泰科電子 (TEL) 2015 Q3 法說會逐字稿

Welcome to the Q3 2013 earnings release conference call.

(Operator Instructions)

And, as a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Vice President of Investor Relations, Mr. Sujal Shah. Please go ahead.

Good morning and thank you for joining our conference call to discuss TE Connectivity's third quarter 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'll 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'll use certain non-GAAP measures in our discussion this morning, and we ask you to review the sections of our press release and the accompanying slide presentation that address the use of these items. The press release and related tables, along with the slide presentation, can be found on the investor relations portion of our website at www.TE.com.

Finally, for participants on the Q&A portion of today's call I would like to remind everyone to limit themselves to one follow-up question to make sure we are able to cover all questions during the allotted right time. Now let me turn the call over to Tom for opening comments.

Thanks and good morning, everyone. The following are the key takeaways from today's call. Q3 was another quarter of solid execution as we delivered $0.90 in adjusted EPS up 6% from last year and above the high-end of our guidance. Adjusted operating margins continue to grow and were up 50 basis points to 15.9% year-over-year. Organic growth was 4%, and total growth was 11%, excluding the negative impact of foreign exchange. Our harsh environment businesses continue to perform well and generate strong profitability. And overall, I am pleased with our execution in what I would characterize as a mixed demand environment. And we'll talk about that quite a bit on the call today.

Automotive, sensors, commercial air and SubCom led our growth. However, revenue was below our expectations due to weakness in China and supply chain adjustments in some North American industrial markets. We saw order growth begin to slow midway through the quarter, and order rates are now running about flat with last year.

For the fourth quarter, we expect sales up 3% organically versus the prior year and adjusted EPS up 6% at the midpoint. For the full year, we expect to deliver 5% organic sales growth and 10% adjusted EPS growth. This guidance is down from what we provided 90 days ago due to the continued weakness in emerging markets, particularly China. In constant currency, full year adjusted EPS growth is expected to be 19% year-over-year.

We had another good quarter of strategic progress in our sensor business with key platform wins in automotive, consumer and security application. The strategic rationale for the Measurement Specialties acquisition continues to play out very well, and we are really excited about our prospects here. We now expect the Broadband Network Solution sale to close in about 90 days, earlier than originally expected and expect to use the nearly $3 billion of proceeds for share buybacks.

Before I get into the details of our performance, I would like to provide some color on what has changed in the market environment from our view 90 days ago. From a macro-regional perspective, Europe continues to grow, and it looks better than it did to us 90 days ago. The US is mixed with a bit lower growth than expected due to supply chain adjustment, so I would say the US looks a little worse, but we do think this is mostly supply chain related. And China has weakened with softness becoming more pronounced. From a segment perspective, transportation remains strong with the exception of China. In the industrial solution segment we see some softening in China and supply chain adjustments in the US market. In communications data and devices and appliances are seeing the impact of a weaker China market. So the main theme on market here is we are seeing weakness in China.

Now please turn to slide 3, and I'll go through a summary of our Q3 results. We delivered solid results for Q3 with adjusted EPS of $0.90 above the high-end of guidance. Sales were $3.1 billion growing 1% year-over-year and up 4% organically but weaker than I expected as I mentioned earlier. During the quarter we returned $386 million to shareholders which included $252 million in share buybacks, significantly increasing the pace of repurchases from the first half of this year. Company orders excluding SubCom were flat organically at $3 billion, with a book to bill ratio of 1.0, and basically orders ran at the same run rate, excluding SubCom, as they were in Q2, which was below -- about $100 million below our expectation.

Our TEOA program continues to contribute towards higher margins and profitability. Adjusted gross margins were up 50 basis points year-over-year, and adjusted operating margins expanded to 15.9% up 50 basis points versus the prior year. During the quarter, we continued to see strong performance in harsh -- our harsh businesses with good organic growth in auto, sensors and commercial air. In our SubCom business we grew strongly year-over-year, while having another program come into force, growing the total value of programs in force to $1.5 billion. As I mentioned our China businesses saw weakening demand in the quarter, and separately we also saw some inventory tightening in certain industrial markets in the US. Currency translation rates impacted Q3 by $296 million in revenue -- that's unfavorably impacted Q3, and $0.10 in earnings per share year-over-year. Excluding the impact of currency exchange rates, adjusted EPS improved by 18%.

Now please turn to slide 4 for a summary of our guidance, which we'll also come back to later. For the full year, we are projecting sales of $12.35 billion, up 3% from the prior year and 5% organically. We expect adjusted operating margins to exceed 16%, with adjusted EPS up 10% at midpoint and nearly double that in constant currency. Our guidance assumes a 6% adjusted EPS increase in the second half versus last year. For the fourth quarter, we expect sales up 3% organically over the prior year and adjusted EPS up 6%, at the mid point of guidance. Given the weakness in China and supply chain adjustments I mentioned earlier, we are adjusting our full year guidance down by approximately $150 million in revenue and $0.04 in adjusted EPS. We now expect to deliver 5% organic growth and 10% adjusted EPS growth. With the cumulative move of the dollar versus world currencies during our FY15 FX headwinds are approximately $925 million revenue and $0.32 in EPS versus last year. Were it not for the impact of FX, we would be generating 11% revenue growth and 19% adjusted EPS growth year-over-year. All in all, we are delivering a pretty solid year in what I'd call a murky environment, but we'll talk more about that as we go through the call.

