泰科電子 (TEL) 2014 Q2 法說會逐字稿

Welcome to the TE Connectivity second quarter earnings call.

(Operator Instructions)

As a reminder, this conference is being recorded. I'd now like to turn the conference over to 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 FY14 results. With me today are Chairman and CEO, Tom Lynch, and CFO, 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 presentations 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 try 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. This was another good quarter for TE Connectivity on many fronts. The majority of the markets we serve are exhibiting solid growth trends and this growth is fairly broad-based across most of the regions of the world. There are still some uncertain spots, but overall, I am encouraged by the trends.

It's good to see other markets in addition to automotive picking up some steam. We're very well-positioned in about 90% of the markets we serve and virtually all of them have attractive underlying drivers which require more of our highly engineered connectivity products.

The concept of the Internet of Things is real and we are seeing it across almost all of our customers. I feel we are in an excellent position to capitalize on these trends because of the range of our technology and the extensive resources we have close to the customer around the globe.

Our operational performance also continues to improve. This quarter, we delivered adjusted operating margin of 15.5%, up 190 basis points from last year and we're on track to deliver 15%-plus adjusted margins for the full year.

Strong productivity, driven by our TEOA Program and this is our business system that encompasses Lean, Six Sigma, and engineering design productivity, coupled with a much more balanced footprint, has resulted in very good operating leverage in most of our businesses. We're also benefiting from our strategic focus of building our Harsh Environment Product portfolio.

The Company continues to generate strong cash flow with six straight years of free cash flow yield at or above 10% of revenue. This gives us the flexibility to execute important strategic acquisitions such as SEACON, which I'll discuss a bit more further on, while still returning two-thirds of our cash flow to shareholders over time.

Our philosophy is a balanced approach, which emphasizes organic investments, strategic acquisitions and returning cash to shareholders through consistent dividend growth and share repurchase. Overall, the world feels more solid economically than it has in a while and we are well-positioned to capitalize on this.

Now let's go through the slides. Please turn to slide 3. Revenues in the second quarter were in line with expectations and adjusted earnings per share was above our guidance range. We continue to see improvement in many of our end markets and the fall-through to operating income on the year-over-year sales increases was strong.

Here are some highlights of the quarter. Organically, sales were up 6% overall and up 7% excluding SubCom. The automotive, aerospace, oil and gas, industrial and telecom businesses drove this growth. This more than offset expected declines in the consumer devices and DataCom businesses and continued project delays in our SubCom business.

Adjusted earnings per share of $0.95 was up 25% versus last year and $0.05 better than the midpoint of our guidance. As I mentioned earlier, adjusted operating margins were 15.5%, up 190 basis points over the prior year and we remain on track to exceed 15% for the full year as we continue to deliver strong operational performance across the majority of our businesses.

Free cash flow was $273 million and we returned $281 million to shareholders in dividends and share repurchases. The annual dividend was increased 16% to $1.16 per share by our shareholders last month, at our annual general meeting. This increase will be effective with the June dividend payment. This represents the fourth consecutive year of double-digit dividend increases.

Our orders increased 4% organically in the quarter and our book to bill was 1.03 excluding SubCom. Orders gross was broad-based, with growth in all regions and in line with our expectations. For the full year, we are raising the midpoint of our adjusted EPS guidance by $0.03 to $3.78. This is an increase of $0.17 versus our prior year performance.

In the second half, we expect solid growth in the transportation market and continued steady improvement in most of our industrial markets. This, coupled with our strong Q2 performance, will more than offset continued delays in SubCom projects. The $3.78 compares to our original guidance six months ago of $3.65, a 13% increase. We entered this fiscal year expecting to deliver strong results and are on track to beat those original expectations.

Please turn to slide 4. We announced the planned acquisition of the SEACON Group on April 2. This transaction is another step in strengthening our leadership and higher growth in harsh environment applications. SEACON has a 50-year history of supplying connectivity solutions for underwater applications, one of the harshest environments where superior quality and performance are required.

Their leading portfolio of products and technologies is a very complementary fit with our existing solutions for the underwater oil and gas markets. We currently have a nice business of about $150 million in revenue that has had solid double-digit growth over the last five years. The addition of SEACON will add over $115 million of revenue and bring our total business to $250 million. We'll also to double our served markets to over $1 billion.

We expect to continue to generate double-digit revenue growth in this market going forward, as this acquisition positions us with the leading product offering. I first had the opportunity to meet the owners of SEACON several years ago. They have built a great business and an outstanding team.

The acquisition is expected to be accretive in year one, excluding one-time costs and will be reported in the aerospace, defense, oil and gas business, within our Industrial Solutions segment. We're very excited to welcome the SEACON Group to TE. As we mention in our press release, we expect the acquisition to be finalized in the current fiscal year.

Terrence Curtin, who is the President of our Industrial Solutions segment, is here and available for questions on this subject in the Q&A section. I'll now provide some detail by business within each segment in the next four slides. Unless I indicate otherwise, all changes are on an organic basis, which excludes the effect of currencies, acquisitions and divestitures.

Please turn to slide 5. Transportation had another great quarter. Sales of $1.57 billion were up 13% over the prior year and orders were up 7% with the book to bill of 1.0. Global auto demand continues to be solid and auto production in Europe was up both sequentially and versus the prior year, driven by exports and importantly, improving local demand. Global vehicle production in the quarter was about 21.5 million units, up 5% from last year.

