Tyco International Management Discusses Q1 2014 Results - Earnings Call Transcript

Jan.31.14 | About: Tyco International (TYC)

Tyco International (NYSE:TYC)

Q1 2014 Earnings Call

January 31, 2014 8:00 am ET

Executives

Antonella Franzen

George R. Oliver - Chief Executive Officer and Director

Arun Nayar - Chief Financial Officer and Executive Vice President

Analysts

Jeffrey T. Sprague - Vertical Research Partners, LLC

Nigel Coe - Morgan Stanley, Research Division

Deane M. Dray - Citigroup Inc, Research Division

Scott R. Davis - Barclays Capital, Research Division

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

Gautam Khanna - Cowen and Company, LLC, Research Division

Julian Mitchell - Crédit Suisse AG, Research Division

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

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

Operator

Welcome to the Tyco First Quarter Earnings Conference Call. [Operator Instructions] Today's call is being recorded. If you have any objections, please disconnect at this time.

I will now turn the call over to Antonella Franzen, Vice President of Investor Relations. You may begin.

Antonella Franzen

Good morning, and thank you for joining our conference call to discuss Tyco's first quarter results for fiscal year 2014 and the press release issued earlier this morning. With me today are Tyco's Chief Executive Officer, George Oliver; and our Chief Financial Officer, Arun Nayar.

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

In addition, we will use certain non-GAAP measures in our discussions, and we ask that you read through the sections of our press release that address the use of these items. The press release issued this morning and all related tables, as well as the conference call slides, which George and Arun will refer to, can be found on the Investor Relations portion of our website at tyco.com. Please also note that we will be filing our quarterly SEC Form 10-Q later today.

In discussing our segment operations, when we refer to changes in backlog and order activity, these figures exclude the impact of foreign currency. Additionally, references to operating margins during the call exclude special items. And this metric is a non-GAAP measure and is reconciled in the schedule attached to our press release.

Now let me quickly recap this quarter's results. Revenue in the quarter grew 2% to $2.65 billion, with organic revenue growth of 1.5%. A 2% benefit from acquisitions was mostly offset by the impact of divestitures and changes in foreign currency exchange rates.

Earnings per share from continuing operations attributable to Tyco common shareholders was $0.57 and included a net benefit of $0.10 related to special items. These special items related primarily to the favorable settlement of legacy matters, partially offset by separation charges.

Earnings per share from continuing operations before special items were $0.47.

Now let me turn the call over to George.

George R. Oliver

Thanks, Antonella, and good morning, everyone. We're off to a great start in 2014, as we reap the benefits of the many changes we have made over the last 18 months to transform into an integrated fire and security operating company. This transformation, along with the execution of our growth strategy, position us to accelerate top line growth, expand operating margins and deliver strong earnings growth in 2014. I am very pleased that our first quarter results were driven by strong operating margin performance across all 3 segments.

Growth in our large and stable base of recurring and service revenue, which represented about 45% of our revenue in the quarter, coupled with good operating leverage in our product businesses helped drive the operating performance this quarter.

Additionally, we continued to benefit from our improved execution in installation and productivity initiatives. Together, these items drove an 80-basis-point expansion in segment operating margin and 15% EPS growth year-over-year.

Even more importantly, we exited the quarter feeling encouraged by both our performance and our order activity, which reflects the progress we are making on our growth initiatives.

To quickly recap order activity, which you can see on Slide 5, year-over-year orders improved 2% in the first quarter of fiscal 2013, followed by 3% growth in both the second and third quarters, increasing to 4.5% in the fourth quarter of last year. And now, in the first quarter of fiscal 2014, orders grew almost 7% year-over-year. Additionally, we saw a nice increase in backlog both sequentially and year-over-year.

Now let me give you a quick overview of our results for each of our businesses. I am very pleased with our results in North America Install & Services. We've seen a significant turnaround in the Security operations, which contributed to the strong operating performance this quarter. The improved processes we have implemented have driven operational efficiencies, not only in the cost structure, but in how we operate the business every day. In addition to being focused on the right projects, we have compressed the cycle time for an order to convert to revenue in Security as installations are being executed more efficiently and profitably. I am very proud of the progress made by both our SimplexGrinnell fire and Tyco Integrated Security teams, which have embraced a mindset of continuous operational improvement.

In Rest of World Installation & Services, strong growth in Asia and our other growth markets was partially offset by macro pressure in Australia. In Europe, the business environment has stabilized, and we expect modest growth from here. Overall, we continue to see good service growth, and Installation has turned positive for the first time since the third quarter of 2012.

Operationally, the teams around the globe are focused on simplifying our structure and increasing productivity. In fact, by leveraging our combined capabilities, we had a few nice wins in the quarter across some key verticals, including hospitality in Macau and industrial across Asia. We are seeing some good momentum and, given order activity in the current backlog, we expect to see revenue growth in Rest of World Install & Services accelerate during the year.

Moving to Global Products. We continue to deliver on our growth strategy by investing in new product introductions and acquisitions. We are seeing noticeable traction from these efforts, as revenue growth continues to outpace the market.