Now we'll turn it over to Bob to cover segment results and financials.

Thanks, Tom, and good morning, everyone. Please turn to slide 5 for transportation solutions. Revenue grew $0.04 organically in the quarter in line with our expectations. The automotive business grew 6% organically with growth in all regions, while global vehicle production was down 0.3%. For the full year we continue to expect growth in excess of two times auto production due to share gains and increased electronic content. Our commercial transportation business was down in the quarter, due to continued significant weakness in the off road vehicle market and weakness in the China heavy truck market.

Sensors continues to outperform expectations and are gaining momentum with both existing and new customers. Assuming we had owned Measurement and AST last year, our total year-over-year growth in sensors was 10% in Q3. We gained multiple new wins in automotive, consumer and security applications in the quarter. We continue to aggressively build this business, and our unmatched customer facing and go engineering resources are significant assets for TE, as proven by our new wins.

Total transportation adjusted operating income was $317 million in Q3, down 2% year-over-year as expected, with strong operational performance offset by FX, weakness in commercial transportation, and ongoing plant investments in sensors to support a growing pipeline of opportunities. Margins actually expanded year-over-year in each of our three business units, automotive, commercial transport and sensors, however, the mix caused by high sensors growth combined with weaker commercial transport revenue impacted the margin rate for the segment overall. In Q4, we expect to grow actual and organic sales in the mid single digits, despite weakness in China and commercial transport, slightly lower than our prior expectations.

Please turn to slide 6. Revenue in our industrial solutions segment declined 1% organically year-over-year, versus an assumption of low single digit growth when we provided guidance in April. Industrial equipment business unit was up 1% organically, with growth in Europe offsetting weakness in the US. In our aerospace defense and oil and gas business continued strength in commercial aerospace was offset by a 37% decline in our oil and gas business, resulting in a 5% organic decline for AD&M in total. Our energy business was flat organically as growth in China and the Americas was offset by declines in Europe.

Adjusted operating income was $109 million in Q3, down 11% year-over-year due to unfavorable FX and significant decline in our higher margin oil and gas business, more than offsetting improvement in commercial aerospace. In Q4, we continue to expect similar market trends as Q3, resulting in organic revenue decline in low single digits.

Please turn to slide 7. Our communications solutions segment grew 12% year-over-year on an organic basis driven by our strong position in the growing SubCom market. This more than offset market weakness across our China businesses coupled with the planned exits of low margin products in data and devices. Adjusted operating income of $71 million was up 163% year-over-year, and adjusted operating margin more than doubled to 10.3% from 4.2% a year ago, due to robust SubCom growth. Heading into Q4, we expect revenue to grow mid single digits on an organic basis driven by the SubCom projects in force. We now have five programs in force with the announcement in May of the new cross Pacific cable network with the NCP consortium.

Please turn to slide 8 where I'll provide more details on earnings. Adjusted operating income was $497 million, up 5% versus the prior year despite significant FX headwinds. The growth versus prior year is driven by our TE operating advantage efforts to improve safety, quality, cost and delivery as well as volume leverage. GAAP operating income was $469 million and included $18 million of restructuring and other charges, most of which were divestiture related costs and $10 million of acquisition related charges in the quarter. Adjusted EPS was $0.90 for the quarter, $0.03 above the midpoint of guidance and $0.05 above prior year driven by strong productivity, restructuring savings and cost management. GAAP EPS what the $0.85 for the quarter. GAAP EPS included acquisition related charges of $0.01, income from tax items of $0.01 and restructuring and other charges of $0.05.

For the full year 2015 I expect approximately $100 million of restructuring and other charges. This represents an increase from prior guidance driven by product exits in data and devices and resizing for a smaller oil and gas business. We expect roughly $0.27 of restructuring and other charges and $0.18 of acquisition related charges, which will more than offset reserve reversals of $0.33 from tax liabilities for the full year.

Turning to slide 9, our adjusted gross margin in the quarter was 33.6%. This is an expansion of 50 basis points versus the prior year, driven primarily by growth in our harsh environment businesses and SubCom and productivity gains from our TEOA initiatives. Adjusted operating margins expanded 50 basis points driven by productivity, restructuring savings and cost management. Total operating expenses were $552 million in the quarter, with increases from acquisitions and RD&E to support growth in sensors. Cash from continuing operations was $524 million, and our free cash flow in Q3 was $391 million. Free cash flow was impacted by timing of tax payments if the quarter. In both gross and net capital expenditures were down $30 million year-over-year. I currently expect the capital spending rate to be approximately 5% of sales for 2015. I'll remind you, we have added a balance sheet and cash flow summary in the appendix for additional details.

Now I'll turn it back over to Tom.

