泰科電子 (TEL) 2012 Q4 法說會逐字稿

Welcome to the quarter four earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given at that time. (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 Investor Relations. Please go ahead.

Good morning and thank you for joining our conference call to discuss TE Connectivity's fourth-quarter 2012 results. With me today is our Chief Executive Officer, Tom Lynch, and our Chief Financial Officer, Bob Hau.

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. 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, TE.com. Finally, for participants on the Q&A portion of today's call, I would like to remind everyone to limit themselves to one follow-up question to 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. Please turn to slide three and we will get started.

We had a pretty solid Q4 delivering sales of $3.4 billion, adjusted earnings per share of $0.76, and free cash flow of $569 million. Our operating performance was in line with our guidance and our adjusted EPS benefited by $0.02 due to a lower tax rate. Our Transportation business had another strong quarter while our CIS and Networks businesses continued to experience soft markets as expected.

Overall, I consider this to be a quarter of good execution. Our adjusted operating margin at 13.5% during the quarter and ran just under 14% during the second half of the year, despite the fact that our networks business continues to be in a very weak part of the cycle. Our overall business is now running at a full-year adjusted operating margin of 13% to 14% at the $13 billion to $14 billion revenue range.

So I feel good about the improvement in our operating leverage; however, in this uncertain and slow economic environment it is also clear that we need to reduce our costs further. I will touch on this in more detail later in the call.

During the quarter we resumed our share repurchase program and bought back 5.5 million shares, spending just under $200 million. The integration of Deutsch is proceeding very well and the Touch and Services business divestitures are complete. With these changes we have a very strong and focused connectivity portfolio.

For the full year, sales were $13.3 billion, down 3% organically versus fiscal 2011. Adjusted EPS was $2.86, also down 3% versus the 52-week fiscal 2011. Free cash flow was $1.43 billion, up 7% versus the prior year, and operating cash flow is right around $2 billion.

I am especially pleased about our free cash flow performance which has been strong and consistent over our first five years, despite what has been at times a volatile and uncertain economic environment. This is certainly one of our most important strengths in the Company.

Now it if you can please turn to slide four. Total company sales of $3.36 billion were down 3% versus the 13-week prior-year quarter and also down 3% on an organic basis. Currency translation, primarily due to the weaker euro, negatively impacted year-on-year growth by about 400 basis points or $155 million. The Deutsch acquisition contributed $153 million in revenue.

On an organic basis, in Asia, our revenue was up slightly. Automotive continue to be strong across the region, offsetting demand softness in our CIS businesses. Within CIS the industrial equipment market was especially soft. On the positive side, our small, but emerging, mobile business was up 40%.

In China, markets were quite mixed but overall the slowest since the 2008/2009 timeframe. Our auto business continued to be strong, up 20% year over year, while our CIS businesses were down 10%.

In Europe, which accounts for about one-third of our total revenue, business was down 5% organically from the prior-year level. In automotive -- most of this decline was in automotive and industrial as our networks business was flat with last year. We expect further seasonal declines in Europe in Q1 due to the seasonality of our business and continued softness in auto and industrial. Right now the automotive industry is projecting about a 10% reduction in European automotive production in this coming quarter.

Our revenue in North America was down 6% year over year on an organic basis. Continued strong demand in our automotive business was offset by soft demand in our telecom and industrial businesses, as well as our SubCom business.

Please turn to slide five and I will provide some highlights of our segment performance. As a reminder, beginning next quarter we will be reporting in our new segment structure and I will touch briefly on this later on.

Transportation had another strong quarter of performance. This business is now running at a $5 billion-plus annual revenue rate. Overall, vehicle production is now at about an 82 annual unit rate with continued -- and in 2012 there was strong growth in the US and Japan, moderate growth in China, offsetting weakness in Europe.

The industry is currently projecting vehicle production to be about flat in the coming year with the 2012 levels, with continued growth in North America and China expected to offset declines in EMEA and Japan.

In the first quarter we expect revenue in this segment to be up slightly versus the prior year with growth in the US and China offsetting weakness in the industrial and commercial vehicle market and weaker auto production in Europe.

Please turn to slide six. Revenue in our CIS businesses was about $1 billion in the quarter. Most of our markets in this segment continue to be soft, primarily reflecting slowdowns in industrial equipment and IT infrastructure spending around the globe.

Margins in this segment did improve through the year and we stabilized our consumer business. As the quarter progressed, we did see additional softness in orders in our industrial appliance business, and we expect these businesses to be down sequentially in Q1. Most of this softening in industrial and appliance is in Asia and Europe.

Please turn to slide seven. Demand in our Networks business continues to be rather weak, especially in the US telecom and in the SubCom business.

Telecom, our largest business in the segment, which accounts for about $1.3 billion of annual revenue, has been very soft in the US for about 18 months and was down 15% in the quarter year over year and for the year. In Europe, business was about flat and in Asia we are up slightly. These are the lowest -- these business levels are at the lowest revenue point in over five years and we do expect at least another two quarters of soft demand due to the normal seasonal slowdown.

