泰科電子 (TEL) 2011 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the TE Connectivity reports fiscal fourth-quarter results. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session with instructions given at that time. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to Keith Kolstrom, Senior Director of Investor Relations. Please go ahead.

Morning and thank you for joining our conference call to discuss TE Connectivity's fourth-quarter and full-year results for 2011 and our outlook for the first-quarter and full-year 2012. With me today are Chief Executive Officer Tom Lynch; Chief Financial Officer Terrence Curtin.

During the course of this call we will be providing certain forward-looking information. 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. We ask you to review the sections of our press release and the accompanying slide presentation that address the use of these items. Press release and related tables, along with the slide presentation, can be found on the investor relations portion of our website at te.com.

Finally, for participants on the Q&A portion of today's call, I would like to remind everyone to please limit themselves to one follow-up question. Make sure we are able to cover all questions during 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 3. This was a good quarter for the Company and a strong finish to our fiscal year.

Sales in the fourth quarter of $3.9 billion were up 25% overall versus last year and were up 2% organically. And as a reminder, this excludes currency translation, acquisitions, and about $277 million in sales that happened in the last week, which was the 14th week in the quarter.

Our Q4 growth was driven primarily by our Transportation and Network segments. In the Transportation segment we are benefiting from strong end markets and share gains. In Automotive, worldwide vehicle production was up 6% and our sales were up 13% organically. I am really pleased that we continue to execute very well in this business across all geographies, especially China and North America.

In our Networks segment, the acquisition of ADC contributed revenues of $323 million in Q4. We did see continued strength in global broadband infrastructure investment, and we continue to see the benefits of the ADC acquisition with our much stronger end-to-end product line.

Energy infrastructure investment also continued to grow around the world, and we had another strong quarter in this business. In total, the strength in Transportation and Networks more than offset weakness in our CIS segment, where we continued to experience soft market demand and distributor inventory corrections.

Adjusted earnings per share were $0.89, up 24% versus Q4 of 2010 and above the high end of our guidance range. Excluding the impact of the extra week, adjusted EPS were $0.81, which was in line with our guidance and up 13% versus the prior year.

Free cash flow is a very strong $560 million in the quarter. As a result of our expectation for continued strong cash generation, our Board increased the share repurchase authorization by $1.5 billion and approved a recommendation to increase the dividend by 17% beginning in the third fiscal quarter of 2012.

Let me say a few words about the full year. Sales were up 19% overall and 6% organically. I feel this was good overall growth considering the challenging macroeconomic environment of the past year.

We had very strong performance in our Automotive; Aerospace, Defense, and Marine; Telecom; and Energy businesses. And this more than offset the disappointing performance in the CIS segment.

Adjusted earnings per share of $3.12, which is a record for us, was up about 20% from $2.54 in fiscal 2010. This increase was primarily the result of organic sales growth and productivity improvements, the acquisition of ADC, and the benefit of share repurchases.

Free cash flow for the year was $1.4 billion. Our strong, consistent cash generation enabled us to make the ADC acquisition, which gave us a leading position in broadband infrastructure markets -- and this is a market that we continue to get more and more excited about -- and as well as enabled us to return $1.2 billion to our shareholders this fiscal year. This balance of acquisition and return of cash to shareholders is consistent with our strategy and consistent with the strategy that we launched four years ago.

Now let me turn it over to Terrence, and he will discuss fourth-quarter performance in more detail, and then I will come back to make some final comments and discuss our outlook.

Thanks, Tom, and good morning, everyone. So if you could please turn to slide 4 and let me go through sales performance. Total Company sales of $3.9 billion were up 25% year-over-year with growth across all segments and geographies. We did have an extra week in this quarter; and excluding the impact of this week, which was $277 million, our fourth-quarter sales were $3.6 billion.

Organic growth was 2% in the quarter, driven by our Transportation and Network Solutions segments. On a geographic basis, sales grew 6% in EMEA and 1% in the Americas on an organic basis. Asia was down 2% organically due to declines in Japan that more than offset 6% growth in China.

Also, ADC sales were $323 million in the quarter, and currency translation increased overall growth by $174 million.

On a sequential basis, sales were up 5% overall and down 2% organically.

Now let me give you highlights by the key markets in each of our segments. And unless I indicate otherwise, all changes will be on an organic basis, which excludes the effect of currencies, the ADC acquisition, and the additional week.

So let's turn to slide 5. In our Transportation Solutions segment, sales increased 12% versus the prior year. In the Automotive market our sales increased 13% versus the prior year, with sales up 14% in EMEA and 12% in both the Americas and Asia. In China, our sales were up 22% versus last year.

Global vehicle production was approximately 19 million units in the quarter, up 6% compared to last year. Our sales growth was once again above auto production due to electronic content increases and our increased share, as well as a benefit of restocking following the Japan earthquake.

