Tyco International Ltd. F1Q08 (Qtr. End 12/31/07) Earnings Call Transcript

Tyco International Ltd. (TYC)

Q1 FY08 Earnings Call

February 5, 2008, 8:30 AM ET

Executives

Edward Arditte - Sr. VP, Strategy and IR

Edward D. Breen - Chairman and CEO

Patrick Decker - President, Flow Control

Christopher J. Coughlin - EVP and CFO

Analysts

Shannon O'Callaghan - Lehman Brothers

Nicole Parent - Credit Suisse

Stephen Tusa - J.P. Morgan

Jeffrey T. Sprague - Citigroup

Scott Davis - Morgan Stanley

Nigel Coe - Deutsche Bank

Deane M. Dray - Goldman Sachs

Presentation

Operator

Ladies and gentlemen, thank you for standing-by. Welcome to the Tyco Reports First Quarter Results Conference Call. At this time, all participants are in a listen-only mode and later we will conduct a question-and-answer session. Instructions will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to our host Mr. Ed Arditte, Senior Vice President of Strategy and Investor Relations. Please go ahead.

Edward Arditte - Senior Vice President, Strategy and Investor Relations

Thank you. Good morning, and thanks for joining our conference call to discuss Tyco's first quarter results for fiscal year 2008 and the press release issued earlier this morning. With me today are Tyco's Chairman and Chief Executive Officer, Ed Breen; our Chief Financial Officer, Chris Coughlin; as well as Patrick Decker who is the President of Tyco Flow Control.

We will periodically be including our business segment Presidents on the earnings calls to provide you with additional details on their businesses, and we are pleased to have Patrick join us today.

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

In addition, we will use certain non-GAAP measures in our discussions and we ask you to read through the sections of the press release that address the use of these items. This morning's press release and all related tables can be found on the Investor Relations portion of our website, at tyco.com.

Now let me quickly recap with our results for the quarter. On a GAAP basis we had diluted earnings per share from continuing operations of $0.74 per share and this included a net gain of a $0.01 per share for special items. Diluted earnings per share from continuing operations before special items was $0.73 per share, benefiting from stronger operational performance and a lower tax rate than our previous guidance. As we indicated on our press release on January 23rd, our revenue growth and our operating margin before special items were both ahead of the guidance we provided due to better results across the company. It's important to note that the lower than anticipated tax rate is a matter of timing within the year, and we continue to believe that our full year tax-rate will be approximately 25%. Chris will have more comments on this, later in the conference call.

Finally, as most of you know we increased our guidance for full year diluted earnings per share from continuing operations before special items to a range of $2.60 to $2.70 from our previous range of $2.50 to $2.65.

Now, let me turn the call over to Ed Breen for some opening comments, Ed will then be followed by Patrick who will discuss our Flow Control business and then Chris will review the results from our other businesses before we wrap-up and take your questions.

Edward D. Breen - Chairman and Chief Executive Officer

Thanks Ed and Doug, good morning everyone. This was a strong first quarter for Tyco and a good start for the year. We are pleased with the progress we are making in three key focus areas, operational execution, capital allocation, and portfolio refinement. And I want to comment on each of these areas as we believe they will drive our earnings growth going forward.

First, we continue to be focused on operational execution. We had good revenue growth in the first quarter with double-digit operating income improvement before special items in each of our segments. In addition, our operating margins before special items were stronger due to better growth and operating performance.

Let me comment on a few examples from the quarter. In Flow Control, our goal has been to gain market share in rapidly growing markets. This quarter we continue to have strong top-line growth and good incremental margins which benefited from higher revenue, productivity and better mix of higher margin products. In ADT, we continue to focus on growing our revenue by improving our customer service levels. We had good year-over-year growth in our recurring revenue base and our key metrics continue to improve. Our total account base grew, our average revenue per user increased, and our disconnect rate also declined. Our income improved and included approximately $24 million of charges for the analog to digital conversion in North America.

Chris will give you more details on the other three businesses in a few minutes, but each had revenue and operating income that were better than/or equal to our expectations. As part of our restructuring program, we also continue to make progress bringing down our corporate expenses, and have reached our target run-rate ahead of schedule.

Secondly, from a capital allocation perspective we continue to use our cash, as we've previously indicated with increases in internal investments to improve growth and productivity. We invested more in the quarter for capacity additions mostly in Flow Control to support our revenue growth. Restructuring actions in Europe mostly related to ADT, as well as capital spending for internally generated accounts within ADT. We believe these investments will generate high returns and strengthen our businesses over the long term.

On the share repurchase front, we've been an active buyer of our shares. To-date we have spent $531 million under our $1 billion share repurchase program. Our activity so far has resulted in the repurchase of 13.3 million shares which represents 2.7% of our diluted shares outstanding.

Third, our portfolio refinement efforts are underway. We expect to close and receive approximately $300 million of cash from the sale of Berk-Tek's Brazilian operations fairly soon. And we would expect to complete the sale of the remainder Berk-Tek later this year.

We are also exploring options to divest or exit a number of other small businesses within our portfolio. For example, while our overall Fire business has good growth opportunities there are few non-core and marginal Fire businesses in Asia and Latin America that we will divest or exit. As part of this plan, we initiated a sale process for NDC, a fire business in Japan, which we classified as a discontinued operation this quarter. And we've already begun to exit certain small fire businesses in Latin America and Asia. Collectively these actions should have a positive impact on our overall margin and should generate significant cash proceeds for us to redeploy within Tyco or return to our shareholders.

Based on our performance this quarter and what we are seeing today, we expect good performance for the balance of the year and we have raised our full year guidance accordingly. Despite the housing downturn and consumer concerns over the past year, the ADT Residential business in North America continue to grow its account base, as I mentioned earlier the average revenue per user also increased. Operationally, we feel we are well positioned and making improvements in this business which will be positive going forward.

