泰科電子 (TEL) 2012 Q2 法說會逐字稿

Ladies and gentlemen, good morning. Thank you for standing by and welcome to the TE Connectivity Second-Quarter Earnings Release. At this time, all lines are in a listen-only mode. Later, there will be an opportunity for your questions. (Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to turn the conference over to our host, Vice President, Investor Relations Mr. Keith Kolstrom. Please go ahead.

Good morning and thank you for joining our conference call to discuss TE Connectivity's second-quarter 2012 results. With me today are Chief Executive Officer, Tom Lynch, and Chief Financial Officer, Terrence Curtin. During the course of this call, we will be providing certain forward-looking information and we ask you to review the forward-looking cautionary statements included in today's press release. In addition, we will use certain non-GAAP measures in our discussion this morning and we ask you to review the sections of our press release and the accompanying slide presentation that address the use of these items. The press release and related tables, along with the slide presentation, can be found on the Investor Relations portion of our website at TE.com. On April 10, 2012, we announced the planned divestitures of our touch solutions and professional services businesses, which we expect to close in the fiscal third quarter. Results for these businesses are now being reported as discontinued operations for the current and prior periods.

Second-quarter impact versus our January guidance was a reduction in sales of about $150 million and a reduction in adjusted EPS of $0.02. Please refer to the 8-K filed on April 12, 2012 for the recast of prior period financial information. Finally, for the participants on the Q&A portion, I would like to remind 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 could now please turn to slide 3. Q2 was a solid quarter for the Company. Sales of $3.25 billion were at the high end of our guidance range. Adjusted EPS of $0.68 were above the high end of guidance, due to another strong quarter of performance in our Transportation segment. Free cash flow was very strong at $379 million and our operating margin improved 90 basis points sequentially to 13% with sequential improvement in all of our segments. From a strategic perspective, we continue to strengthen our portfolio with the closing of the Deutsch acquisition in early April and the planned divestiture of Touch and services.

Orders strengthened during the quarter and book-to-bill, excluding our SubCom business, was 1.03, up from 0.98 in Q1. Market trends in our Transportation segment continue to be strong, particularly in Automotive and Commercial Aerospace. The telcom, datacom, and appliance markets started to show some strength in the quarter coming off a relatively weak Q1. The industrial equipment markets were up slightly in the quarter; however the improvement is coming a little slower than we expected. Our consumer business was down slightly, as expected. Overall, orders are picking up, but there's still a fair amount of uncertainty in the global economy. On a regional basis, we see strength in most US markets and in Europe and Asia, the markets remain mixed with the exception of Automotive.

The Company's operating margin was back to 13% as all of our businesses had improved margins in the quarter. Importantly, CIS profitability improved sequentially by about 150 basis points on essentially flat revenue. We do expect CIS margins to be back to the double-digit operating level in the second half. Our outlook for the full year is for sales of $13.5 billion to $13.8 billion, adjusted EPS of $2.88 to $2.98 per share, and free cash flow of approximately $1.3 billion. Compared to our view of a quarter ago, the automotive market is a bit stronger.

The industrial markets are improving, but not as much as we had thought, and revenues in the SubCom business are down, due to customer funding delays. The net effect is that our full-year guidance is down by approximately $100 million in revenue and $0.03 in earnings per share. We continue to expect to have a strong ramp in the second half, with revenues up 13% and EPS increasing 24%. We also expect our adjusted operating margins to improve to the 14% level in the second half.

Now please turn to slide 4. We're very excited to have Deutsch join TE. They provide a broad range of harsh environment connectivity solutions and fill an important gap that existed in our product portfolio. As we've indicated before, we expect to grow revenue of Deutsch products at the 8% to 10% per year range and improve the EBITDA of the business from current levels of about 26% to approximately 30% in year three.

We're going to do this by leveraging our scale and our supply chain, integrating our go-to-market organizations, and leveraging our strong position in emerging markets. For the remainder of 2012, we expect Deutsch to contribute approximately $370 million in sales and $0.08 of EPS, consistent with what we've indicated earlier. This is about 9% revenue growth versus last year for that business. Our expectation for fiscal 2013 for Deutsch remains the same as previously communicated at approximately $760 million of sales and $0.20 of EPS.

I'm now going to turn it over to Terrence to take you through the quarter in more detail.

