泰科電子 (TEL) 2013 Q1 法說會逐字稿

Welcome to the TE Connectivity Quarter One Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will be given at that time.

(Operator Instructions)

As reminder, today's conference is being recorded. I would now like to turn the conference over to our host, Mr. Keith Kolstrom. Please go ahead, sir.

Good morning and thank you for joining our conference call to discuss TE Connectivity's first quarter 2013 results. With me today are Chairman and Chief Executive Officer Tom Lynch and 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 at TE.com. Finally, for participants on the Q&A portion of today's call, I would like to remind everyone to please limit themselves to one follow-up question. Now, let me turn the call over to Tom for some opening comments.

Thanks, Keith and good morning, everyone. If you could please turn to slide 3 and we'll get started. First quarter results were in line with our expectations as strong margin performance offset slightly weaker than expected sales, particularly in our network segment. Orders were up 3% versus prior year to $3.1 billion and strengthened through the quarter in most of our businesses; primarily due to improved economic conditions in the US and China. Excluding SubCom, our book-to-bill for the quarter was 1.02, which compares to about 0.98 last year. We also had another strong free cash flow quarter generating $304 million and of that, returned $267 million to shareholders through dividends and the repurchase of approximately 5 million shares. We expect to return over $1 billion to shareholders for the full year, as we also indicated on our prior call. I'm encouraged by the order trends, also encouraged by our strong execution on productivity and the traction we're making on the cost reduction programs we announced last quarter. As a result, we do expect increased sales and earnings in the second quarter and we expect to deliver a strong second half.

Please turn to slide 4. Total Company sales of $3.13 billion were down 1% versus the prior-year and down 4% on an organic basis. Currency translation negatively impacted year-on-year growth by $43 million and the Deutsch acquisition contributed $148 million in revenue. Versus the prior year, revenue in our Transportation and Industrial segments were up low-single digits due to the addition of Deutsche. The Network and Consumer segments declined in the quarter. The Network decline represents a continuation of weak CapEx spending in many segments of the broadband network. Consumer was down slightly due to weak PC demand more than offsetting our improving position in tablets and smartphones.

By region, compared to the prior year, revenues were up 4% in the Americas, down 2% in Europe, and down 5% in Asia. Within Asia, China was up about 4%; however, the rest of Asia was down primarily due to weakness in Japan. Please turn to slide 5 and I'll provide some highlights of our segment performance. Transportation had another strong quarter of performance with sales up 3% and adjusted operating income up 10%. Overall, global [light] vehicle production was up slightly versus the prior year, with growth in the US and China offsetting declines in Europe and Japan. Commercial vehicle production continued to be soft in Q1, but orders have strengthened early in the current quarter and we expect sales in this segment to continue to grow in Q2.

Please turn to slide 6. Revenues and adjusted operating income in our Networks business were down 8% versus the prior-year. As I mentioned earlier, the market for broadband network equipment, particularly in the wireline portion of the market, continues to be soft and we don't expect to see this improve until late in the second half. Project activity in the SubCom business remains robust, but the funding continues to be slow and we actually expect this business to bottom in the second quarter. We have a strong pipeline, but projects coming into force have been slow.

With respect to the Network segment overall, I still continue to be bullish, despite the fact that we're in this pretty extended lull in demand on the wireline side. The underlying trends would say that the network has to continue to be built out with small [base] stations coming and the need to drive fiber closer to home to get the data rates that consumers and businesses demand. We think the market will be coming back. It's been hard to call the timing, but we still remain bullish on the underlying market trends. During this lull, we've been pretty aggressive, as we mentioned last quarter, in taking cost out. Much like we did in automotive in the downturn, we're positioning this business for a really strong rebound in sales and earnings growth as demand picks up.

Please turn to slide 7. Revenue in the Industrial segment was up 2%, as the Deutsch acquisition offset continued weak demand in the industrial equipment and solar markets. Adjusted operating margins up 12% were down, as expected, due to the low sales level. Based on normal seasonality and improving order trends, we expect steady sales and margin improvement over the balance of the year and we expect our margin in this segment to be up several points by the end of the year.

