江森自控 (JCI) 2016 Q1 法說會逐字稿

Welcome to Tyco's first-quarter 2016 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.

Good morning and thank you for joining our conference call to discuss Tyco's first-quarter 2016 results and the press release issued earlier this morning.

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

I would like to remind you 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.

Today's call is not intended and does not constitute an offer to sell or the solicitation of an offer to subscribe for or buy securities of Tyco or Johnson Controls.

Select subject matter discussed on today's call will be addressed in a joint proxy statement and prospectus that will be filed with the SEC.

We urge investors to read it in its entirety when it becomes available.

Information regarding the participants in the proxy solicitation is contained in each company's annual proxy materials filed with the SEC.

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

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 measures and is reconciled in the schedule attached to our press release.

Also, I'd like to remind everyone that beginning this quarter restructuring and repositioning charges are included within our reported earnings per share before special items.

These charges are shown as a separate line item below segment operating income.

The prior-year results have been recast to conform to the current-year presentation.

The quarters of FY15, including restructuring and repositioning charges, as well as the related tax impact are included in the appendix to the slides.

Now let me quickly recap this quarter's results.

Revenue of $2.4 billion in the quarter declined 4% year over year on a reported basis, driven by a 6% headwind from changes in foreign currency.

Organic revenue growth in the quarter was flat and net acquisition divestiture activity contributed 2 points of growth.

Earnings per share from continuing operations attributable to Tyco ordinary shareholders was $0.17 and included net charges of $0.25 related to special items.

These special items primarily related to charges for the early retirement of debt as well as divestitures, partially offset by a gain related to an equity investment.

Earnings per share from continuing operations before special items was $0.42 compared to our guidance of approximately $0.40 per share.

Now let me turn the call over to George.

Thanks, Antonella.

Good morning, everyone.

Before we get into the details of the quarter, let me spend a few minutes on our announcement earlier this week regarding the powerful combination created by the proposed merger of Johnson Controls and Tyco, as shown on slide 5.

As a Combined Company, we will have the number one position in commercial HVAC, the number one position in building controls, and the number one position in fire and security, creating a global leader in building solutions, including products, technology and services.

Drawing upon the strength of each company is a combination represents a unique opportunity to truly address the total customer problem.

As the world transforms into a more connected future, the Combined Company will be uniquely positioned to leverage the Internet of things, in connectivity for smarter customer offerings in a more integrated and data-rich future.

It will allow us to better capture opportunities created by increasing connectivity and integration in homes, buildings, in cities.

This combination is not only about serving our customers' needs today but, just as importantly, about being able to anticipate and deliver on the customer needs of tomorrow.

I'm very excited about this combination and the opportunities it creates for customers, employees, and shareholders of both companies.

Lastly the merger of the two companies creates compelling value for shareholders.

In the new Combined Company, Tyco shareholders will benefit from their share of at least $650 million in incremental operational and tax synergies over the next few years.

This alone creates roughly 30% value creation for Tyco shareholders before any opportunities for enhanced revenue growth.

Additionally, we expect that over time the multiple will a creep upwards and reflect the high quality of the portfolio.

In short, Tyco shareholders will be able to participate in the upside of the Combined Company, a highly attractive industrial global leader with strong growth prospects and opportunities across the globe in various end markets.

Shifting gears to the quarter, let's move to slide 7. 2016 is off to a solid start for Tyco.

I am pleased with our results this quarter and with the hard work of our teams around the globe whose efforts helped us achieve better-than-expected earnings, despite the sluggish macroeconomic environment.

Our results for the quarter were driven by our productivity initiatives as well as the strength of our defensive, service and recurring revenue base, which represented 40% of our total revenue.

In fact, we were able to hold both our top line and operating profit levels relatively flat on an organic basis despite the difficult year-over-year comparisons in several of our higher margin businesses and deliver first-quarter earnings per share before special items of $0.42.

Turning to slide 8, let me spend a few minutes on what we are seeing in each of the regions.

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

In particular, we are seeing good momentum in the commercial and institutional verticals.

The only weak spot was western Canada due to the high hazard, heavy industrial end markets.

Overall, our North America integrated solutions and services business performed very well in the quarter with 2% organic growth.

Retail in North America had a solid start to the year with 3% organic growth.

As many of you are aware, we have been increasing our investments in this vertical both organically and inorganically, and we are seeing very nice traction in terms of order growth and customer interactions.

Just last week, I met with many of our key customers at the National Retail Federation Show in New York and they expressed their support in how we are building out our retail technology and solutions portfolio to help solve their biggest problems.

I am very excited about the future opportunities in this vertical and will touch on our most recent retail acquisition in a few minutes.

Moving to Europe, the macro environment remains sluggish and exchange rates are volatile.

Overall, organic growth in our European businesses was relatively flat in the quarter.

