Tyco International Ltd. F1Q09 (Qtr End 12/31/08) Earnings Call Transcript

Tyco International Ltd. (TYC)

F1Q09 Earnings Call

February 3, 2009 8:30 ET

Executives

Edward Arditte – Senior Vice President Strategy, Investor Relations

Edward Breen – Chairman, CEO

Christopher Coughlin – Chief Financial Officer

Analysts

John Inch – Merrill Lynch

Scott Davis – Morgan Stanley

Jeffrey Sprague – Citi Investment Research

Shannon O'Callaghan – Barclays Capital

Nigel Coe – Deutsche Bank

Stephen Tusa – J.P. Morgan

[Steve Winnaker – Sanford Bernstein]

Nicole Parent – Credit Suisse

Presentation

Operator

Thank you for joining the Tyco International first quarter earnings conference call. (Operator Instructions) I would now like to introduce Mr. Edward Arditte, Senior Vice President, Strategy and Investor Relations.

Edward Arditte

Good morning and thanks for joining our conference call to discuss Tyco's first quarter results for fiscal year 2009 and the press release issued earlier this morning. With me today 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 portions of our web site at tyco.com.

Let me quickly recap our earnings this quarter. Revenue in the first quarter was $4.4 billion compared to $4.8 billion last year. The decrease in revenue was almost entirely attributable to the unfavorable impact of changes in foreign currency exchange rates due to the strengthening of the U.S. dollar.

On a GAAP basis we had diluted earnings from continuing operations of $0.57 per share and absorbed $0.04 of special items compared to our guidance of $0.46 to $0.49 per share.

In addition, I wanted to also make you aware that we have realigned certain businesses within ADP Worldwide and Fire Protection Services. While the numbers are not large, the revenue in operating income of ADP and Fire included in the press release have been changed to reflect these moves.

We've also included schedules on our web site to assist you with the quarterly impact for reach quarter of 2008. Now with that, let me turn the call over to Ed Breen for some opening comments.

Edward Breen

Good morning everyone. Overall, the first quarter met our expectations in some areas and exceeded them in others. Revenue of $4.4 billion was at the high end of the guidance range we provided despite the more challenging economic environment and organic revenue decline of 1% was also at the high end of our guidance range. Excluding the Electrical and Metal Products business, we had flat organic revenue growth in our other businesses.

The revenue and margin performance for ADT and Fire Protection Services were about what we had expected as was the operating income in Electrical and Metal Products. On the other hand, Flow Control and Safety Products exceeded our operating margin expectations. Additionally, corporate expense was lower than expected.

Let me make a quick comment or two about each of our businesses, and then Chris will provide you with more details in a few moments.

First, ADT continued to grow its recurring revenue on an organic basis as we have for 11 consecutive quarters and our growth this quarter was in all regions of the world. As we have seen for the last few quarters, the improvement in recurring revenue was offset by softness in our systems installation and service revenue where the economic slowdown is impacting our revenue.

The balanced nature of ADT's business helps considerably in the current environment. Let me give you two examples of that. First, recurring revenue represents more than half of ADT's total revenue and grew 3% in the quarter. And secondly, the growth contribution from emerging markets in ADT which was about 12% helps to offset the slowing we saw in the U.S. and Europe.

Turning to Flow Control, the Valve and Thermal Control businesses had good top line growth and better than expected operating margins. Flow Control's backlog remained solid at $1.9 million and grew modestly in the quarter.

Next, our Fire business had 4% organic revenue growth in the quarter, attributable to both our North American and International businesses and we also had good balance between our service and installation activities. Our operational performance was good and our margins, excluding a legal charge, were a bit higher year over year.

Safety Products which is almost always our highest margin business did see softer revenue in the quarter and organic revenue declined 1%. Despite the softer revenue, we had better than expected operation margin and importantly, we continue to fund our growth plans with higher R&D and sales and marketing.

We have a lot of innovative technology in this segment and we continue to fund internal growth activities as well as technology bolt ons. However, we do expect the top line to be impacted by the economy over the next several quarters.

And finally, Electrical and Metal Products performed about where we expected in terms of operating income, but our revenue was lower than expected and this was entirely due to the economic slowing we saw in the quarter.

Pricing was actually a bit better, but the volume was down over 40% which means that it will take us longer to burn through the higher cost inventory we have in our system. Chris will give you more details on this as well as the implications this has on our second quarter outlook.

I also want to comment on our operational areas of focus and how we are managing in this challenging environment. First, our intention is to continue investing in our businesses to strengthen our long term competitive capabilities and our initiatives are both product and service focused.

Although we are carefully watching our capital expenditures and research and development spending, our intention is to maintain our long term investment plan despite the economic slowdown.

Secondly, we are carefully managing our cost structure and continue to look for cost reduction opportunities. We have aggressively executed certain contingency plans and will implement additional plans as appropriate. In addition, our restructuring activity will increase and I will cover that when I discuss our guidance outlook.

Lastly, our balance sheet is as strong as it's been in my time with Tyco. We have a solid credit rating which were increased in September and we have consistent and strong cash flow. We further strengthened our debt structure in early January when we completed a $750 million ten year bond issue which will effectively replace approximately $550 million of 2009 debt maturities. Our current debt balance of $4.4 billion remains below our targeted debt level of around $4.5 billion.

