泰科電子 (TEL) 2015 Q4 法說會逐字稿

Ladies and gentlemen, welcome to the Q4 earnings release conference call.

(Operator Instructions)

As a reminder, today's conference call is being recorded. I would now like to turn the conference over to Sujal Shah. Please go ahead.

Good morning and thank you for joining our conference call to discuss TE Connectivity's fourth quarter and full-year 2015 results. With me today are Chairman and Chief Executive Officer, Tom Lynch; President, Terrence Curtin; Chief Financial Officer, Bob Hau. During the course of this call, we will be providing certain forward-looking information and we ask you to review the forward-looking cautionary statements included in today's press release.

In addition, we will be using 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 TE.com.

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

Thanks, Sujal. Thanks, everybody, for joining us today. Over the next half hour, I will be providing a state of the Company update, essentially at 2015 year-end review. I'll also share our view of the economic environment in terms of what we see today and what we expect over the next year. Terrence Curtin, our President, will discuss our business performance in detail. Bob Hau, our CFO, will cover the highlights of Q4 and full-year financial performance and I'll wrap up with the details of our guidance and key underlying assumptions.

2015 was a very important year for TE. We made excellent progress on our strategy of expanding our leadership position in harsh environment connectivity and establishing a leading position in the sensor market. Economic cycles will ebb and flow, but we believe the strong secular trend of electronic content growth has a very long runway; especially in harsh environments where we have focused the Company. TE has the broadest range of connectivity and sensor products and we are very well-positioned to take advantage of this secular trend.

During the year, we strengthened our position in harsh markets with a significant level of design [ends] across our harsh portfolio; most notably in our automotive business. We expect that, over the long term, we will generate sales growth of 6% to 8% in our core auto connectivity products on 2% to 3% vehicle production growth, which is the forecast for the next five years.

In FY15, we completed the integration of our sensor acquisitions. Our hypothesis underlying these acquisitions was that our unmatched presence across virtually every industry, coupled with the broad technology range we acquired, would enable us to grow faster than the market and eventually expand into integrated solutions. This is playing out very well and our design and pipeline is growing rapidly.

In August of this year, we completed the sale of our BNS business for $3 billion, several months ahead of our original schedule. With this divesture, our portfolio is now 80% focused on harsh environment applications and approximately 90% of our business is connectivity and sensors. We have strength and scale in all the markets we serve. As Bob will share in more detail and as we communicated earlier this year, we expect to use the proceeds of the BNS sale on share buyback, which we believe is a great $3 billion investment of our capital.

Now, please turn to slide 3 for some more details on FY15. 2015 was the year of very good performance across the majority of our business. Organic sales were up 4% and were up 10% on a constant currency basis. This growth was driven by our harsh businesses and the beginnings of a new growth cycle in SubCom. This more than offset the declining revenue in our data and devices business as we reposition in that business.

Adjusted earnings per share of $3.60 was up 9% and up 19% on a constant currency basis. We delivered 80 basis points of adjusted operating margin expansion on 4% organic growth, exceeding our long-term model of 50 basis points of operating margin expansion on 5% to 7% organic growth. Adjusted operating margins exceeded 16% for the first time, reflecting a healthy portfolio and strong productivity performance driven by our TEOA business process.

We also continued our balanced and disciplined approach to capital allocation, returning $1.7 billion to our shareholders. We increased the dividend by 14% this past March and repurchased 18 million shares.

Now please turn to slide 4 for a summary of Q4 results. Q4 was a challenging quarter as we saw further slowing of orders since our last call, reflecting weakness in China and slowing in most of our industrial markets. Revenue of $3 billion was flat on an organic basis and up 6% on a constant currency basis, but slightly below our guidance range. Adjusted EPS of $0.90 was up 2% over the prior year and up 15% on a constant currency basis and at the low end of our guidance range.

Please turn to slide 5 for a brief overview of Q4 order trends, which will help frame our segment results and guidance. This slide shows our four quarter sequential order trend. As you can see, orders dropped significantly in Q4 and declined roughly $200 million versus our expectations when we provided Q4 guidance in July. We typically see a seasonal decline, but this was much larger than expected. China orders fell for the third consecutive quarter and are now running almost 15% below last year's rate with the slowdown impacting all markets.

We also saw a significant decline in global industrial orders due to a generally weaker growth outlook and the resultant typical contraction of inventories, both with OEMs and in the distribution channel. Recent order patterns and feedback from customers indicate that the majority of this slowdown appears to be a near-term adjustment due to lower levels of demand as opposed to a more profound downturn and reinforcing this, we are not seeing cancellations or debooking of orders. Looking forward, we expect continued economic growth in both the US and Europe and as a result, would expect the industrial and distribution inventory corrections to be largely behind us by the end of our second quarter.

China is a bit harder to call as the Chinese economy is going through several transitions and is being impacted by the slowing industrial growth rates in most of the world. But China does continue to show strength in its consumer-driven economy and our assumption is that our China businesses will bottom in Q1 and will return to growth in the second half. And it was very encouraging to see new car sales in China return to growth in September.

With that back drop, I will now turn it over to Terrence to cover each of our businesses in more detail.