Thanks, Bob. Please turn to slide 10, and I'll cover our outlook at a high level with additional details provided in the slide. Despite the softer market condition we are experience in China, we expect to deliver another solid quarter in Q4, with revenue of $3.1 billion, up 3% organically year-over-year. We expect adjusted EPS of $0.93, an increase of 6% year-over-year. Our Q4 outlook does include a significant head wind from currency exchange rates which are negatively affecting our guidance by approximately $244 million in revenue and $0.10 per share in EPS versus the prior year. Our fourth quarter performance will be driven by the continued strong performance of our automotive business, the momentum in SubCom and contributions from our recent acquisitions. Industrial is expected to continue to be somewhat soft, and we will continue to be impacted by the uncertainty in China and ongoing weakness in oil and gas.

Please turn to slide 11. Note that the total impact of currency exchange rates for the year is approximately $925 million, versus the prior year and $0.32 in EPS. To really provide a baseline for the performance of our business, revenue would be growing 11% and adjusted EPS would be growing by 19% year-over-year were it not for the negative impact of the stronger dollar relative to other currencies.

Now, before we open it up for Q&A, I thought I would just add a few comments that I think are really important about our company. TE is the world leader in connectivity and sensor solutions and has been building a leader position in sensor solutions, which is a great place to be in the increasingly connected world. In kind of just stepping back, Q3 organic growth was higher than last year, a little lower than our guidance, but it was higher than last year. Q4 is a little lower. They have different mix but nonetheless we are delivering solid organic growth in the second half in a pretty uncertain economy and growing very solidly, when you include the harsh environment M&A that we did last year. As I mentioned, we are growing earnings almost 20% on 10% constant currency growth. This was a big year to really support our harsh environment strategy, and I think it's working very well.

And on that subject, the harsh environment businesses continue to perform well, despite the recent weakness in China. Q3 and Q4 organic growth is in the 2% to 3% range and 4% plus for the full year, and 12% at constant currency. Over the last three years, we grew the harsh environment business over $1.6 billion in revenue, and that's including the foreign exchange headwinds. We grew the operating profit of those businesses about $500 million, again, at current exchange rates. And this portfolio now makes up about 80% of the Company. And as we said before the margins are well above Company average. So I feel really, really good about the strength of our harsh businesses and the resiliency of our harsh businesses. If you go back, this has powered about a 300 basis point improvement in operating margin since 2012.

Sensors is a very exciting new growth platform with substantial sales and margin growth opportunity, and we are just at the very beginning of providing integrated packaging solutions. It's very, very early. But I've talked to a lot of customers about this, and the opportunity is real and will be another source of growth for the Company. And the net of all this is, over the past several years we've really transformed TE into what I would call an industrial technology company.

So overall, I think this Company's performing very well. We are positioned very well. We do view the recent softness to be temporary. We don't have a crystal ball, of course. But when we look at the fundamental drivers underlying all our businesses, we feel very good about them. It reinforces the strategy we have. That strategy's pretty straightforward, and we look forward to continuing to execute it very aggressively and delivering solid performance across the Company. So, with that, we are going to open it up for Q&A.

(Operator Instructions)

Amitabh Passi of UBS.

Hello. Good morning.

Tom, I had a question and then maybe a follow-up for the rest of the team. Just on your transportation solution segment, operating margins came in below 20%. I think you attributed part of that to mix, weaker transportation, also looks like ongoing investments in sensors.

Just wanted to get a sense whether we should expect that level now to persist for the next couple of quarters? And as a follow-up, you intriguingly mentioned a few design wins in the automotive segment in sensors. I was wondering if you could touch on that and maybe provide greater insight?

Obviously on the second question we can't say too much as I'm sure you understand. But, as far as the margin goes, we expect the margin to continue to be in the 20% range, plus or minus, depending on mix. As Bob pointed out, the three major segments in the business all improved their margin year-over-year. Sensors margins are lower than industrial transportation and automotive as expected.

And that is why I mentioned it is one of the real opportunities to continue to grow profitability as we scale that business. We don't see anything short of a significant volume decline. I think when we are running at the 4% to 5% growth rate, we have the momentum to continue to deliver strong margins. So I'd -- plus or minus 20% a little bit is what I would expect over the next several quarters.

Okay. Can I squeeze another follow-up in?

Sure.

Okay, thanks. And then maybe just on the supply chain adjustments you talked about. Again I don't know if you have any visibility or insight. Is this a 1, 2 quarter phenomena? Just generally how you expect the supply chain and the potentially excess inventories to be digested here in the near term.

I mean we do have some insight because we are large through the channel, right? So we have a very big business through the channel, which serves tens of thousands actually hundreds of thousands of end customers. So we feel like it's a statistically sound base of information to look at. And the channel was pretty robust in the first half, just like our industrial businesses, as everybody was expecting a little bit stronger second half, and we have seen that tighten up.

We have seen it tighten up on sell through, on sell in. I think the good news is coming out of the last big down turn, everybody in the supply chain is very glued together in terms of what's going on. So we react much quicker than we did. Of course it's hard to predict with confidence, how long it will last.

But what our forecast reflects is, it starts to abate through the fourth quarter, our fourth quarter. And that by the time we get into the first quarter, it should be largely behind us, in the industrial part of the business. That's the current forecast, that is what we are hearing from the market. So that is the best insight we have right now.

Okay, thanks, Amitabh. Can we have the next question, please?