The strength of our balance sheet combined with our cash flow generation is something that we have worked hard to achieve and it's obviously very important in this environment. With that, let me turn the call over to Chris.

Christopher Coughlin

Good morning everyone. Let me start by looking at our company wide performance in the quarter from a regional perspective. Revenue in North America declined 1% organically as strong growth in our ADT residential, valves, thermal control and Simplex Grinnell businesses was more than offset by declines in ADT commercial and Electrical and Metal Products.

Excluding the lower revenue in our Electrical and Metal Products business, North America grew 2% organically. Asia and Latin America continue to grow nicely with mid teen organic revenue growth rates while revenue in Europe, Middle East and Africa regions declined 4% organically due to continued softness in both the U.K. and Continental Europe. Emerging markets which represent 14% of our total revenue grew 20% organically in the quarter.

Now I'll discuss our operating results by business starting with ADT. Overall, ADT Worldwide revenue was $1.8 billion compared to $1.9 billion last year with an organic revenue decline of 1%. Recurring revenue which represents more than half of ADT's total revenue grew 3% organically with continued growth in all geographic regions.

ADT Systems installation and service revenue which represents the remaining portion of ADT's total revenue declined 6% organically as we continued to see weakness in our retailer end market and continued softness in certain commercial markets.

Operating income in the first quarter was $231 million with an operating margin of 12.9%. The strengthening of the U.S. dollar adversely impacted ADT's operating income by about $18 million.

From a regional perspective within ADT, let me first start with North America. We were pleased with our North American residential business which grew its recurring revenue 4% organically in the quarter despite the economic environment.

As you may know, this recurring revenue represents more than 85% of our residential business and continues to provide steady and consistent performance with operating margins above 20%.

Additionally, we continue to grow our account base and average revenue per user in the quarter excluding the impact of currency.

Turning next to our North American commercial business, about 40% of our commercial revenue is recurring in nature. The remaining 60% is systems installation and service revenue and as we have seen over the last few quarters, this portion of our business has been impacted by the slowdown in the retail market as well as softness in the commercial markets.

Overall, our commercial revenue declined 7% organically in the quarter and our operating margin continues to be in the 11% to 12% range.

Now moving on to Europe, Middle East and Africa, we saw our recurring base grow modestly on an organic basis. This was more than offset by an organic revenue decline in systems installation and service where we continue to see softness in our commercial markets throughout the region.

Overall, revenue declined 7% organically and our margin in the quarter was 4.2%. We are reviewing additional restructuring actions designed to further address our cost structure in light of the weaker revenue outlook.

In other regions around the world including our emerging markets, we had a strong quarter with 13% organic revenue growth and margins in the low teens.

Turning to some of our key metrics, our global account base grew 2% year over year to $7.3 million accounts. In addition to growing our account base in all regions, our revenue per user of $44.04 also increased 2% year over year excluding the impact of foreign currency. The average revenue per user has been steadily increasing primarily due to new product packages and to a lesser degree, pricing.

As expected, our worldwide attrition rate increased 30 basis points in the quarter to 13.2%. The increase was driven primarily by our U.S. businesses where we saw modest increases in both our residential and commercial disconnect rate. As I previously mentioned, despite the slight increase in attrition, the U.S. residential business continues to perform well.

Looking ahead, we expect recurring revenue to grow approximately 3% organically in the second quarter. On the systems installations of services side, we expect continued softness in the retail market and certain commercial markets, particularly in North America and Europe. This weakness will be offset by continued strength in the rest of the world and the continued growth of recurring revenue.

Overall for ADT, this should result in an organic revenue decline of approximately 1% in the second quarter with an operating margin similar to what we saw in the first quarter.

Now let me turn to Flow Control. Revenue was $959 million compared to $1.1 billion last year with organic revenue growth of 1%. We had strong organic revenue growth in valves of 8% and 13% in thermal controls. As expected, this was offset by a 17% organic revenue decline in water due to the tough comparison from last year's large scale water projects in Australia.

As we discussed in last quarter's call, the Flow Control business is where we anticipated the most significant impact that currency would have on our results given that 80% of our revenue is generated outside the United States. Revenue was negatively impacted by $124 million due to the strengthening of the U.S. dollar.

Operating income was $137 million and included a $22 million negative impact from foreign currency. The operating margin of 14.3% exceeded our expectations due to better productivity in valves and thermal controls and our cost containment initiatives.

From a customer and market perspective, we have seen minimal project cancellations but we are seeing some of our customers push back the completion dates for certain of their projects. Backlog of $1.9 billion increased 2% organically on a quarter sequential basis.

Looking ahead to the second quarter, we expect high single digit organic revenue growth as the tough compares in water begin to normalize. We expect operating margins of approximately 12% in the second quarter due to the seasonal impact of our Thermal business and a lower profit contribution from the Water business due to lower revenue.

Now let me turn to our Fire business where about half of our revenue is generated from service. Revenue in the quarter was $851 million and grew 4% organically. As Ed mentioned, both our North American Simplex Grinnell business and our international Fire business contributed to this growth with better performance in service and product installation.

Operating income was $58 million in the quarter and the operating margin was 6.8%. As we pointed out in our press release and in Ed's remarks, the operating margin was adversely impacted by 170 basis points due to a legal matter. Adjusting for this legal matter, the operating margin was a bit higher than the prior year. Our backlog of $1.2 billion increased 1% organically on a quarter sequential basis.

