泰科電子 (TEL) 2017 Q1 法說會逐字稿

Welcome to the TE Connectivity first quarter earnings conference call.

(Operator Instructions)

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

Good morning. Thank you for joining our conference call to discuss TE Connectivity's first quarter 2017 results. With me today are Chairman and Chief Executive Officer, Tom Lynch; President, Terrence Curtin; and Chief Financial Officer, Heath Mitts.

During the course of this call, we will providing certain forward-looking information and we ask you to review the forward-looking cautionary statements included in today's press release.

In addition, we will use certain non-GAAP measures in our discussion this morning. We ask you to review the sections of our press release, the accompanying slide presentation that addresses the use of these items. The press release and the related tables, along with the slide presentation, and we 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. Now, let me turn the call over to Tom for opening comments.

Thanks, Sujal, and thanks, everybody for joining us today. We had an excellent start to FY17, delivering revenue growth, margin expansion and earnings growth well above the midpoint of our guidance. Improving markets, coupled with strong execution across our segments, drove this performance. I'll provide some highlights in context for our Q1 results and then I'll turn it over to Terrence to provide more detail on our performance and outlook.

TE's strategy has been driven around three key pillars for some time now. First, a focus on harsh environment applications. These applications demand engineering and manufacturing excellence which provides competitive differentiation. TE stands out as a Company with a broad range of harsh application knowledge and products that can provide solutions to customers anywhere in the world.

Second, driving our TEOA operating system throughout the Company to improve customer service and productivity and reduce our fixed cost footprint. You can see and feel the benefits across the Company and through feedback we received from our customers.

Third, consistently execute on our balanced capital allocation strategy which has enabled us to make strategic acquisitions that have expanded our harsh environment portfolio while consistently increasing dividends and buying back significant amounts of stock.

Since becoming a public company in 2007, we returned approximately $12 billion to shareholders and bought back 184 million shares. We expect to maintain our balanced capital strategy, returning two-thirds of free cash flow to shareholders and using one-third for acquisition.

The accumulative effect of this strategy enabled us to grow share in the markets we serve in and transform our portfolio with more growth opportunities while consistently returning capital to our owners through a strong cash return business model. The net effect is that a $1 of revenue today drives [50%] more adjusted EPS than five years ago.

This quarter's results reflect the benefits of this strategy. Organic sales growth was 7%, driven primarily by strong demand throughout our businesses in Asia, adjusted operating margins exceeded 17%, and adjusted EPS was $1.15, well above the midpoint of our guidance.

We delivered another strong quarter of orders growth, with growth across all three segments. We continue to perform very well in harsh applications and are getting growth and profit contribution across the portfolio.

In the Communications segment, we saw year-over-year organic growth in Data and Devices, earlier than our expectations. This is driven by ramps of high-speed solutions and cloud infrastructure customers.

I'm pleased at the multi-year transformation of D&D that has resulted in a refocused portfolio that will drive growth and higher profitability for this segment. We're also performing well in our acquired businesses, with a growing design win pipeline that gives us confidence for future growth.

The first quarter demonstrates the strength of our business model. For the full year, we are expecting to expand adjusted operating margin by 50 to 70 basis points on 4% organic growth, with margin expansion being driven by all of our three segments.

Versus our prior view 90 days ago, we are raising our full-year organic revenue outlook by 100 basis points and our adjusted EPS guidance to $4.40 at the midpoint. Currency exchange rates are expected to impactful full-year adjusted EPS by $0.16 versus our prior view and this is factored into our guidance. I am pleased that we are growing adjusted EPS 11% year over year, even with the negative impact of the stronger dollar.

Terrence and Heath will go through the moving pieces in more detail as we go through the call. Terrence, I will turn it over to you.

Thanks, Tom. Good morning, everyone. As we get into the segments results and updates that I typically go through, I want to cover our orders for the quarter, which help provide the foundation of the trends that we're seeing as well as our expectations going forward.

If you could please to turn to slide 4, which shows our order trends excluding our SubCom business. Demonstrating our continued momentum that started late last year, orders were up 11% year over year, with a book-to-bill of 1.06 and on an organic basis, orders improved10%.

We saw organic orders growth across all of three of our segments in quarter one, excluding SubCom. We also saw orders growth in all regions, with particular strength in Asia, which grew 26% year over year through strength in China. In Europe and the Americas, orders grew approximately 3% and 1%, respectively.

In Transportation, orders increased 12% year over year, and were up 4% sequentially as China OEMs increased production ahead of the expected expiration of government incentives at the end of the calendar year. Industrial orders grew 15% year over year due to the Creganna and Intercontec acquisition and the organic orders grew 4% with growth across each of our three industrial businesses.

In Communications, excluding SubCom and the sale of our Circuit Protection business last year, we saw year-over-year organic orders growth of 14% including 7% growth in Data and Devices as we began ramping high-speed connectivity that is benefiting from cloud applications, as Tom mentioned.

Please turn to slide 5 so we can discuss our results by segment and let me start with Transportation. The first quarter was an excellent quarter for our segment, with sales growing double digits year on year and adjusted operating margins expanding 340 basis points on increased volume and productivity improvements. Segment sales exceeded expectations due to strength in China and Korea.

Our auto sales were up 13% organically in the quarter, well ahead of auto production growth of 5% due to increased content from the secular trends we've told you about around safe, green and connected, coupled with our very strong global leadership position. Growth was led by demand from China.

As expected, expiration of government incentives spurred demand in the quarter. Note that these incentives are now being phased out over the course of the year so as we look forward, we expect that vehicle production growth in China will continue to be front-end loaded in the first half of 2017.