In Asia, the environment is clearly under pressure, creating global uncertainty.

This region represents about 8% of our annual revenue and declined mid single digits organically year over year.

Although China saw a bit of growth, Southeast Asia was soft.

While a relatively small market for us, Latin America remains an area of strength despite the volatile economic and political conditions across the region and headwinds in resource-based economies.

Organic revenue growth in the high single digits was primarily driven by the strength of our subscriber business.

Sales in our Pacific region, which include the Australia fire business in the first quarter, declined high single digits organically.

Fiscal Q1 was an important quarter from a strategic perspective with several significant developments toward our continuous efforts to remix the portfolio and improve the growth profile, which are shown on slide 9. In early December, we announced the divestiture of our fire installation and service business in Australia.

As many of you are well aware, this business is heavily tied to the mining industry, which has endured a downturn for the past three years, with no meaningful recovery anticipated over the next few years.

We remain committed to the Australian market with our largely subscriber-based security business, and will continue to provide buyer and life safety products to the region through our global products business.

On a pro forma basis following our divestiture, the Pacific will represent about 3% of sales.

At the same time, we announced an increase investment in our existing joint venture in the Middle East, which we now effectively control, and which solidifies our footprint in an important growth region for Tyco.

As we now consolidate the joint venture, the Middle East accounts for roughly $200 million in annual revenue.

By maintaining this strategic alliance, and taking full control of the operations, we now have the installation and service capabilities necessary to target a rapidly growing commercial market with stringent codes and standards, allowing us to gain share in the Middle East.

Within our retail solutions business, we completed the acquisition of ShopperTrak, a leading global provider of retail analytics and intelligence, for a purchase price of $175 million.

Combined with the late FY15 acquisition of FootFall, we have built a $1 billion world-leading retail business with a full suite of solutions ranging from loss prevention to inventory management and visibility to shopper analytics, all of which lead to better operational performance for retailers and a better shopping experience for customers.

In addition to the strategic fit within the portfolio, the combination of ShopperTrak with FootFall in our existing retail solutions business, we have line of sight to an attractive pipeline of synergy opportunities.

Also, we expect this acquisition to accelerate our commercial capabilities as an integrated solution provider and to open the door to C suite executives.

Data analytics and software are at the cornerstone of our growth strategy to solve broader customer problems.

Perimeter traffic data is becoming increasingly more important to retailers as they capture and analyze data to provide actionable insights.

These capabilities can now be translated to various other verticals to better control safety, make operations more efficient, or provide better customer service.

Before I turn the call over to Robert to walk through the details of our first-quarter performance, let me touch on a couple other items.

First, we were very pleased to reach an agreement with the IRS to tentatively resolve the decade-old inter-company debt issue.

Robert will explain the specifics of that agreement in a little more detail later in the call but I would note that when finalized, this should resolve the last significant legacy matter outstanding.

Second, I'd also like to update you on our progress relative to our planned internal investments for 2016.

As you may recall from our discussion last quarter, a significant part of the increase in our internal growth spend is related to the investment in our salesforce.com platform, which we refer to as E3.

E3 allows our sales team and service technicians a complete 360-degree view of the customer, which in turn improves the customer's experience with Tyco.

Phase one of our two-year rollout began in our UK business in early October.

And while we are still early in the process, results so far have been very encouraging.

That said we will maintain a very deliberate pace in our rollout of E3, and for all of our investments for that matter, and if macro conditions deteriorate we have the controls in place to throttle back R&D and sales and marketing investments, as necessary.

As I mentioned earlier in my opening comments, we remain focused on delivering net savings through productivity and restructuring benefits as well as driving growth.

We are confident we have the right playbook, and we are controlling the things we can control in spite of the continued difficult macro environment.

Our first-quarter results reflect this and we are reaffirming our full-year 2016 EPS before special items guidance of $2.05 to $2.20.

With that, I'd like to turn the call over to Robert to walk through the details of our first-quarter results.

Thank you, George.

And good morning, everyone.

Let's begin with an overview of the quarter starting on slide 11.

Revenue of $2.4 billion declined 4% year over year on a reported basis, including a 6% headwind from foreign currency.

Acquisitions contributed 3 percentage points of revenue growth, which was partially offset by a 1% decline from divestitures.

Flat organic revenue growth was better than the 1% to 3% decline anticipated, with stronger revenue across all three segments.

This coupled with strong productivity in the quarter resulted in a segment operating margin before special items of 12.9%.

The segment operating margin includes a 40 basis point headwind related to non-cash purchase accounting.

Excluding purchase accounting, the segment operating margin was slightly ahead of the prior year as net productivity benefits were partially offset by negative mix.

Overall, earnings per share, before special items, increased 11% over the prior year as difficult year-over-year comparisons in several of our higher margin businesses and the negative impact of FX was more than offset by lower restructuring and repositioning charges, as well as net savings.