Please turn to slide 8. Sales in our Consumer segment were down 4% versus the prior year with adjusted operating margins [up] 300 basis points and adjusted operating income up 32%. We're finally beginning to see the results of our efforts in tablets and smart phones and getting an increased number of design [ins] with the important customers in the segment. However, this growth was offset by general weakness in the PC market, which is still a large portion of our consumer devices business. Adjusted margins improved in this segment over the prior year, primarily as the result of improved productivity and cost reduction actions. Now let me turn it over to Bob, who's going to cover the financials in more detail.

Thanks, Tom, and good morning, everyone. Let me discuss earnings, which start on slide 9. Our GAAP operating income for the quarter was $293 million, which includes restructuring charges of $92 million and Deutsch acquisition-related charges of $5 million. Adjusted operating income was $390 million with an adjusted operating margin of 12.4%; up 30 basis points from Q1 last year. GAAP and adjusted EPS were $0.65 for the quarter. GAAP EPS included $0.15 of restructuring and other charges and $0.01 of acquisition-related charges, offset by $0.16 of income related to tax items. The tax income was primarily related to the settlement of an audit of prior year tax returns, as we continue to make progress on resolving our pre-separation shared tax liabilities.

Please turn to slide 10. Our adjusted gross margin in the quarter was 31.6%. Despite sales that were slightly lower than expected, both gross and operating margins were above our outlook for the quarter as a result of increased productivity and rigorous cost and spending controls. Total OpEx spending was $599 million for the quarter and this was up about 7% versus the prior-year, largely due to the addition of Deutsch. The right side of the slide details items on the P&L below the operating line. Net interest expense was $33 million for the first quarter, about flat versus the prior-year. I expect approximately $32 million of expense per quarter for the remainder of the year.

Adjusted other income, which relates to our tax sharing agreement, was $5 million versus our outlook of $9 million. On a GAAP basis, taxes were a benefit in the quarter, due primarily to the settlement of an audit of prior-year tax returns, as I mentioned earlier. The adjusted effective tax rate was 23%, slightly lower than the 24% to 25% guidance. Both adjusted other income and adjusted tax expense were lower and the net effect was no impact to EPS compared to guidance. For the remainder of the year, I expect other income of about $8 million per quarter and tax rate of 23% to 24%, which is slightly lower than what we guided last quarter.

Please turn to slide 11. Cash from continuing operations was $393 million. Our free cash flow in Q1 was a very strong $304 million. This was a very good start to the fiscal year as free cash flow is typically the lowest in the first quarter. We continue to expect free cash flow to approximate net income going forward. Capital spending during the quarter was $124 million or about 4% of sales. This is consistent with historic levels of approximately 4% to 5% of sales. Working capital levels are in line with our expectations. Receivable days outstanding were 63 days and inventory days on hand were 74 days; both up slightly versus the prior year, primarily due to the addition of Deutsch.

Our businesses continue to do a very good job managing working capital. Now let me discuss the sources and uses of cash outside of free cash flow shown on the right side of the slide. We began the quarter with $1.6 billion of cash and ended the quarter with about $1 billion. During the quarter, we returned a total of $267 million to shareholders. We paid dividends of $89 million and repurchased 5 million shares for $178 million. The cash flow statement shows a slightly lower dollar amount for share repurchases, due to the timing difference on actual payment of funds. We continue to expect additional share repurchases of $150 million to $250 million per quarter in fiscal 2013.

Outstanding debt was $3 billion at the end of the quarter. As I discussed on last quarter's earnings call, debt was reduced by approximately $700 million in early October, with the payoff of notes that have matured. We expect debt levels to remain at approximately $3 billion for fiscal 2013. Finally on December 26, Standard & Poor's raised their credit rating on TE from BBB to BBB+ with a stable outlook, based on our stronger performance. Now, I'll turn it back to Tom.

