泰科電子 (TEL) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Tyco Electronics' first-quarter earnings call. At this time, all phone participants are in a listen-only mode. Later, there will be an opportunity for your questions, and instructions will be given at that time. (Operator Instructions) And as a reminder, this conference is being recorded. I would like to turn the call over to Senior Director, Investor Relations, Keith Kolstrom. Please go ahead.

Good morning, and thank you for joining our conference call to discuss Tyco Electronics' first-quarter results for fiscal year 2011 and our updated outlook for full-year 2011. With me today are Chief Executive Officer, Tom Lynch, and Chief Financial Officer, Terrence Curtin. During the course of this call, we will be providing certain forward-looking information, and we ask you to review the forward-looking cautionary statements included in today's press release. In addition, we will use certain non-GAAP measures in our discussion this morning. And we ask you to review the sections of our press release and the accompanying slide presentation that address the use of these items.

The press release and related tables, along with the slide presentation, can be found on the Investor Relations portion of our website at te.com. I did want to mention, I understand there could have been some possible technical difficulty with the slides related to the webcast. If you go on and it looks like it says Q3 2010 slides, it appears it's just a problem with that header slide. So, as far as I know, the slides are okay. You just page forward as we go through the presentation. And finally, for the participants on the Q&A portion of today's call, I would just like again to remind everyone to try to limit themselves to one follow-up question, to make sure we are able to get everyone in the allotted time. Now, let me turn the call over to Tom for some opening comments.

Thanks, Keith, and good morning, everyone. If you could please turn to slide three. Heading should be Good Start to FY '11. Q1 was another good quarter for the Company and a good start to our fiscal year. Our financial results were strong, with sales growth of 11% to $3.2 billion in revenue and adjusted EPS of $0.73, which was a 55% increase over last year. The sales growth was at the high end of our guidance, and EPS was above the high end of our guidance. And we continue to run at about 14% adjusted operating margin at this level, excluding the impact of the ADC acquisition.

With respect to ADC, we completed the acquisition in December, and the integration is going very well. ADC had a small impact on our Q1 results, adding $51 million in sales and no effect to EPS. And in a few minutes, I will provide a full update on ADC. Quarter rates strengthened during the quarter and our book-to-bill, excluding our SubCom business, was 1.03. The order strength was strong across most of our businesses. In our largest business segment, automotive, demand continues to strengthen, and global production is now projected to be in the 76 million unit range for our fiscal year 2011.

Orders in our industrial equipment, telecom infrastructure, and energy infrastructure businesses have been strengthening for the last two quarters, and are really following the trends we talked about on the last earnings call. We are also starting to see signs of improving demand in the distribution channel. The consumer and DataComm markets continue to be a little soft, due to customer inventory adjustments, and our book-to-bill is still below one in those businesses. However, we do expect them to improve in the second half of the fiscal year. Based on the trends and the inclusion of ADC, we have increased our full-year outlook, and now expect full-year revenue to be $13.9 billion to $14.3 billion and full-year adjusted earnings per share to be $3.05 to $3.20.

Just a quick recap, the increase to our full-year guidance reflect the following -- $1 billion of revenue and $0.12 of adjusted EPS from ADC and just a reminder, that's only 9.5 months of ADC, and Terrence will expand on that in a little bit. Increased automotive revenue, based on the increase in global automotive production I mentioned earlier, to 76 million units for the year. Our stronger first quarter of $0.73 adjusted EPS, and this is being partially offset by higher metal costs. As you know, copper and gold, especially copper in the last three months, has really done a run-up. In response to this increase in metal costs, we are being more aggressive on our price increases to offset this. But, there's no question metal is going to be a net headwind in the second half of the year, although we are going to be able to hold our earnings, as we outlined earlier.

If you turn to slide four, I will give you an update on ADC. Just a quick refresher. The combination of ADC and our Network Solutions segment creates a world-leading product range in broadband network connectivity. These products enable every connection point in the network, from the central office and data center, to the desk, TV, or smartphone. But we really go right from the server all the way to the side of the house.

The addition of ADC's distributed antenna system, or DAS products and technologies, also significantly strengthens our wireless connectivity portfolio for both indoor and outdoor applications -- or in building and outdoor applications, and complements our existing products offering. And this is -- this is increasingly important to handle the rapid increase in the demands of the smartphones. Our combined businesses also have very complementary geographic strength. ADC's strength, as we've mentioned before, is in North America and Asia Pacific, while GE's historical strength has been in Europe and India. We see -- early in the integration, but we see lots of opportunities to take this broader product range and strengthen our combined position in all of these regions.

And then, finally, the acquisition positions us extremely well for the pick-up in activity of new fiber installations globally. Many of you were aware of the proposed national broadband network in Australia, and in addition, there are significant new rollouts planned in Mexico, Spain, Brazil, and a number of other countries around the globe, where we believe we are positioned very well. You've probably seen recently -- additionally, I mean, we have seen acceleration of investment in existing builds. So, builds that have been going on, particularly in western Europe, are now going into -- appear to be going into an expanding phase.

Recently, NBN announced their initial infrastructure awards, and we are deep in negotiations with NBN as we speak, and continue to expect that TE is going to have a significant participation in this project. This closing on the ADC deal, this was also very compelling from a financial perspective. We continue to expect approximately $100 million of cost synergies from our integration efforts, and we expect to realize about 40% of those savings in fiscal 2011. As I mentioned earlier, for the year, ADC will add about $1 billion of revenue and $0.12 of adjusted EPS. We expect to exit the year at an adjusted operating margin of around 10% for the ADC business, and we remain confident that this business will reach the target margins of 15% in 2013.

