, we are shifting to driving commercial excellence across the portfolio.

We are making incremental investments in 2016 to drive productivity within our sales force.

We have just initiated a global program to create a commercial ecosystem using salesforce.com to align all Tyco employees around the customer and drive a superior customer experience.

The program is called E3 which stands for Everyone Sells, Everyone Serves, Everyone Helps.

E3 will allow 30,000 customer-facing team members to collaborate around a 360-degree view of our customers, and for our customers to have a more seamless experience with Tyco.

E3 is being rolled out in phases over the next two years and will be the foundation for commercial excellence.

Shifting to continuous improvement, the combination of our productivity initiatives, along with the additional restructuring actions taken in FY15, position us to increase our expected gross savings to approximately $180 million to $210 million in 2016.

These savings are expected to be somewhat offset by wage inflation costs of approximately $60 million.

Additionally, we expect to increase our incremental investments for R&D and sales and marketing initiatives to a range of $70 million to $90 million.

As the incremental gross savings will fund these increased investments we still expect to deliver a $50 million to $60 million benefit to the bottom line.

We will continue to supplement these internal growth initiatives with strategic acquisitions.

During FY15, we committed about $575 million of capital for acquisitions, which we expect to yield approximately $300 million of revenue on an annualized basis.

We continue to actively work a strong pipeline of M&A opportunities with a few transactions in the near term which could total between $200 million and $500 million in purchase price.

In addition to acquisitions, we continued to review the portfolio.

We recently made a decision to divest a business which manufactures piping components within our global product segment.

This business generated approximately $45 million in revenue in FY15.

Additionally, share repurchase remains an important component of our capital allocation strategy.

We currently have a $1 billion authorization in place.

Our current plan is to offset dilution at a minimum and potentially repurchase additional shares if cash builds up on the balance sheet and there is no acquisition activity.

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 6. Beginning with our full-year results, revenue of $9.9 billion grew 1% organically.

The net impact of acquisitions and divestitures added an additional point to revenue growth, which was more than offset by a 6% headwind from changes in foreign currency, for an overall revenue decline of 4%.

In total, segment operating margin before special items expanded 50 basis points to 14.4%.

The margin expansion was led by North America integrated solutions and services, which expanded margins by 200 basis points, helping to offset the margin pressure in rest of world and global products.

Earnings per share before special items increased 12% in 2015, led by strong operations including aggressive cost actions, which together contributed $0.17 of incremental earnings year over year despite a tougher than expected macro environment.

Now focusing on the quarter please turn to slide 8. Revenue of $2.5 billion declined 7% year over year on a reported basis, including a 7% headwind from changes in foreign currency.

In line with our expectation, organic revenue declined 1%.

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

Excluding FX, service was up 3%, integrated solutions declined 3% and global products grew 5%.

Before special items, segment operating income was $394 million and the segment operating margin improved 150 basis points to 15.7%.

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

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

Turning to orders, on slide 9, as I've mentioned in previous quarterly calls, it is important to keep in mind that order growth, particularly in our integrated solutions business, is lumpy and can be impacted by the timing of large projects.

Overall, orders increased 3% year over year with 10% growth in products, 2% growth in service, and a 1% decline in integrated solutions.

Total backlog of $4.6 billion increased 3% on a year-over-year basis and was flat on a quarter sequential basis.

Now let's get into the details of each of the segments, starting first with North America integrated solutions and services on slide 10.

Revenue in the quarter of $1 billion was flat on a reported basis.

Organic revenue growth of 2% was fully offset by the negative impact of the weaker Canadian dollar.

We saw nice growth in service revenue which increased close to 3% organically in the quarter.

Additionally, integrated solutions grew 1% organically.

Before special items, operating income in the quarter was $180 million and the operating margin was 17.8%.

The operating margin improved 460 basis points year over year.

The prior year included a $10 million legal charge which resulted in 100 basis point tail wind to the year-over-year operating margin expansion.

Additionally, the current year benefited from discrete items, which favorably impacted the operating margin by approximately 120 basis points.

Underlying margin expansion of 240 basis points was driven by increased revenue, improved execution, and the benefits from restructuring and productivity initiatives.