Thanks, Tom, and good morning, everyone. If you can please turn to slide 6 for me to review Transportation Solutions.

Overall, our Transportation Solutions segment performed very well in FY15. Revenues of $6.4 billion was up 4% at both actual end rates as well as organic rates. Our adjusting operating margins were 20.4%. Once again, we delivered growth above the market due to the secular driver of content growth, along with new platform wins across our global customer base.

In the fourth quarter, revenues in the segment grew 2% organically. Our Auto business grew 3% organically in a flat global vehicle production environment. Growth in the Auto business was driven by Europe and the US, as well as Asia Pacific outside of China. Our sales in China during the quarter were essentially flat.

Our Auto business is exceptionally healthy, with a rich pipeline of new platform ramps from design wins generated over the past several years that will continue to drive growth well above the market. From an order perspective, during the quarter, we did see the slowdown in China we discussed last quarter and our orders stabilized in the fourth quarter with the third quarter levels. These order trends, however, will affect our first quarter sales, as China was very strong in the first quarter last year.

For 2016, we expect China vehicle production to be up only 2% compared to 2015 and longer term, we expect China auto production growth in the range of 5% to 7%. As expected, our Commercial Transportation business was down in the quarter, due to the continued weakness in the global construction and agriculture markets, with Europe being the only bright spot where we had growth in that market. We do expect the commercial transportation market will remain weak in 2016.

In our Sensors business, we continue to build momentum and deliver strong performance. If you assume we have owned Measurement Specialties and AST in 2014, our total year-on-year organic growth in sensors would have been 12% in the fourth quarter. We have new design wins and a solid pipeline with the technology leaders in automotive, industrial, and consumer markets and to support the design win momentum and continued growth ahead of market, we expect to continue to invest aggressively as we build scale, supporting new design wins and adding to our unmatched customer facing sales and engineering resources. And finally, on an adjusted operating income level, the segment's income was $306 million in the fourth quarter, which was approximately flat with the prior year as we expected.

If you could, please turn to page 7, so I can discuss the Industrial Solutions segment. As Tom mentioned, we saw slowing across several of the markets in this segment during the fourth quarter. When you look at the segment, 2015 started well, but became more challenging as we moved through the year.

The overall industrial market space slowed as a result of the oil and gas market declines and then by China slowing later in the year. To illustrate the trend we experienced, our organic growth in this segment was 4% in the first half of 2015 and in the fourth quarter, we just experienced a decline of 7%. For the year, segment revenue of $3.2 billion was down 4% overall and flat on an organic basis, while adjusted operating margins were 13.5%.

Geographically, markets were mixed with organic growth in Asia offsetting declines in the US that were driven primarily by the oil and gas declines we experienced of 30%. From an end market perspective, the Commercial Air and Medical markets do remain strong. The Defense and Energy, and this energy does not include oil and gas, remains flattish and the real area that has slowed since our last call is the general industrial space, with lower demand for factory equipment in connection with China's slowing.

Our orders in the fourth quarter, as Tom highlighted, do reflect supply chain adjustments that are occurring both at our OEM and distribution channel partners. During the quarter, revenue in the segment declined 7% organically year over year versus an assumption of low single-digit decline when we provided our guidance in July. Industrial Equipment was down 3% organically in the quarter with 11% reduction in orders, as we began to experience the effects of the slowing both in China and in the US with our OEM and distribution partners.

In our Aerospace Defense and Oil and Gas business, we continue to see strength in Commercial Air that is partially offsetting an approximate 47% decline in our oil and gas business that results in an 11% organic decline for AD&M in total. For our Energy business, it did decline 5% organically in the quarter, driven entirely by China, while the Americas and Europe remain stable. Adjusted operating income for the segment was $110 million in the fourth quarter, which was down 23% year over year due to the sales decline, currency translation, and significant declines in our higher margin oil and gas and distribution businesses.

Please turn to slide 8 so I can talk about Communications Solutions. Our Communication Solutions segment is a tale of two businesses in 2015, with growth in SubCom more than offsetting the planned declines as we continued to reposition our Data and Devices business. In the fourth quarter, revenue for this segment of $684 million was up 1% overall and 5% organically. Adjusted operating margins expanded 450 basis points, exceeding 10%, and this strong operational performance is led by the SubCom growth from our program wins and restructuring savings that we've been driving in Data and Devices.

2015 was the beginning of a multi-year growth cycle for SubCom with revenues just above $700 million. Based on the timing of the ramps of new projects, we expect to generate annual revenues between $700 million and $1 billion through this multi-year growth cycle. Our current backlog of programs in force is approximately $1 billion, which reflects the completion of a large program in 2015.

For 2016, we expect to grow SubCom high single-digits year over year, based on the timing of the project ramps and projects we see in the pipeline. And lastly, in the fourth quarter, our Data and Devices and Appliance businesses were both affected by China slowing and the supply chain adjustments by our distribution partners, which are expected to last through our March quarter. Additionally, Data and Devices growth is impacted by product exits initiated in 2015 as part of the repositioning effort. These product exits will impact revenue by approximately $30 million per quarter in the first half of 2016 and then tail off in the second half.

Now let me turn it back over to Bob to cover the financials.