On the commercial side of our ADT business we are carefully monitoring our retailer customer base. As we indicated last quarter we are seeing some softness in our sales in North America as some of our large retail customers have pushed back their spending in new systems or upgrades. Based on our conversations with these customers we believe that these delays are delays rather than cancellations as the payback on these investments for our customers are very quick. Double-digit growth in Asia and Latin America helped our overall growth rate in this business and we expect those markets will continue to grow nicely.

In our Fire business, our North American Simplex business continue to perform well with 4% organic revenue growth in the first quarter. Order rates were up 5% year-over-year and our backlog is strong.

Before I hand the call over to Patrick to review Flow Control results, let me just say a few more words about Tyco's portfolio of businesses and our prospects going forward. First, our revenue base is balanced in terms of geography, more than 50% of our revenue is from outside the United States and our international markets continue to grow faster than in North America as Asia Pacific and Latin America grew more than 10% during the first quarter.

Next, our Flow Control segment which is now our second largest business continues to benefit from very strong end-markets, particularly energy and water and we expect this to be the case for some period of time. Third, Tyco as a whole has a strong base of service business. More than one third of Tyco's total revenue comes from service which provides a stable base of higher margin recurring revenue for us.

Finally, and most importantly, we are taking the appropriate steps to drive earnings growth. We are working diligently on our growth initiatives and continued operational execution, including a restructuring program and the savings that we will get from that. Tax planning, which should continue to reduce our tax rate over the next few years. The portfolio refinement actions we are taken to divest or exit some of our businesses, as well as make bolt-on acquisitions to strengthen our existing businesses. And finally our capital allocation decisions that have us investing in good return internal projects and returning capital to our shareholders.

Now, let me turn the call over to Patrick to provide you with a further update on Flow Control.

Patrick Decker - President, Flow Control

Thanks Ed, and good morning to everybody on the call. It's great to be here this morning to report on Flow Control's first quarter and to give you our thoughts on the outlook for the business.

First, to put the business in perspective for you, it represents about 22% of total Tyco revenue. Our end markets are split about one-third each for the energy market, the water market and general process industries like chemicals, mining and food and beverage. Our business is also very global with more than 75% of our revenue coming from outside the US. This end-market and geographic diversity provides very good balance to both our revenue and profitability.

We are currently benefiting from macroeconomic trends that are shaping the energy and water markets. In the energy market we continue to see good order rates in the replacement market, as well as, new projects around the world to add capacity. Our water business primarily serves the European and Pacific markets where we continue to see a strong need for infrastructure upgrades as well as new water facilities.

In addition, our Australian business continues to benefit from our strong position in that market and the significant water transmission needs required to get fresh water to the population centers, I think, particularly, given the recent drought conditions. We are also expanding our water business in some key emerging regions such as Asia and the Middle East. The strength of these end market resulted in first quarter revenue growth that was a strongest week [ph] in this business in a long time.

Revenue grew by 29% to just under $1.1 billion and organic growth was 17.7%. This strong top-line help drive solid improvement in our operating income, which grew over 50% to $173 million. Our operating margin before special items were 16.1% and improved primarily due to operating leverage, seasonal strength in our Thermal Controls business, which I will address in a few minutes and the mix of higher margin products.

Our backlog continue to grow in the quarter and is up 20% versus last year with eight points of that coming from current year. Many of you are familiar with companies that make valves and related products, but I wanted to spend a minute highlighting our Thermal Controls business which is a significant part of Flow Control and has very strong growth potential given its unique capability to service our customers.

The Thermal Controls business provides electrical heat tracing products and general heat management solutions to our customers in the energy and process industries. We partnered with many of our clients in the early design stage of their project. Using very sophisticated and proprietary engineering and modeling tools we help our client significantly reduce their industrial heating and insulation cost. Our turnkey heat management systems are relatively unique in the marketplace, and we've been able to capture a much larger share of our key customers' business as result of our front-end design capabilities. We are the market leader in this business and we expect revenue of approximately $650 million this year.

We're particularly well positioned in the oil and gas industry and due to the continued additions of refinery capacity around the globe, we expect to continue to see double-digit organic growth in this business for the foreseeable future.

Looking forward our total Flow Control business is performing very well and we expect a good year of operating performance with continued top-line strength and solid operating margin improvement for the full year.

So, with that I will now turn the call over to Chris.

Christopher J. Coughlin - Executive Vice President and Chief Financial Officer

Thanks Patrick, and good morning everyone. Now let me discuss the results of other businesses. And I will first begin with our worldwide ADT business.

Overall ADT Worldwide had good revenue growth and solid operating margin improvement year-over-year. Revenue grew 7% to $2 billion in the quarter. While organic revenue growth was 3.4%. Recurring revenue, which represents almost half of ADT's total revenue, continued to improve globally to 4% organically. And our leading indicators continue to show positive momentum. Our global account base grew 1.6% year-over-year to more than 7.1 million accounts and was positive across North America and all regions internationally. We also improved our disconnect rate by 10 basis points sequentially, to 12.2%. In addition, we continue to increase our average revenue per user by 3% year-over-year, excluding the impact of foreign exchange to $46.50.

ADT's product installation and service revenue grew 3% organically in the quarter with double-digit growth in Asia and Latin America more than offsetting modest growth in Europe and a slight decline in North America. North America's growth was weaker in the quarter, primarily as a result of some project delays by some of our largest retail customers which Ed talked about a few minutes ago.

From a profit perspective ADT Worldwide had nice improvements in its operating income and margin, before special items on a year-over-year basis. Operating income before special items improved 10% to $256 million and the operating margin before special items improved 30 basis points year-over-year to 12.8%. This quarter's results also included $24 million of expenses for the analog to digital conversion which we discussed with you last quarter. And we are expecting our cost in the second quarter to be similar to that amount. We made significant progress in converting many of these customers and by the end of the second quarter we expect the cost of conversion to be largely completed which should improve our margins in the second half of 2008.