Thanks Bob. Please turn to slide 12. We are beginning to see some positive signs in the US and China as orders strengthened during the quarter; I mentioned this earlier. This momentum has continued into January, the first three weeks of January. All segments, except Networks, had a positive book-to-bill in the quarter and our overall book-to-bill was 1.02, excluding SubCom. As a result, we are a little more optimistic that we will see continued demand improvement as the year progresses.

Please turn to slide 13. Based on the order trends, we expect revenue in Q2 to be in the $3.2 billion to $3.3 billion range and adjusted EPS in the $0.68 to $0.72 range. At the midpoint, revenue would be about flat versus the prior-year, with EPS up 3% and adjusted operating margins would be between 12.5% and 13%. We expect approximately $100 million of restructuring charges in the second quarter as we are accelerating our cost improvement actions. On a year over year basis, revenues in the Transportation segment would be up about 5%, primarily due to the addition of Deutsch, as growth in Automotive is offset by a weaker demand for industrial and commercial vehicles. Networks will be down about 8%, primarily due to weakness in SubCom.

Please turn to slide 14. For the full year, we expect sales in the range of $13.3 billion to $13.7 billion and adjusted EPS of $3.05 to $3.25 and the midpoint of $3.15 is consistent with our prior guidance on lower sales of about $200 million. At the midpoint of this guidance, adjusted EPS would be up about 10% on revenue growth of about 2%. We expect a total of approximately $225 million of restructuring charges for the full-year and this is an increase of $25 million versus prior guidance as we plan to accelerate several actions in response to the current slow environment. We do expect stronger than normal earnings improvement in the second half and I'll highlight the key reasons for that. Global auto production is expected to improve slightly in the second half compared to the first half.

We are expecting a modest pickup in Network and Industrial Solutions demand relative to the first half of the year and slightly up versus the second half of last year, which is not very strong. We do expect SubCom revenues to return to the $125 million for quarter in the second half. We have won the awards and now they need to go into force. As I mentioned, the key there is getting the funding, but we believe we're getting closer.

Momentum in our Consumer Device business continues. We have a number of new products we're launching that will go into the market in the second half. That's another key milestone for us in this business, contributing to the sales growth. Then we're expecting a continuation of the slow but steady recovery in the industrial vehicle market. As I mentioned earlier, the orders in that market segment have been very strong over the last four to five weeks.

Last but certainly not least, we expect to continue the margin improvement due to our lean programs and the accelerated cost improvement actions. About 50% of the revenue increase in the second half is seasonally-related. The other one-third is we're expecting stronger markets for Automotive, Commercial, Aerospace Industrial and then, another one-third is we have some significant new product launches, particularly in our consumer and fiber businesses, network businesses. I think the key point is that the margin rate we're delivering now continued to improve operating [leverage].

Please turn to slide 15. Before we move to Q&A, I wanted to review the three scenarios I laid out for fiscal '13 on the last call and these scenarios really summarized how we expected to performance at different sales levels, which I think is important to understand. To recap, at the low-end scenario, revenue would be flat year over year and we expected to generate about 5% adjusted EPS growth as a result of productivity improvements and the benefit of share repurchases. The midpoint scenario assumed 3% sales growth with a modest economic pickup beginning in the second half and adjusted EPS growth of approximately 10%. At the high end of the range, a stronger recovery in the second half was assumed with sales growth of 5% and EPS growth of 15%.

What happened in the first three months of the year, sales in the first quarter were slightly lower than expected. Margins were stronger due to the increasing impact of our productivity programs and cost and spending controls. Free cash flow continued to be very strong and it was, in fact, stronger than anticipated. Order rates did improve through the quarter in the vast majority of our businesses. When we take that all in and all the data points in the macro world, these results and current order trends lead us to a view for the remainder of the year that anticipates revenue at the low to midpoint of prior guidance and adjusted EPS at the midpoint.