Turning to quarterly orders on slide 12, total orders increased 3% year over year, with 5% growth in products, 3% growth in service, and a 1% increase in integrated solutions.

As we have discussed before, order growth, particularly in our North America and rest of world integrated solutions and services businesses, is lumpy and can be impacted by a timing of large projects.

Total backlog of $4.56 billion increased 4% on both a year-over-year and on a quarter sequential basis partly driven by the consolidation of our joint venture in the Middle East.

Excluding the joint venture, backlog increased 1% year over year and was relatively 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 13, revenue in the quarter of $953 million was relatively flat on a reported basis.

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

We saw continued momentum in our service business, which increased 1% organically in the quarter, with positive service growth in both fire and security.

Additionally, integrated solutions grew 2% organically.

Before special items, operating income in the quarter was $132 million and the operating margin improved 10 basis points to 13.9%.

Normalized for a $6 million charge in the prior year related to a legal matter, the operating margin contracted 50 basis points year over year as the benefits of productivity were offset by incremental investments.

Moving to order activity, despite the tough compare with last year, total orders grew 3% year over year, service orders increased 2% and integrated solutions orders increased 5% off of a 13% increase last year.

Included in this quarter's orders growth is a very large order in the institutional vertical which contributed 7 points of order growth in integrated solutions.

Total backlog of $2.51 billion increased 2% year over year and 1% on a quarter sequential basis.

Turning to slide 14, rest of world integrated solutions and services, revenue of $812 million decreased 11% year over year, driven by an 11% unfavorable impact from FX.

Organic revenue declined 1%, as 1% growth in service was more than offset by a 4% decline in integrated solutions.

Acquisitions contributed 3% to revenue growth which was partially offset by a 2% headwind from divestitures.

Before special items, operating income was $77 million.

The segment operating margin declined 40 basis points year over year to 9.5%, fully driven by non-cash purchase accounting.

Excluding purchase accounting, the segment operating margin was slightly ahead of last year at 10% as productivity benefits more than offset the revenue decline.

Turning to order activity in rest of world, year-over-year orders were relatively flat as 3% growth in service was offset by a 3% decline in integrated solutions, driven by a decline in the high hazard, heavy industrial space.

Backlog of $1.87 billion grew 9% on both a year-over-year and quarter sequential basis.

The majority of the improvement in both periods was driven by the consolidation of our joint venture in the Middle East.

Excluding the joint venture, backlog increased 1% year over year and was relatively flat on a quarter sequential basis.

Turning to global products on slide 15, revenue of $611 million was flat on a reported basis.

6% benefit to revenue from acquisitions was offset by a 6% decrease to revenue from FX.

Revenue declined 1% organically primarily due to a difficult comparison of 10% growth in the prior-year period.

Recall the prior-year period benefited from the timing impact of the Scott Air-Paks X3 shipment in the life safety business.

Before special items, operating income was $97 million, and the operating margin declined 130 basis points to 15.9%, including a 70 basis point headwind related to non-cash purchase accounting.

The underlying margin decline of 60 basis points was primarily driven by product mix.

Product orders increased 5% year over year entirely driven by acquisitions.

Now let me touch on a few other items on slide 16.

First, corporate expense before special items was $52 million for the quarter, and we expect corporate expense to be similar in the second quarter.

For the full year, we continue to expect corporate expense before special items to be in the range of $205 million to $215 million.

To be clear, this excludes expenses related to the JCI merger.

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

We expect the tax rate to be approximately 17% in the second quarter.

For the full year we continue to expect the tax rate to be in the range of 17% to 18%.

Moving to cash flow, we continue to make progress in converting our income to cash.

We had adjusted free cash flow of $169 million in the quarter, representing a 95% conversion rate.

We continue to expect our full-year adjusted free cash flow conversion rate to be in the 90% to 100% range.

Moving to restructuring and repositioning activities, we incurred charges of $22 million for the quarter, of which $14 million related to restructuring actions.

We expect restructuring and repositioning charges in the second quarter to be approximately $20 million.

For the full year, we continue to expect restructuring and repositioning charges to be in the range of $75 million to $100 million.

Before I turn it back over to George let me provide you a quick update on our recent announcement regarding the stipulation of settled issues filed last week with the IRS.

We reached a tentative resolution with the IRS to resolve the inter-company debt dispute currently before the US tax court for the 1997 to 2000 tax years.

The tentative resolution is contingent in applying a similar approach to the 2001 to 2007 period, referred to as the roll forward period.

Assuming the appeals division of the IRS applies the same terms for the roll forward period that we agreed to with the IRS litigation division, the total cash payment to be made by the parties to the 2007-2012 tax-sharing agreement will be $475 million to $525 million, inclusive of all interest and penalties.