Thanks, Tom, and good morning, everyone. I just want to highlight, as Keith mentioned, that all the numbers I'll review today as I go through the financials reflect the treatment of our Touch and Professional Service businesses as discontinued operations.

If you could, please turn to slide 5 and let me get started with our sales performance. Total Company sales were $3.25 billion, which was at the high end of our guidance and they were down 3% year-over-year on an actual basis and down 1% on an organic basis. The difference between the actual and organic growth was driven by the effects of a stronger dollar compared to last year. We continued to see strong growth in our Transportation segment, which grew 7% versus last year, while our CIS segment was down 12%, and our Network Solutions segment declined 6%, due to slowness in certain end markets, as well as the impact of inventory adjustments by our customers. On a sequential basis, our sales grew 3% on an actual basis and 4% organically.

The sequential growth was in line with our expectations in both the CIS and Network segments and was better than expected in our Transportation segment. Looking at our revenue by geography and on an organic basis versus last year, our sales were flat in Asia and down 2% in the Americas and Europe. Now let me get into more highlights in key markets in each of our segments. And unless I indicate otherwise, all changes I discuss will be on an organic basis, which excludes the effect of currencies and acquisitions.

Please turn to slide 6. In our Transportation Solutions segment, we had another strong quarter. Sales increased 7% on an actual basis versus the prior year and 9% organically. In the Automotive market, our sales increased 9% versus the prior year and sales were up 13% in Asia, 12% in the Americas, as well as 4% in Europe. Global vehicle production was approximately 21 million units in the quarter and this was up 4% compared to the prior year.

Vehicle production trends are positive in both North America and Asia, however the Europe region remained soft and production was down 5%. We do expect third quarter production to be flat with quarter two at about 21 million units and we expect full-year production estimates at around 81 million vehicles, which is a 5% increase versus prior year. This vehicle growth in production is occurring in North America and Asia, offset by a slight decline in Europe on a total year basis. We expect our full year revenues to grow about 7%.

In the Aerospace, Defense & Marine market, our sales were up 13% versus the prior year. This growth was due to strong demand and increased share in both the Commercial Aerospace and Oil and Gas market. For the segment overall in the third quarter, we expect the Transportation revenues to be up 7% on an organic basis compared to the prior year, which does exclude Deutsch and Deutsch is expected to add an additional $190 million to revenue in the segment in the third quarter.

Please turn to slide 7 so I can discuss our CIS segment. In this segment, total sales declined 12% on both an organic and actual basis versus the prior year. Sequentially, sales were flat as we expected. In the industrial market, sales were down 14% versus the prior year, but did improve sequentially by 3%. We expect an additional 5% to 7% sequential increase in our third quarter. We are seeing this market start to pick up, but not as much as we previously had anticipated.

In the datacom market, which includes sales to the communication equipment, server, storage, and wireless equipment markets, our sales were down 18% versus last year, due to reduced broadband and wireless spending. Sales were flat sequentially and we continue to expect improvement in the second half in this market of our fiscal year. In the Consumer Device area, our revenues were down 8% versus the prior year, due to continued softness in the PC, feature phone, and consumer electronic markets. In the appliance business, we were down 6% versus the prior year, due to soft demand in Europe and Asia. However, our sales did grow 13% sequentially due to an improved demand picture in the US. In quarter three, we expect our CIS segment revenues to grow sequentially 7% to 10%, with improvement in all the markets.

Let's turn to Network Solutions and if you can please turn to slide 8. Total sales were down 6% at actual rates and down 4% on an organic basis versus the prior year. We did see an improvement sequentially of about 4%. In the Telecom Networks market, our sales were down 6% versus the prior year, but we saw improvement of 6% sequentially. The year-over-year declines were in line with our expectations, due to reduced carrier spending in the US. But we did see order rates improve in the quarter and we expect this momentum will continue through the balance of the year.

In the energy market, our sales were up a strong 9% versus the prior year, with growth in all regions, led by over 20% growth in the Americas, which was due to increased customer investment, as well as increased market share. We expect to see normal seasonal growth in the second half of the fiscal year as investment and distribution, transmission, and power generation continues to increase around the world. In the Enterprise Networks market, our sales were essentially flat, as strength in Data Center Investment was offset by declines in office network spending.