For the full year, we expect 4% growth in vehicle production in China and 2% growth in auto production globally. While this is assumption of 2% auto production growth globally is an increase from our prior year of 1%, this upside comes from the strength in the first half in China, with our outlook for the second half production being the same as our view of 90 days ago. For the full year, we expect to continue to outpace the growth of production due to the continued benefit of content growth as well as share gains.

Turning to Commercial Transportation, our team delivered another very strong quarter against still a tough backdrop. This was outperformance versus the market, with organic revenue up 16%, driven by a very strong heavy truck market in China, content growth due to adoption of new emission standards and regulations as well as share gains.

In our Sensors business, the acquisition last year over the UK drove 3% growth overall. The business declined slightly on an organic basis, with growth in Automotive applications and industrial applications being offset by softness in the North American heavy truck applications.

We are expecting organic growth for the year in Sensors, and continue to expect a further growth inflection as we go into 2018 as further auto applications ramp the volume. For this segment, adjusted operating margins of 22% were up 340 basis points year over year with a strong fall-through on the double-digit organic sales and increase of productivity improvements. When you think about the segment margin, our margin expectations remain the same for this segment and you should continue to think of steady-state Transportation operating margins as 20%, plus or minus, 1%.

Please turn to slide 6 slide, so I can discuss our Industrial Solutions segment, which performed in line on both the topline and on the margin side in quarter one. Industrial solutions sales grew 12% on a reported basis, driven by the Creganna and Intercontec acquisitions, and generated 30 basis points of adjusted operating margin expansion despite the 80 basis points of headwind from the declines in oil and gas. If we had owned Creganna and Intercontec in the year-ago period, our growth for these businesses would have been 16% year over year, demonstrating strong performance of these acquired businesses.

Industrial Equipment, we grew 1% organically, driven by strengthening margin and around the factory automation area as well as growth in Medical. Aerospace and Defense remained strong with 4% organic growth, driven by increased content on new airframe builds as well as momentum in Defense programs.

Oil and Gas declined 24%, as expected, due to the weak end market conditions. We feel that our Oil and Gas business has now bottomed and expect this business to remain stable at the current level as we benefit from new programs ramping later in the year.

Our energy business declined 3% organically, with growth in North America and Asia more than offset by softness in Europe. Adjusted operating margins were in line with expectations and expanded 30 basis points year over year to 11.3%, which includes the Oil and Gas impact I mentioned earlier.

Going forward, we do expect the Industrial segment operating margins to expand over prior year levels in the second quarter and then further in the second half throughout this segment. I'd also like to note that we're also including adjusted EBITDA margins on the chart to show margins and margin expansion excluding the impact from the acquisition-related amortization. And you can see in this segment that the year-over-year adjusted EBITDA margins expanded 120 basis points to 16.4 %.

So please turn to slide 7 so I can talk about Communications Solutions. Quarter one was a solid quarter for the Communications segment including our achievement of the key milestone in our Data and Devices business. D&D has returned to organic growth following three years of decline from product exits, as we refocused the portfolio within the business.

Organic growth is occurring six months sooner than we expected in the business. I'd also like to highlight that we also have a very strong quarter of growth in our Appliances business and we saw continued operational improvements throughout this segment that I will talk more about in a little bit.

Organically, sales were up 3%, with reported segment sales down 4% year over year, due primarily to the sale of the Circuit Protection business in March of last year. Our Appliance business has very strong quarter growth, with 14% organic growth year over year, driven by China market growth, share gains and strength in North America.

The growth in D&D is a result of new ramps at cloud customers and the completion of our multi-year journey to refocus the product portfolio in key growth applications. D&D grew 2% organically in the quarter and now we expect organic growth for the full fiscal year. In addition to the growth that we're excited about, Data and Devices also doubled its operating adjusted margin from a year ago and we expect this business to be an increasing contributor to the profitability of the Communications segment going forward.

On SubCom, the business declined slightly in the first quarter as a result of program timing. Our momentum continues through this growth cycle and we continue to expect SubCom to grow approximately 5% in FY17 based upon our very strong backlog.

For the Communications segment, adjusted operating margins were 13.2% for the quarter, down 70 basis points year over year. And if you remember, this time last year, we had a one-time benefit in our SubCom business related to an early program completion which raised our first-quarter 2016 margins in the segment by approximately 400 basis points.

If you normalize for this impact, Communications adjusted operating margins expanded significantly in the first quarter of 2017. And to really illustrate the progress that we've made in this segment over the past four quarters, adjusted operating margins have expanded from approximately 8% in the second quarter of last year to 13% in the quarter we just completed. And we are proud of that accomplishment.

So let me turn it over to Heath and he will cover the financials.

Thanks, Terrence. And good morning, everyone. Please turn to slide 8, where I will provide more details on Q1 earnings. Adjusted operating income was $536 million with an adjusted operating margin of 17.5%, driven by strong organic growth of 7%, productivity improvements, and favorable mix.

GAAP operating income was $486 million and included $47 million of restructuring charges and $3 million of acquisition-related charges. For the full year, we expect restructuring charges approximately $150 million, driven by footprint consolidations from recent acquisitions and structural improvements.

GAAP EPS was $1.13 for the quarter. Adjusted EPS was a new record for the first quarter at $1.15, which was up 37% year on year and significantly above our guidance range set 90 days ago. Additional demand from China and productivity improvements drove the performance above our guidance midpoint of $1.

The 37% growth above prior year is driven by all the levers we have in our business model. We benefited from volume fall-through on increase sales, acquisition support, share buybacks, and a lower adjusted effective tax rate of 19.2%. Versus our guidance view of Q1, the currency exchange headwind was greater than expectations at $45 million of revenue and $0.02 of EPS.