As we have detailed in an 8-K filing, Tyco would be responsible for 27% of the total, which equates to a cash payment of approximately $135 million at the mid point.

We do not expect to recognize any additional charges related to this issue.

Any change to the reserve will be a special item and excluded from our earnings per share guidance.

We expect final resolution of this matter in the next six months.

Now let me turn things back over to George.

Thanks, Robert.

Let's turn now to slide 17 for our earnings guidance for fiscal second quarter, starting with the top line.

We expect revenue in the second quarter to decline approximately 4% year over year on a reported basis with relatively flat organic revenue growth.

Additionally, the net impact of recent acquisition and divestiture activity is expected to add approximately 1 point of revenue growth.

Given current exchange rates we expect a year-over-year FX headwind of $120 million or 5%.

In total, we expect revenue of approximately $2.3 billion.

We expect the segment operating margin before special items to be in the range of 13.7% to 13.9%, including a purchase accounting headwind of 40 basis points.

Excluding purchase accounting, this represents year-over-year margin expansion of 50 to 70 basis points.

Taking all of these assumptions into account, as well as the expectations for corporate expense and restructuring and repositioning that Robert provided, we expect earnings per share before special items in the second quarter to be in the range of $0.44 to $0.46 based on a weighted average share count of 428 million shares.

Thanks for joining us on the conference call this morning.

And with that, operator, please open the lines for questions.

(Operator Instructions)

The first question is from Steve Winoker of Bernstein.

I just wanted to start with the JCI combination, George, and get a little more clarity on, first of all, the synergy side.

On the cost side, you talk about at least $650 million.

What's your thinking there?

I would have expected a slightly larger number.

And then, secondly, on the top line, this has been an illusive opportunity for many building systems companies for years, trying to get the real synergies across building systems that are bought by different people, installed by different people, et cetera.

So, is it on the control side?

On the field side?

Where might you see this heading that could be more tangible for investors given the lack of historical progress here?

Sure.

Let me start with the strategy, because this is a very compelling combination that ultimately is going to change the game in the building.

I would start by looking at what we've been doing over the last couple of years relative to our innovation, that we have a unique position in the building with all of our sensors and devices and products that are installed.

We've been developing our Internet-of-things platform, which is our Tyco On, which has given us the ability to be able to extract data, apply analytics, and then be able to create smart operations.

And that can apply to smart homes, smart buildings, smart cities, with the strongest position that we have in buildings.

And, also, the recognition that the value creation is ultimately then put to work in the controls within the building that ultimately delivers energy savings or optimization of use of the overall facility.

As we've been advancing our strategy, recognize that the controls piece is a very important piece that ultimately takes the intelligence that we create and it puts that to work in new business models that allows us to be able to enhance the value creation that we can provide to our customers.

Now, I know there's one or two others that say that it's really just about bundling, and what I would say is that, with the combination of the Johnson Controls number one position in commercial HVAC, combined with the number one position in building controls, combined with the number one position that we have in fire and security, changes the game.

And that will accelerate the amount of value that we can create in capitalizing on the market, it will accelerate our growth longer term, while we're delivering on the $650 million of synergies that we can extract with the combination.

Now, getting into the combination, when you look at the $650 million of synergies it starts by breaking down by $150 million of tax synergies, and those are pretty straightforward.

When you look at the $500 million of operational synergies, it breaks down into about $150 million of public company costs that are overlapped, that we can immediately begin to address.

We get about $100 million of sourcing savings on the combined buy, and that's through the leverage of the buy as well as being able to utilize our combined portfolio of products.

And then the rest is the $250 million that's derived throughout our operations.

The way you want to look at that is, when you look at our combined SG&A structure, it's almost $5 billion.

And the ability to be able to now synergize these cost positions and be able to deliver the $250 million, I'm extremely confident of.

I will be personally responsible in that we'll be able to do again what we've done the last three years with the fire and security combination, again with the combination of Johnson Controls and Tyco.

I'm very excited about being able to have the accountability to be able to do that and then ultimately be able to lead the combined entity.

Okay, George.

And the $75 million to $100 million of restructuring this year and all those programs that are in place, is there not a more an optimized new structure with Johnson that would maybe -- are you adding an extra step here that, frankly, when you put the whole thing together you'd have a different plan?

Should any of that be put on hold?

Or, no, these are totally complementary programs?

Steve, we're looking at all of that.

We have a lot of things in motion ourselves.

And as we begin the detailed planning over the next few months we're going to make sure that anything we do in addition to what we're already doing, that we compliment the synergies that we're going to drive within the two.

So, what I would say is that I think there will be acceleration of what we're doing combined with what they've been doing in transforming their business to ultimately deliver on these incremental benefits.

Okay.

And just if I could sneak a quick quarterly question in.

