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TYCO International Ltd. (NYSE:TYC)

February 21, 2013 2:10 pm ET

Executives

George R. Oliver - Chief Executive Officer and Director

Antonella Franzen

Unknown Analyst

Okay. If everybody could start to move back to their seats, please. I want to move on next to Tyco. It's interesting how the last couple of days have lined up, because we have a number of companies all in a road that have real exposure to commercial construction and commercial markets, in general. And I think Tyco, as the remainder Tyco, is here, is highly exposed to a lot of the same markets that we're just talking at folks at Hubbell and Ingersoll-Rand and others.

But we have George Oliver, who's the CEO; and Antonella Franzen who is -- has been heading up the Investor Relations effort for -- at Tyco and also worked very closely with Maroon [ph] on the ADT side for a number of year, who knows the business -- both sides of the business very well after the breakup.

And Tyco is a stock that we've been bullish on. I mean, those of you who've followed our work, post the spin, we -- our recommendation to investors was to buy a bigger focus then on the Tyco side, and less of a focus on the ADT side. Part of that is it reflects -- part of that reflects just valuation and where things were trading upon.

It's been up. Part of that reflects the fact that it is our view, at least, that Tyco is very well positioned to be an above-market grower and an above-market margin expander over the next several years as we do get a recovery in our market. It's also our view that there's a lot of pent-up demand out there in security markets, and that there are catalysts to get people to upgrade systems and such.

So those are some topics that I think are important to talk about with George today. This is a company that really has a fresh start, a clean sheet of paper to be able to build its reputation and, really, position itself with its customers and with its investors and everyone else as something different arguably than what we have seen historically at Tyco as a higher-growth entity with rising margins and rising returns.

And as a pure play security company, I think is very, very well positioned to fit into the some of the themes that we've been talking about in our written work, as far as companies getting back to their core competencies, where they have sustainable competitive advantages and scale in the market and such.

So I think what you get with Tyco is very interesting. George has a fair amount of pressure as far as execution is concerned, I'm sure. But what you get is, in fact, very interesting. So George wanted to open up and have a few opening comments, and then we'll move right into Q&A and also queue up the audience responses to him as well.

With that, George?

George R. Oliver

Thanks, Scott [ph], and thanks for having us at the conference. What I thought I'd do is really kick it off and talk a little bit about my own background, where I am new to the role, the new CEO for Tyco. I'll talk a little bit about the strategy that we've outlined for the new company and then some of the initiatives that we have well under way that we updated all of you on at our earnings call recently.

So a little bit about my background. Prior to coming to Tyco, I was 23 years in GE, came up through the operating ranks, having led large operations, including some of the bigger positions, where leading all over the designs and supply chain within the aircraft engine group. I did stints in appliances, as well as water and process technologies. And when I came to Tyco about 7 years ago, it was really with the focus of coming in and really building the product businesses. So I had responsibility for, at that time, the reported segment was Tyco Safety Products, which was a combination of our Fire & Security products businesses.

And if you recall, that was at the time of the last separation when we split off Covidien, as well as TE Connectivity. And there was a real focus on where we looked at the remaining businesses within Tyco as having been underperforming from a revenue standpoint. But, really, good solid businesses with strong brands that with a little bit of reinvestment could be repositioned very well to be able to accelerate growth.

So at that stage, we embarked on a strategy within our products business, to accelerate R&D, to be able to expand our footprint with sales and marketing into some of the high-growth markets. And I think you've seen the progress within those set of businesses being able to deliver double-digit growth over the last couple of years. And within the strategy that we've outlined for the new company, we'll continue to deliver very strong growth over the next 3 years.

And then along the journey within the old Tyco, we looked at how do we get better performance within Security, within Fire and within Flow, and that's when I picked up the responsibility. I started with the international piece of the Fire services Installation & Service business. And so at that time, if you recall, especially in the European businesses, we had margins that were barely profitable with that set of business within Europe. And across the company, we had a keen focus on how do we restructure the business, refocus the business, implement the discipline that were required to ultimately get to double-digit returns, which we achieved across the rest of the portfolio.