As you know, in the fiscal fourth quarter, we acquired Exacq Technologies, a leader in video management solutions offering highly scalable intuitive video solutions supported by a strong brand in North America. We are very pleased that in a short period of time, Exacq has enhanced our presence in the network video security market, and we have begun to leverage our global footprint to expand Exacq's penetration outside of North America.

This acquisition, along with the additional investments we are making in technology, position us well to continuously provide new and/or enhanced products to our customers.

During the course of the year, we expect to continue supplementing organic growth across the businesses with strategic bolt-on acquisitions. As we discussed previously, in the first quarter, we closed the acquisition of Westfire, a design, installation and services business in the fire protection industry in the U.S. and Latin America. The results of this acquisition are reflected in our North America and Rest of World Installation & Services segments. As we look forward, our fragmented industry provides us with a robust pipeline of acquisition opportunities focused on our 4 key areas of technology, service growth, geographic footprint and expansion of our product portfolio.

Overall, we maintain a balanced approach to capital allocation focused on creating long-term shareholder value. We continue to return excess capital to shareholders. And during the quarter, we repurchased 6.6 million shares for $250 million.

Now let me turn it over to Arun to go through the details of our performance.

Arun Nayar

Thank you, George, and good morning, everyone. You can follow my comments on our financial performance starting with Slide 6. Let me start with an overview of our results for the first quarter.

Revenue of $2.65 billion grew 2% year-over-year. Organic revenue grew 1.5%, with 2% growth in service and 2% growth in products. Organically, installation revenue was flat year-over-year as growth in Asia and our other growth markets offset the decline in North America, which was driven by project selectivity and weakness in Australia.

Acquisition growth of 2% was mostly offset by the impact of divestitures and changes in foreign currency exchange rates.

Before special items, segment operating income increased 9% to $352 million and the operating margin improved 80 basis points year-over-year to 13.3%. Higher service and product revenues improved installation performance and the benefits from sourcing, productivity and restructuring initiatives once again led the operating margin improvement. Overall, operations added $0.06 of earnings year-over-year, excluding a $0.01 headwind from changes in foreign currency. Total earnings per share before special items increased 15%.

Orders in the quarter grew almost 7% year-over-year, with 7.5% growth in products and 4% growth in service. Installation orders increased 10%, our second consecutive quarter of install order growth. Double-digit order growth in Asia and a solid 6% growth in North America drove the 10% growth in installations. It is important to keep in mind that order growth, particularly in our Installation business, is lumpy and can be impacted by the timing of large projects. Acquisitions contributed about 2.5 percentage points of overall order growth in the first quarter. Backlog of $5.4 billion increased 6% year-over-year and 1% on a quarter sequential basis.

Now let's get into the details of each of the segments. Starting first with North America Installation & Services on Slide 7. Revenue in the quarter of $957 million was down 2% on a reported basis, driven by the divestiture of our guarding business. On an organic basis, revenue was flat year-over-year as 2% growth in service was offset by a 3% decline in installation revenue. This expected decline is the result of the remaining flow-through of project selectivity in security that we implemented last year. Our revenue in the quarter was better than expected, driven by an acceleration in fixed-price service and a few install orders which turned within the quarter. Before special items, operating income in the quarter was $129 million and the operating margin of 13.5% increased 120 basis points year-over-year. A greater contribution from higher-margin service revenue improved installation margins, particularly in security, as well as productivity savings drove the operating margin improvement. Overall, orders grew 4% year-over-year in North America Installation & Services, with service growth of 2.5% and installation growth of 6%. Total backlog of $2.4 billion was flat year-over-year.

As George mentioned, our security business is now converting orders to revenue more efficiently, which resulted in a 1% decline in backlog on a quarter sequential basis. The margin related to the installation backlog in our commercial security business continues to be strong and was up 130 basis points year-over-year, reflecting the benefits of project selectivity.

Turning to Slide 8. Rest of World Installation & Services revenue of $1.1 billion increased 3% year-over-year. Service revenue grew 2% and installation revenue grew 3% for total organic growth of 2% in the quarter. A 3.5% benefit from acquisitions was mostly offset by the impact of divestitures and changes in foreign currency exchange rates.

Before special items, operating income was $133 million and the operating margin was 11.8%. The 70-basis-point improvement in operating margin was driven by increased revenue and the benefits of productivity and restructuring initiatives.

We continue to see positive momentum in order activity. In the first quarter, overall orders increased 8% year-over-year, of which half was attributable to acquisitions. Service orders increased 5% and installation orders increased 12%. Strong double-digit growth in Asia, as well as our other growth markets, drove the 12% increase in installation orders. Backlog of $2.7 billion increased 11% year-over-year and 3% on a quarter sequential basis, supporting our forecasted growth acceleration in the second half of the year.

Turning to Global Products on Slide 9. Revenue grew 6% in the quarter to $565 million. Organic revenue growth of 2% was impacted by approximately 2 percentage points due to the delayed implementation of new standards by the National Fire Protection Association related to self-contained breathing apparatuses, including our new Scott Air-Pak X3.