Finally, in our SubCom business, our sales declined 19% year-over-year. Several projects that we've talked to you about that have been awarded still have not come into force. We currently expect that quarter three sales will be similar to quarter two levels at $120 million of revenue, which is lower than we anticipated a quarter ago. We do expect a step up in quarter four to about $140 million in revenue as we do expect one of the contracts to come into force later in Q3. We now expect that the SubCom business revenue will be about $520 million in 2012 compared to our prior expectations of $600 million. Overall, we expect in quarter three, Network Solutions segment sales will be up about 9% sequentially, despite the softness that we have in the SubCom.

Let me now discuss earnings, which get started on slide 9. Our GAAP operating income for the quarter was $385 million, which includes $32 million of restructuring and other charges and $4 million of charges related to the acquisition of Deutsch. We continue to expect $75 million of cash charges related to the acquisition of Deutsch. About 0.5 of these cash charges will be incurred in 2012 and the remainder will come primarily in 2013. In addition to these cash acquisition costs, we currently estimate about $55 million of non-cash acquisition charges that will be driven by purchase accounting. The majority of these non-cash charges will occur in our third quarter with the remainder primarily occurring in the fourth quarter.

Turning back to quarter two results, our adjusted operating income was $421 million in the quarter, with an adjusted operating margin of 13%. Both gross and operating margins were above our original outlook for the second quarter. The 90 basis points of sequential improvement in our adjusted operating margin resulted from the cost actions we initiated over the past nine months, as well as continued strong performance in our Transportation segment. All segments had sequential operating margin improvement. Also, at the revenue levels we expect in the second half of $3.6 billion to $3.7 billion per quarter, we continue to expect operating margins to improve to about 14%. On an adjusted EPS basis for the quarter, we reported $0.68. This was above the high end of our guidance range, due primarily to the higher operating income.

Please turn to slide 10. If you look at the top half of the slide, our adjusted gross margin in the quarter improved 170 basis points sequentially and was back to 2011 levels of approximately 31%, due to the cost actions and the operating leverage on the sequential volume growth. We expect that our gross margins will stay approximately 31% in the third quarter. If you look at the bottom half of the slide, operating expenses as a percentage of sales were 18.4%. In quarter three, we expect that RD&E and SG&A of approximately 5% and 12% of sales, respectively, as we leverage our operating expense structure on the higher sales volume.

Let me turn and discuss items on the P&L below the operating line, if you could please turn to slide 11. Net interest expense was $37 million in the quarter, up from $34 million last quarter, due to the issuance of debt in advance of the Deutsch acquisition. As we discussed when we announced the Deutsch acquisition, part of the debt raise was a pre-funding of our upcoming bond maturity in October. Because of the pre-funding, our net interest expense will remain slightly elevated at approximately $42 million per quarter in the second half, before being reduced in 2013 by about $8 million per quarter once we pay down our October maturity.

Other income, which relates to our tax sharing agreement, was $11 million in the quarter. We expect in quarter three it will be approximately $9 million. On the effective tax rate, on both the GAAP and adjusted basis, the effective tax rate was 25.3% and we expect the adjusted tax rate to be about 26% in quarter three and in quarter four.

If you could please turn to slide 12, let me now discuss free cash flow. Our free cash flow in quarter two was $379 million, which was a very strong result. Cash from operations was $481 million and we continue to expect free cash flow for the full year to approximate net income at $1.3 billion. Capital spending during the quarter was $140 million or about 4% of sales and for the full year, we continue to expect that capital spending will be the 4% to 5% of sales range, in line with our long-term expectations.

Please turn to slide 13 so I can talk about cash, debt and liquidity. We ended the quarter with $2.9 billion of cash and we used $2.05 billion of that cash in April to acquire Deutsch. Outstanding debt temporarily increased to $4 billion at the end of the quarter, due to the borrowing for the Deutsch acquisition. We expect to reduce this debt level to approximately $3 billion following the payment of our $700 million debt maturity in October.

During the quarter, we paid $76 million of dividends. As we talked on the last call, in March, our shareholders approved the increase we proposed in the dividend to $0.21 per quarter and this dividend rate will go into effect with the June dividend payment. I also want to highlight, related to the planned divestiture of Touch and Professional Services businesses, that with the generation of the $400 million of proceeds that we expect to get as these deals close in the third quarter, we anticipate restarting our share repurchase program in the fourth quarter.