Looking ahead, we expect organic revenue growth of approximately 1% in the second quarter with margins similar to that of last year.

Moving now to Safety Products, revenue in the quarter was $408 million with organic revenue decline of 1%. Good performance in our Fire Suppression business which generated 4% organic revenue growth in the quarter was more than offset by a 4% organic revenue decline in Electronic Security and an 11% revenue decline in Life Safety. Weaker municipal funding was a primary contributor of the lower revenue in our Life Safety business.

The operating margin 18.1% exceeded our expectation as we benefited from pricing action and savings from cost containment activities. We continue to invest for long term growth, particularly in emerging markets. Additional investments in sales, marketing and R&D cost about 180 basis points of margin in the quarter.

Looking ahead to the second quarter, we expect an organic revenue decline of approximately 8% to 10% with an operating margin of 14% as we continue to invest in the businesses for long term growth.

Now let's turn to Electrical and Metal Products. Revenue of $416 million fell short of our expectations as higher selling prices for steel were more than offset by lower steel and copper volumes in the quarter. Steel volume is currently at its lowest level in over 10 years and is down 40% year over year while copper volume declined 20% year over year.

These declines reflect significant reductions in our distributor inventory levels and slowing demand in the end markets we serve. Overall, revenue declined 11% organically in the quarter. Operating income in the quarter was $27 million which was in line with our expectation and the operating margin was 6.5%.

Based on the level of volume we are currently seeing, revenue in the second quarter will be off significantly from the prior year. While it appears the pricing has bottomed out, we expect volume to be down 40% to 50%. In addition, the lower volumes we experienced in the first quarter, resulted in our carrying a higher priced inventory for the second quarter, which will also hurt our profitability.

However, we expect to have fully processed this high cost inventory by the end of the second quarter which will help steel spreads in the second half of the year.

Based on these market dynamics, we are expecting our revenue for the second quarter to be approximately $350 million and we are expecting an operating loss of approximately $15 million. Again, we believe that the second quarter will be unusual with the combination of historically low spreads and historically volume.

Finally, it is important to note that we expect a better second half of the year due to a normal seasonal pick up in volume and eventual restocking of distributor inventory and spreads returning to more normal levels.

While our initial guidance for 2009 was for a year that was similar to 2007, with $166 million of operating income, based on our first quarter results, and our expectations for the second quarter, we believe full year operating income of approximately $110 million is more appropriate.

Before I turn it back over to Ed, let me touch on a few other important items. First, corporate expense was $114 million and included $8 million of special items related to Legacy legal matters. This was well below our expectation of $140 million due to the timing of certain expenses, cost containment activities and a lower than expected impact from currency. For the second quarter, we expect corporate expense to approximate $125 million.

Turning now to our tax rate, our GAAP tax rate for the quarter was 23.6% and would have been a bit lower, but we absorbed special items that contributed 2.1% to that tax rate. Although the tax rate can move around quarter to quarter, we are expecting our second quarter tax rate to approximate 22% and we now expect our full year tax rate to also be approximately 22%, reflecting continued progress in implementing our post separation tax structure.

Finally, we expect our net interest expense to increase modestly over last year to approximately $70 million in the second quarter.

Now let me turn the call back over to Ed Breen to wrap up the call.

Edward Breen

Let me wrap up with our thoughts on restructuring over the balance of the 2009 and update you on our guidance. First, as most of you know, we essentially completed a two year company wide restructuring program at the end of fiscal '08. This program totaled $400 million of restructuring charges and significantly improved our cost structure.

As we explained in last quarter's conference call, we planned on approximately $50 million of restructuring charges in 2009. Based on the slowing economy and the need to appropriately adjust our cost structure, we expect to increase our restructuring activity this year. Some of this increase represents projects that we have already decided to do and additional projects are still under review.

We are increasing our total expected restructuring charges for fiscal '09 from $50 million to a range of $100 million to $150 million. The specific charges of when these restructuring charges will be incurred, particularly with regard to international projects and the exact amount of these charges is extremely difficult to forecast.

As a result, we have decided to adjust our guidance to exclude restructuring. We will provide you will all the restructuring details on a segment by segment basis as these expenses are incurred.

Let me turn now to our guidance for the second quarter. We expect our organic revenue for total Tyco to decline approximately 2% to 3% in the quarter. The businesses other than Electrical and Metal Products are expected to be up approximately 1% on an organic revenue basis.

Additionally, we expect a $500 million year over year decline in revenue due to foreign exchange given current exchange rates. Therefore, we expect total revenue in the second quarter to be between $4.2 billion and $4.3 billion, again based on today's exchange rates.

From an earnings perspective, we expect earnings per share from continuing operations before special items to be in the range of $0.40 to $0.43 per share. This guidance excludes restructuring charges which at this point we are estimating to be approximately $0.06 per share in the second quarter.

I also want to clarify that the segment guidance provided by Chris also excludes restructuring charges.

Let me quickly describe the two major items that help explain the year over year differences in earnings for the second quarter. First, the volume and spread decline in Electrical and Metal Products will cost us about $0.14 per share and secondly, changes in foreign exchange rates will cost us about $0.08 per share.