On the restructuring front, we incurred $7 million in charges this quarter, primarily in Europe. Since the program began we have incurred approximately $90 million of restructuring charges in ADT, and we began capturing some of this savings this quarter. We are reducing our headcount, closing locations and simplifying operations. In addition, our customer service programs are improving our disconnect rate which has had a positive impact on our recurring revenue. Our focus on simplification, standardization and execution should have a meaningful impact on our European margins as we move forward, and 2008 will be a transition year for us, as we implement all these actions.

Now let me turn to our Fire Protection Services segment, which also had a good start to the year with strong improvement in operating income and operating margin before special items. Revenue grew 5% to $832 million with flat organic revenue growth. The North American SimplexGrinnell business had good organic revenue growth of 4%, order activity grew even faster at 5% and backlog grew 8% year-over-year. The growth in North America and modest growth in Europe was offset by negative growth in our other international markets as we exited some of our fire businesses in Asia and in Latin America, while the year-over-year revenue growth over the next few quarter in these markets will reflect the run-off of these lines of businesses. Our core business in both Asia and Latin America offers solid growth opportunities for us.

From an operating income and operating margin perspective, the first quarter was a strong quarter and the improvement came from all regions. The operating income before special items was $72 million and the operating margin before special items was 8.7%, 120 basis points higher than last year's first quarter. North America had better margins, and the international businesses benefited from better execution and the exit of the lower margin businesses.

Moving to our Safety Products business; revenue continue to... revenue grew 10% to $447 million. And the organic growth of 5% continues to be strong in fire suppression and electronic security. Operating income before special items improved 12% to $87 million, as a result of higher revenue. And the operating margin before special items was similar to last year at 19.5%. While we only incurred $1 million of restructuring charges this quarter, we do expect to incur substantially more later this year as we continue to execute plans to simplify existing operations and exit certain manufacturing facilities in high cost regions.

Now let me turn to Electrical and Metal products, where revenue grew 10% to $487 million, with organic revenue growth of 7.4%. On a year-over-year basis, we had strong volume gains that were partially offset by lower pricing for our copper products. Our operating income before special items was $45 million and our operating margin of 9.2% was about what we had expected. Compared to last year, our operating income before special items grew 10% primarily due to higher volume and improved steel spreads.

During the first quarter we also incurred restructuring charges of $4 million as a part of an overall plan to consolidate our US distribution footprint and improve our cost structure.

As we look to the second quarter, we expect revenue to increase 5% to 7% year-over-year with an operating margin of approximately 12%. The expected improvement in margin over the first quarter is due to increased spreads related to our core steel products. For the remainder of the year we have assumed that the operating margin will be approximately 10% and we will provide you with more detailed estimates each quarter as we have additional visibility.

So before I turn it back over to Ed, let me make a couple of other comments. First, let me discuss our free cash flow. As we expected, we used $407 million in the first quarter including $53 million for restructuring and separation payments. Consistent with our free cash flow pattern in the past, our free cash flow picks up as we move through the year and we continue to expect our free cash flow for the year to approximate net income.

As I mentioned in my remarks last quarter, we are implementing tax planning strategies appropriate for our new company. Our GAAP tax rate in the quarter was 24.8% and our tax rate adjusted for special items was 23.5%, reflecting the progress we have made in this area. I would continue to expect, however, that we could see swings quarter-to-quarter in our tax rate. But we believe that our overall rate for the quarter will approximate 25% as we have said in the past. In the second quarter, we expect our tax rate to be in the 28% to 30% range.

Next, we have moved aggressively to restructure our corporate organization to support the new Tyco. We completed these actions somewhat faster than our plan, as shown by our first quarter corporate expense of $116 million, net of separation costs. I should highlight that these expenses can swing somewhat each quarter, but we would expect that our run rate to average approximately $125 million per quarter.

Finally, let me quickly touch on interest, income and expense. We expect net interest expense in the second quarter to be about $15 million higher than the first quarter, primarily due to reduced interest income from lower cash balances.

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

Edward D. Breen - Chairman and Chief Executive Officer

Before I open the lines for questions, let me provide you with our outlook for the second quarter. Overall, we expect revenue growth to be approximately 8% with organic revenue between 4% and 5%. We expect that our Flow Control business will continue to have very strong top-line growth of 20% with approximately 13% to 15% organic revenue growth in the quarter. We expect ADT Worldwide nominal revenue growth rate to be approximately 5% with continued growth in its recurring revenue base, but slightly lower growth in its product, installation and service revenue, as a result of lower sales to our retailers compared to last year.

For our other businesses, we expect similar growth rates in the second quarter as we had in this quarter. From a profit perspective we expect solid year-over-year operating income and margin improvement across our business and anticipate our operating margin before special items to be approximately 9.5% in the second quarter. We expect our Flow Control business will have a significant increase in both operating income and margin versus the prior year due to strong growth and operating leverage and expect the margin to be approximately 14%.

For our ADT business, we expect operating income to be higher than last year, even with the impact of the analog to digital conversion, and for operating margin before special items to also improve slightly over the prior year. In our Electrical and Metal products business, we expect nice improvement in operating income and margin year-over-year due to higher steel spreads.

Thanks for joining us on the call, and operator, if we can please open up the lines for any questions.

Christopher J. Coughlin - Executive Vice President and Chief Financial Officer

Operator we just got to make one clarification here just to make sure that I got it right. On the tax rate, I just wanted to make sure that we believe, again, that our overall tax rate for the year will approximate 25% in the second quarter. We would expect that rate to be in the 28% to 30% range.

Now let's turn it over for questions.

Question And Answer

Operator

[Operator Instructions] One moment please. We do have question from Shannon O'Callaghan from Lehman Brothers. Please go ahead.

Shannon O'Callaghan - Lehman Brothers

Good morning guys.

Edward D. Breen - Chairman and Chief Executive Officer

Good morning, Shannon.

Christopher J. Coughlin - Executive Vice President and Chief Financial Officer

Good morning, Shannon.

Shannon O'Callaghan - Lehman Brothers

On ADT... I mean the margin ex the conversion expenses was 14%. Can you give us a little flavor on... how that varied by geography and what kind of improvement you might be seeing in Europe at this point?