If you could please turn to slide 14 and let me briefly discuss order trends. Total Company orders in the quarter were $3.2 billion and the book-to-bill was 1.03, excluding SubCom. Our book-to-bill rate in the transportation segment was 1.02 where orders continue to be strong due to the steady demand in the Automotive and Commercial and Aerospace markets. In Network Solutions, excluding SubCom, our book-to-bill was 1.08. It was driven both by normal seasonality and the increased spending by the carriers in the second half compared to our first half. In our CIS segment, our book-to-bill was 1.01, which is a big improvement versus the prior quarters as channel inventories return to more normal levels and we see the improvement that we expected as we ramp in the second half.

Let me now turn it back to Tom who will cover the outlook.

Thanks, Terrence. Please turn to slide 15. For the third quarter, we expect our sales to be in the range of $3.55 billion to $3.65 billion, up about 11% sequentially, and earnings to be in the $0.77 to $0.81 per share range, up 16% sequentially.

Now, if you'll turn to slide 16 for our full-year outlook. We expect sales to be in the range of $13.5 billion to $13.8 billion and EPS is expected to be in the range of $2.88 to $2.98 per share. Just to recap, here, before we go to Q&A, I'll highlight what I think are the key things. In Q2, we did see orders strengthen. That was important to set up the rest of the year. Orders were up 8% over the Q1 level. As we pointed out, segment operating margins improved across all of our segments and, importantly, CIS is close to that double-digit range again and we did have a strong cash flow quarter.

As we look in the second half, we expect sales to grow 6% to 8% organically compared to the first half and about 12% including Deutsch. As I just mentioned, we expect second half EPS of $1.62 compared to $1.31 in the first half. (inaudible) will be back at the 14% operating margin level, at around the $14 billion revenue level, as our operating leverage is kicking back in as the volume picks up. As Terrence pointed out, with the divestiture of the Touch and Services business, it's likely that in late Q3 or Q4, we will get back into our share repurchase program. Then finally, again, the Deutsch acquisition is tremendous acquisition for us.

It will contribute $0.08 this year and $0.20 next year. Strategically, it gives us a product line we haven't had. For two of our businesses, our Aerospace, Defense, and Marine business, that's now going to be a $1 billion plus business for us. Our Industrial Transportation business, which is part of our Automotive business, is going to be close to a $1 billion business. It really strengthens the portfolio and strengthens our industry position, so we're very happy to have the Deutsch team as part of TE.

With that, I will open it up for questions. Take it, Mr. Operator.

(Operator Instructions) Shawn Harrison, Longbow Research.

I wanted to delve into the auto markets and any disconcerting trends you're seeing there. Then long-term, where do think the EBIT margins of the TS business should be, given the inclusion of Deutsch now?

No real disconcerting trends in the auto market, Shawn. I would say China is clearly, has been, and we expect for a couple quarters to be growing much slower than it has since the financial crisis in 2009. It's in the low to mid single-digit growth rate. We're growing about twice that, but we don't see any disconcerting trends in orders. This far in April, it continued to be solid. As Terrence pointed out, auto production is going to continue to run at the $20 million to $21 million per quarter.

Shawn, on your second part of your question related to OI margins, our Transportation segment's running at 16% now. When you take in, certainly, the EBITDA that we quoted, Deutsch will be around 27% in our guidance. When you take out the purchase accounting amortization and depreciation, it gets Deutsch to about 17% right now, OI. That's only about a 10 basis point improvement in Automotive or our Transportation segment, so it's actually only a slight increase. On the total Company for this year, it's about a 10 to 20 basis point increase.

Long-term, you think that Deutsch should be closer to a 20% OI, correct?

Correct.

Okay. Just a follow-up question, where do think you are in terms of just completing some of the restructuring and cost reduction actions in the other businesses; if we've seen the full benefits of that or are more of those to come during the back half of the fiscal year?

I'd say, Shawn, the big structural restructuring is largely behind us. We did have a little bit more related to the CIS business. We've reorganized that business over the last six months and it's a leaner structure now. But I would say, Terrence would know, no big structural. I think we'll always be fine-tuning the business as trends shift and production shifts to follow customers.