And so with that initiative, we launched what we called project selectivity, and within the European Fire business became much more selective with how we applied the resources that we had with the depth and expertise we had in the segment to really focus on projects that we could develop that ultimately we could contribute to or the value creation was such that we could demand price, and it created a base of business that we could build our service platform on.

And so when you look at that business today, it's a little bit smaller than it was at that time, but when you look at the fundamentals of the business, very strong fundamentals, delivering double-digit returns, and even in the current economic environment that we have in Europe, continued to perform very well.

And then subsequent to picking up the international Fire business, we then picked up the SimplexGrinnell business to really create Tyco Fire Protection, which was the reported segment that I had responsibility for. And similarly, SimplexGrinnell was going through a pretty significant downturn because of the nonresidential construction industry within North America. And at that time, we're pressured in margins and, really, similarly, with what we had in Europe, really began to refocus the business, again with project selectivity, and how do we focus our resources on projects that, again, we could create value for our customers, get paid for that value and then build a service, a platform, an installed base to be able to build services from.

And when you look at what happened within SimplexGrinnell, in spite of the lack of the recovery of the nonresidential space, we've actually performed very well. We've expanded margins by well over 300 basis points. We've been able to grow at or above the market rate, and that includes both our installation as well as being able to accelerate our service business.

And that leads me to the new Tyco, which at the time of separation, when you looked at the fundamentals of the businesses within Tyco, you had the ADT subscriber base North America residential security business, you had the Flow Control business. And the remaining portfolio, which didn't get a lot of attention in the old Tyco is really made up of the commercial security business, which was part of ADT, $5.5 billion of revenue combined with about $5 billion of revenue that we had in Tyco Fire Protection. So you can think of it as taking 2 very separate segments within Tyco, now merging the 2 to really create the largest pure play fire and security company in the world.

And so today, this year, we'll be short of $11 billion in revenue, by far, the leading player. And with the mix of businesses that we have, a very attractive mix with both technology businesses within our products across both Fire, Security, as well as Life Safety and a very strong Installation & Service platform globally really positioned to be able to capitalize on the nonresidential construction and build a service base to get the recurring revenue.

Now when you think about the macro environment, the way I think about it is with the service base that we have, 45% of our revenues are service-based. And so when you look at the relative performance, we've been able to perform. In spite of the lack of the recovery with the nonresidential, we've been able to perform very well being able to expand margins over the last 3 years by about 200 or 300 basis points. And then as we think about -- as Scott mentioned, with the recovery within the nonresidential, that gives us an opportunity with a fairly sizable part of our revenue to be able to capitalize in that recovery to be able to accelerate growth.

Now the 3 priorities that we outlined for the new Tyco, it's pretty simple -- is position to be able to accelerate organic growth. And organic growth is achieved by accelerating our investments in products and continuing strong product growth. It's making sure that we're extending our footprint into the high-growth markets to be able to leverage our combined capabilities to be able to achieve that growth. And then the last is making sure that we're extending our service platform and positioning our service capabilities in line with the installed base to be able to accelerate service growth.

The second priority is to be able to complement that organic growth with strategic bolt-on acquisitions. Over the last couple of years, we've done a number of these acquisitions that have been very attractive right down the middle from a strategy standpoint and have really complemented the investments that we've made into our organic growth.

And the third priority is to be able to stay in position to fund the organic growth, as well as continue to expand margins by about 80 to 100 basis points on an annual basis by really synergizing the cost structure that has come together with these 2 separate segments within Tyco.

And the 2 big priorities that we've outlined there is when you look at that cost structure, about $4 billion of our cost structure is what we buy or source, and our ability now to be able to combine all of that, prioritize the categories, put strategic sourcing leaders in place and make sure we have the right make buy, as well as low-cost structure within that buy.

