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Executives

Antonella Franzen

George R. Oliver - Chief Executive Officer and Director

Arun Nayar - Chief Financial Officer and Executive Vice President

Analysts

Jeffrey T. Sprague - Vertical Research Partners, LLC

Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division

Nigel Coe - Morgan Stanley, Research Division

Ajay Kejriwal - FBR Capital Markets & Co., Research Division

Deane M. Dray - Citigroup Inc, Research Division

Shannon O'Callaghan - Nomura Securities Co. Ltd., Research Division

Tyco International (TYC) Q4 2012 Earnings Call November 14, 2012 8:00 AM ET

Operator

Welcome to the Tyco Fourth Quarter Earnings Conference Call. [Operator Instructions] Today's call is being recorded. If you have any objections, please disconnect at this time. I will now turn the call over to Antonella Franzen, Vice President of Investor Relations. You may begin.

Antonella Franzen

Good morning, and thank you for joining our conference call to discuss Tyco's fourth quarter results for fiscal year 2012 and the press release issued earlier this morning.

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

I would like to remind you that during the course of today's call, we will be providing certain forward-looking information. We ask that you look at today's press release and read through the forward-looking cautionary informational statements that we've included there.

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

The press release issued this morning and all related tables, as well as the conference call slides, can be found on the Investor Relations portion of our website at tyco.com.

Please also note that we'll be filing our annual SEC Form 10-K in the next several days.

In discussing our segment operations, when we refer to changes in backlog and order activity, these figures exclude the impact of foreign currency. Additionally, references to our operating margins during the call exclude special items and these metrics are non-GAAP measures. Again, these non-GAAP measures are reconciled in the schedules attached to our press release.

As we discussed in our third quarter earnings call, our full year and fourth quarter of fiscal 2011 included an extra week of results compared to fiscal 2012. In order to more accurately reflect the underlying organic growth of the businesses, we have adjusted both organic revenue and orders growth to exclude the estimated impact of this additional week as we did in the prior year. All references to organic revenue and orders growth discussed in today's call exclude the estimated impact of the extra week.

As we completed the separation and subsequent merger of Flow Control with Pentair on September 28, our results reflect the operations of ADT and Flow Control as discontinued operations. As such, this earnings call will be focused on our continuing operations, which we now report under the following 3 segments: North America Installation & Services; Rest of World Installation & Services, which when combined, represent our direct sales channel; and Global Products, which drives our innovation and technology, as well as the manufacturing of our fire protection, security and life safety products for both our internal and indirect sales channel.

Now, let me quickly recap this quarter's results. Revenue in the quarter of $2.7 billion decreased 2.5% year-over-year. The decline in revenue includes a 3 percentage point negative impact related to foreign currency. Additionally, the comparison was negatively impacted by the extra week of revenue in 2011, which offset the additional revenue related to acquisitions. Organic revenue grew 1% in the quarter.

Our reported segment operating income of $358 million includes a charge of $9 million or 40 basis points for adjustments recorded related to China, which Arun will address in a few minutes. The segment operating margin before special items was 13.1%. The segment operating margin, adjusted for the China impact, was 13.5%, which was in line with our guidance.

The loss per share from continuing operations attributable to Tyco common shareholders was $1.36 and included charges of $1.69 related to special items. These charges primarily relate to the redemption of debt in anticipation of the separation, other separation-related charges and restructuring charges. Earnings per share from continuing operations before special items was $0.33.

Now, let me turn the call over to George.

George R. Oliver

Thanks, Antonella, and good morning, everyone. It is my pleasure to be speaking to you today as the Chief Executive Officer of the new Tyco. Overall, this has been a very good year for the fire and security businesses as we continued to grow the top line both organically and through strategic acquisitions, as well as expand segment operating margins while successfully completing the separation of Tyco into 3 companies.

The separation marks a key strategic milestone for the new Tyco. As a focused Fire & Security company, we can now leverage our portfolio of fire and security products and service solutions in our global scale of operations to enhance our position in the industry and drive operational results to outperform the market.

Before we get into the results for the quarter, I would like to quickly recap the 3-year strategy we laid out at our Investor Day back in September. It is helpful to keep these priorities in context as we go through our fiscal 2013 guidance, which we will cover later on in the call.

Our strategic focus is centered on 3 main areas. The first 2 are really the underpinning of our growth strategy. First, we plan to accelerate our organic revenue growth, which will be driven by continued strong growth in products, accelerated service growth and further building upon our presence in high-growth markets.

Second, we will focus on the execution and successful integration of middle of the plate bolt-on acquisitions. A disciplined acquisition strategy will be a key growth platform for us over the next few years as we seek to strengthen our geographic footprint, as well as accelerate innovation and technology. While the pace of acquisitions is not necessarily linear, we expect, based on the opportunities we see today, these acquisitions to range in price from $50 million to $200 million. Recent acquisitions have added about $400 million of revenue on an annualized basis, with good returns on invested capital.

The third strategic area we discussed is delivering a net benefit of $50 million annually through productivity initiatives. By executing on our strategic sourcing initiatives, cost rationalization and rolling out our Branch-in-a-Box strategy, we have significant cost-saving opportunities that are under our control and independent of the global macro environment.

We expect these 3 initiatives will accelerate organic revenue growth and expand segment operating margin to 15% to 16% in 2015.