In late November, respirator manufacturers, including our Scott Safety business, received notification from federal regulators that the agency responsible for testing had made errors in the process. As such, the certification testing needs to be re-performed, resulting in an industry-wide delay. We have designed our new-generation Air-Pak X3 to meet the federal health and safety standards. Our internal and external testing performed ahead of submissions provides us with a high degree of confidence that our products will pass the revised tests. Despite the delay in the implementation of the new standards, we continue to see strong demand for the Air-Pak X3. We are currently building inventory to ensure we are ready to ship these new products once the standards have been implemented, which is now expected to be in early April. As such, we do not expect to begin shipments of our new products until our fiscal third quarter.

Turning back to the Global Products segment results. Operating income before special items was $90 million and the operating margin was 15.9%. The 40-basis-point expansion in operating margin includes a 30-basis-point headwind from noncash purchase accounting related to the acquisition of Exacq. Product orders increased 7.5% year-over-year, of which about 1/2 was organic and 1/2 was attributable to the acquisition of Exacq.

Now let me touch on a few other items on Slide 10. First, corporate expense before special items was $55 million for the quarter. We expect corporate expense in the second quarter to be at a similar level.

Next, our effective tax rate before the impact of special items was 17.7% for the quarter. We expect the effective tax rate for the second quarter to be approximately 18%. Additionally, we exited the quarter with a diluted share count of 471 million and we expect our weighted average share count for the second quarter to be 470 million.

Lastly, as I noted on last quarter's call, we expect to increase our debt by $500 million in 2014. During the quarter, we increased our debt by $160 million and plan to issue additional debt later in the year.

Now, let me turn things back over to George.

George R. Oliver

Thanks, Arun. Let's turn now to our earnings guidance for the second quarter, starting with the top line.

Given recent volatility in exchange rates, we expect about a $60 million year-over-year headwind related to changes in foreign currency. Additionally, the benefit from acquisitions is expected to be partly offset by the impact of divestitures. Taking these factors into account, we expect revenue in the second quarter to be very similar to last year at $2.6 billion, with organic revenue growth of 1%. We expect continued strong operational execution resulting in a segment operating margin before special items of approximately 13%. This represents about a 70-basis-point increase year-over-year.

From a segment perspective, starting with North America Installation & Services, we see positive growth in service revenue of about 2%, offset by a revenue decline in systems installation due to project selectivity. Overall, organic revenue is expected to be flat year-over-year.

We expect to see continued strong operating margin performance as we reap the benefits of project selectivity, restructuring and productivity initiatives. Year-over-year, we expect the operating margin to improve 150 to 180 basis points.

Looking to Rest of World Installation & Services, we expect organic revenue growth to accelerate to 3% to 4%, given current order rates and backlog. Additionally, we expect continued margin expansion on a year-over-year basis in the range of 50 to 80 basis points.

Moving to Global Products. The delay of the 2013 NFPA standards implementation to April is expected to have a timing impact to both revenue and operating leverage. Organic growth in fire protection products and security products is expected to be fully offset by a decline in life safety.

From an operating margin perspective, we expect significant deleveraging in life safety, which will result in an overall operating margin of 15.5% for Global Products in the second quarter, including a 30-basis-point headwind related to noncash purchase accounting.

As Arun mentioned, we are building inventory for our new Air-Paks and expect to start shipping in the third quarter. The net impact is about a $0.02 shift of earnings from the fiscal second quarter to the fiscal third quarter, assuming the April approval date. Now it's important to keep in mind that this is merely timing. This has no impact on our full year guidance for Global Products, which remains at mid-single-digit organic revenue growth, with an operating margin of 18.5% to 18.8%.

Taking all of these assumptions into account, along with the below-the-line items Arun mentioned earlier, we expect earnings per share before special items in the second quarter to be in the range of $0.44 to $0.46 compared to $0.42 in the prior year.

Thanks for joining us on the conference call this morning. And with that, operator, please open the line for questions.

Question-and-Answer Session

Operator

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

Jeffrey T. Sprague - Vertical Research Partners, LLC

George, could you just speak, just jumping off the guide a little bit, why the margins wouldn't just be kind of improving sequentially in the North American business overall given kind of what's coming through in the backlog?

George R. Oliver

Yes, when you look at -- I mean, it's important that we look at the 2-year period here since separation. We look at what happened last year. We had high backlog going into the first year, and we kept revenue pretty high in the first half of last year. And as we were driving, which was a lower-margin project that we're executing on, and then during the course of the year, we had driven a lot of improvements and started to pick up our margin rate during the year as the revenue was declining in the second half and which will continue to decline in the first half of this year. When you look at sequentially where we will be up over 150 basis points, about 150, 180 basis points, it really is now that the compare that we have with the progress that we're making last year as we're executing on the plan. Now when you look at the progress that the team has made within our commercial security business, it's phenomenal and the work that they've done to restructure the business, realign the business into regions that are closer to our customers and we're beginning to see that now benefit not only our order rates, but our continued execution of projects.