Amit Daryanani, RBC Capital Markets.

To start off with, Tom, if I look at the guide you guys are providing right now, adjusting for the FX tailwind, you are sort of reducing your forward expectations for the quarter by about $235 million, $240 million. Could you talk about how much of that is really due to the softness in China you are talking about and how much of that is perhaps due to the product exit in data and devices that you are undergoing?

Amit, it's Bob, I think the way to think about that $240 -- or before the tail wind from FX is really spread relatively evenly across all three of our segments, transportation, industrial and communications. All three of them are seeing the implication of a slower China, and then we're also seeing the implication of the supply chain or inventory adjustments really in our industrial and appliances business in those last two segments.

Got it. That's helpful. Then if I just think of the transportation segment with China slowing down, North America -- Europe seems to be holding up well for you so far. I'm curious what is your thought how much of your Europe exposure you think ends up as exports through China essentially? And do you think that could be another level of concern you have to contend with as you go down the next few quarters?

Well we, just to put it in, our China auto business is now, flat to slightly down. It's really the first time since probably the financial crisis. And that's what we have reflected in the fourth quarter. So we are, we are definitely seeing less imports into China of high-end vehicles. I think you've heard several OEMs report their outlook for their China sales. So we're seeing some of that.

I believe we have that reflected in our European automotive numbers. We generally have pretty good visibility. It is again, not perfect visibility. But we've taken our overall China numbers down quite a bit, just -- and I think it would be important to highlight that. Quarter-over-quarter, we are going to be down about well, let's see, 12%, in China revenue. That's last year's fourth to this year's fourth. And it is pretty broad-based as Bob said.

And the overall $240 million that Bob referred to about -- about two-thirds of that is China and Latin America, with of course China being the biggest piece. It had been slowing. It slowed more abruptly, and I think this is the key quarter to see it seems like things are settling down maybe over there now, over the last few weeks, as this now begins to bottom out and recover.

Because we think the core fundamentals of a large population, a growing middle class, growing incomes, urbanization, plays to all of our businesses, particularly where we are strong, which is harsh environment. And as I mentioned our harsh businesses, overall, are still growing slightly, despite a broader slow down in China.

Okay, thank you, Amit.

Craig Hettenbach, Morgan Stanley.

Yes, thanks. Just following up on some of the commentary on China weakness. Have you seen any change, more broadly on the automotive side in terms of production forecasts you get? Like what OEMs are doing in this environment? Are they cutting back slightly to reflect that? Or any type of additional information on the production side would be helpful.

Sure. I mean, what our customers, the OEMs are telling us is in the fourth quarter they plan longer than usual in China shut downs a week, maybe some up to two weeks. So there's definitely a goal to balance inventories throughout the channel, including cars on the lot now that the inventories aren't crazy. I think they have been keeping them pretty tight there, but definitely reflects this slowing demand.

Got it. If I could switch gears just to the MEAS the commentary that that acquisition has gone well. Any specific anecdotes you could talk about in terms to leverage that through your broader distribution champions through your customer relationships? What type of uptick you are seeing from that as they potentially benefit from a much broader platform from a TEL?

Sure. I think the broad anecdote, can't get too specific yet as you know, customers have their requirements. But a consistent anecdote is particularly in starting with auto, and across several of our harsh environment businesses, we are spending a lot of time with customers, where we bring in the product and technology experts from Measurement and get them into places where they couldn't get in before.

And we are seeing a lot of bidding activity resulting from that, because they are really a fine, fine engineering and technology and product company. I think as I've mentioned on these calls before, we knew them quite well and certainly expected that, and that's why we acquired them. But the deeper we got the more engineers and applications engineers we got to know the better we even felt about that.

So we're -- it is kind of interesting in some ways. The biggest challenge we have is which ones to pick, because there is a lot of opportunities to pick from. And as Bob mentioned we are ramping up our resources in a thoughtful way in that business, so that we can take on more and more design opportunities. But it's pretty broad-based I would say.

But it's definitely focused in the harsh, although we have had some, we can't talk about them too much, but some really key wins in consumer, that are -- it's very good business. Again because these are highly engineered components and packaged in a way that they can perform their function no matter how they are treated by the consumer. So we are pretty excited about that. So I would say it's been a good almost first year -- about a year now of working with this team.

And on the back end, they are bringing lean into their operations, figuring the best place out where to make things, putting the organization together. That's all done. So, we feel like that first year, where you are figuring things out and how do you best work together? How do you leverage strength but not turn off the small company you bought?

I think I would give us very high marks for that. And now we are really going on the defensive with getting in front of customers.

Thank you, Craig.

Mark Delaney, Goldman Sachs.

Good morning and thanks very much for taking the questions. The first question was just some clarification on the comments about some of the monthly trends that you are seeing with the business. Tom, I understand you talked about seeing some, some weakness beginning during the June-quarter, and I think you commented that on a year-over-year basis bookings are pretty flat. Could you just clarify if you have seen any stabilization in the monthly order patterns, or you are still seeing some month-to-month declines in the bookings?

I would say it feels like it's stabilizing. Week to week, things bounce around, but we are really kind of running at this ex SubCom level $2.9 billion to about $3 billion order rate.

