泰科電子 (TEL) 2017 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the TE Connectivity Fourth Quarter 2017 Earnings Call. (Operator Instructions) And as a reminder, today's conference call is being recorded.

I would now like to turn the conference over to Vice President of Investor Relations, Sujal Shah. Please go ahead.

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

During the course of this call, we will be providing certain forward-looking information. We ask you to review the forward-looking cautionary statements included in today's press release. In addition, we will use certain non-GAAP measures in our discussion this morning. We ask you to review the sections of our press release and 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.

I'd like to note that all year-over-year comparisons mentioned in today's call are on a comparable 13-week basis and do not include the extra week in fiscal 2016. I would also like to remind investors and analysts that we'll be hosting an Analyst Day event in New York City on December 13. The reception with management planned on the evening of December 12. You can now register on our website.

Finally for participants on the Q&A portion of today's call, I remind everyone to limit themselves to 1 follow-up question just to make sure we're able to cover all the questions during the allotted time.

Now let me turn the call over to Terrence for opening comments.

Thanks, Sujal, and thank you, everyone, for joining us today. Now I'm very pleased to share our strong results for the fourth quarter, which capped off an exceptional year for TE across all the value drivers of our business model, including sales growth, earnings growth as well as capital generation and deployment.

Before I get into the slides, I want to spend a few minutes highlighting the progress we've made demonstrating in the successful execution of our strategy to create a safer, stable, productive and connected future. We're focused on attractive markets fueled by content growth and our sales growth this year is evidence of this. Our portfolio is solid, with clear competitive advantages that have the ability to consistently deliver above market growth. Also, our customers value our ability to provide highly engineered solutions into applications where failure is not an option.

To put this into context, to value created for our owners in 2017, we delivered 9% reported revenue growth and 8% organic growth, which we believe is best-in-class performance versus our industrial technology peers.

Adjusted operating margins expanded by 110 basis points to 16.8% with expansion in all 3 of our segments. And both the sales and the operating margin expansion resulted in adjusted earnings per share growth of 22%, which demonstrates the strength of our business model and resulted in performance above our guidance. For the full year, we delivered record free cash flow, $1.7 billion, which represents 100% free cash flow conversion to net income. We also returned $1.2 billion to shareholders and added 2 acquisitions that bolt on nicely to existing platforms in our portfolio, reflecting our balanced capital deployment strategy. We're also pleased that our return on invested capital expanded by over 100 basis points during the year to nearly 15%.

As we look foward into fiscal '18, we are expecting another year of strong performance above the markets we serve with 6% revenue growth, 4% on an organic basis and double-digit growth and adjusted earnings per share after netting out the impacts of tax and currency. Heath and I'll get into more detail of guidance later in the call. So let's get into the slides and I'd ask you to turn to Slide 3 and let me cover some additional highlights for the fourth quarter.

We delivered record performance above our guidance for the fourth quarter with double-digit revenue and earnings per share growth. Sales were $3.5 billion, representing 12% reported growth and 9% organic growth year-over-year. Also, organic orders were up 11% in total, reflecting 16% growth in Asia and 9% growth both in the Americas and in Europe.

Our sales were approximately $200 million above the midpoint of our guidance, driven by upside across all 3 of our segments. This strong revenue growth and related margin conversion resulted in adjusted earnings per share of $1.25 in the quarter, $0.10 above the midpoint of our guidance. From an organic growth perspective by segment, transportation grew 13%, industrial grew 6%, and our communications segment grew 4%. With the [backdraft] of this strong growth, we demonstrated strong execution with adjusted operating margins expanding 70 basis points to 16.7%.

If you could please turn to Slide 4, let me cover some more highlights related to the full fiscal year '17. We delivered sales of $13.1 billion and this was up 9% on a reported and 8% on an organic basis.

From an organic growth perspective, we grew our sales by $1 billion in 2017, with all of our segments contributing. Transportation grew 11% versus global oil production growth of 3%, demonstrating consistent outperformance versus the market due to content growth trends as well as our strong global position.