We are adjusting our full year guidance in order to make the restructuring change as neat and clean as possible. Our previous guidance of $2.20 to $2.50 included $0.08 per share of restructuring charges. The low end of our full year guidance is now being adjusted upward by $0.08 per share to $2.28 per share to reflect the exclusion of our originally estimated restructuring charges of $50 million.

We are leaving the high end at $2.50 per share to reflect the reduced full year outlook for Electrical and Metal Products.

As we look to the balance of the year, there are a few items that we expect to be tailwinds in the second half of the year versus the first half of the year. First, as Chris discussed, Electrical and Metal Products should have a much better second half of the year for a couple of reasons.

Prices have stabilized and we have a meaningful decline in our inventory costs by the end of the second quarter, which should help our spreads. As a result, the earnings contribution from this business should be much higher in the second half of the year.

Second, our other businesses, particularly ADT and Fire also have seasonal increases in revenue and income in the third and fourth quarter. Even adjusting for the economy, we expect both of these businesses to earn at a higher rate in the second half of the year due to their customer base and when work is scheduled.

For example, our Fire Businesses do a significant amount of business with the K through 12 schools and universities and much of their inspection, repair and upgrade work is done in the summer months.

In summary, while the environment is clearly more challenging, I believe we have the appropriate disciplines and focus in place to effectively manage our businesses, addressing both our cost structure and our long term growth initiatives.

Thanks for joining us on the call this morning, and operator let's open up the lines for any questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from John Inch – Merrill Lynch.

John Inch – Merrill Lynch

I wanted to start out with some of the incremental structuring and the thoughts there. ADT Ed and you're up 4.2% margins. That's pretty weak, and understanding the economy is soft there, but I thought we had taken a ton of action in Europe already. Could you describe as you look out, what it is that you think you could be doing more to address the current economy and sort of what you think the timing is? Do you still ascribe to margins in ADT over time approaching 10% or is something structurally changed there do you think?

Edward Breen

First of all, overall during this quarter we're now in, part of the restructuring we're doing is taking out some variable overhead costs in the businesses. As you saw, most of our declines we're seeing are on the commercial side of the business so we have to readjust our work load level, and that is happening during this quarter.

It takes us kind of a quarter to quarter and a half to get that incremental cost out of the system so you really didn't see that out yet, but it'll start to have some benefit in the third quarter for us. And a little bit this quarter, but specifically with Europe, I think it's the most exaggerated example of what we're seeing.

Europe is almost totally a commercial business with very little residential business as you know. The mix is very skewed there and that's where we're seeing the most softness with our orders being down 7% to 8%. So there's where we really have to do an adjustment of our cost. Again, it takes a little longer in Europe as you know because of the union situations in certain countries, but we will be bleeding that out mostly over this quarter and a little bit into the third quarter.

Eventually we should be able to get these margins up around 10% in Europe. There's nothing structurally different there that we can't get there once we stop seeing the softness in the marketplace. We're north of 10% in every other region in the world. This is the only one and it's because of the commercial softness.

Christopher Coughlin

Just to highlight, it's the one place where we saw a chase in the revenue decline and you can't take the actions. And again, this is a people intensive business in terms of the installation, and so it's working with the workers councils and getting all those things approved so we can take the actions that are required, which is why it's also so difficult to estimate the exact timing of when those restructuring charges will take place by quarter.

John Inch – Merrill Lynch

But to be clear, the nature of the downsizing in Europe restructuring is going to be effectively right sizing sales forces and stuff like that for volume. You're not looking to structurally realign sort of operating segments or combine businesses or something.

Christopher Coughlin

No. John we're doing it, just a full disclosure, we're doing a little bit of back office consolidation in the U.K., but predominantly as Chris and I just said, it's a head count recalibration.

John Inch – Merrill Lynch

With ADT in emerging markets up as strong as you said, emerging markets are obviously softening everywhere, what do you think the outlook is for those businesses? Do you feel the pace in world penetration can continue or are you baking in an expectation of emerging markets slowing both in ADT and I guess globally? Chris, you said emerging markets was 14%, still growing at very high rates. What are your thoughts there?

Christopher Coughlin

I think we are seeing some of the impact of the economy in the emerging markets but while we had 20% emerging market growth in the first quarter, our guidance and forecast called for still significant growth but not quite at that level.

John Inch – Merrill Lynch

The other question was on inventory, destocking it. I'm assuming that Electronic Security got impacted by this in the Safety Business. How other than electrical metal, how are you seeing the impact of distribution destocking or whatnot in your businesses and would you expect that to begin to normalize a little bit as the year progresses?

Christopher Coughlin

I think different businesses are at different levels. We saw significant destocking in our distributor levels, certainly in the Electrical Metal Products business and we would expect as we get into the second half that that will moderate somewhat as the distributors are going to need to restock.

In the Safety Products business I think we saw the destocking start a little bit later so that's going to have more of an impact on us we believe in the second quarter where our organic revenue expectations are decline and some of that is the destocking that we're seeing the Fire Suppression business in our distributor businesses there.

There's a little bit of timing there. They got the impact a little bit later than what we saw in the steel and copper business.