Now let me give you a feel for the business environment in each of the segments, then Arun will provide you with more details regarding our quarterly performance.

Starting with our North America Installation & Services segment, we are well underway in the integration process of our commercial fire and security businesses. As we discussed at our Investor Day, we're deploying a strategy of project selectivity in our commercial security business. This is a disciplined process focused on getting the right installation projects with long-term service potential. We've had a lot of success doing this in SimplexGrinnell, our North America fire business, and we are going to continue to use those same methodologies in the security business to improve the installation performance while driving service revenue growth.

A key part of executing this strategy is having the right leader. As of November 1, Mark VanDover is the President of Tyco Integrated Security, our North America commercial security business, reporting to Brian MacDonald, Chief Operating Officer of Installation & Services. Mark has held key senior roles in Tyco since 2000, most recently as President of Security Products. With his extensive experience in the security industry and proven track record of operational performance, Mark is the right person to lead our commercial security business in North America.

In Rest of World Installation & Services, service revenue in the quarter grew 4% year-over-year, with growth across Europe, Asia Pacific and South Africa. In installation, project activity in the high-growth markets is being more than offset by a decline in the mature markets due to project selectivity in the nonresidential construction market, which continues to bounce around the bottom.

Lastly, Global Products continues to perform very well, with strong organic revenue growth and operating margin expansion. We continue to see our growth investments in R&D and sales and marketing provide good returns on the capital we have deployed. Additionally, we are benefiting from the acquisitions we have made by both leveraging our existing global footprint, as well as expanding distribution channels to pull through additional Tyco products.

Now let me turn the call over to Arun to discuss the operating results in more detail.

Arun Nayar

Thank you, George, and good morning, everyone. I would like to echo George's comment that it is my pleasure to speak to you today as the Chief Financial Officer of the new Tyco. Before I get into the details of our business segment performance, I want to spend a couple of minutes on our security results in China.

We disclosed in our press release on September 17 that we expected to record additional reserves in the range of $40 million to $60 million in the fourth quarter due to the aging of certain receivables in China. Since then, we conducted a thorough investigation and have concluded that revenues related to certain security contracts had been improperly recorded for periods going back to 2008. As such, we have adjusted the results of our Rest of the World Installation & Services segment in all periods since 2008, the earliest year impacted.

As disclosed in our earnings release, the cumulative impact was a decrease to revenue of $164 million and a reduction of operating income of $51 million. The impact on the fourth quarter of 2011 was a $16 million reduction of revenue and a decrease to operating income of $3 million. For the fourth quarter of 2012, operating income was reduced by $9 million. We do not expect to record any further adjustments related to this matter.

With that as a backdrop, let's now focus on the business results. I will first provide an overview of our financial performance for the year and then give you a more in-depth review of this quarter's results.

Beginning with our full year results, organic revenue grew 2%, with products growth of 10%, service growth of 3% and a 2% decline in our installation revenue. Orders increased 7% year-over-year, with about 1/2 of that growth coming from acquisitions. Backlog increased 7% on a year-over-year basis to $5.1 billion.

In total, segment operating margin, before special items, expanded 70 basis points with a solid margin expansion across all 3 segments: 100 basis point expansion in Global Products, a 70 basis point increase in North America Install & Services and a 30 basis point increase in Rest of World Install & Services.

Overall, this was a very good year for Tyco, and I want to recognize and thank our employees around the world who made this possible.

Turning to our quarterly results, organic revenue growth of 1% in the quarter was led by continued strength in our product businesses, which grew 9% organically, and our global service business, which grew 2% in the quarter, highlighting the resiliency of our recurring revenue base. Growth in these platforms was partially offset by a 4% decline in our global installation business, driven by the nonresidential construction market.

Orders were up 5% year-over-year, with the majority of that growth coming from acquisitions.

Segment operating margin, before special items, expanded 50 basis points year-over-year despite a 40 basis point headwind related to the adjustments recorded for our China business and an additional 20 basis point headwind related to the benefit of the 53rd week in the prior year. As you can see on Page 13 of the earnings slides, excluding the impact of these items, segment operating margin improved 110 basis points in the quarter, driven by a higher mix of service revenue, leverage in our products businesses and the benefit of productivity initiatives.

Now let me get into the details for each of the segments, starting first with North America Installation & Services. Revenue in the quarter of $1 billion declined 1% organically, driven by a 2% decline in installation revenue. Service revenue was relatively flat on an organic basis as the decline in security offset service revenue growth in the fire business. As George mentioned, we have initiated a strategy of being more selective on the projects we pursue in the security business in North America. While this will impact our organic growth rate well into fiscal 2013, we expect to see a benefit to our operating margins related to project selectivity as we move forward.

Service orders in North America increased 4% year-over-year, while installation orders declined 6%. Typically, our results are operationally stronger in the summer months due to the seasonal construction cycle and availability of customer locations to do refurbishment and upgrade work, especially in universities and schools. Backlog of $2.5 billion increased 5% year-over-year and, due to normal seasonality, declined 1% on a quarter sequential basis.

Operating income before special items was $128 million, and the operating margin increased 70 basis points year-over-year to 12.3%. The positive benefits of an increased mix of higher-margin service revenue, coupled with productivity improvements, was partially offset by increased investments in sales and marketing and the benefit of the 53rd week in the prior year.

