Executives
Edward C. Arditte - Sr. VP Strategy and IR
Edward D. Breen - Chairman and CEO
Christopher J. Coughlin - EVP and CFO
Analysts
John Inch - Merrill Lynch
Shannon O'Callaghan - Barclays Capital
Jeffrey T. Sprague - Citigroup
Nigel Coe - Deutsche Bank NA
Scott Davis - Morgan Stanley
Tyco International Ltd. (TYC) Q4 FY08 Earnings Call November 11, 2008 8:30 AM ET
Operator
Welcome and thank you for joining the Tyco International Report Fourth Quarter Results Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions]. Today's conference is being recorded. If you have any objections, you may disconnect at this time.
Now, I will turn the meeting over to Mr. Ed Arditte, Senior Vice President Strategy and Investor Relations. Sir, you may begin.
Edward C. Arditte - Senior Vice President Strategy and Investor Relations
Thank you. Good morning, and thanks for joining our conference call to discuss our Tyco's fourth quarter results for fiscal year 2008 and the press release that we issued earlier this morning.
With me on today's call are Tyco's Chairman and Chief Executive Officer, Ed Breen; and our Chief Financial Officer, Chris Coughlin. Let me remind you that during the course of the call, we will be providing certain forward-looking information. We ask you to 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 you to 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 can be found on the Investor Relations portion of our website at tyco.com.
Now, let me quickly recap our earnings this quarter. On a GAAP basis, we had diluted earnings from continuing operations of $0.55 per share, and this included a net charge of $0.26 per share for special items. Diluted earnings per share from continuing operations before special items was $0.81.
For the full year, on a GAAP basis, we had diluted earnings from continuing operations of $2.25 per share, and this included a net charge of $0.81 per share for special items. Diluted earnings per share from continuing operations before the special items was $3.06.
With that, let me turn the call over to Ed Breen for some opening comments.
Edward D. Breen - Chairman and Chief Executive Officer
Thanks Ed, and good morning everyone.
I want to start my remarks today with a few comments on our performance in the year and Chris will then review the quarter in more detail. Given the rapidly changing economic environment, we will then provide you with our thoughts on 2009 and how we are managing our businesses in these more challenging times.
Overall, we had a good fourth quarter, which was a strong to finish to the year. 2008 was a year of progress as we move forward in executing our strategy and delivering strong results. From a total Tyco perspective, we delivered on our organic revenue growth guidance for the quarter despite the more challenging economic environment and at solid organic revenue growth in the year. Additionally, we improved our operating income substantially in the quarter and for the full year.
Total Tyco revenue grew 6.7% in the fourth quarter with organic revenue growth of 4%. For the full year, revenues exceeded $20 billion and organic revenue growth was 5%. Excluding special items, our operating income grew 19% in the quarter and 46% for the full year. Our operating improved by more than 1% point in the quarter and almost 3 percentage points for the year, mostly to better execution in each of our businesses, our restructuring program, reductions in corporate expense and favorable steel prices.
From a cash perspective, we generated a significant amount of cash in the fourth quarter and we finished the year, where we expected. Tyco's cash generation continues to be strength for us. When we look at our individual businesses, ADT made substantial progress in improving its recurring revenue and strengthening its systems installation and service capabilities.
ADT's recurring revenue grew almost 5% organically for all of 2008 with growth in all regions of the world. ADT also completed the acquisition of First Service Security, which adds more robust systems integration capabilities to our North American commercial security business. Some of the improvement in recurring revenue was offset by softness in our systems installation and service revenue, which Chris will talk about in more detail.
Next, Flow Control had a very good year with solid organic revenue growth of 9% despite the difficult comparisons, we had in the second half of the year in our water business. We also made good progress on profitability as we improved our operating margin for the full year by 140 basis points to more than 14%. Flow control's backlog remain strong and our order activity in the quarter increased 12% year-over-year.
Our Fire Protection Services business had a year significant operational improvement in both North America and internationally. Our North America SimplexGrinnell business, which represents approximately 60% of the revenue continued to win both small and large projects and operated more efficiently and order growth was up 7% over last year.
Our international Fire business also had good margin improvement as a result of restructuring and a more disciplined approach in selection of projects. Also internationally, orders grew 5% excluding the impact of currency. These combined efforts improved fires operating margin by 160 basis points for the full year.
Next, our Safety products business also had a solid year in 2008 with 8% organic revenue growth. This is a nice improvement from our growth rate last year as higher prices and sales to emerging markets helped grow our suppression business and the launch of a new breathing product in our life safety business has been well received. Our operating margin before special items of 18.5% for the full year improved even though we increased our investment and sales and marketing and R&D to pursue long term growth opportunities particularly in emerging markets.
And finally, the Electrical & Metal Products business had a very strong year. The pricing environment combined with better operating efficiency more than doubled our operating efficiency more than doubled our operating income in 2008. As most of you know, this is a cyclical business and we'll talk more about our 2009 expectations later.
Before I turn it back to Chris, I would like to take a few minutes to talk about where we are in our priorities that we laid out last year following the separation transaction. At that time, we outlined certain operational and strategic plans to improve our business and tighten the focus on our portfolio and we make meaningful progress in 2008 on a number of fronts.
Operationally, we improved the operating margins significantly across Tyco as operational excellence, sourcing, cost out, and pricing initiatives we implemented during the year paid off. Additionally, some of the improvement is from the restructuring program, we initiated in '07, which we essentially completed in the fourth quarter.
We benefited from some savings in '08 and anticipate capturing additional savings from this program in 2009 of about $50 million. We also reduced our corporate expenses by more than $175 million and reduced our tax rate by more than 3 percentage points. Additionally, we made good progress in refining our portfolio. We received $1 billion in cash from divestitures during the year and made a number of bolt-on acquisitions to strengthen our product and service offerings.
Lastly, we returned excess cash to shareholders and announced the 33% increase in our dividend to $0.20 per share in September. We remained focus on making sure our balance sheet is strong, especially given the current state of the credit markets and recently the major rating agencies improved our credit rating to BBB+.
Our strong balance sheet and our manageable debt maturities positioned us to continue to invest in our businesses. Overall, we've made good progress in each of our key initiatives. We have more work to do in '09, and I will talk more about that in our outlook for next year after Chris finishes the review of the operating results.