And second is within our Installation & Service business. We have $4.5 billion worth of our costs distributed out across the globe, positioned to be able to do installations, as well as perform the service. And if you think about it, it's about 1,000 real estate locations, about 600 of which are what we call branches, which is our factory in the field. And now our ability to be able to synergize the 2 structures together to be able to free up the resource is a significant opportunity for us. And it really is achieved by standardizing the work that we do at the branch level to be able to support our customers and accelerate growth, while we're looking at all of the supporting processes of the back-office, being able to standardize those processes, simplify those and then centralize them to be able to leverage the scale.

We've got the 2 platforms within the new company, which about 20% of our revenues are derived within our product businesses, and we have 3 product platforms. We have fire protection products, which is made up of our suppression, fire suppression and fire detection technologies. We have security products, which is made up of our access, intrusion and video technologies. And we have life safety, which is made up of our breathing apparatus, air purification, gas-detection technologies.

And then the Installation & Service business, when you look at that, it's about 80% of our revenues. The split of that is about 45% Installation, 55% Service. Again, by far, the world's leader in Service, with about a 15% market share. And so when you think about the market we're competing in, we're competing at about $100 billion market. We're about 11% share, so there's significant opportunity as we look forward to be able to now leverage the combined capabilities to better serve our customers and ultimately accelerate growth.

And then lastly, we have a very strong balance sheet. We have solid cash flow, a very balanced capital allocation plan, not only supporting the growth, but also returning cash to our shareholders. But when we look at that, the priority is continuing to support the growth, continuing to execute on the strategic bolt-on acquisitions, knowing that acquisitions aren't always linear and being positioned to be able to return cash to our shareholders.

The plan that we outlined back in September, which we're on track to achieve, is to be able to accelerate our revenue growth to a 4% to 5% CAGR over the next 3 years and be able to then deliver segment operating margins of 15% to 16%. And as we stated during the first quarter earnings call, we're off to a good start. We've got a strong leadership team in place. The initiatives that I've talked about are well under way and believe that even though the macro environment, I think, since we did Investor Day is probably a little bit tougher, based on what we can control internally within our business, we're well positioned to be able to continue to deliver on those commitments.

So on that, Scott, I'll turn it back to you.

Question-and-Answer Session

Unknown Analyst

Great. Thank you, George. Let's start right off with the audience response to some questions. I don't want to taint the numbers at all with my questions. And we've got 6 great questions. Well, maybe we'll do 3 now and do 3 later. But do you currently own the stock? Yes. And you're overweight? Yes. And you're equal to your benchmark, or yes, and you're underweight in your benchmark. Or 4 is no. So let's get a sense of where the audience's ownership is. Please vote will now.

[Voting]

Unknown Analyst

Okay, about 67%. Now that is amazingly consistent with what we've seen all day. Very high weighting of nos, much more so than what we saw a year ago for all the companies combined. So let's go to the next question then. What's your general bias towards the stock right now, positive, negative or neutral? Please vote.

[Voting]

Unknown Analyst

Pretty comparable ratio of positives to negatives that we've seen most of the day. And, obviously, a lot of people that don't have an opinion, which I think maybe provides a little bit of -- that clean sheet of paper that I talked about in my introductory remarks about your ability to influence people's interest in your stock here. Let's go to the next question then, please. In your opinion through the cycle, EPS growth for Tyco will be above peers, in line with peers, or below peers? Now this is through the cycle, through the cycle, please. Above peers, in line or below? Please vote now.

[Voting]

Unknown Analyst

Okay, generally positively biased, but again pretty consistent with what we've seen with a lot of the other companies.