As a point of reference, our guidance is simply the dollar to euro conversion of $1.10, and the dollar strengthened significantly against the euro and against most major currencies in the quarter. For the full year, we are expecting currency exchange rates to unfavorably impact revenue and adjusted EPS by $300 million and $0.16, respectively versus prior guidance.

I continue to expect full-year adjusted effective tax rate of 20% for FY17 which is higher than the rate last year. While nothing has changed in our tax rate assumptions, I want to point out that year over year, we get an EPS benefit in the first half of FY17 and have an EPS headwind in the second half of FY17.

Remember that our third-quarter 2016, and fourth quarter 2016 tax rates were 17% and 13%, respectively. With our 20% tax rate assumption this year, we expect to see year-over-year EPS headwind in the second half of approximately $0.13 through the difference in our tax rates.

This is not a change versus our guidance from 90 days ago but I wanted to provide some color on the timing. Page 16 of our slide deck contains a bridge that provides the details from the first half and second half.

If you turn to slide 9, as Tom mentioned in his opening remarks, our solid results reflect the impact of our transition to a higher margin harsh environment portfolio, our focus on TEOA and our capital strategy. Our businesses are generating higher operating leverage as a result of this strategy and each dollar of sales generates 50% more adjusted EPS today than it did five years ago.

Adjusted gross margin in the quarter was 34.8%, a 140 basis point improvement from prior year, driven by volume fall-through on increased volumes, productivity improvements, favorable mix, and savings from portfolio actions with D&D. As noted earlier, adjusted operating margins were 17.5% in the quarter, up 180 basis points year over year.

In the past, we have discussed our business model outlined that TE can generate 50 basis points of adjusted operating margin expansion on organic growth of 5% to 7%. However, with the transformation of the portfolio, you can change successful execution of our TEOA initiatives.

We believe that we can generate 50 to 70 basis points of adjusted margin expansion in 2017 on 4% organic growth, which demonstrates our strong organic model. We will also increasingly discuss adjusted EBITDA at the segment level to help explain the cash earnings of our businesses as it excludes the impact of amortization and acquisitions.

For TE, adjusted EBITDA margins in Q1 were strong at 22.7% and up 190 basis points year on year. To show the progress we have made, adjusted EBITDA margins are up over 500 basis points from five years ago.

Cash from continuing operations was $404 million and free cash flow was $218 million in the quarter. We returned $234 million to shareholders through dividends and share repurchases in the quarter. Looking ahead we continue to expect free cash flow to approximate net income, capital expenditures be approximately 5% of sales.

We remain committed to our disciplined long-term capital strategy of a balanced return of free cash flow to shareholders while still having ample free cash flow for acquisitions. As a point of reference, we have increased the dividend per share by approximately 300% since becoming a public company.

Our balance sheet is strong with reasonable debt levels and the ability to continue to support the return of capital and acquisitions going forward. We have added a balance sheet and cash flow summary in the Appendix for additional details.

Now, with that, I will turn it back to Terrence.

Thanks, Heath. So now I will get into our guidance for the second quarter as well as for the full-year 2017 so if you could please turn to slide 10 and I will follow-up with a quarter two outlook.

We expect second quarter revenue of $3.025 billion to $3.125 billion, and adjusted earnings per share of $1.05 to $1.09, representing sales growth of 4% on both a reported and on an organic basis, and 19% EPS growth at the midpoint. This guidance does include the impact of a stronger dollar, which we expect to be a $60 million headwind to sales and a $0.03 headwind to EPS on a year-over-year basis. Following two consecutive quarters of record adjusted earnings per share and strong orders in the first quarter, we expect our second quarter adjusted EPS to also be a quarterly record and our guidance represents a strong first half of FY17.

By segment, we expect Transportation Solutions to grow mid-single-digits organically and low single digits on a reported basis, due to the impact of the dollar. This is above expected auto production, growth levels of 2% in the second quarter, which that growth will be driven by Asia and in Europe.

Personal transportation growth is expected to be driven by China. Industrial Solutions is expected to grow mid-teens overall due to the Creganna Intercontec acquisitions and will be up low-single digits organically. And in Communications, we expect mid-single-digit organic growth, with growth in all three of our businesses.

Now you can turn to slide 11, and let me cover full-year guidance. Relative to our prior view 90 days ago, we are raising our organic growth expectations for 2017 by 100 basis points and raising the midpoint of our adjusted EPS guidance with better operational performance more than offsetting the headwinds from the strengthening dollar that Heath highlighted.

While we are raising our guidance for the full year, we are maintaining our previous view of second half by keeping our second half organic growth expectations consistent with our view 90 days ago. I believe this is prudent given the uncertainty in the macro environment and when you look at the implied transfer from first half to second half, please keep in mind the impact of the stronger dollar and the tax dynamics that Heath mentioned earlier. And we have some slide details in the back of slide material for your reference.

For the full year, we expect revenue in the range of $12.2 billion to $12.6 billion and adjusted EPS of $4.30 a share to $4.50 a share. This represents 3% reported growth, 4% organic growth on the topline and 11% adjusted EPS growth at the midpoint versus 52 weeks of FY16.

Relative to our prior view of revenue guidance, reported revenue growth is down 200 basis points due to the $300 million impact from the currency exchange rates. Our organic growth is up 100 basis points, reflecting improvement in the Transportation and Communication segments.

We are raising the midpoint of adjusted EPS from $4.34 to $4.40 which, in essence, includes a $0.22 increase due to operational improvements and better performance from our acquisitions and this is offset by $0.16 of headwind from the stronger dollar, so really highlighting the strong business model Heath and Tom talked talk about.