As George mentioned, we have made significant changes in our North American integrated solutions and services business, and we are seeing the benefits of those changes in the margin expansion.

As I've discussed on last quarter's call, orders in the fourth quarter of FY14 benefited from several large orders resulting in a difficult compare in the fourth quarter of FY15.

As expected, overall orders decreased 4% year over year in North America integrated solutions and services.

Service orders increased 3% and integrated solutions orders decrease 11% off an 18% increase last year.

Order activity this year was driven by the commercial, retail and government verticals.

As we look to the first quarter it's important to keep in mind that we have another tough compare in order activity as last year's Q1 integrated solutions orders increased 13%, driven by several large projects.

Total backlog of $2.5 billion increased 2% year over year and in line with normal seasonality declined 1% on a quarter sequential basis.

Turning to slide 11, rest of world integrated solutions and services revenue of $827 million decreased 18% year over year driven by a 13% unfavorable impact from FX.

Organic revenue declined 3% driven by a 7% decline in integrated solutions, partly due to a tough compare of 7% growth in the prior year, as well as pressure in the UK and the Asia Pacific regions, mainly from the oil and gas vertical.

Acquisitions contributed 2% to revenue growth which was more than offset by the impact of a divestiture.

Before special items, operating income was $90 million.

The segment operating margin declined 90 basis points year over year to 10.9% 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 in order intake.

Year over year, total orders increased 6% with 1% growth in service and an 11% increase in integrated solutions which included several large orders in Latin America and Asia.

Backlog of $1.9 billion grew 4% on a year-over-year basis and 2% on a quarter sequential basis.

Turning to global products on slide 12, revenue declined 2% on both a reported and organic basis to $666 million.

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

The organic revenue decline resulted from a slowdown in the US fire market, as well as significant decrease in demand in the Middle East related to the oil and gas vertical, each of which negatively impacted our life safety business.

Before special items, operating income was $124 million and the operating margin declined 60 basis points to 18.6%.

Productivity initiatives were more than offset by volume deleverage and mix, as well as an 80 basis point impact from non-cash purchase accounting.

Product orders increased 10% year over year primarily due to recent acquisitions.

Now let me touch on a few other items on slide 13.

First, corporate expense before special items was $45 million for the quarter.

This is about $10 million lower than we had expected and was offset by a $10 million increase in other expense.

Corporate expense for the full year was $201 million.

Looking ahead to FY16, we expect corporate expense to be in the range of $205 million to $215 million.

Next, our effective tax rate before the impact of special items was 17.4% for the quarter and 16% for the year, driven by a one-time benefit recorded in the second quarter related to the realization of certain non-US deferred tax assets.

As we look forward to FY16, we expect the tax rate before special items to be in the range of 17% to 18%.

Moving to cash flow, we had a strong conversion quarter with adjusted free cash flow of $339 million, representing 130% conversion rate.

We have made significant progress in the last six months converting our income to cash.

However, the weaker than normal conversion in the first half of the year takes our full year adjusted free cash flow of $761 million to a conversion rate of 80%.

As we look ahead to 2016, we fully expect to be back to the 90% to 100% conversion rate for adjusted free cash flow.

Moving to restructuring and repositioning activities, we incurred charges of $120 million for the quarter and $289 million for the year, of which $176 million related to restructuring actions.

These actions primarily related to severance and other employee related charges with an expected pay back within two years.

These and past restructuring and repositioning actions, along with our strong productivity initiatives, have offset the weaker macro environment and have been a strong contributor to our double-digit EPS growth this year.

As Antonella mentioned, beginning in 2016 our EPS before special items will include restructuring and repositioning charges.

Our expectation for restructuring and repositioning charges for 2016 based on our current outlook is $75 million to $100 million, with approximately $20 million expected to be included in our first-quarter results.

Before I turn it back over to George, let me provide you a quick update on our recent debt refinancing, which is detailed on slide 14.

In September, we took advantage of the low interest rate environment and raised $1.5 billion of debt.

Half was issued with a 10-year term and at an annual interest rate of 3.9%, and the other half has a 30-year term at an annual rate of 5.125%.

All the proceeds were used to redeem several tranches of higher interest rate debt, pay make whole payments for the early redemption, and repay debt that matured in October 2015.