Now despite the current softness in the market, I continue to remain very bullish about the future of our Networks segment because the wired portion, primarily fiber portion, of our customers' infrastructure is critically important to meeting their capacity and coverage needs. And we have never had a better product line to meet these needs.

Now while this business is slow, we are going to take advantage of this and reduce our costs across the business. We're taking an approach similar to what we did in 2008 and 2009 with our automotive business.

Now I will turn it over to Bob Hau, our still brand-new CFO, to cover the financials in more detail.

Thanks, Tom, and good morning, everyone. Before I cover the fourth-quarter financial performance I want to remind everyone that the segment reporting changes Tom mentioned earlier are effective with the first quarter. We will report first-quarter results in this new structure in January of 2013 and we expect to file an 8-K with re-cast historical P&L information in December, well in advance of the January earnings call.

So let me discuss earnings, which start on slide eight.

Our GAAP operating income for the quarter was $401 million, which includes $14 million of charges related to the acquisition of Deutsch and restructuring charges of $39 million. The Deutsch acquisition and related charges includes $7 million of non-cash fair value purchase accounting adjustments and cash acquisition charges of $7 million. We expect approximately $75 million of total cash charges related to the acquisition of Deutsch. About $40 million of the cash portion was incurred in 2012 with the remainder expected in 2013.

The Deutsch acquisition is on track and EBITDA exiting the year was in line with our expectations.

Our adjusted operating income was $454 million with an adjusted operating margin of 13.5%. Both gross and operating margins were in line with our outlook for the quarter. We do anticipate revenue levels and margins to be down sequentially in Q1 due to normal seasonal trends and continued softness in telecom and industrial markets.

GAAP EPS were $0.93 and adjusted EPS were $0.76 for the fourth quarter. GAAP EPS included $0.07 of restructuring and other charges, $0.03 of acquisition-related charges, and $0.27 of income related to tax items. The tax income was related to a reduction in valuation allowances associated with tax loss carry forwards in certain non-US jurisdictions where the ability to use NOLs in future periods now seems more certain than prior estimates.

Please turn to slide nine. Starting at the top half of this slide, our adjusted gross margin in the quarter was slightly above guidance at 31.8%. We expected adjusted gross margins to be down around 31% in the first quarter due to lower sales volumes.

Summary of operating expenses is shown at the bottom half of the slide. Total OpEx spending of $617 million is lower than the prior-year quarter, due primarily to the additional week in the fourth quarter of fiscal 2011. SG&A was up about 100 basis points as a percentage of sales, due primarily to the lower sales levels. In Q1 we expect RD&E and SG&A to be approximately 5.5% and 13.5% of sales, respectively.

Turning to slide 10, let me discuss items in the P&L below the operating line. Net interest expense was $40 million in the fourth quarter. As planned and discussed in our earnings call in July, in early October we did payoff notes that matured of $714 million. Therefore, in the first quarter we expect net interest expense to drop to approximately $32 million and stay at that level through the fiscal year.

Adjusted other income, which relates to our tax sharing agreement, was $12 million. In Q1 we expect other income of approximately $9 million.

The GAAP effective tax rate was negative 5% in the quarter due to the reduction in the NOL valuation allowances that I discussed previously. The adjusted effective tax rate was 23.5%, which was favorable versus our guidance of 26%. As Tom mentioned, this favorable rate and the positive impact of the EPS of approximately $0.02 in the fourth quarter, and we expect the adjusted tax rate to be 24% to 25% in Q1 and the full year of 2013.

Now let me turn to free cash flow and working capital on slide 11. Cash from continuing operations was $714 million, up 17% from the prior year. Our free cash flow of Q4 was $560 million, a very strong finish to year, and free cash flow for the full year was $1.43 billion. We continue to expect free cash flow to approximate net income going forward.

Capital spending during the quarter was $148 million and in fiscal 2013 we expect capital spending levels of approximately 4% to 5% of sales, consistent with our historic levels. Working capital levels are in line with our expectations with receivable days outstanding of 63, inventory days on hand return to 69 days, and our business has continued to do a very good job managing working capital in this uncertain environment.

Please turn to slide 12 and I will discuss the sources and uses of cash outside of free cash flow.

We began the quarter with $1.3 billion of cash and ended the quarter with $1.6 billion. During the quarter we returned a total of $283 million to shareholders, we paid dividends of $89 million, and repurchased 5.5 million shares for $194 million. The cash flow statement shows a lower dollar amount for share repurchases due to the timing difference of actual payment of funds.

Our outstanding debt was $3.7 billion at the end of the quarter. As I mentioned earlier, debt was reduced by approximately $700 million in early October with the payoff off the note that matured. We expect debt levels of approximately $3 billion in fiscal 2013. We expect to continue to generate strong free cash flow in future periods and plan to continue share repurchases of $150 million to $250 million per quarter in fiscal 2013.

Now I will turn it back to Tom.

Thank you, Bob. Please turn to slide 13. Before I get into the orders and our outlook I just wanted to refresh everybody's memory on the new segment structure. This slide shows our fiscal 2012 revenues in the new segment grouping.

The regrouping of our business units into these four segments has two primary objectives as we discussed on the last call. First and foremost, it enables us to best leverage our capabilities for the customer and further optimize our efficiency. It's pretty critical for us.