On the oil and gas headwinds, you guys had expected, I think, 25% down in the quarter and maybe 10% for the year.

What is your current thinking and what happened?

The way we look at it, it's playing out as we thought.

We were at a tough run rate at the end of last year with what happened in the third and fourth quarter.

That has continued.

It mainly hits our fire protection products business with our high hazard, heavy industrial products, as well as our life safety business with the breathing apparatus and some of the products that we put into that space including gas detection, and then where we have high density of our services across the globe, mainly in the North Sea, western Canada and throughout Asia.

What I'd say is it's playing out as we expected.

We continue to make sure that we're working other opportunities to be able to offset any additional pressure that we see through the course of the year.

But I feel very good with the plan that we have in place to be able to deliver on what we ultimately expected to happen through the year.

It certainly outperformed.

Thanks, guys.

Next is from Steve Tusa of JPMC.

Hi, guys, good morning.

Can you maybe talk about -- you guided to a negative organic, you came in flat.

Can you maybe talk about the visibility you guys have on this revenue acceleration in the second half?

A lot of companies that are a bit more short cycle have what looks like back-end loaded accelerations in there.

But I think there's some specific -- you guys have mentioned some specific things related to your service business and how the backlog plays out.

What's your confidence level in that and how much visibility do you think you have there?

Steve, it's important to look at what we see happening not only with activity in the markets that we serve but also the ability to be able to generate orders.

We're seeing nice progress with the investments that we've been making, not only in our E3 capabilities, starting in Europe, but also just the overall progress we're making with our commercial excellence initiatives.

That combined with the investments we're making in new products, as well as our enterprise software that's enabling new solutions, we're beginning to see some real nice traction.

So, when you look at our order rate in the first quarter, it was up about 3%.

We see the activity continuing to improve, our conversion to orders continuing to improve, and that is going to be the foundation that enables us to be able to continue to accelerate revenue for the rest of the year and being able to deliver on the total-year performance.

Is there a dynamic around the way the backlog plays out?

I think you mentioned warranty and fire and some of the headwind from the roll off of security a couple years ago, the project selectivity.

Is that now already in the run rate or is that still up to help the second half of the year?

What's in the run rate -- let's start with the segments.

When you look at install, we're going to see continued nice progress.

Granted, there's a longer cycle of conversion, but we've been increasing our backlog sequentially over the last few quarters, which is going to be the base of business that comes through in the second half.

Our service orders actually picked up in the quarter.

Our service orders were up, even though we generated 1% service revenue growth, our orders were up 2% in the first quarter.

And as we look going forward, we see that continuing to improve in the second quarter, that they will continue to go from 2%, 2%-plus, 2% to 3%.

And that is ultimately, when we say that for the year we're going to get to service growth of 2%, 2%-plus, and then we'll get to a run rate that when we look towards 2017 that we'll get service back to being 3% to 4%, in that range.

And that, as you know, certainly with the quality of the base that we create with the selection of projects, and then with the service that's embedded within those projects over the life cycle, is where we'd get the accelerated returns.

Okay.

And then one last question, just on the productivity versus investments.

What's the update there?

I know you have $0.05 of incremental foreign exchange but you're reaffirming the guidance and you talked about some of these investments being perhaps you could slow roll them a little bit, a little bit more discretionary timing-wise.

What's the update on that front, because you've got to offset this four [ex] somehow, obviously.

Yes, I would start by saying that obviously as we provided guidance we originally said we're going to spend in our reinvestment $70 million to $90 million.

That was going to be broken down into supporting our E3 initiative on the commercial front end of about $15 million, sales and marketing investments in line with our continued progress with our growth about $30 million, $35 million, and then R& D was going to be up around $20 million, $25 million.

When we look at that, we certainly have been in line with what's happening in the economies we serve, taking that into account, and then making sure that we're governing the reinvestment in line with that.

So, the way that I look at it right now, given where we are, given the macro conditions, we believe that we're at the lower end of the reinvestment, which ultimately, as we look at the total year, gives us confidence that we're still going to be able to deliver on the total year commitment in spite of some of these other headwinds.

Great.

Good execution.

Thank you very much.

Thank you.

Next question is from Jeffrey Sprague with Vertical Research Partners.

Thank you.

Good morning, everyone.

A little bit to the earlier question about the possibility of duplicating effort on restructuring, I was thinking about the flip side of the coin.

I don't believe there's going to be a lot of anti-trust scrutiny of this deal.

Perhaps there will be.

But could you speak to your ability to share covert plans with JCI, pending close in terms of investing product integration and system integration and the like that you'll be looking to achieve in this merger?

Really, the essence of my question is, will you have an opportunity to commercially get a running start into the close?

Jeff, we're looking at that and I think you're probably right.

We can push some of that before the close.

We've done this stuff before and we know what stuff we're up in front.

We're going really country by country to get regulatory approval.