Thanks, Terrence, and good morning, everyone. Please turn to slide 9 and we'll provide more details on earnings.

Adjusted operating income was strong at $488 million, up 12% in constant currency. Including $60 million of foreign currency headwinds, operating income was flat with prior year. GAAP operating income was $407 million and included $11 million of acquisition-related charges, $28 million of restructuring charges driven by Data and Devices, as well as Oil and Gas, and $43 million of other charges related to the BNS divesture. Adjusted earnings per share was $0.90 for the quarter, $0.02 above prior year, with strong operational performance on lower sales, incremental benefits from share buyback, and negative impacts from currency exchange rates.

GAAP EPS was $0.34 for the quarter and included acquisition-related charges of $0.03, expense from tax items of $0.40, and restructuring and other charges of $0.13. For the full year 2016, I expect approximately $75 million of restructuring charges. We ended 2015 with a full-year GAAP income tax rate of 21.4% and an adjusted effective tax rate of 22.3%. I expect a full-year adjusted effective tax rate of approximately 23% to 24% for 2016.

Turning to slide 10, our adjusted gross margin in the quarter was 32.5% and was negatively impacted by lower volume and lower sales of high margin products, including those in the distribution channel. Our adjusted operating margins expanded 50 basis points, driven by productivity from TEOA, restructuring savings, and cost management. Total operating expenses were $482 million in the quarter and down 9% from the previous year, primarily driven by benefits of one-time expense reductions and overall cost control.

We are making reductions in discretionary spending, but are also continuing to invest in harsh businesses, as we see this slowdown as temporary. As a result, we do expect operating expenses to rise sequentially in Q1 as we get back to a typical quarterly run rate. In the quarter, cash from continuing operations was $540 million and our free cash flow was $389 million.

In Q4 of 2014, we received a $100 million benefit from the sale of an underutilized asset, which impacts the year-over-year comparisons of free cash flow. Gross capital expenditures were down $15 million year over year and I expect capital spending rate to be approximately 5% of sales in 2016.

We continue to have a balanced capital allocation strategy. In 2015, we returned $1.7 billion to our shareholders; of which $759 million was returned in Q4. During the quarter, we bought back 10 million shares; roughly half of which came from the proceeds of the broadband networks divesture. Since 2007, we reduced our outstanding share count by approximately 20% and expect to continue reducing share count in 2016. Now we've added a balance sheet and cash flow summary in the appendix for additional details.

I'll turn it back over to Tom.

Thanks, Bob. Please turn to slide 11 and I'll cover guidance at a high level and we do have some additional details provided in the slide deck in the back. As we mentioned earlier, in the last 90 days, we have seen demand further weaken, particularly in China and across many industrial markets. This drove the weak Q4 orders I discussed earlier and translates to a soft Q1.

We now expect Q1 revenue of $2.7 billion to $2.9 billion, down 8% from the prior year and adjusted EPS of $0.072 to $0.80, down approximately 15% year over year. We do expect continued growth in the US and European automotive markets, commercial aerospace, and in SubCom. This will be more than offset by broad-based inventory reductions in the channel and continued softness in China. Q1 is also impacted significantly by negative FX translation, which is more than offsetting the benefits of the share repurchase on EPS.

Please turn to slide 12. For the full-year, we expect revenue of $12.4 billion, up 1% versus the prior year and reflecting 3% organic growth at the midpoint. Our adjusted EPS guidance is $4, representing a year-over-year growth of 11% at midpoint. Our guidance does include the impact of the 53rd week in our fiscal year, which includes approximately $200 million in revenue, $0.05 in EPS. It also includes the benefit of share buyback and the negative impact of currency exchange rates. On a constant currency basis, revenue is expected to grow a little over 4% and adjusted EPS is expected to grow by 14% year over year.

Our full-year outlook is based on the following market and regional assumptions. In Transportation, we expect mid-single digit actual and organic growth. We are assuming that global auto production is roughly flat year over year, with the first half being down slightly and the second half up 1% to 2%.

We expect China to return to approximately 2% production growth in the second half. Longer-term, we do expect China auto production to be in the 5% to 7% range. We expect another year of strong growth in our Sensors business and we expect that the Commercial Transportation market will remain weak.

In Industrial, we are assuming low single-digit actual and organic growth. We assume that global industrial demand stabilizes in the 1% to 2% growth range and as a result, inventories come into balance by the end of Q2, ending the negative supply chain effect on our business. We are also assuming that the oil and gas market remains weak. In Communications, we assume low single-digit actual and organic declines, but growth in SubCom and Appliances being more than offset by product exits in Data and Devices, as well as continued China weakness.

By region, we assume that the overall US and European economies continue to grow, albeit slowly, and that China begins to level off and returns to growth in our markets in the second half. I mentioned earlier we have already seen some pickup in auto sales and the government has recently taken some additional stimulus actions in China. And we believe that the core driver of growth in China, a rapidly growing middle class, will continue.