End-demand trends remain solid in quarter one, In quarter-one global auto production is estimated to be approximately 20 million vehicles, up 4% versus the prior year. This production estimate includes growth in North America and a continued recovery in Japan, partially offset by a slight decline in Europe.

In the Aerospace, Defense, and Marine market, sales were up 8% versus the prior year. Growth was driven by strong demand in the commercial aerospace and oil and gas markets and as well as share gains in the commercial air market. For the Transportation Solutions segment in the first quarter, we expect that our revenues will be up approximately 10% versus prior year.

Please turn to slide 6. In our Communications and Industrial Solutions segment, total sales declined 8% organically versus the prior year. Let me discuss certain markets in detail.

In the industrial equipment market, which had been strong for the first nine months of this year, our sales were down 5% in the quarter versus the prior year. We are experiencing inventory corrections by distributors which we expect to continue into early fiscal 2012. And just to remind you, about half of our sales in the industrial market go through the distribution channel.

In the DataComm market, which includes sales to the communication equipment, server, storage, and wireless equipment markets, our sales were down 14% versus last year driven by continued softness in the server and switching markets as well as distributor and EMS inventory corrections.

In the Consumer Devices area, revenues were down 13% versus the prior year but were up 10% sequentially. As discussed on prior calls, the year-over-year sales decline is due to customer mix and our relatively weak position in smartphones. The sequential growth reflects our efforts to stabilize the business and normal market growth related to holiday builds.

We believe our business bottomed in quarter three, and we're encouraged by the recent program activity and improving relationships with key customers. In quarter one, for the CIS segment we expect revenues to be down approximately 10% versus the prior year driven mainly by customer inventory adjustments that are occurring.

Please turn to slide 7 and let me get into Network Solutions. Total sales were up 68% including ADC sales of $323 million. On an organic basis, sales in the segment were up 2% versus the prior year.

In the Telecom network area, sales were up 6% organically versus the prior year driven by continued global investment in fiber networks; and we saw particular strength in Latin America and Asia.

In the Energy market sales were up 9% versus the prior year with strong growth in all regions as investment in distribution, transmission, and power generation continues to grow around the world.

In the Enterprise Network market our sales increased 4% versus the prior year due to increased data center spending and infrastructure builds in emerging markets.

Finally, in our SubComm business, as expected our sales declined 10% versus the prior year. Bookings in the quarter were $80 million, and we're working to bring several recent awards into force and continue to expect 2012 full-year sales of approximately $600 million.

Overall, in quarter one for the Network segment, we expect it to be up about 30% due to the ADC acquisition. On an organic basis the segment will be relatively flat versus the prior year, as global growth in fiber and energy networks is offset by an expected decline in SubComm, which we expect to have sales about $125 million in the first quarter, and a temporary slowdown in spending by North American telecom carriers.

Let me now move over to earnings which start on slide 8. Our GAAP operating income for the quarter was $465 million; and this includes $23 million of charges related to the ADC acquisition. The integration has progressed as we expected, and with the actions we have taken the business exceeded 10% adjusted operating margin in the fourth quarter and contributed $0.12 to our full-year adjusted EPS.

Also in the quarter we had $62 million of restructuring and other charges. This was slightly higher than we guided, as a result of actions that we took in response to the continued softness we are experiencing in the CIS segment.

If you look at our Company overall, during the quarter we reduced our headcount by about 3% through a combination of temporary and permanent reductions in response to the weakness that we were seeing in certain markets. On an adjusted basis, operating income was $550 million with an adjusted operating margin of 14.1%. The operating income impact from the additional week in the quarter was $53 million. Excluding the extra week the adjusted operating margin was 13.7%, which is a 60 basis point improvement versus the third quarter.

The improvement on slightly lower sales was driven mainly by the pricing actions that were implemented to offset material price inflation.

Adjusted earnings for the quarter were $0.89 per share, and if you exclude the $0.08 benefit from the additional week, adjusted earnings were $0.81 per share, which was up 13% from the prior year. The improvement was driven by sales increases, the acquisition of ADC, and the impact of share repurchases.

If you could move to slide 9. Looking at the top half of the slide, gross margin in the quarter was 31.5%, which did include a benefit from the extra week. If you take this benefit out, our adjusted gross margin was in line with our guidance of approximately 31%. This is an improvement versus 30.2% in quarter three and was primarily due to the effect of the price increases. Based on the expected volume decline that we see in the first quarter compared to this quarter, we expect adjusted gross margin of approximately 30.5%, which is down slightly.