Revenue from the Industrial Transportation business was again very strong in the quarter due to overall strength in the truck market and the impact of emission standard changes in Europe and China. Just a comment, our TE and Deutsch Industrial Transportation businesses are now fully integrated and performing very, very well. Transportation revenues grew double digits in all regions this quarter.

Europe was up 12%, as I mentioned earlier, due to strong exports and improvement in local demand. And in Europe, new car registrations were up in the March quarter. In the Americas, revenues were up 10% due to continued solid demand and share gains.

Asia revenues were up 18%, with a 34% increase in our business in China and 12% in Japan. We're the leader in China and continue to grow faster than the market. We continue to invest aggressively in talent and capacity there to further strengthen this position.

Our margin improvement was due to a combination of favorable mix with heavy trucks in the industrial transportation markets, the operating leverage that came with our volume increases and productivity improvements driven by our TEOA Program.

As I mentioned last quarter, we expect revenue growth of mid- to high-single digits in the second half as we do expect some moderation in the year-over-year auto production growth rates, which is typical. We expect adjusted margins to remain at or above the 20% level.

Please turn to page 6. Market demand in the Industrial Solutions segment was in line with our expectations in the second quarter. Revenues were up 4% and orders were up 2% versus the prior year.

We are seeing a continued recovery in the Industrial Equipment business, with revenues up 8%, driven by demand in the factory automation and high-speed rail markets. The commercial aerospace and oil and gas markets were up 5% and continue to have strong demand. We expect this to continue for the balance of the year. As expected, our Energy business was down slightly in the quarter as demand softened, particularly with the emerging market customers in Europe.

Adjusted operating margins continue to improve and were up 70 basis points versus the prior year as a result of the increased volumes, the benefits of accelerated restructuring and productivity increases. Looking forward, we expect another good quarter in Q3, with sales up mid-single digits versus the prior year and continued margin improvement.

Please turn to page 7. Sales in the Network segment were down about 1% versus the prior year. This was mostly in line with our guidance except for further weakness in the SubCom business caused by additional project delays.

Excluding SubCom, sales were up 2% organically. The Telecom Networks business grew 6% in the quarter, driven by increased investment in Fiber Optic Networks particularly in Europe. The Enterprise business was up 5%, due primarily to the strength in the Americas.

Our DataCom business was down 7%, in line with our expectations. The SubCom business is very slow, as the timing of awarded projects coming into force continues to delay. We now project second half revenue of $150 million, with full-year expectations down about $100 million from our prior guidance and from prior year. And due to these delays in the current quarter, we are anticipating a loss in SubCom in the third quarter.

On a positive note, the AAE-1 project, which was announced yesterday, and this is a major project that connects Asia with Europe worth more than $500 million, came into force last week, and we expect to begin the project late in the quarter. And when we say came into force, that means we've got a sizable down payment.

This has been a very tough year in the SubCom markets, but we are very well-positioned with our wins over the last two years and I remain confident that demand for bandwidth will drive another build cycle.

Adjusted operating margins in the segment were down slightly versus the prior year, driven by the sales declines in SubCom and DataCom. We do expect seasonal second half pick-up in the Telecom and DataCom businesses. Overall segment revenue should be up about 10% versus the first half.

So to digest the Networks business, the Telecom, Wireless and Enterprise businesses, which comprise about $2 billion annual revenue, are growing again this year, after a couple of years of decline, and margins for the year will be double-digits. SubCom is, we believe, at the very bottom now and the DataCom business is starting to level out and on a positive note, there are investments in high-speed solutions that are starting to take hold.

Please turn to slide 8. Revenue in our Consumer Solutions business was down 3% versus the prior year. This was in line with our expectations, as lower customer demand and Consumer Devices business more than offset growth of 5% in the Appliances business. We continue to see improving trends in the appliance market, where we have the leading market share and very attractive operating margins.

Adjusted operating margins in the segment were similar to the prior year despite the revenue decline due to restructuring savings and metals tailwinds. In Q3, we expect revenues to be up slightly versus the prior year. Now, I'll turn it over to Bob to cover the financials in more detail.

Thanks, Tom, and good morning, everyone. Let me discuss earnings which start on slide 9. Adjusted operating income was $532 million, up 20% versus the prior year. GAAP operating income was $510 million, and included $21 million of restructuring charges, 75% of which was in the Network segment, and $1 million of acquisition-related charges in the quarter.

We continue to anticipate full-year restructuring charges of approximately $50 million for the full year. Adjusted operating margin was 15.5%, up 190 basis points from Q2 last year. The improvement versus the prior year is driven by the 6% organic sales growth, productivity from TEOA, cost savings from restructuring actions taken the last couple of years and favorable metal costs.

Adjusted EPS were $0.95 and GAAP EPS were $0.87 for the quarter. GAAP EPS included $0.03 of restructuring and other charges, and $0.05 of charges related to the legacy-shared tax liabilities. These tax charges are consistent with our overall expectations of settlement of these pre-separation tax issues.

Turning to slide 10, our gross margin in the quarter was 34.2%. This is a 200-basis point increase versus the prior year due to volume increases, increased productivity from our TEOA Lean Programs and a cost savings from restructuring and metals. Total OpEx spending was $641 million in the quarter, which was up 5% versus the prior year. The increase resulted primarily from increased investments in sales and marketing and increased variable compensation costs, partially offset by cost savings attributed to our restructuring actions.

On the right side of the slide, net interest expense was $26 million in the quarter and I expect $26 million to $27 million of expense in both the third and fourth quarters going forward. Adjusted other income, which primarily relates to our tax sharing agreement, was $2 million. In the third quarter, I expect other income of about $8 million.

