泰科電子 (TEL) 2012 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the TE Connectivity reports fiscal first-quarter results. At this time, all participants are in a listen-only mode. You will have an opportunity to ask questions after the presentation. Instructions will be given then. (Operator Instructions).

As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Keith Kolstrom, Vice President of Investor Relations. Please go ahead.

Good morning, and thank you for joining our conference call to discuss TE Connectivity's first-quarter 2012 results. With me today is our Chief Executive Officer, Tom Lynch and our 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. Finally, for today's participants on the Q&A portion, I would ask everyone to please limit themselves to one follow-up question.

Now let me turn the call over to Tom for some opening comments.

Thanks, Keith, and good morning, everyone. If you would please turn to slide 3. Q1 was a slow start to the fiscal year for us. We anticipated a slow start, but it was softer than expected.

Sales in the first quarter of $3.3 billion were up 3% overall versus last year and were down 3% organically. This excludes currency translation and the ADC acquisition. And the sales level was about 3% below the guidance range, and I will come back to this in a minute.

Adjusted earnings per share were $0.66, $0.04 below the midpoint of our guidance range, driven by the revenue shortfall. Free cash flow was $85 million in Q1, which was in line with our expectations. And orders were $3.2 billion in Q1, with a book-to-bill excluding our SubCom business of 0.98.

As we came off a strong fiscal year '11, we did expect the first quarter of our fiscal year '12 to be down sequentially by more than just normal seasonality because of continued inventory corrections and the slowdown in the telecom market, particularly the North American telecom market. Our Q1 guidance was a sequential decline of about 5% to 7% in revenue and approximately $0.15 EPS. We ended up being down 9% in revenue and 18% (sic) in EPS.

When we reaffirmed our guidance at our investor meeting in early December, revenue and earnings were tracking in the range. However, sales dipped below this rate in the last four weeks of the month, particularly in our European businesses and in the North American telecom market. This impacted our Network and CIS segments, and more than offset another strong quarter in our transportation business, where revenue grew 7%.

Despite the lower sales volumes in Q1, we were able to maintain our adjusted operating margins above 12% due to the pricing and cost reduction actions we implemented through the second half of last year and into early this year. At the $3.3 billion revenue level, the 12% margins were in line with the model we communicated at our investor meeting.

Let me say a few words about our outlook, then I will turn it over to Terrence and will come back and talk about the outlook in more detail at the end of the quarter.

The order softness in Q1 -- and our orders were about $3.2 billion, which was lower than we expected -- will result in Q2 revenues and earnings about equal with the Q1 level. On an organic basis, Transportation and Networks will be up slightly sequentially and CIS will be flat. The weaker euro will have a negative impact on revenue of about $50 million versus the prior guidance.

We do expect a stronger second half due to normal seasonality and inventory levels in the channel getting back in balance. I will cover this in more detail later on.

And as the volume returns, we do expect our earnings to accelerate. At the expected second-half revenue levels of $3.6 billion to $3.7 billion for the quarter, I expect our OI margins to be back at the 14% range and EPS to be back above $0.80 a quarter.

Now let me shift gears a minute, and I will give you a brief update on the Deutsch acquisition. The acquisition continues to proceed as planned. In December, we received French Workers Council approval and continue to expect the deal to close in our third quarter, pending final regulatory approvals. We continue to be very, very excited about adding Deutsch's industry-leading harsh connectivity products and strengthening the portfolio in our Transportation segment, where our end-market demand continues to be solid.

Now I will turn it over to Terrence to discuss the first quarter in detail, and then I will come back and covered the outlook, including the change versus prior guidance. Terrence?

Thanks, Tom and good morning, everyone. If you could please turn to slide 4, and let me give you an update on the sales performance.

Total company sales of $3.3 billion were up 3% year over year on an actual basis, but down 3% organically. The slight year-on-year increase was driven by 7% growth in our Transportation Solutions segment and the acquisition of ADC, which contributed $185 million of additional quarter one sales. And to remind you, we closed that acquisition back in December of 2010. Partially offsetting these positives were organic declines in the Network Solutions segment of about 3% and the Communications & Industrial Solutions segment of 13%.

On a sequential basis, our sales declined 9% from our 13-week fourth-quarter revenue of $3.6 billion. Our quarter one guidance was based on an expected sequential decline of about 5%, based on the 13-week fourth quarter. As Tom mentioned, larger-than-expected declines in North American telecom spending and our businesses that serve the European infrastructure and industrial markets show the additional weakness versus our guidance.

Geographically, and on an organic basis, our sales declined year-over-year in Europe by 7%, while the Americas and Asia were essentially flat.