Looking at the bottom half of the slide, operating expenses as a percentage of sales were in line with where we guided. In dollars, expenses were up $136 million year on year, primarily driven by the increase in sales, the addition of ADC, net of the cost actions that we did with the acquisition, and the additional week in the quarter. In the first quarter we expect research, development, and engineering and SG&A of approximately 5.5% and 12.5% of sales, respectively.

Let's turn to slide 10 so I can discuss items on the P&L below the operating line. Net interest expense was $37 million compared to $34 million in the prior year. We expect in quarter one net interest expense of approximately $34 million.

Other income, which relates to our Tax Sharing Agreement, was $14 million. In quarter one we expect other income of approximately $13 million.

In the tax rate, both the GAAP and adjusted effective tax rate was 26% in the quarter, and we expect the tax rate to remain the same at this level of 26% in 2012.

So now let me talk about free cash flow and working capital on slide 11. Our free cash flow in quarter four was very strong at $560 million; and for the full year we generated $1.4 billion of free cash flow. Capital spending was $206 million in the fourth quarter or about 5% of sales.

For the full year, capital spending in 2011 was about 4% of sales. In fiscal 2012 we do expect the capital spending to run with our long-term expectation around 4% to 5% of sales.

In working capital, our days were flat versus the third quarter overall, and we ended the year at our targeted levels. As we look at 2012 we do expect free cash flow to approximate net income; and as typical, our first-quarter free cash flow will be the lowest quarter of the year.

Please turn to slide 12 so I can talk about cash and the balance sheet a little bit. We began and ended the quarter with $1.2 billion of cash. Uses of the $560 million of free cash flow generated in the quarter were dividends of $76 million; repurchases of approximately 10 million shares; and the payment of $129 million related to pre-separation tax matters.

In 2012 we expect additional payments of about $90 million related to the shared separation tax liabilities. If you take both the payment that we just made in 2011 and the $90 million expected in 2012, this will represent about one-third of the estimated $600 million we expect to pay out related to the pre-separation tax liabilities.

I also want to highlight that, based upon the strong free cash flow and our strong balance sheet, during 2011 $1.2 billion of the $1.4 billion of free cash flow that we generated was returned to shareholders both through dividends and share repurchases.

If you could move to page 13, and then I will briefly discuss order trends. Total orders in the quarter were $3.6 billion, and the book to bill was 0.94 excluding the SubComm business. If you take out the impact of the extra week on orders, our orders were $3.4 billion in the quarter.

Book to bill in the Transportation segment was 1.01 and orders continue to be solid, driven by increased auto production and improving demand in the commercial aerospace market. In Network Solutions excluding SubComm, our book to bill was 0.94, driven by normal seasonality and the slowdown in spending by North American telecom carriers.

In our CIS segment, our book to bill was 0.86, with the continuation of the distributor inventory corrections that began in quarter three and end-market softness in the DataComm market impacting order rates.

So now let me turn it back to Tom and he will cover our outlook.

Thanks, Terrence. If you can turn to slide 14, in 2012 we expect organic growth of 2% to 6%. This compares to 6% in 2011. This is in line, I'd say, with current expectations for a slight slowdown in global economic growth in our fiscal 2012.

For the first quarter, we expect our sales to be in the range of $3.4 billion to $3.5 billion. This is an increase of 6% to 9% over the prior year. On an organic basis, which excludes the ADC acquisition, this is essentially flat versus the prior year; Terrence touched on that a little earlier.

In addition to normal seasonality, Q1 will be affected by continued weakness in CIS markets. By segment, we expect continued strength in Transportation and expect this segment to be up about 10%. Networks will be flat, and CIS will be down about 10%.

Our Q1 EPS is expected to be in the range of $0.68 to $0.72. This is down slightly versus the prior year. The essence of this is that the CIS weakness is more than offsetting the benefits of having ADC in the quarter.

For the full year, sales are expected to be $14.3 billion to $14.9 billion. Adjusting for ADC and the additional week in fiscal 2011, organic growth is expected to be 2% to 6%. The midpoint of our guidance is $14.6 billion and the major assumptions underlying this are as follows.

We expect and the industry expects auto production to grow about 5% to 82 million vehicles. We expect continued growth in telecom and energy infrastructure investment. We expect SubComm sales in the range of about $600 million. And we do expect the market served by our CIS business to begin to improve in the second half of the year.

This translates into an adjusted EPS in the range of $3.10 to $3.40. And that compares to the 2011 adjusted EPS of $3.03; and again, that is excluding the extra week in 2011.

At the guidance midpoint of $3.25 EPS, this is approximately 7% earnings growth, driven by the sales increase, increased further ADC synergies, and the benefits of our strong cash generation.

Just to sum it up before Q&A, I would say 2011 was a very good year for the Company with many positive accomplishments. We had strong sales growth and record EPS coupled with $1.4 billion of free cash generation.