Now, we are fully integrating our two businesses together. Through the year, we will keep you posted on our progress with ADC. But ADC and TE are rapidly becoming one business. So, a really nice start to the year, and I will now turn it over to Terrence Curtin. He will cover our Q1 performance and our outlook in more detail.

Thanks, Tom, and good morning to everyone. Let me start by giving an update on the top-line sales performance. If you turn to slide five, total Company sales of $3.2 billion were up 11% year-over-year, with growth across all our segments and geographies, as a result of the continued global economic recovery and our strong market positions. Excluding the SubCom business and ADC, the growth we saw was broad-based across all regions, with Asia up 16%. And this does include our China geography, which was up 20%. The Americas and Europe were up each about 10%. As Tom mentioned, ADC added $51 million to our quarter one sales, and currency translation decreased overall growth on a year-on-year basis by about 100 basis points.

On a sequential basis, organically, which excludes the currencies and acquisitions and divestitures, our sales were down, as expected, about 2%. Strong organic growth of 6% in our Transportation Connectivity segment, which was driven by our automotive market, was more than offset by expected declines in the Communications and Industrial and Network Solutions segments. Our total sequential growth of 2% was driven by the addition of ADC, and actually currencies benefited our top line on a sequential basis, even though they were negative on a year-on-year basis.

Now, let me get into the highlights of the key markets in each of our segments, and unless otherwise indicated, all changes I discuss will be on an organic basis. So let's turn to slide six. In our Transportation Connectivity segment, our sales increased 16% versus the prior year and were up 6% sequentially. Starting with Automotive, our sales increased 16% versus the prior year, and were up 9% sequentially. Year-over-year, sales were up 22% in Europe and up 12% both in Asia and the Americas.

Global vehicle production was in line with our expectations, at slightly above 18 million units in the quarter, which equates to year-over-year production growth of 5%. The demand trends that we're seeing remain strong across all regions, and based upon current projections, quarter two auto production is expected to be up 3% to 4% versus quarter one levels, to about 19 million units. This, once again, would be year-on-year production growth versus last year of 5%. Our sales growth greater than the production is being driven by a favorable vehicle mix, higher content, as well as the share gains that we have mentioned to you on prior calls. Based upon the external indicators, we are estimating that global production will be 76 million in 2011, which would be a 5% increase over 2010, and up about 2 million units versus our last call.

In the aerospace and defense market, sales were also up nicely at 12% versus the prior year, driven by continued improvement in the commercial aerospace and marine markets. While we did experience growth in the defense area, it was at a slower pace than the commercial aerospace market. And sales were down 8% sequentially, due to normal seasonality. For the Transportation Connectivity segment overall, we expect strong mid-teens year-on-year growth in quarter two, or mid-single digits sequential growth, with continued improvement in both automotive and the aerospace defense and marine areas.

Let's turn to slide seven now, and I will comment on the Communications and Industrial Solutions segment. Sales increased 13% versus the prior year, with growth across most end markets. Sequentially, sales were down 9% with broad-based declines, driven by the expected inventory channel adjustments that we discussed on last quarter's call. Let me touch upon a few markets in the segment. In the industrial equipment market, sales were up 24% versus the prior year, driven by the continued increase in capital spending on factory automation, as well as growth in the alternative energy markets, particularly solar.

In the DataComm market, which includes sales to the communication equipment server and storage markets, our sales increased 19% year-over-year, driven by both new customer program launches and continued spending on broadband infrastructure and data storage equipment. In the consumer device market, which includes primarily mobile phones and consumer electronics, the sales increase was driven by end unit growth and devices. In quarter two for the segment, we expect overall revenues to be similar to quarter one levels.

While we do believe the inventory adjustments that we highlighted last quarter are largely complete, and we saw improved order rates throughout the quarter in this segment, we ended the quarter with a 0.9 book-to-bill -- 0.99 book-to-bill. We do not expect the DataComm market to pick up until the second half of our year, and we will also be impacted by the seasonality in the consumer device and computer market. The softness in these areas will be offset by an -- stronger industrial sales.

So let me turn to slide eight now, and talk about Network Solutions. Total sales in the segment were up 7%, including the $51 million of ADC sales. On an organic basis, sales in this segment were up 2% versus the prior year, ad all markets except our SubCom business grew 10% to 35% organically. Sequentially, sales were down slightly by about 3%. This sequential decline was due primarily to the normal seasonal patterns in these infrastructure businesses.

To highlight the markets, sales to the energy market were up 13% versus the prior year, with strength in Europe and in the Americas. We continue to see steady improvement, driven by the recovery in this market around the world. Sales to the service provider market were up 34% organically versus the prior year, driven by continued fiber acceleration in Europe. We continue to expect strong demand in the fiber network investment in all regions globally. In fact, due to the strength that we are seeing, we do not expect a traditional seasonal decline in the second quarter. And in the enterprise network market, our sales increased 10% versus the prior year, due to the increased data center spending.