Now let me give you some highlights of the key markets in each of our segments, and as I talk through this, all the changes I mention are on an organic basis, which excludes the effect of currencies.

So if you can please turn to the next slide, in our Transportation Solutions segment, sales increased 7% versus the prior year. In the automotive market, our sales increased 7% versus the prior year, with sales being up 14% in Asia and 12% in the Americas. Sales in Europe were about flat, and in China, our sales were up 13%.

Global vehicle production was approximately 20 million units in the quarter, which was up by about 1% compared to the prior year. End demand trends remain stable, although OEM production expectations have moderated, particularly in Europe. Expectations are now around 80 million vehicles for the year to be produced, with approximately 20 million expected in the second quarter. Versus the prior year, these revised production numbers would be up approximately 3% for the full year and up 2% in the second quarter.

Full-year production estimates include growth of about 9% in North America and 8% in Asia, while Europe will experience about a 6% decline.

Our sales during the quarter and our expectations for the full year continue to outpace production due to our strong market position, as well as the continued increases in contents of electronics in vehicles.

Turning to the Aerospace, Defense & Marine market, sales were up 9% versus the prior year. Growth was driven by further demand increases in the commercial aerospace and oil and gas markets. In addition, improved share gains across all these end markets enabled us to grow above market rates. For the segment overall in the second quarter, we expect that our revenues will be up 5% on an organic basis when we compare to the prior year.

If you can please turn to slide 6. In our Communications & Industrial Solutions segment, total sales declined 13% organically versus the prior year and on a sequential basis. In the industrial equipment market, our sales were down 15% versus the prior year, and these declines were fairly broad-based. Also impacting this market, as we covered on the last call, inventory corrections by our distribution customers, who account for about 50% of the sales in this market, negatively impacted the quarter. We do expect a modest increase in the second quarter, with further improvement in the second half.

In the datacom market, which includes sales to the communications equipment, server, storage and wireless equipment markets, our sales were down 20% versus last year. The declines in this market were larger than expected, driven by continued market softness, as well as corrections of inventory occurring throughout the entire supply chain as a result of reduced carrier spending in the quarter.

Similar to the industrial markets, we do expect the inventory corrections to work off in the second quarter, and we expect to have an improvement in the second half of our fiscal year.

Consumer Devices revenues were down 12% versus the prior year, and these declines were in line with our expectations. As discussed on prior calls, customer mix and our relatively weak position in smartphones, as well as a weak PC market, drove the year-on-year declines. We continue to be optimistic as we make progress with key customers and secure new program wins in this area. In the second quarter, we do expect our CIS segment revenues to be similar to quarter one levels.

Turning to Network Solutions, if you could please turn to slide 7. Total sales were up 25%, including ADC. On an organic basis, sales in the segment were down 3% versus the prior year. This will be the final quarter where there will be an adjustment for the ADC acquisition as we reach the one-year anniversary.

Turning to the markets, sales to the Telecom Networks market were down 1% versus the prior year, but they were down sharply at 17% sequentially. Our guidance did anticipate a significant sequential decline; however, carrier demand was even weaker than we expected, both in North America and in EMEA, and we believe this additional weakness was driven by the proposed consolidation that was going to occur in the industry, which created delays in carrier spending.

Sales to the energy market were down 4% versus the prior year, with strong growth in North America offset by weakness in Europe. We expect to see improvement in Europe and more normal seasonality in the second half of the fiscal year as investment in distribution, transmission and power generation continues to grow around the world.

In the enterprise area, our sales increased 5% versus the prior year due to increased data center spending, as well as infrastructure builds.

And finally, in the SubCom business, as expected, sales declined 9% versus the prior year. There were no significant bookings during the quarter; however, several of the awards that we discussed on prior calls are in the process of being finalized and we continue to expect fiscal year 2012 sales of approximately $600 million in this business.

Overall in the second quarter, we expect sales in our Network Solutions segment to be up about 5% sequentially, driven by carrier spending particularly in North America, and we expect this improvement to continue through the year and our Network Solutions segment sales to be up about 4% versus the second half of fiscal 2011.

Let me now discuss earnings, which start on slide 8. Our GAAP operating income for the quarter was $378 million, which includes $19 million of restructuring and other charges of $4 million of initial charges related to the planned acquisition of Deutsch.

Adjusted operating income was $401 million, with an adjusted operating margin of 12.1%. The sequential decline in our adjusted operating margin resulted from the 9% decline in sales. The fall-through on this decline was about 30%, and these results are in line with the model I discussed at our investor meeting in December, with margins of about 12% in a 10% revenue decline scenario.