And it has also enabled several of our top leaders to move into expanded or different roles, which is very important for the organization's vitality and long term. We believe this will also provide improved information regarding the performance of the Company for all of our investors. And as Bob indicated, a recast of historical period results will be filed in December.

Please turn to slide 14. As we alluded to earlier, as we enter into fiscal 2013, I don't think any surprise to anyone, things are pretty uncertain in much of the global economy. Many of our customers, many of which I've talked to in just the last month, especially Tier 1 customers, are taking a very cautious approach to the outlook, which translates into tightening down the amount of inventory in the supply chain. Typical reaction.

As our fourth quarter progressed, we saw our order rates slow and this slowdown was pretty much across the board in Europe and in our industrial business in the US and Asia. Total orders for the quarter were $3.19 billion and our book to bill was 0.94, excluding SubCom. This trend is very, very similar to the trend we had in the fourth quarter of last year and our book to bill was very similar to the Q4 fiscal year 2011 and Q4 fiscal year 2010 book to bill that we had exiting the fourth quarter.

Please turn to slide 15. Based on the order trends that I just discussed, we are currently expecting revenue in Q1 to be in the $3.15 billion to $3.25 billion range and adjusted EPS in the $0.62 to $0.66 range. It is a slight increase over last year and a decline sequentially.

On a year-over-year basis the benefits of Deutsch are being offset by continued weak market for broadband networks, equipment, as well as weaker exchange rates, particularly the euro. Sequentially, the decline is a combination of normal seasonality in most of our businesses coupled with the slowness in Europe and Asia we alluded to earlier.

Please turn to slide 16. For the full year I am going to lay out three scenarios, a range if you will, to show how we would expect our company to perform at different sales levels over the next year. At the low end, which would be a very slow growth year or no growth year, we would expect revenue to be flat year over year and essentially our quarterly revenue pattern would mirror last year. You can see this in the lower left-hand corner of the chart.

In this case, where there is really no revenue growth, which is the benefits of Deutsch being offset by weaker exchange rates, we would still expect to generate 5% adjusted EPS growth as a result of the productivity improvements we continue to see and the benefit of share repurchases.

The mid-range scenario, or midpoint, assumes 3% growth with a modest economic pickup beginning in the second half and revenue, again, following seasonal patterns. In this case, we would expect EPS growth of approximately 10%. And I would call this, based on everything we see today, we hear from our customers and the assumptions people are making about the economy, this is our most likely scenario.

Then the high end of the range assumes a stronger recovery in the second half and drives full-year sales growth of 5% and EPS growth of 15%. The key takeaway from all of these, one, it is obviously difficult to call a year out in these circumstances right now, but in any scenario we would expect to see solid earnings growth. Even in a no-growth scenario, because of our productivity and our strong cash flow, we are going to generate approximately 5% EPS.

And if we were to see a pop in the second half of the year across the global economy and a recovery in the telecom spending, then you could really see our operating leverage kick in generating up to $3.30 in EPS. But as of now I would say, based on everything we see, $3.15 feels like the most likely scenario.

In any of these three scenarios we would expect to return over $1 billion to shareholders in the form of dividends and share repurchase, and in the most recently completed quarter, as Bob mentioned, we did over $280 million in the quarter. I guess a core assumption we have is that the first half of our fiscal year is going to continue to be pretty slow economically and then there will be some - we will see our seasonal pickup in the second half and we do expect a little bit of an economic pickup by the time our fourth quarter rolls around. And that would be our July/August/September quarter.

Please turn to slide 17 and I will kind of wrap things up here. Although 2012 was a tough year from a demand perspective, I feel we continued to strengthen the Company. We improved our operating leverage. We strengthened the portfolio with the addition of Deutsch and the divestitures of Touch and Services, and had another very strong cash flow year.

Just to reiterate, since 2007 when we came out on our own, we generated over $7 billion of free cash flow and we have returned approximately $4.4 billion to shareholders.

As we look forward to 2013, clearly these are uncertain times and a couple of our key markets, especially telecom, are in a weak part of the cycle. Despite this, I believe we are very well-positioned to manage through any negative economic scenarios and accelerate our profitability as the economy improves. And I think you could get a sense of that in our Q3 and Q4. With just a little bit of revenue running in the $13.5 billion to $14 billion level we are generating 13.5% to 14% operating margins.

In addition, our technology and product pipeline is very strong across the Company. Over the last five years we have been increasing R&D spending, absolute spending, because there is so many opportunities in our core connectivity business.

Over the next couple of years, beginning in 2013, I expect that we will begin to realize a wealth of new products, particularly in high speed, light weight fiber optic applications across our entire portfolio.

And our strong suit, our cash flow and operating leverage, enabled us to deliver double-digit earnings growth even at a low sales growth rate.

But it is also clear that in this environment we can't depend on normal revenue growth to drive margin expansion. And so, as a result, we are taking additional actions to further reduce our costs. Our objective is to permanently reduce costs by an additional $75 million.

We expect to hit this annual run rate in the second half of fiscal 2015. We expect to incur approximately $200 million of charges during fiscal 2013, our current year that we just entered, with roughly half occurring in the first quarter. Cash spending in fiscal 2013 related to these actions is expected to be approximately $150 million.