Revenue levels remain tough to predict in this environment, but on the positive side, we got off to a great start with our productivity and cost reduction initiatives and we expect to carry this through the balance of the year. We expect another strong year of cash flow and expect to return over $1 billion in capital to our shareholders this year. As Bob mentioned earlier, we continue to expect $150 million to $250 million of share repurchase this quarter in fiscal 2013 and in addition, our Board has recommended a 19% increase in the dividend to $1 per year. This increase would be effective with the June quarter and is subject to shareholder approval at the March annual meeting. Again, I think the bottom line for us is our strong cash flow and improving operating leverage should enable us to deliver very attractive earnings growth even at a low sales growth rate. With that, let's open it up for questions.

(Operator Instructions)

Amit Daryanani, RBC Capital Markets.

A question on the Automotive segment -- if you could maybe talk about the softness that you saw in the December quarter, specifically in EMEA. This was more demand-driven or do you think there's an inventory correction that's occurring over there that could persist over the next couple of quarters, especially related to dealer registered vehicles that you make? Maybe you just talk about that part of the business and the inventory correction, that would be helpful.

I think in the Automotive piece, it's more demand-driven, Amit. To your point about the low new registrations, that's offset a little bit by the fact that the high-end, 50% the cars there are being exported to other parts of the world or in China and the US where the economies are picking up again. We didn't see too much inventory. I think inventory in the auto chain, value chain or supply chain is in good shape. We did see some inventory corrections the last couple quarters in the industrial vehicle market, but now we're starting to see that turn around. I'd say that's how I would summarize it.

Got it. So, the expectation would be that, that segment or the Automotive in general should improve as you go forward through fiscal '13, right, on a revenue basis?

Yes.

As a follow-up, Bob, if we just talk about the Industrial segment, just touch on the margin declines you saw. It was fairly severe on a sequential and year-over-year basis. Maybe just talk about what happened there and more importantly, the path to go back to 15% margins in that segment. Is that going to be more revenue-driven or do you think some of these cost take-out initiatives you have could help that segment, especially in the back half of fiscal '13? Thank you.

To answer the second part of your question first, it will be both revenue and cost, which the cost piece is well underway. The drop-off is in high-margin items. That's a business that's over 50% through the channel into the industrial equipment portion of our industrial solution segment. That tends to be very high margin. We're seeing signs that the channel is starting to replenish. We need to see a little more of that before we can move from cautiously optimistic to bullish.

But it has a -- I guess you could use the word mix to describe it. It's just high-margin business that dropped off and then coupled with the Solar business that was twice the size it is today a year ago because of everything that went on with the shift to China and then the ultimate significant collapse of the business. But I'm pretty confident of our ability to drive the margins back up to near Company average or Company goal over the next four or five quarters.

Shawn Harrison, Longbow Research.

I wanted to focus in on the cost profile, both the savings generated this quarter from raw materials and efficiency gains and what you have left there and then also, the accelerated restructuring program, the $225 million for this year. What does that mean for restructuring savings for fiscal '13?

Shawn, that second question, the $225 million restructuring, we begin to get a little bit at the end of the year, but most of this doesn't start to hit until next year, given the nature of plant realignment and shutdowns, things like that. For example, we've announced about 50% of them already, which is where we spent the $100 million, now we need to -- once you announce you need to move equipment, transition it to the receiving plant and that will typically take sometimes a year. As we said last quarter, we didn't really expect to see too much benefit. Maybe a little -- I mean, we're pushing and accelerating very hard, maybe get a little bit at the very tail end of the year.

Shawn, the other aspect, you heard Tom say, the restructuring charge for fiscal 2013 prior guidance was $200 million, now $225 million. So, not only are we accelerating the actions we had already laid out, but there's a slight increase in the restructuring charge and the actions we're taking. That will translate into about $85 million worth of annual savings. We'd previously said we'd see $75 million of annual savings as we exited '14, so full-year benefit in 2015 that $75 million is now $85 million. There is a higher return from increased spending.

In the raw materials savings you saw this quarter, do think you've eked out as much as you can from that or will we see more benefits as the year goes?

I think we'll see more benefits. That was a nice contribution to our gross margin. It's a program that's been -- we call the war on material. It's been driven hard for several years here and it includes everything from upgrading the capabilities of the organization to how we design products to faster localizing of material sources. Over the last couple quarters, all that heavy lifting really started to come into fruition. I would expect we'd continue to see this level of productivity through the balance of the year. It's one of the reasons why we're optimistic about the ability to improve margins over the balance of the year.

