泰科電子 (TEL) 2013 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the TE Connectivity second-quarter 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 call is being recorded.

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

Good morning and thank you for joining our conference call to discuss TE Connectivity's second-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. 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, 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. Please turn to slide 3. I am pleased with our overall performance in this quarter.

Adjusted earnings per share of $0.76 was a record for the second quarter and $0.06 above the midpoint of our guidance. Sales of $3.27 billion were in line with expectations. Adjusted OI margin of 13.6% was up 60 basis points versus the prior year and up 120 basis points sequentially.

We generated $353 million of free cash flow and during the quarter returned $319 million of capital to shareholders through dividends of $88 million and share repurchases of $231 million, giving us a total share repurchase of about $409 million in the first half. The strong OI margin performance is another step towards delivering 15% margins at the $15 billion revenue level.

Our favorable earnings performance was due to higher revenue and strong margin results in our Transportation segment, and continued productivity and momentum across the Company. Orders were $3.4 billion in the quarter, up 4% versus the prior year and up 9% sequentially.

Book-to-bill excluding SubCom was 1.06 and was above 1 in all four of our segments. Just as a reference point, book-to-bill in our first quarter was 1.02.

The economy does continue to send mixed signals; but based on our order trends we continue to expect a strong second half due to the normal seasonal pickup, improvements in the industrial and telecom markets, and strong productivity performance. For the full year we expect adjusted earnings per share of $3.10 to $3.22 on sales of $13.075 billion to $13.375 billion.

Earnings per share is up slightly from our guidance last quarter. The outlook in our Transportation segment has strengthened and it's more than offsetting foreign exchange headwinds and a reduced outlook in our Networks business in the second half compared to the prior forecast.

Please turn to slide 4. Total Company sales of $3.27 billion were in line with our expectations, as I previously mentioned. On a geographic basis, sales in the Americas were up 5%, excluding SubCom, due to another quarter of strong US Automotive demand and the Deutsch acquisition. This more than offset continued softness in Networks and Industrial.

In Europe, sales were up 2%, again due to the Deutsch acquisition, which more than offset the weakness in those markets in our Industrial and Networks markets. Our Automotive sales in Europe were down about 1% versus the prior year on a decline in European auto production.

Asia sales were down slightly in the quarter. Growth in China and Korea was more than offset by weakness in Japan. Strong performance in our Transportation segment and the addition of Deutsch more than offset weaker Networks revenue and foreign exchange headwinds.

Please turn to slide 5 and I will provide some highlights of our segment performance. We had another very strong quarter in our Transportation segment. Sales were up 9%, and adjusted operating income was up 31% due to increased organic revenue, the addition of Deutsch, and very strong operating performance.

This strong performance was in spite of a slight decline in global vehicle production around the world. On a regional basis, the vehicle production remains strong in North America and is picking up again in China. This offset weakness in Europe and Japan.

Another important development was an increase in demand for industrial and commercial vehicles, primarily driven by demand for heavy trucks in the US and China. The Deutsch acquisition is serving us very well in these markets. We expect continued strong results in the second half, with quarterly results similar to the Q2 levels.

Please turn to slide 6. Results in our Network segment were down 11% versus the prior year; down 8% excluding the SubCom business, which is very soft right now. This resulted in about a $30 million decline in operating income.

Demand across our Networks businesses continues to be slower than we anticipated. We are seeing additional project activity in our Telecom and SubCom businesses and feel we are well positioned to capitalize on these, when these projects come into force. We have reduced our second half outlook in this segment, but do expect to improve our adjusted operating margin to the high single-digit range exiting the year.

Please turn to slide 7. Revenue in the Industrial segment was up 4%, in line with expectations, as the addition of Deutsch and continued strength in commercial aerospace and oil and gas markets offset weak demand in the industrial equipment and energy market. Organically, sales were down 7%, as expected.

Adjusted operating margins were up 170 basis points sequentially, but below prior year levels due to the decline in organic sales. Orders were up 10% sequentially, and we continue to expect sequential sales and margin improvement over the balance of the year.

Now please turn to slide 8. Sales in our Consumer segment were down 7% from the prior year, largely in line with our outlook. Weakness in the PC market, still our largest Devices market, and a slow but gradually improving Appliance market more than offset our improving position in tablets and smartphones.

We do continue to be very selective about the projects we are going after in the Consumer markets. In addition, we are seeing some delays in customer programs; and as a result we have reduced our second-half outlook in this segment. Despite the sales decline, we continue to improve profitability in this segment and expect adjusted operating margins to be around 10% as we exit the fiscal year.