Edward D. Breen - Chairman and Chief Executive Officer

Let me touch on it, and Chris might want to jump in also. What we are obviously seeing, Shannon, is good performance in the recurring base. And as you know the recurring part of our business is a higher margin business. So, we are finally seeing nice incremental moves sequentially, quarter-to-quarter in that part of the business, and very good progress in North America along those lines.

You do not see really in that result, any movement yet in the European margins upward, although I would expect you will be begin to see some of that in the second-half of the year, as some of the restructuring savings start to kick in. We are on track with the restructuring in Europe and so we will start to see some of that second-half, as I said, and obviously a significant part of that as we go into fiscal '09.

But one of the, the highlights I would mention in the quarter, I'm not declaring total victory on this yet, but as Chris mention in his remarks, we did finally bottom out on the recurring revenue business in Europe which is a good sign. We said we would do that by the end of the year, my gut is we stay around the zero level for couple quarters. So, it looks like we are getting ready to turn that up as we kind of exit this year that's on track also. So, a good recurring business, higher margin... the mix help us there. And we are just better, we are executing better across the whole business from service standpoint and installation standpoint. We are just doing a better job each quarter as we go and hopefully that will obviously continue for us.

Christopher J. Coughlin - Executive Vice President and Chief Financial Officer

Yes, Shannon. I guess I would just add one more thing in term of our major business of ADT that we would expect as we complete some of the restructuring actions as you know, it takes some time in that part of the world that it's really toward the a back-half of the year that we will start to see more significant margin improvements in that part of the world.

Edward D. Breen - Chairman and Chief Executive Officer

And this, and just to clarify also this quarter we are in now, will be the last quarter of this amps conversion program. You know we won't have that going forward.

Christopher J. Coughlin - Executive Vice President and Chief Financial Officer

Remember also, excuse me, that we have a nicely growing business in ADT in Asia, smaller but growing in Latin America. And as we highlighted in the call, those were nice contributors as well.

Shannon O'Callaghan - Lehman Brothers

And, you know, in Europe, you know, getting ahead of that plan in terms of the recurrent revenue decline. How much was that... is the attrition rate come down significantly more, you are getting better productivity out of the sales force, which is kind of the driver?

Edward D. Breen - Chairman and Chief Executive Officer

Yeah, well both are improving. Our productivity is improving, but I would say that is secondary. That would be a very big focus for us after we get done the restructuring. But that has improved. But the disco [ph] rate in Europe has had a nice steady decline, which is contributing to this overall improvement you are seeing in the ADT disconnect rate.

It's a lot of the programs we instituted a year, year-and-a-half ago in North America we are doing exact same thing in Europe, except we are taking a little more time on some of those because we are doing so much restructuring. We are not sure of too much on the table at once. So, we are doing some of that, we will do more of it in the second-half of the year as the restructuring starts to wind down.

Shannon O'Callaghan - Lehman Brothers

And then just, on this portfolio refinement topic. I guess specifically to fire, but any other areas too. I mean in fire we saw some margin improvement, they are related to I guess getting out of some of these areas. How does the exit of these fire businesses change your view of the potential margin for fire? I mean if you could quantify that a little more and when you are thinking about portfolio refinement, things that could get sold, can you give us a ballpark of scope of total revenue base or total expected proceeds or something.

Edward D. Breen - Chairman and Chief Executive Officer

Well, let me touch on the first part of that, what we're exiting is, as we said, kind of non-core and marginal businesses mainly in Latin America and Asia. And I'll point out, they are mostly what I would call the pipefitting type business, doing the sprinkler type work, where we don't get as much leverage putting the whole system in. And we're getting out of that, and we did do a fair amount of that in the quarter, we just reported. And that did reduce our growth rate in the fire business, internationally, by about three full points.

So, we weren't focused on growth there. Right now we're trying to get the portfolio were we want it. We've got more work to do there, but the good part is where we are standing which is obviously most of the markets, the fire business, is a good business to be in with good incremental returns on our investment and it's a low investment business. So, that will take us a couple of more quarters to clean that business up.

And maybe like Chris comment, in total may not go to in total on this, we're working on the Earth Tech sale. We're working on the sale of some of these fire businesses, in addition to exiting some of those. And they add up, give or take, to a few hundred million dollars in addition to the sale of Earth Tech.

Christopher J. Coughlin - Executive Vice President and Chief Financial Officer

Yeah, I think that's right. Again I think the fire business, again, just to reiterate one of the things that Ed said. As we pair down the portfolio and work-off some of the projects in some of the marginal businesses we'll increase our margin. However, the key in that business is really getting some incremental growth as the return on capital is very significant, as there is no capital being poured back into these businesses. So, again, I think we'll see some incremental proceeds. As we mentioned, we have started the sale process for NDC, again it's not a huge number in and on itself, but a number of these things will add up.

Shannon O'Callaghan - Lehman Brothers

Okay, great. I'll leave it there. Thanks guys.

Edward D. Breen - Chairman and Chief Executive Officer

Thanks Adam.

Patrick Decker - President, Flow Control

Thanks Adam.

Operator

Next question we have is from Nicole Parent. Please go ahead.

Nicole Parent - Credit Suisse

Good morning.

Edward D. Breen - Chairman and Chief Executive Officer

Good morning Nicole.

Christopher J. Coughlin - Executive Vice President and Chief Financial Officer

Good morning Nicole.

Nicole Parent - Credit Suisse

Ed I would believe curious to hear your perspective, and maybe if you could elaborate a little bit on why you think the retail customer delays are delays versus cancellations in the US, why not kind of the weaker US consumer?

Edward D. Breen - Chairman and Chief Executive Officer

You know, Nicole, this business has been a lumpy one for us in my over five years here now. We have seen this, I think, three times now where we go up, we go down some. And we started to see it last quarter, we saw it again this quarter. It was North America related. The reason... look, we talk to all these customers this is for our basically our anti-theft system, our Sensormatic product. And these program's are very good paybacks for our customers. So they are going to do these programs, it's just a matter of when they spend the capital to actually do it. And so we have taken into account in our guidance for the year that we will see softness in that area continue and not pick and that's kind of how we laid our thinking.