We improved our share and capitalized on the positive trends in the Automotive, Aerospace, Defense, Marine, Energy, and Telecom markets.

I am really proud of what the team did in completing and integrating ADC. This is a tremendous addition to our Company; and again, welcome to all the folks from ADC who are doing a great job for us. This integration, as I said, is right on track and the operating margins have doubled inside the year of acquisition, as we committed.

As I mentioned earlier, performance in some of our CIS businesses was not up to expectation. This was a business had a great year in fiscal '10. The market hit us; we didn't quite react as fast as we could have in '11. But I am confident that we are getting this back on track and we are going to see improved performance in the second half of the year as we get through the inventory adjustment.

So all in all, a good year for the Company. I really feel like we are a stronger Company than we were a year ago. And although we are in a bit of uncertain times I am really confident that if the market is flat we will do -- we will perform solidly; and if the market does pick up we will perform well. With that, let's open it up for questions.

(Operator Instructions) Jim Suva, Citi.

Thank you, and congratulations to you and your team there at TE Connectivity. The question I have and then probably a quick follow-up is -- on the December outlook it is kind of interesting to see that year-over-year earnings per share are actually going to be down, especially considering that you are folding in ADC, which you mentioned is on track. Can you help us bridge the gap about why year-over-year December's earnings is down?

Is there any impact from the Thailand flood for production disruption? Or is it all the CIS weakness? But help us understand why December year-over-year EPS would be lower year-over-year.

Jim, thanks. No impact from Thailand -- no noticeable impact, although we have a little business there. It really boils down to CIS.

A year ago CIS was ramping. As I mentioned, through 2010 we had a very good year. We expected the business to continue to grow. We had been chasing it up, I think like a lot of companies in 2010, and we were making sure we got in sync with what we expected was a growing market.

It started to slow down throughout 2011. So if you think of a year ago, we were ramping; now we are still adjusting downward. And that is the whole impact.

So that is more than offsetting ADC. The balance of the business is very good. So it is really a CIS issue.

As we get through the inventory adjustment you will again see the operating leverage that you saw throughout the Company in FY '11 kick in, in the second half of FY '12.

Great. Then my quick follow-up is on your full-year earnings guidance. Does that incorporate the recently announced stock buyback? Or if you are active in that would that be additive to your EPS guidance?

That is included, so any way we would use our cash is included in our full-year guidance range.

Okay, thank you and congratulations to you and your team.

Amit Daryanani, RBC Capital Markets.

Thank you. Good morning, guys. I guess two questions.

One, could you just talk -- are thoughts on implementing further restructuring for the CIS segment specifically, given the revenue headwinds you have there? Near-term I'm just trying to get a sense. To get back to the 15% margins we saw in Q1 of last year, is it really going to be a revenue game from here on out? Or is this some sort of cost-cutting initiatives you can take to get there?

We have been adjusting our costs down. I would say tightening down; it is more that than any big restructuring. I will let Terrence get into a little more detail in a minute.

So yes; as we saw the slowdown was going to continue three to four months ago we began ramping down. Our total headcount is down over 3,000 in the last 100 days.

With respect to the 15% margin, I would expect us -- if we get back to normal revenue growth early next year to be on that. That's still the right next step for us. I don't think there is anything fundamental that is in the way of that. The pricing that we were able to do this year has offset some of the material costs.

About the only piece of our business that is really weaker fundamentally I would say than a year ago is consumer. We have been talking about that. But that has stabilized; and even at the current levels, that is not going to hold us back from getting to 15% margin.

Terrence, you want to elaborate on the restructuring?

Yes, when you look at CIS, how it is included in our guidance, Amit, certainly we guided it's going to be down 10% year-over-year. Sequentially, it's going to be down about 8%, 9%, so that is creating additional volume pressure -- to Jim's question.

When you look at it, as that comes back both from the cost actions, levers that we are pulling as well, Amit, in our guidance we do assume exiting the year CIS will be back up to about a 13% margin.

And to Tom's point we get back into 15% early the year after, based upon volume and how we get our operating leverage.

Got it. That's helpful. Maybe just my follow-up was, if you could talk a bit about the 15% op margin target that you have had in the long term. Is that still what we are aiming for? Would it be more reasonable to think that is more of a fiscal '13 dynamic at this point, when ADC's benefits are realized, CIS is at more stable footing?

And to the extent -- on that conversation, could you also just talk about why conversion margins for fiscal '12 look like they are in the high single digits right now?

So on the first part, to Tom's point he said earlier, when you look at the 15% total Company, certainly that looks like that would be exactly like you said. That would be into 2013 assuming certainly a normal growth environment.