Now I will turn it over to Bob, who will cover the financials in more detail.

Thanks, Tom. Good morning, everyone. Let me discuss earnings, which start on slide 9.

Our GAAP operating income for the quarter was $359 million, which includes restructuring charges of $78 million and Deutsch acquisition-related charges of $6 million. We now expect a total of approximately $275 million of restructuring charges for the full year, an increase of about $50 million versus prior guidance. We are increasing our restructuring spending in 2013 and expect a substantial reduction in the level of restructuring actions next year.

Our adjusted operating income was $443 million, with an adjusted operating margin of 13.6%, up 60 basis points from Q2 last year. Our adjusted EPS was $0.76, and GAAP EPS was $0.66 for the quarter. GAAP EPS included $0.13 of restructuring and other charges and $0.01 of acquisition-related charges, partially offset by $0.03 of income-related tax items. The tax income was primarily associated with the expiration of statutes of limitations related to non-US tax audit periods.

Turning to slide 10, our adjusted gross margin for the quarter was 32.2%. This is an 80 basis point increase versus the prior year on relatively flat sales, as a result of continued progress on our TEOA programs driving increased productivity and cost reductions. As you know, TEOA is our version of Lean and is delivering results across the business.

Total OpEx spending was $609 million in the quarter, up slightly versus the prior year. Increased expenses related to the addition of Deutsch were mostly offset by cost-reduction and productivity initiatives.

The right side of the slide details items on the P&L below the operating line. Net interest expense was $30 million in the second quarter, and 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 $8 million, in line with guidance. The adjusted effective tax rate was 23%, which was at the low end of our guidance of 23% to 24%. For the remainder of the year, I expect other income of about $8 million per quarter, and the tax rate to be 23% to 24%.

Turning to slide 11, I'll discuss our balance sheet and free cash flow. Cash flow from continuing operations was $446 million, and our free cash flow in Q2 was $353 million. We continue to expect free cash flow to approximate net income going forward.

Capital spending during the quarter was $125 million, or about 4% of sales. This is consistent with our anticipated spending rate of approximately 4% to 5% of sales going forward.

Receivable days outstanding were 61 days, and inventory days on hand were 71 days. We worked to reduce working capital levels following the Deutsch acquisition, and they are now in line with our expectations.

Now let me discuss sources and uses of cash outside of free cash flow, shown on the right side of the slide. We began the quarter with $1 billion of cash and ended the quarter with about $1.1 billion.

During the quarter, we returned a total of $319 million to shareholders. We paid dividends of $88 million and repurchased about 5.7 million shares, or $231 million.

The cash flow statement shows a lower dollar amount for share repurchases due to a timing difference in actual payment of funds. Beginning in the June quarter, dividends paid increased by approximately 19% to an annualized rate of $1.00 per share. We continue to expect additional share repurchases of $150 million to $250 million per quarter for the remainder of the fiscal 2013.

Outstanding debt was $3 billion at the end of the quarter, and we expect similar levels for the remainder of the fiscal-year 2013. Now I will turn it back to Tom.

Thanks, Bob. Please turn to slide 12. Orders were up 9% versus the first quarter, and our book-to-bill was 1.06, excluding Subsea. All segments had a positive book-to-bill, as I mentioned earlier; and in the Transportation, Industrial, and Networks segments orders were all up about 10% sequentially or more, although, as I mentioned, the increase in Networks was lower than expected. Orders were down slightly in Consumer.

Please turn to slide 13. Based on our order trends we expect revenue in Q3 to be in the $3.325 billion to $3.425 billion range and adjusted EPS in the $0.80 to $0.84 range. We expect adjusted EPS to be up approximately 4% versus the prior year due to improved productivity, cost reduction, and our share repurchase program.

Revenue is expected to be up sequentially with growth in all segments. Versus the prior year, revenue will be down about 4% as weaker demand in Networks and Consumer, coupled with the weaker euro and yen, more than offsets growth in our Transportation segment.

Please turn to slide 14. For the full year, we expect sales in the range of $13.075 billion to $13.375 billion and adjusted EPS of $3.10 to $3.22. As I mentioned earlier, our adjusted EPS outlook is up slightly at the midpoint compared to what we guided last quarter, primarily due to our strong Q2 performance.