The adjusted effective tax rate was 21.7%, which was lower than expected. This is partially offset by the lower other income and gave us a net benefit of about $0.02 to earnings per share. Overall, the adjusted tax rate for the first half of the year was 23.8% and I expect the adjusted tax rate to be in the 24% range through the remainder of the fiscal year.

Turning to slide 11, I'll discuss our balance sheet and free cash flow. Cash from continuing operations was $453 million, and our free cash flow in Q2 was $273 million. Net capital spending during the quarter was $159 million, or 4.6% of sales, and I continue to expect capital spending rate to be approximately 4% to 5% of sales for the full year.

Receivables days outstanding were 63 days and inventory days on hand were 73 days, each up two days versus the prior year. Inventory levels were slightly elevated as we expect increased revenues in a number of our businesses in the second half.

Now let me discuss sources and uses of cash outside of free cash flow, shown on the right side of the slide. We began and ended the quarter with $1.4 billion of cash. During the quarter, we returned a total of $281 million to shareholders.

We paid dividends of $102 million and repurchased about 3.1 million shares for $179 million. As Tom mentioned earlier, we expect the SEACON acquisition of $490 million to close in the current fiscal year. Outstanding debt remained at $3 billion at the end of the quarter. Now, I'll turn it back to Tom.

Thanks, Bob. Please turn to slide 12 and I'll cover our outlook. Based on the trends I discussed earlier, we expect Q3 revenue of $3.54 billion to $3.64 billion, up 3% to 6%. The project delays in SubCom are negatively impacting our growth rates by approximately 1%.

We expect adjusted EPS of $0.96 to $1, which is an increase of 9% to 14% over the prior year. In Q3, we expect continued strong results from both the Transportation and Industrial segments. The Consumer segment is expected to be up slightly and Networks, excluding SubCom, is expected to be about flat versus the prior year.

Please turn to slide 13. For the full year, we expect revenue of $13.8 billion to $14.1 billion, up 4% to 6% versus the prior year. We expect adjusted EPS of $3.72 to $3.84, an increase of 15% to 19%. Relative to prior guidance, the story is Transportation is stronger and SubCom is weaker.

We expect to have another strong year of cash flow. And we're using that cash in a manner that is consistent with the plan we have discussed over the last several years. Namely, investing to grow the business organically with investments in manufacturing capabilities and capacity in emerging markets as well as increased investments in R&D and sales and marketing, strategic acquisitions like the SEACON Group that accelerate growth in attractive markets and returning cash to shareholders through dividends and share repurchases.

Just to close, I'm encouraged by the positive signs in most of our markets we serve and feel very good about our overall execution. I really believe we're well-positioned for future growth and expect to deliver strong performance for the remainder of the fiscal year and beyond. Now let's open it up for questions. Operator, can you open it up for questions, please?

Thank you.

(Operator Instructions)

Mark Delaney, Goldman Sachs.

Thanks very much for taking the question. Tom, I was hoping, first, you could elaborate a little bit more on the outlook in the SubCom business? I understand it's weaker in the near term but you also mentioned some -- a new award coming into force, and maybe you can help us understand what the order pipeline, what that implies for revenue potential in the Subsea business, as you start to think into fiscal 2015?

Thanks, Mark. As you know, we don't -- we're not really going to talk about fiscal 2015 until the end of the year, but in the SubCom business, there's really three components of the business. The biggest part is building the communications systems and that's the piece that's really down right now because of the project push-outs. The smaller pieces are maintenance and our oil and gas business, which is fairly steady.

And this AAE-1 award, which we were awarded many months ago, but took a while to come into force is good news but it's happening a lot later than we thought which means we're underutilizing our assets right now. As that comes into force late this quarter, early next quarter, we believe that will start the ramp. There's several other projects that we've been awarded that are close to coming into force but they're also been taking longer. So I think once we get two to three projects to complement sort of the ongoing business, then we'll start to ride up the upswing of the cycle.

That makes sense. Thank you for that and then for my follow-up question, I'm hoping we can get a little bit more detail on the recent acquisition or the proposed acquisition of SEACON. And what are the expectations there in terms of margins? And if you plan to do any restructuring in that business or if it's already having the cost structure that you'd expect it to have longer term?

I'll say a few things and I'll ask Terrence to elaborate. I'd say though this isn't really a cost synergy play, this is an expanded market play, so we're really doubling the size of our served market and bringing a full system now to the customer. So that's the attractive part and it's higher than Company margins for sure because of the very highly engineered and extreme harsh environment nature of the business. Terrence, you want to elaborate on that?

Sure, Tom. Hello, everyone. When you look at SEACON, I think a couple of things, maybe to paint a picture where we play today in the underwater space from an interconnect perspective and what SEACON brings to us. First off, when you look at our position today, we're exposed to about a $400 million market, which is very focused on high-performance cable as well as connections around the power element.

SEACON, very nicely, adds about $115 million of revenue. It is extremely profitable, about 30% plus EBITDA and when you look at it, it really opens up our market from $400 million to over $1 billion, as Tom said. So, what they bring is really along the optical and fiber side, connections that happen underwater, they're very wet-matable.

And we look at this market overall, we've been able to basically grow our small position from $70 million to over $150 million today, what it really does is give us a rounded out portfolio in some of the harshest environments. And we believe that with the combined portfolio, with the trends we see in underwater and oil and gas, we'll be able to continue to grow the combined well north of double-digit growth going forward.

So happy with the acquisition and what it brings. To Tom's point, it is very much around growth and really making sure we capitalize on this market that is a very fast-growing market and one of the fastest in the industrial space from a segment perspective.