Arun Nayar

I think the other thing, Jeff, is the retail. Obviously, Q1 is -- the retail numbers are a much bigger component of North America than in Q2, and that's the higher-margin business. It's the seasonal shift that we see between Q1 and Q2 due to that.

Jeffrey T. Sprague - Vertical Research Partners, LLC

Right. And can you address what's going on in price overall, but in particular, service price? And what, if any, role that's playing in the margin improvement that we're seeing?

George R. Oliver

When we look at price, I mean, when you look at the overall company, you could look at the 3 segments, we continue to get very good price in our products business, which is tied to the investments we've been making with the new products that we've been introducing. So we continue to get nice price pickup there. When you look at our Installation & Services business, now Installation, when you look at Installation, we talk about margin in backlog. Our margin backlog in the North America segment was up about 130 basis points relative to our commercial security business. Now that is how we booked the project and that includes price. But then, Jeff, what we're doing is, as we're driving our Tyco business system and driving speed in how we're operating in driving process improvement, we're now seeing also improved margins come through on the execution of those projects. And so, when we talk about price in installation, it's really built in, in how we spec a project. And then when you look at services on the recurring revenue, we have price built-in escalations within our service agreements. And so, no matter where you go across the globe, we make sure that we're escalating price in line with the markets that we're competing in. And that, with the productivity that we're driving, again, with our Tyco business system, that again is positioning us to be able to continue to improve service margins also.

Jeffrey T. Sprague - Vertical Research Partners, LLC

And then finally for me and I'll move on. A lot of speculation out there about ADT CAPS. I don't know if you want to address that directly. But what is your view on kind of core versus noncore assets in the portfolio and what other kind of fine-tuning of the portfolio might be in order?

George R. Oliver

I would start, Jeff, by saying that the management team, we're totally focused every day on how we're creating the maximum shareholder value. And with that, we're continuously assessing our overall portfolio to make sure that we have the right mix of businesses, the right end markets that we're serving that positions us to be able to achieve our long-term strategy and deliver on the commitment to long-term shareholder value.

Now that being said, we don't comment on any speculation in the market. But certainly, you can -- I can assure you that we're always focused on making sure that we've got the right portfolio that's going to be positioned to not only accelerate growth, but continue to deliver increased margins and increased EPS going forward.

Operator

The next question is from Nigel Coe with Morgan Stanley.

Nigel Coe - Morgan Stanley, Research Division

So just coming back to the 2Q guide. Some companies have talked about weather as a factor. And I'm wondering, first of all, are you seeing any impacts in certain areas of the U.S. from the cold weather? And did that have an influence at all on your F Q1 guidance?

George R. Oliver

I'd start, Nigel, by saying that this quarter, typically, the second quarter is our seasonality low given the activity because of the weather that we see across North America. I think we have seen a little bit of tougher weather this year. But I can assure you is we're executing on our growth plans in how we're executing not only in the growth, but also on the margins, that we believe that we're positioned to be able to continue to execute and be able to deliver on the guidance, as well as the guidance for the total year. So although I think we've had some disruption, I don't think it's anything significantly unusual from what we've seen in the past and we're going to continue to execute.

Nigel Coe - Morgan Stanley, Research Division

Okay, okay, that's great. And then switching to North America margins, obviously, very, very strong year-over-year performance. How much influence is the backlog selectivity having on the margins? Can you delineate what impact that had on 1Q performance?

George R. Oliver

So let me start, Nigel. When you look at what we've done with our commercial security business since we launched the new company, there's been a phenomenal turnaround. We put new leadership in place. We've restructured the business. We're closer to our customers. And as a result, we're driving speed with our business processes in how we're driving growth and then how we're executing projects. And all of this is being supported by the Tyco business system that we're developing, which is really focused on standardizing, simplifying and then automating these processes, which is supporting the speed to market. So it's hard to say that it's purely just the project selectivity, which is how we're now focused in the market to make sure we're going after the right end markets that play to our strengths that we can execute successfully. And a lot of the improvement is not only that focus, but now the execution of those projects with the depth and expertise that we have within the business supported by the restructuring that has been completed. That, when I think about turnarounds in businesses, I've done a lot of turnarounds and I can tell you that the work that's been done in North America, the progress that has been made and the performance that's being delivered is pretty impressive. And I think, that, combined with strong performance in our SimplexGrinnell business, is what has led to the strong performance in the first quarter.

Nigel Coe - Morgan Stanley, Research Division

Okay. And then just a quick one, George. You mentioned $60 million of impact from FX. Just want to clarify, that's the 2Q, not the full year?

George R. Oliver

Yes. So when you look at the FX impact for the total year from when we originally provided the guidance, we're now seeing $60 million in Q2. It's about $100 million for the total year. Now that being said, with that impact on the top line, there's about $0.03 of pressure on the EPS. Now given our strong start for the year and the continued progress we're making implementing the Tyco business system and driving operational improvements, that we're highly confident that we'll be able to deliver on the previous guidance.