Just as a follow-up, Network Solutions taking maybe a little more bearish view. If I exclude the Subsea business coming back in the second half and the broadband project, what gives you confidence in that business bounces back over the next 12 to 18 months? I know you're taking more restructuring charges, but I just didn't get a good sense today that you have maybe a lot of confidence in that bouncing back.

I thought we'd have more confidence by now, but it's not quite where I'd like to be, to your point, Shawn. We're seeing signs. You need to go around the world. So, in the emerging markets, there's still double-digit growth; pockets of growth in Europe. I think the US finally had a little bit of growth in the first quarter in our revenue, which says that some of the investment is moving back into the wireline. Really, a lot of spending has been around expanding capacity on existing towers and then just deploying LTE, of which we don't participate that much in our networks business. I think the next phase, which we thought would happen a little faster, I think is taking a little longer, which is pushing small base stations out further near the home or the office because they're not going to be building that many more towers.

In those base stations, there's going to be a lot of fiber connectivity to that and then, we believe -- you see what some of the carriers around the world are doing. They're upping the bandwidth they're providing for the home and it is a way to raise the price. We haven't changed our view on the underlying thesis of this business, which is you've got to have the bandwidth and over time, it's going to continue to get -- that fiber is going continue to get closer to home, but it has taken longer than we thought. We think a little bit of an uptick by late this year, but we're not counting on anything. Not a bounce, I wouldn't say it's a bounce. It's just a gradual pickup, that's our current projection.

Sherri Scribner, Deutsche Bank.

I don't know if I missed it, but did you give the number of orders this quarter?

What we said was our book-to-bill was 1.02 for the quarter after excluding SubCom and $3.1 billion.

Okay. Just looking at the order rates, it seems like everything is improving with the exception of networking. Just wanted to get a sense of, were you seeing improvements throughout the quarter? Do you think you'll see consistent improvements in orders as we move through the year in all the segments? Maybe a little more detail in the segment areas? Thanks.

That is our current view that starting with transportation -- not big increases, because it's running pretty strong right now, but a pickup. I think the industry is forecasting 1 million more cars first half, second half. That's a little lift in the business first half, second half. We are seeing signs talking to our big OEM customers in the industrial business and the distributors. We're seeing orders from distribution pickup. I think once everybody got through the first wave of January uncertainty in DC, we did see orders pickup.

Four out of our last six weeks, you take the two holiday weeks out, orders were pretty robust, which was more than in prior years at this time of the year because this can be a pretty soft time and often a time it's very hard to call. Then you go into the consumer business, we definitely have nice momentum, albeit we're still small in tablets and smart phones, but we have more designs than we did last year at this time. We're executing them well so those orders are picking up, PC is going down, but I would expect consumer business will gradually ramp. The second half should be higher than the first half because we have some significant new products we're launching there.

The balance of industrial energy we expect to be steady. It's been a little slow, particularly in Europe. But starting to see signs that, that's loosening up a little bit and that's a very seasonal business, so as we go into coming out of the second quarter and go into third and [fourth], our telecom and energy businesses pickup because they're outside businesses, so there is a typical kick to that.

There's nothing that -- probably the biggest jump from first half to second is SubCom. But we have all the awards, it's just those awards working through the funding. That's the business where we can jump the most. I think it's pretty balanced. With networks being -- showing the lowest growth, I think we're not bearish but we're conservative, I hope.

Steven Fox, Cross Research.

First of all on the consumer segment, I believe you just did 9% margins in that segment, which is a nice recovery. Tom, given all the product shifts that you mentioned for the next few quarters, what does that imply for the consumer margins going forward and where could they go maybe longer-term? Secondly, you mentioned one-third of the second half recovery would be around new products. I was wondering if we could get key examples of what you're referring to there. Thanks.