Thank you very much.

Wamsi Mohan, Bank of America Merrill Lynch.

Yes, thank you. Good morning. Tom, in networks, you been divesting $20 million or so of revenues each quarter over the last two quarters. Can you tell us what these underperforming assets are and how much more there is to go? And I have a follow-up.

Sure. Thanks, Wamsi. In DataCom, we did that last year and we're coming to the end of the compare but we were in, for a long time, the Magnetics business, basically coils that were used to help set frequencies in these products. Really a commodity product that had a number of competitors so it just didn't fit the highly engineered criteria that we had for our business. You take that out, the business is down single digit, some of that is market, some of that is clearly -- we're kind of a mid-tier player in the current 15 gigabit speed so but that's pretty much behind us, the exit of product lines in that business.

Okay, great. Thanks. And in the Networks business, clearly, SubCom has a large negative impact on margins, but can you give us some sense on how the ex-SubCom margins trended in the segment in the current quarter and how much restructuring benefits flowed into this quarter? Thanks.

I'd say just generally commenting on the comments, the Telecom, Enterprise and Wireless piece, which we would think together as our Broadband business, which is about a $2 billion annual business, margins trended up in the quarter and they're trending up for the year. That business, as I said, was down 4% last year; it's up 4% this year. That's two thirds of the segment.

And DataCom margins are still down; that's really two components. Our Core Connector business is improving and we're making sizable investment in high-speed copper and fiber because that's where the world is going and we want to lead there and early wins position us well. But that's not going to become serious revenue for a few years and the SubCom margins are way down because the volume is way down.

Got it. Thanks a lot.

You're welcome.

Mike Wood, Macquarie.

Hi, thank you. In automotive, your view for 1% to 2% EMEA growth for next quarter, curious how that fits with the kind of mid-single digit growth we're seeing in vehicle registrations in Western Europe exiting the quarter, roughly at a 10% growth rate? Curious what the production versus demand trends are you're seeing there?

You're talking about the production growth in Europe?

Yes.

That's what the industry is projecting right now and it's corroborated by what our customers are guiding us on to produce relative to local production. But remember, we've consistently grown in Europe as well as sort of the higher end vehicle makers there because so much of their product is exported.

I think what's really positive about this is there's absolutely overall growth in Europe locally. So that says that the economy is -- it's not robust by any stretch but it's improving and that's broadening the base of car sales over there whereas we've really benefited up until the last two quarters from the export market which is a high content market. This is putting a broader base on it.

Okay. And can you also comment on -- there was a large telco carrier in the US just what -- announced plans to rollout fiber in the US in a number of cities -- what trends just you're seeing overall in terms of the fiber deployment? And whether or not you're seeing any pricing pressure in that segment as those carriers increase CapEx in that area?

Mike, it's really a carrier by carrier thing around the world. So that particular carrier you're talking about, we -- well we do well with all the carriers in the US and we're benefiting from that. I don't -- a little more pricing pressure than normal, which is with the fiber volume up, this the second year in a row that the fiber portion in the network, our revenue is up double digits.

And one interesting thing that's happening in that market is, the copper piece is finally getting to a small enough piece where the decline in copper isn't directly offsetting fiber and that's why we're starting to see the growth because carriers are investing in the fiber portion of the business.

And that's -- that 4% I talked about, the 4% to 5% we expect to grow this year, that's closer to high single digits in fiber. So we're definitely seeing -- there's a lot of positive trends I would say, new players announcing they're going to build fiber networks, net neutrality, kind of wearing down in the US, of course, just the tremendous requirement for more bandwidth.

So the trends look better right now, feel better, are better, I would say, those underlying trends than they have been in a long time as drivers were our part of the business. So we're optimistic but we need to see it turning to a higher revenue growth rate for sure.

Thank you.

Amit Daryanani, RBC Capital Markets.

Perfect. Thanks, good morning, guys. Two questions for me. One, just on capital allocation, could you just touch on your capital allocation thought process as you get through the back half of the year, given the fact that you have to have a cash offer for $90 million for SEACON? Does that change the buyback process on a go forward basis at all?

Thanks, Amit. This is Bob. Overall, as you know, our capital strategy is broadly set around continuing strong free cash flow which we anticipate will approximate net income out into the future, and that allows us to fund the capital requirements of the business. In order of priority, we'll continue to fund organically; that's capital investments as well as R&D that we spend; 4% to 5% of sales in capital, we spend about 5% in R&D and we anticipate that continuing out into the future.

After the organic investments, we're certainly looking for value creating strategic acquisitions and then long term, over a period time, we expect two-thirds of our cash to go back to shareholders through dividends which we've been increasing as earnings increase.

As Tom pointed out, in the upfront comments, four years in a row of double-digit increases and most recently, last month, a 16% increase for an annual dividend and we'll also do share buyback and the SEACON acquisition perfectly aligned with that strategy. It's $500 million -- $490 million of cash outflow, we'll pay with cash on the balance sheet.

Got it. And then I guess Tom, I was wondering if you could maybe spend some time just talking about how do you think about divestitures broadly on a go-forward basis or when to deemphasize parts of your business? I recall when you guys actually spun out of Tyco; the divestiture was actually a very big part of the story on how you were able to improve margins. I'm curious, as you look at your portfolio, especially the networking piece of your business, or parts of it, how do you evaluate divestitures on a go-forward basis?