Nicole Parent - Credit Suisse

That's helpful, and with respect to organic growth. I guess you saw modest up-tick sequentially. Do you feel like you are happy with the contribution by business and could you quantify the internal investments that you made in new products in the quarter?

Edward D. Breen - Chairman and Chief Executive Officer

Look... the organic growth rate for us was as good as we had it in these mix of businesses and it was pretty much across the board. The one area, when you look at the aggregated number that will look a little light was the fire business. But the points Chris and I made, that really was because we were exiting some of these businesses internationally. And when you look at, what I would call, a business that we didn't, we weren't doing that to SimplexGrinnell in North America, had very nice growth, our backlog is at all time high in the North America fire business.

So, that feels good, and feels good for us as we go through the second quarter. So, organically, I feel good. The thing I'm most pleased about though is the business model change that's occurred at ADT, and it's been going... you know, we started this in give or take 2004/2005. We are seeing the benefits of that kicking in for the Company and it's showing in every metric that Chris highlighted. The base is going up, the attrition rates coming down... by the way it's coming down in every region around the world, it's not one spot. The ARPU is going up consistently, the resale rate is hanging in at a nice level. So, all the metrics we track feel good and to me getting the organic growth rate of our recurring business up at 80... if I had to prioritize it, that's number one to me in the Tyco portfolio, because it's such a profitable business.

Nicole Parent - Credit Suisse

That's great, and just on the internal investments in the quarter, any quantifications?

Christopher J. Coughlin - Executive Vice President and Chief Financial Officer

There are a number of different metrics that you can look at. Quarterly you saw our CapEx go up. As you know CapEx broadly defined for us includes new account generation. We had better new account generation internally within ADT. We actually have a little bit of decline year-over-year in our dealer spend.

From a product point of view, Nicole, the one area of the Company that I would highlight for... if you will... R&D and new product innovation is really our safety products business. The numbers in the quarter are not gigantic, but on a year-over-year basis we will see a nice increase there in our R&D spending for new product development. And I guess the last comment that I would make is the two small acquisitions that we made have been in that area. One was the retail expert technology that we bought in Safety Products and then the other acquisition has to do with video capabilities that we can put over the Internet. Both of those are really bringing in new product technologies into our portfolio that we think we can make available not only within ADT to our customer base but also to third-party customers.

Nicole Parent - Credit Suisse

Thank you.

Edward D. Breen - Chairman and Chief Executive Officer

Thanks.

Operator

And the next question we have is from Steve Tusa of J.P. Morgan. Please go ahead.

Christopher J. Coughlin - Executive Vice President and Chief Financial Officer

Good morning, Steve.

Stephen Tusa - J.P. Morgan

Hi, good morning.

Edward D. Breen - Chairman and Chief Executive Officer

Hey Steve.

Stephen Tusa - J.P. Morgan

I'm just curious, what surprised you most in the quarter relative to where you guys started a couple of months ago. I mean clearly ADT was very strong from a profitable perspective and the trends at flow were very good, but what were you most surprised with?

Edward D. Breen - Chairman and Chief Executive Officer

Well Steve, the piece that felt good to me that were, maybe hedging on a little bit, was the ADT performance. And one of the reasons we were being a little cautious was that we're going through this amps conversion. And to put that in perspective, our truck rolls during the quarter are almost 50% higher than at normal run rate if we weren't doing the amps program. You can imagine the stress that puts on the Company. So that had us a little bit nervous. And what was very nice to see in the quarter is despite all of that kind of extra work, the Company is doing, in the field everywhere, the performance came through very nicely for us, almost like that program wasn't effecting us at all.

But it has to be having some affect, and will again this quarter on the business. So that to me, if I kind of put it in order would be the number one. And obviously Flow Control is just... I think the business is just smoking right now. And the good news is the trends in that business look like there is a long run on this thing because of the markets and the projects. Some of these projects we're beginning to book are three to five year projects. A very significant size, and they are just beginning. So the kind of that, as Patrick said, the macro trends in that business just feel good.

Stephen Tusa - J.P. Morgan

Yes, many of your competitors are putting a very strong backlog. That looks sustainable. And then when you just... kind of a follow-up to that question on ADT. Was there anything unusual in this quarter from a mix perspective which just seems unusual that you could go from such a strong first quarter to maybe a little bit of a weaker sequential second quarter? And then if we think about the second-half of the year you have some nice things going for you with those cost rolling-off. And seasonally it is the strongest part of your business in the second-half it seems historically. So is there something in the mix here that we... that you guys should callout, just to let us know why it's kind of declining sequentially here?

Edward D. Breen - Chairman and Chief Executive Officer

No, let... no, not, no there is no one-timers or things like that in the number. What I would just say though, Steve, is we keep... we look at each quarter as we go. You clearly get some lumpiness on the contracting side of the business, the recurring piece, we can almost model that out at this point in time. The other piece, you get some lumpiness in, we are going to see a little bit of lumpiness this quarter and the negative, because a couple of these retail orders pushed-out. But that could bounce back the next quarter. I just... it bounces around like that so, no, but lumpiness on that side.

Christopher J. Coughlin - Executive Vice President and Chief Financial Officer

Yeah. And I will just highlight that again, it's the way that this business flows internationally. It can quarter-to-quarter; the margins can go up and down depending on the mix of particular commercial projects within our regions at any one quarter. So, again, I think we are confident that over the year our margins will continue to improve on a year-over-year basis, but again as we have seen in a number of our businesses including Flow Control, those margins can swing based on project timing, quarter end shipments and what not, because these are large projects, and not just shipping a particular product, it can have swings quarter-to-quarter.

Stephen Tusa - J.P. Morgan

And then one more quick one just on ADT. How... do you guys know how big, you know your kind of new commercial, sorry new residential exposure, actually is in that business and what it did in the quarter?