We do expect operating margin to be slightly above 12% in quarter two, with revenues at similar levels to quarter one. And we expect improvement to about 14% operating margin in the second half as our revenues approach the $3.6 billion to $3.7 billion level that is included in our guidance. Adjusted earnings per share for the quarter was $0.66, and we expect similar results in quarter two.

If you can please turn to slide 9. Looking at the top half of the slide, our adjusted gross margin in the quarter was just under 30%. We expect to gross -- adjusted margins for about 30% again in the second quarter, and back to the 31% level in the second half.

Looking at the bottom half of the slide, operating expenses as a percentage of sales were better than guidance. Expenses were up $17 million year-on-year, primarily due to ADC, as the prior year included only a partial quarter of ADC results, partially offset by the cost actions. In quarter two, we do expect RD&E and SG&A of approximately 5.5% to 12.5% of sales, respectively.

Turning to slide 10, let me cover the items on the P&L below the operating line. Net interest expense was $33 million compared to $30 million in the prior year. In the second quarter, we expect net interest expense of approximately $36 million. The sequential increase is due to the interest on the funding we are starting to put in place with the planned Deutsch acquisition.

Other income, which relates to our tax-sharing agreement, was $1 million. This was much lower than our guidance of $13 million of income due to adjustments related to our pre-separation shared tax liabilities. These adjustments affect both other income and the tax expense, so both were lower than guidance. The net effect had no impact to earnings per share compared to our guidance. In the second quarter, we do expect other income of approximately $9 million.

The GAAP effective tax rate was 27%, and the effective tax rate on an adjusted basis was 23% in the quarter. As I just mentioned, the legacy tax adjustments resulted in a lower adjusted rate, and there was no favorable impact on EPS. We do expect the adjusted tax rate to be about 26% in the second quarter and for the remainder of 2012.

Now let me turn to free cash flow and working capital, which starts on slide 11. Our free cash flow in the quarter was $85 million, and cash from operations was $210 million, which is a 36% increase over the prior year. As is typical for our Company, the first quarter is always the lowest quarter for cash generation and we continue to expect that free cash flow will approximate net income for the year, which would be approximately $1.3 billion at the midpoint of our guidance.

Capital spending was $130 million in the first quarter, or about 4% of sales. For the full year, we continue to expect capital spending of approximately 4% to 5% of sales, in line with our long-term expectations.

In working capital, the net working capital days are at targeted levels. Receivables and payables are similar to the fourth quarter, and inventory increase seasonally is 71 days, and we expect that inventory days to work back down into the 60s by the end of the year.

Let's turn to slide 12. We ended the quarter with $1.4 billion of cash. Uses of free cash flow generated in the quarter were dividends of $77 million and $17 million related to share repurchases that we traded at the end of the fourth quarter, but settled in the first quarter.

We did issue $179 million of commercial paper during the quarter. We have reentered the commercial paper market in advance of the planned acquisition of Deutsch. We expect to initially fund approximately $1 billion of the acquisition with debt and the remainder with cash. And we will continue to raise funds in anticipation of the deal closing, which is expected in our third quarter.

Also, as I covered on the last call, we continue to expect net payments of about $70 million related to shared tax liabilities in 2012. The 2012 payments, as well as the payments we made last year, represent about one third of the estimated $600 million of total net payments that we expect related to the pre-separation tax liabilities.

If you could please turn to slide 13 and let me briefly discuss order trends, before Tom gets into the details of the outlook. Total orders in the quarter were $3.2 billion, and the book-to-bill was 0.98, excluding the SubCom business. Book-to-bill in the Transportation segment was 1.01, and orders continue to be solid, driven by stable global auto production and improving demand in the commercial aerospace market.

In the Network Solutions area, excluding SubCom, the book-to-bill was 0.97, driven by normal seasonality and a slowdown in spending by North American telecom carriers.

In our CIS segment, our book-to-bill was 0.95, primarily due to the impact of the inventory corrections that I mentioned. In January, our book-to-bill is running slightly above 1, which is a positive sign.

Now let me turn it back to Tom, who will go into more details on the outlook.

Thanks, Terrence. Please turn to slide 14. I touched a little bit on this earlier, but let me reiterate our outlook. For the second quarter, we expect our sales to be in the range of $3.3 billion to $3.4 billion. This is down slightly versus the prior year on an organic basis and about flat sequentially.