I do feel very good about our ability to drive 4% organic growth, expand the operating margins by 50 to 70 basis points, and generate double-digit adjusted EPS growth in this uncertain macro environment. This is an improvement and demonstrates that the portfolio is delivering while we continue to benefit from the secular trend of content growth across our businesses. While much of our operating margin expansion in the past few years have been driven by our Transportation segment, I'm pleased that in 2017, our operating margin expansion will be driven by all three segments with more contribution from Communications and Industrial.

So for the full year guidance, and thinking through the segments, we expect Transportation solutions to be up mid-single digits organically on 2% auto production growth, reflecting content growth trends and share gains. We also expect Commercial and Transportation to have performance [end-market] again this year, benefiting from content expansion in the heavy truck market. And we expect Sensors to grow mid-single digits in total year over year.

Industrial Solutions organic growth guidance is not changing from 90 days ago and we continue to expect growth to be up low single digits organically with continued gains in Commercial Aerospace and Defense as well as Medical. Communications is expected to be up mid-single digits organically, an increase versus our prior year view due to the strength in Appliances and Data and Devices.

And as I mentioned earlier, we hit milestones of improved performance for our D&D business as progress and growth and profitability is ahead of our prior expectations. We now expect organic growth for D&D in FY17 in the low single digits and momentum in SubCom remains strong. We continue to expect growth in the mid-single digits for the year in SubCom.

Before I turn it back to Tom for closing comments, I do want to highlight that this is Tom's last earnings call as our CEO after doing about 40 of these earning calls with you all. And I do want to say on behalf of the leadership team, as well as our 70,000 employees, I want to publicly thank Tom for his leadership over the past 10 years.

So with that, Tom, I will turn it back over to you for closing comments.

Thanks, Terrence. I appreciate that.

Well, to sum things up, this was a great quarter and positions TE for another very good year of performance. Our portfolio is focused on the right markets and we are the leader in the vast majority of these markets. We are consistently improving our customer satisfaction, growing margins and earnings per share and returning capital to shareholders.

Most importantly though, we have a strong, passionate organization across the globe that really is dedicated to providing our customers with an extraordinary experience. It is making a difference -- our customers are giving us the feedback. They are giving us more opportunity and it's definitely shoring up in the financials.

This will be, as Terrence mentioned, my last earnings call. Hard to believe. Where did the time go? I also want to take a moment to thank all of our investors and the analysts who have covered us. I really have enjoyed our relationship over the past 10-plus years. It has been very rich.

And most importantly, I want to thank the entire TE team for the greatest experience of my career. It's hard to imagine you could be this fortunate to work with a team like this for this long.

In March, Terrence will succeed me as CEO in a very well-planned transition. Terrence is uniquely positioned to take TE to the next level of performance and I really -- I just couldn't feel any better about this succession. I'm really -- we've worked together for -- since the beginning. He's been a driving force in building this Company and he has a clear vision for it to take and a really strong team to work with to go there.

So I will miss it, for sure. But it is the right time to turn it over to this team. So with that, let's open it up for questions.

(Operator Instructions)

Wamsi Mohan, Bank of America.

Hey, Tom, good luck. It has been a pleasure and you're handing over the reins, you're on a high note with all-time margin highs. So for my question, you had really strong auto revenue performance relative to production growth in the quarter, reflecting some really strong content growth. I was wondering if you could share some color around this content growth? Where that was strongest regionally and some of the drivers that supported it? Any color around that?

And it looks like, when I look at your full-year guide for the auto segment revenues relative to production, it looks like the relative growth delta slows down through the course of year so is that just conservatism or what are the dynamics that you're seeing there? And I have a follow-up.

Wamsi, let me -- when you look at it, the first quarter was a very strong quarter and it was driven out of Asia. We saw, I think, continued trends around North America being flat but we also did have growth in Europe. When you think through the content, it is broad based. It is not one application and I think, really, what it comes to is both the content and the share gains and represents our strong global position that we have throughout automotive.

I think when you look at the year, like I said in the guidance, we did expect automotive in the second half of the year production to slow down versus the first half and we kept that the same. We still feel when you get to the second half, while production globally we assume to be relatively flat, we're going to still drive mid-single-digit organic growth which proves that organic content and growth story.

So it's just one of the elements of how production is with the strong Asia part in the first half. A lot of it is driven by China, but the content along all the trends we have, whether it is the electronification of the car, how the car gets more connected, or around the green side of car as emissions and electronics get put on. So it isn't one specific area. It's really a culmination of all the trends we talked to you about.

Okay, great, thanks. Thanks for that color, Terrence. As my follow-up, any early thoughts here on the potential impact from a border-adjusted tax? Or, more broadly, maybe you can just talk about your manufacturing footprint today and how that might possibly change under a different scenarios that might play out here with the new administration. Thanks.

Wamsi, it is Terrence again. As you know, we produce where our customers consume, so when you look at our footprint, and a lot of the work that we've done to get our capacity to the right part that Tom and Heath talked about in their prepared comments, we feel very good about where our footprint is aligned with where our customers are. So we are fairly balanced when it comes into that element.

How the border tax comes out, I think we all have to sit there and wait to see how that does. When we sit there today, we like where we are positioned manufacturing-wise and we will keep you all updated. Clearly on things and tax related to repatriation, being a Swiss company, that doesn't really impact us positively or negatively. So from that viewpoint, when we look at the guidance we gave you, it is pretty much a steady-state guidance as we think about it.

Okay, great. Thanks a lot, Terrence, and good luck, guys, Great results.

Thanks, Wamsi.

Craig Hettenbach, Morgan Stanley.