This, coupled with continued strong performance in our Transportation business, is more than offsetting foreign exchange headwinds, which were about $0.05 per share in the second half, and a reduced outlook in our Networks and Consumer businesses. This full-year outlook represents a strong improvement in sequentially in the second half, as adjusted EPS versus the first half will be up in the range of 20% to 28%. This is driven due to the sales increase of 4% to 9%, improved productivity, and reduced share count.

Let me make a few comments about the range to put it in perspective. The midpoint scenario assumes revenue about flat with the prior year, with a modest economic pickup beginning in the second half, and adjusted EPS growth of approximately 10% overall. The high end of the range would be a 1% sales increase driven largely by a stronger recovery in the second half, particularly in our Industrial and Networks business. Adjusted EPS growth would then be about 13%.

At the low end, revenue would be down about 2%, and we would expect to generate about 8% adjusted EPS growth for the year as a result of productivity improvements and the benefit of share repurchases.

In summary, we had a strong Q2 and expect to deliver a strong second half, with second-half adjusted operating margins above 14%. And for the year we expect to deliver adjusted EPS up 10% versus the prior year.

Our key assumptions for the second half -- global auto production expected to be up slightly in the second half and industrial transportation demand increasing, particularly in the heavy truck area, a trend we are already seeing. Networks and Industrial demand -- industrial equipment demand is improving versus the first-half level, but it still does remain slightly below last year's second half.

SubCom revenue expected to be up about -- up to $100 million in Q3. That is an absolute level of $100 million in Q3, and return to about $125 million in Q4. In Q2, we ran $80 million, which is a low point in many years.

And we expect continued margin improvement due to our Lean programs and the acceleration of our cost-improvement actions. As I mentioned, we expect to deliver 14%-plus operating margin in the second half.

For the full year, we expect free cash flow of about $1.3 billion; and as we pointed out last quarter, we expect to return in excess of $1 billion of capital to shareholders. So with that, can we please open it up for questions?

(Operator Instructions) Wamsi Mohan, Bank of America Merrill Lynch.

Yes, good morning, Tom. Good morning, Bob. This is Ruplu filling in for Wamsi today. Just wanted to start by asking you about the Transportation segment margins. Very good performance.

Just wondering. Was that more seasonal, maybe because of commercial vehicle market picking up? And how do you see that progressing as we go forward in the second half of the year?

Thanks, Ruplu. A couple things. Not so much seasonal, but I would say the pickup in commercial vehicles, which as you recall really was soft last year especially in the second half, has nice leverage on the margins. And the Deutsch business that we brought in has very strong margins. They are very highly engineered products that operate in very difficult environments, and they do command nice margins.

So that is the biggest thing, as well as just continued strong execution and with the 3% organic growth in the light vehicle bringing that flowthrough to the bottom line.

Okay, thanks, Tom. And just looking at the book-to-bill numbers, they are again very strong. How have they trended so far in this quarter, in the third quarter?

The trend is continuing to be about that level through the first three weeks of April. So continuing what we saw build through the second quarter, so far.

Okay, thanks. And the last one for me, Bob, I think you mentioned the $50 million more in restructuring. I was just wondering if you could give some more details on which segments that is targeting . And when do you expect to see the benefits from that?

Yes, as far as the targeted segments, consistent with what we have seen really in the first half of the year, Networks in particular, but also Industrial and Commercial -- excuse me, Consumer; a little bit less obviously in our Transportation segment. In terms of benefit, we had indicated about $85 million of run rate benefit in 2015 from the $225 million. That number is now closer to about $100 million, given the increased activity we've got this year.

Okay, thank you. Thanks.

Amit Daryanani with RBC Capital Markets.

Yes, thanks. Good morning, guys. Just two questions for me. One, maybe just back to the Transportation side, the margin performance you guys had this quarter was at an all-time high, I believe. Maybe could you just talk about how sustainable that level is if revenues remain flattish?

Then additionally, if you look at the European production data, it has been a lot more robust, or declining at least less than what the registration numbers have suggested. Do you think that could end up resulting in a more severe back half than what you guys are forecasting? The assumption being there might be an inventory build there. Just any thoughts on that would be helpful as well.

Sure. Regarding the Transportation margin, the industrial and commercial vehicle, because of the Deutsch acquisition, is a bigger part of that business now. So we basically doubled the size of our Industrial commercial business with that acquisition; and those margins are higher than the segment average. So that is giving us nice leverage, which we expected.

And we have improved those margins. We are actually running them slightly ahead on the cost synergies that were the goals that we set out when we did that acquisition. So that is helping.