During the course of the year, and including the recent debt refinancing, we increased our long-term debt by $700 million to $2.2 billion, with a weighted average interest rate of 3.7%.

Despite our higher debt balance, we expect to reduce net interest expense in 2016 to approximately $80 million.

Additionally, we expanded the capacity under our credit facility from $1 billion to $1.5 billion and extended the term five years out through 2020.

Now let me turn things back over to George.

Thanks, Arun.

Let's turn now to slide 15 for our earnings guidance for FY16.

Let me begin by noting that the uncertainty created by the macroeconomic environment, particularly in our international markets, has resulted in a more cautious outlook for 2016.

Additionally, the headwind created by lower oil prices has kept pressure on customer CapEx budgets and OpEx spend, including continued deferral of discretionary maintenance.

Based on the timing of the decline in our results in 2015, which began at the tail end of our fiscal second quarter, we expect our FY16 results to reflect low double-digit declines in our oil and gas vertical on a year-over-year basis.

Although underlying activity may still be subdued throughout FY16, our year-over-year comparisons eased significantly in the back half.

With that in mind let's get into the details of our FY16 guidance.

We expect total revenue to be in the range of $9.65 billion to $9.85 billion with organic revenue growth being flat to up 2% year over year.

We expect to start the year with an organic revenue decline given the compares with FY15 but we expect to see the growth rate pick up, particularly in the second half of the year.

Included in our full-year revenue guidance is a $310 million or 3% headwind related to FX and the net benefit of recent acquisitions and divestitures of approximately $30 million.

The overall segment margin before special items for 2016 is expected to expand 50 to 80 basis points year over year.

As Arun mentioned, our EPS before special items guidance for FY16 includes a range of $75 million to $100 million for restructuring and repositioning charges.

Based on these items and the specific guidance Arun provided for corporate expense and below the line items, we expect earnings per share from continuing operations before special items for the full year to be in the range of $2.05 to $2.20 based on a weighted average share count of 427 million shares.

This compares to FY15 EPS before special items of $1.74 which has been recast to include restructuring and repositioning charges of $289 million.

Historically our EPS before special items has been stronger in the second half of the year due to the seasonality of our businesses.

We expect this to continue in 2016.

However, given the oil and gas and FX comps we are facing in the first half, we expect our earnings to be a bit more skewed to the second half in FY16.

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

Based on the factors just outlined, we expect that the first quarter will be our most difficult comparison of the year from both a reported and organic revenue standpoint as well as a segment margin perspective.

Turning to slide 16, our first-quarter FY15 recast EPS before special items was $0.38.

Let me walk you to our year-over-year earnings growth.

First, the prior year included $75 million of restructuring and repositioning charges, which, when tax effected, equates to $0.11 of EPS, versus our expectation of $20 million of charges or $0.04 of EPS in the first quarter of 2016.

Year over year, this results in a tail wind of $0.07.

Next, the first quarter of last year did not reflect any negative impact in our oil and gas vertical.

We expect this will be a $0.02 headwind year over year.

Third, the US dollar continued to strengthen throughout FY15, resulting in an FX headwind of $0.03 year over year in the first quarter.

Additionally, a decline in volume and unfavorable mix is expected to be a $0.03 headwind year over year, which will be fully offset by the net savings in the quarter.

Overall we expect earnings per share from continuing operations before special items of approximately $0.40 in the first quarter of 2016.

Before the operator opens up the lines for questions, I want to take a few minutes to thank Arun for his hard work and dedication over the last eight years at Tyco.

Arun has led us through the separation and has been our Chief Financial Officer since 2012.

Arun was integral in launching the new Tyco and taking us through many acquisitions, divestitures, and capital market transactions, all while leading the transformation of our finance function.

Arun and I have worked closely together over the last three years and I want to take this opportunity, with our shareholders and analysts, to say thank you.

Thank you, Arun, for your commitment, candor and leadership.

And I wish you all the best as you retire at the end of the year.

As many of you are aware, Arun is 65 and we have been planning a transition over the last year.

While we will all miss Arun, I am happy to welcome Robert Olson who will be succeeding Arun as our Chief Financial Officer.