Sure. We would expect consumer had a nice pickup from -- of course, nowhere to go but up, you could say, from this time last year to 9% and really well run to get there, launching new products, we mentioned before a new team. Our expectation is to pick up another point or 2 in the operating margin through the year. The target is to be at the end of the year in double-digits in this business. We believe when we model it -- and it is in many ways the hardest to predict business because the cycles are the shortest, we do have a nice infrastructure in Asia to support this business so it's low-cost infrastructure. Most of our leadership team is there, so we're on the ground close to the customer.

We believe this can be low double-digits, nice return on capital, nice earnings growth model. We would expect this business to grow core organic growth to be higher than the other businesses. Part of that because of the share and part of it the nature of the growth of smartphones and tablets, et cetera. I'd say the important thing for us in this business is to get double-digit margin by the end of the year.

Just on the new products?

Second part of your question was new products?

Yes, just examples of what you were referring to in terms of [helping the second half] -- (multiple speakers).

You can imagine we can't get into too much, but look, we're really focused on miniaturization in the connector space. So, high speed -- really high-speed, high-performing, high [reliable] cables and then flexible antennas so that they're design-friendly for the device designers. Those are the three big things and we have new products coming in all those. We've launched some new products in the first half as well, but we have another round of that coming in the second half, that has some potentially higher revenues associated with it if we execute and the demand for the end products are there.

Great, that's very helpful. Thank you.

Amitabh Passi, UBS.

Bob, just a clarification, it looks like the implied EPS for the back half of the year is about $0.90 a quarter versus the $0.65 and $0.70 in the first half. You may have touched on this, just curious how do you see that ramp in the back half? It seems like implied operating margins would be almost in the mid-30s?

You're correct. About $0.90 per quarter in the back half and that's really driven by a combination of the seasonal growth that we naturally see -- we typically see an outsized portion of our earnings in the second half of the year given the sales growth that we see driven by seasonality, plus the new products that Tom talked about. The other benefit we have is in our cost reduction programs, whether it is our lean efforts with the [TEOA/TE] operating advantage, our war on material that we talked earlier, getting both raw and component material cost down on a year-over-year basis, continue to accelerate that and of course, the accelerated restructuring as well as slight increase in restructuring will all benefit us as we enter the second half of the year.

Got it. Just as a follow-up for you, Tom, you touched on Network Solutions, you talked about the potential Small Cell opportunity, we've also heard some updates from AT&T, Deutsch Telekom, just wondering what kind of visibility to have into any sort of potential builds with these two large operators and any sense of timing? Do you think they're more a 2014 type event? Do you think you could see some benefit this year? Just some thoughts around at least some of the more publicly announced updates from some of the larger carriers?

There have been definitely big announcements of total amounts of spending and then you've got it, the devil's in the details where it's going to be spent. I think for us, we would expect a slight increase in spending in the US in our section of the network and probably a little more than that in Germany. But it is a carrier-by-carrier, you really have to go carrier-by-carrier. I'd say, in the greenfield, building fiber quickly. In the US, it went through a significant investment in the three to five years ago, pushing for the traditional telcos, pushing fiber and video on that fiber close to the home or to the home -- depending on the operator and then a lull there, but now we see the pickup. The carriers in the US are talking about significantly increasing speeds, I think that's the best news for us because that puts the pressure on everybody else.

As you get to 200-megabits, 300-megabits that people are talking about and even in some of these experimental systems that are being build at a gigabit, you've really got to bring fiber right to the home. We're very bullish. We've been off on the timing and we're adjusting the cost structure accordingly. But we continue to be bullish that it only takes a couple of these operators to really drive it deep because then they begin to deliver quite a different experience to the consumer and enable a lot different experiences. That typically -- based on my history in the cable industry, that typically will lead to everybody getting more aggressive, but all of our customers have to figure out their business model.

Are there any regulatory hurdles that you think need to be cleared both in Germany and the US for deployments to accelerate?

I don't think anything significant, no, not that I'm aware of.

Okay, thank you.

Matt Sheerin, Stifel Nicolaus.