So let's -- I don't want to spend a ton of time on this selectivity issue, but I did -- we did get a lot of calls on it, and sometimes you think you know a market well, and then something sneaks up on you, and you realize you don't know it as well as you thought you know it -- knew it. And I thought I knew about -- I thought I knew a lot about security, now I'm starting to think maybe I don't know so much. What happened or what historically happened with Tyco that competitors were able to take service aftermarket away from you? And, I guess, the context of my question -- what I struggled to understand with is that, given that you're so much bigger than anybody else's out there, how could somebody possibly come in, even as a mom-and-pop and with 0 margin expectations, even 0, given your cost advantage and scale and mostly out of this -- now maybe part of the answer is that not every geography, but how does that really happen? And what does it tell you about prior management and maybe things that were done incorrectly in the past?

George R. Oliver

Well, I think you have to think about it relative to the type of service that we perform. And so let's start with Fire. So in fire protection, you have T&M-type contracts, you have inspection, you have preventative-maintenance-type contracts. And when you look at, you have mechanical service, you have electronic service. And so what we're best-positioned to do, given the installed base that we created ourselves with our technology, is to be able to perform the service on that installed base over the life cycle. And that is biased towards the electronic installed base. On the mechanical side when there are inspections due and the like, there's certainly regional players that can go in and do an inspection and do a one-off type repair under time immaterial. And so where we're successful is being able to apply all of our capabilities to provide the full service to a particular customer, combined mechanical service as well as the electronics service, especially if we have that installed base with our technology. So that will be the Fire side, so there's always going to be some elements in Service that a regional player, because of their cost structure or because of their niche capability that they could go and perform successfully and compete. But it's where we have the broader portfolio that gives us an advantage to be positioned to better support our customers. On the security side, you would think of it as the ability to be able to install the most reliable, the most cost-efficient installed system that then has the attached monitoring. And so when you think about the most attractive segment, a service segment within Security as getting the recurring monitoring revenue. Now that, by far, no matter what market we're in across the globe, we are certainly advantaged with the scale that we have, being able to leverage our monitoring centers, our customer care centers, to be able to provide that service with minimal incremental cost with the customer base that we serve. Now when you think about beyond that, some of the ability to service larger installations that are more customized to the particular project, making sure that we are biased towards our technology, the ease of the integration of our technologies, so that when service is required, we're going to be able to provide that service much more efficiently and be able to then gain the recurring revenue that comes with the maintenance of that installation. And so those -- when we talk about project selectivity, similar to what we've done in Europe, and then we did in SimplexGrinnell, and now we're going through a similar process within our North America commercial security business, think about the cost model. It's both install and service. You incur a lot of costs in how you develop projects. And the good news is that we support about every end market. The challenge we have is that we support about every end market. And unless you're disciplined in the end markets that play to our strengths, that we could differentiate the solutions that we provide and do it in a cost-effective manner, then that ultimately is what leads to our service revenue growth, which is, when you look at the total economics, the most attractive model for us going forward. And so when we picked up the operating team in place, the management team now in place, when we picked up responsibility for the commercial security businesses, which were embedded in the ADT structure, including the residential security business, realize that the fundamentals were not where they needed to be, similar to the other businesses that we had within the new company. And so the focus on the quality of the projects and making sure that the resources that are deployed for those projects are much more strategic to the end market that we create the most value and then get the highest return through the recurring revenue.

Unknown Analyst

Okay. That's helpful. And I don't want to spend the next 20 minutes talking about selectivity, because it was the highlight of the conference call. Let's talk about stuff that maybe is more important when you think longer term. So one of the questions I had, and I thought your break-up presentation and your launch was very good and very comprehensive. But when you think about margins, I was thinking about this last night when I was thinking about questions to ask you guys. It's very rare for us to find companies that can raise margins without a great deal of restructuring, so fair amount of cost, or markets that have structurally changed where they're getting price all of a sudden, price falls basically straight to the bottom line or short-term issues that may be driving margins higher than demand spikes or such. But you're actually calling for margin expansion in a relatively benign growth environment without a huge restructuring cost attached to it. What gives you the confidence? And maybe you can give us some examples of where those costs are coming from and the confidence that you can get that type of margin expansion that -- really, that quickly and sustainably over the next few years?