Previously, Robert was CFO of DISH Network, a provider of satellite video services and technology where he served as the Executive Vice President and Chief Financial Officer for five years.

Robert also has vast experience in the commercial space, which he gained during his time as Chief Financial Officer of Trane Commercial Systems, the largest operating division of American Standard, from 2006 to 2008.

I am pleased to welcome such an accomplished financial executive to our senior leadership team.

Robert's experience as a Chief Financial Officer, combined with his broad experience in service-oriented technology companies, will be especially valuable as we grow our services and solutions businesses.

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 Nigel Coe, Morgan Stanley.

Thanks, good morning.

Just wanted to dig into the Q1 guidance, just going through the bridge.

First of all, you normally give a range and this time you've given us more of a point estimates.

So, I'm wondering, does that reflect a degree of confidence in $0.40-plus?

And then just digging into the $0.03 from volume, the $0.03 negative, it looks like that's based on a 3% decline.

I just wondered if you could confirm that, please.

Yes, when we look at the first quarter, Nigel, it's probably the most difficult compare we've had as the new Tyco.

When you look at not only the currency headwinds, it's going to be our most difficult quarter.

The product mix is coming through both our fire protection products as well as our life safety products, and, therefore, that's going to create a mix issue.

And then our overall products we're projecting right now to be down mid single digits, and that is where a lot of the pressure is coming.

That all being said, we have been able to drive the productivity and cost out actions, have been able to more than offset the FX headwind that we're getting to be able to maintain relatively flat margin rates in spite of the purchase price accounting that we are seeing year on year.

Okay.

So, the products down mid single digits in Q1.

Maybe you can broaden that out in terms of what are you expecting by segment?

But before we get into that, just wondering, you mentioned weakness in US fire products within products.

You've consistently talked about fire as a leading indicator for the North American business.

So, I'm wondering, does the weakness in US fire indicate a broader weakening in the demand environment in North America?

Nigel, the US fire service pressure that we saw is really the compare that we have within our life safety business.

As you recall, last year we had the X3 launch.

And then as that played out we had a surge in output during the course of -- it was actually during the course of 2014 and that continued in the early part of 2015.

Now, that being said, during the course of the fourth quarter, we did see a little bit of weakness come through.

That all being said, I would say that the orders we're seeing today are very strong, and that's projecting to not only support the volume that we're committing in the first quarter but beyond within the rest of the year.

Okay, thanks, George.

And before I go I just wanted to say thanks to Arun.

Enjoy retirement.

Our next question comes from Jeffrey Sprague, Vertical Research Partners.

Thank you.

Good morning, everyone.

Congrats Arun.

George or Arun, could we talk a little bit about what's going on in service?

There's a hint of an inflection going on there but I don't know if it's just some lumpiness.

It would seem like maybe the delayed reaction of the project selectivity may have run its course and some of that downward pressure on service may have run its course.

Can you just elaborate on what you see going on in the service portfolio and the margin construct within that and how we should think about that into 2016?

Sure.

Let me start, Jeff, by saying that we've had a lot of focus in how we're building out our commercial capabilities with our sales force, with our footprint.

And we continue to invest in expanding that.

That has played a big role in our ability to be able to now start to see progress in the latter part of the year and as we project 2016.

I would say, when you look at the overall growth in 2015, we achieved about 0.5 point of growth, with the fourth quarter being up about 1%.

So, we are starting to see momentum.

As we look at not only the investments we're making, the increased installed base, the new services we're launching, we expect to be positioned to deliver about 2% service growth in 2016.

Is there anything to add about the embedded margins in the backlog or in the service portfolios as you think about 2016?

Jeff, we stay very disciplined with how we price our services for the value that we create.

And a lot of the new services we're developing create higher ROI for our customers that we serve.

What's key for us is continuing to stay disciplined on our price.

We're going to get net price increase in 2016.

That, combined with the productivity we're driving across our entire service network, gives us confidence that that segment will strongly support the margin expansion that we're forecasting for the year, which is roughly 50 to 80 basis points.

Great.

And then just one more, if I could actually.

Your commentary on US non-res sounded pretty constructive.