Edward D. Breen - Chairman and Chief Executive Officer

Yes, the rent look, obviously, we had residential exposure for two years now with the downturn in that end of the economy. And when you look at it, I think we highlighted this maybe last quarter. The focus of new home construction is not our focus. Let me say it that way. Only about 15% of our new business that we bring in comes from new construction. So, if that drops in half, give or take, it's 7%, 8% of the volume that we can bring into the Company.

And we are seeing some affect of it, but the fact that we [Audio Gap] new business model, we now have a sales force that is seasoning. We have a great product offering that we are adding to, which is taking our ARPU. And I think it's stickier and it's more enticing. All of those things are kind of powering us through that, and you are continuing to see this recurring base slowly continue to creep up and I expect it will go up a little bit more over the next year.

Stephen Tusa - J.P. Morgan

Great. Thanks a lot.

Edward D. Breen - Chairman and Chief Executive Officer

Yeah, thanks.

Edward Arditte - Senior Vice President, Strategy and Investor Relations

Operator, next question.

Operator

The next question we have is from Jeff Sprague of Citigroup. Please go ahead.

Jeffrey T. Sprague - Citigroup

Thank you. Good morning everyone.

Edward D. Breen - Chairman and Chief Executive Officer

Good morning, Jeff.

Jeffrey T. Sprague - Citigroup

Hey, couple of questions on ADT, but maybe, since we have Patrick on the line a quick one on Flow. Patrick, one of the discussions we had often is kind of in the initial stabilization at Tyco going back a few years ago, the restructuring of Flow wasn't front and center, it was more focus on ADT and other things. And kind of the gist of my question is how do you feel about... how the plans are actually aligned to kind of capture this revenue growth opportunity you have in front of you. And what type of restructuring actions might we see there over the next year or so?

Patrick Decker - President, Flow Control

Sure. Yes, Jeff, I... from restructuring standpoint I would say that obviously over the last couple of years we continue to reduce the size of our footprint. I think last year we took in 12 different locations, we'll continue to evaluate that. The key to our ability to do that really is again continue to build our capability in emerging markets. From a manufacturing standpoint, that really is the cornerstone to our footprint transformation. So, we'll continue to evaluate and see what opportunities are out there. If you look at a number of our plants right now we have added capacity in certain areas where they are critical product lines, they are very profitable, and at the same point have shed other capacity along the way as well. So I don't see any big bang out there at this point in time, but we'll continue to prune as we see most appropriate.

Edward D. Breen - Chairman and Chief Executive Officer

We are expanding capacity in certain areas as well, to meet the demand.

Jeffrey T. Sprague - Citigroup

So you're expanding and pruning simultaneously to kind of improve the throughput?

Patrick Decker - President, Flow Control

That's right. I mean, the key for us is not so much the number of facilities that we have, but making sure we have them in the right location to better supply our customers. We're really one of only a couple of global competitors out there that really are well positioned right now to go after a lot of this big global oil and gas projects. So, again, in many respect our footprint is the strength of ours as well.

Jeffrey T. Sprague - Citigroup

And then just a little bit more detail on ADT, we hit a lot here on the call, but given the focus on trying to drive the organic at ADT, given the margin opportunity there, should we expect... I mean... I'm just thinking about the amp conversion, I mean, that rolls-off, but would there be more marketing investment and selling investment and things like that that maybe layers on into the Company... as you try to drive the growth rate?

Edward D. Breen - Chairman and Chief Executive Officer

Not on a percentage basis. As we grow the business, obviously, I think some of the sales expense will increase, but no, not generally... there is not going to be a spike-up... I think you will remember, Jeff, a couple of years back we took it up at a much significantly from the spend level we were at, but we are getting close to kind of spending at the percentage rates that we should be spending in the business. We are doing more advertising. I don't know if you noticed that, we have done some in Europe even in the business. So, we are spending some extra money against that.

But it won't move our percentage around much at this point. Look, just to stress it... our goal in this business. And I have said this many time... we could get this growth rate to go up significantly from here, but we are not going to do it unless we get the quality of business that we want to take. And I still think we are going to get the growth rate up, but we are going to do it very prudently based on sticking with the metrics that we want in this business.

Christopher J. Coughlin - Executive Vice President and Chief Financial Officer

And I would also add, we have spent a fair amount of time over the past year on sales productivity initiatives. So we are investing more in our training and development and getting a lot more productivity out of the existing. So, I think that will also continue to produce results going forward rather than just a lot more money out it.

Jeffrey T. Sprague - Citigroup

And when you look at the ARPU improvement would you say it's more a function of just mix, what you are adding versus what's rolling-off or is there some true up-selling that you can kind of visibly feel going on in the account base?

Edward D. Breen - Chairman and Chief Executive Officer

Yes, no, no we are definitely just up-selling in the business with the different packages we now have. And we have always said before we had our own seasoned sales force, we weren't... it wasn't easy to do it through a dealer program. So now we're capable of doing that. And on the service end of the business, we're doing well, we're focused on price, by the way we had initiatives in a few of our businesses, ADT being one of them on pricing, especially around the contracting end of the business. And all these things, I think going to... they're going to help us as we go forward. I just say the organization is becoming much more professionalized then it was a few years ago. Our service days, one of the big metrics in the ADT business is being able to do an install very quickly when you have an order. We've brought that time down to install significantly, all those things help you become more efficient and do better.

Jeffrey T. Sprague - Citigroup

There's been truck roll for this amp program, benefits in ARPU or account retention or anything like that, that was notable.

Christopher J. Coughlin - Executive Vice President and Chief Financial Officer

No, I don't think it's impact that significantly yet. Again, we'll have some accounts that haven't been converted and we'll have to see whether that has some one-time sort of impact on our attrition rate, but so far we have not seen. That hasn't impacted us...

Patrick Decker - President, Flow Control

Yes there's no impact on ARPU at all, really, because what we're doing is we're changing out an analog phone for a digital phone, not changing the monthly rate that somebody pays.