Moving to the Rest of the World Installation & Services segment, revenues of $1.1 billion declined 1% organically. Service revenue increased 4% in the quarter, highlighting our ability to continue to drive growth in this strategic area. Installation revenue declined 7%, driven largely by the number of projects complete -- number of completed projects in the prior year.

Service orders increased 2%, while installation orders declined 4% year-over-year. In aggregate, orders declined 1%. Backlog of $2.4 billion increased 8% year-over-year and, due to normal seasonality, declined 3% on a quarter sequential basis.

Operating income before special items was $135 million and the operating margin was 12%, a decline of 60 basis points year-over-year. Adjustments related to certain projects in China that I have mentioned earlier negatively impacted the operating margin by 70 basis points. Additionally, the benefit from the extra week in fiscal 2011 impacted the operating margin by 40 basis points year-over-year.

As you can see on Page 8 of the earnings slides, collectively, these items negatively impacted the Rest of the World operating margin in the quarter by 110 basis points. Excluding these items, we improved the operating margin 50 basis points year-over-year driven by a higher mix of service revenue.

Moving to Global Products, revenue grew 15% in the quarter to $558 million. Organic revenue grew 9%, with positive growth across all 3 platforms led by security products, which grew 24% organically as the benefits of R&D investments continue to drive new product introductions.

Product orders increased 31% year-over-year, with about 1/2 the growth coming from recent acquisitions. From a profit perspective, operating income before special items was $95 million, and the operating margin improved 220 basis points to 17%, with margins improving across all 3 platforms. Productivity continues to fund innovation and technology investments, which, in turn, is driving volume growth and expanding the operating margin.

Now let me touch on a few other important items. First, corporate expense before special items was $103 million in the fourth quarter, bringing our full year corporate expense to $331 million. The corporate expense number for the quarter and the full year also includes costs associated with supporting the operations of the ADT and Flow Control businesses as these costs are not eligible to be reported in discontinued operations. As a result, corporate expense will not be comparable year-over-year as we move through each of the quarters of fiscal 2013.

In line with our previous guidance on corporate expense for the new Tyco, we expect corporate expense in fiscal 2013 to be approximately $225 million, with first quarter expense of approximately $55 million.

Next, our effective tax rate for the fourth quarter before the impact of special items was 28.4%. The tax rate in the quarter was impacted by the amount of corporate costs allocated to continuing operations as no tax benefit is recognized for these costs. We expect our effective tax rate for fiscal 2013 and for the first quarter to be in the range of 19% to 20%.

We expect net annual interest expense in fiscal 2013 to decrease to approximately $100 million, given our reduced debt balance of $1.5 billion.

Lastly, let me quickly touch on restructuring and separation costs, both of which will be excluded from our guidance for fiscal 2013. We continue to see opportunities to streamline our businesses, particularly related to the integration of our field offices, as well as our key strategic operational initiatives. As a result, we expect restructuring costs in 2013 to approximate $50 million.

As we mentioned on our Investor Day, we expect to incur separation costs of about $65 million in fiscal 2013 related to rebranding our North America commercial security business and separating our monitoring centers from ADT. Again, these costs will be excluded from our guidance as the timing of the expense is uncertain and can shift from quarter-to-quarter.

Now, let me turn things back over to George to wrap up this morning's call.

George R. Oliver

Thanks, Arun. Let's turn now to our earnings guidance, starting with the full year of fiscal 2013. We expect revenue to increase to approximately $10.6 billion to $10.7 billion. Embedded in this guidance is year-over-year organic revenue growth of 1% to 2%, which excludes the impact of foreign currency, acquisitions and divestitures.

Given the productivity initiatives we laid out at our Investor Day, we expect the revenue increase to leverage quite nicely. This benefit will be partially offset by the dis-synergies related to separating our commercial business in North America from ADT. These costs are expected to impact the operating income by approximately $35 million in fiscal 2013.

As we progress over the next few years, we expect these costs to be offset by the benefits of field office integration and sourcing initiatives. As a result, we expect segment operating margin to increase 20 to 50 basis points to 12.9% to 13.2%, including a 30 basis point headwind related to the dis-synergies. This represents a $0.10 to $0.15 increase in earnings per share solely from segment operations, driven by increased volume and the benefits of productivity.

As we continue to deploy project selectivity in our commercial security business in North America, we expect that overall growth in our North America Installation & Services segment will decline approximately 2% to 3% organically year-over-year. Again, the operating margin will be impacted by $35 million of dis-synergies, which will result in an expected operating margin similar to last year.

In Rest of World Installation & Services, we expect revenue of approximately $4.5 billion, with 2% to 3% organic revenue growth and operating margin expansion of 40 to 60 basis points year-over-year to approximately 12%.

In Global Products, we expect revenue of approximately $2.3 billion, with organic revenue growth in the mid-single digits and an operating margin of approximately 18%.

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 $1.75 to $1.85.

When compared to a normalized 2012 EPS of $1.60, our fiscal 2013 guidance represents a 10% to 15% increase in earnings per share. As in prior years, we expect our earnings per share to be stronger in the second half of the year due to the normal seasonality of our businesses.