A question regarding the accelerated restructuring program, could you be more specific about the areas? I know you talk about Networking, Industrial, Consumer, could you parse that out? On the Networking business is that where you're taking the biggest cut? With depressed revenue, even ex-Subsea, I'm trying to figure out what revenue run rate you need to get to, to get back to double-digit operating margin.

As we laid out last time, Matt, it hasn't changed that much, we've just found more. We're digging for every opportunity and three more months went by and we identified another $25 million investment with a pretty good payback. It's going to be primarily in Networks and Consumer. It's fine tuning in Industrial. There's some difficult work there to get the footprint in order and rebalance, but fundamentally, those businesses are pretty healthy and we're pretty confident as the revenue comes back, we have significant operating leverage. When you look at the margin levels of Consumer and Networks, we needed to take a lot of cost out. We found it and we think we can do it without really mortgaging the upside of revenue.

We're running, I believe, around [$3.4 billion] annual, somewhere in that -- for that segment. We probably need to get into the [$3.2 billion] rather, we are running about [$3.2 billion] we probably need to get to [$3.4 billion, $3.5 billion] to get to the double-digits. I would expect at [$3.6 billion], we should be somewhere in the 12% to 13% range. There is a lot of leverage in -- it's high gross margin business in Networks and it will be higher with the costs we're taking out and the synergies we continue to extract across all the business and one of the reasons we put those four businesses together. Because they all basically are in the same industry and in many cases, touching the same customer. The goal was to become much more efficient than they were grouped in other segments.

Got it. On the use of cash, you talked about the dividend and buybacks, not much mentioned on acquisitions. I know in the last couple quarters, you've talked about niche, tuck-in deals nothing really big. Is that still part of the strategy? Any specific areas where you're looking to fill voids?

We really haven't changed our strategy. If you can find the right opportunities at the right price, we would like to be bigger in Energy and Industrial. They're really good businesses, they play to our strengths -- highly engineered, high-quality, reliability, got to last the life of the piece of equipment, that's what we do best. We have a number of opportunities that we're looking at, but there's nothing really even warm, I would say. Also, to ourselves, we want to make sure we fully capitalize on Deutsch. I feel very good about the integration on that. We're careful, let's get that under our belt and running well before we would do anything else. We're looking and knocking, though.

Okay, thank you.

Jim Suva, Citi.

Congratulations to you and your team at TE Connectivity. I have two questions, the first one is on the networking. Can you talk to us a little bit more about your confidence in that, like are the carriers giving you road maps for these small base stations? It seems like the whole LTE upgrade cycle, so far, you guys are not positioned to capture that. Are you actually getting firm orders from that or is that hypothetical, what you perceive happening? It just seems like this segment continues to disappoint. I'm just trying to get the disconnect about why it's not coming to fruition.

I wouldn't use the word hypothetical, Jim, but I would say it's still at the architecture stage, so there isn't really much -- what's being deployed is called small base stations today are these digital antenna systems. That's not really what the carriers and the equipment providers are really thinking when they say small base station. Small base stations are on the drawing board, in tests -- pilots in the field. It's not being deployed, I would say, yet.

What's typical timeline for deployment of that?

I think when it starts it's going to be a long, drawn out deployment because you're talking about really taking these base stations, almost like cable amplifiers today. You see for every so many houses, you have a green or brown box that has a cable amplifier in it. That's almost what a small base station is. It's getting something to repower the six -- boost the signal close to your house. Today, the only thing you really have are the towers and they're running out of capacity with all the data that's going through them. As you know, it's not very easy to get a new tower built. But it'll be a long -- I would expect it will be a long deployment as small base stations get rolled out.

As I said, what we're selling right now and seeing a little pickup is more the traditional backhaul -- there's more fiber going up the current towers and antennas, they're switching off slowly from coax. There's changes in the network that way that we're benefiting from. The big one for us is when fiber in the home continues to pick up and it is, it's different pockets around the world, it's just not broadly deployed and small base stations get deployed. That's when we would expect to see a pop -- a nice pop in our demand.