Okay. That's helpful. For follow-up questions I want to focus on sub C, two part question, first it seems like the, the comments for the FY15 revenue guidance just a little bit above $700 million, seems like a real small down tick versus the comments for $720 million on the last conference call. Can you maybe just help us understand -- I know it's small but if anything is kind of changing driving that slight change to the revenue forecast for SubC for FY15.

And second part on SubC, given the new award that you won, what sort of visibility do you have into FY16 revenue in the SubC business?

Mark, you're right. There is an ever so slight decline $720 million to $712 million, $715 million, something like that, if I remember correctly. That's really just the timing of some material coming in, when we get it loaded on ship. This is a project business.

And so, as you progress as material comes in, all you need is a vendor to be late by a week and you lose some revenue. But it is purely timing, so no implication of that whatsoever. In terms of FY16, it is too early to give guidance for FY16, but obviously, we've done well this year. We feel good about adding the fifth program in force, and we are spending that this year. That's now $1.5 billion in force for us.

Thank you.

Thank you, Mark.

WIlliam Stein, SunTrust.

Thanks for taking my question. Tom, earlier you mentioned that you saw part of the slow down extending through the fiscal Q4 guidance and likely ending in Q1. So this clarification is really about whether that's the China-related weakness or the North American sort of channel adjustments you're seeing, or whether it relates to both. And what gives you the confidence to --to have the view that this ends by the end of fiscal Q4? Thank you.

Sure, thanks, Will. Really my comment about we think it will, based on what we are seeing and hearing now, work its way through in Q4 is the North America industrial. And part of that is, and demand is still -- it's slower -- it feels slower from what we're hearing from second half first half, but it's not off that much. And you still have a pretty healthy American economy, even though, I think, most of us feel it is not growing the way we thought it would, it's still growing and all the indicators like payrolls and things.

And then when we just look at the sell in and the sell through, what we are hearing is that should start to work its way through by the end of our fiscal year. That's our best estimate at this time. China's harder to tell, I think just because data is harder to get. Kind of the only data you have is your own data, and we have seen China can move up very quickly as well.

So I'm more uncertain about that, Will. Last year we had a tremendous first quarter in China. And actually, we had a pretty good first half until it began to taper in the second half. So harder to tell there. Wouldn't be surprised if this leaked in through the first quarter. But that's a guesstimate based just on recent order trends.

Thank you, Will.

Shawn Harrison, Longbow Research.

Two part initial question if I may then a brief follow-up. On the BNS business and also the proceeds, is the BNS business still running at a $0.53 EPS rate for the year. And then on the proceeds, in terms of deploying that is, is that on top of the typical buyback where you had been spending $150 million to $250 million a quarter, so we'd say $200 million on average of buy back and then $600 million or $800 million a quarter of incremental buy back once the deal closes?

Yes Sean the BNS business as you know is now recorded in our discontinued operations. I would say it is broadly or generally performing as we expected through the sale process. In terms of proceeds, you are right, we have a practice or a capital deployment approach of $150 million to $250 million per quarter share repurchase. We did $252 million this most recently completed quarter.

We expect to be in the market in fourth quarter. Once the BNS transaction closes, that will be an additional $3 billion or -- that we'll be able to return the majority of that back to shareholders. That is in addition to our deployment of our operating free cash flow.

Okay then as my brief follow-up, Tom, if you could just remind us and delineate between the content you have per vehicle in China versus say Europe so the declines we are seeing in China auto production, just to weight that a bit and how much of what you are seeing, right now, is truly declines in production versus some other factors in terms of maybe mix going against you.

I would say it's definitely production-related. Our content in China is sub 50. It's much higher in Europe. So there can be a mix effect. But it's interesting, over any period of time that we look at, it just doesn't --the numbers are so big, 80 some million cars being sold that the math almost smooths itself out unless you had a dramatic shift.

I mean we were worried coming out of the last down turn that the world was going to go to buying small cars, and that was going to have an impact on our content. We didn't see any of that. The exciting thing about China is content is growing faster in China cars, both local and multi-national. And the hot car in China right now are local SUVs, where we have really nice content.

And our content in China, regardless of whether it is a local Chinese automaker or multi-national is really almost exactly the same. In fact a little higher with the locals, because we provide a little more to them than we would the OEM, which is a real strategic advantage that we started back in the down turn.

So I guess the long -- the short answer, Shawn -- or long answer is we are not really seeing that much impact, if at all. It is kind of in the $0.10, $0.20 range of content per unit mix. At this point.

Very helpful, Tom. Thanks so much.

Thank you Shawn.

Sherri Scribner from Deutsche Bank

Hi, thanks. I was curious, I don't know if I missed it, but did you give a number for global vehicle production this quarter? And then also, could you give us some detail on how much China is as a percent of revenue for the three different segments? I know that Asia-Pacific is about a third of your business, but maybe some metrics around how big China is by different segment would be helpful.

Sure. At a high level China's running in the 17%, 18% of our total business. That is total company. It's much higher than that in data and devices. You know, part of that is because most of the production is in China, and it is sometimes hard to, in those kind of businesses, to -- where is consumption locally? And where is consumption globally? Our auto business, which runs over $1 billion, is all local consumption.