I think Shawn, when you look at it, certainly, this quarter you saw the benefit of some of the cost actions we took. As you saw in flat revenue, the margin went up 150 basis points. We still, even though the industrial market, volume is a little bit lower, as you go through the year, we still see CIS getting up the fourth quarter to about the 12% rate. We still continue to see that benefit coming, based upon the cost actions we've taken.

Thanks so much.

Amit Daryanani, RBC Capital Markets.

I just have a question on the transportation side. Specifically, in Europe being up 4% organically, do you have a fear or sense that you may be potentially pulling in some production from the back half to the earlier part of the year? Given car registration, new car registrations in Europe are tracking well below the production numbers, I think, so far in calendar Q1. Any impact, really, from the explosion at a resin manufacturing site in Germany and if you could talk about if that's encompassing your forward guidance?

We don't see any of that related to (inaudible). Remember, our a lot of the auto production in Germany is export and what we're seeing is even though China, for example, is growing only in single digits now, the high-end vehicles are still growing much higher than that. There is that impact. It is not being driven by local European demand. You're right, that is down. It still more export powered.

On the resin question, we don't anticipate any meaningful stop in production in our guidance related to that, based upon where we see production levels right now.

Fair enough. Then if I look at operating margins for the back half at 14%, about 100 basis points improvement from the Q2 level, can you maybe just walk us through how much of that benefit is from Deutsch coming in versus divestitures versus organic leverage? I think the leverage is probably 50% of the margin expansion. I just want to confirm that.

Most of that is organic leverage or due to the volume flow-through picking up 10% plus.

In your categories, because of the divestitures, between Touch and Services, that really does not benefit our rate that much, our OI rate. Deutsch, as I said, is 10 to 20 basis points, so when you look at that expansion on Transportation and also overall, and when you look at, really, improvement in Network Solutions and CIS based upon the volume leverage and prior cost actions.

Perfect. Thanks a lot for your time.

Wamsi Mohan, BOA Merrill Lynch.

This is Ruplu filling in for Wamsi. First, I just wanted to touch on the guidance for Deutsch. It looks like you're guiding for $0.08 for this fiscal year and $0.20 for next fiscal year. But that seems a little bit conservative, because from what I understood, Deutsch has about a 5% to 6% annual growth rate or that's what I remember. Is the $760 million revenue for fiscal '13, is that a conservative estimate? Because you're getting $0.08 for two quarters and then you're guiding $0.20 for the full year, so just wanted to get some clarification on that.

A couple of things, when you look at it, Ruplu, certainly, there's some seasonality in their business, that the first half is typically lighter than the second half. When we look at things right now, we believe the guidance we gave previously is appropriate and certainly, just taking a second half and annualizing it for the Deutsch business, there'll be a little bit of seasonality in our first and second quarters next year. It's still in line with what we said when we announced the acquisition.

Okay. Great. In CIS, in terms of inventory corrections, do you think at least in Industrial the inventory corrections are done with? Or do you expect some of that to also flow into the third quarter?

I think it's substantially complete. We're looking for sequential growth in Industrial and high single-digits. I think most of it is behind us and as long end demand also begins to pick up, we are hearing from our big distributors that their inventory levels are pretty close to where they like them to be.

Okay. Thank you so much.

Craig Hettenbach, Goldman Sachs.

Just wanted to follow-up, Tom, on Deutsch. Some of the push back, I think, on that deal was more on the price side. If you can just walk through your view of some of the synergies, particularly on the top line side? Any feedback, I know it's early on, but whether it's from your sales force, channel partners in terms of the portfolio for Deutsch and implications for growth?

The feedback from our channel partners is extremely positive. As you know, we've been doing a lot to strengthen our channel business, which was always strong given the size of the Company, but in the last three years, it's gotten stronger. This was a product line we didn't have, so through the channel it's really important; the broader the product line, the better. This is an attractive product line because it's very high-end and highly engineered, so we see a fair amount of synergy through the channel. We also see the ability to take this into other markets where we don't have a circular connector product line. That'll take probably a couple years to do that. Then, as I mentioned in my comments, the ability to leverage our supply chain and we're very, very bullish on both the channel and customer synergies, the emerging markets synergies, and the opportunity to take our scale, our connector business being about a $10 million business, and help out the Deutsch business, which is about a $700 million business.