With that, let me turn it over to Chris.
Christopher J. Coughlin - Executive Vice President and Chief Financial Officer
Thanks Ed, and good morning everybody.
Let me start with a quick recap of the quarter before reviewing the businesses in detail. As Ed mentioned, from a total Tyco perspective, our overall revenue growth in the quarter was 6.7% with organic revenue growth of 4%, which exceeded our guidance.
Additionally, we are pleased with our operating margin in the quarter, which improved 120 basis points year-over-year with significant progress in most of our businesses. And looking at our business performance in the quarter from a regional perspective, our revenue in North America grew 5% organically.
Asia and Latin America continue to grow nicely with mid-teen organic revenue growth rates. While revenue in the European region declined 2.3% organically due to softness in both the UK and in Western Europe. Emerging markets, which represents 15% of our total revenue, grew almost 30% organically.
Given the economic environment, we are starting to see additional pressure in some commercial markets globally, especially in North America and Western Europe. We expect Asia and Latin America to continue to show good growth, but at moderating rate.
Now for our operating results by business, I'll start with ADT. Overall ADT Worldwide revenue grew 3.2% in the fourth quarter to more than $2 billion with organic revenue growth of 0.5%. Recurring revenue, which represents half of ADT's total revenue grew 5% organically with continued year-over-year improvement in all geographic regions.
North America continued to show improvement in recurring revenue driven mostly by strength in our residential business. Our Europe, Middle East and Africa regions had positive recurring revenue growth for the third quarter in row and exceeded 2%.
In other regions around the world, we continue to see strong double digits growth. ADT system's installation and service revenue, which represents the other half of ADT's total revenue, declined 3.5% organically driven mostly by our retailer end-market in North America and Europe, and a weaker commercial market in the UK. Asia and Latin America continued to grow nicely in the quarter with combined double-digit organic revenue growth.
From a profit perspective, ADT's operating income before special items in the fourth quarter was $248 million, and the operating margin before special items was 12.1%. The operating margin was adversely impacted by 70 basis points related to one time charges that were mostly legal related, and approximate 40 basis points related to the integration of First Service Security.
Turning to some of our key metrics, our global account base grew almost 2% year-over-year to $7.2 million accounts. In addition to growing our account base in all regions, our average revenue per user increased 3% year-over-year, which excludes the impact of foreign currency to $45.99. The average revenue per user has been steadily increasing throughout the year as a result of our broader product offerings and pricing initiatives.
During the quarter, we saw an increase in our attrition rate by 20 basis points to 12.9%. The increase in attrition was predominantly related to the U.S. commercial business, where market conditions are putting pressure on some of our core commercial and small business customers.
Turning to Flow Control, we saw another strong quarter of revenue and operating income growth. Revenue grew 11% to $1.2 billion with organic revenue growth of 6.5%. The continued strength in our end markets resulted in another strong quarter for the balance and thermal control of businesses, which had a combined organic revenue growth of 12% in the fourth quarter.
As we expected, revenue in the water business declined 6% organically in the quarter due to the top comparison to last year's large scales water projects in Australia. Before special items, operating income and flow control grew 19% to $161 million and the operating margin improved 100 basis points to 13.6%. Higher revenue and better productivity in valves and thermal controls more than offset the decline in water. Our year-over-year order rates in the fourth quarter increased 12% globally or 8% excluding currency and our backlog increased 32% year-over-year to $2.1 billion.
Now I'll turn it to our Fire business, which continued to make solid improvements in its productivity and profitability. Overall, Fire revenue grew 4% in the fourth quarter to $944 million with organic revenue growth of 2.4%. Revenue on our SimplexGrinnell business grew 7% organically with more than 50% of revenue generated from service, an important factor in a slowing economic environment.
Geographically, strong organic growth in North America and Asia was partially offset by year-over-year revenue declined in Europe, as well as revenue decline in Latin America as we continue to be more disciplined in project selection. This was also a strong quarter from an income perspective, with operating income before special items of $104 million, and an operating margin of 11%. The operating margin before special items improved 130 basis points over last year, with improvements in SimplexGrinnell as well as our international businesses.
I'll now move to Safety products. Revenue grew 13% in the fourth quarter to $507 million with organic revenue growth of 11%. Revenue growth was driven by strong performance in fire suppression and life safety. Before special items, operating income increased 18% to $99 million with an operating margin of 19.5%.
Higher revenue and better productivity was more than offset our planned increases in sales and marketing and R&D expenses. We're also active in the fourth quarter in our restructuring activities as we announced the closure of certain manufacturing operations which will reduce our cost structure.
And now I will turn it to Electrical & Metal Products, where revenue grew 11% in the fourth quarter to $591 million and the organic revenue growth was 9%. Revenue growth was due to significantly higher metal prices partially offset by lower volume. Before special items, our operating income was $119 million and our operating margin of 20.1% was somewhat higher than our guidance as steel and copper prices were better than expected.
Additionally, we made productivity improvements over the past year, which also contributed to the increase in our operating margin. During the quarter we also initiated plans to consolidate certain manufacturing and distribution operations. We believe these actions will further reduce our cost structure and improve our competitive position next year and in the long term.
Before I turn it back over to Ed, let me make a few other comments. First, from a cash perspective, we had a strong finish to the year. Our free cash flow for the fourth quarter was $759 million and included $62 million of payments primarily for restructuring activities.
Next, corporate expenses in the fourth quarter excluding special items totaled $152 million and were somewhat higher than our previous guidance due mostly to the volatility we saw in foreign exchange markets. As some of you know, Tyco utilizes the finance structure that loans money on an inter-company basis from one Tyco company to another.
And the cost of hedging of some of these loans is reflected as a corporate expense. During the fourth quarter, the extreme volatility in the foreign exchange markets resulted in cost increases above our expectations. Given the market environment, we have seen so far this quarter, we expect to incur additional costs related to these foreign exchange movements in the first quarter, which will result in an overall corporate expense of approximately $140 million in the first quarter of 2009. However, based upon our current view, we still believe our full year 2009 corporate expense will be in the $500 million range.