In SubCom, as expected, sales declined 29% versus the prior year, and 2% sequentially. Booking in the quarters were $23 million, and in prior quarters I discussed two contracts for about $300 million combined, which we have been awarded and are in the process of securing funding. The financing process has taken a little longer than we originally anticipated, but we expect these contracts to come into force in the near future. In quarter two, we expect our revenue in SubCom of approximately $150 million, and continue to expect full-year 2011 sales of $600 million to $700 million. Overall in quarter two, we expect sales in the Network Solutions segment to be up approximately 30% compared to quarter one, due to the $280 million of acquired sales relating to ADC and continued recovery in the end markets.

Let me now get into earnings, which starts on slide nine. Our GAAP operating income for the quarter was $400 million, which includes $59 million of charges related to the ADC acquisition and $4 million of non-ADC restructuring charges. Of the total $59 million of ADC charges, $48 million is cash-related, and $11 million are non-cash charges primarily related to fair value purchase accounting adjustments for inventory and backlog. In quarter two, we expect approximately $42 million of total ADC charges, with $13 million being cash charges and $29 million of non-cash purchase accounting charges. As we stated previously, we expect to incur $110 million to $130 million of cash costs related to this acquisition. About 80% of these cash costs will be incurred in 2011, with approximately $61 million in the first two quarters. The non-cash purchase accounting charges that I mentioned will be complete in quarter two.

Turning to operating income, adjusted operating income was $463 million, with an adjusted operating margin of 14.5%. Margins were up 300 basis points versus the prior year, due to the volume increases and the operating leverage from prior cost actions and ongoing productivity programs. In the first quarter, we did benefit by about 50 basis points from favorable mix and other items in our margin, and it was primarily in the gross margin area. And excluding these favorable items, as Tom mentioned, our adjusted operating margin was right around 14%. Adjusted EPS for the quarter was $0.73, up 55% from $0.47 in quarter one 2010, driven by the strong leverage on the sales growth, a slightly lower effective tax rate, and the benefit of using our cash mainly around share repurchases. The acquisition of ADC had no impact on our first-quarter adjusted EPS.

Let's continue on to slide ten now. If you look at the top half of this slide, our gross margin in the first quarter was 31.9%. And this improved approximately 300 basis points from the prior year gross margin of 29%, due to the operating leverage on incremental volumes. In the second quarter, we expect our gross margin will be around 31%, which does include about 30 basis points of metal headwinds versus quarter one.

Looking at the bottom half of the slide, our operating expenses were in line with the guidance expectations of about 5% for RD&E and about 12.5% for SG&A. Expenses were up $59 million year-on-year, driven by the increase in sales. In quarter two, we continue to expect that RD&E will run about 5% of sales, but SG&A will be closer to 13%, driven by the acquisition of ADC and considering that we will continue to have cost integration actions happening that will continue to bring that rate down throughout the year.

Let's turn to slide 11, and let me cover some items on the P&L below the operating line. Net interest expense in the quarter was $30 million, compared to $35 million in the prior year. In quarter two, we expect approximately $36 million of interest, due to the addition of $250 million of new debt issued in quarter one and the impact of the ADC legacy debt prior to completing our tender. Other income, which relates to our tax-sharing agreement, was $12 million, compared to $8 million in the prior year. And for quarter two, I expect this will be same as quarter one. The GAAP effective tax rate was 30% in the quarter, and the tax on adjusted income was 26%. The GAAP tax rate was impacted primarily by the non-deductible nature of the ADC acquisition-related charges, and for the full year, we continue to expect a tax rate on adjusted income similar to the quarter one levels of about 26%.

Now, let me get into free cash flow that begins on slide 12. Our free cash flow in the first quarter was $45 million. Excluding the effect of ADC, which was a $50 million outflow, we were in line with the expectation I discussed on last quarter's call for the free cash flow of approximately $100 million. The $50 million ADC cash outflow included $35 million of acquisition-related spending, and this includes transaction costs, integration, as well as some severance. If you look at working capital, our days sales outstanding of 63 days was flat versus the prior year. And our inventory days on hand, excluding contracts in progress, were 65 days, which was up 2 days sequential. We do expect to bring the inventory down through the year to the lower 60-day level.

We had approximately $117 million of capital spending in quarter one, which is about 4% of sales. And this was an increase up from prior-year levels of $76 million. We do expect the capital spending for the full year 2011 to be about 4% of sales. Cash restructuring, excluding ADC in the quarter, was $22 million. And for the full year, we continue to expect approximately $130 million of cash restructuring related to the actions we took in prior years. For ADC acquisition-related cash spending, we did have $35 million in the quarter. And for the full year, we expect $105 million of cash spend related to the acquisition. We continue to expect that our 2011 free cash flow will be in excess of $1.2 billion, excluding the $105 million of ADC acquisition-related spending.

So let's turn to the balance sheet on slide 13, and I will get into debt liquidity. We ended quarter with about $1.4 billion of cash, and during the quarter we did pay $1.28 billion for the ADC acquisition. This $1.28 billion was partially offset by the cash assumed in the deal of approximately $550 million, which resulted in a net cash outflow of $717 million. In addition, as part of the acquisition, we also acquired marketable securities of approximately $150 million and assumed debt of about $650 million. We initiated offers to repurchase this debt in quarter one, and we expect the tender to be completed here in the second quarter.

Also, as previously communicated, we plan to finance a portion of the cost of the ADC acquisition through issuance of debt, which we issued in December via a $250 million offering of ten-year bonds. If you take this new debt and you consider all ADC legacy debt, if it's all tendered, we would have about $2.6 billion of debt outstanding. On the other use of the cash during the quarter, we did redeem $100 million of commercial paper. And we also returned $116 million of capital back to our shareholders through dividends and the repurchase of about 1.4 million shares.