I think you hit the nail on the head, and although we complement JCI's portfolio really well, we don't overlap.

So, we don't expect major issues.

And as I noted, it's a country by country approach so there may be opportunities in certain countries to accelerate things.

I was wondering on the retail side, you said 3% growth in the quarter.

Can you just speak to -- obviously, in the back of our mind we're all worried about retail, looking at the headlines and pressure on traditional retailers.

But they obviously are responding pretty aggressively with their own omni-channel strategies and the like.

Just wonder if you could tie all of that together, the bricks-and-mortar pressure versus what your offering brings as they try to change their business models, thinking about the growth and the new aspects of the business model versus maybe the traditional theft-prevention side of the business.

Sure.

Let me start by just laying out that the retail vertical and where we've been and where we're going and what we see happening, especially with some of the new technologies and solutions that we're developing.

Historically we have been in a position to prevent theft and protect the merchandise, and certainly that business continues to be very strong because there is a high value proposition in reducing shrink for our retailers.

But more important is the infrastructure that we utilize to be able to create those benefits.

We've been using that now to create intelligent solutions, whether it be store-performance solutions, inventory management, now with the combination of FootFall and ShopperTrak the ability to be able to now create shopper analytics and traffic and the like.

These are high-value propositions to the retailers that significantly enhances their operations.

So, they're getting a high return on the services that we're providing to them.

The engagements that I had last week at the National Retail Federation up in New York, very strategic.

We've become very strategic to the retailers in how they improve their operational performance, how they drive uplift in sales, how they make sure they have the right inventory to be able to support that, and then ultimately drive significant value for their shareholders.

What I see happening, although there is some concern in retail just in general, that we've been capitalizing on the current trends and in spite of that have been growing.

And with that we've been remixing our sales capabilities, our capabilities to be able to sell up into the C suite, real strategic solutions.

And in spite of, I think, the pressure there, that we see a runway here that we're going to be able to continue to accelerate.

Great, thank you.

Thank you.

Next question is from Nigel Coe of Morgan Stanley.

Thanks for the information on retail.

I think that's a really important point.

But I wanted to switch back to the synergies and specifically the $500 million targets.

You've called out $150 million of corporates, $350 million of other.

And I think there's some concern out there to the extent of the actual branch field office synergies between JCI and Tyco.

So, I'm just wondering, of that $350 million remainder, is the field consolidation a disproportionate amount of that synergy?

Maybe just characterize the progress you've made on consolidating your fire and security networks.

Sure.

As we always said when we started the fire and security, the combination, that we would yield a footprint reduction of roughly 25%, 30%, that we would make sure that we have the right resources in the field that are customer-facing to be able to support the customer and grow, while we're creating shared services regionally that we could leverage the volume, deliver very strong productivity and ultimately put that resource back to work in growth.

We're still mid innings relative to that transformation because of the timing it takes to get out of existing real estate and then to get into a more optimized footprint with what I discussed and having the right footprint in the region, and then having the right shared services in place to be able to leverage the scale.

Why I am very confident being able to deliver on the savings, the benefit comes through G&A.

The G&A that's still is there relative to the support of our businesses as well as what we see within the Johnson Controls businesses together is significant.

And then you could look at just G&A or even the sales costs that we incur in the potential overlap there, especially as it relates to the back-office support of sales.

So, when we lay out these incremental synergies we definitely have line of sight to being able to deliver on these incrementals.

Now, as we get into the planning, the question is how much more could you do, as we get into the planning phase.

But, Nigel, when you look at the total-cost base of the two businesses with what we've been able to accomplish and still be in the middle innings, and then being able to lock at what could be done with the combination, it's pretty compelling.

I agree with that.

And then just a quick follow on -- obviously good news on the IRS.

I know there's another stage to go before you can actually sign off on that.

How important was the IRS settlements in getting the JCI deal done?

Was that continuously a barrier to forming some form of merger with JCI or anyone else?

Was that an important hurdle to cross?

Nigel, this is Robert.

I think, as you know, we've been working that with the IRS for a long time now, so I think it was just in general important to Tyco to get that resolved.

We thought we had a really good case.

Credit to the IRS, they worked hard to support their side.

Both sides had to ultimately compromise a little bit.

But, as I said, we felt we had a really good case.

The importance of this announcement, this stipulation of several issues, is that both parties went in front of a judge and basically signed, they agreed with a common set of facts.

So, it really puts both sides, limits any change from those common set of facts that we agreed to.

So, I think it's a real positive development.

Had the JCI opportunity not come around, it would have created other opportunities that would have been exciting too.

But we're obviously really excited about the JCI merger.

So, what you're saying is it wasn't a material hurdle for the merger.

I think that we had a great case, so I think that it's just something that makes sense, the timing worked out.

But we had a great case.