First question, I just wanted to touch on near-term environment. As you said, you're maybe taking a hopefully conservative approach to the back half of the year and not flowing this through, but just -- I feel like we've been here in the last few years a couple times where there's been some glimmers of expansion, and it fades. So anything different you're seeing from customers or any types of inflections, design-ins, things like that, that you'd compare and contrast where we are today versus the last few years?

What I would say, Craig, I think there's a couple of things. One thing that's -- if you looked at the quarter, it's very broad based across all our businesses and that is something you haven't seen in awhile. I would also say both through our direct customer relationships, I would also say our channel partners, you see some confidence in some of their activity.

The other thing that I would say is it is across -- see all our orders grew in all three regions so there is, to your view, some glimmer of I think it trumps the background around our markets but I would also say there is still uncertainty in the macro, when you deal with things like the currency rates that why we have kept our back half the way it is from where we guided.

So when we sit there, I do think you're going to continue to see improvement. Clearly, you're going to see improvement in our Industrial and Communications segment as we go through the year. I think the order trends and some of the comments we made show very strong trends that we are excited about. And then also the element around D&D growth. That's not a headwind after we did a lot of pruning to get that business focused on applications where we thought we could get paid for the great engineering and serve our customers for that we do.

I do think there are some positive glimmers and momentum, not only in the business, but in the markets we serve. So I do think it feels a little different from a backdrop than it was a year ago or even during certain times last year.

Got it. Thanks for the color there. And then just as a follow-up, I know the Company has highlighted from an integrated product perspective, the opportunity in transmission applications. Just wanted to get an update where you are there. And then really even beyond that, are there other types of applications within autos where you see the potential for some integrated products?

Absolutely. Certainly, when you think about integrated products and where we bring -- giving much more than just an Intercontec product but other technologies like sensors, and sometimes even some of our cable technologies and material size. It does go broader than transmission. I know we used the transmission example as one to bring it to life, but it is in brake applications, it is in e-track applications, it is throughout the auto is where we get those. So it is much broader than that and probably what should do is bring some of those others to life as we talk to investors. I know we've been talking a lot about the transmission example.

But, Craig, I think the important point is when you see the content growth that we're driving above production, like we did in the first quarter and what we've guided for the year in auto, it's those integrated solutions that help drive that content up. That's why we have confidence that, over time, what we do around $60 today, over the next five years we can take up to that $80 range, not only from the trends that we benefit from but also bringing those integrated solutions to our customers. And we become more important to them and serve them anywhere they are in the world.

Okay, thanks.

Thanks, Craig.

Amit Daryanani, RBC Capital Markets.

I have two as well but first, I'll -- congratulations and best of luck, Tom, on your next chapter. I used to stop at -- on the Transportation side, Terrence, could you just quantify -- did you say 20% of margins plus or minus 100 or 22% for the rest of year? And within that, what's that headwind do you think you have in Transportation right now from sensor segment margins being below the Transportation averages and if you could quantify that part for us?

Sure, my comment was 20%, Amit, plus or minus (technical difficulty) percent so I appreciate you being aggressive. (Laughter). And on the sensors, sensors actually -- we all know that, that's running single digit as we continue to invest ahead of the ramps we have ahead of us, so we will begin in 2018. So we do think that, that will be a lever over time as those programs ramp but we still have significant investment in those programs so as we've talked to you, we do think the (inaudible) will get up to mid-teen EBITDA over time but we are going to make investments when to ramp those programs. And we are from a margin perspective, investing ahead so I do think that is something that will have a little bit more of a tailwind but it will help the Transportation margins over time.

Got it. Eventually, it will be 22%, plus or minus 100, just not right now. (Laughter). Maybe a follow-up, if I look at your full-year guide, right, either on the op margin expansion that you guys are talking about, really, the EPS growth, it all seems very first half heavy to me. The back-half margin, I think, implied flat; EPS is probably down, I think in the back half, and again, the tax-rate adjustment is a big factor there.

I guess just talking about given the strength you see in demand, your auto book is really good, your book to bill is really strong, it doesn't seem like you are extending this positivity into the back half of the year. What holds you back and what refrains you from doing that right now?

Amit, this is Heath. I think we're taking a prudent view of the back half of the year, just with the -- certainly, we're benefiting in the first half from some very strong Asia auto but the broadening strength across the portfolio is encouraging, and we will continue to update you as we move along throughout the year. I would say we're just wanting to make sure that people well understand the second half impact of the higher (inaudible) tax rate relative to some lower tax rates we had in prior year, in the second half.

Then the FX -- the anticipated FX headwind is more significant in the back half, so from a -- those will impact how we think about it year over year, second half EPS. From a margin perspective, we -- admittedly, the 17.5% is everything, pointing in the right direction, from mix, everything else in the quarter. And we are taking a prudent view as we look through the back half of the year but there's nothing that I say artificially inflates that 17.5% and nor do we expect something that comes in that is significantly unfavorable other than just the operating activities in the back half of the year.

Perfect. Thanks a lot. Congratulations on a nice win, guys.

Jim Suva, Citi.

Thank you very much. Many of the questions and comments before this were focused on the auto sector and Transportation, which is rightfully so, so I think my follow-up questions I will ask on the other segments and that is two questions and I will ask them at the same time. First on Industrial, we do note that oil prices are up year over year, so one would hope that maybe that would help out with, say, the Industrial segment some. Is that starting to kick in? Or maybe I'm off on what the key performance-leading indicators are that you're looking at or how should we think about that? Especially with the new presidential Trump administration signing in things like Keystone product, EPA changes and things like that, how should we think about it?