So let me move to slide 14, and I will talk about an overview of our orders prior to getting into our outlook. Starting at the top, in Transportation Connectivity, our largest business, automotive, continues to show strengthening demand across all the regions. Auto production is now projected to be up 5% versus 2010, and as we saw in the first quarter, we expect that our auto business will continue to grow faster than the overall auto production market, as we benefit from content growth, a slightly favorable mix, and market share gains. In the aerospace and defense and marine markets, they also continue to show signs of improvement, driven by commercial aerospace as well as the marine area, which is really oil and gas. This improvement in these markets, combined with our increasing content on new platforms and new customer wins, are driving the trends in the order levels.

In our Communications and Industrial Solutions segment, as I mentioned, orders improved throughout the quarter, but we still ended with a book-to-bill of 0.99. The industrial end market strength is being offset by the continued sluggishness in the consumer and DataComm markets, which we do not expect to improve until the second half. In our Network Solutions segment, as I mentioned, demand continues to remain robust and also continues to recover. And we still expect our revenues in the second half of the fiscal year to be up approximately 10% versus the first half, excluding ADC. ADC's revenues for the full year are expected to be approximately $1 billion, and we still are very encouraged by the increasing fiber activity we see, especially outside the United States, by carriers to expand and upgrade their broadband networks.

So now, let me talk about the outlook on slide 15. For the second quarter, we expect our sales to be in the range of $3.45 billion to $3.55 billion, which is an increase of 17% to 20% over the prior year. This includes approximately $280 million of revenues from ADC, and the year-over-year increase is broad-based across all markets offset by a decline in our SubCom business. Our adjusted Q2 earnings per share are expected to be $0.70 to $0.74 per share, which is up 9% to 16% versus the prior-year second quarter. This includes approximately $0.02 of adjusted earnings per share related to ADC, and ADC will negatively impact our operating margins by about 70 basis points in quarter two, as we still are implementing our integration and the expected cost savings that are on track.

Excluding ADC, this implies an adjusted EPS of $0.68 to $0.72, and is about a 14% OI, which is down slightly from quarter one on flat revenues, due to the quarter one favorable mix in the network segment that I mentioned, as well as the slight increase in the metal headwinds. For the full year, sales are expected to be $13.9 billion to $14.3 billion, up 15% to 18% versus fiscal 2010. ADC adds approximately $1 billion in the revenues for the full year, or about 800 basis points of the year-over-year growth.

As we covered in our last call, fiscal 2011 includes a 53rd week, which will occur in the fourth quarter, which adds approximately 200 basis points or $240 million to the year-over-year growth. Full-year earnings per share on an adjusted basis are expected to be $3.05 to $3.20 per share, compared to the $2.54 in 2010, which is an increase of 20% to 26%. ADC adds approximately $0.12 to the full-year adjusted EPS, and the 53rd week adds about $0.05 per share. The midpoint of this full-year guidance is $0.17 higher than we guided last quarter, due to the addition of ADC and the strong performance we had in the first quarter, and the strength we see in automotive, offset partially by metals headwinds. This guidance assumes current foreign exchange rates and commodity prices. So now, let me hand the call back over to Tom.

Thanks, Terrence. Just wrapping it up here. The fourth quarter was -- the first quarter was our fourth consecutive quarter of operating margins of 14%, in the $12 billion to $12.5 billion annualized range, of course excluding ADC. And it was a quarter with solid revenue in growth in most of the industries and in all regions. And it was a quarter in which, if you go back a year ago when we started -- when we were beginning to close the gap on our original goal of 12% at $12 billion, that was based around a $3 copper price. So, the team has done a great job of being able to deliver 14% at $12 billion and overcome about a 25% increase in metals overall.

The market demand for the year is a little stronger than we saw it last quarter. As Terrence mentioned, due primarily to the strength in automotive. But we do expect virtually all of our businesses, with the exception of SubCom, to show solid year-on-year revenue growth across the balance of this year. And there is very good momentum in automotive and in our network infrastructure businesses. And this does assume -- this outlook does assume that consumer and DataComm begin to grow a little bit in the second half of this year. The ADC integration, while still in the early stages, is progressing very well. And we'll start to see a little bit of earnings accretion in Q2, and then the level picks up by Q3.

And as we mentioned, the biggest challenge right now is the price of metals, but our view is with a combination of productivity, more aggressive pricing that's already underway, and the volume growth we expect in the second half, we'll overcome most of that and deliver this $3.05 to $3.20 EPS. So all in all, a good start to what we believe is going to be a good year. So let's open it up for questions now.

(Operator Instructions). Our first question comes from Amitabh Passi with UBS. Please go ahead.

Hi, thank you. My first question just had to do with the full-year guidance you provided. Just a couple of sub-parts related to that. It looks like you are assuming $1 billion dollars for ADC, yet I believe ADC almost did $1.1 billion on a trailing 12-month basis in calendar year 2010. So just assuming why you are anticipating flattish to perhaps slightly down sales in ADC.

And then, just to get to your full-year guidance, it looks like you lead a decent step-up in revenues in the June quarter and in EPS. Just trying to understand where that's coming from. If you could perhaps provide a little more color in terms of the revenue trajectory in the back half of your fiscal year.