Our guidance assumes current currency exchange rates and as the year goes on, we have much less of a headwind from FX translation and an increased earnings tailwind from our share repurchase program. Although this is a sluggish time in many markets, I feel the Company has never been better positioned with clear leadership across attractive harsh markets, a very focused portfolio, strong balance sheet, and multiple levers to drive accelerated EPS growth. We have established a strong track record with 13% compound annual adjusted EPS growth 2012 through the midpoint that we're guiding for 2016.

In constant currency terms, we've demonstrated strong double-digit EPS growth in each year. I think all the actions we've taken to transform this portfolio drives TEOA across the businesses and the focus on harsh environment connectivity in Sensors is really, really starting to pay off. Fundamentally, we view we're in a couple quarters slowdown here and expect to get back to strong performance in the second half of the year.

So with that, why don't we open it up to questions. Cynthia, could you give the instructions for Q&A session?

(Operator Instructions)

We will go to the line of Amit Daryanani. Your line is open.

Perfect. Thanks a lot. Good morning, guys. Two questions for me. One, maybe just looking at the FY16 EPS guide, I think at the midpoint, you're implying about $0.40 of incremental EPS year over year on really no revenue growth, 1% maybe, right? Could you maybe talk about, if I think of the 40% EPS uptick, how much of that do you think is going to come from operating margin or core levers versus the buyback deal limit you have? I would love to understand the split between the two.

Hi, Amit. Three key drivers, we start to -- we certainly get a nice lift, and Bob will talk a little bit more later on, I'm sure, from the buyback. In the first half of the year, we still have to overcome the negative impact of translation, so you don't really see net impact of buyback or translation in any significant way until the second half. And our second half assumes we get back to low to mid-single digit growth rates, which we expect will power operating earnings improvement.

So a pretty significant contribution from the buyback, a lesser contribution for the full year from operating margin improvement. In a flat year, we expect to be relatively flat at the OI margin, but up in the second half over prior year.

Got it. And then just Tom, Terrence, you both seem to be fairly convinced this is more of a benign inventory correction and things should start to normalize in a quarter or so. To the extent you can talk about, you've seen a different book-to-bill order trajectory between what you see in the channel versus OEM that gives you comfort that this is more inventory correction versus bigger demand vacuum that we may be perhaps getting into?

Good morning. When you think about it, we did see, and as I talked a little bit in the industrial overview I gave, we did expect, through our channel partners, we would probably be pretty flat in the fourth quarter. Actually their activity through their point of sale and what we saw was probably more down mid-single digit, which then clearly creates pressure on them trying to get their inventories back into position. We did also see OEMs, especially in places like the United States, that we did see the slowing move a little bit before that, earlier in the quarter, so we have seen the traditional OEM start and the channel partners. When we look at it, it feels very similar back in 2012 and 2013 where we had a similar phenomenon where you had a step down in growth that occurred and then clearly supply chains start to crack.

The other area that we are expecting a channel correction is in China auto. I think when you look at the order comments I made and where China, those orders stabilized but we are getting impacted in the first quarter, as that growth of that market slows down from what used to be a 10% production environment to a 2% production growth environment. So there are a lot of signals on that. I would say our orders in October are sort of where we expect them to be versus the forecast we're given. So it does seem to have stabilized, but we have to see, I think, when it comes out is certainly the big wild card.

Thank you.

Can we have the next question, please.

And that will be from the line of Wamsi Mohan from Bank of America Merrill Lynch. Your line is open.

Yes, thank you. Good morning. Tom, can you elaborate on what you're seeing in China, particularly as it relates to the auto end market? Maybe if you could share some clarity on what their trends have been to the extent that you can see between like Tier 1, Tier 2 cities versus lower tier and domestic versus multinational corporations? I have a follow up.

Sure, Wamsi. I was just there a couple weeks ago and you can imagine, spent a lot of time with our auto team. I think -- so the macro trend is early in the year, this calendar year, we began to see the growth rate of registrations decline and productions follow that. There was a couple blips up and down through the year, but I'd say from March on, a pretty, pretty steady decline through July. A lot of folks think that's in reaction, a little bit of slowing of the economy, I think, that creates uncertainty and then, of course, the volatility in the China stock market where individuals have quite a lot invested.

What we've seen recently is registrations picking up. I think on the verge of the third month in a row of registrations picking up, which is a really good sign, in some ways not surprising, because you still have a lot of positives in the China economy. The growth of the consumer and services sector, which the government is trying -- has been trying to accomplish for a long time and now that's the biggest sector of the economy and that puts a lot less volatility in your economy, but also continues to drive significant wage growth as people move from the interior into the cities.

In terms of demand between the Tier 1 to Tier 2, Tier 3, I think we'll see the three and four cities growing faster just because there's been a lot less car purchases there over the last three to four years. Those cities are -- they're growing faster than the Tier 1 and Tier 2, and in multinational versus local, a little more momentum in the local customers lately. They have a very nice fleet of SUVs and SUVs have become very popular in the last year. For us, we're strong across all the OEMs there in the Tier 1, so a switch between multinational and local doesn't really affect us. And, in fact, in the last big downturn, we did a lot of things to get much closer to the local suppliers and we provided more services to them than the typical connectivity supplier would and that served us well and got us a lot of design-in over that time.