We just view this as a very important investment, albeit painful at times, to continue to get our cost structure down to the levels that we feel are in sync with the levels of the business. With these investments we are making in products and cost reductions we expect to be able to deliver that 15% operating margin at a lower level than previously anticipated.

I think for those of you who have been following us, 15% operating margin is an incredibly important level of performance for us to hit. That is why we are taking these actions, and we would expect to be able to do that in the $15 billion to $15.5 billion revenue range.

With that let's open up for questions, please.

(Operator Instructions) Wamsi Mohan, Bank of America.

Thank you, good morning. Tom, can you talk a little bit more about what you are seeing in the automotive market and EMEA? We have heard from some other companies of an atypical buildup of inventory of zero kilometer used cars is how they dubbed it. Also curious, are you seeing any softness in China in the luxury car market? And I have a follow-up.

Thanks, Wamsi. Well, Europe continues to slow down and I think right now some of it is a little bit of extra inventory. I don't think it is overwhelming because I think the automakers have been adjusting as well as the Tier 1s, but right now the expectation in Europe is to be down 10% year over year in Q1 in number of cars produced. And that is our biggest market.

With respect to China, China was, by China measures, slow even in automotive through 2012. We had a very strong year again, but production was in single digits for the first time -- grew through single digits for the first time in a while. Now most of the decline was at the mid-tier to low-end vehicles; it was not at the high tier.

We are seeing a little bit of slowdown at the high tier, but it is still fairly robust. I was there last week with our automotive team and they expect production to be up slightly, total production of Chinese cars to be up slightly in the year and for us to have another year of double-digit revenue growth. So obviously watching it pretty closely.

Okay, thanks, Tom. As a follow-up, I think you mentioned on the prepared remarks that these additional restructuring actions will kick in in the second half of this fiscal year. Why is it that it takes so long to realize these benefits? Is it the regions where these actions are being taken and what end markets are these actions geared towards? Thanks.

Thanks, Wamsi. A couple things. If it is factories it takes a while with notice periods and all of those things and to move the equipment. You also typically have in that case -- we are incurring some costs that are operating expense costs in the period of the move. So it does take a few quarters, I would say typically two or three, if you are involving factories to begin to see the benefit of the savings.

We would expect to see a little bit in Q4. And, of course, we are pushing for as much as fast as we can, but practically speaking, we have to be careful of not disrupting customer flow.

What was the very last part of your question?

Just the end markets where you are taking these actions?

I would say primarily around our consumer and networks businesses. Those business -- consumer, we are kind of regaining our footing in that business and besides a lot of new markets now coming to market, part of it is to make sure we have the right cost structure. That is a very competitive business and we are making good progress there.

Then in the networks business, just because the market has been down for such a long time, taking the opportunity to make sure that in the event that it is a lower level of business than we had thought we still have attractive returns.

Okay, thanks a lot.

Thank you.

Matt Sheerin, Stifel Nicolaus.

Thank you. So regarding your commentary, Tom, on weakness in the industrial markets, I know that a lot of that is through distribution. And, in terms of your overall exposure to distribution, not as much as other suppliers but certainly in the industrial side.

Are you seeing sell-in to distribution at a lower rate than sell-out, like we saw last year when we saw an inventory correction? Or are you getting signs that just demand for the distributors is weak and will continue to be weaker?

I would say it is more just sell out is weak. I will also say, Matt, that we do have a pretty substantial amount of our business goes through the channel. For the Company as a whole it's plus 20%. In our industrial businesses it's closer to 50%, so we leverage the channel, benefit from the channel, work with the channel quite a bit.

Okay. Then on the cost-cutting actions that you are taking, it sounds like it makes sense on the networking side. Are you looking at mostly manufacturing-related costs as opposed to technical sales and support, because we are potentially at the bottom of the market here and you don't want to take this kind of cost outcome of those kind of resources out, right?

We totally agree with that, and as we did in the big downturn three-and-a-half years ago, we didn't take those kind of resources out. We believe that it's really kind of the heart and soul of the Company and that is where we create our value.

So, no, it is more around excess capacity. I think there is a couple of things. We are getting smarter. We are getting better with our lean, so we are creating capacity every year, which you go back two or three years ago we would have expected to use for growth. But in these times we don't need it and so we are going to take advantage of the slowdown and take some of this capacity off-line and move it into other locations.

Okay, thank you.

Amitabh Passi, UBS.

I had a clarification and then a question. My clarification was in your EPS guidance for fiscal 2013 have you already embedded the potential impact of your share repurchases of somewhere between $150 million to $250 million per quarter?

Then, Tom, my question for you was your wireline segments, whether it be your telecom, fiber business, the service provider segment, or SubC has been weak for some time. Just wanted to get your thoughts on what do you think spurs incremental spending there, particularly in North America? And is there a need for you to perhaps bulk up the macro cellular wireless piece of your business to perhaps complement what is going on in the wireline markets?

This is Bob. From a share repurchase standpoint, as we indicated, we are planning about $150 million to $250 million per quarter in 2013. We did restart fourth quarter of 2012 and that is baked in to the EPS guidance for the full year.