Now let's shift to our guidance for the first quarter. Starting with North America Installation & Services, we expect growth in service revenue to be partially offset by a decline in installation for overall organic revenue growth of approximately 1%. Due to the impact of the dis-synergies I spoke to earlier, we expect the operating margin for the first quarter to be approximately 10.5%.

Turning to Rest of World Installation & Services, continued nice growth in service revenue is expected to be more than offset by a decline in installation revenue. We expect total revenue of approximately $1.1 billion, with an operating margin similar to last year.

In our Global Products business, we expect to see year-over-year organic revenue growth in the mid-single digits, driven by the continued momentum across fire protection, security and life safety. As incremental investments in both R&D and sales and marketing will increase in the first quarter by approximately $15 million, we expect an operating margin in the range of 16% to 16.5%. We expect sequential operating margin expansion each quarter in fiscal 2013 and, again, expect the full year operating margin to approximate 18% as incremental investments will continue to drive volume growth.

Overall for Tyco, we expect revenue in the first quarter to be in the range of $2,515,000,000 to $2,600,000,000 with a segment operating margin of approximately 12%. This, coupled with our expectations for corporate expense and below-the-line items, we expect earnings per share from continuing operations before special items in the first quarter to be about $0.39. On a normalized basis, this represents an 8% increase in earnings per share.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question today is from Jeff Sprague with Vertical Research Partners.

Jeffrey T. Sprague - Vertical Research Partners, LLC

Two questions. George, one for you and then one for Arun. George, first, when we think about kind of the project selectivity and how that plays through your results, can you -- it sounds like we saw some of that in this quarter, although this wasn't a new Tyco quarter yet, right, it reflects the legacy company. Can you give us some sense of what the selectivity impact was on orders in this quarter and how that plays out over the remainder of '13?

George R. Oliver

Yes, I'd go back and start by just going -- when we deployed project selectivity in fire protection, we saw 200 or 300 basis points of an impact initially, but that was then making sure that we're focused on the right projects that ultimately led to service. And the way that we're operating now across our fire businesses, we're actually growing in line or above the market rates on where we're competing. And so, when we look at now the commercial security businesses, as we discussed during our Investor Day, we're deploying the same strategy, making sure that we're focused on the projects that will lead to that recurring revenue. And so when we look at our orders, the order impact overall for installation, we saw about a 5% -- in total orders in Tyco, about a 5% decline in the fourth quarter. North America was driven with about a 6% decline, which a lot of that was attributed to the project selectivity as well as the current market conditions. So there's a few -- a couple 300 basis points that I would say because of the strategy that we're deploying that now is being impacted in the business. But as you know, you've seen the progress as we've now become more selective driving projects that ultimately get to the service, we've seen a nice pickup in the overall margin rate within that segment of the business.

Jeffrey T. Sprague - Vertical Research Partners, LLC

So you would say, at this point, margin and backlog is developing in line with a way that would give you actually fairly high confidence in those margin targets for the year?

George R. Oliver

Oh absolutely. I mean, we, as we've discussed, with the productivity, when you look at our overall productivity initiatives, whether it be the sourcing, what we're doing with Branch in a Box, with the installation business, looking at our real estate footprint and then looking at the project selectivity and how we're now contracting these projects, that all supports the ability to be able to deliver on that operational improvement for the year.

Jeffrey T. Sprague - Vertical Research Partners, LLC

And then just for Arun to the balance sheet, does the balance sheet we see here reflect the new Tyco balance sheet? The cash was actually a bit higher than I expected, but is this all attributable to new co?

Arun Nayar

Jeff, that's right. The balance sheet is the new balance sheet and the cash that you're seeing, which is a little higher than we expected, is really driven largely by the spillover of some of the separation costs that we expensed in 2012 that will be settled in 2013. And in addition to that, we also have a tax -- a legacy tax payment as part of the settlement with the IRS, that's due sometime in 2013.

Jeffrey T. Sprague - Vertical Research Partners, LLC

Can you roughly size those for us?

Antonella Franzen

Yes, the tax payment is about $140 million and when you think of spillover of separation, there's a couple of $100 million related to just separation.

Jeffrey T. Sprague - Vertical Research Partners, LLC

And then, just taking that a little bit farther though; I still struggle with getting to $100 million of interest expense on a touch less than $1.5 billion in debt. I know there's some higher-cost stuff in there, but is there some room in that interest expense number?

Arun Nayar

Jeff, unfortunately, the interest expense number is pretty much fixed because all our debt, the $1.5 billion debt is term debt with fixed coupons on it. So it's really a result of the coupons that are outstanding on the debt that's there today.

Operator

Our next question is from Steven Winoker with Sanford Bernstein.

Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division

So just to clarify again, that corporate number in terms of the quarter that you just had, if you went pro forma, I know your normal run rates you're saying $55 million or at least for the first quarter, does that mean that your pro forma corporate on this past quarter, would that have been shaved off about $48 million or would the number have been something different?

Arun Nayar

That's correct, Steve. The pro forma number would be closer to the $55 million that we are talking about for Q1 than what you're seeing in the numbers, that's in that financials that we laid out in the release. It's really simply driven by the fact that the rules that we have did not allow us to -- it really asked us to put the full corporate expense of the old Tyco in our corporate expense number, which included the corporate expense related to the ADT and Flow Control businesses. So you're right, the pro forma number would be closer to the $55 million that we expense -- we expect in Q1.

Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division

And, Arun, is the same thing true for the tax rate as well?

Arun Nayar

Yes, the tax rate exactly. There is some legacy stuff in that Q4 tax rate that drives it to the 28.4%. And as we kind of go forward, like I said in my comments, we expect the tax rate for 2013 and for the first quarter to be in the 19% to 20% range.

Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division

But the tax rate would have been 19% to 20% for this quarter otherwise?

Arun Nayar

That is correct, yes. That's right.

Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division

Okay. I'm just trying to get to that. All right. And then on the guidance front, when you look at the Rest of the World growth, you're talking about $4.5 billion, 2% to 3% for 2013. It's a little bit higher than I was thinking. And just maybe a little bit of color about what gives you that confidence?

George R. Oliver

Yes, I mean, we're looking -- I mean, the focus there has been continuing to really accelerate our service growth, so the service growth is coming through very nicely. The backlog -- when we look at our backlog year-on-year, the backlog at the end of the year was up 8% year-on-year, which supports the guidance that we've provided. And then when you look at the total growth for the year because we do have some acquisitions that roll into 2013, the actual total growth is about 4%.

Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division

Okay. All right. And then maybe just lastly, on the rebranding in North America, there are a lot of horror stories out there of companies attempting to rebrand very well-known brands. How are you guys -- or how are you gaining comfort to minimize and mitigate that risk this year?

George R. Oliver

Yes, let me touch that. We've been very disciplined when we look at all of our separation costs to make sure that we're getting the benefits that it's ultimately required to separate from ADT and we're getting the benefits for what we're executing on. And I would say that the -- with that, we've been -- and with the focus that we've had, with the rebranding launch that we've made, number one is the Tyco brand is very respected not only in the industry, but more broadly. And that with the Tyco Integrated Security brand and the way that, that has been deployed, it has been very well received, very well received by our customers, by our colleagues, across the business. And like I said, we've been very disciplined in how we're actually spending those resources to make sure it's ultimately required to maintain the base that we had as we were branded within -- with ADT. Now recognize we still have use of the ADT brand for the first 2 years and a transitioning off that brand during that time period.

Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division

Are you doing it geographically or are you -- or evolution or a big bang or how is that going to work?

George R. Oliver

Well, I mean, we've been working on this since the separation was announced. And we believe, we think we're kind of through the initial phases. Now it's about making sure that all of our trucks are branded correctly, making sure that all of our colleagues out in the field have all of the new branding materials. But like I said, we're accelerating this as fast as we can to ultimately get the new brand, which is Tyco Integrated Security out into the market and try to drive that conversion from ADT as quickly as we can.

Antonella Franzen

Yes. And again, Steve, this is just the North America security business that's being rebranded.

George R. Oliver

And we're also leveraging -- the work that we've done in North America, which has gone very well, we're now leveraging that branding activity globally, which is really, really strengthening now as we think about an operating company with the combination of businesses that we have, with our pure play position, leadership position in the industry, that's going to play out really nicely.

Operator

Our next question is from Nigel Coe with Morgan Stanley.

Nigel Coe - Morgan Stanley, Research Division

Just wanted to -- if you look at your backlog trends, up 5% year-over-year in North America, up 8% in Rest of World, I think you said orders were up 5% organic in the quarter, yet your 1Q revenue guidance is calling for a low single-digit organic growth. I just want to try to square that circle?

Arun Nayar

I think the key thing here, Nigel, one is we are very pleased to have the backlog build up, obviously. The second is that we see the backlog filtering through some of these projects do not necessarily reflect themselves in the first quarter, but are reflected in our full year guidance as both in North America as well as in the products business.

Antonella Franzen

And Nigel, one thing to add to that. When you think about the timing of it, as George mentioned, overall for the full year, we expect North America's organic growth to actually be a decline, but yet you see growth in Q1, and that's because of the timing of the backlog flowing through Q1. Now in Rest of World, it's a little bit different; although for the full year, we're expecting growth of 2% to 3%, there was actually a decline in the first quarter and that goes back to Arun's comment in regards to the timing of that backlog as some of the projects in there are a little bit more longer term. So it's really more the timing of install and the way kind of it flows through the year.

Nigel Coe - Morgan Stanley, Research Division

Understood. And then on the selectivity of projects in North America, can you maybe just scale -- maybe quantify or maybe even in a qualitative way just talk about how the margin in the North American backlog maybe how that's trending compared to maybe last year or last quarter? Are we seeing that margin improvement in the backlog?

George R. Oliver

Well, what I would start by when you look at North America, it's really made up of SimplexGrinnell, which is about 1/2 of the North America segment, which is our fire business and then the commercial security business, which we picked up from ADT. And so when you look at the 2 businesses, we've got SimplexGrinnell that's growing nicely, both installation and services and, from an operating standpoint, continues to be able to expand margins. We've taken the same strategy and we've deployed that now within the commercial security business. So when you're looking at the results, you're looking at the combined businesses of SimplexGrinnell, fire business with now the commercial security business, which we branded Tyco Integrated Security. And so when you look at the total, there is, as we look at the security business, as we're taking on a much better mix of projects that lead to service, that ultimately is pressuring some of the projects that didn't have service attached in the short term and we believe for the year, even with that decline in revenue, in total for North America, we can maintain our margin rate. And then we'll be positioned with a nice backlog that we can execute going forward that not only we'll be able to maintain our relative position in the market from an installation standpoint, but also get the service revenue that's recurring with those projects over the life cycle.