Okay.

And then the other part of your question, Sherri, is the auto production volumes for fourth quarter? So we have, in our current guidance, auto production for fourth quarter globally about 21 million vehicles, up about 3.5% year-over-year. That gets you to the 2% on a full year basis, just under 87 -- excuse me, just under 87 million vehicles.

Did you give a Q3 number?

Q3 was down three tenths of a percent. About 21.5, 21.7 million units.

Okay. And then can I just ask a question about the transportation segment? I think your long-term goal has been to grow that segment in the high single digits. And it looks like we are tracking a little bit below that this year. I know there has been some puts and takes, but what is your view overall of the ability to continue to grow that segment in the high single digits? Thanks.

Thanks, Sherri. I think at historical production levels of about 3% in the last three years is going to average out, or take next year's estimate, this year and last year, it is going to average out to about that. We would expect to do that, especially with our expansion into sensors, which will grow, we are going from a very low base there.

So yes, I think if production grows in that 3%, we expect to grow 2% plus ex production what we are doing this year production is growing 2%, and we are growing 6% plus. So we still feel that hole. I think we really feel good about this year's performance because it proves out what we have been saying about the pipeline of wins that we have had over the last four or five years, that we're growing our win rate faster than the market's growing.

And now that's showing up in this kind of this multiplier or production effect, where if you go back four or five years we were always saying 1.5 times production. Now we are over 2 times production. As we begin to ramp the sensor business over the next several years it will increase even more. So we feel good about this auto business of ours.

I would say in the current year we are definitely seeing the headwind from FX impacting the overall growth. If you back that out, transportation is well above the 6% to 8%. That's also got at benefit of our acquisition. Our guidance is mid single digits organically. That's below that 6% to 8% long-term rate, and that's really driven by slower commercial vehicle, both in heavy truck declines in the second half of this year and slower off road. But, long-term, still believe the 6% to 8%.

Okay, thank you, Sherri.

Jim Suva from Citi.

Thank you very much. Congratulations to you and your team.

On slide 6 of your prepared handouts entitled industrial solutions, I was taking a look at the operating margins. I know most of the questions have been focused on transportation, which is rightfully so. But looking away from the other areas for potential improvements, the operating margins for industrial solutions came down pretty meaningfully year-over-year. Yes, of course, actual and organic sales came down 5% to 1%. But the 100-basis decline in operating margin is a pretty big gap.

Can you talk a little bit about that, because to me it seems this is one area of meaningful improvement you can do for the Company, and is it really tied now to sales for the future of this company or restructuring, or are you doing some plant consolidation? Or how should we think about what actions you are actively doing? Or is it just simply tied to sales for improving the turn around of this segment, which is below corporate average?

Thank you, Jim. Yes, the margin decline as we point out here is really two big factors, right? The oil and gas business is down 30% plus, and that is the highest margin business in the segment and the -- and FX. So, and we have a strong European industrial footprint, particularly in energy and in industrial equipment.

And they are strong margin businesses, so, particularly energy, which has been slow in Europe. Our industrial equipment business has actually been pretty good. If you go through the makeup of the business and talk about -- and who knows how long this oil and gas thing's going to last? But that team has managed to, despite a 35% decline in revenue, keep the margins in solid double digits.

And the piece we bought, which was more in the service and support side and the new project side is still in the 20% plus range. So what I would say is, A, our aerospace defense business, very strong, with above-company average margins. Our oil and gas, below, right now. But again, who knows when?

But as that grows, that's inherently, because of its harshest environment characteristics, a high margin business. Industrial equipment is the one that's the big fragmented business that serves multiple industries, lots of small customers that we have been steadily improving. Growth slowed down a little bit right now.

But that is where you are seeing us in the path and continue to fine tune the -- our manufacturing network. TEOA is especially important there in the slow volume high mix business. But those margins today are at about company average. What's holding it down right now is oil and gas and energy. Energy because of Europe, oil and gas just because of what happened in the markets. But we still believe and are committed to this is a above-company average margin business.

For that pressure from oil and gas do you wait for it to come back, or do you pro actively make some plant adjustments?

Oh yes we've kept the margins in double digits by being very proactive, I mean super proactive. Bob, you want to add on to that?

Jim as I mentioned in my opening comments, we've now increased our restructuring charge for $100 million. Part of that is communications, restructuring, and part of that is oil and gas. So we've definitely been taking action this year.

Okay, then as a quick follow-up for the stock buy back you mentioned that the BNS is looking to close about -- I mean a little bit earlier than expected within 90 days. Can you remind us and investors about your cadence or appetite for the stock buy back and timing what you are going to do? I think it is about $3 billion sales proceed -- the timing once you expect the stock buy back? It looks like the acquisition -- or divestiture is going to close a little bit earlier?

Yes, so we had been indicating we expected the transaction to close by the end of the calendar year. We now see that closing within the next 90 days or so. And as you indicate, it's $3 billion of proceeds, and we have said since the day we announced the transaction, back in January, that it would be -- the vast majority of those proceeds would be used for share buyback, and we have not indicated the specific timing of that.

Great. Thank you very much.

Thank you Jim.