Now I'll turn to our tax rate or our GAAP rate. GAAP tax rate for the quarter was 24.7% and was favorably impacted by 50 basis points related special items. Adjusting for these special items, our tax rate for the full year was 24.6%, reflecting the significant progress we made throughout the year in implementing our post separation tax structure. Looking forward to 2009, although the tax rate can move around quarter-to-quarter, we are expecting an annual and first quarter fax rate in the 22% to 24% range.
The next item is net interest expense, which was $62 million in the fourth quarter. We expect our net interest expense in the first quarter to approximate what it was in the fourth quarter. Next, as we have previously mentioned, beginning in 2009, our restructuring charges will be included in our guidance. We will, however, provide you the restructuring charge information to the extent that it is meaningful.
In 2009, we anticipate incurring restructuring charges of $15 million to $20 million in the first quarter, and we currently anticipate approximately $50 million for the full year, which would be approximately $0.8 per share. Given that current economic environment, we are also looking at additional restructuring projects, but no decisions have been made at this point.
I also will touch the pension expense for a moment. As you know, most of our U.S. plans have been closed for a long time, and the recent reduction in valuation of investments will result an increased pension expense in 2009 versus 2008. We expect this to result in a headwind of approximately $0.04 per share for the full year of 2009. And we do not expect a significant impact on our cash contributions.
Finally, I want to quickly explain the impact of currency translation on our 2009 results. As you know, more than 50% of our revenue is generated outside the United States with roughly 75% of our international revenue coming from Continental Europe, the UK, Australia, Canada, and South Korea. At today's exchange rates, we have seen about 20% devaluation across all our non-U.S. currencies, which we expect to negatively impact our revenue by about 10 percentage points in 2009. Most of this impact has occurred in the last 60 days.
Now, let me turn the call over to Ed to wrap up this morning's call.
Edward D. Breen - Chairman and Chief Executive Officer
Thanks Chris.
Now... let's now turn to the current business environment and what we are seeing in each of our businesses. I also want to comment on our areas of management focus in these more uncertain times. Tyco's top managers from around the world recently got together to kickoff 2009. Given the current environment, we spent most of our time discussing our cost structure, pricing, growing our service business and customer satisfaction. These topics are important focus areas for each of our businesses, and will be important contributors to our performance in 2009 and longer-term.
In terms of business activity, let me provide you with what we are currently seeing in each segment and our current outlook. In ADT, our recurring revenue grew almost 5% organically in 2008 with growth in our account base and average revenue per user. We saw growth in all regions of the world, and our outlook is for continued growth of moderating slightly from this year's levels.
On the other hand, the systems installation and service revenue declined 1% organically in 2008 and 4% in the fourth quarter as strong growth and emerging markets was more than offset by the softening retailer end market and weakness in the UK. Given the economic environment, we are starting to see additional pressure in some commercial markets globally especially in North America and Western Europe. We expect Asia and Latin America to continue to grow, but at a somewhat slower rate.
Therefore, we expect the systems installation and service revenue in ADT to be lower on an organic basis in the first quarter compared to the fourth quarter. So for all of ADT, we see positive but slower growth in recurring revenue offset by a revenue decline and systems installation in service revenue. This is expected to result in our organic revenue decline of approximately 2% to 3% in the first quarter with operating margins around 13%.
In our Fire business, we see modest organic revenue growth in the first quarter and we expect margins to be somewhat lower year-over-year, mostly due to tougher pricing and a softening environment. Flow Control is where we anticipate the significant change in the currency markets to have its biggest impact on our results given that 80% of the revenue is outside of the United States.
Additionally, the first quarter of '08 was our strongest quarter in the year for our water businesses in Australia, which will make the comparison even more difficult in the first quarter of '09. To-date, we haven't seen any major project cancellations, but we are seeing some of our customers push back the timing of completion for their projects, which will also impact our results. Therefore, we currently expect to see low single digit organic revenue growth and an operating margin of approximately 12% due primarily in the declined in high margin Australia water business last year and $5 million of restructuring charges.
Next, as Chris discussed, Tyco Safety Products had a strong fourth quarter, which was a nice finish to the year. We do expect the market environment to have an impact on this business particularly on municipal spending in the near term, which will impact our life safety breathing business; and as a result, we are looking at a modest organic revenue decline in the first quarter with margins in the mid teens, which includes $5 million of restructuring in the quarter.
Finally in electrical and metal products, the cycle has clearly turned in terms of steel prices and the declined, we have seen over the last few months will have significant impact on profitability. We believe our revenue in the first quarter will be approximately $450 million, and we expect our operating income of approximately $25 million to $30 million. The operating income decline from last year reflects the processing of higher price fuel inventory being sold in a market with declining steel prices, as well as restructuring charges.
In addition, we are seeing significantly lower volume, which is not surprising given the current economic environment. In the first quarter for total Tyco, we expect an organic revenue decline between of 1% and 3% versus last year's first quarter. Additionally, we expect $425 million year-over-year decline in revenue due to foreign exchange, given current exchange rates. Therefore, we expect total revenue to be between $4.3 billion and $4.4 billion, again based on today's exchange rates.
And we anticipate our earnings per share from continuing operations before special items to be between $0.46 and $0.49 per share. Let me quickly describe the major items that help explain the year-over-year differences and earnings for the first quarter.
First, currency translation will cost us $0.08 per share today's exchange rates. Second, corporate expense will cost us $0.04 per share, and this is mostly due the currency volatility as Chris mentioned. Restructuring, which is now included in guidance will cost us $0.03 per share; and finally the decline in metal phrases in our Electrical & Metal Products business will cost us $0.02 to $0.03 per share. Again, the first quarter will be the toughest compared quarter for flow control due to the strong Australian water projects last year. Although we will continue to have a tough compare, it will begin to improve in the second quarter and beyond.
In this economic environment, it's difficult to estimate the full year, but let me give you our current thinking. For the full year 2009, we issued to big headwinds that will impact our results first, currency translation at today's exchange rates could impact our revenue by approximately $2 billion and our earnings by approximately $0.38 per share.
Secondly, we are currently estimating that Electrical & Metal Products could approximate the level of earnings that had in 2007, which would represent a $0.35 per share decline. While this estimate may be too harsh, we think it's prudent to be conservative in this environment.
With respect to the restaurant of Tyco, we see a number positives in 2009 including improvements in operating performance. Additional restructuring benefits, a lower tax rate and few shares outstanding that we anticipate will contribute to overall earnings.