Sure, thanks, Amitabh. Remember, ADC is only -- that $1 billion is only nine and a half months. So we only had $50 million in Q1. So, if you just took that run rate, it's close to $1.2 billion, what its run rate has been. Although, like our Telecom business, we see some momentum there.

In terms of the step-up in earnings, a couple of things there. The networks business is in -- as much as there is momentum in it now, it's still in the winter. And so, both energy and Telecom infrastructure we expect first half, second half, will be up nicely due to market momentum, our position, and better weather. The normal seasonality. So that's part of it.

And our consumer businesses that are muddling along a little bit right now, I'd say, not including automotive, we do expect as we get through the inventory adjustment that that's going to pick up a little bit. And then, don't forget, there's an extra week in the second half of the year. So, there is definitely first half, second half growth. I'd peg that to general economic growth, and a little bit of momentum on our side. But that's how we get there.

Okay. And then, just for my follow-up, Tom. NBN, perhaps you could provide us a bit of an update. We saw $1.6 billion in awards made. You were not in the first set of awards. A lot of confusion, what that means and doesn't mean. So perhaps you could clarify what your position is, where you are in the bidding process at NBN.

And then related to that, can you just give us a sense of your pipeline when you look at fiber to the X opportunities globally? You mentioned Mexico, Spain, Brazil. Any sense of just how big the order pipeline is, just so that we can get a sense of what's in your funnel or your pipeline today?

Sure. On NBN, I'd say the two pieces of NBN are -- there's no question that the combo of TE and ADC, if you go back a year ago and we looked at where we thought we would come out on NBN, when you risk-assessed it, the combination strengthens our position. The one thing it did do, is it slowed down the process for us a little bit, because the customer really didn't want to end their end of the detail negotiations with two companies and then have to harmonize that all. So we got started a little later. We fully expect -- I mean, would be very disappointed if it didn't come out this way and surprised, to get a nice hunk of business out of that. And so, I would say stay tuned over the next couple of months on that.

In general, the pipeline that we mentioned, Spain, Brazil, a couple of other areas, we are seeing a nice pick-up where there has been very little fiber. We are not at liberty to talk about it yet, but we have been selected as the initial supplier on one of those. And those are typically $100 million-type businesses over three or four years to start. It's hard to call the whole -- if they do everything they say they are going to do, they are going to be very big. But you know how this business -- it kind of goes in fits and starts. But there is a lot more activity now than there was a year ago.

And just as importantly, in the existing networks where fiber has been rolled out over the last five or six years, to go back -- there was a nice cycle back five or six years ago, then the last three years in western Europe and the US there has been a lull in that cycle. And for sure in western Europe, we're seeing that pick up. And that's our strong suit. So we feel good about that pipeline right now. And you can see it in our revenue in the Telecom networks business the last two quarters. The significant growth in the revenue. So there feels like there is nice steam in the engine.

Okay. Thank you.

You're welcome.

Our next question is from Wamsi Mohan with Bank of America. Please go ahead.

Yes, thank you very much. Good morning. In the automotive business, you mentioned in your slides Europe up 22%. Can you talk a little bit about how much of that is coming from domestic European markets versus markets like China? And how much longer do you expect the strength within the China market to continue in the premium segment?

Sure. If you break up Europe into a couple of pieces, a big part of Germany, roughly half of their automotive production is export. And US and China are the two largest markets for their export. So I would say, most of the strength we saw in the second half year last year and the first quarter was largely export-related. Although, new car registrations are up for the first time in a while in Germany. And you see the outlook for the German economy is pretty positive right now.

China, the market grew about 50% last year in production. We grew about 70%. We don't expect that kind of growth this year, and our outlook would expect a market growth in the neighborhood of 10%. And we would expect to grow well in excess of that, because we are very well-positioned there. So, still a nice growth coming off a huge growth in China. But it's getting to be such a big market, that you are not going to probably see 40% or 50% unit growth there.

Yes, thanks for the color. And as a follow-up, can you perhaps help with the assumptions around the automotive revenue growth in the context of the things that you spoke about, in terms of mix, content growth, and share gains?

When you look at it, Wamsi, the unit production growth I mentioned is about 5% year-on-year, and it looks like it is going to tee up pretty naturally throughout the year, evenly 5% year-on-year by the quarters. When you look at the amount above it, it's pretty equally split between share and content growth. So, when you look at it, it's pretty evenly split between those two elements above production.

Thanks a lot, guys.

Thanks, Wamsi.

Thank you.

We will go to Matt Sheerin with Stifel Nicolaus. Please go ahead.

Yes, thanks, and good morning. So I wanted to ask a few questions regarding the gross margin. So, Terrence, you guided to 31% for the March quarter. So, that assumes, I think, a 30 basis point headwind on metals. And then, the assumption that ADC also drags that down, correct?

Actually, when you look sequentially, Matt, ADC has no impact on the gross margin. ADC, where it's impacting our margin on an OI level, has to do with more of the OpEx area.

On the cost side, okay.

Below the gross margin. When you think about the 31.9% we did, down to about 31% in the second quarter, the first quarter did have, as I mentioned, we had a favorable mix items, and we built some inventory in the first quarter that benefited our gross margin by about 50 basis points in the first quarter. And that's why I commented that our OI was running about 14%. So that takes you to a mid-31% gross margin, and then you get the metals headwinds sequentially of about 30 basis points. It gets you down to about a 31%.