Then my follow-up question is on the SubCom business. You mentioned last year you got a benefit, of course, but your guidance on SubCom looks a bit different than, say, some of the other customers and competitors who are seeing extremely strong SubCom pipelines and just curious about what you are seeing on the SubCom side? Thank you.

Sure, Jim, let me take both of those. Let's start with Oil and Gas. Number one is, when you look at our Oil and Gas business, we basically are seeing stabilization and that stabilization we are happy to see, circling we hope upside comes as oil moves but right now, I would say as we see it from the program we are exposed to is much more around stabilization than I would say any ramp up.

The other element that I would say when you think about our oil and gas business, it is very much around oceanic oil. So pipelines, land base, we are not as strong in that. So on that, it is important to understand ours is really around offshore oil and gas, and the indicators around that are really offshore rigs. So where we see things right now is it's still stable and our guidance assumes stable, and hopefully, we get some benefit from some of the things that President Trump is talking about, that those kick it and help them back to give us a little more upside in Industrial but that's not assumed right now.

On SubCom, we feel very good about where we are at. Similar, really, not much has changed since last quarter. Our guidance for the year is to be up 5%, that will put us well over $900 million in revenue. Our backlog, we are booked for the year so really, when we look at the programs that we win throughout this year, it's really around 2018. So 2017 is very locked and loaded.

Our team is working very hard to execute to the backlog which is where we are from an execution perspective and really, program -- there's a pipeline of programs that we are quoting, and trying to win and staying very active. So we still think we are in a growth phase but I would just say, right now, the 5% that we talked about last quarter being up year over year, even though we were down a little bit due to timing in the first quarter, we feel, right in front of us, it's really around execution for us this year.

So clearly, benefits from cloud applications, not only in SubCom, you heard it in D&D, where we also had that benefit. The hyperscale customers and we're getting benefits from both the segments from them.

Okay, thank you for the details. Much appreciated.

Thank you, Jim.

Shawn Harrison, Longbow Research.

Wanted to just get the earlier recovery within Data and Devices and maybe just what brought about the earlier recovery. Did the wins ramp fast or maybe just what could be the growth rate within that business going forward since we really don't have a comp for the past couple years given that the pruning and the business sales and everything else?

Sure, Shawn. If you look at it, it really comes down to penetration on high-speed applications and with the growth on how they are ramping some of our -- the cloud infrastructure providers and hyperscale customers. So really, when you look at it, those customers are probably about 20% of our Data and Device businesses today. We've been focused on it and the adoption that we're seeing, and the ramps that they have done, have been a little bit quicker than we expected.

So I think the momentum that you've been waiting for and we've been waiting for and we are very pleased it's six months ahead and it actually shows the design wins and the execution momentum we're getting in the business again to drive growth. 90 days ago, we told you we were probably going to be flat in data and devices for the year organically and with growth in the second half.

We posted 200 basis points here. We do think it will be in the low-single digit for the year but I think you're going to get growth throughout the year and I think the real thing that you should assume right now is that we believe this business can be a low-single digit organic grower right now and it is really going to be as we continue to build our product focus there, how much higher can we take it.

And I would still say, what's great is we are at that inflection point that we've been waiting for and it is a real testament to the team getting that momentum sooner, and it's certainly been focused on the customer base. So really pleased with where we are with it because it is also focused on the right customers and getting wins with the right customers everywhere in the world.

That's helpful, Terrence. Then a follow-up for Heath, if I may. I think the restructuring charge for the year may have went up a bit but maybe I'm wrong, but I was hoping you could actually speak now that you've been there for more than a few -- a month or so, I think with the last call. Just to maybe some opportunities in terms of just maybe leaning out the organization and how you're going to approach M&A going forward. Maybe some -- are there opportunities like Intercontec that are out there in the TE funnel that we could see close during the year? So if you could just touch on those topics, that would be great.

Sure. Well, a couple different angles there. We did in-shelf the restructuring comments from 90 days ago. And largely, that's -- there's not one item on there that drives it, there's a list of several things, particularly around support for reconsolidation, that continues to go on for deals, for acquisitions that have been completed over the last few years and marginally that's facility consolidation.

Then there are some structural things that we look at and will continue to be ongoing, I'd say for this year and probably into the early part of next year, just in terms of how we're organized and the layers within the Company. So more to come on that, but I think we are sharpening our pencils certainly. Not all $150 million of that restructuring will be cash charges. There are some things in there that are not cash that we will talk about later in the year, so more to come on that.

But on the M&A side, certainly we are active. Intercontec has been a great performance out of the gate. We're also very pleased with the performance on the medical segment, Creganna, is -- they're -- both of those are well ahead of the deal model expectations and are executed very well. And Creganna, we will anniversary here a little bit later this quarter in terms of the first full year in our portfolio, the medical space continues to have legs to it.

And so looking at things along that, maybe not the same size necessarily of a Creganna-type transaction, but things that are a little bit closer to Intercontec size or something, plus or minus, in that range, that have good margins and where we can get to a return on invested capital, maybe a little larger than historically we have. So there's lots of opportunity out there but we will be choosy and spend the shareholders' dollars wisely.

All right. That's helpful. Congrats on the quarter and, Tom, thanks for all the help over the years. I appreciate it.

You are very welcome.

William Stein, SunTrust.

Congrats everyone on the new roles, especially, Tom, you've really transformed this thing from the old Tyco. But I did have a question on the sensor demand. It sounds like you're lowering that outlook modestly. We have thought that this would be an accelerating market for content share and integration. Can you offer us a little bit more detail on how the market is progressing for you and how you expect it to perform over the next several quarters?