When you look at the conversion rate year on year, it is really the impact of CIS's comparison in the first quarter and the first quarter. Through the remainder of the year we see more normal conversion rates; but certainly would, when we compare to this first quarter, that fall-through is weak in our first-quarter compare, really related to Tom's point earlier when CIS was ramping last year. Now we are in sort of a decline mode. So that is the real reason why the fall-through looks a little light.

That's fair. Actually your conversion margins actually looked pretty good for the next three quarters after Q1. Thanks a lot and best of luck.

Amitabh Passi, UBS.

Hi, thank you. Just a clarification. What exactly is embedded from ADC's contribution in your full-year fiscal '12 guidance? Is that an incremental $0.08 over fiscal '11? Perhaps you could just clarify that.

Well, when you look at it, it's completely in line. We are not going to guide by ADC; that is integrated in when you look at it. But it's completely in line when you look at what we said in the original acquisition plan.

So we have about $45 million of savings in this year. And when you look at it, it is getting up about 80% of the $100 million we said originally would be in by the end of 2012. So from that viewpoint that is how you should think about it.

To your point, Amitabh, I think you're right. Fiscal '11 included about $0.12 from ADC.

Correct.

Correct, okay. And then perhaps for Tom, when I look at your full-year fiscal '12 guidance, can you perhaps give us insight in terms of what your expectations are for your major end markets, your major operating segments, relative to the plus-2% to plus-6% that you are guiding to for Company overall growth?

Sure. Let me just reiterate the fundamental assumptions underneath it. So it is predicated on auto production of 5% to 6% getting to about 82 million units. So we would expect our Automotive business to grow higher than that, as is typical. We would expect the Networks business organically to grow in the low to mid single digits, largely impacted by the slowdown in North America right now, which is related to everything going on and the potential consolidation of the carriers there.

We will pick up the benefit of ADC. So overall that gives us about growth in the 7% range.

In CIS, it is really a tale of two halves. Down about 5 to 10 in the first half; up 5 to 10 in the second half. And that is year-over-year comparison. So those are the major assumptions embedded in that.

Okay, thanks. I will jump back in queue.

Shawn Harrison, Longbow Research.

Morning, everyone. Wanted to just delve in on the Automotive business. Much better than market performance this quarter even if you maybe strip out some of the Japan destocking. But if you could talk as you move through 2012, do you expect that same type of spread over market growth based upon the content and the share gains?

I would expect in that range. I mean we had another very good year. As you know, Shawn, we are strong in every single market in every part of the world.

We clearly, by every angle we look at it, picked up share in North America and in China. I would say we held on to our very strong position in Europe. So I would expect that we will continue to grow above the production rate -- probably not quite as much as we did in FY '11, to be candid.

I think we are not reducing our expectations, but with an exceptional year part of that was still the benefits coming out of the downturn when we kept investing. But we would expect to inch our share up a little more in '12, but probably not have as big a jump as we did in '11.

Are you seeing any warning sides in the automotive market? I know that -- I guess it's the one end market that is really holding up well here. So there is a concern here that potentially we could see a little --

I'll tell you, we look at it every hour of every day. I wouldn't say warning signs. I mean, clearly softness in car purchases in Southern Europe, but that is not new. That has really been going on for four or five years.

The German market continues to be strong. I don't think as bullish as two or three months ago. It was really -- our customers are really bullish and you have seen they are still bullish, but maybe not quite as much.

Continue to expect strong growth in China, probably a little slower than last year but still very robust. So we -- everybody is our customer; we are very plugged in; we are super sensitive obviously from three years ago. So we have our tentacles into every place we can to pick up any insights.

But if you look at even the most recent orders we are not seeing any signs yet. And we know our customers are also more in tune and ready to react to any unfavorable indicators. So I wouldn't say warning signs, no.

Okay, and there's a brief follow-up. Terrence, maybe if you could speak to where you are at on commodities right, now both copper and gold, versus the price recovery; and how you view that I guess in the first half or the next six months.

Sure. When you look at this quarter, we did a pretty good job. We pretty much essentially offset -- with the pricing actions we have talked to you about over the past six months, offset the metal headwind. And you saw that in the gross margin, as I indicated, and on the operating margin.

When you go into next year, with the movement we have seen in metals and also considering our hedging positions in the next year, right now when we look at metals and the pricing we still have to roll over, the impact on next year is going to be pretty minimal, whereas last quarter I told you it could be a $0.05 or $0.10 headwind, right now with where metals have moved it looks like it's going to be fairly neutral. And that is what is included in our guidance.

Very helpful and thanks so much.

Steve O'Brien, JPMorgan.

Hi, great. Thanks for taking my question here. As far as the drop-off, I think it has been widely reported in terms of Western carriers' network spending. Can you help me understand what gives you the confidence that there will be recovery, I guess, getting to a quarter or two out, that gets that Networks segment back going?