Then, Amitabh, on your question about the Networks business, it really depends on where -- the cycle depends on where we are in the world. So Europe is kind of flattish right now. Some carriers there are being very aggressive, pushing fiber deep; others are backing off, typically because they did it a few years ago.

But, in general, fiber is still not that deep in a network. It is deepest in the US, but it is still not close enough to the home or the office to handle all the digital content that is coming. Then in Asia it's still growing, although it is lumpy. Then you have big programs like what is going on in Australia and New Zealand.

In terms of small base station, we have, through the ADC acquisition, what is commonly referred to as the DAS business, or distributed antenna, which is the forerunner of small base station I would say. The capability to add on capacity and coverage without having to build a tower and, clearly, that is where the industry is going, especially in the US.

We have a product line there that we feel pretty good about. What we are more excited about, as you build out all these small base stations to get the signal back onto the main network you need to connect them with fiber. So these small base stations supporting an LTE network are going to be out pretty close to the home in order to have the bandwidth that you need for the home. And they will be, in our view, predominantly connected by fiber.

So in the last year-and-a-half we have had the acquisition activity in the carriers in the US that will tend to slow down spending and then I think a really big push to get 4G or LTE out there and at the expense of some of the wired infrastructure. So we have seen these cycles before. When we are in the bottom of them they always feel pretty tough and there are those moments when it seems like it is never going to come back, but we really like the product line we have and we feel we are very poised for when that investment cycle hits again.

Then with respect to SubCom, as you know that is a very cyclical business and it is at the low end of the cycle. Five years ago it was at the top end of the cycle and life couldn't have been better, but even at the low end of the cycle it is a good business returning cost of capital. When you model bandwidth around the world, and nobody is perfect at this, we expect another growth cycle to come in the next few years.

Excellent, thank you.

Thank you.

Shawn Harrison, Longbow Research.

Good morning. Two questions, just the first on Deutsch. Maybe if you could just -- it sounds as if things are going pretty well there, but if you could maybe talk about just how it is progressing, what we should expect from that business in 2013 and both kind of just the earnings contribution, whether you think there is upside or challenges. And then just second, the raw material environment if you are facing any incremental headwinds right now or if you think you are relatively neutral to raw materials? Thanks.

With respect to Deutsch, it's going very well. The cultural fit, and I have been to most of the locations, is very good. As we have said before, our people have been in these similar businesses a long time so there is an initial point of understanding to start with, which I think is important.

The business is a little slower than when we bought it, the assumptions we had when we bought it. I think that is reflective of the slowdown in the global economy. The synergy is higher, so on balance we expect the earnings contribution from Deutsch in 2013 to be as we stated at the time of acquisition, which I am pretty pleased with given it is a little softer top line.

We also feel there is -- longer term there is a little more opportunity than we thought from a sales perspective; the ability to take these products, some directly, some with modification, into other applications. So so far so good, a tremendous amount of enthusiasm I think with the Deutsch team and us about what the prospects are.

Then with respect to raw material --

Raw materials for us above a push for 2013, perhaps a very small tailwind if copper, gold, and silver stay where they are at today. But it would be low single-digit millions of tailwind if it were to hold, particularly given where we stand from a hedging standpoint.

Also, add on a Deutsch standpoint, I mentioned in my opening comments we exited 2012 about on expectations from the EBITDA standpoint. As Tom pointed out, sales a little bit late. Integration costs coming in better or integration savings coming in better than we had anticipated, so we actually crossed the 30% EBITDA margin in the second half of 2012 for the first six months of ownership, so pretty pleased from that standpoint.

Thanks so much.

Thank you.

Amit Daryanani, RBC Capital Markets.

Thanks a lot. Good morning, guys. Just two questions from my side, one just on the Deutsch side. You touched on this a little, but your revenues were $27 million off what you guys were initially expecting last quarter from Deutsch.

Even though the rest of [tel's] transportation segment seems to have held up well, why do you think Deutsch underperformed on the revenue line so severely?

The biggest part, Amit, is in the heavy truck business with slowdown in industrial activity so that is really where we have seen it. I think you have seen some of the companies, the big OEMs, how they are guiding in that area in the last month, and they are big customers of ours.

China, we are starting to see acceleration again towards the new CAFE, the equivalent of the CAFE standards, which is a big opportunity for us and is one of the core theories of the case for doing Deutsch. Where today trucks in China are -- unlike the automotive market, the truck market it was all kind of local and at the low end with few exceptions. But with the new much more strict emissions standards that should come into play over the next year-and-a-half, and get ready for that over the next year, we see a really big opportunity there. But in the short term it is off-road heavy trucks.

Got it, that is helpful. Could you maybe just touch on what drove the sequential margin declines for the Transportation segment? Was down about 160 basis points, but was that largely just a revenue mix or something else that impacted that?

Then how do you think that segment will perform in fiscal 2013 that you are baking into your guide?

Amit, from a sequential standpoint you hit it right on the head. It is definitely associated with the lower revenue, partly on a seasonal basis. We saw a bit of weakening in operating margins just from a standpoint of leverage through the factories.