Jeffrey T. Sprague - Citigroup

And just one final quick one for Chris. So, just thinking about separation cost going through corporate and tax sharing and all that that played out in the quarter, how do we think about that for the balance of the year, where those items kind of play out?

Christopher J. Coughlin - Executive Vice President and Chief Financial Officer

I think we'll... we're about completed on most of the separation, we do have some that will impact us here in the second quarter and a little bit going forward. So I think both. If I look at our restructuring as well as our separation and cash impact of that, I think we will see outflows of cash that would approximate $200 million on those two projects with a relatively small amount of separation... they'll be finished really here as we probably finish up the third quarter.

Edward D. Breen - Chairman and Chief Executive Officer

And, Jeff, the restructuring will wind down as a special item, I'll say it that way as we exit this fiscal year, we are on track. We will by the way spend more money, it looks like, in this quarter and next quarter in our Safety Products business on restructuring that you see one of few key programs, but we are on track and that will end at the end of this year.

Christopher J. Coughlin - Executive Vice President and Chief Financial Officer

And we are tracking those savings quite closely, we are generating the kind of savings that we had anticipated on the program. And again, if you look at things like our corporate expenses which have been taken down pretty dramatically very fast that was a key initial part of our restructuring plans.

Jeffrey T. Sprague - Citigroup

Great, thanks a lot guys.

Christopher J. Coughlin - Executive Vice President and Chief Financial Officer

Thanks Jeff.

Edward D. Breen - Chairman and Chief Executive Officer

Thanks Jeff.

Operator

The next question we have is from Scott Davis of Morgan Stanley. Please go ahead.

Scott Davis - Morgan Stanley

Yeah, good morning guys.

Edward D. Breen - Chairman and Chief Executive Officer

Good morning, Scott.

Scott Davis - Morgan Stanley

Just want to follow-up on Jeff's question on ARPU. When you think about, I mean, 3% year-over-year is a pretty solid member. I mean when you think about the next, let's say calendar '08, how much of that is locked and loaded. I mean how much of that do you have in contract form versus really requiring the sales forces to get out there and up-sell, and I guess the second part of that question, really, is does it concern you or concern the sales force at all that the consumer certainly in the US and even in Europe is getting a little stretched and maybe looking at mix and cutbacks here and there... so maybe a little tougher to make that up sell?

Christopher J. Coughlin - Executive Vice President and Chief Financial Officer

Yes, I think, Scott, that we are pretty confident in the ARPU that we are seeing in the improvement there. We can model it out as we look here certainly over the next few quarters. So, I think we are confident that that will continue to improve slightly as we move forward. And again a lot of focus has been put into place.

We are looking very carefully at the... at our payment and whether we are seeing a pushback from our customer base. We haven't seen anything significant. Again, I think, people who have security systems in their homes think it's an important thing to have. And so we haven't this, and again we are seeing very consistent performance in our residential business. And the downturn that we have seen, certainly, in housing, there has been... this weather is for [ph] about two years and we haven't seen any significant impact of that as the consumer gets a little more... a little tighter, we will continue to take a look at it, but again we haven't seen anything to-date that has us overly concerned.

Edward D. Breen - Chairman and Chief Executive Officer

On, Scott, just to Chris' point, the housing thing, and that's been with us for a couple of years now, in our ARPU, by almost every single quarter over about ten quarters in a row here, almost, the ARPU is consistently gone up. I go back to fourth quarter of '05, ARPU was around actual rates like $42 and something, and Chris just reported, what, $46.50, so you can see the progression and it's pretty sequential as you move out.

Scott Davis - Morgan Stanley

Okay.

Edward Arditte - Senior Vice President, Strategy and Investor Relations

I think the key to that, Scott, as Ed just pointed out, is not that there are great big increases, it's solid slow steady increases has really been the way this has worked and that's... I think that's a good thing, you also asked about Europe, and let me make the point on Europe that our residential business in Europe is really quite small. And so really our residential business is very, very US-based. And to Chris' comment, the quality of portfolio is materially better than it was a few years ago. And we're not dependent nor have we ever really been dependent over the last few years on new home construction, so we think the quality is much better and the performance that we've been seeing has been really pretty good in this environment.

Scott Davis - Morgan Stanley

Yeah, and part of the question that I don't think it answer is just contractually how much of that is locked and loaded. When you're signing new contracts, let's say, either bulk contracts or something your sales force originates, are there inflation clauses built into those contracts at all?

Edward D. Breen - Chairman and Chief Executive Officer

There are no inflation clauses built in.

Scott Davis - Morgan Stanley

You said none.

Edward D. Breen - Chairman and Chief Executive Officer

None.

Scott Davis - Morgan Stanley

Okay, I get it. All right, second part of the question on corporate expense. I think you really beat our model on almost every line item, not Electrical and Metal Products but almost every other line item except corporate expense. And when I think of your composition of businesses, $500 million seems like a pretty big number for me, compared to comps. Is... can you walk through maybe what is keeping that number up or if there's something in there like pension, for example, that's holding that number up a littlie bit higher than maybe what it ought to be. And I guess the logical second part of that question is just working card, are the things you are doing on the corporate side that maybe you're doing as a bigger conglomerate that you can really start to revisit as a smaller company.

Christopher J. Coughlin - Executive Vice President and Chief Financial Officer

Yes, first, Scott, one of the things that I would stress is there are no two companies out there that define corporate expenses in the same way. We tend to, and I tend to look at this as where is the control over those expenses. So, we don't do a lot of allocating of cost down to the various business units. Those things are controlled at the headquarters level, we just leave at the corporate center, where I think many other companies, that you look at, will have pushed some of those costs into various business units. We also have some other, sort of, business headquarter costs that are going there.

So there's nothing that I would say like pensions or anything like that which drive that cost. Certainly we still deal with legacy issues. Therefore we've got the shareholder suits that are primarily behind us, as you know, but we still have some of the tail suits that we are spending some legal costs on. But I would say, organizationally we're about where we expect to be. We always look at those costs, and look at how we can become more efficient and have plans to simplify our organization which hopefully will continue to drive down those expenses. So, we have taken, on a run rate basis, a couple of $100 million of costs out of these businesses, but I think, don't expect, we'll continue to look at it, but I don't think you will see a dramatic ramp down from where we are.