So shifting trends, but I wouldn't -- when you really translate that back into content per vehicle in China, it's still moving up. There isn't a big change in the content for vehicle. We continue to see the fundamental trend to more electronics and people want to own cars, so this recent trend is very encouraging as it's ramping pretty nicely from registration level in July to registration level in October.

Thanks, Tom. Appreciate it. Appreciate the color there. And then one for Bob really quick. Bob, is there a way to think about how much of that EPS benefit or margin benefit year on year is coming from commodity tailwinds? If you could quantity that for all of 2016, that would be great. Thanks.

Yes, I think the best way to think about it, first off, we certainly are seeing improvement/tailwind in a number of our commodities, the largest one and the biggest move is copper, so we're definitely anticipating improvement year over year on that. What does moderate that, of course, is we have a hedging program and so you don't see big moves or shocks to the up or down side of our commodities. So I would say we expect probably $0.08 to $0.10 benefit in 2016 over 2015 as some of the hedging that we put in place throughout 2015 feathers in throughout the next 12 months.

Thank you.

Thank you, Wamsi. Can we have the next question, please?

That would come from the line of Mike Wood from Macquarie.

Thanks for taking my question. It would be helpful if you could quantify the gross margin impact from the destocking in this quarter and in your fiscal first quarter 2016, just so we can get a better understanding of the underlying gross margin trends.

Yes, Mike, good morning. I think the way to think about it, as you saw in the slides in my opening comments, we definitely saw a decline in gross margin. That's been a key tenet of our operating performance over the last several years and still up very nicely from where we were two or three years ago. What I think we're experiencing in Q4 is not only the impact of distribution in particular, but overall volumes revenue down on an actual basis, 3% organically flat.

You see that impact flow through your factories in terms of absorption of costs when you get that kind of quick reduction. Additionally impacting is not only the declines in distribution, which is higher gross margin business for us, but also things like oil and gas and commercial vehicles. So all three of those distribution, commercial vehicles and oil and gas are better than Company average margins and that creates, to use a four letter word, mix issue for us, but certainly something that, as the distribution channel recovers as we see that inventory correction improve in the second half of the year, we'll see those gross margins come back.

Okay. Can you also give us the amount of TEOA operating margin improvements factored into 2016?

Well, I think as I mentioned, we see the gross margin or the operating margins improve on a year-over-year basis in the second half and certainly, there's benefits of TEOA, there's benefits of the volume coming back, as well as benefits of some of the restructuring actions we've taken. I think in our opening comments, we did mention we don't expect commercial vehicles to rebound. That's been a tough market for the last few quarters.

We expect that to continue, same with oil and gas. I think the distribution channel will help give a lift, but certainly continue to drive productivity through TEOA and the metals benefit will also impact gross margin, as I said earlier, in response to Amit's question.

And Mike, I'll just add one thing about TEOA. If you were to go back before we used -- we really had TEOA well established in the Company, we typically did not offset price erosion with productivity, so we were very dependent on the volume to carry the margin improvement. One of the reasons we are up 400 basis points, some of it's certainly the portfolio and some of it is because now TEOA is offsetting what typically is 1.5% to 2% price erosion.

So it's a significant contributor to that margin growth so that when we do get 4% volume growth, which six or seven years ago would not produce 80 basis points of margin improvement, now has enabled us to drive 80 basis points. It's subtle and it's woven in there, but it's very, very significant. Then of course the other key thing with TEOA and its primary purpose is to drive customer experience and drive high quality, which we generally get the best marks for in the industry and high on time delivery, so it's really served us well as we've driven this across the Company.

Okay. Thank you.

Thank you, Mike.

You too.

Can we have the next question, please.

And that's from the line of Matt Sheerin with Stifel. Your line is open.

Yes, thanks, and good morning. Question regarding your comments on Communication Solutions and your intent to deselect revenue and I think you talked about $30 million in the next couple of quarters. What does that translate in terms of annual revenue run rate? What does that do to the margin structure of that business? Are there related restructuring charges or costs that you plan to take out there?

Yes, so let's -- a few of us can probably answer this question for you, but as we've been -- part of our core strategy has been to reposition the business around the products that really have margin, the power products, miniature products, the high speed products, which we are best at and move away from the commodity products. To put it in perspective, we took out almost $200 million worth of revenue in 2015 and we held the profit in that business and that was a negative margin business. It was very low margin business. We just felt it wasn't strategic in any way and had very little prospect to improve margin. So the cost actions we took to enable us to maintain profitability at the same level with 200 less margin, I think hopefully that gives you a perspective of where we're going with that business.

I would also add, Matt, it's Terrence, when you look at next year, I mentioned there will be $30 million of a headwind in quarter one and quarter two, that will tail down probably for the year about $90 million in total. It really ties into when we talked last year about the combination of our data com and devices unit as we got that focused. So, Bob, if you want to talk charges?

Yes, I think, Matt, I mentioned that we've got about $75 million of restructuring charges anticipated in 2016, a good portion of that is associated with actions we've got underway in data and devices. As you recall, last year, 2015, we also had significant restructuring charges. We spent, on a full-year basis, about $93 million, 60%, 65% of that was the data and device business unit, so we're definitely aggressively attacking the cost structure, as well as the implication that (technical difficulty) see that benefit impact 16 and 17 and beyond.