Amit, at the 13.7, $3.15 EPS scenario I would expect the margin in that business to be up modestly.

Fair enough. Thanks a lot.

Expect another year of good performance.

Jim Suva, Citi.

Thank you, congratulations to your team. Can you talk a little bit about the restructuring? Is it mostly TE Connectivity or ADC or Deutsch, or a combination of the three, or maybe just proportionately how do you think about where the restructuring actions are?

Appreciate that question, Jim, and thanks for the compliment. It is hard to cut it that finally because ADC has been part of us almost two years now. But if you were to go back and look at some of the locations we have already announced there is a couple that are ADC locations that were originally contemplated as part of the synergy and we are doing more than we originally contemplated because the business is slower.

There is a little bit of fine tuning in Deutsch I would say. Again, as we get smarter and as Bob mentioned, we are identifying more synergies. If you want to break it down to businesses, we are going through and finding wherever we have excess capacity that still may not be where the customer is going or where the customer has gone. It's an ongoing journey to make that happen, but generally speaking you could say the majority of it is going to be around consumer and networks.

Okay. Then as a quick follow-up, with the restructuring actions going on is your M&A pipeline still very active or given the slowdown in the economy you take a pause on it? Or are those people focused on restructuring; are they like different teams?

I am just trying to get a feel for your M&A. You talked about stock buyback, you talked about restructuring, but M&A just didn't really come up. Just wondering about your appetite for that. Thank you very much.

No, our M&A pipeline is still full, because I think in that case it is all part of understanding what is going on in your markets. We certainly have areas, as we said many times, that are very attractive to us if the right opportunity was available, desire to do something, and it was the right price.

So I think we have a group of people that work with our businesses that are constantly making sure that that pipeline is growing in the sense that we are identifying all the companies out there so that we are on top of our markets. I would say, clearly, the thresholds for doing one is higher. As I said last quarter, we have done two sizable ones in the last two years and our priority is to make sure we make them successful. I feel very good about where we are on that journey with those two acquisitions.

So in a sense it gets harder and harder to -- the threshold gets higher and higher and likely to be smaller size, really true bolt-ons in the area that we are most interested in. So we don't want to, in a sense, restrict the pipeline because I think we could, one, maybe misunderstand what is going on in the market and, two, miss opportunities because many of these take a long time to come to fruition.

Thanks and congratulations to your team.

Craig Hettenbach, Goldman Sachs.

Yes, thank you. Tom, you called out the parallel to the restructuring actions to the automotive market in 2008/2009. So was hoping to get a sense of the operating leverage you saw in that business kind of coming out of the downturn and if you see any similar parallels to the earnings power for the networks and consumer once end demand comes back.

Yes, in automotive we picked up 1.5 points to 2 points. We also did increase our investment in R&D in that business at that time, especially in hybrid electric and a few other areas. I would expect in the businesses we are primarily focused on to get a similar kind of leverage, 1 point to 2 points, in consumer or networks. That is the objective.

The opportunity is there because the team has identified the excess capacity and how we can take advantage of locations that have capacity.

Overall, we expect about $75 million worth of savings, which once we get out to that run rate second half of 2015, as Tom indicated, we see an accelerated opportunity to get to the 15% operating margin, $75 million order of magnitude, 0.5 point at the total TE Connectivity level.

Got it, thanks for that. Then as it relates to the capital allocation, the buyback resumed this quarter. Any thoughts on the dividend, which if you look at your payout, even though you have steadily increased its since spin out it is still below the overall market? And just really curious how you think about that payout ratio if there is an opportunity over time to increase that from where it is today.

We do think that for us, depending on where we are in the cycle and what our other opportunities are that payout ratio in the 25% to 35% range would be the right ratio for us. As you know, we have been consistently increasing the dividend. I would expect that at the upcoming Board meetings in advance of our annual meeting that is certainly a topic that we will be reviewing with the Board to see what we want to do in the coming calendar year regarding payout.

But we have to take into consideration what the economy looks like, what do the other opportunities look like, but our philosophy would be consistent increase in the dividend rate. We just haven't locked down what that will be yet for the coming year. Okay?

Yes, thank you.

Thank you.

Stephen Fox, Cross Research.

Thanks, good morning. Two questions. First, as it goes to the restructuring, I was just curious what it implies about your typical incremental margins, whether there has been any change there or the ability to realize meaningful sales synergies from Deutsch over a longer period of time?

Then, secondly, Tom, maybe you could just talk a little bit more about China around the other markets. There seems to be the linchpin maybe for next six months in terms of which way the economy goes globally and how your operations have improved over the last year or two there. I know you have had some initiatives underway to bring them up to par maybe with other areas, so that would be helpful. Thank you.

Just a point of clarification on your first question, restructuring relative to Deutsch?

No, the overall restructuring -- the new restructuring charge that you are announcing I'm trying to understand what it implies about your typical incremental margins, if you have to take further cost actions here.

We are addressing fixed costs primarily in the restructuring, so the goal is to continue to improve flow-through on higher volume growth. So, yes, we typically fluctuate between 25% and 30% depending on the mix of businesses and the region it happens in. We want to continue to reduce where it makes sense. We don't sacrifice capacity for growth, that fixed cost base, so that is the way to think about that.