On a year-over-year basis, we expect the Transportation segment to be up approximately 3%, Networks down about 4% and CIS down about 10%. CIS continues to be adversely impacted by weaker spending in our datacom and industrial businesses, as well as channel adjustments, as Terrence mentioned. But we do think it has bottomed out, and we expect the channel inventories to be close to normal at the end of the second quarter. Our adjusted earnings-per-share are expected to be $0.64 to $0.68, about flat with Q1.

For the full year, sales are expected to be $13.8 billion to $14.2 billion, which is flat to slightly up versus 2011 on an organic basis. And at current rates, currency translation will be about a $300 million headwind versus last year, and this is the weaker euro.

The midpoint of our guidance is $14 billion, and our major assumptions are auto production grows 3% to 80 million vehicles year-over-year, second-half seasonal increases in telecom and energy infrastructure, and an improvement in our CIS markets in the second half of the year compared to the first half, driven by the channel getting in balance and seasonality.

Adjusted EPS for the year are expected to be $2.90 to $3.10, compared to 2011 adjusted EPS of about $3.03. And this $3.03 excludes the extra week in last year. So essentially, we are calling -- our current outlook is for 2012 to be flat with 2011.

Now if you can turn to slide 15, with this, we are trying to illustrate the midpoint of our revenue guidance by quarter and give you a sense of the seasonality and also a sense of the change from the prior guidance by quarter.

The big takeaways from this slide are that the first-half sales are expected to average slightly above $3.3 billion, and with a corresponding operating margin of about 12%. And second-half sales will average about $3.65 billion, with operating margins back to the 14% level. Now, when you take this versus the prior guidance for the full year, sales at the midpoint are about $600 million lower and EPS at the midpoint is about $0.25 lower.

Approximately $200 million, $0.05 of the EPS decline, are related to a weaker euro. And the majority of the balance of decline is related to lower demand in our European businesses, plus the channel correction.

Now just a few closing comments. The first half was definitely slower than we expected when we guided back in October, and we feel bad about missing the first quarter. And in retrospect, more than anything, it looks like we maybe called the holiday impact wrong. But I still feel really good about the fundamentals of this business, and the fundamentals are going to get better when we close the Deutsch acquisition. And just to highlight, I think with Deutsch, we just have a tremendous product range.

I believe we are stabilizing in our consumer market. That has been a weak spot for us. It is still going to be a while before we improve, but I think we are getting stable there. I really believe CIS has bottomed. The key to that will be the channel getting back in balance this quarter.

Our overall operating leverage is sound, and the 12% at a 10% sequential decline I think kind of proves that out. Our customer satisfaction is up across the business, and we are going to continue to be a large cash generator. So I think the bottom line for us is we have stay the course, make sure that as the volume picks up again we take advantage of it, get to the 14%, and as volume moves above $3.6 billion, we quickly close on the 15%; we are not coming off that because of a quarter or two.

So now let's open it up for questions.

(Operator Instructions) Amit Daryanani, RBC Capital Markets.

Thanks a lot. Good morning, guys. Maybe just to start off on the CIS segment, could you talk -- when you look at this 13% organic decline in sales, how is it different in term of sales to OEMs versus sales to the channel? And I'm assuming this softness came fairly late in the quarter. What is the conviction that you recover? Because you are actually talking about -- I think about 20% plus growth in the back half versus the first half.

A couple things. The first part of that question would be it is pretty balanced across; a little more in the channel because of the inventory correction. So clearly, the downturn there, I'd say the channel adjustment later in the quarter, more than early in the quarter.

And if you look at the normal seasonal patterns of the business, we would expect -- I mean, that business typically will be stronger in the second half. And we also believe -- just at the absolute inventory levels at our customers, we know how much inventory we have in the channel, and it's down. And it went down quite a bit in the first quarter. So those are the data points that give us some confidence.

The OEMs we talk to, I would say are cautiously optimistic. But it is as much about seasonality and the channel getting back in balance as anything.

And (inaudible) most of the semi companies that seem to be talking about the industrial side potentially starting to bottom out, do you think that could just be a reflection that you have much shorter lead times, so you are potentially see that bottoming out a quarter delayed than all the semi companies are seeing it right now?

Yes, I think that's it. And that is typically -- we would typically be three to four months after the semis in certain industries. So yes, I think your point is right on there.

Finally, I want to understand -- on the transport side, fairly impressive margin performance. Could you really just talk about what drove margin expansion in the December quarter when sales, I think, were down about $100 million? And then as you look to fiscal '12, can you maintain that high 15% margin run rate in that segment?