Regarding the European registrations, as you know, a significant part of the Northern European auto production is exported. So the strength in US and China, you're going to look at those OEMs and their revenues aren't going to track exactly to European registrations for that reason. And most of the decline, the severe decline is in the South.

So we think we have got this all reflected in our outlook. Our second half is really -- I think I touched on -- we continue to expect the US market to be solid. China after a slowdown last year is picking up. We saw that in the first two quarters. And we continue to expect Europe to be soft.

Got it. That's really helpful. Then if I just look at your fiscal-year guide, I wanted to just make sure I understand.

You're basically lowering your full-year revenues by $275 million versus what you had 90 days ago. But it looks like about $165 million of that is really FX driven. Should we be talking about what the rest of that $110 million downtick is driven by?

And then if my math is right, versus the 90-day guide that you had, that $165 million is a $0.04, $0.05 in EPS hit, which means had you not had FX you actually could have raised the midpoint by $0.06, rather than a penny. Is that accurate?

Yes, yes and yes.

Perfect.

I think you got the numbers right, quickly. As far as the rest of the revenue decline, it is mostly in Networks. SubCom continues to be slow. We are seeing the seasonal pickup, but we are not seeing in as much as we expected, I would say, in any of our Networks businesses.

So second half will be better than first half. Orders picked up, as I mentioned, in the second quarter versus the first quarter, but not as robust as we had originally. I think when you dig inside things, both SubCom and Telecom have a lot of project activity, which is encouraging. I would be a little more concerned if the project activity was light.

But we are seeing activity, so we think that bodes well, although it has been hard to call the timing.

Fair enough. Thanks a lot for your time, guys.

Shawn Harrison, Longbow Research.

Hi, just a quick clarification, then two actual questions. First off, on the $100 million in savings, is that a '15 run rate, as you said, or is that '14?

That is a 2015 run rate.

Okay, perfect. Then the two questions. Just on distribution, I guess are you seeing acceleration in that business, and is it accelerating at the same rate as the overall orders or a little bit better?

And then second, on the Networks business, typically when you see project activity build, how long does it take before you actually see that turn into actual revenues?

Yes. On the distribution we are seeing the book-to-bill is pretty consistent with our overall book-to-bill of 1.06 in the quarter. So we have seen that pick up pretty broad-based across the world, which is encouraging, knock on wood.

On the Networks project business, it is hard to call. In SubCom it is really hard to call, because you can -- especially in the last year and a half, we have been selected for projects. It is not in our backlog because until you actually sign up and sign the contract -- but we have been selected, but in many cases, the projects haven't started yet. So they can take longer.

I would say typically in the Telecom business, the majority of these are accelerated builds. The encouraging thing as well is there are some new fiber to the home builds throughout the world. So I would expect those to start showing up in revenue early next year.

Is it broadly geographic or is it Eurocentric or US-centric?

I would say in the US it is kind of a continuation of -- fiber is pretty well established, although it is still not that deep in the network, other than one of the carriers. So it's, I would say, add-on business in the US. In Latin America, Middle East, and Asia it's new projects. And in Europe, it is a continuation of old projects.

But it is pretty sporadic in Europe. I would say Europe is still soft. There is a few carriers that are accelerating, but overall it is soft.

Okay. Thanks so much, Tom, and congrats on the margin performance.

Mark Delaney, Goldman Sachs.

Thanks very much for taking the question. I was hoping maybe you could start just more broadly on inventory levels across the supply chain. I know you touch a little bit on Automotive and distribution; but just maybe holistically, how do you feel about customer inventory levels?

Generally pretty good. Again, I think after what happened three or four years ago to everybody in the supply chain, everybody has been more cautious and gotten better at this. I know we feel like we have.

Our connections with the customer, our planning processes, our double-checking, triple-checking, is much more rigorous than it was before. So in general -- and I spent a lot of time in the last quarter on the road with our customers and our distribution partners, and that is one of the first questions we talk about. I would say it doesn't feel like there is any kind of inventory issues.

That's helpful. Thank you. As a follow-up question, can you help us understand or remind us what it was that you guys did that enabled you to increase your design win activity in the mobile segment with some of the larger OEMs? And then what the new outlook is on timing for some of those new programs to ramp?

I would say couple things. One, we are starting from a low base, to be frank. So winning a few more awards is better than we were.

The big thing is we put new focus and new leadership in the business about 18 months ago that had a lot of experience in that space. And that has helped us on our speed to market. I feel like we have always had good products, but we haven't always been great in the speed side of it. So that has improved.