Okay, and as you think about that 31% number, does that factor in any successful price pass-through to customers? Or is there a lag impact there? And as you negotiate contracts with customers, is the conversation getting a bit tougher now that supply has opened up, things aren't as tight as they were six months ago, and end demand isn't growing as fast as it was?

Let me take the first half, and I will ask Tom to talk about the customer discussions. That 30 basis points does have some price, but you are right. Pricing happened on a lag basis. Certainly, the run-up in copper that we saw -- and gold, from our last call, happened really in December and in January. And you know there is a lag effect. So, it is a net negative in our second quarter, but there will be some lag benefit later in the year.

And Tom, why don't you talk about -- .

Yes, and then I would say that just -- add on to that, that selective price increases in the last six months, which often shows up in less price erosion than normal, but going forward more aggressive price increases, but that's always tough. I mean, that's really a customer-by-customer basis in the customers where you are selling to the tier ones or the OEMs. It's not generally a broad-based increase, whereas through the channel and into the smaller customers you can do that a little more. So, I would say the discussions are always difficult.

And even though supply is a little bit better than where it was, the good news is that customers are still generally pushing to make sure we can supply. So it's never easy. But our view is, we have to get a little more than we have in the past, when you break through $4 in copper and you are at $1,300 an ounce for gold.

Okay. And then, just segueing into the distribution channel, you talked about pricing going up there. And I know there is also a bit of an inventory build and a correction there. Was some of that related to the fact that they built ahead of price increases, and have you seen inventory start to cool down, if you will? Or come down in the channel?

I think inventory definitely started to balance out. We can see it in the sell-in and sell-out numbers, which we have a pretty good handle on. I don't think that build last -- that gradually happened in the last two quarters is really around pricing. I think it was more around the supply chain of the last year. Everybody was trying to cover themselves. And so, you have a little bit of double ordering. Not anything totally out of control, but definitely required a somewhat balancing out. But that feels like it's almost behind us now.

Okay. That's helpful. Thank you.

Thank you.

And our next question comes from Craig Hettenbach with Goldman Sachs. Please go ahead.

Yes, thank you. Tom, just a follow-up on the automotive, the theme of content growth and share gains. Any specific drivers within content that you are most excited about for this year? And then also, from a market share perspective, any trends by geography or things you can point out to there?

Yes, I would say a year ago, 18 months ago, I think we were worried that content would go down, maybe not significantly, but it would reverse its long trend and go down, because people might move to smaller cars. What we are seeing in every region, in virtually every model, the content keeps going up. There is just, the push for safety, the push for more fuel-efficient current engines, requires more electronics. And the push for more connectivity, in general, so you can bring all of your smartphones right into the car is definitely driving content across the board. That's the short-term, I would say, content driver.

The mid- to long-term content driver is hybrid vehicles and electric vehicles. And pretty much every auto maker now, if they haven't introduced one, they are close to introducing one. So I think we are moving past it, it's really going to happen to -- because governments are pushing fuel efficiency. So that's not really driving content yet, which is an exciting part of the business. That's going to come.

I think from a geography position, we are very strong in China. And in the last couple of years, we have made nice share gains in China, to the best of our estimates. We have always been strong in Europe, and we are maintaining that. And we are picking up some -- a little bit of share in the US, which historically was our smallest market because of the captive nature of the Big Three for most of their careers of their suppliers of connectivity. That's opened up. And then, we kept investing during the downturn, and I think that's starting to help us out.

Okay. And as my follow-up, Terrence, the dividend announcement last quarter, with ADC complete now, and the expectation for $1.2 billion in free cash flow, what's the priority of the Company and the Board from a capital allocation dividends relative to buybacks?

When you look at it, Craig, it's the same as we've always said. Certainly, it's always first around funding the business, to fuel the growth. And then when you get into, specifically, your question, we have teed up the dividend increase from a payout ratio, like we've said, and it's in line with our traditional payout ratio. So that will be voted on by our shareholders here in March. And then after that, as we see -- we have excess capital, we will execute share buybacks. We did a little bit in the first quarter, a little bit lighter due to the ADC acquisition. But I expect you'll continue to see us doing buybacks, if there is not an opportunity out there where we need our capital for. And it's very consistent with where we've been.

Okay, thank you.

Thanks, Craig.

Our next question comes from William Stein with Credit Suisse. Please go ahead.

Thanks. Terrence, I'm wondering if you can tell us a bit about the inventory performance in the quarter. I didn't expect it to rise this way, and I understand it benefited gross margins, it's going to hurt gross margin next quarter. Can you give us an idea as to what happened there, and why you are confident it's going to go lower in the next few quarters?

Well, number one is, as we've said before, we feel we can run the business in the low 60 days. Some of it is, our end markets are in different states. We have places like our automotive market that's strengthening. We did build in that area. Some of the markets in our CIS are a little bit more delayed, so we did build there a little bit, as we will work off as the markets improve. And we are also in the networks, also building as well.

So when you look at it, we did expect to have an inventory build in our guidance. Like I said, we had our free cash flow. It was a little bit more than we thought. But like we've said historically, I think bouncing around a couple of days will happen between quarters, based upon seasonal patterns. So, you will see that come down throughout the year, and I feel confident we will be in the low 60 days by the end of the year.

Okay. And then, I'd like to touch a little bit, as a follow-up, on the touch systems business. It looks like it was a little weak. I think, also, the year-over-year performance isn't great. Is there a broader share shift to other technologies that you're not participating in, or anything else going on in that market that's causing this business not to grow, relative to what seems rather obvious, that touch is proliferating in so many consumer electronics applications?