Well, a couple of ways. I mean, I think first and foremost, when we came out and looked at the portfolio and shored up the strategy around connectivity, it had to be a couple criteria, right? It had to be related to the strengths we had so we weren't interested in the most part of business that had no relation to the rest of the businesses and we couldn't leverage our strength.

So that's why we did quite a bit. I'd say the portfolio we have now is all related to connectivity and when you think of the Internet of Things, there's the network that enables that and there's everything that's connected to it and we're right in the middle of both of those, so we like that position very much.

Networks has been a slow business for sure the last couple of years but we don't see -- we're still -- I'm still very bullish on the underlying dynamics of the things I mentioned on the last question that say it's going to drive it. So if you look at the Telecom, Enterprise, Wireless, you've got to push fiber more into the network whether it's -- and even if you don't believe in fiber to the home, high-bandwidth to the home with a small cell network requires a lot more fiber than you have today.

G.FAST, what's coming is the next-generation of the -- call it, very, very, very fast DSL in the next couple of years, needs to be much closer to the home which needs to have a fiber connection to offload it. And then as you just get LTE all over the place, you need a much more robust fiber backhaul to take advantage of it. So when we look at all those qualities, we say there's going to be investment.

We're starting to see signs of it picking up. We're seeing a much more broad-base of that around the world. I think, so we haven't changed our fundamental strategic view of the business, so we haven't changed how we see it fitting in the portfolio.

Got it. I guess, Tom, I think initially you made a comment saying you guys are very well-positioned in about 90% of the markets you serve. Maybe you can share with us what are the 10% you'd be not well-positioned in and is that the divestiture potential for you guys?

So those two are consumer devices so that's about $700 million of revenue where we're not a lead player there and we don't have the best sockets, but that's such a -- it's a core business to us. I mean, it's -- we do everything there we do every place else. So it's same capital, same material, et cetera, and I'd say DataCom.

But in DataCom, we have tremendous momentum around the next generation of high-speed, which the product, the products in the market, the product has been selected by a variety of customers, now the transition from the current speeds that are out there in data centers and in the wireless network to higher speeds take time.

But what I really excited about there is the decisions we've made four or five years to develop the high speed are -- they have some proof points now. I'd say both of those businesses are Core Connector businesses, right? They are part of the $10.5 billion of which you had referred to as the connector business and that business from end to end, some businesses are stronger than others but overall an incredibly strong business.

Perfect, thanks a lot.

You're welcome.

Matt Sheerin, Stifel.

Yes, thanks, and good morning. Just a couple questions for me. On the Industrial Solutions business, you had nice year-over-year improvement in operating margin. As you look forward through the rest of the fiscal year, do you think you can get those margins to the Company average around 15%? And is that coming mostly from leverage on volume or is there more restructuring benefits from that?

I'd say it's a combination of things. Clearly, the most important thing is volume, but we feel like, as I mentioned in my earlier comments, we feel good about the momentum and the order rates we've seen for the last three quarters continuing into this quarter; support continuing revenue growth that's -- when we're in that kind of 4% to 6% revenue growth, that business has very nice operating leverage with the improvements over the last couple of years.

So yes, I mean we expect the margin to continue to march up and I think as we said in Investor Day, we see that as a business that over the next couple of years as well over the[ 15%] Company average that we have today. So very bullish on that business both from a growth aspect and the markets we play in and the products we have as well as the improvements in operating leverage that will deliver higher margins.

Okay, thanks, and Bob you mentioned in your commentary about metals, lower metals cost having a benefit on your gross margin? Can you help quantify that either year over year or sequentially? And how does that impact your model going forward?

Year over year, it was about $17 million, $18 million in the current quarter, in the second quarter and we expect about $15 million to $20 million per quarter in the second half of the year, consistent with prior guidance.

And you're not seeing any impact on pricing as customer see the benefits of those that your benefits where they're asking for lower pricing and pass-through?

Matt, this is Tom. I would say price erosion is up a little bit so it's hard to -- you can't completely look at those two disconnected. It's -- the business doesn't work with kind of across-the-board increases or decreases. It tends to be negotiation by negotiation but net of the two, it's a benefit I'd say because the price erosion increase is less than the benefit we're getting. If you would have -- if you were to just simply say, take out all the metal tailwinds benefit, how are you doing, we're still slightly above 15%.

Okay, thanks a lot.

You're welcome.

Shawn Harrison, Longbow Research.

Hello, Shawn.

Morning, Tom. Back of envelope, is it about maybe a $0.03 earnings headwind versus kind of your expectations? And then just also if you could maybe size the total programs? I guess the one that came into force and the ones that could potentially come into force over the next couple quarters?

You're talking about SubCom, Shawn?

SubCom, yes. Sorry.

It's in that range, yes, relative -- it's $0.03 to $0.04 from where in the quarter.

Okay and then just the size of the programs coming or that's -- that came into force as well as coming into force in terms of just an opportunity?

The one that came into force is the biggest one we had in the backlog, about $0.5 billion. The others are less than that. They're more in the $150 million to $200 million range and coming into force soon. We've been awarded them and we work closely with the customer, so I think if they come into force in the next couple of months, that will shore up next year and it will be better than this year. And Shawn, the AAE contract that just came into force, we'll start that later this quarter and that will take us through 2016 to complete that program.

Okay. And then just as a follow-up on networks, I see where the Telecom, the Wireless aspect, even the Enterprise coming back and you have visibility now into a double-digit EBIT margin in the back half of the year. But if I add everything up, I mean it looks as if just in terms of maybe over the next two years, it's going to be tough to get to a mid-teens EBIT margin without further restructuring. Do you think further restructuring within networks is possible, or is needed to get to, let's say, a 15%-plus EBIT margin?