Based on what we see right now, we are planning on a year, where our organic revenue is flat to down 4%. In addition, we are expecting full year 2009 earnings per share from continuing operations before special items in the range of $2.20 to $2.50. Again, let me say that the environment is uncertain, but we wanted to provide you with our best estimates at this point.
As we wrap up today's call, I want to comment on our areas and management focus in this environment, and there are 5 points I would like to stress. First: our cash flow was solid in 2008 and our cash position and balance sheet are in very good shape. Our debt maturities are very manageable and our bank credit facilities are also in good shape. Overall, we feel comfortable with our cash and capital structure.
Second, our operating teams are focused on cost and pricing. We made very good progress on the cost side in 2008, and we continue to look for structural cost reduction opportunities. We are proactively looking at all opportunities to reduce costs including additional restructuring if business conditions weaken further. We will remain very active in our sourcing and Six Sigma programs, which we have allowed us to improve our cost position. We also significantly expanded our focus on strategic pricing in 2008 and that will continue into '09. Overall, cost and price are top of mind issues for our operating teams.
The third area I wanted to comment on is our continued investment for growth. Our current plan for 2009 costs for approximately 1.2 billion spending for capital expenditures and investments in ADT for new accounts. These are important long term investments for us and our intent is to continue fund these investments through the softer environment although we will do so cautiously. The fourth point is the acquisition environment. We will continue to look at any complementary technology and service add-ons to our portfolio, and we will stay disciplined about pricing.
Finally, sharing purchases will continue to a part of our capital allocation strategy. We spent approximately $1 billion on share repurchases in 2008. And those of you that have followed us for some time know that we have a history of balancing share re-purchase activity with strengthening our balance sheet in capital structure. Looking forward, we will be more cautious on the share repurchase front until the credit markets return to more normal conditions.
Thank for joining us in the call. And operator, if you could open up for any questions.
Question And Answer
Operator
Thank you. [Operator Instructions]. Your first question comes from John Inch, Merrill Lynch. Your line is open.
John Inch - Merrill Lynch
Thank you. Good morning.
Edward D. Breen - Chairman and Chief Executive Officer
Good morning, John.
Christopher J. Coughlin - Executive Vice President and Chief Financial Officer
Good morning, John.
John Inch - Merrill Lynch
Good morning. So, I wanted to ask you about restructuring benefit. I believe Chris, you suggested that '09 in your guidance, there is about $50 million of benefit.
Christopher J. Coughlin - Executive Vice President and Chief Financial Officer
About $50 million of benefit in '09. Correct.
John Inch - Merrill Lynch
I think you guys have taken about $400 million of charges. That sort of suggests the reasonably low kind of return of payback. Could you talk a little bit about that?
Christopher J. Coughlin - Executive Vice President and Chief Financial Officer
Yes, we had about benefits of about $100 million in 2008. So the incremental piece above that in 2009, we think would be $50 million, and then as we move throughout the year as we do more restructuring, we'll see some benefits at the end of '09 and further.
John Inch - Merrill Lynch
And Chris, is the $50 million, is that net of the new restructuring actions, or the new restructuring actions dragged from the $50 million?
Christopher J. Coughlin - Executive Vice President and Chief Financial Officer
The new restructuring dragged through the... up to 50. So, we'll get the benefit of that toward the end of the year and then they are...
Edward D. Breen - Chairman and Chief Executive Officer
And John, also we did get some savings in the second half of '07, when the program have started back then. So, cumulatively it kind of gets closer to about $200 million of cumulative savings from the program that cost us $399 million.
Christopher J. Coughlin - Executive Vice President and Chief Financial Officer
John, I think the way to think about it in '09, given the $50 million of savings and the $50 million of spending is that effectively itself funding in '09.
John Inch - Merrill Lynch
Okay. That makes sense.
Christopher J. Coughlin - Executive Vice President and Chief Financial Officer
From an earnings point of view.
John Inch - Merrill Lynch
Right. And then what... I mean kind of normalized, what's the run rate in corporate expense, it still seems kind of high relative to overall Tyco. Could you just give us your thoughts as to where you think that ran rate can actually trend based on what you know today? Not necessarily in the first quarter, but just... what's the trend line, the pathway for that cost item?
Christopher J. Coughlin - Executive Vice President and Chief Financial Officer
Again, I think when I've said is we expect it to be at about $500 million for the year. So the first quarter was higher than our normal run rate due to the FX exposure that I mentioned. So, clearly there are some items in there that are part of a normal sort of corporate expense that we see, it continued... has decreased significantly. We looked at that quite closely all the time in terms of managing that expense. We're still again have some legacy legal costs as we clean up the remaining opt-out cases and other from the class action suite. So we think overtime, it will decline, but we're still looking at that $500 million range for this year.
John Inch - Merrill Lynch
But it sounds like it's down in '10, right?
Christopher J. Coughlin - Executive Vice President and Chief Financial Officer
It should be, yes. And again, I think what you'll see this year, and if you look at how it played out in 2008, the second half of the fourth quarter were our higher quarters that sustained moving into the first quarter, and then we should see it start to go down in the second half of the year.
Edward D. Breen - Chairman and Chief Executive Officer
And effectively, John, to what Chris is saying, second, third and fourth quarter, when you put them all together, it's actually going to average below the 500 run rate. We get as the 500 because of our high first quarter, so I think on a run rate, once we get over this first quarter, we actually are trending below last year's watermark.
John Inch - Merrill Lynch
Yes, that's...
Christopher J. Coughlin - Executive Vice President and Chief Financial Officer
And again, hopefully continuing the biggest item being getting somewhere the legacy stuff out of the way.
Edward D. Breen - Chairman and Chief Executive Officer
Right. And, we've again done some things with our internal structure to reposition as to post the separation. That has cost us some money this year. We are seeing the benefits however in improved tax rate.
John Inch - Merrill Lynch
Just lastly, the decision to curtail share repurchase with the sock down, I mean, you're not the only company that's done this. But I am wondering, has this been prompted by the rating agencies or is there something else kind of going on? Because if you look at you're your redemptions, they don't seem to be much of a headwind, your cash is good. What... just help us understand a little bit of the thinking why you wouldn't be more aggressively buying your shares versus curtailing them down here?