On the cost side, Craig, just to reiterate, in addition to the supply chain, when we look at taking the EBITDA from 26% to 30%, about half of that is in the gross margin area and the other half was in the OpEx structure. Some of it relates to synergies in the back office, as well as the go to market. So when we look at that, that's just getting started and I think we're off to a good start on the integration. From that viewpoint, early indicators are positive.

Okay. As a follow-up, it looks like a nice snap back for the networks and [com] business into the June quarter. Can you talk about what you're hearing from customers there and any notable trends by geography to highlight?

I think you're just seeing in the datacom equipment side, it's probably a little more that the inventories are getting back in balance so there's not the penalty, in a sense, that we've been going through of having too much inventory in the channel and therefore, the negative adjustment that occurs. We are seeing some pickup in end demand, but I'd say still most of the benefit in the sequential growth is inventory-related in a positive way. In the telecom, as you know, in the US and to some extent in Europe, the spending in our Q4 and Q1 was down. A lot of it related to everything that was going on with the big carriers and how some of those issues were shaking out. We're seeing that spending get back out.

Spending for the full year in the carrier business is still going to be relatively flat to slightly down. It was a big year last year. You have a low first half this year, kind of a recovery in the second half and hopefully, we would expect to get back into more normal spending next year. But no big discernible trends, I would say. Terrence?

No, to Tom's point, in the telecom network space and when you look at North America specifically, we expect our business to be basically flat year-over-year in the second half, so certainly improving nicely sequentially as spending starts to pick back up. From that viewpoint, it's happening as we expected three months ago.

[NBN] does kick in the second half for us. It's not huge, but it starts to build and everything's getting lined up for that right now.

Got it. Thank you.

Jim Suva, Citi.

Good morning, this is (inaudible) on behalf of Jim Suva. Now that we've anniversaried the closing of ADC, do you mind giving an update on the acquisition targets? I recognized that ADC contributed $150 million of incremental sales this quarter, but on the cost side, are you hitting the goals? I think originally outlined $100 million of cost savings, one-third of that should have been in manufacturing restructuring and then expectations for double-digit operating margins in this segment?

Yes, Samuel, it's Terrence. On that, if you actually look, we basically, right now in this quarter, we'll have, since we acquired them, about $25 million of run rate cost synergies. When you look at that, we're right on target with what we said publicly. That's about a $15 million improvement year-over-year, so last year in the second quarter we had about $9 million in this quarter. From a cost perspective, the ADC is right on. Certainly from a volume, the AT&T items we talked about, North America, volume was a little bit softer. But as volume comes back, we do believe we'll be right on with the acquisition targets we laid out. Volume's a little bit of pressure, but the cost side's right on.

Great. Thank you. Then given ADC and also Deutsch, can you just remind us, tell us M&A strategy going forward?

Sure. I think we've laid out, but happy to re-lay out. Fundamentally, very strategic driven, meaning we don't sit and wait for somebody to give us a call. It's areas that, for several years now, that we wanted to establish leadership position. With ADC, it gave us a leadership position in the telecom networks business, tremendous fiber optic portfolio. With Deutsch, it filled that hole in both Aerospace Defense and Industrial Transportation and gives us a product line for our broader industrial business.

It gave us the full range; we had a pretty full range before and this really gives us a great product range. Then as we look forward, we like the energy infrastructure business, we like the industrial business. They're both pretty fragmented businesses, in the sense that they're served by lots of companies like ourselves. We do have a leading position there. But there's still, I believe, the opportunity over the years, so that's where we focus our efforts right now.

Great. Thank you and congratulations on the quarter.

Amitabh Passi, UBS.

Terrence, perhaps for you -- the $130 million volume adjustment you've made to the full-year guidance, is the bulk of that coming from your [Subsea] segment? It sounds like you took that from 600 to 520. Wondering if you could just help us understand where you see those volume adjustments coming from the $130 million that you called out?

Sure. You are right on that, Amitabh. When you look at it and take Deutsch out, take the disk op moving pieces out, when you look at it, it's actually, auto's a little stronger as you saw in the second quarter. Then the two areas where it's weaker than we guided three months ago is SubCom, certainly, to the projects. We've been winning our fair share of the projects, but some of the funding's been taking a little bit slower. We expected one project that's based in Asia to come into force earlier. We expect that to come in into June, so certainly, that project's going to tamp slower than we expected. That's the $80 million.