Industrial Solutions grew 4%, driven by continued momentum in both factory automation as well as medical applications. And our Communications segment grew 7% with growth across all 3 of our businesses. For the year, adjusted operating margins were 16.8%, with expansion in all 3 of our segments, demonstrating our strong operational execution in 2017 and this resulted in us delivering adjusted earnings per share of $4.83, which was up 22% over the prior year.

Now let me get into order trends, so if you can please move to Slide 5. We continue to see broad-based strength in our orders across our segments, which reinforces our growth outlook for the first quarter. Total orders, excluding SubCom were similar to our third quarter at $3.3 billion. Our orders were up 12% year-over-year on a reported basis and up 10% organically. Organically, excluding SubCom, our orders grew evenly at approximately 10% across all 3 regions, continuing the balanced demand trends we have been seeing over the past few quarters.

By segment: in transportation, our orders increased 11% organically, with growth in all regions; our industrial orders grew 8% organically, with growth in all regions and particular strength in Asia, which showed double-digit growth; in communications, excluding SubCom, we saw year-over-year organic order growth of 6%, with strength driven out of Asia in both Appliances as well as Data and Devices. Let me now talk about our performance by segment and if you could please turn to Slide 6, I'll start with transportation.

Transportation sales grew 13% organically year-over-year and operating margins were in line with our expectations and impacted by supply chain issues we discussed last quarter. Segment sales exceeded expectations due to strong auto demand in both Europe as well as in China, our leading position in the heavy truck market and strong growth in Sensors. Our auto sales were up 10% organically with mid-single-digit growth in the Americas, mid-teen growth in Europe, and high single-digit growth in Asia against a global auto production growth of only 1%. We are consistently demonstrating the ability to outperform the market due to content growth, and we expect this trend to continue. We also expect the benefit from new program ramps as we move forward, which will also contribute to our outperformance versus vehicle production levels.

In Commercial Transportation, we continue to outperform the market with organic revenue growth of 37% year-over-year and particular strength in Asia. This significant outperformance is driven by a combination of the increased content of regulations in China as well as share gains from our leading global position. We saw double-digit growth in each region with continued momentum in heavy trucks as well as growth in the agriculture, mining and construction markets. While we do expect the China heavy truck market to moderate as we move through '18, we expect to continue to see revenue growth ahead of the market growth rates.

In Sensors, our business grew 9% organically year-over-year with growth in auto, Commercial Transportation and the Industrial markets. We continue to generate strong design win momentum, particularly in auto application, we're winning across a broad range of sensing products as well as technologies. Adjusted operating margins for this segment were in the range of our expectations and were impacted by approximately 150 basis points from the near-term supply chain [efficiencies] we highlighted last quarter.

We expect this issue to be largely behind us by the end of this quarter with December quarter margins returning to above 19%, which is in line with our target (inaudible).

If you could please turn to Page 7, and let me move over to the Industrial Solutions segment. The growth momentum we started to see in the second quarter of our fiscal 2017 continues with 6% organic growth year-over-year in the fourth quarter. This organic growth was driven by 13% growth in Industrial Equipment, which was with particular strength in both factory automation as well as medical applications. Our positions in each markets, coupled with the acquisitions completed last year driving strong growth ahead of the market both on a reported and on an organic basis. Both the Intercontec and Creganna acquisitions continue to perform exceptionally well and ahead of our expectations.

In our Aerospace and Defense and Marine business, we saw 1% organic growth, driven by the defense market, partially offset by program timing in commercial Aerospace, which continues to be sluggish. Our energy business declined 2% organically due to weakness in Europe.

Adjusted operating margins for the segment expanded 80 basis points year-over-year, in line with our expectations. Our adjusted EBITDA margins expanded by 150 basis points year-over-year, demonstrating the performance of the business excluding the impact from acquisition-related amortization.

Please turn to Page 8 and let me get into the Communications Solutions.

Communications solutions delivered its 4th consecutive quarter of growth with 4% organic growth and 430 basis points of adjusted operating margin expansion, up to 16.4%, and this is through both combination of the growth we're experiencing and the operational improvements we made in the segment.

Data and Devices delivered 6% organic growth as we continue to benefit from growth of high-speed solutions. And because of our multiyear transformation, our D&D business doubled its adjusted operating margin from a year ago, driving significant improvement at the segment level as the actions we took to focus the portfolio and optimize the operations were really taking hold.