John Inch – Merrill Lynch

And lastly, your philosophy towards share repurchase? You've got $1.2 billion cash on the books. You've still got a big authorization. I don't think you bought back shares in the quarter. Are you going to wait for this whole reincorporation into Switzerland before you start to buy back shares again? How would you like us to think about that?

Edward Breen

We do have the $1 billion of authorization which we've bought back about $100 million against that. We didn't buy back any as we indicated at the beginning of this quarter. I would expect that we would look more at this as we get into the second half of the year which is a time when we generate the majority of our cash flow, and we'll see what kind of markets we're dealing with at that time, what the credit markets look like.

But we're in good shape now as we just completed here this past month the bond offering. So again, we're still looking at it. And again, I think we'll look at it towards the second half of the year and we'll get a better feel for what the market as well as the credit markets look like.

John Inch – Merrill Lynch

Does Switzerland have anything to do with this, or no?

Edward Breen

No.

Operator

Your next question comes from Scott Davis – Morgan Stanley.

Scott Davis – Morgan Stanley

I wanted to have a quick follow up on ADT and then talk a little bit about Flow and Fire. First on ADT, what changes in this kind of market? Do you get a little bit better pricing on dealer accounts or is there a mixed shift in more home grown, how does that transition when times are weak like this?

Edward Breen

We've been shifting slightly more towards generating accounts internally over the last year, so that mix is moving. We like that but we want as much of the dealer business as we can get but it is shifting because we continue with our sales force to be more matured and getting better at selling the packages and all that. So that shift is kind of naturally occurring.

I don't think that's an economy comment, but I think that shift will continue throughout this fiscal year. The other thing thought that we're seeing there, I think we're bucking the trend a little bit on the economy as on the side of, because we're getting good at selling these packages with more services in it, we're continuing to incrementally every quarter, drive up our ARPU as Chris mentioned, and still adding accounts, 2%, 3% levels.

Again, I think we're bucking it a little bit because we're just getting better and better at what we're doing. We were kind of artificially holding ourselves down a couple, three years ago. So I think some of that you're seeing and again, it has nothing to do with the economy affecting it.

The nice thing about ADT is that as Chris mentioned, 85% of residential is recurring and it's holding up very nice, and 40% of our Systems Installation and Service business is recurring business which is holding up very nicely also. So with that nice balance that we have there, we're seeing that play through. We saw it in the results this quarter and what we expect next quarter.

Scott Davis – Morgan Stanley

If we can move over to Flow, more so even in Fire, your backlogs were up sequentially in both Flow and Fire which is a surprise to most of us. I mean if you look at [Floser] for example, their backlog was way down. I know it's not perfect overlap but just as an indicator, maybe you can walk us through a little bit where your geographic strengths were and markets strengths. I know you've got tough competition on the water side, but what's kind of driving that backlog up?

Edward Breen

Actually if felt very good during the quarter. The Valve business had about an 8% organic growth, so that was very solid, and Thermal Controls had 13% organic growth. And then, the negative was the 17% organic decline in the Water business as Chris mentioned, very much the Australia compare which probably does start to go away in the quarter we're now in, and that's why expect organic revenue in Flow in this second quarter to be in the high single digits from only 1% in the first quarter.

So we're continuing to see good business on the Valve and Thermal side and Water again, readjust as we go into this quarter and next quarter. The only other negative I see, but it's embedded in these numbers I just described, is we do have some large projects where people are delaying when it's going to end.

You know, three year project looks like it's a four year project in some cases, and we did readjust our backlog based on that. It's something that should not be in the 12 month window. But having said that these are still the numbers with the 1% improvement of backlog sequentially.

Scott Davis – Morgan Stanley

I received a few emails from people just confused on guidance. Can you say it again? You're excluding restructuring. I'm not exactly sure why you're doing that, but essentially guidance doesn't change. Is that correct?

Edward Breen

Essentially what we have done is because of the difficulty in estimating as we talked about the extent of what our restructuring is going to be, again we're looking at a lot of projects and many of these projects are outside the United States where it takes quite a bit of time to get the approval and then you've got to follow all the accounting as to when you can actually record the charge.

So what we decided to do was because that is sort of a real swinging number that we want to make it clear. What are our operations delivering and then we'll tell you exactly what our restructuring expectations are. So we've done that, and I think therefore, we had $50 million, about $0.08 per share in our guidance and now we've increased the low end to reflect that we're taking that out so it's an apples to apples, no change on the low end of our guidance.

Now we haven't increased the top end by the 8% essentially reflecting the weakness that we're seeing in the Electrical and Metal Products business. So again, we reduced the top end, we've increased the bottom end to reflect the restructuring change.

Operator

Your next question comes from Jeffrey Sprague – Citi Investment Research.

Jeffrey Sprague – Citi Investment Research

One quick clarification on the guidance. In your guidance range, is Q1 $0.57 or $0.61?

Christopher Coughlin

Under our new change that would be $0.61 relative to the guidance that we gave, we gave $0.46 to $0.49 on a GAAP basis, and we delivered $0.57. On a going forward basis, excluding restructuring that would translate to a $0.61.

Jeffrey Sprague – Citi Investment Research

Can you give us the actual color on attrition in ADT in the U.S. and Europe?

Christopher Coughlin

I'll have Ed give you the exact numbers, but again we're seeing slight increases in the U.S. businesses both on the commercial as well as on the residential side. We expected that and we expect that to continue sort of modestly as we go forward.