Operator

The next question is from Deane Dray with Citi Research.

Deane M. Dray - Citigroup Inc, Research Division

Just a follow-up on that -- on the guidance point and maybe I missed this, but can you comment on the annual guidance? It sounds like there is some additional FX pressure, but are you reaffirming today?

George R. Oliver

Yes. The changes, as we talked about, the changes on the top line, we've seen about $100 million more than what we originally guided, which is about $30 million for the year. So that would impact us by about $100 million to the previous guidance. Now that being said, we've said that with the operational improvements that we're executing on, we'd be positioned to be able to offset the $0.03 of pressure that we'd have on EPS because of that FX impact.

Arun Nayar

Yes, just to kind of reaffirm of this, Dean. When we guided for the full year, we guided a top line of $10.9 billion to $11.1 billion, and that's still our range of the guidance number for the top line. And we guided to $2.05 to $2.15 for the EPS, and that's still our guidance today.

Deane M. Dray - Citigroup Inc, Research Division

Excellent. And then in the release, it was interesting that you specifically called out some of the early signs of an improvement in nonres, and we've all been looking for this. Maybe you talk about what sort of early indicators you're seeing, code activity and how you expect to see this play out?

George R. Oliver

What I'd say is, I think it's important to baseline to last year. So last year, our installation businesses were down about 4%. And so as we laid out the plan for this year, which took into account about a 1% improvement in the overall growth within North America, would be our -- or actually that was across the globe, that we'd be positioned to deliver install revenue that would be up 1%. So it's a pretty good shift from what we saw last year to this year.

Now that being said, what I would say is in North America, we are definitely seeing some recovery taking place in the commercial and institutional segments, and we're seeing the activity on the front end of the businesses. Now recognize we have different parts of the cycle that we compete in, so our fire business is a little bit earlier cycle. The security business is a little bit later cycle. But we're seeing that activity. And I think, that combined with the strong execution of our growth initiatives has, really, the combination of that has enabled us to be able to deliver the orders that we saw in the first quarter.

What I'd say is in Europe, we're seeing stability, and I would say that our relative performance in Europe is very strong relative to what has taken place there over the last couple of years. And I think that's attributed to the restructuring and repositioning that we completed there over the last 4 or 5 years.

Australia for us, it seems to be a little bit softer, and that's -- we have a big vertical in mining, as well as the commercial industry within Australia seems to still be a little bit soft. But our team there continues to execute very well.

Growth markets, when we look at our growth markets, as you can see, we're starting from a smaller position within the growth markets, but we're executing very well. We're making the investments that are required, we're beginning to accelerate and our growth rates continue to be strong double digits. And so, what I see is, based on the guidance we gave, kind of what we're seeing play out here in the first quarter and continuing in the second quarter, we have a high degree of confidence that we'll be able to deliver on the guidance that we provided.

Operator

The next question is from Scott Davis with Barclays.

Scott R. Davis - Barclays Capital, Research Division

I know it's going to be hard to answer this specifically, but North American Install, down about 3% for 1Q. I mean, what do we see the trajectory here? I mean, you give some 2Q guidance. Do we start to see a pretty substantial pickup in 3Q and 4Q? How should we think about that, I guess, is my question?

George R. Oliver

So when we looked at the total year, Scott, and how this is going to play out with the pieces, I would start with our Fire Protection business there, continues to perform very well, and we're seeing, certainly, the pickup of the market on the front end of that business. Within Security Products, we are still in the -- we're in the latter stages of the project selectivity and the type of end markets and customers that we ultimately are getting out of. We're seeing nice pickup in our core business, with the investments we're making not only in the front end within our sales team, but the technologies that we're developing to bring to market to be very competitive with the solutions that we serve our customers with. So it's really a mix. So when you see that play out during the course of the year, we still see, as we've said, the second quarter overall, we'd be down total about 2% in revenue, service would continue to grow and install being down 3%. And then you look at -- when you look at the rest of the year then, we start to then be somewhat -- we pick up in the third and fourth quarter, so that we'll be positioned to deliver relatively flat growth for the total year, which was our guidance. And so, what I would say is that we do feel good about the activity, the progress that the teams have made, the restructuring that has been completed, and I think we'll be positioned well from that baseline to continue to accelerate going forward.

Scott R. Davis - Barclays Capital, Research Division

Okay. That makes sense. And, guys, I know there's been a lot of chatter in the home automation market. There's -- and you did the deal on video solutions. That seems to be a clear trend that's going on out there. But what's going to happen in building automation? Are we going to see -- I mean, at least your vision at least, are we going to see a comparable gravitation of kind of merging between consumer electronics and the needs of the building? I mean, how do you guys think about that and how do you think you're positioned for that?

George R. Oliver

What I would say is when we look at our fire and security business and how critical that is to the building system, it's important that, as the fire and security provider, that all of the technology that we bring to the building then is enabled to be able to connect and be able to deliver the most robust life-safety solution to the customers that we serve.