Let me talk a couple things, certainly from the standpoint that we were very pleased with our Transportation segment performance in the quarter, even though it did get a little bit softer in Europe. When you look at it, we did go up close to 16%. We do think we will be maintaining around 15% from the year, so some of it was a little bit of timing on the margin, Amit. But we do think the Transportation segment, even with the slightly lower global auto production, will stay about 15% for the entire year.

Amitabh Passi, UBS.

Thank you. I just wanted to follow up on the first question, again looking at your CIS segment, particularly datacom and industrial. I mean, the sequential declines, I think, if the numbers are correct, are almost on the order of 20% to 30%. And I don't think we have seen these levels of decline since the downturn in '08, '09. So just wanted to understand better.

I mean, OEM demand, I don't think is contracting to that level. But from your perspective, if you could maybe shed a little more light at terms of which pockets of these end markets are you seeing the greatest weakness, and then what gives you -- I guess, where do you expect sort of the most recovery as you look forward?

There are three big pieces in our Industrial business, which would be -- well, two big pieces. There is the general industrial market, which is equipment makers, rail, solar, things like that. And also appliance, we include for purposes of this. So those businesses, end market demand in appliance has been down. We are starting to see that level off.

In the general industrial market, it has been drifting down, but the channel has been drifting down at a much steeper rate because about half of our business in industrial, we serve through the channel. So when we see the business ramping up, if you would look at our trends over time, as that market begins to grow, we tend to grow ahead of it, as inventory gets laid in to support the OEMs' build plans. And then when it turns down, we tend to contract faster than it.

On datacom, I would say we do quite a bit of business through the channel in datacom as well, but I think there, it is more of an end demand continues to be weak at the big equipment makers. So that I think is going to last a little longer than industrial.

Got it. And then just as my follow-up, for Terrence, again going back to the CIS, and perhaps even Network Solutions, are there any other levers you have to maybe minimize the downward impact to margins? I mean, we are seeing CIS margins now go from 15% to about 8.7%. Just wondering what else can you do to maybe accelerate the margin recovery in the back half.

What we -- mainly, the actions we've been taking have been mainly in CIS. We have been reducing our workforce in that area to basically resize with the demand expectations. And right now, we do expect in our guidance that the CIS business in the second half, with the actions and the volume, will get back up into the 12% to 13% OI range in the second half of the year.

So certainly, we are being hit by the volume. To your point, we were down -- in the first half, we still expect that to be down more than 10%. And we expect our second half really to get flat with prior year in CIS. So when you look at -- certainly at the inventory corrections Tom talked about, we think with that, we will get our margins back up into the 12% to 13% range on being flat in the second half.

Shawn Harrison, Longbow Research.

Good morning, everyone. Just wanted, I guess, a clarification on the back-half guidance in regards to distribution versus just seasonality. How much of that back-half growth is distribution adding incremental inventory? Is there anything baked into that guidance or is it solely distribution stops getting worse and seasonality?

The back half, the $600 million, if you look at second-half versus first-half revenue, about $100 million of that is distribution. And it is not so much filling up the channel. It is really not draining the channel more than anything else. So it is where sell-through begins to balance with sell-in. So what we sell in equals what they are selling out, as opposed to their sell-out is out of balance with sell-in now.

Have you seen regionally, I guess -- is Europe just still the one area that is destocking the most, and then the other regions that you use distribution kind of more back to normal?

I would say Europe is the most, but there are still corrections in the US and in Asia in the channel. But it is more pronounced in Europe because the end demand has been a little softer there. Whereas in the US, I think we are seeing, in most of our markets, things pick up. And the same -- and Asia has been fairly steady.

Jim Suva, Citi.

Good morning. This is Sam (inaudible), actually, on behalf of Jim Suva. Just taking a quick step back, I wanted to get a better sense of why the year-over-year is so soft, the midpoint of guidance being flat. And it still includes the ADC acquisition, and presumably a boost to auto -- I don't know -- you said it was supposed to be up 3% year-over-year, and helped by the [Thailand] pushout of orders.

Can you just go into some details of what specifically is lagging and what management can do to improve that?

Full year-over-year guidance is what you're asking?

On a sales level, yes.

So the big change -- so you have -- well, we had ADC in 10 months last year, so there is a little of a pickup from ADC (multiple speakers)-- yes, $185 million. You have the euro, which is a couple hundred million plus weaker year-over-year. And then you have the European end markets; right now, we are calling off about [$300 million] year-over-year. The other piece is telecom spending relative to our guidance for sure is going to be a little down -- our last guidance.

Got it. And then just to confirm, the pending Deutsch acquisition is not included in the outlook -- is that correct?

That won't be in until it's closed.

Got it. Thank you.