U.S. residential was up to $13.7 million from $13.3 million. U.S. commercial from $14 million to $14.3 million. What that does is take total U.S. from $13.5 million to $13.9 million and the non U.S. was fairly flat at right around $12 million.

Edward Breen

I would expect to see a little bit of creeping on that if the economy stays the way it is.

Christopher Coughlin

As you know, for those that aren't as familiar with this, the point of attrition costs us on an annual basis about $39 million of revenue. It is good margin revenue, but it costs us about $39 million of revenue which is about half a point of organic growth. Just to put it in context for people.

Jeffrey Sprague – Citi Investment Research

What's going on with the sales force? Clearly the growth in ARPU and recurring monthly revenue is pretty encouraging. I'm wondering if you're actually seeing a lot less churn in your sales force with the economy in the shape that it is, and is that playing some role here?

Edward Breen

I don't know that the economy is doing that. We're having about the same attrition in the sales force, but we've worked it way down with our new program we started a couple of years ago. So we don't have anywhere near the attrition on that team that we used to have again, because of the way we changed pay system, a bonus system.

They sell more packages, they get a bigger bonus. It's a better paying job than it was before. So for a whole bunch of reasons, when you really study the metrics behind the residential business, it's just a system that's maturing. They team's gotten better. We have added people to it because we're seeing the incremental payback.

Our packages are stickier. As you see we're not cutting back at all on our TV advertising. One of the areas we get a lot of our leads from, we're spending at a very nice level there, and so we're seeing the lead generation come in. We're not seeing a fall off at this point.

And again, we're able to drive, not a lot, but we're getting a couple percentage point increase in the ARPU each year over year, and it continued again this quarter. Again, we are clearly feeling the economy in that business, but we're bucking the trend in my opinion a little, just because we're getting better at what we're doing as we mature our own team and not rely just on dealers.

Jeffrey Sprague – Citi Investment Research

And switching gears to Flow, is there a particular vertical market where you're seeing the projects stretch out, or geography? Or is it just kind of a broad based phenomenon?

Edward Breen

I would put it more broad based, but I'll give you a specific example where we see some of it. We see some push out without saying names on the oil and gas side, and one of the areas I'll give you an example is the Tar Sands in Canada. They're very long four, five year projects and we're hearing people say, "Well, the four years is going to six, or the three years is going to be four," and crimping their capital spending a little bit.

Although our big customers there, nobody's cancelling the project, but we're seeing a little bit of push out. That would be an example. So more on the oil and gas side.

Jeffrey Sprague – Citi Investment Research

I don't know if you said it, but could you give us the OP dollar impact from FX in the quarter?

Christopher Coughlin

It's about $0.07 or $0.08. It's probably close to $50 million.

Operator

Your next question comes from Shannon O'Callaghan – Barclays Capital.

Shannon O'Callaghan – Barclays Capital

Just on Fire, could you go a little more into, obviously the results there are stronger than what most people would have figured. Can you give a little more sense of what you're seeing there in terms of verticals or market share, other drivers that you see?

Edward Breen

Just overall, we are doing a much better job in executing in the business, especially internationally. We've really honed down Simplex Grinnell. They've been humming along now for a few years, but we're just getting better execution on projects more globally, and you clearly saw that because international has really contributing nicely, both organically and to the bottom line.

But to me, I think the bigger issue is, we have been really refocusing on the service part of the company. In Simplex Grinnell it's more than 50% of our business now and we're trying to drive up our international business to be a bigger component of service.

It's very interesting, if you do go focus on it, the business is there, and that's what we've been doing. Service has good margins. I wouldn't quite call it recurring but it's more recurring like and more repeatable once you're in with a customer. That's not just talk. For instance, what we've done in Simplex Grinnell is actually about six months ago, hired a leader for just the service business and we separated it from the rest of our installation business to give it 100% focus, and that's what we're doing also globally.

I really think that's one of the key contributors to our organic at least holding up to where it is holding up so far, that we have that going. I would say that is market share gain, but it's market share gain on the service side and we're clearly holding share if not gaining a little bit in some of our other core verticals that we have.

I think that when times get tough, what we're hearing from our team, people know we're going to be there in this business, and we're the big player, and I think that plays into our hand a little bit. But more of it is this service piece and international improving its execution.

Christopher Coughlin

Also, we are seeing some slowing in this Flow business but the Electrical is continuing to show good solid performance, and that mix is also favorable to us.

Edward Breen

As Chris mentioned, we are culling down the growth rate from the 4%. I can't imagine again, if the economy stays like this, that won't drift down some, and that's kind of what we guided to.

Shannon O'Callaghan – Barclays Capital

In terms of the pick up in attrition, what are you hearing about the driver of that? You should be benefiting a little bit from the fact that people aren't moving as much as they used to, so are these actual cancellations? Are people taking themselves down from the gold package to the bronze package? What's going on?

Edward Breen

I wouldn't say it's the gold package. The people are, again the moves have helped the attrition rate, but again there are some just disconnects for payments, not wanting to pay the monthly fee. So they don't really downscale. It's either on or it's off. I think that on the residential side.

And then on the commercial side, again, it's really some of the small commercial where we're seeing some of the mom and pops, the strip mall where those businesses are struggling, more vacancies and that is what is resulting in the higher attrition rate on the commercial side.