Arun Nayar

Yes, and how it will show up, Nigel, in the financial projections that we are kind of making here is if you kind of normalize the fiscal '12 results that we printed, to take care of the dis-synergies, if you were to compare apples-to-apples, the margin rate would be closer to 10.5% in 2012. And we expect to see about a 70 basis point improvement just on an apples-to-apples basis in 2013. So the benefit of this project selectivity is coming through in the margin rate.

Antonella Franzen

And that's with an organic revenue decline of 2% to 3%.

Nigel Coe - Morgan Stanley, Research Division

That's really helpful. And then maybe one more.

George R. Oliver

Nigel, when we think about the productivity initiatives that we have underway, when you think of the footprint that we had in both of those businesses in North America, that gives us a nice opportunity to be able to really synergize the business processes and how we support our field operations. And so we're going to -- we're beginning to see some of that benefit offsetting some of the dis-synergies. But going forward, there's going to be a lot more opportunity.

Nigel Coe - Morgan Stanley, Research Division

Okay, that's great. That's helpful. And can you maybe just touch on the Chinese investigation? And I'm just wondering, I know you do have some long-tail projects. Is it normal in your business to have receivables relating to sales booked in '09? And secondly, how confident are you that this is a Chinese-specific problem? And are you looking at other areas to see if there's any other problems in other regions?

Arun Nayar

Nigel, let me just say first that we have done a very deep review of all our internal controls across the world and very confident that they are all working effectively. With regards to the China, it's a series of contracts; it's not just the one contract there. It was a series of contracts that we looked into. And when we dug deeper into it and did our investigation of these aged receivables, what we actually found was some falsification of documents. And as a result, we can't -- and we found that the revenues had been improperly recorded as a result of that. Now one thing we have done is we have done a very thorough investigation there in China. It was restricted to just the one district in China. I mean, China is a big market for us. This particular incidents were taking place in just one district. And we have gone broader than just China. We've gone into Greater China, Hong Kong, Taiwan and then also into the rest of the world, just to make sure there are no similar things out there. And we are very confident that we have addressed the issue, we addressed it quickly and it's behind us. And we are moving forward with our plans to expand our business in China.

Operator

Our next question is from Ajay Kejriwal with FBR.

Ajay Kejriwal - FBR Capital Markets & Co., Research Division

So in the Rest of the World service business, you're seeing nice growth. Maybe if you can talk about what's driving that, how much of that is pricing versus subscriber growth and then the sustainability?

George R. Oliver

Yes, we don't -- when we look at our service growth, we look at it holistically, across all of our commercial operations. So what I would say is it's really driven by -- as we talk about driving productivity to free up resources, to be able to reinvest, we put a lot of investments back into our sales force -- into our services sales force across the globe and we're seeing the benefits of that. So it's twofold, not only the capabilities within our sales force in being able to drive service sales, but also expanding our footprint to be able to capitalize on more of the installed base. That's pretty much what's driving it. And then there's a big focus on the high-growth markets. And so as we've discussed and back in the Investor Day, we've put a lot of our reinvestment back into the emerging markets. They represent a significant opportunity for us to be able to expand our base and be able to drive service growth and that's been the focus of the strategy and I believe it's playing out nicely.

Arun Nayar

I think, for 2012, Ajay, we grew the -- in what we call our growth markets, we grew by 17%. And that's consistent with what we had spoken to at the Investor Day as well.

George R. Oliver

Some of this will be helped with the acquisitions that we're making, the strategic acquisitions, bolt-ons, is also giving us a footprint within the new markets that gives us a base now to build and really drive service growth going forward.

Ajay Kejriwal - FBR Capital Markets & Co., Research Division

Good. And then could you maybe update us on the consolidation of sourcing, what's the progress there? You talked at the Analyst Meeting about the 4 commodities where you saw near-term opportunities, so any updated thoughts there would be helpful.

George R. Oliver

Yes. We're making tremendous progress. When -- if I reflect back on the Investor Day, we talked about a $9.3 billion cost structure, of which $4 billion was what we bought through our procurement organization. Historically, we've operated out of like, I'd say, 12 to 15 different organizations across the globe. What we've done is now we've reorganized that under one leader, Vivek Kamath is our Global Sourcing Leader. And what we're seeing now is although we were doing a good job in isolation across the globe, the ability now to be able to aggregate that entire buy and be able to now negotiate with our supplier base, as well leverage a more global supply base, we're seeing some real nice savings. And so as I said, the ones -- the commodities that we're well along with, we're seeing double-digit savings. And we're going to continue to make sure that we've got the resources in place, commodity-by-commodity, to be able to generate these savings because this is ultimately what's going to enable us to do the reinvestments in R&D, in sales and marketing, which supports the organic growth commitments we made, while we're expanding our margins and delivering $50 million to the bottom line.

Ajay Kejriwal - FBR Capital Markets & Co., Research Division

So you've already started seeing those savings or is that more you'll ramp up over the next several quarters?