Nigel, specifically to the merger that we're pursuing, no it wasn't a hurdle, per se.

Certainly the timing was obviously very positive.

Okay, thanks a lot.

I'll leave it there.

Thanks.

Thank you.

Next question is from Deane Dray of RBC Capital Markets.

Thank you.

Good morning, everyone.

I wanted to go back to the merger plan.

Just the way we look at it, one of the more unusual structures is this staged 18-month management succession.

George, I was hoping you could share a bit more color as how you expect your role as COO during this interim period.

I know you'll have a Board seat, which is unusual for a COO, so that probably speaks loudly to your management role.

But will the timing, will it be at all disruptive?

Is there a tradeoff here or are there advantages in having you serve in this 18-month interim?

Let me give you my perspective.

Number one, we've had a great relationship with the JCI team, with Alex and his team, as this has developed, working very closely with them in making sure that we're going to position the combined Company for a lot of success.

And we see, not only in the synergies that we've outlined but, more important, strategically how these businesses come together and change the game in how we serve buildings.

We felt it was important that we get the structure, we get the integration done right, right out of the gate, which ultimately is going to be the foundation for just tremendous growth, and be able to deliver long-term returns for both of our shareholders,

The idea here is that, with the work we've done, I go into a role learning in depth all of their businesses and what can be achieved.

I have been fundamental to the business models that we've been developing here within Tyco, and this gives us an opportunity to be able to expand those business models that I truly believe are going to create a lot of value for our customers and a lot of returns for our shareholders.

I will be an active participant on the Board.

And we believe that through this transition we're going to build an unbelievable Company that's going to have a lean structure, that's going to be focused on customers, that's going to differentiate with technology, that's fundamentally going to change the game, and be able to create accelerated growth and increased returns for our shareholders.

That's great to hear.

And then just a question on the quarter, you called out a order on the institutional vertical.

We were braced for some negative orders and maybe this was a swing factor here.

I know you can't name the customer name but just some context of was there anything significant about this order, the scope of the products and services, and anything that you think would be helpful to share.

Dean, this is Robert.

It's a large order but it's right in our sweet spot.

These are things that we've been doing for many, many years and we know exactly how to execute.

So, we're real excited about it.

But we called it out because it was a large order, but nothing unusual beyond that.

Dean, a comment on that.

That's in our sweet spot.

It's in an institutional space.

It's absolutely reflective of how we're changing the game with our combined technologies and creating new solutions that ultimately create more value.

And for others that think that it's bundling, this is how we're ultimately coming together and creating new platforms that now is enabling us to be able to take bigger pieces of the pie and create a lot more value for our shareholders.

Could you give a size of the order?

It was a little north of $30 million.

Terrific.

Congratulations.

Thank you.

Next question is from Shannon O'Callaghan of UBS.

Good morning, guys.

George, you've had a lot of traction in the retail business and the opportunity there makes a lot of sense given your position.

Is there any other vertical where you can help us -- or where you've seen this smart-building concept really being implemented with sensors and data analytics and anything that actually leverages across what you'll now have at JCI?

Sure.

As we said in our prepared remarks, a lot of the learning that we've had in retail that was certainly most advanced there, was taking our sensoring and our devices and creating smart operations and ultimately building new business models that allow us to be able to create new services.

It is happening, Shannon, across all of our end-markets.

Oil and gas is a great example where, in spite of the economic decline, it's an area ripe to be able to take all of the intelligence that we gather from the devices and sensors that we deploy in that space and then to create real-time services that can be provided that obviously enhances life safety but also improves operations.

I would tell you that across the board, whether you look at commercial buildings and institutional buildings, or a big space for us is campuses, is a great space there where we've deployed a lot of our new technologies and new enterprise software that allows us to differentiate solutions.

It's happening across the board.

That's why the timing of this merger with JCI relative to the building, with what we've done, the business models we're building, the work they've done.

They've got an unbelievable platform within their controls business, the Metasys platform, that can scale at any level.

So, the combination of the intelligence that we create in our sensoring and devices, and how that's been deployed through their controls, which ultimately deliver the value to the customer, whether it be energy or utilization of space or utilization of facilities, that's where the value will be extracted.

As we develop more and more, we'll become more specific relative to the capabilities but it's accelerating rapidly.

Okay, thanks.

And then just in terms of the comment about the 30% premium when you factor in the 44% and the capitalized synergies, a portion of that 44%, it seems, is coming from the $3.9 billion you put in.

Is that really a premium, effectively, that's coming to Tyco?

Or maybe you could just help me think through how you get to the 30% in your thought process around that.

Yes, this is Robert.

Most of the value growth to shareholders comes from the synergies.

And then next we've obviously got the exchange rate working in our favor.

What we don't take any credit, we're entirely basing that on cost synergies, both operational and tax.