Christopher J. Coughlin - Executive Vice President and Chief Financial Officer
Well, again, I think our plan is to still... again, we've announced a new program of $1 billion. I think just operationally as we look at it, our priorities continue to be funding our internal organic wealth, fund our restructuring programs, look at bolt-on acquisitions, and then return some to our shareholders. Obviously, through the dividends, we increased as well as through share repurchase.
While, however, the credits markets remain so tight, we're just going to be able to more cautious, particularly in the first half of 2009, where we have some debt maturities. Again, I wanted to make sure that we have the flexibility to invest in the business, but we expect to have excess cash would start to repurchase shares during '09. But again until the debt markets really get back into some semblance of normalcy. I am just going to be conservative on the cash side.
Edward D. Breen - Chairman and Chief Executive Officer
John, I'd also point out that I think we are being cautious, but we're not stopping it. And we are looking as Chris mentioned in his comments is there also additional restructuring that we could do in the year, especially if we see any additional softness and back to cost of some cash. So, just being very prudent with the credit markets like this.
Christopher J. Coughlin - Executive Vice President and Chief Financial Officer
But it is not driven by the rating agencies, when we went and... went through with the rating agencies again and got our upgrade, just as recently as September, we laid out to our plans, which included our plans for share repurchases. So there is a full expectation by the rating agencies that in our current ratings that we will be repurchasing shares.
John Inch - Merrill Lynch
Thanks very much.
Edward D. Breen - Chairman and Chief Executive Officer
Thanks, John.
Operator
Your next question comes from Shannon O'Callaghan, Barclays Capital. Your line is open.
Shannon O'Callaghan - Barclays Capital
Good morning, guys.
Edward D. Breen - Chairman and Chief Executive Officer
Good morning Shannon
Christopher J. Coughlin - Executive Vice President and Chief Financial Officer
Good morning.
Shannon O'Callaghan - Barclays Capital
Can you just talk a little bit about what you are seeing going into the first quarter? I mean the fourth quarter look pretty decent. You called out I guess couple of things getting weaker, but to move to this 1% to 3% organic decline. What's driving the most caution?
Edward D. Breen - Chairman and Chief Executive Officer
Well, let me just walk you through at key pieces of it, Shannon. And I think we made these points, but I'll just stress it a couple to you. And by some of this, we have not see or just expecting some additional softening here. One of them is... on ADT, I would break it into its two pieces. We've got the recurring piece and the system installation piece. The recurring piece, as we said, we think is going to continue on nicely positive, but I don't think it's going to run at the 5% level, and I just think stressed with the consumer is going to slow down net ads. So, I think growth with the machine is running very well. You could see it round well in the fourth quarter. But you've got to think potentially this one eases back a little bit in '09. So that would be one.
And then two, we're counting on additional weakness coming in recurring on the systems on installations side of the business. So we are expecting that to continue to even weaken more. And by the way, I wouldn't doubt on our planning. I'll be glad to tell you a number. It could weaken up to maybe 10% in the guidance that we gave you. So, we're thinking we see more of that on a global basis.
On the Fire side, I feel actually pretty good as we highlighted our backlog is in very good shape. Our orders both internationally and SimplexGrinnell in North America were up nicely in the quarter. So the backlog looks in place kind of for the first half of the year. I don't know if we see anything additional there, but what I do like is we continue to grow the service piece a little quicker than the rest. And I think services are very stable, a piece of business, so that's a big focus for us. So fire is still in pretty decent, although I would expect we might see a little bit of pricing pressure if you start to see a little bit of softness in the environment, and we've taken that into account.
On the Flow Control side, let me explain this for a moment. We are highlighting a low... what I would call a low first quarter for Flow Control. But I do not expect, we're going to have a low year. I think we're going to have a very solid year on Flow Control. The first quarter will be our lowest as I mentioned because of currency, and will be our lowest, because this is the most significant... that compared with our Australian water business, and that will begin to improve in second quarter and then as we go throughout the year. The water business in the first quarter year-over-year is down 20%, okay? So, this is the severe compare. So, Flow will improve as the year goes, we have just about a record backlog within a couple of million of last quarter, and you can see our orders are up very substantially year-over-year and that continued in the fourth quarter. So, although, a weaker first quarter, I think a good year there.
And then on safety products, we're kind of counting on maybe flattish business there from 8% organic. And we are thinking that mostly we'll see some lightness across the Board, but a little more maybe for municipalities on our life safety business, because maybe they are a little bit tighter on spending money. So, we've taken that into account, and the guidance we gave. That's the big pieces. And by the way, we might be being, as I said really harsh on ourselves on saying that steel or Electrical & Metal will be the same profitability as 2007, which is $166 million.
I hope we don't know, but we are planning very conservatively there. This will be a very bad quarter, because we're catching the falling knife with higher inventory prices with rapidly falling price. But even the volumes are down, we start getting the spread gain, we're back in line, and we should improve as the year goes. But again, we're accounting on it being down at those levels. So, I think that's the big piece of that how we're looking at it.
Shannon O'Callaghan - Barclays Capital
Okay. And, how about on profitability? I mean, I don't know if... maybe I missed it, but I didn't hear sort of margin guide is there... how are you thinking about your ability to hold margins across the segments?
Christopher J. Coughlin - Executive Vice President and Chief Financial Officer
On the margin front, again we have a couple of things that going to hurt us from an overall company perspective. Obviously, the margins in our Electrical & Metal Products business will decline dramatically from what we saw in the fourth quarter, just due to pricing as well as the composition of our corporate expense. As Ed mentioned, the flow control business, where we've seen improving margins throughout the last couple of years. If that compare, we're going to have with the Australian water business has a significant impact on our margin structure in the first quarter.
Shannon O'Callaghan - Barclays Capital
In the first...
Edward D. Breen - Chairman and Chief Executive Officer
Yes, and then more for the year.
Christopher J. Coughlin - Executive Vice President and Chief Financial Officer
So, again for the year, I think that... Again, the cost measures that we've taken we should hold our margins if this going to pretend on what the volume pressures are.