And maybe I am under-appreciating also probably the growth, and maybe you can touch on this, the growth you are assuming for the Energy and enterprise piece parts?

Thanks, Steve. Yes, I guess the way I think about it is, you just look at the fundamental demands on the networks and no end in sight. The capacity is being stretched. Coverage needs to expand. The throughput needs to expand. So there's fundamental drivers.

I think we are always going to see a lumpiness in demand. In my entire career around this -- and I have spent most of my career around this business -- it has always been lumpy because it is significant investments that go in and then a pause. So I think the combination of what is going on in our Q4 in North America, on top of the last year a pretty robust investment around the world, means it is going to grow slower.

We grew 14% organically in the Network business in fiscal year '11. So it was a tremendous year of both market growth and share growth for us. Add on top of that ADC, so a big year for us.

We see that organic growth being kind of in the low single digits in the midpoint of our assumption for fiscal '12. So we definitely expect it to slow down a bit. I don't think we are unrealistically optimistic with that kind of assumption.

We do hope things get worked out in North America soon. There is certainly the need for the investment. That is what our customers are telling us, to stay ready.

But we had a lot of experience in this market, so know that it can be lumpy. But we are positioned very well in the product range and we are positioned very well in our cost structure, so we will capitalize on the upside and we will manage through any slowdown.

Great. Thanks for that, Tom. Then a quick follow-up and maybe a clarification too, if I could. The follow-up would be what are your distributors telling you in terms of inventory levels and how low now can this -- how long can this correction continue? How close to the bottom are we in terms of leanness of inventories on the shelf?

Then the clarification is just perhaps you could give us an actual share count being used in your EPS guidance for the quarter and next year. Thanks.

Probably I'm not going to get that detailed; but I will say we are -- that is another group. We do an awful lot of business through the channel, so we are -- and I am personally in touch with my peers there all the time. We are seeing pretty much all the same trends, which -- there is a little bit too much inventory in the channel. And adjustment for that we all expect.

They are more the eyes and ears for us. We really rely on that, that Q2 -- through Q2 we expect it to level out.

We are not seeing it drop off as much as we did over the last couple months, so we are seeing a flattening out, which is encouraging. And as long as end demand stays okay I would expect we will be through this in Q2.

Matt Sheerin, Stifel Nicolaus.

Yes, thanks. So, just actually following up on the last question regarding expectations for share count for the year, because I think in answering Jim's question I think Terrence said that the buybacks are factored into the fiscal '12. I am just trying to figure out whether the buybacks you already did, or the $1.5 billion that is out there that is factoring that in. I am trying to get a share count for next year.

When you look at the first quarter, we are assuming around 430 million and for the year, it's around 425 million. And remember, how the mechanics work; it is an average. You don't get the full benefit next year of your share repurchases. Just how the math works.

Yes, so you still have -- because if you had $1.5 billion, we are talking certainly more than 20 million shares, right?

Correct.

Yes, okay. Then, could you talk a little bit more about where the cuts were made on the CIS area? How much more is to go?

Then I'm just interested in what your near- and long-term strategy with smartphones are. Because obviously that is a big market opportunity that you are not participating in deliberately in a big way. I am just trying to get a better understanding of your strategy there. Thanks.

So let me answer the smartphones first. If I understood the last part of your question, just to clarify, I wouldn't say we are not participating deliberately. I think you know the story for us is -- we had a decent position in the handset business. When it shifted over the last couple of years more to smartphone, and there was a customer shift we didn't react to it very well. That is really -- I would call that execution issues on our part.

So we like the smartphone business. We believe there is no reason we can't do better. We have most of the right products.

Now we have a bit of a new approach to the market. We have had some success, as I said, in handsets in the past. So I think we know how to compete there; and I am a lot more confident now that we have stabilized our position.

So that is a market that we expect to do better in. It is not going to happen overnight, but there is no fundamental reason that we can't do better in that market.

And the first part of your question was where we made the (multiple speakers)

Just in terms of the cuts, yes.

We made three-quarters in manufacturing. So when you look at it, it's mainly manufacturing and then just a little bit on the overhead side.

Okay, and is that it then for now?

Correct.

Yes.

Okay, thank you.

Craig Hettenbach, Goldman Sachs.

Yes, Tom, if I can follow up on the Automotive market, the 2X growth in the quarter relative to units. Can you touch a little more just on the content, what you are seeing? What you saw last quarter, and then as you look into 2012, what is really driving the dollar content gains for you in terms of what applications?

Boy, you really have to go by region to get that. As you know, content is quite an aggregated average number. It's in the emerging markets; it is just an increase in features across-the-board.

It is more safety. It is more antilock brake systems. It is things like that.