What we don't take into consideration is any revenue synergies or any multiple uplifts.

Those would just be upside from there.

With regard to the way we structure the deal, this was all part of the negotiations and I think what we ended up with through those negotiations was a really good outcome, both for Tyco shareholders, obviously, but also for JCI shareholders.

And, remember, we go to both sets of shareholders for approval.

I look at this as a win-win deal with great, as George has alluded to, great future.

Okay, thanks.

Thank you.

Next question is from Scott Davis of Barclays.

Good morning, guys.

I'm not sure I've ever asked this question of you guys, or heard it asked, but do you, when you think about non-res construction overall, and I'm just talking about North America, not rest of world but, do you have an explicit forecast you're using for 2016?

And I'm curious to hear your early view on 2017.

We're getting some visibility but there's some early signs that 2017 might be a bit of an air pocket.

But I'd be curious, you guys are closer to it, so I'd be curious to hear what you're thinking and how you come up with a forecast, assuming you use one.

We use a lot of different inputs.

We use the Architectural Billings Index as a lead indicator of the activity, and that's continued.

It's continued to be positive net, net-net, up and down but overall net positive.

We do track other inputs, whether it be -- we have pretty good visibility within our fire business on all new projects that are being developed, and making sure that we've got visibility and then certainly deciding how we're going to compete for those new projects.

We have a pretty good pipeline that we look at on a regular basis.

We certainly stay close to our customers with the direct channel.

We have a pretty good view relative to what they're thinking with what might be occurring.

So, Scott there isn't any one answer.

I would tell you that as we do our forecasts we take all of those different inputs and then try to baseline what we think is going to happen.

What I would say is that, as we look at North America, we've done a phenomenal job in being able to turn the security business around.

We're getting growth now across the entire platform.

And with the addition of Girish Rishi who came in roughly about 9 or 10 months ago, we're now bringing North America to the next level of integration, because we had two very successful businesses in our fire business and our commercial security business.

There was still some structural overlap that this is now giving us a much better view of our combined customer base that will enable us to, I think, become even more robust relative to how we plan.

But we're watching that closely.

We take a lot of different inputs and make sure that we're providing the contingency that we need to assure that we deliver on our commitments.

The other thing I'd say is, with the work we've done on the commercial excellence side, and then now with the E3 initiative, there's tremendous opportunity for service growth on the existing install base as well as now with these new service models that we're developing, to be able to create a lot of value in a tough economic environment for our customers that ultimately enables us to be able to get accelerated growth.

And that's a big focus now, especially with the thought that, that might slow here, the non-resi might slow here over the next few.

Got it.

I'm curious on the technology side, when you go out and talk to your customers, this is an industry, I think, where many of us have talked about a potential upgrade cycle for probably eight or nine years and we haven't gotten it.

You go to the trade shows and see new products and such but it doesn't seem like there's anything that is really a catalyst to get people to upgrade.

What's holding back some of these buildings?

Just thinking of the building I work in, we've gone full LEDs, there's been a big upgrade there, we've done a number of things in HVAC.

We haven't done anything in fire and security, I don't think, in 15 years.

What's stopping these buildings from, particularly in security?

And what do your customers tell you about that?

I'd start by saying, when you look at the served market, the $120 billion served market in fire and security, it's viewed as being a low-growth, low-return market.

Typically, what we have done historically is usually delegate it down throughout the organization and it's more viewed as a cost.

What I would tell you what's changing, and what's going to change this trend, is now this tremendous value on creation, with the ability to be able to create intelligence, being able to take that intelligence and create new business models, and then to have what I would call much higher ROI or return on the expense that they incur that ultimately is going to support their business.

As we're deploying the new technology, the new platforms, we're now getting up to the C suite in how we're strategically aligned now with the customer base.

And whether it's working on what we're doing in security driving presence, and the work we're doing in retail driving item-level intelligence, all of that is becoming much more strategic to the customer.

The way that we've deployed our resources, Scott, to capitalize on that, over the last 18 months we've had a growth board where we start with the customer, what's their biggest problem, and then how do we put a big leader with the right resources, leveraging all of our technologies and our products and our enterprise software to fundamentally change the game in how we solve that problem.

And I would tell you, today we have about 15 projects that are doing just that.

I think as we get traction, as the value proposition becomes clear, and they recognize that with the returns that we generate it's going to accelerate the trend.

Interesting.

Good luck with that, guys.

And congrats on the deal.

Good luck on that.

Operator, I'd like to turn the call over to George for some closing comments.

Thanks again for joining our call this morning.

I want to reiterate that we're off to a solid start in 2016.

Despite the macro concerns, I have never felt better about how we are positioned and how our leaders are executing on fundamentals.

I look forward to talking to many of you soon.

Operator, that concludes our call.

That concludes today's conference.

Thank you for your participation.

You may now disconnect.