The other piece, as both Tom and I indicated, the industrial markets and our CIS business are ramping nicely. They just are ramping a little bit slower, so that's the other area, which is a little bit slower than three months ago. But the number you stated at $130 million is right on, really SubCom and industrial are the areas that are a little bit slower.

As my follow-up, can you give us some sense of how we should be thinking about SubCom looking out at the fiscal '13? Then maybe any sense of the [NBN] ramp as we move into fiscal '13?

Sure. Starting with SubCom, when you think about SubCom, we feel that right now you should probably think about SubCom at $600 million next year. As these projects come into force, certainly we will always update you. It can be a lumpy business, so if some more projects come into force it could be higher than that, but right now, we'd say you should think about $600 million. In NBN, NBN in our current year, really in our third and fourth quarter, as Tom mentioned, is about $25 million, $30 million of revenue this year. That could ramp depending upon deployment, up into the $100 million range per annum over the next handful of years, as we've talked previously. We're starting to see in our third-quarter some NBN activity, as they're mobilizing their deployment and how that goes could go up to about $100 million per annum, based upon the ramp and that could get up there maybe next year.

Okay, thanks.

Steven Fox, Cross Research.

First question, just going back on Deutsch, I thought I heard that you said the business has been growing about 9% year-to-date, which I think would be a little bit faster than you would have said back in December. Maybe if you could just dive into what the trends are specifically at Deutsch that you've been able to analyze since you've acquired it? Then secondly, on Deutsch, how quickly can you start putting those products into your own distribution channel? What sort of timeline have you laid out with your channel partners to expand your product offering there?

Let me take the first part. This is Terrence. When you look at Deutsch, it is, if you take their second half to second half, the $370 million, they're growing about 9%. When you look at, they are getting a little bit of benefit to some penetration in the Oil & Gas area, that is creating that growth in this compare to be towards the 9% area. In the Aerospace and the Industrial Transportation, it's closer to that 6%. So right now, they are getting some favorable momentum with some projects they won in the Oil & Gas area, which, as we discussed previously, was an emerging area. Right now, it is a little bit stronger than we said, really due to Oil & Gas, some of the contracts that they've won. We still believe we can keep that, over our long-term, up to 8% to 10%, over our long-term period versus their 6%, which was more over the past decade, growth that we stated previously.

From the channel perspective, we'd expect to begin in the fourth quarter. We're working through the process now and the evaluation of who we select.

Is that on a global basis or do you start in certain regions first?

It's with a big global distributor, so I would expect that you'd see the earliest impact in the US and Europe.

Great. Then just two quick follow-up questions, just so I'm clear. All of Deutsch is going into the Aerospace Defense and (inaudible) line or is it going to be spread out a little bit into the Auto?

And the Transportation segment, which part of that is Aerospace, Defense & Marine and part of it is Automotive. The Industrial Transportation piece goes into Automotive.

Steve, just to let you know, about 60% of Deutsch goes into Industrial Transportation, which, as we report it is Automotive and the remainder would go into the Aerospace and Defense piece.

Very last question, just do you have a combined D&A estimate for the quarter, Terrence? I might have missed that.

For Deutsch, for next quarter, that will be about $20 million of D&A, both as our current estimate and quarter three and quarter four for Deutsch, as we wrap up the purchase accounting.

Great, thank you very much.

Matt Sheerin, Stifel Nicolaus.

I know that you've put some selective price increases through in the last quarter or so. Was that successful in sticking and did that help margins at all in the quarter?

Most of the pricing was done earlier than that. There is a catch-up effect, depending on the terms of your contracts and the timing. So, a little bit, but the majority of that came late last year.

Okay. Looking at the recent divestitures, as you look at the business and the various moving parts, is there anything else that you're looking at in terms of divesting here? That segues into your long-term commitment to the Subsea cable business, which is obviously not as synergistic as the rest of the business.

No, there's not anything else that's active. We appropriately evaluate the portfolio regularly. As far as Subsea goes, I like that business a lot. I think we like that business a lot, because we're at the world leader in it and it's not easy to get those kind of positions. It's in a little bit of a down cycle now, but it's still a good business even in the down cycle and as you know, when the up cycle comes, it's a fabulous business. No, that's no plans for subsidy.