It is reduction -- a drive to reduce weight, which actually helps us. Even though the size of our products go down, there tend to be more complexity.

In the Western world it is the gradual -- and it is still a small part of the business -- but it's the gradual increase in hybrid electric vehicles that as you know have a lot more content.

But overall, content hasn't moved that much. It continues to steadily march up; that 5% or 6% a year is what we see.

Then what we're really excited about, that is sort of the tipping point for HEV hits in the next three, five, six years. Then you will see a nice -- that average content will go up higher than that.

Okay. Then just staying with as you mentioned some share gains. Can you just talk about the pricing environment that you have seen recently and expectations as you go forward?

Well, as you know, with all the metal cost increases we faced over the last few years I think the industry in general -- certainly speaking for us in particular, we raised prices. Modest price increases. But those are in place now.

If we were to see another spike we are ready to do that again. It is to a point where when copper is raising 20% or 30% a year and gold 30% to 40% a year, we have to add that on. So I think that was an important accomplishment for our organization in the past year.

Okay, thank you.

William Stein, Credit Suisse.

Thanks. Good morning. I am wondering if you could dive a little bit into ADC/TE's performance in terms of the various strengths of that business? Is the strength that we are seeing driven by fiber deployments or the distributed antenna systems? And maybe if you can talk about the outlooks in those two parts of the business that would be helpful.

I would say both. DAS or distributed antenna systems was very strong this year. That product is used (technical difficulty) demand coverage and capacity in and around buildings and in large venues like stadiums. So that was the strongest segment within ADC.

The other benefits we have seen are a number of big deals around the world where we now walk in with a very comprehensive end-to-end product line. So we certainly have seen strength outside the US of the combination of that. The first half of the year was a solid year in the traditional fiber copper in the US, and then it slowed down in the second half.

Great, thank you.

Again for next year, I would say we expect another strong year in DAS; a little bit slower year in the fiber and copper connectivity.

Mike Wood, Macquarie.

Hi, good morning. Can you give us any color in terms of order trends intra-quarter just to bridge the gap with the 1.6% organic growth that you had in the quarter and the outlook for 2% to 6% growth next year? Was there signs of stabilization? Or more color there would be helpful.

Yes, Mike, I think when I commented on the order trends that we saw during the fourth quarter, they have continued here in October and I would say that they are stable, albeit in our CIS market at a lower rate. So when you look at it, the order trends in our Transportation unit remained stable and strong.

And our CIS businesses, they are at that lower rate, reflecting that distributor inventory correction. And in Networks, ex the North America carriers, really what we are seeing is this is typically a seasonal point in the year as they do slow down going into next quarter or second quarter.

So ex the North American carriers, the orders are where we would expect them to be. So still the correction in CIS is the big thing that we continue to watch.

And I think, Mike, for the full year, as Terrence mentioned earlier, the expectation is those CIS markets will start to improve in the second half. That is not something we are seeing in the order rates right now; but there is an expectation that that will improve.

Okay. Also in the consumer electronics space I saw a supplier of Nokia reported they have seen some better momentum there. Is that still a manufacturer that we would expect to see your trends in that segment follow? Are you seeing that benefit?

Yes.

Yes, our trends would follow that manufacturer, clearly and certainly. Like we said, the business stabilized in the last quarter and was up sequentially. So yes, we would still continue to follow that.

Okay, thank you.

Sherri Scribner, Deutsche Bank.

Hi, thank you. I just wanted to dig into your comments about CIS improving in the second half of next year. Is that primarily a comment about the market improving? Is that your share improving? Is that some actions in targeted markets that you are going after that changes in the second half? Just wanted to get a little more detail. Thanks.

Sure, Sherri; thanks. I would say number one it is the inventory correction. That is the biggest thing.

Slight improvement in end markets. And I would expect a slight improvement in our consumer business. Nothing miraculous, but kind of steady, extent, beachhead kind of improvement.

Okay. Great, thank you.

Steven Fox, Cross Research.

Thanks, good morning. Tom, you highlighted China in your opening remarks. I am assuming some of that is auto, as you said during the call. But is there anything else you would point to that is going on and driving growth in China recently?

And where would you say your profitability is in the region at this point? Is it at satisfactory levels?

In terms of the last question, yes, very -- I feel very good about our profit margins there. And of course you have to run very fast to keep that.

Clearly, our strongest position there is in automotive. If you think about China, there are kind of three submarkets is how I think about it. It's the markets driven by local consumption that are served by multinational competitors and local competitors. In Automotive, for example, we are strong with both.

Energy and telecom and enterprise, which is all local consumption, again I would say we are pretty strong in telecom, especially with our recent acquisition, although it is a very fragmented market. And in enterprise, which is also a fragmented market, but we have a strong market position.