As I mentioned, we are being selective there. We are trying to really focus where we bring some technology to the customer and not focusing on the more commoditized side of the business.

Maybe just to follow-up a little bit on that. How much of the full-year change to your revenues were some of these new programs, outside of the FX part? And then do you guys have good visibility on when some of these new programs could ramp?

It's a couple of programs. It is really no more than that; and one that we didn't do and one that pushed out. So there is not really a substantial change. It is not like a dramatic change in the number of programs in our pipeline. It is really a couple.

Mark, we do get a typical seasonal lift into the second half of the year, particularly around the Consumer Devices element of the Consumer segment, which we have baked into our guidance

Great, thank you.

Matt Sheerin, Stifel Nicolaus.

Yes, thanks and good morning. Just a question on the full-year guidance. Looking at your guidance for the June quarter and then full year on a revenue basis, it looks like September is going to be flattish to up a little bit sequentially, which is seasonal. Yet to get to your full-year EPS guidance it looks like you are going to see fairly significant margin expansion with strong EPS growth on a sequential basis.

So where is that coming from? Is that a mix issue? Do you expect cost to come out through this cost-cutting program? Just trying to reconcile the difference there.

Sure. No, I think it is really four main areas. You could call it mix.

I would say it is the strength of our Transportation business particularly in this commercial vehicle which is one of our strongest-margin businesses. So that is one.

It is continued productivity. Bob mentioned the program that we call TEOA, which is our version of Lean, is really, really starting to deliver results for us. You are seeing it in the P&L and in productivity.

But it is on-time delivery, it is quality. So that -- our productivity levels are up nicely from where they were even a year ago.

There are the benefits of the early stages of the restructuring just starting to kick in. And as Bob mentioned, we are doing it faster; we're trying to get it behind us and doing it faster.

And then the benefits of the strong cash flow that we are primarily using for return of capital to shareholders. It shows up in a lower share count.

Okay. What is the assumption on share count for the June quarter with your guidance?

We are planning roughly $150 million to $250 million per quarter on share repurchase. We did a little more than that in Q2.

We closed out the quarter on an average fully diluted at about 4.25 million shares. It will go down 2 million or 3 million per quarter for the balance of the year.

Okay, great. Just lastly, we have seen gold come down and copper has been down in terms of pricing. When do you expect to see that favorably impact your margins?

We will see a little bit of the tailwind in the second half. But as you know, we hedge quite a bit, so we won't get the full benefit of if it stays down until -- you really won't start to see that until next year.

But year-over-year we have got a little benefit. It is not a lot.

Okay. Thank you.

Sherri Scribner, Deutsche Bank.

Hi, guys. This is Kevin LaBuz on behalf of Sherri. Taking a step back and looking at last year, you were expecting to see demand improve in the back half of the year; and it turns out that didn't materialize. So just now fast forwarding to this year, wondering what gives you more confidence in seeing that growth come about, or the improved demand in the back half of the year.

Sure, we usually get a little bit of a lift sequentially, so we feel pretty confident about that. I would say the main thing is the order rates in Q1 and Q2. So we are 4% year-over-year; and as I mentioned, that is continuing and even a little bit better than that in the first three weeks of April. So that gives us a lot of confidence around Q3 and early to Q4.

I think the question -- it is really kind of a Q4 question in a way. If this order rate continues where we are, things will be good.

To your point, the economies I think in general plateaued and softened a little bit in the summer last year, and that affected our fourth quarter. So we feel more confident at this point because of the way the order rates are running year-over-year, and what our channel partners are saying, and what our customers are saying. But we have got to see it continue this way through this quarter, the order rates continue strong through this quarter and into the early -- the very beginning of the fourth quarter.

All right, thank you. That's helpful. Just looking at the distribution channel, have you seen any signs of restocking there?

I don't know if -- maybe a little bit. I think it is really tracking demand, though, frankly, because I think everybody is being careful about restocking in advance in light of the last two or three years, where strong Q2, early Q3 momentum and then things petered out a bit.

So I would say a little bit of restocking, but nothing of significance. It just feels like responding to customer end demand more than anything else.

Okay. Thank you very much.

Jim Suva, Citi.

Thank you very much. Could you just take a step back and think about, as you run the business longer-term, help us understand the organic, true Company in a normal environment, sales growth opportunities for TE Connectivity?

Maybe break it down into some of the major material components such as content growth, what you think over the long term will happen. Unit growth maybe from Automobiles.