Okay. Thanks a lot.

Sherri Scribner, Deutsche Bank.

I wanted to get a sense, I think you had some comments about the inventory correction, maybe we're starting to see a bottom, but we need to see demand pick-up in the channel. I wanted to get a sense from you what you're hearing from your channel partners? Have you started to see a pick-up in the channel at this point or is that more expectations that we'll see a pick-up as we move through the rest of the year?

Yes, we have. I think it's still more driven by the customers of the channel partner, the end customers' inventories coming back in line and therefore, the channel inventories come back in line. But yes, we have seen sequential growth in this current quarter and we expect it in the third quarter.

Okay. In terms of the guidance for the fiscal third quarter, it looks like you're expecting pretty strong growth across the board; clearly, in transportation, you'll benefit from the Deutsch acquisition, but also in networking and CIS up 8% to 9%. What is giving you the confidence that we'll see that type of growth? Do you have strong orders in terms of customer forecast? Are you starting to see a pick-up thus far into the quarter? What really gives you that confidence?

It's the orders of the last couple months. The order rate picked up, as we expected it, in the middle of the second quarter and has been largely tracking to the third quarter. You're right, most of the pickup is in CIS and in networks. There's a pretty significant seasonal pattern to networks, because energy and telecom is really business that's mostly outside. There's always a seasonal pick-up there.

CIS is much of anything, you've got a little bit of an end demand pick-up, but you do have the benefit of inventories not correcting anymore. Those are the two big things. I think if you were to take the benefit of the inventory not correcting out, you would have seen a higher second quarter revenue and a lower ramp in the third quarter. But the order rates through April, so far, are running just about this level.

Okay, great. Thank you.

Mike Wood, Macquarie Capital.

I know it's fiscal, but can you give color in terms of that outperformance that you had in organic growth versus vehicle production? And maybe how much you'd attribute this to content in like vehicles versus the mix from higher price points in cars?

I'd say it is really three things. It is content continuing to grow. It is mix, so as I mentioned about China, for example, a little bit of mix and it is share. From when things were bad in '09, we kept investing in engineering and we're really seeing the benefits across the world, especially in the US. We've always been really, really strong in Europe and Asia and because of the US automakers for most of their existence had captive connector suppliers, so we have been chipping away at that share and invested in the downtimes and that's paying off. It splits those three reasons.

Okay. Is there any mix shift, either positive or negative from the relatively weaker trends in Europe, either via share or content?

Not material.

Okay, thanks.

Anthony Kure, KeyBanc.

Just wanted to delve a little bit into the telecom carrier spending. Obviously, what you're looking for the second half has been pretty well discussed, but looking at CapEx trends, I think from the carriers, at least in the US, generally flat year-over-year. As you think about what happened last year and this spending trends this year, then just given the secular trends of data flooding these markets, can you just talk about expectations you have for CapEx trends over the couple of years in broad terms?

When you look at that, Tony, number one like you said, we expect in the second half to be flat year-over-year in North America. We do expect places like Asia to pick up around NBN. As we look going out, carrier CapEx with the broadband, we expect it'll be slightly up. A lot of that relates to being focused on the broadband deployment on the fiber side, so we continue to think fiber growth of our portfolio in the Telecom network will grow about double-digit. We still see those trends occurring. Certainly, early this year, we took a little bit of pause with some of what was going on with some of the customers in that area, but overall, that's how we see it going out.

I would say over time, we would expect our business in that area to go up 6% to 8%. If you take what it grew last year and this year, it's going to be, on average, high teens last year and flat this year. It is a little bit more lumpy business, but the drive for fiber, the need for fiber is there. There's really no choice, even with the LTE and in many ways, you're still going to have more fiber connection points, fibers replacing coax on the antennas up in the towers. We're still really bullish on this business and we have a terrific product line.

Great. Thanks so much for the color.

Gentlemen, did you have any closing remarks?

No Just want to say thanks, everyone, for joining the call and feel free to call the IR team with any follow-up questions. Thank you.

Ladies and gentlemen, that does conclude our conference for today. We thank you for your participation and for using the AT&T Executive Teleconference. You may now disconnect.