George R. Oliver

So the way I'd frame that up, as you think about the businesses and the way that they're being run in ADT security and then Fire previously, there was a lot of improvement that was made in total that delivered about 200- or 300-basis-point improvement over the last 3 years. Now when we think about the new company, it really is a combination of 2 very large segments coming together that were pretty much operated separately, right? And so you had a $5.5 billion commercial Security company globally, you have about just short of $5 billion in Fire Protection. And so as we looked at the cost structure of the new company, it's about $9.5 billion. And then when you break out that cost structure, about $4 billion of that cost is what is procured or sourced. And historically, we had been procuring -- supporting the businesses with regional procurement organizations, roughly about a dozen. In the new company, as we looked at the order of magnitude of the buy being $4 billion and no different than what we've done in other large industrial companies over time, taken that buy, consolidated that buy, segmented that buy by category, put in a big strategic sourcing leader running the organization, as well as category leaders, and then deploying a strategy of make-buy strategy and having the right, what I'd say, low-cost juncture within that buy to be able to deliver significant savings. And so out of the gate, we put that -- we've been putting that structure in place over the last 9 months. We're off and running with an integrated organization, and we're seeing some real pickup here in our savings short-term. So that's a big element of the cost savings. The second is the -- in the Installation & Service business, think of it as we have a distributed cost base with about 1,000 real estate locations across the globe, of which about 600 are, what I'd call, are factoring the field, where we actually do the design work developing projects, we do the execution of those projects, we manage the service techs to be able to support the service. And historically, we've had all of the back-office support within those branches. The strategy that we had embarked on, even prior to the separation began is to -- how do we go to standard work at the branch level with what we do to develop projects, support customers and grow, and how do we standardize -- or simplify and standardize the back-office work, centralize it and leverage the scale of what we have to support the branches. So we've defined that as Branch in a Box. Now within this real estate footprint, it's really the combination of all the real estate from the ADT Commercial business coming together with the real estate that I had within Fire protection, there's a direct overlay. You're typically in the same markets, in the same cities and the same regions. And so it's twofold, not only synergizing the footprint, but then being able to take a lot of the non-value added work at the branch level, take that away from the branches, centralize it and get a lot of synergy. Now that occurs over time, because the idea is getting out of leases within the real estate leases, getting to the right footprint for the combined businesses within any city. We're working through a plan now that, that continues to accelerate over the next 3 years. Those are the 2 big elements of costs within the new company. And then the third, what I'd say is previously, the company was run, somewhat as a holding company, where we had different businesses, different business models. Now within the new Tyco, we have very similar business fundamentals, both in our product businesses, and then looking at all of our combined Installation & Service business, which then gives us the opportunity to really create an operating company. And so what we're doing is really right from the top, we brought in strong functional leaders across all of our functions and really now streamlining or transforming those functions down throughout the organization that allow us to operate much more efficiently as an enterprise. So those are the -- what I'd say are the 3 big initiatives that's going to free up the capacity, the savers what we would call it, the cost-out productivity that enables us to take about half of that, or about $50 million on an annual basis, to reinvest in R&D, to invest in the service growth and to create or expand our footprint within the high-growth markets. Then the other $50 million because the $100 million is net savings that we deploy half into growth and the other half is what positions us to be able to deliver the 80- to 100-basis-point margin expansion.

Unknown Analyst

George, when you think about your days at GE, if you came up with a plan like this, you would be pretty confident that you have the people in place and the culture in place to be able to execute. Do you have the right people in place and the culture in place at Tyco to be able to have such a really -- I mean, I'm not saying it's a complex initiative, but it's a fairly aggressive initiative, right?