Appliances had another strong quarter with 10% organic growth as demand remains strong, particularly in Asia. Our performance this year is a result of share gains and the benefits of a strong China air conditioning cycle. We do expect this cycle to moderate in China as we move through 2018 and we continue to expect our client business to grow globally above market rates in fiscal 2018.

In SubCom, our business declined slightly as a result of program timing but we continue to have a solid pipeline of new opportunities. Hopefully you saw that this week, we announced a new transpacific program that connects Asia to the United States with a consortium solution of parties including cloud customers. With this win we announced, our backlog now stands at approximately $1 billion.

Please turn to Slide 9 and let me cover the segment highlights for the full year. Yes, I really like how this slide shows the progress we've made across all segments. And when you sit here, overall for the full year, we had exceptional performance in the transportation segment with 11% organic growth and 40 basis points of adjusted operating margin to 19.4%. We do expect another year of above-market growth in fiscal 2018 and operating margins to be in our normalized range of 20% plus or minus 1 point for the full year.

Our Industrial Solutions segment delivered 11% reported growth at 4% organic growth for the full year, with contribution from all the businesses. Adjusted operating margins expanded 50 basis points to 12.7%, driven by both growth and the operational improvements we're making in the segment. And we expect another year of mid-single-digit organic growth and margin expansion in 2018 for this segment.

In Communications, it clearly had a phenomenal year in 2017 and contributed to both TE's top line performance as well as margin expansion. This was driven by the segment's 7% organic growth and almost 400 basis points of adjusted margin expansion. Clearly, we've been hard at work in the segment, especially around our data devices business and, clearly, this performance of the segment level shows the successful transformation as well as the growth that we're getting from high-speed solutions for the data center. Also, our client business grew 13% organically, reflecting our industry-leading position; and our SubCom business saw a strong growth of 6%. Yes, so I'm very proud to say, all segments contributed to our growth and margin expansion in 2017 and you'll also see that again in 2018.

So with that, I'll turn it back over to Heath to cover the financials.

Thank you, Terrence, and good morning, everyone. Can we please turn to Slide 10 where I will provide more details on the Q4 financials. Adjusted operating income was $576 million with an adjusted operating margin rate of 16.7%, which leveraged the strong organic growth of 9%. GAAP operating income was $552 million and included $23 million of restructuring charges and $1 million of acquisition charges. Adjusted EPS was $1.25, up 10% year-over-year, driven by sales growth, operating margin improvement and the contribution from acquisitions.

Excluding an $0.08 negative year-over-year impact from tax, adjusted EPS was up a strong 17%. For the quarter, our EPS performance was above our prior range and $0.10 above prior midpoint due to the strong revenue performance. GAAP EPS was $1.21 for the quarter and included restructuring charges of $0.04.

For the full year 2017, restructuring charges were approximately $150 million and I expect similar levels for 2018, driven primarily by activity in our Industrial Solutions segment as we optimize the footprint as well as make structural improvements across TE's cost structure.

Turning to Slide 11. Our strong Q4 results demonstrate that we are performing well against our business model and executing upon multiple levers to drive earnings growth, including organic revenue growth and consistent capital deployment strategy of M&A and return of capital to our owners as well as our TEOA efforts. Adjusted gross margin in the quarter was 33% with improvement from prior year, driven by fall-through on increased volumes and productivity improvements from our TEOA programs. This was partially offset by the impact of supply chain inefficiencies in our transportation segment, which Terrence already discussed. Adjusted operating margins were up 70 basis points year-over-year to 16.7%, with strong organic growth, driving leverage in the operating structure of the company.

Adjusted EBITDA margins in Q4 were 21.5%, up 80 basis points year-over-year. For the full year, adjusted operating margins were up 110 basis points to 16.8% with contributions from all segments. We expect further margin expansion in fiscal '18, while continuing to invest for growth and support our growing design win pipeline. As we've discussed on previous calls, we're also committed to reducing SG&A as a percentage of revenue over time while making progress.