As I'm sure you're aware, there have been some uneven data points the last several months, and just here in the last couple days a couple retailers hitting the wall and things like that.

How do you feel about those markets as you look into 2016?

Do you, in fact, think there's visibility?

I don't know if you have frontlog or any early color on how orders are shaping up as you look into 2016?

With the exception of the heavy industrial high hazard end markets, particularly in western Canada, we're seeing broad-based continued expansion at a similar rate that we've seen during 2015.

I just got back from our sales meeting in North America and I think we're seeing the activity across the board continuing.

We're building a strong pipeline.

We're executing with the increased investments we're making.

We're executing well in that pipeline.

As Arun mentioned, we do have another tough compare with some large projects that were completed last year first quarter.

But based on what I'm seeing, the way that we're developing the pipeline, the way we're investing in our sales force, and then being able to bring new solutions to that sales force, gives me confidence that we're going to see continued expansion here with the orders we've been delivering and then ultimately with the revenue that comes through over the next year or two.

Thank you.

Our next question comes from Steve Tusa, JPMorgan.

Hi, guys, good morning.

Can you just let us know how that productivity sales and marketing and R&D finished 2015, where you came in on those numbers?

The $190 million to $210 million and the $70 million to $90 million, to compare that to what you guys did in 2015?

If you look at the 2015 numbers, Steve, we came in around $80 million in terms of the savings that we got for the year.

Okay.

And the sales and marketing and R&D, which I think you said is going to be around $70 million to $90 million this year, what was that in 2015?

The $70 million to $90 million is the total spend that we expect to have incrementally in 2016 over 2015.

And in 2015 our total incremental spend was in the $40 million to $50 million range.

I promise I'll come within the range but how necessary are some of these investments?

It seems like a pretty significant step up.

The question is, is that in response to a more competitive environment?

Are you having to spend more to get what seems like a still relatively low organic growth rate?

Or is this like -- hey, we're going to step on the neck of our competition and really accelerate this thing moving forward?

I'm just wondering how you can toggle that over the course of the year.

It would seem to me this year you had weaker revenues, you were still able to deliver on the margin and you didn't spend anywhere year over year near as much as you're spending this year.

Does that question make sense?

Maybe it doesn't.

Let me take that Steve.

If you look at what we've done the first three years, we've been very disciplined around creating the operating company and streamlining all of our processes, which has enabled us to be able to deliver very strong fundamentals, which is what has been driving the returns.

As we went through a difficult 2015 we also recognized that we needed to free up additional resources to then put to work on the growth side of the Company.

So, as we accelerated the restructuring and repositioning, we were planning on now taking those strong fundamentals we delivered in the first three years and leveraging those to a greater degree on the top line.

Now, let me give you an example.

In retail, we've been working on retail in investing on the front end of our business while we've been accelerating the investments in technology and new solutions within our store performance solutions.

And with that effort in 2015, we saw a nice mid single-digit improvement in our retail orders, and that's playing through now.

We've taken that same approach now across the enterprise.

And with the incremental roughly $30 million, $35 million we put to work in 2016, that gives us complete confidence that with the same discipline that we went about driving operational improvement, we're putting to work on the commercial side of our business, and believe that with that we will be positioned very well to be able to create order growth, which will translate to accelerated revenue growth over the next couple of years.

Okay.

So, just a quick follow-up on that.

I don't think that this high level spend was necessarily in the model that you provided, the forward three-year model that you provided last fall -- I don't think.

So, this stepped up level of investment, is this a step up in 2016 and then it goes back to normal in the next three years?

And was this something, a decision you made middle of this year?

It just seems like it's a pretty significant step up.

Again, is this something you're talking about is more as an offensive step up than a defensive one?

Correct, Steve.

It's Antonella.

Exactly to your point, when we initially laid out the three-year plan, our net savings over the exact three years were expected to be more in the range of $30 million to $40 million a year.

And as you know, we did step up our restructuring and repositioning, particularly at the tail end of FY15 to drive additional savings into 2016 that's going to fund these investments.

It is at a higher rate.

One of the other things that I would mention that's driving that increased investment is George talked about our E3, which is the implementation of our salesforce.com platform across Tyco to have a global view of the customer.