Scott Davis - Morgan Stanley

Okay, thank you.

Christopher J. Coughlin - Executive Vice President and Chief Financial Officer

Thanks.

Operator

And the next question we have is from Nigel Coe of Deutsche Bank. Please go ahead.

Nigel Coe - Deutsche Bank

Thanks, good morning.

Christopher J. Coughlin - Executive Vice President and Chief Financial Officer

Good morning, Nigel.

Nigel Coe - Deutsche Bank

So, I just want to turn back really to ADT residential, and I know it's a relatively small part of the portfolio, but it seems to gone disproportionate amount of attention. It seems the focus is always on new home sales, but especially in the existing home sales they are probably a bit more important. Now as existing home sale is full, do you see through a disconnection that... was that helpful to you, at least in the short term?

Christopher J. Coughlin - Executive Vice President and Chief Financial Officer

Yeah, obviously the largest single reason for disconnects are moves. So, we do see that during periods like this where there are fewer existing home sales that the... that does impact the fact that our disconnects are less on those business... on those homes.

Nigel Coe - Deutsche Bank

Okay, so that helps your organic growth, because you, obviously... you see therefore have to drive the new adds, you aren't going to drive the new additions, as hard to get the organic growth?

Edward D. Breen - Chairman and Chief Executive Officer

Correct.

Nigel Coe - Deutsche Bank

Okay. Secondly, you talked about this, the fire exits in Latin America and Asia. Just wanted to confirm, it doesn't sound like it will be, but would there be any deletion as those operations drop to discontinued operations?

Christopher J. Coughlin - Executive Vice President and Chief Financial Officer

No. There won't be any significant dilution from those businesses. Again, those are relatively modest... and again other than NDC, which we are in the process of selling, most of these are actually wind-downs as opposed to selling of businesses. So it impacts negatively our organic growth rate. But the cost and the revenues of those businesses remain in continuing operations. So, right now it's only the key business that we have put into disc-op [ph], so it won't have any significant impact.

Edward D. Breen - Chairman and Chief Executive Officer

And I think this quarter was a good example of that, we did a fair amount of it this quarter, it did lower our international organic growth rate in fire, by the three points that I mentioned. But you don't see it on the profitability. It's helping our profitability, because these are extremely low margin and marginal businesses.

Edward Arditte - Senior Vice President, Strategy and Investor Relations

So, we are not dropping them into disc-ops [ph].

Nigel Coe - Deutsche Bank

Okay, got it. And then finally on the buybacks, it looks like the average price of the buyback was about 40 bucks per share. That's broadly where you are now. So, is there any reason to believe that you wouldn't still be aggressive for the buybacks at these kinds of levels?

Edward D. Breen - Chairman and Chief Executive Officer

No, there is no reason we wouldn't be. I think we averaged about 39-60, 39-70 when I looked at it, so you're close there on the buyback. And we still got authorization left. And I think you've watched our pattern and our actions over quite a few years here and no, there is no reason to think we would change.

Christopher J. Coughlin - Executive Vice President and Chief Financial Officer

... we generate cash; we have room to buyback more.

Nigel Coe - Deutsche Bank

Right, thanks a lot.

Edward Arditte - Senior Vice President, Strategy and Investor Relations

Okay, operator, we are getting close to the bottom of the hour. So we have time for one more, quick question.

Operator

Thank you. We have a question from Deane Dray of Goldman Sachs. Please go ahead.

Edward Arditte - Senior Vice President, Strategy and Investor Relations

Good morning, Deane.

Deane M. Dray - Goldman Sachs

Thank you good morning.

Edward D. Breen - Chairman and Chief Executive Officer

Hey Deane.

Deane M. Dray - Goldman Sachs

Ed, would love to hear your comments on your approach to guidance, you've had a nice beat this first quarter, and you came in ahead of that positive renouncement, raised the bottom-end $0.10 but the high-end by $0.05, is this just a inherent conservativeness or can you address what might you be thinking on how you address the guidance?

Edward D. Breen - Chairman and Chief Executive Officer

We are feeling very good about the year, which is the reason we took guidance up. We are not seeing anything that's bothering us except the one little corner of the retail market being soft; everything is feeling good to us besides that. And maybe I will just put in the word, you probably kind of said it the way I would say it, but we are one quarter into the year that's a relief, let's see how things progress here.

Deane M. Dray - Goldman Sachs

Okay, just on that last point, it was interesting how would, absent that retail softness, which would be understand, because that's not very new pressure on the retail side, but broadly you are not talking about any sort of industrial slowdown or pressure or spillover from credit markets, and I mean you are certainly seeing that positive results in Flow but beyond that

Edward D. Breen - Chairman and Chief Executive Officer

Well, you know, Bill, that's true, I mean, believe me we have been looking at this every week just because of what you hear in the news. And they... look a lot of the other big industrial companies reported and have said the same thing we said. I would point out we also look at our contracting business and its pieces, and when you look at it it's very interesting that a lot of the work it's happening because of codes and certain vertical markets.

And for instance 40% to 45% of our fire business in North America, to give you an example, it's things like schools, universities, hospitals, nursing homes; and nothings going to change there, in my opinion. So, I... we actually study it by vertical, and we haven't seen any of the verticals really move at all where we would be concerned except the retail end of our North America market. So, look, just for your guidance comment; it's early in the year, let's see how we progress and we'll update next quarter.

Deane M. Dray - Goldman Sachs

Okay, thank you.

Edward Arditte - Senior Vice President, Strategy and Investor Relations

Okay. Ladies and gentlemen thanks for joining the call. We look forward to talking to you over the next few days; if you have any follow-ups. And we look forward to reporting to you on our second quarter results which will be somewhere around the first part of May. Operator, I'll turn it back over to you for replay information.

Operator

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