Tyco International Ltd Earnings Call Insights: Full Year Guidance and End Market Conditions

Tyco International Ltd (NYSE:TYC) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

Full Year Guidance

Jeffrey Sprague – Vertical Research: George, just to elaborate a little bit more on the outlook. Obviously, you have always kind of the seasonally backend loaded year. It seems like this year is maybe a little bit less back loaded than normal, I guess, because of the selectivity thing, but just give us a little bit more color on how that plays out Q3 versus Q4 and where are kind of the upside versus downside to your guidance might be?

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George R. Oliver – CEO: Yes, what I’ll do, I’ll start by saying, Jeff, when you look at our performance quarterly and then look at first half to second half, typically when you normalize our performance, it’s about 45% in the first half, 55% in the second half. Now, when you look at this year’s third and fourth quarter, when you look at our full year guidance of the $1.80 to $1.85, it’s wrapped around the consensus of $1.83. What’s important here as you look at the underlying operations going forward in the third quarter that really we’re driving very strong operational performance. Now, in the third quarter this year, we do have –when you look at last year during the third quarter, we had a very strong retail quarter with high margins and when you at the compare there year-on-year, we have a mix of about $0.01 to $0.012 that’s given us a little bit of a headwind in the third quarter. Typically, last year when you look at our third and fourth quarter, typically our fourth quarter is the highest. Last year during the third quarter, we had a very strong third quarter because of that retail business. So, typically, we do get the lift in the fourth quarter. So it’s a little bit of anomaly last year, but I think we’re positioned very well in spite of the economic environment with the productivity and cost out there that we’re achieving that in addition to the restructuring and it’s being completed. We’re going to be very well-positioned to be able to deliver on our guidance.

Jeffrey Sprague – Vertical Research: I was also just wondering on the acceleration that you are seeing in some of the service revenue numbers. What’s actually behind that? Is it prior installed business that’s now coming into the service stream? Is it people picking back-up on service they deferred, is there any kind of common theme there to takeaway and what does it imply for the next year or so as we look out?

George R. Oliver – CEO: I’ll start with the project selectivity, so if you go back and really think about our project selectivity that we’ve had in place now in fire for the last couple years and we’re implementing that within commercial security, that in itself yields projects that have higher service revenue attached to those projects over the life cycle of the projects. So when you look at our split between install and service, we’re growing service 3% with install slightly down. That suggest we’re getting a higher level of service for the installed on the install projects that we’re performing. In addition, Jeff, that we’re increasing our capabilities in service and expanding our footprint, so when you look at our service sales reps year-over-year, we’re up 8%, and so we’re investing similar to what we’re doing in our products business reinvesting in technology; in service, we’re investing in capabilities in footprint to make sure that we’re going to be positioned to be able to accelerate the service growth. So, it’s really the combination of those two that has positioned us well to accelerate service 3% to 4% this year and I think we’ll be well-positioned for next year to get to the 5% service growth.

 

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End Market Conditions

Nigel Coe – Morgan Stanley & Co Inc: The backlog trends were somewhat better than I expected in both North America and Rest of World and I’m wondering if maybe you could just add some color in terms of the end market conditions and are we seeing some more product activity breaking free, but maybe a bit more retrofit activity. Any color on the end markets, this quarter versus previous quarters, would be very helpful…

George R. Oliver – CEO: Sure. Let me start with the global GDP. I think we’re seeing what everyone else is seeing with that global GDP down about 30 basis points. Now, as we look at our business – is a big element of our business non-residential construction, it has a big impact on us. Now, when you look at that space, the ABI, The Architectural Billings Index is a lead indicator and over the last it’s been about six or seven months Nigel that it’s been improving. So we’re seeing some of that with the activity that we see in the market. But little bit of a concern that it has slowed over the last couple of months. What’s important to us is that in spite of what’s happening within the macroeconomic environment, we’re driving very strong productivity and cost out, controlling what we can control to make sure that we’re going to be positioned to be able to deliver on our commitments. So when you look at that, I think the reason why the backlog going back to the initial part of your question, when you look at backlog on our install orders were up about 2% in total. Now that’s a similar type performance within North America and Rest of World. Now as you look at our backlog the sequential – sequentially we increased our backlog 3%. We expect based on our order activity, we expect that to continue to increase in Q3. What’s important now is, knowing what’s within that backlog that we’re going to be able to be positioned not only to deliver on the growth in the second half, but also being able to deliver on the margin commitment over the next two quarters also.

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Nigel Coe – Morgan Stanley & Co Inc: Then maybe one for Arun. I guess, I wasn’t expecting to hear the word arsenic on the Tyco call. Just to what extent you believe that this is sort of capping the liability and that this won’t escalate from where you result this quarter?

Arun Nayar – EVP and CFO: Well, Nigel first of all you’re right. This is something that goes back to the ’40s and ’50s just part of the acquisition that we actually did in the 1990, but the work – the arsenic work and producing the herbicides was done very early last, very early in last century actually. So in terms of the second question that you had, the point is that, we’ll finish the feasibility study with an extensive work and coming up with the reserves that we have put on the books right now, and keep in mind that this work is going to be completed in the next 12 months. So it’s not a very long tail here that we are looking and that’s what gives us the confidence that we should be able to get this done within the reserves that we have put up.

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