I mean, I'd answer it this way. If the growth that we expect and seeing signs in SubCom, seeing nice signs in Broadband, and believe we're with the discontinued products and the new products that are coming, we should be back into a growth in DataCom.

When we get to -- with the restructuring that we've done in the last year which is pretty significant, we'll start to see the benefit when revenue in the segment is growing 5% to 6%. If for some reason, we're wrong on that growth rate again, and it's the smaller business, there is -- we won't need as much infrastructure but I don't really believe that. But as we've done in the past, you'll see we'll adjust accordingly.

And how much --

We can march it back up to near that mid-15%; it depends on how fast the growth comes back.

How much restructuring left is the -- in terms of I guess savings to come into the business over, let's say, the next 12 to 18 months in terms of the dollar amount?

Overall, Shawn, we took obviously a significant amount of restructuring last year across the Company and spent a little over $300 million. That's tailing off dramatically this year, about $50 million. Last year, if I recall, Networks was about 40% of that spend across the organization. As I indicated in my opening comments, we took some restructuring charges, about $21 million in the most recently completed quarter, second quarter.

About 75% of that was related to networks, so, as Tom pointed out, heavy restructuring is behind us. We expect kind of a net benefit of $115 million of run rate savings in 2015 from that restructuring actions. We're getting about $70 million to $80 million this year so an incremental $40 million next year.

And the spend would be equivalent to the saves in terms of just ballpark, any percentage?

Correct. That's probably a fair allocation.

Got you. Thanks so much, Bob, and congrats guys on the progress in the quarter.

Thanks, Shawn.

Thanks, Shawn.

Amitabh Passi, UBS.

Thank you. Tom, I wanted to try the portfolio question from a slightly different vantage point. If I look at Network Solutions and I look at Energy Networks along with Consumer, these have been segments that have been quite challenging.

You did talk about Network Solutions improving but I'm curious as you think about M&A, is there opportunity to further bolster these segments or do you think this is largely a volume-related weakness, that as business and demand trends improve, the segments do better? Or do you see M&A potential as well in Telecom Networks and Energy Networks?

Well, let me take you through them real quick, individually. Energy, I would say, we've always looked and been interested in M&A in that business. It's, really -- it's been slow; it really follows the economy. We expect that to -- growth to resume; it's been especially slow in Europe but it's a good business. It's a good cash generation business.

It's a business that right around the Company average margin and at that margin has been improving whenever we grow more than 3% or 4%, we see nice margin lift so we'd probably consider that a real, solid business with steady contribution.

Consumer, I don't see M&A in consumer. I think that's really -- we have to win more sockets, as we would say, and more strategic sockets. I think we've really upgraded some areas where we were very weak in that business which was operationally. We have, I consider a crackerjack operational team there now and as we just have to persevere with the designs and get some design wins there and that's revenue related. You're absolutely right; we need to grow more revenue there.

And the third one was networks in general, telecom wireless. I don't think -- I don't see anything significant in M&A there because in our push, the network, we made the move to take leadership in fiber when we acquired ADC. And while the revenue hasn't materialized like we thought, the insurance policy, the cost side, we've taken a ton of cost out, so we feel that business, we're well-positioned in our portion of the network.

We have the -- we really do have the best fiber products, connectivity product line, across the world. It's -- we see it in the high win rate we have. That's a volume play. There's going to be -- those are nice --that's a very nice gross margin business that's higher than the Company average gross margin. So that's a leverage play and we're starting to see signs with this 4% growth range this year. So they're all kind of in a little bit different perspective but that's, at a high level, a way to think about it.

Got it. And just as a quick follow-up. I was intrigued by your comment where you had said even if you're not a believer in fiber to the home. And I just want to get a sense from you, are you seeing a preference for wireless alternatives or NextGen copper alternatives, which seems counter to some of the gigabit ethernet movement that we're seeing industry where I felt we were seeing the industry pivot back to where it's fiber to the home. So I would love to get your thoughts there.

It's mixed. I mean when we look at our business, we know we need to be able to support multiple different network architectures and they range from kind of HSC, the cable side going deeper, the normal cable network going deeper with more fiber. We're benefiting from that. Some carriers really believe in fiber deep and fiber to the home. I'd say they're benefiting from that.

DSL is really not sufficient anymore but it takes time to change and that's what you're hearing with one of the carriers that they're going to get very aggressive in response to another new carrier/search company.

Around the world, it's different. There's parts of Europe that are aggressively building fiber to the home. There's other parts that are waiting for G. FAST, which is the superfast VDSL but that requires more fiber. There's Australia, New Zealand building fiber to the home and even with the change in government, while that showed down a bit, there's still -- it's either going to be -- it's probably going to be more selective to fiber to the home but fiber deep.

But if you're going to deliver -- if content providers are going to -- like they're negotiating now for dedicated bandwidth from the carriers, you're going to have to push fiber deeper into the network to get that because LTE does have some limitations. So I think it's kind of timing of investments but we are starting to see a little more positive signs and optimistic that maybe this cycle on our end of the network, which I'd called the bandwidth-rich portion of the network, is starting to come back. But we need to see that consistently before I'm comfortable that it's actually here.

Excellent. Thank you.

You're welcome.

Jim Suva, Citi.

Thanks very much. Just a quick clarification point, and then my two questions. On the clarification, I assume, or maybe let me know if I'm right or wrong that the pending acquisition of SEACON is not in your sales and EPS outlook because it's still pending or maybe I'm wrong with that?