We ended 2017 with an adjusted effective tax rate of 17.4% for the full year. Going forward, I would expect more normalized full year adjusted effective tax rate of 19% to 20% for 2018, which results in a tax headwind of $0.17 in our 2018 guidance compared to our 2017 results. Our business continues to generate solid free cash flow with record Q4 and full year performance. In the quarter, cash from continuing operations was $873 million and free cash flow was $691 million. We returned $376 million to shareholders through dividends and share repurchases in the quarter.

For the full year, free cash flow was a record $1.7 billion with a 100% net income conversion, demonstrating a high quality of earnings. In fiscal 2017, we've returned $1.2 billion to shareholders through dividends and share repurchases and used roughly $250 million for acquisitions.

Converting earnings to cash provides us the ability to support both return of capital acquisitions, while retaining the strong financial position. As we balance the use of our cash flow, return on invested capital is an important metric to measure ourselves. We have made good progress this year, expanding the ROIC by over 100 basis points to nearly 15%, as Terrence mentioned earlier. We've included a balance sheet and cash flow summary in the appendix for additional details.

And with that, I will turn the call back over to Terrence.

Thanks, Heath. And let me get into guidance for 2018 and I'll start with our first quarter which is on Slide 12 in the presentation.

For the first quarter, we are expecting a strong start to our fiscal year. We expect first quarter revenues at $3.35 billion to $3.45 billion and adjusted earnings per share of $1.23 to $1.27. At the mid-point, this represents reported sales growth of 10%, organic sales growth of 5% and adjusted earnings per share growth of 9%.

By segment, we expect Transportation Solutions to grow low double digits on a reported basis, which includes the recent acquisitions of Hirschmann, a leading provider of antenna technology and products. And Hirschmann bolsters our position as a value-added solution provider in the connected vehicle applications, truly a high-growth area. On an organic basis, we expect mid-single digit growth in transportation. We expect auto to be up mid-single digits with global auto production being flat year-over-year, once again demonstrating outperformance due to content growth. We also expect strong growth in Commercial Transportation and continued growth in Sensors. And as I mentioned earlier, we do expect segment adjusted operating margins to be above 19% in the first quarter.

In Industrial Solutions, we expect to grow mid-single digits organically, with growth driven by continued strength of both factory automation and medical applications. And in Communications, we expect low single-digit growth with growth in Data and Devices and Appliances, offsetting some impact from SubCom project timing for the quarter. Now let me move to the full year, and if you can turn to Slide 13, I'll get into it.

We expect full year revenue of $13.7 billion to $14.1 billion and adjusted earnings per share of $5.13 to $5.33. At the midpoint, this represents reported sales growth of 6% and organic sales growth of 4%. Bridging between the 6% total growth and organic growth of 4%, we do expect acquisitions and currency exchange rates to each add about 100 basis points of growth in 2018.

On an adjusted EPS growth, it's expected to be 8% at the midpoint. We expect further margin expansion in 2018 and it's important to note that the adjusted EPS guidance is negatively impacted by tax headwinds of $0.17, which Heath talked about. And possibly impacted by currency exchange rates of $0.05. If you net out both the tax and currency factors, our EPS guidance reflects double-digit growth.

In 2018, we, again, expect growth in all 3 of our segments. In transportation, we expect to be up high single digits on a reported basis and up mid-single digits organically.

Auto is expected to be up mid-single digits organically on 1% auto production growth this year, reflecting continued content growth and share gains. Commercial Transportation is expected to continue to outperform its end market, benefiting from content expansion and share gains in heavy truck and we expect another year of growth in Sensors. In Industrial Solutions, we expect it to grow mid-single digits on both the reported and organic basis, with the primary growth drivers being factory automation and medical applications.

In Communications, we expect to be up low single digits both on a reported and on an organic basis. In Data and Devices, we expect to benefit from high-speed ramps and the cloud infrastructure customers as well as new design ramp for server OEMs. Growth in Data and Devices and Appliances is expected to more than offset some declines in SubCom due to program planning in 2018.

In summary, I feel very good about our portfolio as well as our execution and believe TE is well-positioned to continue to deliver profitable growth ahead of our markets. And we have to establish levers to drive earnings growth and continue to perform well against our business model, as demonstrated by our strong fiscal results in 2017. We do look forward to sharing more with you as part of our Investor Day in December and I hope that you can join us.