Craig Hettenbach, Goldman Sachs.

Thank you. Tom, can you dig a little bit more into the auto market, just trends by geo. And particularly what you're seeing in Europe, local consumption versus how the export market looks like for your European customers?

Sure. I think it is mixed. Exports continue to be strong. We saw -- well, I shouldn't say -- Europe -- the Southern Europe market continues to be slow. That has been slow for a long time, and it is well below its normal demand, and that is several years now.

Germany, which is where we are strongest, is both pretty healthy as a local market, and of course, about half of that business gets exported. And the US and China and Eastern Europe are fueling the export market that we serve through the German OEMs.

In Asia, I would say it is steady. We are still seeing a recovery, particularly with the Japan OEMs, from last year's earthquake, catching up with some pent-up demand. And the US is growing at double-digits, and we are benefiting from that.

So when you look at the big picture, year-over-year, European auto is going to be flat to slightly down for us. Asia will be up nicely; China will be up double digits as part of that. And the US will be up double digits.

Got it.

Wamsi Mohan, Bank of America.

I'm sorry we are not getting a connection, Wamsi Mohan. I'm going to release your line. Are you there?

Hello, can you hear me?

Yes.

Hello. Can you hear me?

Please go ahead.

Hi. Sorry. This is (inaudible) filling in for Wamsi. Just looking at the guidance for the second half, you are guiding operating margin to be about 14% and the full year for 13%. But that doesn't include the Deutsch acquisition. Just trying to understand how Deutsch would affect that. Do you think that you could get to the 14% by year once that is layered in?

When you look at it, you're right how we put it in. Due to the timing of regulatory processes, we don't -- we would not include that until the timing gets more certain. So from that viewpoint, certainly that will be additive both to EPS when it closes and the timing that is left in the year. Deutsch could improve the margin a little bit, but I don't think it would bring the full-year margin up from what is low 13s included in our guidance up to 14 for the year.

I see. Okay. And just the last question, on book-to-bill, it looks like even with the slowness, the overall book-to-bill for the first quarter in both CIS and Network Solutions, it was better than the fourth quarter. And you mentioned a positive book-to-bill going into January. So based on the trends that you are seeing, do you think that book-to-bill in CIS and Network Solutions can actually be positive in the March quarter?

It is tracking that way right now, so if it continues, yes. What we saw -- just to kind of recap for the Company, October and November last year, we were at a 1 book-to-bill. We dipped in December. We are back up slightly over 1 in January. And we need to see more than three weeks.

But I would say it is giving us some confidence. And if you look at where our orders were running relative to last year in January, we are running 4% to 5% above that.

William Stein, Credit Suisse.

Good morning, guys. I am hoping to beat this distribution horse a little bit more, given that was a big problem in the quarter. And yet you've done a lot of consolidation among your distribution partners. Can you talk a little bit about percent of revenue through distribution now, your [rev rec] policy on selling or sell-through, and what you can do to improve visibility in that segment? Then I have a follow-up, if that's okay.

Well, too, you have a couple questions there. Number one, with what we've done so far, we still have about 15% of our total sales through distribution. That has moved up maybe a point with the changes we've made.

On revenue recognition, we record revenue on the title transfers when we actually sell in. So we don't do it like the semis that do it on sell-out. So from that viewpoint, we do record revenue when we sell in, and they take the inventory.

On visibility, I mean, certainly they are a channel. We do talk to them, but certainly this has been deeper, from what they communicated to us when we do our forecasting. And from that viewpoint, I don't know how we improve that visibility. But we continue to have discussions, and it does -- similar to the semi comment made earlier, it does look like we are in the bottoming here.

Can I talk about auto production for a minute? Can you remind us what your prior full-year -- or I guess this is on your fiscal basis -- auto production estimates were? And your sales in that market I think suggest that you are gaining share. Can you talk to us about how that trend has maybe changed or improved over time, and what gives you the confidence that it will continue in that direction?

Sure. When you look at it -- last call, we talked about basically a global auto production around 82 million units. And as we've said, we expect it to be 80 million now, with the decline really being driven by Europe, as those production estimates have moderated. And really, as part of what Tom said on our guidance estimate, we have reduced our automotive revenue by about $100 million per year for that production decline in Europe.

So we still, even on a 3% auto production increase globally, we do expect to grow about twice that amount this year, based upon our share, as well as content increases.

Thanks, guys.

Matt Sheerin, Stifel Nicolaus.

Good morning. Question on cost controls. I know you had some cost-cutting measures in the September quarter on weaker demand. Doesn't sound like you've implemented anything incremental here. And is that, Tom, due to the fact that you are expecting somewhat of a snapback in the rest of the year -- in the second half of your fiscal year?