Edward D. Breen - Chairman and Chief Executive Officer
Maybe I... let me kind of bridge the year a little bit from all the numbers we gave you. This might actually help. We ended 2008 at $3.6. So if you take the big items that Chris and I talked about on the headwind, the true big items. You have the FX translation that will cost us $0.38. Again, we might be in a harsh, but we are using today's exchange rates. Would you all know that move pretty dramatically in the last 45 days. But $0.38 there, and then if you take Electrical & Metal back to 2007 levels, you have $0.35 of headwind. So that kind of puts you in the mid-230s range. And so what we are saying is there's other puts and takes, but that's kind of the middle of the range of guidance we gave. You might think we are going to be a little lower than that, maybe a little higher than that, but it kind of puts you right in that 233.
There are items, by the way, that we highlighted as you dig through. Positives will be less shares outstanding, a better tax raise, Chris mentioned, a little more savings from restructuring, a little more benefit on the corporate expense line, then a couple more headwinds, although not big, are a little more pension headwind that Chris mentioned. And we are putting restructuring into our guidance, so any restructuring we do there we'd go against. And so kind of overall you look at, the rest of the businesses, some up a little, some down a little bit. You kind of get a push on all the quarter fourth quarter businesses applied, which I don't feel bad about in this environment.
Shannon O'Callaghan - Barclays Capital
Okay. Thanks a lot guys.
Edward D. Breen - Chairman and Chief Executive Officer
Yes.
Christopher J. Coughlin - Executive Vice President and Chief Financial Officer
Okay.
Operator
Your next question comes from Jeff Sprague, Citigroup. Your line is open.
Jeffrey T. Sprague - Citigroup
Thank you. Good morning everyone.
Edward D. Breen - Chairman and Chief Executive Officer
Hi, Jeff.
Christopher J. Coughlin - Executive Vice President and Chief Financial Officer
Good morning Jeff.
Jeffrey T. Sprague - Citigroup
Hi,just a real quick one. First, just on cash conversion, what are you thinking for '09? And then Chris, could you just be specific on what you are looking at in term of near term debt maturities in '09?
Christopher J. Coughlin - Executive Vice President and Chief Financial Officer
Sure. In terms of cash conversion, historically, we have generated cash that approximate net income before taking to account the cost of our restructuring programs. As we look at that now, I don't see that significantly changing in 2009. We still think we can convert at the same kind of levels, and we'll obviously have some cash expenditure related to our restructuring program. So, no real significant change there. We are looking obviously, very closely at all of our capital expenditures in terms of what were expected volume increases and those types of things, and capacity as well as some additional potential restructuring note, additional decisions made as I said.
In terms of the near term maturities, we do have maturities in 2009, all early in the year, November as well as in January for a total of $500 million. Those are well taken care of within our plan. Again, we anticipate maintaining our debt level in the $4.2 billion to $4.5 billion range. And again, we'll continue to generate cash and as I said, we should still have cash available for not only our internal growth, our restructuring activities, bolt-on acquisitions and share repurchases.
Edward D. Breen - Chairman and Chief Executive Officer
And just to stress, Jeff, as Chris mentioned, we are funding every internal growth initiative that we want to fund. We did it in '08; we are planning on doing it on '09, I said we will be cautious depending on what we see, but we are not cutting back or skimping there. And my opinion is, we are entering a tougher environment. We compete with, as you know, thousands of smaller competitors around the globe. As I told our management team, when we had them all together for our global kickoff meeting. This is our chance to come out of this and play offense more and gain some market share.
So, we have the money. We are funding our growth initiatives as you saw even through all of '08 and the end of '08, we took sales, marketing and R&D up in Tyco Safety product business. We plan on kind of going forward in the downturn. So, we are funding all that. We still have money left-over for any bolt-on acquisitions and again share repurchase, once we feel a little better about credit markets.
Edward C. Arditte - Senior Vice President Strategy and Investor Relations
Yes, Jeff, this is Ed Arditte, let me add one other thing, just to follow-up on what Chris's point on free cash flow. It's not real easy to get out our free cash flow for 2008, but let me make this statement. And I am happy to have spent time offline to clarify with anybody. But our free cash flow for the year is quarterly masked by a number of one time items including the legacy litigation settlement that hit the books.
Overall, our free cash flow in 2008 moved up nicely from 2007, adjusting for the one time items. We moved up into $1.5 billion range compared to about $1.1 billion on again apples-to-apples basis. So, I think that... while it's not easy to get out, I can take you through what it is pretty clear and it's strong.
Edward D. Breen - Chairman and Chief Executive Officer
Yes, Jeff, I'll also mention and as I mentioned, the maturities that we have in 2009, we don't have any additional maturities until 2011. So, the $500 million that comes due here in the early part of this year will be refinanced both with available cash and the credit facilities that we have in place.
Jeffrey T. Sprague - Citigroup
Great. And then I want to pick up, Ed Breen, actually on some of your comments about the kind of the competitive environment. Can you elaborate a little bit more how might that directly apply to ADT and how you might flex between internally generated activity versus dealer generated activity. And just kind of what is going on in those channels here just in the last couple of months as things are dramatically changed out there in the marketplace?
Edward D. Breen - Chairman and Chief Executive Officer
Yes, Jeff, I think competitively, one of the areas we are very focused on. And I'll come back to the recurring piece in a second is the systems installation end of the business both by way if I take ADT and our global fire business. We have a big component of service in there, which we have a major focus on and we've actually organized our teams around this now. So we've made some structural changes and I think we're going to gain some share on the service side of the business. And I think I don't want to overstate this. But we have a couple of trend going in our fire business for instance, where we are seeing an uptick, even though we are in a tougher environment and that's why one of the reasons why you saw such a nice organic growth in fire in the quarter.
So we're really going for the service component piece, I think we can get share there. But one of the things that we have in the installation and the both fire and security. There's where we compete with a lot of local, I'll call the mom and pop shops around the globe. And they're... I think they're in a much tougher environment here with the capital. They need to run their business and all. And we are the safe bet to do business with. We are going to be there tomorrow. And I think this is a real opportunity for us to get share kind across that into the platform, and we're smart about it. And by the way... and price it properly even though we are in a tougher environment as I mentioned pricing is a big initiative for us and we're seeing some benefits from that.