Great. My follow-up question is on the operating margin, I believe you had set out a goal of 15% and there were certain revenue metrics of when you thought you'd hit that as well as the timeline of hitting that 15%. Can you just refresh my memory on that?

Sure, Jim. I think, right now, we feel in the $15 billion revenue range. It's down a little bit from what we've said. That's part of the goal of the restructuring, to accelerate that. If we can do it faster, we will, without upsetting the apple cart. But think about it as 15% in the $15 billion range. Six months ago, we were talking about $15 billion to $16 billion range, so we're pulling that in.

Okay and then the timeline?

If you take our forecast, it would probably be sometime late next year you'd start getting at a $15 million run rate.

Thank you and congratulations to you and your team at TE Connectivity.

Anthony Kure, KeyBanc.

First, on the book-to-bill as it relates to the different segments, specifically on the consumer side, could you speak to, given the shorter cycle nature of consumer products, does the first quarter book-to-bill reflect second quarter revenue only or is the order book here have a longer view than the shorter cycle nature of consumer products?

I would say, Anthony, generally it would reflect, it's a good indicator of the quarter to come. We did see in Q1 and part of the reason we were a little down on sales, because with this kind of book-to-bill, we would have expected to be in the sales range for Q1. What we did see is a little more scheduling out of orders. It was almost a phenomena of, look, I want to get in line, the customer saying I want to get in line for the order, but I don't really necessarily want to take it in early January depending -- could something, the fiscal cliff, et cetera. I think just that extra uncertainty and trying to protect themselves.

That would explain to me a little bit of the book-to-bill. The encouraging thing is in January, we've seen the book-to-bill get even stronger. I think if it would have turned down, that would have said, that was just a pushing out of orders, we're really at a different order rate and we're not seeing that much for the second quarter. Consumer itself, I would say, generally is indicative of the next quarter, generally.

Okay, so it doesn't reflect, then, the new products that are coming online in the second half?

Yes, not the new products in the second half, no. There's no orders in for that.

Okay. My follow-up is just a little bit more on the consumer. You mentioned the puts and takes within the business itself, PC being weaker. Can you just remind us what the weighting is, PC versus smartphone and tablets for that business?

Let me dig that out real quick here. PC is about 35% of the business. Mobile and tablet is about 45% and then, the remainder would be business equipment, those types of things.

In business equipment, it's everything from cameras to copiers to Nintendo and things like that.

Those would be the percentages for the consumer devices business within the Consumer Solutions segment.

Okay, great. Thank you.

Mike Wood, Macquarie.

The outperformance to global vehicle production that you're expecting for 2013, can you provide some color on your visibility to that and the main drivers; whether it is luxury vehicle outperformance or content growth?

To make sure I understand your question, Mike, our outperformance of vehicles, I mean that's growing faster than --

Global auto production, correct.

Yes. I think there's a couple things there. There is the electronic content. If production's growing 1% or 2%, you're going to have anywhere, depending on the mix of cars in the world, anywhere from 3% to 5% of content, then you're going to have 2% of price erosion and it is different region by region. If production is going up, you would expect our revenue to go up a little more than the production numbers and then I think we have had strong performance continuing to gain share in places like China and the US, where we really invested in both places in the downturn and because of the fragile nature of a lot of supply chain at those times, we're able to garner a little more business. That's what we've been tracking -- those three things have been why we're tracking slightly ahead.

Does the $125 million SubCom quarterly sales pace that you're expecting in the second half, is that more of a chunky draw down of some of the shadowed pipeline or is that more of a sustainable pace that we should expect heading into your next fiscal year?

Right now, we would say that's more of a sustainable pace. In the past, when we've seen this kind of pipeline, it's usually a signal that we're going back into an up cycle, but we need to see that start to happen. I think as some of these projects break loose in the next two quarters, that's going to tell us a lot of where we -- is the cycle really starting to recover or is it going to stay on the bottom? We have enough signs that we're starting to see recovery and then what will the slope be? Will we go back into another boom or will we go into a more steady build cycle? That's too early to call.

Got it, thank you.

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Thanks, everybody, we appreciate the questions, as always, and have a good week.

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