That is clearly something new that we haven't historically done in the past.

So, that's part of the increase, as well as the increase that we started last year with our sales force that we see coming through in this part of the year, as well.

So, it is a bit of an elevated increase.

It is more proactive.

It's not per se defensive at all.

And we feel that we can very much fund that with the increased savings we have and still deliver the increased $50 million to $60 million of savings.

Okay, thanks.

We're still getting less earnings for more restructuring so I just feel like it's a relatively elevated level of spend.

But we will leave it at that.

Thanks a lot.

Our next question comes from Scott Davis, Barclays.

Hi, good morning, guys.

And, Arun, its been a pleasure and good luck to you in the future.

Didn't want to pile on Steve's question but I somewhat agree with his conclusions, in a way.

Give us a sense of what you think normal restructuring is.

It's hard over time to think in terms of there's got to be stuff you can do every year that you call restructuring and at some point that is just real operating expenses.

What do you think is normal if we get past 2016 and we can start to think about 2017, 2018, 2019?

Scott, in a normal environment, when you look at our business models with the labor content that we have, it takes about $75 million a year to get normal productivity to be able to support the reinvestment and continue to drive the margin expansion.

And that would be on a normalized level.

As we look at the current environment being somewhat more challenged, I believe, going forward, we're going to be positioned to continue the work that we've done from an operational standpoint that has been able to support the reinvestments that's going to give us confidence that from a top-line standpoint we're going to be positioned to accelerate.

We made great progress within our commercial excellence initiatives.

And the most recent change with the step up of the reinvestment has taken the confidence that we achieved during 2015 in the retail vertical and accelerating that across the portfolio.

And I can tell you based on the E3 initiatives getting additional productivity longer term through our sales force, and then with the continued investment in expanding our footprint and our total capability, and then that supported with the new products and new services, especially some of the enterprise software we're launching, gives me a lot of confidence that we're going to be able to accelerate orders growth during 2016, and that will translate into increased revenue growth over the next couple of years.

Okay.

Just conceptually, George, we've had a number of years now in getting Tyco pointing in the right direction, of really getting -- there's been a number of different initiatives.

Would you be disappointed if, let's say, global GDP is, just to make up a number, say, 2.5% next year, would you be disappointed if you hit 1% core growth as the mid point of your range?

Another way to say it is, is this guidance -- it's based on, obviously, realities of economic headwinds but at the same time you guys aren't tremendously cyclical.

So, I would imagine, given the amount that you've invested in such, is there hope at least that you think that you can have an above global GDP growth year, above peer group growth year?

I would absolutely be disappointed if we came in lower than the GDP.

As I said, Scott, the first quarter is going to be our most difficult compare for the Company.

When you project what happens after we get through the first quarter where we have the -- we are going to have the worst compare in oil and gas.

We're going to be down 25% in the first quarter of 2016.

And we're projecting that vertical to impact the overall Company by about -- it's going to be about a 10% decline from an oil and gas perspective for the total year.

Now that being said, when you look at the trends in the other businesses and how it's going to play out during the course of the year, we will be positioned to deliver on that even with minus 1% to minus 3% organic growth in the first quarter.

We will be positioned to deliver on that 0% to 2% with the idea that if things are better then it should be better.

But we're being somewhat cautious given what the current environment is.

Makes sense.

Okay, thank you.

Appreciate the color.

Our next question comes from Deane Dray, RBC Capital.

Thank you.

Good morning, everyone.

And also best of luck to Arun, and welcome to Robert.

Just to start off, give us a sense of how the quarter played out, if you could, organically by month.

And then any color on how the first quarter has started off organically?

Deane, as we look at our set of businesses certainly our product businesses are more weighted to the latter part of the quarter.

And what I would say there is we did have a couple of soft spots, mainly additional softness in the heavy industrial space, similar to what we've seen in oil and gas, as well as, as I said earlier, in our fire services, a little bit of a slowdown in the orders that we saw within that segment.

Now, when you look at our INS businesses we see continued activity across all of our end markets that we serve in North America.

It's mainly driven by the commercial end market as well as some key institutional end markets like higher ed, government seems to be coming back, retail strong.

In our fire business, healthcare.