As far as resi side, I am surprisingly, maybe, we're still seeing a very sold environment there. We had a slight, as Chris mentioned just up two-tens of a basis point increase in the disco rate. Again, I am not surprised by that. But that was almost all on the commercial size of the business, and I would... that's kind of a strip mall type customer, the small type customer, the small commercial account, where you see some of them going out of business and all. That's really where we've seen it, but the Reggie business is feeling good. Again I think we are being cautious in saying okay, it is going to drop back a little from 5% growth. I can't imagine what the stress that the consumers see and that we won't see some pullback. So I think we are being rightfully cautious there, but I still think we're going to have a real nice 2009 on the recurring side.
Christopher J. Coughlin - Executive Vice President and Chief Financial Officer
Ourdealers are still generating accounts even as we begin the year here.
Jeffrey T. Sprague - Citigroup
And then on... you noted the ARPU was up. Was there kind of a change intra quarter and your ability to the price, so as you've gotten into October and early November?
Edward D. Breen - Chairman and Chief Executive Officer
No, we haven't noticed that, pricing is held up. Again, it's not... we didn't just raised price across the board. A lot of this is our packages and putting better offerings together. But no, we have not notice that. And in fact we... as we said, we ended the quarter at our high water market of 45.99. Now, will that subside a little, because, again the consumer strike back will be part of 5% organic growth and recurring maybe drop in down a few points.
A little bit of that and a little bit of just less account generation. But the Chris's point we actually have about the same number of accounts that we could buy and can buy from dealers. We haven't seen that drop-off yet.
Jeffrey T. Sprague - Citigroup
Okay. And then just finally from me, FX, we should think... well, I guess would be all toggling our models, the FX as we go through '09. Should we think about your guidance being set as of last night, the end of October, and let me... where do you kind of draw the line in the stand on the FX for the guidance?
Christopher J. Coughlin - Executive Vice President and Chief Financial Officer
Yes, it's essentially the end of October hasn't changed too much since then, but that's the kind of rates that we use in generating the guidance.
Jeffrey T. Sprague - Citigroup
All right, thank you.
Edward D. Breen - Chairman and Chief Executive Officer
Thanks, Jeff.
Operator
Your next question comes from Nigel Coe, Deutsche Bank. Your line is open.
Nigel Coe - Deutsche Bank NA
Yes, thanks. Good morning.
Edward D. Breen - Chairman and Chief Executive Officer
Good morning, Nigel.
Nigel Coe - Deutsche Bank NA
Just, I just want to understand a little bit more SimplexGrinnell now was up 7% organic during the quarter, ADT was down 3% to 4% on the infill side. I just want to understand the disconnect. And I understand some of the retail, maybe some residential, if you could just refresh that, please?
Edward D. Breen - Chairman and Chief Executive Officer
Yes, Nigel, I would point out two things, the 7% organic growth on fire was our SimplexGrinnell business. So, we are a little bit less growth internationally, but still not bad growth in the fire business. So just, I think we have 5% internationally, 7% SimplexGrinnell.
The biggest... if you want to call it disconnect, there is that we are so large or so much a larger on the retail customer base in ADT. And so, it's the end channel that is different, and that is where... I'm ballparking; we've seen kind of 70% of our drop is really been retailer and kind of 25% to 30% just other commercial. So, we've seen a pretty draconian drop there, and that's the difference. If you take the fire business, a couple of the big end markets are holding in there very nicely. Hospitals, universities, a lot of these... nursing homes, they are on an upgrade schedule that I don't think they change, because of regulations out there, they need to have this and have it done right. And so, it's the strength of the different end market that's looking showing that disconnect.
Nigel Coe - Deutsche Bank NA
Okay. So, it sounds like there's more of an institutional flavor to the fire business, which helps to keep it ...
Edward D. Breen - Chairman and Chief Executive Officer
Yes, that's right.
Nigel Coe - Deutsche Bank NA
Okay. And secondly, could you just kind of go through world map of Europe, obviously that's been a big focus for the restructuring actions. Where are those margins right now, and where do you think go in 2009?
Edward D. Breen - Chairman and Chief Executive Officer
Yes, Nigel. We are pretty much through the restructuring although we are still getting some of the benefits. Let me tell you a few of the good things and kind of couple of the negative on this. What's really changed nicely for us is as we mentioned positive recurring revenue for three quarters in a row now in Europe. That's a big deal for us, because that line for two and a half years, three years are moving in the wrong direction. So I'm feeling good that we have that kind of buttoned down in place and it's doing its thing although at lower level, but we'll improve just like we are everywhere else in the globe in the business.
The other positive is the restructuring savings, we did track it, we did get what we wanted. But let me just give you a couple of numbers. The two areas we restructured in Europe was the fire business and the ADT business. The fire business, we improved our margins 170 basis points year-over-year. And in the ADT business, we improved our margins 80 basis points year-over-year. The negative is that's where we are seeing some of the softness in the commercial market, the systems installation market, which has just given us a headwind against the nice restructuring that we did.
So when you look at the margins, we are kind of tipping on 7% margin in ADT in Europe. If we hadn't had these headwinds, we'd be tipping closer to 8.5% kind of on our way to 10% in '10. I don't feel comfortable about 10% in '10, if we continue to see the economic headwinds. I do think we'll continue to make progress. But if we are in a tougher environment, we will make margin progress, but not the 10% in that timeframe. So I think when you look at the underlying numbers, nice progress, but not where we want to be at the economy that held in there.
Nigel Coe - Deutsche Bank NA
Okay, that's fair enough. And then just finally on the electrical & metal, you talked about of the people in the downwards, which isn't a great surprise. But does that mean the inventory levels of slightly higher than you like. And does that put a bit more short term pressure on margins?
Christopher J. Coughlin - Executive Vice President and Chief Financial Officer
No, I think, Nigel, in fact, we have done a very good job in that business and significantly decreasing the inventory levels that we've been maintaining. So we knew this downturn was going to become. We weren't trying to make speculative advice at any point. So, compared to the last time, we went into the decline, we have a significantly reduced amount inventory on hand, so our tightened cycle time has improved. So if you look at the last time we had downturn like this, it really took and impacted us for more than two almost three quarters. We expect again, we will hit this wall here in Q1. But again, we'll be replenishing that inventory again much quicker at the lower cost inventory than what we've seen in the past.
Nigel Coe - Deutsche Bank NA
Great. And then finally, I guess, the strategic options of that business in this kind of market, I guess that's a whole for now?