And then along with that questioning, can you help us understand the margin profile of this business? It seems like it would be accretive to your margins but just not sure on that. And do you have to do any cost realignments with them? Are they located physically where some of your plants are and you can integrate the two plants together? Are we looking at another round of restructuring, or is it -- sounds like [with SEACOM] quite happy how you have it?

And then my second question is on a different topic, is about the consumer side, is you've kind of been talking about trying to get this some wins for quite some time organically. It seems like either it's not happening or you've got the wins and they're going to come.

But can you help us understand is your confidence there a lot higher? Or is there still just a lot of wood to chop or a lot more effort still to turn around the consumer business which has been underperforming for multiple years?

Yes, Jim. It's Bob. On SEACOM, you are correct. We do not have an impact from the acquisition in our outlook. We expect that deal to close still later this year and it will close late enough in the year that it will have zero to negligible impact on the overall results for 2014. Obviously, we expect it to close this fiscal year so there will be an impact in 2015. In terms of margin profile and our plans for restructuring sort of thing, I'll turn it back to Terrence to address that one.

Thanks, Bob. Jim, it's Terrence. In relationship to your question, yes, SEACON, as Tom covered on the slide is about $115 million in revenue and has above 30% EBITDA so from your viewpoint, yes, it will be above average Company margins, help both the segment and the Company in that regard. When we look at what they do, this is not a cost play, so when you look at restructuring, there is no big restructuring or plant consolidations in relation to this acquisition. It's really around growth, but certainly, I'm sure there will be some acquisition cost that Bob and Keith will call out to you just due to typical acquisition things but not restructuring.

And Jim, on the consumer side, I would say the big -- we're performing better in the newer parts of the market but it's not enough to move the needle yet so let -- I'm elaborating on that. The PC and feature phones business part of consumer is still bigger than the tablets and smartphone business and the PC and feature phone business which is where we still have a little better position in a market that's shrinking.

So we're -- that's going to crossover sometime in the next year but -- so we're growing almost at the market in tablets and smartphones but it's just not enough to move the meter so we have won some significant awards but it's still -- it's not big enough yet to grow the business. So I'd say we're better in terms of our talent, our engineering, the products we're bringing out but it's still going to take us awhile to move this -- move the performance up.

Thank you very much.

William Stein, SunTrust.

Great, thank you for taking my question. I'm wondering if you can talk about in the automotive segment any effect from the Euro 6 implementation regarding particular emissions that comes into force later this year? Is that having any effect on the business today?

It's been having -- we see it for sure and especially in the truck market. So in a couple areas, right, it's a more content. And we said earlier in the year, we saw some pull forward as typically what happens when there's a change in standard, if a customer has the ability to pull some spending forward that the cost than less they'll do that.

So we saw a benefit from that. What we've been pleasantly surprised by is that it's still -- the demand is still strong, stronger than we would've expected at this time of the year, six months ago, which reflects I think more economics underlying that, meaning things are picking up and people are investing. So, and the fundamental benefit of the emissions standard is it's more electronics and it's more content for us. So yes, we're starting to see the benefit of that.

Great. And then the follow-up is, again, on the subsidy business. Not wanting to beat a dead horse but this business has surprised you to the downside this year. You obviously have a better view into your business than we do so you have ways to look at it and forecast it but should be superior to ours.

But what can we look at when we understand that your position is very strong in this market, you're doing well, very well in terms of winning mandates, but the projects aren't coming into force. Is that an interest rate related thing? A credit-related thing? A network/bandwidth-related issue? How can we think about the likelihood of more of these projects coming into force?

Well, there's multiple factors that's -- the interesting thing on one hand, it's a finite number of projects but on the other hand, there's -- each project could be affected by different things. So pre-financial crisis til now, one of the things in a project that has to happen for a project to get funded is that if it's a consortium or a group of entrepreneurs as we would call it, the bandwidth has to be pre-sold.

It used to be you could pre-sell 60%, 70% and get the project funded. Now you have to sell 100% to 120%. It's taken longer for that. I think in general what you see the carriers who are really drivers four, five years ago or less so today, it's a function of where they're putting their investments. So that's the latest thing. So, it's been a variety of things.

Where some of these big jobs are coming from, this last one, its two destination points are Hong Kong, I think, and France and 30 branches in between, which the good news is, it's a big job. The challenging news is that's an awful lot of approvals and permitting so even if you have your money together, you've got to make sure you have all that, so that takes a lot. So I'd say there's a lot of things.

When we kick the tires on modeling the bandwidth and making sure something hasn't happened, I think we conclude that you've got to build, the next build cycle is coming. Just to put in perspective, the last cycle from trough to trough was 12 years.

You look at the trough of the last cycle to where we are right now, 2014, it was actually a 12-year cycle. And trough to peak can typically be seven or eight years and in that 12 years, you have three or four, what I call, tough years and three or four good years and three or four great years.

And over the cycle, it's a good business that really -- nice contributor to the Company, well above cost of capital. We believe that this 2014 is that next real trough and it's higher than the last trough because there is just more building and we have this oil and gas adjacency that we didn't have early in the last cycle.

So it's been a little tough to forecast for us for sure. I think the last point I'd make about putting in perspective, if you look at last year, the business contributed $0.06 to $0.07 a share, roughly 2% of our total earnings per share. This year, it's going to be a negative 1% earnings per share because of the third quarter. So I think it's down to -- the volatility is still high but if the impact is low and as this thing starts to ramp up again, we should see steady contributions.