Wamsi Mohan, Merrill Lynch.

It is [Rukluk] filling in for Wamsi. Tom, high level question to start. Can you just give us your thoughts on the overall product portfolio? Are you done with the product exits that you were doing in the data and devices segment? And overall is there any more opportunity to rationalize the product portfolio?

I think the product portfolio is pretty solid right now. And I'll call out about a few exceptions to that comment. We are still rationalizing in Data and Devices. Our strategy there is to really focus on our core connectivity business, which is a good business for us and move out of what we have now deemed to be commodities and things like that, and that's going well.

And that's why you see such big declines in that business, because we are elegantly and treating our customers well but exiting those products. Across the rest of the portfolio, it's -- I like it. I mean, I think you'll see more adding than subtracting. And whatever we do on the subtraction would be more fine tuning around hey, we don't -- this range is a commodity. It's not really strategic, we don't need it to sell other products.

We don't want to put our energy into it. Would rather -- anything that widens this harsh environment mote and sensor business is where our inorganic and organic investments are going. If you see further exits, it'll really be around the edges.

Okay. Thank you for that. And then, just as -- for my follow-up, can you, you've talked about the heavy truck market being weak in China. Can you talk about the other geographies? Are you seeing weakness in any other place apart from China in that market?

I think in North America, as you know, it's been a very hot market the last couple of years. The growth rate is slowing. But no surprise there. We've all expected that. But we expect heavy trucks to continue to grow. We actually expect China to rebound, eventually -- hard to call.

But you went through a nice surge with the adoption of Euro 4. And really the government really drove that hard. So you had a period where trucks were going down, and content was going way up. And there has been a little shift in China, to smaller trucks. But we believe, with all the infrastructure building over there that's going on, that will swing back to larger trucks, which are much more efficient.

And there's a lot of opportunity in China to improve the transportation of goods industry. And that plays to our strength, because we are -- that's more content. So I think, in a little bit longer term, probably hopefully late next year, you start to see China pick up. The US continues to be okay and Europe has been pretty solid.

The challenge in the industrial transportation market has been off road. So as we know, the agriculture industry has been really not investing, due to where farm prices are. You have the commodity industry, you have the spill over effect of oil prices down. So construction, although it's mixed, it's starting to level off. All those industries have been a drag over the last few years.

So, what I think will happen, over time, is you'll see those industries begin to recover because there's pent-up demand. You'll get a lower growth rate, in heavy trucks, and this business will, over time, return to a low single digit production growth rate, which is very attractive to us because we have so much content and we've grown our content so much over the last couple of years.

Thanks. I appreciate the color.

Matt Sheerin, Stifel.

Most of the questions been answered. But did want to go back to their commentary about distribution inventory correction that seems to be going on. Could you give us a sense of what you are seeing on a sell in basis versus sell out? And expectations for where you think inventories are going to go and what do inventory days look like at distribution now, versus where they should be?

Days are up a little bit, but I think it's more single digits than days in my conversations with the distributors. Again, I think everybody has been managing it -- we are all managing it much better than we did the last time around because of what we've learned. So, clearly the first half, we had nice growth in our sell in, in the first half. And sell through was pretty solid too.

But we began to see late second quarter, early Q3, sell in -- sell through began to slow a bit, and that is when inventories began to build a little bit. I think we all were like let's jump on this quickly and get things in balance. So I don't think it's a -- I don't think it's a big horrendous deal, but it's enough to have our third quarter be slightly down in the channel, and probably our fourth quarter relatively flat.

But that's why we think coming into Q1 sell-throughs and inventory levels are back to where they should be. Again, I don't -- it's not a major disruption. But it is -- it is a fine tuning, which I think is good. It doesn't feel good when it's happening, because we're selling less, but I think it is good, because the system is more in balance.

Okay that's helpful. Just a quick question for Bob. The share count assumption for the quarter in your guidance, what's that?

So we expect that, in fourth quarter we'll continue at that between $150 million to $250 million range. So call it you know 1 million or 2 million share reduction for the third quarter.

Okay thanks a lot, guys.

Thank you, Matt.

Mike Wood, Macquarie Securities Group.

Thank you for all information. I wanted to break out the SubCom profit what you are trying to do with the increasing margins in the mobile device subsegment, can you just give us some more color on what's happening in those two sub markets?

The sub segments of data and devices, Matt? Or Mike?

Some comments on the mobile device side where you are exiting smaller margin product. How successful are you in getting that margin up in the mobile device side?

On the mobile what we call the Data and Devices businesses, we combined those businesses. We announced that earlier in the year, because of customers were converging, technology is becoming more similar and frankly, we needed to reduce costs in those two businesses, which are our two weakest business. So we are still in the turn around.

I think -- we have some good wins, we have some losses. I don't think there's enough there to say from a market perspective we changed our position. We are changing our cost structure, and we are getting back into the product range, which we do best. The core connector, fine pitch, board to board type of connectors, power connectors, where we are very good and that we want to put the lion's share of our energy around.

So it's still in midway through the turn around, I would say. Stabilizing, but not exciting from a profitability point of view. We still have work to do to reestablish the growth and get the margins up to double digits. On the SubCom side, as Bob mentioned, seeing steady progress in the market, we continue to have a high win rate. There continues to be a lot of bid activity.