Okay. That's helpful. And then regarding the commercial transportation business, you talked about that continuing to weaken next year. Obviously, you're starting off of a pretty low base and tough comps year over year, which will get easier at the end of your fiscal year, but are you expecting that to bottom in the next quarter or so and stabilize or will that continue to weaken?

We expect the market to remain weak and I do think we expect some bottoming around middle year but overall we aren't expecting growth in that market for the year next year.

Okay. That's it for me. Thanks a lot.

Thank you.

Thanks, Matt. Can we have the next question, please.

And that will be from the line of Shawn Harrison with Longbow Research. Your line is open.

Good morning. I was hoping to talk about the buyback just in terms of how much is left and maybe if you could walk us through the cadence of the buyback expected through the end -- or I guess throughout the next couple quarters and when you think you'll be done with using all the proceeds from the BNS sale?

Yes, Shawn, good morning. We started the share buyback in fourth quarter. We closed the deal very end of August, so the month of September we were in the market. For the quarter we spent -- we returned about $625 million. About half of that was the proceeds from the BNS transaction, so call it $2.7 billion or so left. I think the way to think about it is we'll exhaust that, we'll have completed that return probably by the end of the third quarter of this fiscal year.

And to be clear, that's in addition to the consistent cadence have of $150 million to $250 million a quarter, which you've targeted previously?

The money becomes pretty fungible once it hits the bank accounts. We've got the cash now and there are some practical limits to how many shares we can buy in a given quarter or given day with some 10b-18 rules. So I think the way to think about it is the BNS proceeds get returned in the first three quarters and then fourth quarter, we look to get back into the more normal phase.

Okay. And then maybe just another way to ask the inventory question, is there any way to parse out how much of the decline in bookings you saw exiting or for the quarter, that was tied to inventory corrections, be it either the channel level or the OEM level versus just weaker general demand? I know it ends up being mixed a bit, but any clarity there probably gives us greater confidence in this back half ramp.

Shawn, it's Terrence. When you look at it, certainly to your point, it does get mixed when you look at the [math] patterns. But when we estimated both through channel and OEM ordering, we think it's a little bit shy of $100 million. So probably in that $75 million to $100 million range, certainly spread across China, as well as our OEM and distribution partners.

Thanks so much, Terrence.

Thank you, Shawn. Can we have the next question, please.

And that will be from the line of Craig Hettenbach with Morgan Stanley. Your line is open.

Yes, thank you. Tom, there still seems to be questions from investors in terms of buyback versus M&A. You're going to go through the proceeds of BNS to use that to buyback stock, but can you just talk about your balance sheet, your cash flow, and the optionality you have for doing potential deals and also what the deal environment looks like today?

Sure. I think we feel very good at the highest level with the strong balance sheet, strong ongoing cash flow generation, and especially, a lot of cash in the bank now. The ability to return the BNS cash and to continue sort of the two-thirds/one-third capital allocation, we feel like we have enormous flexibility. There's a nice pipeline that we have and it's very focused on the harsh businesses, as we've indicated many times.

I think the way to think about it, it wasn't that long ago we spent $2 billion on the sensor acquisitions and the oil and gas acquisitions and then quickly went back into normal share buyback and then did the BNS deal and now we're into much bigger share buyback. I think what all that says is the broad strength of the Company gives us a lot of choices. When we -- if you go back a few years ago when we spent $2 billion on Deutsch, we went a couple quarters without buyback, but then went right back into it and then had a year of a lot of buyback, almost all of our cash flow going to buyback. So I think we're pretty confident that while M&A make take precedence in one quarter and buybacks in another, that over a couple year period, this 2/3, 1/3 really fits with our business strategy, first and foremost.

Just to reiterate, we look at our strategy, the areas we want to lead in, the products that we want to add to our portfolio so we can take advantage of with our scale and that's what drives our strategy and our M&A pipeline. Then we balance that against where we believe this Company has a lot of, a lot of value creation ahead of us and it makes sense to use a fair amount of our cash flow to take back shares. So I think you can continue to expect the very balanced approach here operating within this 2/3, 1/3 framework that we have. If it ever comes a point where we need to change that, we'll give plenty of advanced notice, but it's been working very well for us.

Thanks for the color. And as a follow-up for Bob, when you think about the sub com business, the growth into FY16, can you touch a bit on the margins? I know typically as those programs ramp in force, the margins improve over the course of the programs. Can you touch on that?

Yes, the way to think about it is in the $700 million, $800 million range, we're nicely into double digits, low teens. As we approach $1 billion over the next several years, depending on the timing of our new programs and how quickly those ramp up, you can expect us to get up into Company-average operating margins.

Got it. Thanks.

All right. Thank you, Craig. Can we have the next question, please.

And that's from the line of Jim Suva with Citi. Your line is open.

Thanks very much. A question regarding the Industrial Solutions segment which, in my mind, has quite a bit of area for improvement. When we think about the decline in sales versus the decline in operating margins, obviously, there's leverage there that's going on in a negative manner and things like that. Is there anything to believe that if we were to see the exact opposite, that margins shouldn't rebound right back up to where they were prior to that decline or is there something going on within the business?