Christopher J. Coughlin - Executive Vice President and Chief Financial Officer
Well, obviously we're in a very difficult market right now on all aspects of the business. But again, you've got to look at this business over a period of year. We made $384 million in operating earnings in 2008, generated very nice cash flow and return on investment. That was up from $166 million in 2007. We always have a down year after an up year, and if you look at it over a period of time, this is a very nice business with very nice returns, as well as earnings and cash flow.
Nigel Coe - Deutsche Bank NA
Okay. Thanks, guys.
Edward D. Breen - Chairman and Chief Executive Officer
Operator, I think we have time for one more question.
Operator
Thank you. Your last question comes from Scott Davis, Morgan Stanley. Your line is open.
Scott Davis - Morgan Stanley
Good morning, guys.
Edward D. Breen - Chairman and Chief Executive Officer
Hey, good morning, Scott.
Christopher J. Coughlin - Executive Vice President and Chief Financial Officer
How are you?
Scott Davis - Morgan Stanley
Can you talk a little bit about your outlook for revenue per user? It just seems that some of the pricing that you've gotten over the past year maybe a bit unsustainable given the macro backdrop.
Edward D. Breen - Chairman and Chief Executive Officer
Scott, we're not seeing anything yet. Again, it's not... I'd stress it, it's not... we are not trying to go out in this environment and try to get a 5% price increase. What we are doing is offering packages in a smarter better way, and it's more value for the consumer. And that's more of the reason we're getting the pricing. Will that get affected some? It could. I don't know that it would go down. But when we make the progress, where we can take it up 3, 4 percentage points again this year like we did last year. I would be suspicious of that. Therefore, while we said, we think our recurring, one of the reasons are recurring to drop-off the 5% growth rate that we had in a year.
So, we are expecting a little bit of headwind on it, but if we are still smart about the value we are offering and the packages we're putting together... I hate to say that, but our team is just getting more matured and more seasoned. We only really got the corner stones on this thing, year and a half or so ago. We continue to get higher closure rates per sales person. They know how to market it better, and all of that helps play into it. But again, I think that stuff will improve and then we'll see a little bit of headwind that will help drift it back a little.
Christopher J. Coughlin - Executive Vice President and Chief Financial Officer
Scott, I would also mention that I agree with, obviously add on the resi piece, whereagain, we've been signing up new customers, building our account base even in the more recent days. We could see though on a combined basis, our ARPU impacted if we see a larger disconnect rate on the commercial side, which would have a little bit higher ARPU. So if we see continued disconnects of our small business customers that were doing monitoring to what not that could impact our consolidated of revenue per user.
Edward D. Breen - Chairman and Chief Executive Officer
And I would... at this point, I would think we would see some more pressure although not big jobs, but some additional pressure on the store rate. That one surprise me that we see that for a little bit of period to time here.
Scott Davis - Morgan Stanley
Makes sense. It's helpful. And can we talk a little bit about... you mentioned bolt-on acquisitions, but not necessarily which segment. When I think about ADT, I mean, all the challenges you are going to have... your competitors may have on a multiple of that. It always seems like an area really right for consolidation to me. You've got guys out there, and now you've got some changes in the margin with brain stripping out, and used to re-brand itself over the next couple of years, which is going cost a lot. And you still have monotonic as an intended asset than these thousands that kind of mom and pops. And then what...is that really... I mean the downturn time like this that you likely will see consolidations or is there something structural that's keeping this industry is fragmented as is it right now?
Edward D. Breen - Chairman and Chief Executive Officer
Scott, I don't know that you'll see it right away, because people's opinions of what things will work, kind of adjustment periods like this. So I am like take a little bit of settling in. But no, I think there is some opportunities there, but I would stress to you, we are very diligently looking at any bolt-ons that strategically would fit whether it's ADT, Fire or Flow. We're not gong to do anything outside than knitting of those kind of three areas and again we will be very cautious some prices prior need to readjust out there. But this probably is an opportunity whether it's additional dislocation and conversations that go on, I think that will happen.
But let me just stress to you, I believe from a return standpoint us growing organically. The way we are doing it with the upfront money we are getting from the customer is a very safe way to grow ADT. So, you'll never seen us say we want to do some big acquisition on the resi side of ADT. Now again pricing might readjust to make that look more attractive. But the way we can grow it, keeping the attrition rats down, the quality, we get the upfront money, it's a very good return business done that way. And I don't want to compromise that. We would have to have a heck of a deal on the acquisition side for us to throw our money there versus the route we are going down.
Christopher J. Coughlin - Executive Vice President and Chief Financial Officer
Yes, Scott, I would also say that we do have the financial flexibility that if certain of these mom and pops get in trouble, if they are over extended, and we can acquire some accounts at a reasonable price. Again I don't see anything new, but again the economic environment is such we have the ability to take advantage of that. But I would say that's more small account purchases as opposed to purchasing large companies?
Edward D. Breen - Chairman and Chief Executive Officer
Not much different than doing a dealer purchase by the way.
Christopher J. Coughlin - Executive Vice President and Chief Financial Officer
Right.
Edward D. Breen - Chairman and Chief Executive Officer
We would go through the same... and make sure it works for us.
Scott Davis - Morgan Stanley
Yes, that's' kind of why I asked the question. As I always see, there are some big guys out there that you could potentially buy and there is always mom and pops. And I suppose that it seems like you're not really buying a brand, you're just buying account. So...
Edward D. Breen - Chairman and Chief Executive Officer
Right. Then you've got to get it at the right price, and you want to be attractive versus what you can generate internally, and we're very methodical about going through that.
Scott Davis - Morgan Stanley
Okay, Thanks, guys.
Edward C. Arditte - Senior Vice President Strategy and Investor Relations
Okay. Ladies and gentlemen, thank you for joining our fourth quarter conference call and our outlook for 2009. We look forward to speaking to you again in early February, when we report on our first quarter results. Or certainly any questions or conversations in the meantime, you know how to reach us. Thanks very much for joining us today.
Operator
Thank you for attending today's conference. If you would like to listen to a replay to today's conference, you can do so approximately two hours after the conclusion of today's call. The replay number toll-free is 866-465-1306. Again toll-free 866-465-1306 or toll international number is 203-369-1423. Again the toll international number is 203-369-1423. Again, thank you for attending today's conference. You may disconnect at this time. .
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