George R. Oliver

We will continue to ramp. I mean, this is something that we're putting the structure in place. We're consolidating the resources that we have today deployed across the globe that are doing sourcing activities. We're putting that into one organization. We've got targets set. We've got budgets that are set to what we've guided to. But also, we're stretching beyond as we try to accelerate the initiative thinking about 2014 and 2015. But we feel really good about the prospects that we're going to be able to generate a lot of savings here.

Operator

Our next question is from Deane Dray with Citi Research.

Deane M. Dray - Citigroup Inc, Research Division

Just a follow-up on Ajay's question, the $50 million of productivity savings. You've given us 3 buckets, sourcing, cost-outs and the Branch in a Box. And how does that $50 million get a portion across those 3 initiatives?

George R. Oliver

Yes. What I would say is there's a number -- it's easy to kind of highlight the 3 big ones, but there's a number of productivity initiatives that are taking place across all of our functions, all of our businesses. And what we do is align -- the big focus is around those 3. And so, it is not just that that's driving the savings. But what I could tell you is that we do have plans in place and budgets established across the globe with those 3 to be able to generate the savings. But we don't separate it like that, Deane.

Antonella Franzen

Yes, and I think the one good thing actually that you brought that up to remind everyone of is when we talk about the $50 million, that is a net number. So the gross savings related to those 3 items that you spoke to is much higher than the $50 million. We net that with any commodity increases or compensation inflation. Then, in addition to that, some of it's going back to being reinvested in the businesses. And then the $50 million that George is speaking to is the net number that pretty much drops to the bottom line.

George R. Oliver

Yes, Deane. That's why when we think of the total savings, it's closer to over $100 million of savings that's offsetting the headwinds on escalation, on any commodity headwinds that we feel. And then the benefit we invest about 1/2 of that back into the R&D and sales and marketing and then deliver the $50 million benefit to the bottom line. So it's hard to segment the $50 million benefit into any one of those categories. It's really inclusive of all of those initiatives.

Deane M. Dray - Citigroup Inc, Research Division

Great. That clarification helps. And then over on the businesses and Global Products, one of the numbers that jumps out is that 24% organic revenue growth in security products. Just give us a sense of what was driving that? Is that all new products? Is it easy comp? It just looks outsized.

George R. Oliver

Yes, Deane, as you know, over the last 3 or 4 years or probably 4 or 5 years, we've been increasing our investments, double digit, within our product businesses continuously. And I think we're -- what you're seeing is with the performance in our product businesses, you're seeing those investments play out. Now, specifically within the security business, we've put a lot of investment into our intrusion business and this is developing the capabilities for the interactive market. We're now taking the wireless technology that we acquired from Visonic, which is industry leadership and we're now incorporating that into our intrusion platform. And so when you look at these investments, we're now opening the market. The market in intrusion is about a $2.5 billion market. And today, we're roughly about a 15% share. And there's a real opportunity there now as we develop our new technologies to expand the served part of the market that we have the capabilities for. And so we've been expanding very nicely in line with the investments that we've been making here over the last 2 or 3 years.

Arun Nayar

And I think just to add to that, George, we also here have been getting the panels now for the ADT dealers in North America, which has been a big part of expanding the introduction of that product.

Deane M. Dray - Citigroup Inc, Research Division

Great. And then just the last...

George R. Oliver

Deane, also, I think one of the things we talked about, we talked about the organic growth in products being mid-single digits. Also, what's helping the products business is the acquisitions that we've made. And so when you look at our -- the total growth in products for the quarter will be somewhere around 13% and then, for the total year, it will be about 9%. And that's with the acquisitions that were already done last year that now will roll over to 2013. And so what I talked about earlier was that we're seeing the benefit of not only getting the new product into our current distribution, but then getting what you'd call our core products now into that new distribution that we've acquired. And so we're seeing that tick up on both sides of the equation, which has actually helped our growth very nicely.

Deane M. Dray - Citigroup Inc, Research Division

Great, that's helpful. And then just the last one for me is some commentary on the guidance for next quarter, just the idea that we're seeing a single point EPS guidance number. There are some companies that do that. Maybe, George, just give us a sense of how you would like analysts to view that single point number. Is that at least $0.39 or better or it's just typically, we'd see a range? And so maybe comment there. And then, we're already in mid-November, maybe some comments on October would be helpful.

Arun Nayar

I think, Deane, the way we think about this is it's an approximate number of $0.39, that's what we say. And if you move up and down $0.01 or so, it would be where we would come up with. It's an approximate number.

Antonella Franzen

Tyco, I mean, historically sometimes on the quarter, we do give a point estimate. And again, Deane, to your point, we are more than halfway through the quarter, which gives you a little bit more visibility to get closer to a point estimate rather than a range for the quarter.

George R. Oliver

And that's what we did, Deane. I think when you look at the total, when you normalize the year and our ability to be able to really, on a normalized basis year-on-year, we will deliver from the $1.60 to the -- if you could go to the midpoint of the $1.80, right, the $0.20 there, that's driven by operations, which is offsetting the dis-synergies that we're going to incur in North America. And so when we look at the quarterly splits, we're about where we need to be as far as the -- about 22% of our earnings are delivered in the first quarter, the $0.39 it's about an 8% improvement year-on-year. We're in the early stages now of some of these activities that we've launched as the new company. And we have every bit of confidence that we're going to be able to continue to execute. We're going to start to see acceleration to be able to be positioned to deliver the total year.