A few things. One, we have cut additional costs in the quarter. Part of our -- where we can flex, we do. And so even with short-term changes in demand, there is some element of our cost structure we can flex.

We do try to protect our ability to flex up, though. So you are right, that is why the margin, when you get down to the 10%, we lose over a point in margin because we do believe that several of our markets are bottoming out. But we definitely reduced costs in the quarter, and we flexed down and up. I think from the end of the third quarter, we are down 6000 people. Some of that is temporary, some of that is flexing out. It is difficult things. But we do flex within the quarter as well, and of course we tighten down discretionary spending.

But the second part of your question, I would say, we do expect demand to improve towards the end of this quarter and into the second half. So we are making sure we will be ready for that.

Just to add to Tom's first comment, we've taken our temporary workers down by about 20% since June, and that continued through the first quarter. And I think that is why you saw some of the resiliency in the operating margin. So about two thirds of the 6000 Tom mentioned are out of our temporary workers, and then the other element was our workforce itself.

Okay. That's helpful. On the Transportation group margins, which obviously were very strong, looking at a mix change with Europe, weaker than expected this year, does that have any more of a negative impact on margins, the weaker Europe, because of mix and because of the dollar content higher in vehicles in Europe, or does that not make a difference?

I think one thing is that where the weakness is is in -- more with the non-German OEMs. And we have a little less content there. And in the more high-end content in the German OEMs as well. So no, I don't expect any margin pressure from that, other than the normal flow-through on lost revenue.

Sherri Scribner, Deutsche Bank.

Thank you. I just wanted to get a little bit of detail on your thinking for the second half of the year. I know you have talked about some strong seasonality in the CIS segment. In terms of Automotive, I would assume that would be relatively flat, with some growth. And then Telecom, I assume there would be some seasonality, but wanted to get some detail on the growth expected in those different segments.

So when you look at CIS and Network Solutions sort of first half to second half, both of them will be up about 15% first half to second half, whereas Automotive will be up slightly, about 3% first half to second half. So you are right. When you look at CIS, as I mentioned, that would be basically getting back flat year on year. And in Networks, it would be up about 4% year-over-year, second half to second half. So that is how we are looking at it. And as Tom said, big chunk of that is seasonality, but also some inventory -- lack of inventory correction in the second half in CIS.

And then thinking about the Network markets, what gives you the confidence that we will see seasonality with that type of strength in the second half of the year? Are you expecting that some of the issues with acquisitions are going to be resolved? Is it primarily related to the distribution channel? How do you feel comfortable with that half-over-half growth?

Part of it is -- and look, I think there is an element of uncertainty for sure. But part of it is the decline was so abrupt in Q4 and Q1. And what our customers are telling us was there is a significant part of that was related to what was going to play out in the US. So until that was sorted out, where should I spend and how should I spend? So we think that is sort of the unnatural part of the decline, and we would expect that to catch up.

And again, we're listening to our customers. And also, when you look at the need for more coverage and more capacity, that is only going to get worse. We know that there is CapEx constraints that all companies have to go through. So it is really a little of a bounceback off of a very, very low point, as well as coming out of the winter into the spring and summer, when we have the natural increase in build.

But I would say if you were to sort of handicap all of the major segments, there is probably a little more uncertainty with this.

And the other thing I would add is that basically assumes -- we are sort of assuming a flat to slightly down global telco CapEx picture.

Mike Wood, Macquarie.

Thanks for taking my question. Can you give us a little bit more color in terms of just the timing in the telco spending that you just mentioned, with the freeze in CapEx by like AT&T and what Verizon is doing, and how you think that can actually trend throughout the year, given the timing of like announced -- the whole M&A picture?

I think, as I just said, down almost 20% -- the first-quarter levels of our total Telecom business was down about 20% from where it was in the second half of last year. So a pretty substantial decline.

Our second-half assumption is about flat with the second half of last year. So yes, I think there is some uncertainty there, but we are not looking for a huge boomerang above last year's spending level. So our assumption for telecom spending on our kind of equipment versus what we thought a quarter ago is down, clearly down.

And what are you seeing with some of ADC's key products, like the DAS?

DAS is very big in the US and was very slow in Q4 and Q1.

Okay, thank you.

(multiple speakers) of the many things where there was just no spending.

Anthony Kure, KeyBanc Capital Markets.

Good morning. Just wanted to touch on the comment around energy and the expected improvement in Europe. Can you just talk about what markets you're expecting the improvement in and sort of what is driving that?