And energy is an extremely fragmented market. We are growing with the market, but there's hundreds of competitors and we have a small market share.

The balance of the third piece of the way I think about it is a piece that it's really manufacturing for export. There is local demand; but PCs, handsets, DataComm infrastructure, all of that. And that really follows more the global demand patterns. We are there for lower cost manufacturing.

So I think that really follows our position in our other markets. So in consumer we are not so strong; we are solid in DataComm; we're pretty strong in industrial, for example. I don't know if that gives you a little bit of an answer to your question.

Yes, it does. But I was actually curious how those markets held up versus your expectations from a sales and orders standpoint. Was it about what you expected? Or are you seeing unusual strength or weakness in any of those areas in China?

(multiple speakers) unusual. It slowed down in the middle of the year in all the markets. Automotive slowed down a bit but it picked up nicely in the end of the year, and we had a very strong, very solid level double-digit automotive growth in the fourth quarter.

I would say it is probably a little slower the second half of this year than the first in telecom infrastructure. A lot happened over the last few years; that has slowed down a bit. Again nothing -- it is not a rapid decline or anything, but definitely seeing a slowdown there.

And the balance of the markets are kind of following global demand.

Great. Thank you very much.

William Stein, Credit Suisse.

Thanks for taking my follow-up. What I wanted to ask also is about the weakness that you are seeing through distribution, whether you could characterize -- when you look at the point-of-sale, whether you can characterize how much of the weakness is strictly inventory-related versus end demand in that channel?

It seems to be more inventory, I would say, because the trends for us through the channel on point-of-sale -- you know, the sellout are better than the sell-in, which is definitely a reflection of inventory adjustments. So I would say most of it appears to be inventory right now. I think we all expect once we get through that to get back into growth.

So that is giving you optimism for second half when that reverses itself and you either see a rebuild of inventory or just selling to match sellthrough. Is that fair?

Our guidance reflects that optimism, cautious optimism. I wouldn't say it is highly confident optimism, but cautious optimism based on the trends we see right now.

Just one other if I can. Distribution has been an area where I think you have been rationalizing the number of partners over the last year or two. Any update on that process?

Yes, I am extremely pleased with our progress in the electronic distribution channel. Very pleased.

I speak regularly with my peers there. I think we are working together better than we ever have. Thanks for the question.

Amit Daryanani, RBC Capital Markets.

Just had a couple of follow-ups, guys. One on the Automotive side, I'm not sure if -- maybe I missed this. But could you quantify the benefit you had from some of the restocking impact from Japan? Is there any impact of that baked into the guide for the December quarter as well?

When you look at the December quarter, we assume some of that being ahead of production that we saw this past quarter will not reoccur. So that separation will be less. For example, in Asia this quarter, Amit, production was up 4%; we were up about 13%.

Some of that relates to the supply chain repriming itself. So I don't have an exact number on it, but we know that was (technical difficulty).

Got it. Then just given the fact we upped the dividend and (inaudible) the buyback for fiscal '12. How should we think about acquisitions going forward? Is next year going to be a bit more of a time you continue to digest ADC? Or is the appetite still there to do deals?

No, our strategy remains the same, that we want to continue to strengthen our position. Most of our focus is through products, but largely also in markets if we don't have the right market position. And our priorities continue to be around industrial and energy and commercial there. So this doesn't change our strategy at all.

Got it. Thank you.

Wamsi Mohan, BoA Merrill Lynch.

Hi, this is Ruplu filling in for Wamsi. Most of my questions have been answered, but just on the SubComm business you mentioned $600 million for next year. I was just wondering if you can give us an update on the recent wins you talked about. The Pac Fibre win, how that is coming along.

And can you comment on the linearity of the $600 million over next year? Is it more back-end loaded?

Hey, Ruplu. When you look at it, first quarter, as I said during the script comments, was about $125 million is what we expect the first quarter to be. The Pac Fibre win is something that is assumed that contract comes into force; it is not in force yet. So it is one of the two contracts that we do assume will come into force.

But certainly our customer is still working through their funding side of that. So it is -- the year is more back-end loaded, to your question. First quarter will be $125 million and $600 million for the year.

Okay, great. Just one last clarification on the inventory correction in distribution. Did I understand correctly that you expect it to be a one-quarter correction and in 2Q it should be normalized? Or do you think it will extend into 2Q as well?

It will extend through Q2 is our current estimate.

Okay. Thank you very much.

If it plays out as we think, by the second half of Q2 we will see evidence that it is over.

Okay, thank you.

Thank you, and with that we will turn it back to Mr. Kolstrom. Please go ahead.

Thanks, everyone. For any follow-up questions, please call Matt Vergare in IR. Thank you very much.

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