As far as Deutsch sales synergy, I think it is early but we are seeing it for sure in the two key markets. We are seeing opportunities of, one, having the complete product line going into a customer and from soup to nuts providing the heavy-duty connectivity system. That is beneficial to customers; they are telling us they like that, it simplifies their life. So I think over time that is an opportunity.

The shorter-term opportunity is to take advantage of our channel strength around the world where we have a large infrastructure, I would say an effective infrastructure, that works with our channel partners to support all the smaller customers, generally smaller customers, around the world. We are seeing increased activity around this product line from Deutsch through those partners, in many cases not sold by those channel partners before.

So that was the early synergy. Then in the longer term I think it is really the opportunity to get more design-ins, because we can provide more of the system and we can solve the problems in a more effective way having this complete range of products for the harsh environment.

Then with respect to China, yes, we have quite a presence in China, as you know, about $2 billion of revenue. We have substantial engineering resources there, obviously manufacturing resources there. Our strong suit in China in our beacon business is automotive where we have been supporting the automotive industry there, both multinational and the locals, for a long time.

I think we are doing well in the telecom business. Telecom and energy are tough businesses in China, lots of local competition, but we are in the upper echelon of suppliers. Not huge businesses, but strong position.

Then the balance of the business in China is typically, not to generalize too much, but a for-export business where, whether its computers or mobile phones or even industrial equipment. And we have more than a beachhead there.

But, clearly, China getting energy and getting a pickup in their environment. I was encouraged from my visit and talk to our folks last week that it looks like as that transition in government over there comes soon, a desire to get the economy going, stimulus is flowing again in some areas, and the recognition that that economy needs to grow 7.5% to 9% to keep the country moving forward. But for the last year it has been slower than I have seen other than the crisis years.

Thank you very much, that is helpful.

Mike Wood, Macquarie.

Good morning. Regarding the outperformance that you are expecting with global auto production, is that being driven by higher content per vehicle or Deutsch synergies, or is this just better performance on the high end? Then can you talk about whether or not you are worried about a trade down impact as the economy is slowing?

Sure. It is not really Deutsch-related in the automotive business. They bring a little bit of capability, but they are a more harsh environment. It is continuing content in every category of car -- A, B, C, D, E. It is selective expansion beyond our traditional product line in areas like sensors.

It is continuing to lead. We have invested a lot for a long time in lightweight and be able to connect alternative metals and copper, and we have got tremendous capability there. So it is a combination of factors that contribute to us growing a little bit faster than the market.

Okay. And the growth that you mentioned in tablets and smartphones, are these new wins with customers or are these just an expansion with your current business?

We have had a couple of significant new wins. Not enough to say we are well established yet. I think enough to tell our customers, hey, we really are a good, capable, innovative supplier to these markets and to tell ourselves that we can do it.

So the last year was an important year for us to convince, more than anything, ourselves that this is a market that we should be able to be successful in. So it is a couple more wins, not just extensions of existing wins.

Of course, in that business you have got to have wins all the time because, unlike automotive or industrial, you don't typically get designed in with a particular part number and last that long. It is -- if you are not that well established in the business it's a good thing because it gives you a chance to get established, but it does make it a pretty ferocious business. So you have to be good at it and you have to be quick to ramping volume, which has not been our strong suit in the past but which we are getting much better at.

Great, thank you.

Thank you.

Sherri Scribner, Deutsche Bank.

Thank you. This is Kevin LaBuz for behalf Sherri. It is really no surprise given the macro situation that you have seen a slowdown in sales, but I am wondering what have you seen on the design side. Has the pace of activity there slowed?

Not really. We have seen a little bit, and I would say these are really one-offs where when things slow down sometimes customers slow down their efforts to introduce something that might be cutting edge. But we haven't seen even a lot of that. A couple of things where we were close to getting designed-in and then the customer decided, in light of the market, to hold on to the incumbent solution.

But for the most part the customers aren't slowing down their demands on the number of designs. I think that is not in their best interest. You can really lose a lot of momentum if you are the customer doing that. You want to have a pipeline of designs so that when things do come back and they spend more money they are ready.

A lot of what we do in this industry supporting our customers, whether it is high speed or light weight or fiber optic related, are important parts of the architecture. So it is not just a simple component that gets dropped into a design, it is very often a component that is custom designed or partially custom designed for their application.

And in many of our industries the consumer might have the shortest cycle, but in almost any industry next-generation products are designed several years out. If you delay that you really run the risk of missing a window.

So we have kept our investment; that is why I said earlier even with the restructuring we are not touching engineering. You look at our investment in engineering over the last five years it has gone up. I just think we have so much opportunity that we felt like we were going to go after it. But I guess to answer your question we have not seen much change in the design demands of our customers.

All right, thank you. Just turning to Asia, there has been a lot of talk about slowdown in China, but what are you seeing in other geographies there? So excluding China, what are you seeing in Asia?

Sure. I would say -- and it really depends on market, but to generalize a little bit, Japan had a strong year in 2012 and I would expect to have a very slow year in 2013. The post-earthquake bounce really drove some business there, but we are seeing that slowdown already.