Now that being said, as things do converge, I can assure you that not only are we maintaining our strong technology position in every one of our product businesses, but we're also developing a platform for ease of integration of all our capabilities that will truly differentiate what we do and how we bring our solutions to market, especially as we focus on our direct channel. And so, we fully understand the trend of technology and we're developing the platforms and making sure that we maintain the leadership position that we have in our products that will enable us to be able to play in the space and play very successfully.

Operator

The next question is from Steven Winoker with Sanford Bernstein.

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

Could you just maybe give us a little bit of an idea, as you head into that second half of the year and installation picks up, to the extent that the declining installation maybe has been a little bit of tailwind in the margin front, what kind of mix impact we might think about as that starts to grow? Is it significant for the company or not really because you're offsetting elsewhere?

George R. Oliver

I mean, when you look at our mix across the globe, I mean, our -- the plan that we had outlined in driving the $150 million of operational improvements every year and then that being able to improve our overall margin rate 80 to 100 basis points, all of the elements that are behind that, whether it be our strategic sourcing and the leverage we're getting on our buy, that continues to go very well. The work that we're doing with our Tyco business system and simplifying our business processes and executing on a reduced footprint in the field, being able to centralize our shared services, all of that. And then when we look at how we're building leadership and functional excellence across every one of our functions, which is enabling the Tyco business system in supporting the overall company improvement. When you look at the benefits that each one of those initiatives deliver, it's across the board. So it's in not only cost of goods, but it it's in overhead, it's in reduction of real estate, all of the above. So we're very confident that with all of the improvements that we're driving, that as we pick up on revenue, we'll be able to still continue to drive strong improvement in operating margins.

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

Excellent. And then another just -- maybe it's a follow-up to that, I noticed again the restructuring charges are maybe naturally low, but certainly come down in this quarter, this last quarter. Does that signal anything about that kind of activity for the company? Is there just more of a timing question, you sort of expect there to be more activity as we go through the year to support your prior statement also?

George R. Oliver

If anything, Steve, we're accelerating. And so, I like to leave you with a thought that as every quarter that goes by, we're accelerating activity around really driving functional excellence, driving the Branch in a Box concept with our Tyco business system. So we're standardizing, simplifying and automating all of our key business processes, which is driving speed in how we can grow and serve our customers and is driving simplicity so that we can take that resource and reinvest. And so, as we're going through the course of the year, this is purely timing. That, with the benefits that we see ahead of the projects that we're executing on, it will require this amount of restructuring.

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

And maybe lastly, just a follow-up to a lot of the previous discussion on growth. The quality of the order rate intake that you're seeing, which is nice to see, do you -- does it give you high level of confidence that this is -- looks like it's something that might be sustainable at this point?

George R. Oliver

Absolutely. I mean, when you look at the orders and where -- we look at backlog in orders. I mean, margin in backlog, and you can see the trends. Right? We've seen as a result of project selectivity, margins in backlog like, for instance, in North America up 130 basis points. And then we're also, as a result of all of the improvements that we're making across the business, we're executing even better than what was planned within the order. So what I would say is that we'll be very well positioned to be able to continue to execute and continue to expand the margins on the type of projects that we're taking on in this order book.

Operator

The next question is from Gautam Khanna with Cowen.

Gautam Khanna - Cowen and Company, LLC, Research Division

Just wanted to follow up. You mentioned a shortening of your North American installations orders-to-sales-conversion timeline. I just wondered, what -- where is that really changing? Why is it changing? And what, if anything, do you -- what implications does it have for staffing, margins and the like?

George R. Oliver

So I think it's important to understand what the structure was before, the structure that we've implemented now as the new Tyco, and then all of the operational improvements that's been done to position us to be able to do this. So before, it was one big centralized organization, operated as such within the old structure in the old Tyco. As we took on the business, we not only restructured the business similar to what we had within Fire Protection, but to a regional structure, with regional leadership and making sure that we had common processes to support those regions in how they support their customers. And so, with all of that improvement based on the improvement in process, being close to our customers, now we've created increased speed in how we're taking orders and now converting those orders to completed projects as well as to service revenue. And so, I feel great about the progress that has been done. It's going to be a competitive advantage with how we operate and continue to grow in the space and I think it is reflective of the leadership and all of the process improvement that's been had here over the first year of separation.

Gautam Khanna - Cowen and Company, LLC, Research Division

Is it fair to say it's more a function of your approach to the market as opposed to customers kind of changing the way they're buying products or the timelines in which they want them delivered? You're able to execute more timely, is that what you're saying?

George R. Oliver

Well, I would say the market, customers always are demanding more. And when they want a project, there's a higher demand. And what I would say is that within that, we're going to be very well positioned with the speed that we're developing in being able to fulfill that demand. And so it does competitively help us. And then from a cost standpoint, it also then makes us more efficient with how we're executing on those projects, which leads to the continued margin expansion of how we're executing.