The reason why I ask is, with actual down 12% in sales, organic down 7%, and seeing operating margins down 23%, that's quite a big deleveraging, so I'm just wondering if there's anything in addition we should be aware of? Or if indeed sales at some point were to improve and say be up 12%, should we be up right back to where we were the operating margins or even better, given TEOA?

Jim, it's Terrence. I think you're thinking about it right. When we look at that segment, we do view that segment long term, should be above the company average, so from that framing, we still believe that. I think when you look at the fourth quarter, clearly the revenue decline, as well as oil and gas and some of the distribution slowness, which are higher all sort of hit at once. That exasperated the margin, but when you look at it, clearly places like commercial air, industrial equipment, defense are above Company average so do believe as that comes back and we get through some of the destocking, you will see that margin move back up and it will be an opportunity.

Great. Thank you very much and congratulations to you and your team.

Thank you, Jim. Can we have the next question, please.

That will be from the line of Mark Delaney with Goldman Sachs. Your line is open.

Yes, good morning, and thanks very much for taking the questions. First question is a follow-up on the supply chain inventory reductions that the Company was talking about. And I was hoping you could help us understand where you expect inventory of TE products to be at OEMs and distributors as you exit 1Q? The reason I ask is trying to get a better sense for what gives you guys the confidence for the revenue pickup in the remaining quarters of FY16? Because even stripping out the extra week, it looks like you're assuming above seasonal quarter on quarter trends for the remainder of the fiscal year.

I think when we view this inventory correction is really a three quarter process. It started in Q4, our current assumption is it hits -- the worst impact is in Q1, but still a fairly significant impact in Q2. So it's going to take nine months and we don't really have any big springback baked in this year, so almost I think about it is it kind of gets neutral in the second half of the year, so that our second half isn't really thinking of a springback. The way I would frame it for you to think about how the year will progress, starting with Q4 of this year, you have a negative impact from China, you have a negative impact from inventory and the continued year-over-year negative impact of foreign exchange.

The core markets, everything excluding that running pretty steady. You go into Q1, it's a little worse on China and inventory. It continues at about the same negative impact year over year on FX. As you move into the second half of the year, you get -- our assumptions and we'll have indicators over the next couple months, but our assumptions are inventory's in balance as you go into the second half of the year. China has come down to a level where it should start growing again, because it's come down quite a bit from where it was a year ago and FX is kind of a wash.

I mean, the dollar could change, but if it stays at the current rate, it's pretty much a wash in the second half of the year and the rest of the business, we're not expecting any miracle in the second half. We are expecting production growth to be 1% to 2% in the second half. We're expecting core industrial demand to be 1% to 2%, so they're not really, I don't think, aggressive assumptions and really reflecting what we're hearing from our customers. So that's the way I'd, at a very high level, think about how our year -- we expect our year to unfold based on those assumptions.

Okay. Appreciate that. As a follow-up question, something to talk about OpEx, OpEx was nicely down in the fiscal fourth quarter, below what I was expecting. Can you help us understand where OpEx dollars should be in fiscal 1Q 2016 and then to what extent there's still any excess OpEx associated with the BNS transition agreement, if you could quantify that?

Mark, I think the way to think about it is first of all we very typically have a rebound Q4 to Q1 of OpEx spending. There's typically a ramp that you see in the first quarter of every fiscal year, so we expect to see that and certainly expect OpEx kind of in general to return to more normal levels in 2016 over what we saw in fourth quarter, kind of more normal in the first three quarters of 2015. In terms of the BNS transaction, we talked initially about what we referred to as stranded costs, some of the costs of the central services that we have. We lose that kind of revenue, you don't necessarily take out dollar for dollar from a cost standpoint.

We're still in the midst of transition or transaction services agreements with the buyer and that will be in place for up to a few years, a couple years. We don't expect them to last for forever and individual countries, individual activities will feather in and out and that will give us the opportunity to manage those costs as those TSA programs unwind.

Thank you.

Thank you, Mark. Can we have the next question, please.

That will be from the line of William Stein with SunTrust. Your line is open.

Hey, guys, this is Joe Meares calling in for Will. Thanks for taking my question. I just had two questions regarding [MEAS] in the sensor business. What inning would you say you're in with regards to margins going from being dilutive to the transportation segment to being accretive?

Sure, I'd say we're still in the early innings of that. As you know, the -- we said that from the beginning, the hypothesis was this will provide us accelerated growth in a market that we had a small beachhead. That is definitely playing out as our design wins have been really great, even exceeding our high expectations, and the core organic growth rate continues in double-digits, despite a sluggish economy.

The margin, we expect, will take a few years to move out. It's definitely dilutive, still generating 20 points of margin in that segment and we do have the dilutive effect of sensors, but there's a clear path as we bring our scale to this business to get those margins, first thing, get them above Company average and then get them up near the transportation average. We're in the early innings on that. That's going to take some time because we need time for design wins to turn into sales and then to take advantage of that and turn that into scale.

That's helpful.

It's very much tracking to our plan and we feel great about that acquisition.