Before we do go to Q&A, I do want to close by thanking our employees for the strong execution this past year and their continued commitment to both TE as well as our customers. So now let's open it up for questions.

Sujal?

Cynthia, could you please give the instructions for the Q&A session?

(Operator Instructions) We'll first go to the line of Craig Hettenbach with Morgan Stanley.

First question on autos, Terrence, you know the 10% growth versus 1% production, you guys have been tracking 2 or 3 and that certainly stands out. So if you can just touch on, if there's any timing elements. And then as part of that question from a Sensor program perspective, any visibility in terms of when you see those new design wins ramping on the Sensor side in autos?

Thanks, Craig, for the question. Let me take it into 2 pieces. So first off, in automotive. There is no timing, so there is not what has actually -- if any way we're trying to catch up with some of the inefficiencies we've talked about. But really what was nice about the fourth quarter was how even our growth was across all 3 regions. We saw -- earlier in the year we had tremendous growth in Asia. And as we came through the year, that's kind of slowed a little bit. We still have the fourth quarter about 9% growth in Asia, 14% growth in Europe and also 5% growth in the Americas, so it's pretty broad based. And really from that viewpoint, I think that's where you really see the benefit.

As we go forward, yes, and I think it's reflected in our guidance, we see next year to be a pretty tougher oil production environment. We expect production to be flat in the first half and we expect, really, 1% growth for the year to really be driven out of Asia as well as Europe, with the United States being down a little bit. And we still think we're going to get to that mid-single digit from the content growth. So feel very good about the momentum we have and it's consistent that we can grow content above production around the trends.

On Sensors, your second question, feel very good about the growth we had this quarter and it was across all 3 pieces that we sort of look at in the Sensors. And we have a nice growth in automotive. We had nice growth in Commercial Transportation as well as the broader industrial markets that drove them. The program ramps are similar to what we told you before. We expect some of the auto ramps that will be happening more in the later half of next year, that's when you're going to see the benefits of those, and that'll help in the later half. But nothing's really changed from what we told you [about those ramps].

Got it. And then if I can just ask a follow-up, for Heath. Step-up in buybacks this quarter, any read through to that? I know you guys have been pretty consistent about the cash return policy, but did notice that an increase in buybacks in the quarter.

No, I mean nothing's changed from a balance perspective of our overall capital deployment strategy. Clearly, we had good cash flow generation in the quarter. We balanced that out with acquisition activity that's going on and make sure that we hold to a reasonable cash level and return money back to the owners of the company. So nothing that strategically changed in terms of our outlook on that.

Can we have the next question, please?

That will be from the line of Joe Giordano with Cowen.

Just kind of following up on that last question, M&A outlook, I know, it's a core part of your business, of your strategy. It is a part of your capital allocation program. I know your goal is to be a little bit more disciplined on price versus maybe some of the acquisitions you did historically, and you're in an environment with pretty high valuations. So how are you looking at this right now? How does the pipeline look? Maybe some comments on potential timing as well?

Sure. I appreciate the question. Listen, M&A activity is never as linear as you'd like to model it to be. The reality of it is, we've got a lot of sticks in the fire. We're probing around in all areas that you would think that we would be acquiring in. Some of the platform activity that was done in Sensors and in medical has enabled us to tackle a couple of more fragmented markets where we can go after bolt ons, we can layer in to those existing -- to those platforms that we brought in to the TE portfolio. But we're out there pretty aggressively right now, looking for things. But to your point, it is a pretty good seller's market and we have just to maintain our discipline accordingly.

So we're active, is what I would say. I think you'll continue to see us announce a handful Hirschmann-like size deals over the next couple of years. And our goal is still to make that an important lever to our business model. But it is a expensive market. There's no doubt about it. There's a lot of competition for deals out there. So we're going to maintain our discipline but still aggressively go out and cultivate activity.

And then as a follow-up. You mentioned, like, $150 million or so in restructuring. I just wanted to -- what's your internal estimate for cost out from actions you've done previously into '18? And how should we think about the 150 you're spending this year playing out? And just more broadly, where are you on -- do you think you are on this whole journey of site consolidations and streamlining the production and footprint of the company?