Gautam Khanna - Cowen and Company, LLC, Research Division

Okay. And at Global Products, you mentioned the certification delays. So should we expect in the second quarter to see the backlog of products pick up pretty substantially or the book-to-bill? And if you can comment how orders have trended given this delay so far in January? Are people holding back on orders that so that we may not get -- just, if you could comment on that.

George R. Oliver

Sure. Let me start by just talking about the product, because we go every few years, there's a new NFPA product, the work that we've done in Scott Safety has positioned us with an awesome product that's going to market, that we have every bit of confidence that it meets the standard. That all being said, so we're seeing very nice demand in spite of the product not being in the market today. And so, when you see the impact that it had on our product business, it was about 2 percentage points on growth in the second quarter. It's going to be 4 percentage points in the second quarter. Now that all being said, the order rates, even without having the product in the market, are in line with what we historically would have seen. And our position, we continue to expand our position in the North America fire services with the products that we provide from Scott. And so, when you look at what's going to happen here during the course of the year, we'll build up I think it's roughly about a $60 million backlog on the demand for this product and then we will be well positioned to be able to deliver that product in the second half of the year. And so, when you look at the overall product performance, we'll still be positioned to deliver strong mid-single-digit organic growth within the segment. That will be complemented by the strategic acquisitions we've made. And then from a margin standpoint, given the shift of this product to the second half, we'll be well positioned to be able to deliver on the 18.5 to 18.8 percentage segment operating income.

Operator

The next question is from Julian Mitchell with Crédit Suisse.

Julian Mitchell - Crédit Suisse AG, Research Division

I just wanted to follow up on the trends you're seeing in Rest of World Installation & Service. You had about, yes, 4% organic orders growth, I think, in the December quarter and you talked about Europe stabilizing, Australia being soft. How about the other regions? I guess, Latin America and Asia, in particular, what are you seeing there in terms of quotation activity and orders?

George R. Oliver

Well, what I'd say is when you look at the mix there, so Europe is roughly flat. I think our products and service was up, offset by install being down slightly. So we're relatively flat in Europe. Australia is down a bit because of the -- mainly driven by the mining industry. Where we've been extremely successful, and it's in line with all of the investments we're making into the growth markets, which today represents about, I think it's about 14% of our total revenue, we're seeing a nice pickup because of the investments we've made. That means that we're localizing our products, we're putting the depth and expertise that we need to be able to execute locally and, as a result of that, we're starting to see some nice pickup. Now I would say, in Asia, what we've seen here is now as we brought these businesses together, by leveraging our entire portfolio, we're now winning more of the larger projects within the region. So we've got some nice wins within the Asia region. And so, the combination, when you look at our overall order growth within the Rest of World, it was about 8%. It was a nice mix of strong service orders growth, as well as install. Install was double digit. And so, when we think about the order book and how that plays out over the course of the year, we're going to be well positioned to be able to deliver on accelerated growth during the course of the year to be able to deliver on our guidance.

Arun Nayar

Just to add, George, a couple of other regions where we've seen good solid growth is the Middle East, driven by the oil and gas end market, and in Latin America, both showing very strong growth for the quarter.

Julian Mitchell - Crédit Suisse AG, Research Division

Got it. And then just maybe a slight follow-up on the issue of building automation that came up earlier. You are seeing more communication or maybe more efforts from some other, the likes of JCI and UTC and so on around this topic. Does that shift at all your view on where your organic increases in R&D are going or your focus in terms of M&A? Or do think that this is a trend that has been going on for decades and there's no real kind of acceleration or change in the competitive landscape going on now?

George R. Oliver

I'd start by saying, we absolutely understand what the trends in technology are in making sure that for what we do and how we do it, we're going to be well positioned to be able to sustain our position. On many cases, we actually do some building automation with the type of systems and platforms that we install today. So as we look at how we leverage all of our combined strengths, all of the domains that we're competing in and then developing technology that easily integrates what we do into a building system, it's certainly part of the strategy and we're continuing to execute on those investments. And so, we have, with the depth and expertise we have within the fire and security industry, coupled with the technologies that we're developing, we'll be well positioned to be able to serve that market.

Operator

The next question is from Ajay Kejriwal with FBR Capital Markets.

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

So maybe just on X3 and I know you provided good color on the shift from 2Q to 3Q, but talk about that order shift and what the impact could be beyond Q3. Meaning do you expect that onetime surge in orders in the third quarter or does that continue a little bit into the fourth quarter and beyond?

George R. Oliver

Ajay, as we look at the orders, even without having the product fully approved, our order rates are very consistent with what we would have seen with our older products. And so, we have high degree of confidence that once we gain the approval to the new standard, that we will absolutely see a pickup in orders based on the new product that we've developed. We feel great about the new product. It has had early response and response we've had from customers has been great. And so, once we do get the approval, we actually see an opportunity to pick up from where we are. But right now, based on the order rates we see and then once we do get the approval that we'll be able to deliver on what was originally planned for this product during the course of the year.