And then are ASP declines embedded in your content growth, or then do we deduct some type of ASP declines? And really how we should think about organically growing the Company and maybe hopefully someday we get back to a more normalized environment.

Big question. Yes, we think about this all the time. I think in at least the last five years it is hard to call any kind of trend.

But if you look over the long historical trend around our connector business which is about 75% of our business, that is in the 5% to 6% range over a long trend. That hasn't been that high over the last five years.

So of that -- so I would say 5% to 6% is probably the long-term trend when we look at the continued growth of electronics. And that really is about probably 8% volume, unit volume growth, on average. Or maybe -- yes, 6% unit volume growth, rather; 2% price erosion; 2% to 3% content growth. In those ranges, plus or minus 1%.

And it really is market by market as well. That is the way we would build it up. But historically the industry has grown in that 5% to 6% range.

Great. Thank you very much.

Amitabh Passi, UBS.

Hi, guys. This is Jim Hillier for Amitabh. Thanks for taking my question. In the Network Solutions business, if I look at this on a sequential basis, it looks like the operating margins showed a sequential drop with only a modest change in revenues quarter-over-quarter. Could you discuss the factors behind the margin softness and what is giving you the confidence that operating margins can improve to the high single-digit range exiting the year?

Yes, the slight margin erosion -- well, the margin is really low, and it is primarily due to -- overall compared to where we have run in prior years, the volume being way down. SubCom is essentially breakeven right now, a little bit above that, but we believe that is at the low end of the cycle.

So the improvement from the rate we are at, picking up 200 to 300 basis points over the next two quarters, is first and foremost volume driven, most of which I would say is seasonal related, a little bit of project related. And secondly, the actions that Bob described, the actions we have been doing to -- in light of it being down longer than we thought, taking additional costs out to shore up the baseline margin level. So it is a combination of those two things.

Okay, got it. Thanks. Then as a follow-up on Networking Solutions, if you could talk about your broader expectations for Telecom and IT spending in the back half of the fiscal year, that would be helpful as well.

Well, for the back half of our year, which is the -- ends in September 30, I think we feel a little bit of a pickup on SubCom because of projects coming into force. So $80 million in the second quarter and getting back to the $100 million to $125 million run rate at the end of the year.

Telecom picking up, mostly seasonal, but a few projects kicking in. And then I would say our enterprise and datacom business flat, flattish over the next two quarters. So it is really driven more by Telecom and SubCom.

Okay, thanks.

(multiple speakers) spending in those areas.

Mike Wood, Macquarie Capital.

Hi, good morning. You had previously talked about the National Broadband Network contribution to the Network segment growth this year. Has that also gotten pushed out? Or can you give us an update there?

NBN ramped up in the quarter. In fact I was down there about a month and a half ago, and they are going aggressively. So I would say we are at the run rate we expect to be over the next few quarters. Took a big nice jump up in Q1 and Q2, and it's probably going to continue to run at that level for a couple quarters as -- really deploying the resources to accelerate faster.

So, yes; we are well positioned there. We are shipping product. It is materializing.

It has taken a little longer than I think the original plan, but not unusual with a project of this magnitude. But it is real, and we are shipping. It is one of the largest projects we have going.

Okay. Of the roughly -- I think you had $2.2 billion in China sales you had last year, can you talk about how much of that is related to Automotive, and what you saw there in the quarter, and what your outlook is? I think China luxury vehicles are pretty strong in first quarter

Yes, we had a 20% growth in our China Automotive business in the first quarter. We have a real strong position across every level of the market in China.

Automotive is about a third of our total revenue that we do in China, and we are pretty well spread out across our other businesses in China as well. It is the biggest local business per se, meaning that the products are all consumed in China. There's really no export in that.

About two-thirds of our other business ends up in products that get exported.

Thank you.

Well, thanks, everyone. Appreciate your time today. Just to reiterate, we really do feel good about this quarter. I think the operating leverage of the Company continues to get better. The cash flow continues to be strong.

The integration of Deutsch has gone very well. We are really pleased with the people, mostly, and the products, and I think we are adding a lot to the value proposition that Deutsch already had.

We are looking for a nice pickup in the second half of the year. The current order rates are right in line with that. And I think, importantly, at those revenue levels expect to generate around 14%.

And as I mentioned, we are definitely on track to do, between dividends and share repurchase, about $1 billion of capital return to shareholders. So thank you very much and talk to you in a quarter, if not before.

That does conclude our conference for today. Thank you for your participation and using AT&T executive teleconference service. You may now disconnect.