George R. Oliver

What I would say is in -- if you look at -- again, I'd go back looking at the last 2 or 3 years, we've had strong operating performance in the old Tyco, and there was a lot of talent, a lot of capability along these lines within the old Tyco. What's different now is taking that to a new level. We have brought in some new, very talented function leaders to lead these functions, very strong operating leaders that ultimately are going to be positioned to execute the plan, so it's a combination of the 2. Building off of the strength that we had in the old Tyco. We've supplemented that the new leaders, new talent to make sure that we've got the right leadership in place to be able to execute the initiatives that we've outlined.

Unknown Analyst

Okay. And then the natural follow-up then is, obviously, it's a very hard for us to analyze corporate expense, because we don't get a breakdown especially with corporate expense, but it would appear at least that you would have a greater corporate expense opportunity and some low-hanging fruit there, but very hard for us to know, but when you do take -- because people allocate cost in different ways, but when we do take a look at your corporate expense versus peers, it does appear to be higher. Is that a potential bucket of an opportunity too, the next couple of years?

George R. Oliver

what I would say, in line with the transformation that I just talked about in becoming an operating company, there's a lot of work to be done from an IT standpoint. We brought in a big IT leader, John Repko to lead the IT transformation, going to an operating company to be able to integrate our capabilities and execute much more simply, right with what we do. And in line with that, we've also now have been investing in getting to a strong, functional organization. So initially, you get all those opportunity to reduce your investing back in the transformation. Now you'll start to see the savings from that in subsequent years, which then allows us to take a lot of cost out of the remaining structure going forward. And so in the initial stages here, I mean, certainly, we had targeted the 3 companies separated, we were actually at a level less than where we started at the old Tyco. So we're able to achieve that initial objective. And now going through the first year is getting the functions transformed to get to a whole new level of savings in the new structure going forward.

Unknown Analyst

Let's go to the next audience response question. Okay, in your opinion what should Tyco do with excess cash? Bolt-on M&A, larger M&A, share repo-ed dividends, debt pay down, internal investment? So let's vote on this, please.

[Voting]

Unknown Analyst

Okay, so there is -- that's pretty clear. Well, it's not totally clear. I mean, share repurchase and bolt-on M&A. Internal investment, and I think this is one of the few, especially in the last 2 days, where internal investment has been the response, so that's interesting. Okay, so let's go to the next question. This is about PE multiples and its 2013 earnings and where do you all think that this company should trade. Let's vote on this, please.

[Voting]

Unknown Analyst

Right down the middle with the rest of the companies that we cover. It's about the same. Okay, and then which is actually a takeaway in its own, right? Like when you think about we've had -- I think I probably sat in on 14 or 15 sessions here, and the responses have been amazingly consistent with only a couple of outliers, like the Ropers of the world, but that's pretty much it. Everybody else is in a -- what I would classify as a reasonably tight band around answer #3 and #4. Okay. And then let's do the last one. What do you see is the most significant investment issue for Tyco: core growth, margin performance, capital deployment or execution/strategy? I'm not sure exactly what the answer is going to be here, so let's vote.

[Voting]

Unknown Analyst

Wow, a bigger core growth number than we've seen in lot of the other companies. But growth has been emphasized, so that's interesting. So there's a lot of varying opinions there. So let's talk about a couple of things then. For one, what kind of core growth, when you say -- I mean, it's a double-edged question here. I mean, what kind of core growth do you really need to have a tailwind to your initiatives? And what kind of core growth do you think you can drive with your initiatives? And let's just say -- let's just assume, if you want to put it as a percentage of GDP or something, 1x GDP or 1.5x or whatever. Is there a comparable metric you want to talk about?