If the AAE-1 deal had not signed, I'd be a lot more nervous. That's a big deal. That will get us going and then what we've also seen in the upcycles, it's not a perfect predictor but when a big job like this goes, it tends to mobilize the other ones because there is a limited amount of ship capacity. So this was getting this job -- we've got to go through the slow valley in Q3 in the business but getting this job is a big, big step up and then we've got to get a couple other two of these to come into force and we work hard to help our customers do that.

That's helpful. Thanks, Tom.

You're welcome.

Steven Fox, Cross Research.

Thanks, good morning. Just a couple quick questions, first on the auto side, Tom you mentioned some market share gaines. I was wondering if you can elaborate on that as well as some more aggressive investments in China for auto and whether that's also driving market share gains? And then secondly, with regards to the acquisition, just curious if you could just discuss a little bit how well-positioned or not well-positioned they are from a distribution standpoint? And whether there could be some sales synergies there like you've seen with Deutsch? Thanks.

On the auto side, as you know, we are strong in every region. If you go back in time for five years, really, our weakest region was the US. And the downturn was extremely painful, but we give us the opportunity because in this part of the value chain, we're the leader.

We invested in the US when it was down. We did things like adjust our fixed -- our cost of sales cost structure but we invested in engineering and we went after programs and our estimation is we've moved our US share up about 4 points over that time. So that was positive.

In China, we provide a very broad range of services and products to our customers. We've been expanding our engineering there. Our entire China automotive team is local. It's a very seasoned, experienced team. We are expanding our capacity there because not only because the market is expanding the because we're doing more and more there for that market. If you go back in time, there was a lot of things imported into the market and that's -- we're reducing that quickly and that's part of the footprint adjustment we were doing in Western Europe during the downturn.

So those two things plus we continue to add engineers across the world in automotive. It's a business that's very -- it's a lot of projects that you have to work on with the customer and when you're -- when we're so strong in all these customers that we keep pouring engineers in, that's how we're able to build a $200 million center business from nothing when we weren't in the center business. So it is our sweet spot and we keep investing in it aggressively. Terrence, do you want to comment on SEACON again?

Yes, sure. When you look at SEACON and to your question, Steve, a relationship to channel and distribution, when you look at this market as a much more direct market, so this we're going to sell into and we're selling today with our current portfolio as well as where SEACON sells into. You're selling into the manufacturers of the drilling systems, certainly the ROV systems, all the instruments and lights as well as the equipment that goes on the ocean floor.

So when you look at it as a much more direct relationship and channels serve, I think what's very nice about both our go-to-market position as well as SEACON. They have bases in Norway, UK, US, Mexico as well as they also have a nice field service support around the world that supports their product to the people working in the oil and gas industry so it is a much more direct model than what we saw in Deutsch, where we were able to leverage our channel scale. So it's much more direct than a channel play.

Great, thanks very much. I appreciate the color.

Thank you. Sherri Scribner, Deutsche Bank.

Hi. This is [Kritisha Tahir] calling on behalf of Sherri Scribner. Tom, I just had a question for you actually. In your opening comments, you mentioned majority of the markets are exhibiting solid growth trends. I just wanted to understand what demand trends you're seeing or do you still see customers as being cautious? Are you seeing any reductions in customer forecast? Thanks.

Thank you. Let me go through that. So clearly, auto and industrial transportation continue to grow. There is robust growth there. We really haven't seen that change much. As I mentioned, we'll see that the second half growth year over year and those markets will be less than the first half growth. Some of that seasonal, some of that's just -- it's been hotter than normal in the first half. Industrial equipment is growing with 8% quarter growth, that's another third or fourth so that's sign and you see it and a lot of the industrials reporting capital spending is starting to break loose. We see that seems to be a pretty steady sign right now. I'm not seeing any warning signs that would change.

Commercial aerospace, a lot of new planes being built, the whole fleet being rebuilt and that's another area where we gain share and our content is up significantly. So we see that and in the appliance business, so new home sales in the US, appliance picking up in Asia, particularly China, which is a good sign because that's consumer spending in China.

And by the way, I talked about our China business been up 34% in automotive. It was up 20%-plus overall, the four of our five markets, four of our five markets up double digits. So it's fairly broad-based. What's not growing, I'd say the DataCom market is not really growing right now and you can see that and others folks provide that equipment, certainly not growing for us. Consumer growing, but I talked about the trends that we're not really fully participating in the trends and of course, the one that's challenging right now, SubCom, but that's just timing, in our view. We have a good position there.

So if I compare to last quarter, I compared to this time last year, definitely feels more robust, broader-based. You look at the number of countries that we shipped to around the world. There's more where we have higher sales growth this quarter than we did last quarter and last year. All good signs. I'd say nobody's celebrating. We're still very mindful that of the last five years have been unpredictable, if anything, so, we keep running the business accordingly.

Okay, great. Thanks. That was helpful. I just also wanted to just following up on that, just get my idea on the long-term growth target. If you maintained what you had previously provided, for example, 6% to 8% in Transportation, and 4% to 7% in Network, 4% to 6% in Industrial; and 3% to 5% in Consumer. Do you still maintain that or do you see a change in that long-term target?

That's still how we see the long term.

Okay, great. Thank you.

You're welcome. Okay. Well, thank you, everybody. I appreciate you listening. Again, I think this was a real good quarter for us and the progress on a number of fronts and look forward to talking to you soon.

Ladies and gentleman, that does conclude our conference for today. Thank you for your participation and for using AT&T Teleconference. You may now disconnect.