Shannon O'Callaghan – Barclays Capital

Given everything going on with some seismic shifts and a lot of things that are going to be going on in the corporate world in terms of people reassessing business models and things, how are you thinking about the portfolio right now? It's kind of a time to take a look at things and consider, you've been considering, but does Electrical and Metal still make sense? Are you still committed to ADT Europe? Things like that, how are you thinking about the portfolio?

Edward Breen

As you know, we did a ton of clean up of the portfolio during this past fiscal year before things got kind of crappy out here, and got rid of $1 billion to $1.2 billion of stuff that broke proceeds in the company, so we really did a lot of what we wanted.

I will reiterate what Chris and I always say, Electrical and Metal is a very good business. We understand that it's very volatile, but over the cycle it's really nice. I view it as a nice asset. It could be a part or not a part of the company, and we'll just continue to assess that as we go down the road.

But by and large, we have the three global platforms, Flow, Fire and ADT about where we want and we're really going for growth and long term positioning in those three businesses. So any bolt on acquisitions we do would be on one of those three platforms, whether it's service or product. And that's really where we're focused.

So we have it about where we want. Now having said that, there still is a lot of things we can continue to clean up in the company. Too many IT systems, we're still kind of incrementing our way along with that and that will continue. But that's not unloading a business.

Christopher Coughlin

I'll also say we're at a pretty good financial position here with our capital and debt structure. I wouldn't want to do anything that was sort of a fire sale in bad economic times so again these businesses are all strong over a long period of time. And again, we'll still be looking at potential bolt on acquisitions in those core businesses that Ed mentioned.

Operator

Your next question comes from Nigel Coe – Deutsche Bank.

Nigel Coe – Deutsche Bank

Can you just talk about your retailer concentration? We've seen Citi Expo folding. What is your specific concentration to these large retailers?

Edward Breen

In terms of, we do about $1.3 billion of retailer business on a global basis, and as you know, a good portion of that, approximately $800 million of that is sensormatic related product. The sensormatic related product breaks down roughly about two-thirds, one-third between what I would call pags which is more the consumable products and the other third really being more of OEM equipment typically sold and installed when a new store opens.

That's where we've seen the biggest impact from the economy on our business, and it's really in large part highly correlated with the number of new store openings. Our level of business with major retailers, particularly in North America is very, very broad based and it touches lots and lots of retailers.

I don't think we have any unusual exposure to any one large retailer. We're not sitting with any receivable exposure to any of these. There have been a few bankruptcies announced and so on. So I think generally speaking, it's a very diversified portfolio of customers that we have.

Having said that, it's a part of the economy that's clearly under pressure right now and probably will be under pressure for a period of time here.

Nigel Coe – Deutsche Bank

On the dealer accounts, you're still spending a decent amount of money on these accounts. Are you seeing favorable pricing terms with the economy weakening? What sort of prices do you get per customer now?

Edward Breen

I think that the dealer accounts, we've been pretty disciplined in how we evaluated those over the last couple of years. Certainly the cost of those dealer accounts is not going up right now, maybe down modestly. We are seeing some larger acquisitions particularly do some bulk where we're getting a little bit better in terms of the acquisition price than we had seen before, but it's not dramatically different from what it's been over the last year or two.

Nigel Coe – Deutsche Bank

I don't watch a lot of TV, but I do see quite a few ads from Brinks and yourselves. Would it be fair to say that your commercial advertising expense is picking up?

Christopher Coughlin

I would say it's holding. We haven't cut back at all on our advertising as Ed said. It's a major lead generator for us and again, that business has continued to grow so we've held our advertising.

Operator

Your next question comes from Stephen Tusa – J.P. Morgan.

Stephen Tusa – J.P. Morgan

Question for you on the commercial attrition, I might have it in my records, but where did that peak last cycle, and is that a decent apples to apples comparison?

Edward Breen

I don't have all the details here on the last cycle, but memory suggests it was somewhere in the $14.5% to 15% range. That's an estimate on my part. I don't have that data in front of me.

Stephen Tusa – J.P. Morgan

So you're kind of close to that level now so the increments from here would be like you said kind of gradual.

Edward Breen

That's what it feels like. The other thing I think you have to take into account is that the base is just a much healthier base of customers both in residential and commercial, especially when you look at the European base where even on the commercial side, if you remember back a lot of these accounts we got with zero down and it just wasn't the healthiest business.

The portfolio in both is much, much better than we've ever had, and it's continued to get better as we go along. I think that helps us along with the track record we're seeing here. My gut is it kind of keeps creeping up a little bit, the range we're seeing.

Stephen Tusa – J.P. Morgan

So say in the commercial side as kind of similar dynamics to what you're seeing on the dealer accounts and residential.

Edward Breen

Yes. Particularly outside the United States.

Stephen Tusa – J.P. Morgan

What indicator do you look at for that to gauge where that's going? Is it vacancy rates? It's obviously not new construction, but is there something that's a better indicator for that business or is it kind of on its own trajectory versus the economy?

Edward Breen

I think that some of it is just the overall economic activity that we track, and obviously what we look at, payment cycles and slow paying. So we take a look at a broad range of five or six key items and track it very closely every month.