We're seeing pretty good activity and from a service standpoint we actually had very strong service growth in North America in the fourth quarter.

Now, some of that was recovery but overall very strong performance.

Then if you go to rest of world, in line with what we expected, with oil and gas and some of the heavy industrial verticals, we've seen now that impact.

And that was pretty much in line with what we expected.

So, my assessment would be that the overall environment is similar.

It's playing out as we had expected.

When I look at order activity so far in the first quarter, it's in line with what we had in the fourth quarter.

Certainly we have a couple of compare issues year on year.

But I'm confident, with the investment that we're making in how we're expanding our capabilities, our footprint -- and we're enhancing the ability of our front end to be able to get closer to the customer and ultimately execute on the growth -- that we're going to see continued positive trends here during the course of 2016.

Thanks.

And then it struck me as you were describing the hows and whys regarding the name change in the segments on commenting that you want to be positioned beyond fire and security.

You mentioned retail.

We know the presence there.

You also have some interesting technologies and hospitals.

But could you share with us on where else you may take your technologies, what other verticals, and what might move the needle over the near or medium term?

Yes.

Deane, when you look at our technology spend, not only are we continuing to invest in our sensors and devices and products, making sure we have leadership product positions, which we have today and we continue to grow, but now also developing software.

It will enable us to be able to take, for instance, Tyco On, with all of our connected hardware, to be able to maintain the health of systems, and being able to maintain systems that are installed.

And then on top of that, being able to utilize the data that's extracted from those systems to be able to put to work in new services that enhance the operations of our customers, no matter what vertical that we support.

So, we're today working on a dozen growth projects, similar to start ups, that we're investing in that are going to be new-new business.

And these are platforms that are enabled by technology that fundamentally create a much higher ROI for the customers that we serve, leveraging the same infrastructure that we serve them with in fire and security.

So, across the board, as these ecosystems develop in the connected world, being able to now utilize our software platforms to extract the data, apply analytics and then ultimately create new services that get built on top of the traditional services that we provided.

Great, thank you.

Our next question comes from Julian Mitchell, Credit Suisse.

Hi, this is Brian Gibbons in for Julian this morning.

I was wondering if you could give some color on your margin expansion assumptions for 2016 across the segments.

Will it be another tough year for rest of the world or is there some room for a turnaround there?

The segment that has driven the margin expansion in 2015 certainly was North America.

We exceeded our expectations, delivering about 200 basis points.

Now, that being said, as you project going forward we're going to get continued productivity but we're putting more of that to work to support the growth.

In total for the Company we'll achieve roughly 50 to 80 basis points.

That is ultimately going to be offsetting about 10 basis points of purchase price accounting.

And then when you look at the segmentation, North America would be roughly, we're estimating somewhere around 20 to 40 basis points.

In rest of world, about the same, about 20 to 40 basis points.

And then within our product businesses we get into more of the growth phase in the latter part of the year and we deliver, it's roughly about 110 to 160 basis points, and that's including offsetting 30 basis points of purchase price accounting.

Great, very helpful.

And then on your free cash conversion what do you think are the most important levers there to increase cash conversion in 2016?

Brian, it's across the board.

As we look at the free cash conversion, getting up to the 90% to 100% with 2016, it's really improving each of the DSOs, the DPOs and the DIOs.

So, we're looking across all of the fronts there, working capital metrics to get to that number.

Great, thanks.

Our next question comes from Steve Winoker, Bernstein.

Thanks.

Good morning, all.

Arun, I'll echo my congrats and good luck going forward.

George, let me just make sure I understand the guidance in 2016 on oil and gas progression.

I understand that really the major headwinds started in third quarter and fourth quarter.

But are you simply saying that the guidance is assuming no underlying improvement in oil and gas for the year, or we're just saying we're taking advantage of the benefit of easier comps in the second half?

The way that I look at it, the way it's going to hit us here is we have our worst comp here in the first quarter, with oil and gas being down about 25%.

And then as that plays out, we see that stabilizing a bit, especially as it relates to our service business.

We are seeing continued pressure on CapEx but that will impact us longer term, as far as the new projects that are being booked or lack of new projects.