A couple things, well, to answer the question. Our expectation around Sensors has not changed for this year. Overall, we expect growth to be mid-single digits. The only change it would have would be due to FX. So our expectation has not changed versus where we were. I think when you look at it, certainly we did get impacted in our Sensor business by the same thing that impacted our Industrial business since we lost Measurement. And Measurement was very much focused on Industrial applications.

So as there was the industrial recession going on that impacted our Industrial segment, it did also impact the Measurement asset that the growth was a little bit slower. What we really get excited about was when we bought Measurement, we basically signed up to scale then and use our go-to-market to take that great Measurement technology into different markets like automotive, into places like Industrial Transportation. And really those program wins and that momentum there is very strong, that program pipeline is strong.

But as you know, those programs don't -- you don't win them today and ship them in three months, they're programs that we've been building the last couple of years, really you're going to see the growth of that, really, in 2018 is when we are going to start having some of our launches. It's why we are investing ahead in Sensors, in front of those programs. And in some cases, they are integrated products. They are not just a sensor element, they are things that also have additional things on them. So we feel very good that we are leveraging our go-to-market to get those wins. Certainly you're not seeing it in the numbers yet. And 2018 is when you're going to start to see those come through in revenue and we're going to be excited to show it to you in 2018. So you're not going to see it in the 2017, it's just where the program ramps are.

That's actually really good color and my follow-up is related to that. It is pretty brief. Those gains that you are ramping now in terms of the design wins where we will see revenue in 2018, would you expect those to wind up coming at the expense of another company already in that space or are these brand-new applications, and I assume it is mostly in automotive?

Yes, they are a big chunk of our automotive and they are among many technologies, so their humidity, their temperature, their pressure, they are among many different technologies and in the Sensor space, the fragmentation around the Sensor space really makes it that you compete against different people, not one competitor. So what's really great about the programs we've won is they are among varying technologies.

They are in different regions of the world which really shows the strength of our go-to-market, and it also proves out some of the business case that when we bought Measurement to get these technologies, how do we leverage our go-to-market in places where we have very exceptional leadership positions, like our Transportation segment we are leveraging. So we will continue to share those as they ramp, but 2018 will be the year where you start seeing it in the numbers versus just from our words.

Thanks and congrats again on the great print.

Mark Delaney, Goldman Sachs.

Thanks very much for taking the questions. Congratulations on the good results and, Tom, let me add my best wishes for you going forward.

Thanks, Mark.

First question is just specifically on Asian auto, there's talk about some potential slowdown there on the call. If we strip out the FX impacts, your $4.40 becomes $4.56 for full-year guide, and you guys are on a $4.60 run rate, so it seems even actually in FX, there is some slowdown baked into the business as we go through the year.

Is there anything you are actually seeing in the Asian automotive business that started to slow down, either in terms of orders or customer conversations, or is that just you're doing your best to forecast the potential change there for the back half?

When you look at it, Mark, similar to last quarter, we knew there's this China incentive that was ending at the end of the first quarter and we expected a spike in China demand, that the incentive is sort of being phased out throughout the year, we do expect production to still stay strong into the second quarter but there still is an element of because you have incentives, there is a pull-forward on demand.

And so when we look at it and talking to our customers, they have told us they expect production to moderate in the second half versus the pretty strong level we are going to have in the first quarter and continue a little bit in a second quarter. So it is not really different than what we saw before, it's just we're getting a little bit of increased production due to the incentive being phased out.

So when we look at the second half, the second half is identical to where we were 90 days ago and if there's more incentives, around China, I would expect we would benefit from it but they are not there yet and we're really aligned with our customers. So like we said, we expect auto production in our third and fourth quarter to be relatively flat globally but we expect organic growth in our automotive business even in the flat margin due to our content and share gains so when you look at that year on year, we do expect growth in Transportation in a flat backdrop production model right now.

That's helpful. My follow-up question is on margin. The gross margins, in particular, came in very nicely, 34.8%, I think is at an all-time high, certainly more than I was looking for. I think there was comments there was nothing unusual in there but there's guidance assumes margins moderate as we go through the year. Can you just help us specifically, how should we think about the gross margin line and what sort of factors help you to get to that 34.8%? And why should we expect it to come down as we move through the year on the margin level?

Well, I think it's similar to the same answer that I provided earlier on the overall operating margin. I think in the quarter, certainly, we benefited from the volume being higher than maybe what we certainly guided earlier. And then, we also got some favorable mix in the quarter in terms of just geographically where things were delivered. So I don't think we're looking at a significant drop in gross margins but you can be within a point or so.

That's helpful. Thank you very much.

Thank you, Mark.

Steve Fox, Cross Research.

First of all, Tom, not to beat myself too much but as I think back to what you were handed when you took the job, I never would have thought you would have been this successful with the business, but congratulations with everything you did.

Thank you very much.

Truly one of the better managing jobs I've ever seen. So in terms of just big-picture question, if I could. One of the things I noticed at the last CES I attended in January was that a lot of the tier 1 OEMs are moving further up the stack and I'm thinking the guys that also make sensors and connectors. And as they do that, it seems like they are looking to put more turnkey solutions out there, integrating some of the products that you're focused on. And I was curious if you think that, that is either a competitive threat, maybe pressure to margins, or how you would deal with that in your own roadmap going forward? And I know that's a longer-term question but I was just curious what you thought. Thanks.

Tom, you want to start with that and I will jump in then?

No, I think you should take this on, so go ahead.

When you look at it, clearly, we view that as an opportunity. When you get into any integration, one of the things that's great about the business that we've always had is we benefit from electronics trends, but we also get integrated out due to electronic trends. Connectors can be integrated out by semiconductors and so forth but because there are more electronics happening, it also creates a net content opportunity.