Sure. I would say two things. In the commercial and industrial side, which is most of our business, the 12-inch screen or the 15-inch screen, now we're introducing digital signage, things like that. In that business, it's been a little bit slow related to the consumer slowdown. Typically slow late in the year. We're starting to see signs of orders pick up there.

We aren't yet participating in the consumer screen business. That was an objective of the acquisition, the small acquisition we made last year, to be able to get some additional technology, potentially bundle it with our technology, and take a run at that. But we're not really in that business yet. So, if you were to take the entire world of touch, and say, hey, that whole market, what's our market share? From that perspective, it's down. I would say we are holding our share solidly in the commercial and industrial space. But as the consumer space is the one that's really high growth, we haven't participated in that yet. And this is a key year for us to introduce a couple of products there to get a beachhead.

Is the idea to extend what you have done with sensitive objects, to try to push that technology forward? Or would you do new R&D in that area, or new acquisitions to improve your position?

It's much more an organic focus. Take that technology and link it with some of our other technologies to get a big thing in the small screen world is power, and can you do it with a minimal number of layers on the screen, which gives the rest of the device more flexibility. So that's what we are trying to drive to. We don't think it's a winning strategy for us to just replicate what's already out there, which is pretty established. So, that's our focus. And we wouldn't be looking at -- never say never, but we wouldn't be looking at doing that inorganically right now, based on the technology.

Thank you.

Thanks, Will.

And we'll go to the line of Shawn Harrison with Longbow Research. Please go ahead.

Good morning, Tom and Terrence. Two brief questions. First off, ADC, I think when the deal was initially announced, you were talking about $0.14 of full 12 months first accretion. It looks like now, kind of backing into it, maybe it's $0.17 to $0.18. So, if you could just talk about maybe where you are seeing some of the upside, versus that original accretion forecast.

When you look at it, the $0.12 certainly is nine and a half months versus your $0.14. The financing we were able to do look better, and we're getting the cost actions, and we see where the run rate we are getting are coming in on the integration a little bit quicker than we thought. So, I think it's a combination of those two, Shawn, that will get us on a better run rate. And like you can see, the guidance is $0.12 for the year, $0.02 in the second quarter. We will be exiting this year at a $0.20 run rate. So if you assume $0.05 in each of the second half quarters. So, we feel very good, like Tom said, about the integration activities. And also where the market is going is very positive. I think that could provide alternative leverage as we get out on it.

Okay. And so, if you see the end market strengthen further, that $0.20 run rate could definitely improve.

Definitely.

Okay. And the follow-up question just has to go with the pricing. Given that you sound to be -- or you need to be potentially a little bit more aggressive on cost recovery, because of the move in copper and gold, I know historically it had been kind of a 50% to 60% recovery versus the move in commodities. Do you think you can drive that ratio higher over the next couple of quarters, just given it's a global inflationary environment for commodities?

We certainly are going to try to do that. Our outlook would assume that it doesn't get higher than that. Part of it is how your contracts are staged, and X amount -- about 20% to 30% of the business is what I'd call pay as you go. You do have agreements, but they don't tend to be long-term. The rest of the product you are shipping today does tend to have some type of term to it. Now, in some cases, you do have some flexibility to try to go in and adjust the price. But I would not expect, we're not limiting our efforts. But in terms of how we express it in our guidance, we're not counting on a recovery of more than that.

Okay. And then, with ADC, is the price recovery there much more similar to your legacy network solutions business, which it was essentially more of a full recovery?

Correct.

Yes.

Okay. Thank you very much, and congrats on closing the deal.

Thanks, Shawn.

Our next question is from Steve O'Brien with JPMorgan. Please go ahead.

Hi, thanks for taking my question. I'd like to talk a little bit about the consumer business, and I know it's not just pure mobile devices any more. You have some of the other segments of the old EC business. You have circuit protection in there. But it does seem like the growth rates might be lagging some of the trends in smartphones and tablets, et cetera, and maybe some competitor performance. If you could provide some more color there around the business, in terms of what dragged down the Q1 performance here, and why you are optimistic about the second half of the year.

Sure. I think your assessment is fair. I think if you look at our consumer business, you can break it down into a few pieces. The smartphone piece, tablet, PC, and traditional consumer electronics. Traditional consumer electronics, we're very selective in, and that part of the business hasn't been that strong. Obviously, the strength has been in smartphone and tablet.

I would say the good news for us in the last six months is, we have a beachhead there. But that's clearly not our strong suit yet. We are not broad-based in those markets as we would like to be. Those are attractive markets. And go back three or four years, we weren't really in the mobile phone market at all. We did a nice job of getting established in the core business, and now we are going through the same thing in the smartphone business. Again, if you were to put it on our list of things we feel best about, the things we don't feel best about, you'd put this in the area we don't feel best about, but we have some momentum.

Thanks, Tom. As a follow-up, could you discuss -- I know with this realignment, it's not just different numbers here coming on the press release. He helped us understand how you've realigned the organization, and how that might improve efficiency here in the longer term.

You mean about the segments?

Right, exactly.

I would think of the segments as kind of an organizational gathering place. If you look at our segment leaders and the people they have at the segment level, it's not a lot of people. Underneath, we are organized in about 22 business units. So, we tend to be organized around market segment, and we gather aerospace and defense, our relay business, our automotive and commercial vehicle business and transportation, our communications and industrial business segment, which we call CIS, has a bunch of segments in it. Everything from medical and circuit protection, touch, data communication, consumer devices, industrial appliance.