The cloud players are very active in this, so that -- we pointed out before, that is a big change from where the primary drivers were before. But fundamentally we think it is a good change. Because there is a tremendous desire for high quality service and plenty of band width, because that's so integral to the total value proposition of those players. So we think that is a fundamentally good driver.

And the backlog is now up to $1.5 billion, so I would say we continue to see more proof points that we are in the uptick cycle, and we're feeling pretty good through 2016. You know, you've got to keep knocking off several wins a year, to fill the pipeline. But overall feel good SubCom's on the way back up, and we are getting our arms around the Data and Devices business from a strategy and a cost structure. We can see where we want to be.

Great and on MEAS it seems like if I back into the numbers it was roughly similar contribution versus last quarter to the segment. Has that seen any impact yet from China? I believe China was just under 20% of sales. Is that expected? Or is there any restructuring actions taken to offset that weakness?

I would say, I would call it a consistent quarter. They are certainly going to see, as China in general slows down, they'll see an impact, but not significant. And overall, growing very nicely organically, as I mentioned, our sensor business. If you -- if we had owned AST and Measurement this quarter last year, that business grew 10%. So certainly seeing some nice growth overall.

I would say in China, sensors are not as established in the vehicles over there. So, particularly the local vehicles -- so you have a more, an additional demand pool, that, in order to become competitive, you need to put more features in. So we feel that's an extra demand driver. And the only, per se, restructuring that's going on, is where we're combining for scale.

We're not doing any, in response to market conditions, oh it is growing slower so we're taking costs out. We're investing in the business, as I said, from that perspective, so than we can win more deals and grow it faster.

Great. Thank you.

Steven Fox, Cross Research.

Thanks. Just one question from me. I'm just a little confused still by the increase in the restructuring charges, understanding what you just said. But you expressed a lot of positive statements around harsh environments in general, but you are downsizing oil and gas.

And then along the same lines, you are doing some product pruning, which I would think has been an ongoing effort for a number of years. And I'm just curious how that, what that has to do with restructuring and whether that was also in response to end markets? Thanks.

Jim, I'll let Bob add to this, too. Oil and gas is adjusting to a 35% decline in the business. And the natural uncertainty about everything that's going on around oil, which -- does Iran come back in, when do oil prices go up, et cetera? The remainder of the increase is related to the phase of -- accelerating the phase of Data and Devices. That is what it's related to. We are not really restructuring in any other business. Bob?

Yes, the vast majority of our restructuring to date and will be for the year is in the communications segment and the oil and gas in particular. Oil and gas, last year, was a $300 million business. We are going to exit at a $200 million clip. That really calls for some pretty significant restructuring.

And then Data and Devices in combination of the product exits. We've really been underway for, call it 12 to 18 months. Probably on the closer end of that 12 months plus the combination of the old data come and consumer business drove us to take some additional costs out. But we're not taking outside costs in our harsh environment growing, to your earlier question, Mike's question on Measurement, not taking out costs where we've got growth opportunity.

Understood. Real quick I understand the need to sort of keep your plans for a buy back close to your vest, for now. But I mean, when the deal closes can we expect some signals around how you plan to execute or use that $3 billion in proceeds? Or is this sort of going to be status quo, and we'll learn about it on a backward looking basis?

I think one of the hallmarks of TE has been some pretty good transparency. And once the deal closes and we get into the activity, we'll give you some color about what our expectations are.

WIlliam Stein, SunTrust.

Thanks for taking my follow-up. So, with the pull in of the timing of the BNS sale, can you just highlight to us what the regulatory approvals that you are still waiting on are? And with regard to the $3 billion consideration, understanding that you've told us that you expect to use the majority for buy backs, would you consider another acquisition, potentially, in the sensor area? At the analyst's day you were, the Company, I would say, was still constructive on its intention to acquire in that space, and I wonder if this could be an opportunity to readdress that? Thank you.

Well, let me address the second part of that question. I think the strength of the Company is our strong cash flow, our really strong capital structure, our strong operating leverage, and all of that provides choices, right?

So we clearly have an active M&A pipeline. Sensors and harsh environment are very important to us. And wherever we get the right opportunity to strengthen those businesses, we will seize them. Of course it has to be at a price we think fits our strategy and our return goals. So, yes, I mean the bottom line is, we can do both. That is really the simple message. We can do both.

If you look back the last two years, that's what we've done. We bought MEAS, we bought AST, we did significant buybacks, I think that is really one of the strengths of TE.

Then in terms of the timing, Will, we pulled it in a bit from end of the calendar year to now, within 90 days. We have really, three large regulatory hurdles. The US, Europe and China. We have US and Europe, so we are awaiting China. And of course there are a number of other countries that have the right and obligation to weigh in.

But it's really those big three. And of course then, we are in the midst of integration planning that we are helping them with, obviously. And let them comment on that progression. But it really is, at this point, a regulatory hurdle with China.

Great. Thanks very much.

Thank you, Will. If you have follow-up questions, please contact investor relations at TE. Thank you for joining us this morning, have a great day.

Thanks everybody.

Thank you.