I think when we look at it, Steve, it's really around -- it creates more opportunity because of the abilities we have and the value we provide to our customers. So as we sit there, it's why we get excited about our content in auto being able to grow from the 60 to the 80 that we talk about because what sensors bring to it, how we integrate these things in, we probably aren't to a turnkey level like you described or how I think about them. But that integration we provide to allow somebody to get to a turnkey level is very important and that drives the content-growth opportunity and the stickiness we have with our customers and via our engineers basically creates so much more opportunities.

So we view it as a net-net opportunity. We don't view it as displacement because we are very close to the architecture of the vehicle of what we do. And that is a very important factor as people continue to [involve] the architecture with the role that we play partnering with BOEs and the tier 1s, both of them are our customers. It's really what we get excited about and why we're so buoyant on the content opportunity. So it is all a plus.

That's helpful, Terrence. And then just a quick follow-up to that. I guess as it applies to acquisitions, would you envision acquisitions still being focused on discrete sensor and connector technologies or are there other materials and integration skills that you may add to deals?

I think when you look at it, I think you can always think that we will always have priority toward the components side but even when do -- take Creganna. That is doing more than just a component so I think you will see things over time that can add integration-type skills, but I think it will be a balance of both and it will be how does it tie into our strategies in the different markets.

I think you've seen us move it out with Creganna but we had more of the components. They had much more of a fuller assembly and integration capability than we had. And that's one of the things we get excited about because our customers in Medical wanted that. And we could bring it organically alone so I think you will see a little bit of a different answer at different markets but I think you can expect a little bit of both from us.

Great, thank you very much.

Matthew Sheerin, Stifel.

Hi, this is Alvin Park speaking on behalf of Matt Sheerin. First of all, Tom, congratulations and I wish you the best of luck.

Thanks very much.

Just in terms of commodity pricing, prices have been increasing particularly for copper, so could you give us some insight into how that might affect gross margins going forward for the rest of the year? And if you will be able to pass those costs along with -- to the customers?

In -- as we think about FY17, we do not anticipate a material impact from that, but that's largely because of our hedging programs that we have in place that protect us in the near term. We will obviously monitor that as we go forward, more thinking about the impact of 2018 and how we want to handle that from both a hedging as well as how we incorporate that into our cost-pricing structure. But for 2017, at this point, there's enough balance of back and forth in terms of where we are seeing the different commodities move as well as where we have our programs in place that we don't anticipate that being an impact.

I see. Another quick follow-up. On D&D, you talked about cloud infrastructure and I think in a previous question, you mentioned the cloud infrastructure opportunity represents roughly 20% of D&D. I think you mentioned hyper-convergence (inaudible). Could you give us some more color and details in terms of what penetration -- what areas of penetration and what opportunities you look to see going forward?

When we look at it, we very much have focused the portfolio around high-speed applications. So if you went back five years ago, we would have talked to you about consumer electronics, [the places], and it is very much as we've gone through our journey there to reposition it and it's very much around high-speed applications and the great product for us we have around that, which also includes miniaturization with high-speed being coupled together.

So when we sit there, it is really around the hyperscale providers, certainly the big four and the people that also help them build out the cloud. So that's the one that we've been penetrating very well. We are very pleased that they're 20% of our D&D business today and that's going to be the area we continue to invest in on the high-speed side.

Thank you very much.

Sherri Scribner, Deutsche Bank.

I just want to ask a question at a high level. If you think about the update that you are giving us versus 90 days ago, it sounds like there's a bigger FX headwind than originally thought due to the stronger dollar, but your organic outlook for Transportation and Industrial is really unchanged, maybe a bit more front end loaded. But on the Communications side, it sounds like you have a bit more of a positive outlook for the full year. Is that driven by a re-acceleration in SubCom through the year or is that driven by the better outlook in Data and Devices? So I guess, one, is that the right way to think about it? And, two, what's driving that better outlook in Communications?

I think your -- the first part of your assumption is accurate. Obviously, the strengthening dollar in the quarter versus our prior guidance has added some headwind to the year. We quantify that at roughly at the current rates about $300 million which is our prior guidance on revenues. In terms of our outlook by segments, your comment -- we are still projecting Transportation to be mid-single digits but on the higher side of mid-single digits than what we had thought 90 days ago.

Industrial, right on track in terms of what our prior guidance is, and you are correct on Communication. We have moved that from low-single digits up to mid-single digits in terms of organic growth, growth to Communications segment. That's largely -- that increase is largely driven by Appliances and D&D though. SubCom is unchanged since our last projection. We feel good about the SubCom number, it's all down to execution because that's fully booked up, but the change there with the bias towards the upside is coming from the better projections out of D&D and Appliance.

Okay, great. And then, can you just give us some high-level thoughts on what you're seeing geographically in the Industrial business? Thanks.

Sure, Sherri. One of the things I mentioned was I'm very pleased globally geographically that across (inaudible), we had growth in all regions. When you look at the Industrial segment we talked a lot about Asia with Communications and Transportation during our comments. We also had nice growth in Industrial in Asia for about 6% organically in Asia in the quarter and orders were up about 18% in Asia as well. So on an organic basis, so we saw it there.

We continued to see Europe in a nice position organically, low-single digits. And, lastly, on an order side, in North America still is relatively flattish in the Industrial space for us organically and we do expect that through the year, in some of the Comair programs and Medical, that, that will pick up but really, we see -- we saw a lot of strength in Asia.

Thank you.

Thank you, Sherri.

Do you have further questions? Please contact Investor Relations at TE. Thank you for joining us this morning, and have a nice day.

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