Operator

Your next question comes from [Steve Winnaker – Sanford Bernstein]

[Steve Winnaker – Sanford Bernstein]

Around the retention and attrition rates within ADT, I know a lot of these accounts that you have are not from a lot of the lower quality new builder accounts of history, but have you got any specific experience around customer retention and loyalty programs that you're accelerating or putting into place and are there parts of the economy or country in the U.S. where you're seeing sort of a very big difference from the average?

Edward Breen

You're talking about in the residential business now, correct.

[Steve Winnaker – Sanford Bernstein]

Yes, that's right. That's first, yes.

Edward Breen

I don't think that we are seeing any particular area that is dramatically different and the trends are different than the overall trend. I think again there's slight upticks in a number of locations. And again, we do have what we call our save program in terms of customer retention. We've improved all aspects of the service business. Our monitoring and just the overall quality of service that has been improving and what we're giving our customer base.

Christopher Coughlin

The other thing I would mention is that ADP has never had a real strong focus on the residential business on what I would call the real large home builders and so we estimate that new home construction is somewhere in the 5% to 7% of our account ads in some of the previous years. So again, it hasn't been a big area of focus for us.

Edward Breen

I think one of the biggest things that will help us and continue to help us going forward is the customers we're getting are buying more from us which I think translates into a stickier customer, and they're paying us money, we're not giving it to them up front. And if they're putting money into it and they're taking three or four services from us, they really want the service.

And that's to me the fundamental difference. We've been bleeding all those accounts into us the last few years while the attrition has been more those older accounts that have fallen under that. And I think that's going to help us substantially over time, although the economy will have a little bit of a headwind.

[Steve Winnaker – Sanford Bernstein]

Your experience in Asia Pacific and emerging markets, progress in headway on those fronts?

Edward Breen

I think you can see from our organic numbers which are still holding up pretty nice. We're penetrating very well. Flow Control is a global company so if you're just talking ADT, we're making good strides in China, and we're making good strides in India. It's mostly a commercial business although we've ramped a residential monitoring business in China which we're playing out for the long term.

But we're really penetrating on the commercial side and I think you're seeing that in our numbers. They look very nice as Chris said. I don't expect they're going to stay up at the levels they're at, but I think we'll still have decent organic growth this year.

[Steve Winnaker – Sanford Bernstein]

Are you still hiring more feet on the street in China?

Edward Breen

What we're doing, the senior team, Chris and I, we're meeting once a month with the senior management teams in all our emerging markets, and that's exactly the conversation we're having. We don't want to slow down our growth plan there because we happen to be sitting in this environment right now.

We're very specifically talking to those teams about what are their growth initiatives, do they make sense in this environment, and we're very willing to fund those as we go. For instance, we're making great strides in India and we just opened up a new research and development center tied to our Flow Control company.

But it's a research center for all of Tyco, and we're ramping up 100 to 150 engineers there as we speak. It's a great opportunity and we're going to take advantage of it in a downturn.

Operator

Your next question comes from Nicole Parent – Credit Suisse.

Nicole Parent – Credit Suisse

I want to follow up a little bit on the restructuring. I understand the rational for increasing it. I guess when I think about excluding it, I'm not so sure why we would, but could you talk a little bit about the payback that you would expect and if you think about the restructuring actions that you done over the last couple of years how we should think about that payback?

Edward Breen

I think the restructuring that we had done over the last year and a half ago, I think are helping us tremendously this year and will also as we get into the second half of the year as we had charges in the second half of last year, so on a year over year basis, I think that's going to help with our margin. So that $400 million program in total as it's completed and up and running will generate about $200 million in savings.

We're doing more as we said in the first half of the year so generally most of our projects on average have about a two year kind of a payback. And again, they're just very difficult now as we're getting into; we have a lot of the projects done. They've been planned out in detail. We're able to estimate those.

Now we're dealing in a very different environment looking at changing growth rates quickly. And again, we want to make sure that we do this in the right way, talk to our people around the world, talk to our constituents like the unions and whatnot, particularly outside the U.S., and that's where it's hard to gauge on how quickly we're going to be able to do those.

The ones that we had planned at the beginning of the year are all tracking relatively on time.

Nicole Parent – Credit Suisse

As we think about capital allocation and priorities and kind of notions of uses of cash and how we think about acquisitions and potential divestitures in this market?

Edward Breen

I'd say very little change. We put our capital expenditure plan together for this year. My gut is we'll under spend it slightly, but we've told our teams of all the programs that Chris and I approved, were good growth initiative plans for us for the long term. And that's how we're looking at it.

As I mentioned in my comments up front, we're not cutting back on the growth initiatives in the company just because we're in this environment. On the other hand, you hear us, we are going to cut a lot of other costs. So CapEx won't be much different than the year before and my gut is, our dealer spend which uses $400 million to $450 million of our cash will run hopefully about the same this year because that's about the level of the quality accounts that we want and we're not seeing much of a change there.

I would say that doesn't change much and I will stress that if there's some good acquisition opportunities, our balance sheet has never been in a better position. We clearly would look at it in this environment with some of the pricing out there.

Edward Arditte

Thanks for joining our call today. Look forward to talking with you over the following few days ff you have any follow up questions, and look forward to speaking with you again to review our second quarter earnings, and that call will be scheduled for the first part of May.

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