Deane M. Dray - Citigroup Inc, Research Division

That's helpful. And just any surprises in October?

George R. Oliver

Any surprises in October?

Arun Nayar

Well, we're seeing about the same level of activity that we saw coming into the quarter here, Deane. So it's pretty consistent with what we've been seeing in the past quarter.

George R. Oliver

Yes, when you look at our install business, our install business is lumpy historically. And so the way you need to look at that, when I look at install in total, it's roughly flat for the year of 2012 and that's consistent with what we've seen from an economic standpoint across the globe. And so what's important is to focus on the products, the continued product growth with the investments we're making and the service growth. And then as the installation business starts to come back or we hope that it starts to come back because we do see some positive indicators, the ABI Index is now trending positively, if that were to happen, we're not banking that in our forecast, but that would certainly help us going forward.

Operator

Our next question is from Shannon O'Callaghan with Nomura.

Shannon O'Callaghan - Nomura Securities Co. Ltd., Research Division

A couple of questions on the products business. So I mean, it was up 9% organically and then I guess the orders were up like 15 x acquisition and currency, but you're talking about mid-single digits, I guess, for 1Q and for the year. What's the slowdown there?

George R. Oliver

Well, I mean, overall, when you look at the total, the total growth for the -- the total orders for the quarter were up closer to 30%, right, for the [indiscernible]...

Arun Nayar

Yes. I think that the big thing is just the rollout. Shannon, the way it's going to play out, it's the -- the comment is very -- just Antonella had mentioned in her comments earlier, it's just how the backlog and the -- is going to roll out between Q1 and Q2. As -- what you -- what we talked about is for the full year, the full year guidance is in the mid-single digits as well, but that's where you're going to see because we're going to lap now the acquisitions. Most of the acquisitions that we brought in came into our fold starting second quarter. And so...

Shannon O'Callaghan - Nomura Securities Co. Ltd., Research Division

Right. But organically -- I mean, your orders -- 1/2 of the 31% this quarter was acquisitions. But organically, you were up like 15% or so, right? And next year, it's mid-single digits for both the first quarter and for the year so...

George R. Oliver

We've had some -- when we -- when you look at some of the project delays, typically, it is a shorter-cycle business, but there have been some projects that we have orders for that have been pushed out, they'll still be completed. That's going to have some impact. So there's a little bit of timing there. But overall, I think when you look back at the order rates and then ultimately what we've achieved in revenue, there's pretty good correlation from orders to revenue.

Antonella Franzen

Yes. I mean, Shannon, just to further comment on that point. I mean, the 15% orders growth, we did have very nice growth through the quarter, that was 9%, not at the 15%. You'll see some of those orders roll into Q1 and you will see some of those orders roll into Q2. And by the end of Q2, most of those orders kind of have been processed and then it's really the second half of the year, new orders that are coming in that's driving the full year organic.

Shannon O'Callaghan - Nomura Securities Co. Ltd., Research Division

All right. So then and on the -- when you think about going from kind of a 1% to 2% organic this year to the 4% to 5% 3-year CAGR, the selectivity thing is a weight this year that it presumably gets better. I mean what are the other things you're kind of counting on to those other 2 years will have to be sort of above the range? So what gets you from A to B in terms of end markets or other things?

George R. Oliver

So when you look at the guidance we guided on, the 1% organic growth for the total year, in fiscal year '13 will be 3% and that did include the acquisitions that were already completed prior to the Investor Day that we communicated. So we'll actually be about 3% in 2013 in total revenue. Now when you look at the strategy that we've deployed, it's continuing to accelerate our service revenues, going from the 3% that we achieved in 2012, continuing to expand that over the next 3 years to about 5%. It's continuing to execute on getting our footprint into the high-growth markets, so that we cannot only create the installed base, but then again be positioned to really capitalize on the service over the life cycle. And I think when you look at install, the install has been negative, but as the recovery does happen, then we'll start to see a positive impact with the install business contributing at much higher margins given the project selectivity strategy that we've deployed in the commercial security business. So we're -- even with the current environment that we're in, with the guidance we've provided, we feel very good about being able to deliver on that 3-year plan, to be able to accelerate our revenues, to achieve a 4% to 5% CAGR on the top line, as well as be able to position and deliver on the margin of 15% to 16% by 2015.

Shannon O'Callaghan - Nomura Securities Co. Ltd., Research Division

And so does the organic assumption then in the 4% to 5% for 3 years, is -- it includes the ones you did last year, but does it include future things?

George R. Oliver

No, that's a good question. It does not include any additional acquisitions that we will make. And as we discussed during the Investor Day, we are pursuing strategic bolt-on acquisitions, which is a priority for capital deployment. And they have turned out to be very, very nice with the -- from an overall growth standpoint. And so we're going to continue to do that. That would be in addition to the CAGR that we communicated during the Investor Day.

Operator

Thank you. This concludes the question-and-answer session. I'd like to turn the call back over to speakers for any closing comments.

Antonella Franzen

There are no further comments. Thank you.

Operator

Thank you. This does conclude today's conference. Thank you very much for joining. You may disconnect at this time.

Antonella Franzen

Thank you.

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