So, as we project the overall volume, it's going to stabilize but still net it's going to be down 10% for the total year.

Okay.

And is there any pricing pressure in any of that that you're seeing?

Any time one of these end markets down turn like they have there's certainly pricing pressure.

What we do is stay very disciplined, not only in our product businesses but in the service business, making sure that we're getting price for the value that we contribute.

Net of it all, we get price during the course of the year.

So, we work within that environment to make sure that we're staying price positive.

But certainly that does come into effect as it relates to the volume.

I think one thing we have seen here is where there were automatic renewals of our service contracts, et cetera, they are coming on for competitive bids each time now as the renews come off.

We are maintaining our pricing discipline but clearly there's more competition out there.

Okay.

And you're holding share count flat in your guidance.

Is there an upside opportunity to that?

Or you're saying we're really planning on moving all the excess to M&A?

Steve, what we have said is that we still do have a pipeline of M&A activities.

That is the best use of capital and that's our projection going forward.

But at the same time, we will not sit on cash, and if cash accumulates we will accelerate the buybacks.

Okay, all right.

And one last thing.

The restructuring, if I look at the year-on-year EPS growth, which is clearly higher than most other peers that I'm looking at, above 20% -- but most of that is really restructuring expense reduction year on year -- what are the chances, George, that you could even go higher than that $75 million to $100 million range?

Or do you feel like that's pretty much locked in?

At this stage, we've taken a cautious outlook on the year.

Obviously in the second half of 2015 we had accelerated a lot of our cost out restructuring to position for 2016, not only to support the reinvestment but continue to deliver strong EPS growth.

Given our view of the world today, we feel good about the guidance we've provided.

Certainly, depending on how the markets play out will affect how we look at restructuring as well as our reinvestment in growth.

And we'll balance the two as the year plays out.

Okay, thanks a lot guys.

Thank you.

Our next question comes from Shannon O'Callaghan, UBS Securities.

Hi, good morning.

Congrats, Arun.

Good luck with everything.

On the restructuring, how do we now think about the three-year targets that you guys laid out?

It was originally off a normalized base in 2015 of, I think, 2.25 normalized for $75 million restructuring, and it ended up being a lot higher than that.

Is the 12% to 15% CAGR still intact?

And if it is, is it now off $1.74 or how do we think about that?

The change from our Investor Day last November in laying out the three-year plan, certainly the economic environment has changed pretty significantly.

Now, assuming that type of environment, the $75 million that we spend every year to drive labor productivity, mainly the labor productivity to support the reinvestment in margin expansion, has had to increase given the look that we have today relative to the global macroeconomic environment.

What I would say is that in a growing economy, global economy, we should be positioned to be able to maintain and deliver on those type of goals in a normal environment with $75 million restructuring.

With the changes that we've seen, then it's been prudent to make sure that we are managing the fundamentals in a changing environment so that we can make the investments and be positioned to capitalize on the growth that will occur going forward.

Okay.

And then can you clarify a little bit this ramp through the year for global products?

A lot of margin improvement there but it sounds like the first-quarter margins are going to be under pressure.

So, where do we start with margins there and then what drives the ramp through the year?

When you look at last year we had a strong start of last year.

We were plus 10 in the first quarter on a volume basis, and then year on year we're saying we're going to be down mid single digits.

So, when you look at the mix -- and a lot of this is driving the mix in our fire protection products business, which is supporting oil and gas, as well as our life safety business -- so that as you look as it plays out during the year, our total margin rate in the first quarter will be down about 120 basis points in products.

But then as you look out as we play through the year, we get back to an average of about 19% to 19.5%.

A lot of that is when you look at the investments we're making, with normalizing the volume that we'll achieve in the second, third and fourth quarter, it gives us a lot of confidence that we'll be able to deliver on those margin rates.

Okay, great.

Thanks.

That helps.

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

In summary our FY15 results demonstrate that we know how to execute in a tough economic environment.

We're going to remain focused on making the right investments, whether that be in R&D or sales and marketing, and driving our ongoing restructuring and productivity initiatives and deploying our capital to create shareholder value.

Operator, that concludes our call.

That concludes today's conference call.

Thank you for participating.

You may disconnect at this time.