George R. Oliver

So if you think about -- again, you'd have to break it out into the segments. So if we start with Products, we believe, given what we've been able to achieve with the increased investment in R&D and the expansion of our sales and marketing that in the last 2 years, in a very low-growth environment, we've been able to deliver double-digit growth. And continuing along those lines, we'll continue very strong growth, right, and the products -- and we get good leverage on our Product growth going forward. When you look at our Installation & Service business, certainly, there is a factor that's tied to the nonresidential construction business. And we've been focused with the project selectivity, so that we're not only going to capitalize on the late-cycle recovery here with the nonresidential recovery, but at the same time, even in a low-growth mold, continue to expand our services. Because when you look at that model, that's ultimately where we get the better -- the significant returns. And so that growth rate with the strategy that I outlined will get to this year, last year, we're 2% or 3%. This year, we're north of 3%, 3% to 4% and we get to 4% to 5% in the next year or 2. And that has, obviously, significant return associated with that. And so the question mark is going to be the Installation piece, which is about -- Installation is about 35% of our revenues today. And so as the non-residential recovery happens, the lift that we get with that business going forward. And then with that, you get a subsequent bump on the Service that you'd get from that installed base going forward. And so we did not build in any significant recovery in the plan that we outlined back at our Investor Day in September. We had not built in any significant recovery of the nonresidential business in the plan that we outlined back then. And so with any -- we don't get as much leverage in the Installation & Service business, because of the incremental cost that we incur to perform that work. But that said, we still get leverage of the 15% to 20%, which then -- incremental margins that ultimately will contribute to the growth rate.

Unknown Analyst

Sure. Now that makes sense. So I'd hate to hog up the questions here? How about from the audience, any questions? Any questions? Anything? So from the back?

Unknown Analyst

It's a question on capital structure. When I look at your balance sheet, the way I compare your debt to EBITDA versus other companies that I cover, you're at somewhere north of 0.5 turn and south of 1 turn. But I heard you say that you're at 2 turns when you capitalize leases and a do other things like that. I don't do that for any of my other companies. What makes your business model different that we should do that for you? And if not, then what would be an appropriate capital structure?

George R. Oliver

Well, what you mean -- the way the debt rating agencies look at it, they factor in those leases into the structure. And that gets us to about 2x. And as we think about it, within the rating that we're in today, is from a competitive standpoint very important with the companies that we compete with to do the large installations and more important, the long-term service commitments that we make. And so as we think about it, we think about that's in line with where we need to be. And that going forward as we continue to perform and accelerate, then we'll have more capacity going forward. But we've -- that's the way the debt rating agencies look at it, and certainly, in line with that, that's where we want to be from a ratings standpoint.

Antonella Franzen

The only thing that I would add to that, the reason, maybe it doesn't come up with our peers so much is you've got to keep in mind, George mentioned we have these thousand factories in the field, off of 600 of which are branches. Those are all lease facilities. So due to the service and installation nature of business, we probably have to carry a lot more leases than our typical peers would.

Unknown Analyst

John's right, though. We don't typically run into that with other companies.

George R. Oliver

Not significant. I mean, it's a significant -- when we think about the structure we have, which is very distributive, it is a significant structure.

Unknown Analyst

Next question?

Unknown Analyst

Just to clarify real quick guys. On the operating margin expansion through 2015, you talked a lot about it, what's going to drive it, the 270 to 300 basis points or so. Just to be clear, do you need the 4% to 5% volume growth that you're looking for on an annual basis through 2015 to achieve all of that kind of 300 basis points of margin expansion? And then my second question is just on the bolt-on M&A stuff, the tradition at the consolidated Tyco current Security didn't get a lot of M&A dollars, what specifically can you buy there? I mean, obviously, I'm not looking for specific names, but where are your opportunities by geography and product?

George R. Oliver

Okay, the first...

Antonella Franzen

If the growth needed to drive the...