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

Got it. And then, George, I know you talked about portfolio management and it's an ongoing process. But then maybe just conceptually talk about use of proceeds if you were to divest some assets at some point? I'm not asking you to identify what those assets are, but then how should we think about the use of proceeds between, say, buybacks versus acquisitions?

George R. Oliver

So I would say that we're totally focused on making sure that the allocation that we execute delivers the most amount of long-term shareholder value. And as we -- when we launched the company, the plan for the capital allocation was, number one, continuing to be able to support the increase in dividends in line with our performance. And that's exactly what we're doing. We've recommended a 13% increase this year, and then we'll continue to make those recommendations in line with our performance as we go into subsequent years.

Second is, as we look at the M&A that we've done, it, by far, is the best allocation of capital that we've done. Last year we've done 5 acquisitions or completed 5 acquisitions. We've done one so far this year, and that with the acquisitions we've done, we've been able to execute extremely well, and long term, absolutely, will deliver the most amount of shareholder value. And then what we've said is, then we will return, after supporting the M&A pipeline that we're executing on, that we would return excess capital through share buybacks, and that's exactly what we've done. In the first year, we returned about $300 million. So far this year, we've done $250 million, but our plan would be, after M&A, to be able to return that through buybacks, and that's exactly what we're executing on.

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

Got it. And maybe if you can remind us on the share buyback place holder that you have for the year and how that -- how we should think about that in relation to cash flow and the leverage levels, please.

George R. Oliver

Sure. I mean, we have -- after the $250 million that we did in the first quarter, the $250 million remaining on authorization, we're constantly reviewing our capital allocation with the board. And our intent is to maintain an appropriate level to be able to execute our commitments.

Operator

Our final question today is from Shannon O'Callaghan with Nomura.

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

George, in terms of the strength you're seeing, the recovery you're seeing in nonres North America, do you have any more color on that sort of by vertical market?

George R. Oliver

I mean, we have a big presence within the commercial and institutional space, and that drives a lot of the nonresidential markets that our businesses compete in. And so, that's where we're starting to see the pickup. I would say that it's also reflected in our Fire Protection products business, where the work that we've done with the new products that we're developing there, we're seeing a nice pickup also within our products business within those 2 spaces. So I think that's where we are seeing most of the pickup that has helped -- that's come through our order rate here in the first quarter.

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

Okay. And then just on Global Products, I mean, obviously a lot of attention to the Air-Pak kind of lumpiness here. How about the rest of the business? I mean, what's sort of tracking ahead of plan in terms of orders there?

George R. Oliver

I missed the first part of that was on the Global Products?

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

Yes.

George R. Oliver

So on the Global Products, I mean, what I would say is we look at each of the segments within our Global Products business. Our businesses are continuing to perform very well and that the investments -- if you look at the R&D investments that we've made over the last 5 years, over that 5-year period, we've increased R&D about a 12% CAGR. And we've been seeing the impact of that R&D with the new products that we are bringing into market, the market shares that we're gaining and the penetration that we're having into the new markets. And so, we feel very good about the continued performance of all 3 platforms. And I'd say, across all 3, we're gaining market share. And so, I would start with life safety, the new product. We're very confident that when it launches, we're going to continue to perform as we have and continue to drive market share. I'm going to say, in Security products, the work that's been done there, not only with the organic investments that we're making, whether it be intrusion, access of video, that has been complemented with the 2 big acquisitions we made. So Visonic's bringing wireless technology that really we can embed now in our core products and go to market with new products, as well as now with the Exacq acquisition, which has enabled our video platform with very strong IP network video capability that really now will be a big strength in how we serve our direct channel. And so, I would say, across the board, we continue to perform. You'll see a little bit of an impact because of this delay on the X3. But I would say that we're very well positioned to deliver strong single-digit -- mid-single-digit organic growth, which will be complemented by the strategic bolt-on acquisitions we've completed. But I feel very good about the progress on all 3 platforms.

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

So even x the Air-Pak, you expect all the other stuff to accelerate as well?

George R. Oliver

Yes. For the year, we're very well positioned to be able to deliver on our guidance, which we said we would be mid-single-digit organic growth. And certainly, we'll pick up some additional growth through the acquisitions we've done, very well positioned to be able to deliver on that guidance. And with that, we continue not only to increase our R&D to support the growth, but also we're continuing to expand margins nicely, benefiting from the Tyco business system that we're implementing and really streamlining the overall processes that we utilize to be able to execute on these businesses.

Arun Nayar

And outperforming the market.

Antonella Franzen

Operator, we're going to have George do a few closing comments before we end the call.

George R. Oliver

Okay. I'd just like to end by thanking everyone for joining the call this morning. Certainly wanted to reiterate that we're off to a great start in 2014. I think we have a track record now of continuous operational improvement, which is really being strengthened now by the development of our Tyco business system. This, along with the growth strategy, gives me tremendous confidence that we're well positioned to achieve our EPS guidance, our growth guidance of 11% to 17% this year and strong returns for shareholders in the years to come. So, operator, that concludes our call.

Operator

Thank you. This does conclude today's call. Thank you for participating. You may disconnect at this time.

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