That's helpful. Thanks. Follow-on, you did mention the Transportation operating margin looked pretty solid despite the weakness in Commercial Transport at over 20%. What's helping here? Is it mostly the restructuring stuff you guys have done or maybe mix in the other businesses?

Yes, Joe. There's not been restructuring going on in Transportation, other than what we did several years ago. There's a little bit of work that was done early in the year around the acquisition, but that was very small and definitely behind us. I think what it is, is the basic productivity and efforts around TEOA and this business. We expect the business to be at or better than a 20% operating margin.

I know there were a lot of questions at the end of third quarter because it dipped slightly below that. We, at the time said, look, it was largely driven by a pretty significant decline in commercial transport. We see that again this quarter, but we see the 3% organic growth in Automotive that just continued to push productivity across the business and it has been and will continue to be our highest operating margin business.

Great. Thanks, guys.

Thank you, Joe. Can we have the next question, please.

That's from Sherri Scribner with Deutsche Bank. Your line is open.

Hi, thank you. Thank you for providing some of the detail on the linearity of your expectations for sales growth in Automotive through 2016. But I was hoping you could give us some detail on your thoughts of the linearity of industrial sales as we move through FY16? What are your expectations? How much upside in the second half is baked in? Then following that, can you give us some sense of your expectations for operating margins in the Industrial segment? Should we expect them to get back to FY14 levels? How should we expect them to progress through the year? Thanks.

Sheri, it's Bob. I think the comments we made around the inventory correction [to expanded] distribution channel, as you may recall the largest segment that participates in the distribution channel is the Industrial Solutions business. So as we see that inventory adjustment kind of work itself out in the first half of the year, you'll see that improve towards our second half and get us better year-over-year growth rates second half over what we've gotten first half. That does give us, on a full-year basis, kind of low single-digit growth organically as those supply chain numbers work out.

In terms of operating margin for the Industrial Solutions business, I do expect an improvement in 2016 over 2015 and probably not too far off to think back in the 2014 levels that 3% organic growth gives us some volume into our factories. As we've said for the last couple of years, volume will help. We continue to work TEOA. We did some restructuring back in 2013, 2014 in this business and as that volume comes back, we will see those margins improve. I think Terrence in answer to an earlier question, we expect this business to be better than Company average out into the future in terms of overall operating margin.

Okay. That's helpful. I guess just to clarify on the growth you expect through the year, is the primary driver of weaker growth the inventory correction or do you see some overall demand that you think will improve in the second half?

Sheri, it's Terrence. I think there's a couple of things. When you look at the first half, we're going to be impacted by the inventory, as well as oil and gas, will still have a little bit of a headwind on us in the first half because of how that came down. When you [set out] those two impacts we'll have in the first half, when you look at the second half, like I said earlier, the com air side of the business, the medical part of the business we do expect to be strong, but we do think the general industrial space did take a step down in growth, but we still think it'll be growth once these inventory corrections work out.

Thank you.

Thank you, Sheri. Can we have the next question.

And that will be from the line of Steve Fox with Cross Research. Your line is open.

Thanks. One more question on linearity if I could, just to clarify in terms of your thinking from a broad standpoint, are you assuming that some of the growth rates that you're talking about for the second half of the year are achievable even if oil prices stay where they are and the US dollar stays where it is? Because that's obviously been affecting demand beyond just direct oil and gas segment.

If you think of our -- maybe one way to help put a little clarity, if you think of our portfolio, we see about 70% of the portfolio is going to have solid mid-single digit growth and that's our big -- mostly our big harsh businesses like auto, commercial air, our sensor business for sure, and sub com. So when you put those together, they're going to have solid growth really through most of the year with the exception of Q1.

We expect our Industrial and our energy and appliance businesses to get back and work through the inventory corrections and start to grow in the second half, but not -- we're not looking at, as I said earlier, miraculous growth, kind of low single-digit growth. We expect industrial transportation, oil and gas, and data and devices to be down year over year for the year. So I guess to answer specific to your question, we're not assuming any benefit from something happening in oil and gas or any further worsening from oil and gas for sure.

That's fair. And then just one quick follow-up, given the timing of some of your acquisitions and the recent slowdown, I was just curious, have you seen any kind of unusual competitive behavior that you had to factor into your guidance for next fiscal year? Do you feel like things, even with what's going on in terms of distribution, things are fairly well in check in terms of what you're thinking from the combination?

We haven't, Steve, and we monitor that kind of thing pretty closely, but I would say no. I don't -- it's such a fragmented industry with the exception of a couple of industries that we don't see any sort of competitor or two getting too progressive. I think basically the industry has gone through -- a few industries have gone through a little pause, but most of these industries are still fundamentally healthy. It's essential for our customers that keep adding connectivity to their products for them to stay competitive.

So that's this secular trend that is so beneficial to us and for example, we're not really seeing any change, certainly no slowdown in the rate of projects we bid on, design activity our customers are bringing us in on, so we are not seeing any of that. So the fundamental drivers of the business are still very robust.

That's encouraging. Thank you very much.

Thank you.

Thank you, Steve. It looks like there are no further questions. If anyone has any questions, please contact Investor Relations at TE. Thank you for joining us this morning and have a great day.

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