George R. Oliver

On the margin expansion, so when you think about the margin expansion, we have line of sight into our current cost structure and having outlined the initiatives with sourcing, with Branch in a Box in our distributed Installation & Service business and with the transformation of our functions in creating an operating company, we have line of sight to be able to deliver on the margin expansion without the revenue growth, okay? So the margin expansion is given the cost structure, think about it as 2 roughly $5 billion companies coming together that has a pretty direct overlay from a cost structure standpoint. Our ability to be able to synergize that cost structure to be able to deliver that margin expansion. And then some of that doesn't happen overnight. That's why on an annual basis, we get the 80 to 100 basis points on an annual basis but can get to that level savings based on we have line of sight, too. The M&A is right down the middle. I want to make sure that we're not doing M&A that's outside the zone. As the industry leader, we have line of sight to what is happening -- we're more than double or almost double the nearest competitor. We have a nice mix of business, both products globally and Installation & Services globally. So we have a pretty good idea of what's happening in the industry. When we look at our product businesses, the acquisitions that we've done have been new technology and/or product extensions that have absolutely accelerated our ability to not only deliver organic growth but then complement that with additional growth, right? And you've seen that performance in the product businesses with the acquisitions that we've done over the last 2 years. On the Service side, it's more regional. So getting the footprint and getting the base or the footprint that's needed to be positioned in a high-growth market or a market that we're not serving today to have the depth and expertise to be able to build the base and generate the Service growth. And so you'll typically -- and then the third is the emerging markets. We have been -- similar to other companies, we started from behind a few years back. We've been making a lot of organic investments into the emerging markets. But we also learned that, that takes time because a lot of what we do is through the depth of people that we have in place to perform, to bring the expertise into the market. And so we learned that by complementing the organic growth with strategic bolt-ons that gives us that footprint and that local capability and expertise, the 2 combined are very powerful. Taking the expertise that we have across the enterprise, bringing it to a local acquisition that give -- is a huge accelerator to our ability to be able to capitalize on that high-growth market. And so the focus first is technology, service expansion and extending our footprint to be able to capitalize on the high-growth markets. And every one of these acquisitions that we've done and that are in the pipeline that we're doing are absolutely right down the middle and complementing the strategy.

Unknown Analyst

I want to finish up with one last question, which I think is important. I mean, my view is that there is pent-up demand out there and Security is -- probably Fire as well, that's not a market we see a lot of data on. I mentioned this in the prior session, pent-up demand is a lousy investment thesis, because this stuff can linger forever, but are there catalysts out there that you see that are changing and meaningful? And I guess, catalyst meeting at energy efficiency or building automation and integrating things, and then, of course, maybe that all comes back to energy efficiency as well. But I know that Schneider has been out there selling that theme and apparently being reasonably successful on. Is that something that's real other than a marketing ploy?

George R. Oliver

I would say in our space, when you think about how -- what we do fits into the overall building, it's high priority, and typically, there's lots of involvement in how that's specced, right, right from the top. And so as the industry leader, whether we provide an integrated solution or whether we take our stuff and integrate it with others, we're not kept out of that opportunity as a result because of the strength of what we do. What I would tell you is that in the Fire and Security space that with technology, with software that there is a trend and being able to -- the more that you can create a single architecture with software to be able to take all of the capabilities, whether it be electronic fire, whether it be interactive intrusion, access control video, a system that can actually integrate simply, right, into a building? Where you can plug-and-play and create a unique solution for the user depending on what their needs are is a huge advantage. Now historically, that's not been the case, right, where it has been strong products within each of the spaces. But the ability to be able to integrate those software to create something unique has been more difficult. And so as a industry leader with the combined capabilities that we have now within the new Tyco, we are uniquely positioned to be able to achieve that. And then the value creation beyond the installation in service is software. It is being able to provide analytics, being able to provide data, whatever the customer desires to ultimately fulfill their life safety needs. And so I think for us, as the industry leader in the position that we're in, we don't necessarily see the trend in integrating the building. We do see the ability to be able to provide very robust life safety solutions with the combination of Fire and Security and making it easy for the customer to actually utilize.

Unknown Analyst

Okay. Fair enough. That's a great place stop. So thank you, George and Antonella, and thank you, everybody for your questions and interest.

George R. Oliver

Thanks, Scott.

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Source: Tyco International Ltd. Presents at Barclays Industrial Select Conference, Feb-21-2013 02:10 PM
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