China, by typical recent measures, I would say had a slow year, although a growth year. Expect that to pick up a little bit; seeing signs of that in our order rates this quarter.

Korea, steady I would say. Low growth, but steady growth; of course, continuing to have significant exports in the auto and in the mobile device business. So those being the three big markets.

Southeast Asia, very promising growing market. See places like Indonesia really be -- standards of living starting to improve and investments starting to grow there. In Australia/New Zealand pretty significant investments in infrastructure, and relative to us, telecom infrastructure. So very important there; the governments have made a statement that having full broadband solutions across country is important to being competitive.

By the way, I think we will see that over time everywhere. That is one of the reasons we are so bullish on our Networks business.

Excellent, thank you.

Thank you.

Tony Kure, KeyBanc.

Good morning. Just a quick question on the guidance for fiscal 2013 as you look at the EPS and the revenue line. Sort of trying to back into the EBIT margin improvement.

You have already talk to your expectations on the transport side, but overall for the Company I am looking at sort of a 20 to 30 basis point operating margin improvement. First, is that correct? Second, how would it be influenced by the other segments, the two segments at this point?

That is directionally correct. Yes, I would say you are in the ballpark. It is that kind of revenue growth; we would expect the productivity we have in the pipeline to generate that kind of operating margin.

Then you talked about the transport being up marginally. Can you talk about the other two segments from the margin expectations?

Yes, I would say I think ultimately, to your point, the 20 to 30 basis points operating margin is about right on a year-over-year basis. Transportation being the strongest one given the growth opportunities there. The other three segments -- industrial, consumer, and networks -- all expanding on a year-over-year basis but to a smaller level given the lack of volume leverage in those three individual segments.

Great. Then on the enterprise IT side, obviously slowing down there. Just if you have visibility into what is driving that, we have heard a lot about the sea level decision-making extending, a lot of projects pushing out.

Do you have that sort of visibility that these types of things are pushing into 2013 or are these just cancellations on run rate business? Maybe if you provide deep down onto that market?

I think, again, it depends on the region of the world and the customer. There are some customers that are very aggressive in pushing us for earlier implementation of next-generation high-speed solutions. There are some that are, in light of the economic circumstances, holding capital budgets in an uncertain economy or living with the solutions they have.

So I would say it is mixed, but if I had to categorize it in one area I would say it's more of a push than a cancellation. We don't see too much on a cancellation, because I think from our customer's point of view that is not a smart thing for them to do. It is easier for them just to push rather than lose the attention of the supply base and the continued innovation in the investment we bring.

Okay, great. Thank you so much.

Thank you.

Michael Wherley, Janney.

I just had a question about the consumer restructuring and if you are seeing some program wins there, where exactly is the consumer restructuring? Does it have to do with customers that have lost share, or is it just more broad-based?

It is really about tightening up the capacity, Michael. When I talked about the organization change we made three months ago that had been in the works for a while, it was really founded on grouping like businesses together and making the final break from what had always, in this company, been structured as a regional geographic business and making the transition to a vertical global business.

So in the past consumer really was three businesses in the Americas, Europe, and Asia. We concluded a couple years ago that that was not going to enable us to be, one, cost effective or nimble in responding to the needs of that market. So part of the capacity in the restructuring that you hear us talking about is really tightening up the back end of that business now that we have had it as stand-alone for about nine months now.

And getting scale, because time to volume and scale in that business is critical to getting the margin you need to make it an attractive business. I'm encouraged with the leadership and team we have put in a year ago, the progress they have made in that year. Both on new products, important new wins at the key customers, and the customers are setting the pace in that market, as well as making a lot more sense out of the backend of that business and making us much more efficient.

Okay. What has given you the confidence that you have gotten better at sort of the quick ramp ups where you have struggled in the past in that consumer business?

Growing confidence. We have a couple of really great success stories with a couple of the biggest and the most demanding customers. And they were critically important for us, of course, because we don't have a long track record of doing that.

So very important product for these customers that we did a very, very good job and in one case helped them out of a bind. So I think we are building our confidence and their confidence in us. In this business you are only as good as your last experience, so we have to be good every time. So far, so good, knock on wood.

We are far from declaring victory, and probably never would anyway, but I think our team's confidence in the ability to make this a good business is growing.

Okay, thanks very much. The last question I have is just sort of on your lean opportunities across TE. Separate from the restructuring, what sort of headway are you making with lean and how does that sort of tie in with the current restructuring?

The headwind on lean is really good and I think you could start to see it in a year last year where we had actual slight shrinkage in some of our markets in revenue and overall, the operating margin held in there nicely. Three years ago that would not have been the case.

So lean is focused on taking the waste out of the process. It has been around; it is a tool-based program, requires a lot of discipline, and strong site-by-site leadership. It is implemented at every site we have, some further along than others, but at least half our sites.

We refer to it as a star three you get when it is actually improving your performance. So it is a journey that takes a lot of perseverance, it is helping us, and it is freeing up physical capacity, which plays into some of the decisions we are making now.

Thanks very much, guys.

Thank you all very much for the questions.

Thanks very much for joining the call today. Please call the IR team with any follow-up questions.

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