And we try to group these things where there is the most synergy to be had. We like the businesses to be run vertically, so that somebody wakes up every day in a business like appliance or like Telecom networks in our networks business. But we group them where they are similar technology, because we have really a broad range of technology, and we also want to make sure we lever our scale, whether it's purchasing power, whether it's manufacturing footprint. So that's kind of the organizational philosophy. So you could expect, over time, the segments could be tweaked at times, like we have just done recently. But the units underneath them, the businesses themselves, are pretty well established and full fledged businesses that we don't mess with.

Okay. Thanks.

Thank you.

And we will go to the line of Steve Fox with CLSA. Please go ahead.

Hi, good morning. Two questions. First of all, on ADC, you've talked about the growth opportunities for in-building wireless, but obviously it's not making a lot of money right now. Just having it under -- as part of Tyco now for a few weeks, can you just talk about whether you've seen anything positive or negative in that business, that makes you more or less confident in its growth and profitability? And then I had a follow-up.

Yes, there is a lot of activity, and every time somebody announces a new smartphone, or smartphone continues to gain a bigger portion of the overall mobile network, or tablets for example, I think it's all good for broadband infrastructure. And it requires that structure to be augmented by things like distributed antenna systems that add capacity and coverage in a cost-effective way. One, it's not easy to build towers all over the place. And as you know, in a lot of buildings, your coverage tends to weaken.

So it's a strategic product line for both our Telecom networks and our enterprise business. And that was one of the attractive things about ADC. I mean, it's still in the early stages, that whole portion of the market. But there is momentum there. There is a lot of RFP activity.

But do you have more or less confidence around actually making money on that product line going forward?

Of course.

More?

More.

Okay. And then, just as a follow-up, obviously there is more material headwinds than you would have expected maybe three to six months ago. But you are still getting some leverage out of the business. Can you just talk about long-term targets of 15% plus, any change in the confidence level there, and what you can, say, be doing once ADC is integrated?

I think we are still very confident, even despite the headwinds. I mean, we have to be successful on the pricing actions we talked about. We have to be very successful with the integration of ADC, but that's off to a very good start and we're confident about that. We like the mix of businesses we have. Our day to day, grind it out productivity, we're better at that than we were three or four years ago.

So, our view of -- if you take ADC aside, because it's going to take a couple of years to get that part of the business to 15%. But what I would call the core business, still looking at 15% at the $14 billion revenue range. So, hasn't changed. There's a little more pressure on that because of metal prices being much higher than we thought six months ago. But we would expect volume to be the biggest lever we have, too.

Great. Thank you very much.

You're welcome.

Operator, we have time for one more question.

And our final question this morning will come from Jim Suva with Citigroup. Please go ahead.

Congratulations to you and your team for great results and a strong outlook. My questions are, first of all, on the material in the metals headwinds. Am I correct that it's still about 7% of cost to goods sold for the raw materials? I think in your presentation you gave a while ago that it mentioned it was about 7% of COGS. And does this change with ADC, with the integration of the company. And any hedging contracts that we should be aware of, as far as timeline, that may roll off, that may be a step function, whether it's six months down the road or something like that?

And then, the second question is, on the consumer side, maybe Tom, if you can make another crack at that question, as you claim that you have some momentum in the area, but really the last six months have been materially underperforming the market. And it looks like you basically missed much of the consumer Christmas season for that market. Is it just a competitive pricing environment? Are you less focusing on that area, and more so automotive? Is it getting more competitive in that market? Or why should we view that there is momentum there, or is it even worth really going after that segment aggressively? Thanks, gentlemen, and congratulations again.

Thanks, Jim. So let me talk to the last part of that question first. We view that much of that market is attractive to go after, and we are going after it. As you know, we are pretty much in every market, and in some, given our historical performance and expertise, we are stronger than others. I think we have been getting better in this market, but we're not happy by any stretch of the imagination with our position.

If you go back a year ago, where we were in the big smartphone players versus today, we definitely have a beachhead, as the saying goes. So, we've won our first projects, we're shipping our first projects, and that's a start. I would agree that we have not benefited from the growth in this market as much as others. But it is an important market for us. And we are going to be in it for the long haul. So, we're investing in it.

Let me take your first part of your question. So Jim, it's about 10%, the metals. So when you take a copper, gold, silver, and that whole group, it's more like 10%, so you are a little light. When you look at ADC, ADC is similar with the way it weights, and what it will do to the total does not really change. And as Shawn asked, in ADC, its pricing is more consistent with our Network Solutions, which you have more of a pass-through environment than you do in some of the other segments.

On the hedging element, certainly our hedges -- it's a rolling hedging program. We don't hedge 100%. It's a rolling program. So that will have an effect throughout the year as hedges roll off. If you look at -- it's a smoothing effect. If you look at exiting the year, going into next year, if metals stay where they are, it could be about a $0.05 headwind going into next year, once all the hedges roll off, net of our productivity. So, that is the way you should think about the headwind, once hedges roll off, if metals stay where it's at, going into 2012.

Great. Thank you, and again, congratulations to you and your team.

Thanks, Jim.

Thanks, everyone, for joining us today. For sure, if you have questions after the call, please feel free to call Matt Vergare or I. Thanks again for joining the call.

Thanks, everyone.

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