That comment was meant to be broad-based, not just Europe. We did see, similar to a lot of our businesses towards the end of December, a little bit of a contraction there as December ended. But my comments that I made on the script really related to global energy, not just Europe.

And also, that is a business that does have very pronounced seasonal patterns in our Q3 and Q4, due to it being in the outside environment. So it does include seasonality, plus the continued demand we are seeing around the world.

And I would just say a little specificity around Europe is our first half of '12 will be slightly below our first half of '11 in Europe in energy, and about equal with the second half. So to Terrence's point, we are not counting on growth in Europe. That is part of this broader -- the [EUR300 million], the guidance change across our European business, and energy is part of that.

Great. Thank you.

Steve O'Brien, JPMorgan.

Thanks for taking my question. Stepping back to the big picture, back in December, TE raised its organic growth expectation -- longer-term organic growth expectation to 7% to 9%, up from 6% to 8%. Are there anything that you are seeing now in terms of your end markets or longer-term outlook that kind of have you questioning that organic goal, and the whole sort of 20 by 15 plan? Just pointing out that Auto right now and even Network Solutions clearly seem to be tracking towards the lower end of the guidance range, even as we go into second half of 2012.

I would say the climb up -- and as we indicated there, there is a steepness to it; it is a little bit steeper -- but I don't feel -- as I said at the end of my comments, I don't feel different about the fundamentals. I think a weak quarter or two always gives cause for reflection. But if you think of the things that are driving it, more efficient energy, with the requirements that are in automotive in cars around the world, the increasing environments for emission improvement, in commercial vehicles for emission improvement, the whole new commercial aircraft rollout that is underway, and we are benefiting from the buildout of broadband.

Yes, it is a little slower than we thought this quarter and next quarter. But boy, it is still in the beginning of the digital age, really, when you look at that. So everything that we model and with the way the network looks like, we are still really happy to have the best fiber portfolio.

So I don't think -- we don't feel different about the fundamentals. Could the timing be off a little bit? Yes. But we've also seen the way things bounced back after being depressed for a quarter or two. So I still like our position.

Great. And things do sometimes tend to bounce harder than we always expect -- on the upside, too. On the raw materials and margin front and pricing pressure, I guess a couple different topics, but all getting back to margins. Are you seeing more OEM pricing pressure? And is there heightened pricing pressure with the potential reductions in the cost of raw materials? In other words, OEMs seeing the drop in copper are asking for a reversal to any of the pricing concessions that may have happened last year.

I think there is always pricing pressure. No question. I think -- I don't think it is materially different. I think we face it all the time. I mean, if you look at copper, it dipped down for a while; now it has bounced back up. And when it dipped down, we probably got a little more question about that. But we were adjusting prices to a level of copper that was lower than it was even three to six months ago.

I think it is just a fact of life in this business that we have to always contend with. And I think we are doing a better job than we've done in the past with it, both on pricing and productivity. But it is not going away.

Shawn Harrison, Longbow Research.

Just one brief follow-up. Looking at CIS, getting back to a 15% EBIT margin I know at least a minimum is the long-term goal. But what revenue level do you project TE needs to be at to deliver that type of revenue, given what we've seen with commodities, but you price increases, cost reductions, et cetera?

If you look at that from a CIS specific standpoint, you would probably need to be in the 1.3 to 1.4 per quarter level, roughly. So when you look at it, we would need to be up towards that level.

Okay. Very helpful. Thanks so much, Terrence.

William Stein, Credit Suisse.

Thanks for the follow-up. I wanted to ask about the Consumer Devices end market. It looks like you merged that with your Computers end market. Is that right? And on a merged basis, it looks like they were down 15%. Did that surprise, and can you talk to us about the split between those two end markets?

That did not surprise; that was completely in line with our expectations that we laid out. So when you look at it, one of the reasons it was merged is just the convergence of devices; it is difficult to break out tablets and mobile devices. So it is why they were put together and it was in line with our expectations.

And Touch seemed to have a good quarter. It that sensitive objects working or is that your traditional business? And maybe just (multiple speakers).

It's more the traditional business. Sensitive object technology is very promising and we have our first product in the market with that. It is a very little bit of revenue right now, but that is an exciting technology. But it is about the improvement, it's in the traditional business.

Thanks, guys.

There are no additional questions. Please go ahead.

Thanks, everyone, for joining the call today. Please, as always, feel free to call either myself or Matt Vergare with any follow-up questions throughout the day. Thanks very much.

Thank you.

That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. Replay will be made available to you. You may now disconnect.