Sure. Listen, I think it's a rule of thumb, not all restructuring activity is created equal, right, in terms of returns. But on average, it's about 2-year payback on the restructuring dollars that we spend on a cash -- on net cash payback. Obviously, it depends where in the world you do these things, it could have a quicker or a longer payback. But on average, it's about 2 years. So you can model that in relative to what we spent this year and what we'll spend next year.

The second part of your question, though, about where we are in the journey. Listen, the company, well before I got here, a little over year ago, and had done a tremendous amount of heavy lifting in the Communications Solutions segment, rightsizing primarily the Data and Device business as, as starting back and as far as 2012, as we walked away from about $1 billion of revenue that was no longer going to be part of our strategic content and having to right size the business for that. So over the 4-year journey or so, you saw a lot of activity in that segment. We feel very good about the operating footprint as we think about Communications Solutions today.

Our focus has turned a little bit more towards the Industrial Solutions business, which has been a beneficiary of a fair number of acquisitions over the last several years. And there's some natural site consolidation activities that would optimize that footprint and we'll thoughtfully tackle that. But it's going to take a couple, 3 years to get through that. And I think it's important that our customers and employees are first in mind on that. We don't want to do anything to disrupt what's going on there.

So we're growing nicely in most pieces of our Industrial Solutions segments, we have to contemplate that as well, as you think about where we have capacity around the world. But I would envision a couple, 3 years would be my -- if I was going to guide you today.

Can we have the next question, please?

That would be from the line of Wamsi Mohan with Bank of America.

Terrence, you reported 8% organic growth in 2017. That's pretty impressive. Guidance implies 4% organic. Could you just talk about sort of what you're seeing from an end market perspective going into '18? And I have a follow-up.

Great question, Wamsi. And let me paint a little bit of backdrop. When we think about this year, I really think we did a good job capitalizing as markets improved. So first off, when you think about maybe going from 8% to 4%, I would start with transportation. We had a 3% auto production environment here at 2017. We expect that to step down to 1%. We do believe with our content and our win, we're going to grow above market to that mid-single digit where we guided and, certainly, auto production is moving from 3% to 1%.

Secondly, both in transportation as well as in our CS segment, we benefited from content gain as well as share gain both in our appliance and our Industrial Transportation business, really around China. Some cycles that were -- had some regulations and I talked about the air conditioning cycle in appliance. We do expect those markets to come back a little bit more to reality as we go and moderate through the year. But we do see growth in those markets, but we don't expect the growth to be as high as we had in '17.

In Industrial, I would tell you, I think we see more of the same. I think the industrial markets throughout this year got more momentum, as I said, that it became more balanced across the world. And I sort of view, you're going to continue to see this mid-single digit growth where we've been running in the second half.

And then the last thing that I would say on the bridging of sort of the 8% to the 4% is, our SubCom business grew 6% last year, well over $900 million. What we're looking at next year, we expect SubCom to be $800 million to $900 million based upon the backlog that's over $1 billion that I talked about. And what's really nice about that is we do expect our Data and Devices as well as Appliances growth to offset even if SubCom is down a little bit, still at a high point in cycle that we do think is elongated. So there's some of the moving parts qualitatively that are reflected in the guidance that I talked about as part of the script and in the slides.

That's helpful, Terrence. And I guess my follow-up, and it's somewhat related to your answer here. You showed pretty significant operating margin improvement and you noted some pretty strong above-market trends here in fiscal '17. Your EBIT margin improved double of what you typically expect of 50 bps and more than double and are still depressed by some supply chain inefficiencies. Your guidance is implying roughly 50 bps going into next year. And I'm just wondering why won't it be higher than that, given that you still have sort of 4% organic growth and you don't have the headwinds of supply chain inefficiencies that you're sort of lapping this quarter?

Oh, I'd say, I think, part of the issues we've got, as Terrence said, we still have another quarter or so of some of the inefficiencies as we wrap that up here through the end of the calendar year. And we're taking a reasonable view where our investment levels are going to be for next year as well as where the growth is coming from and how the mix layers into that.

But in general, I would say, we feel very good about the work the transportation team has done to handle this revenue growth and dealing with the situation of improving the -- inequipped, what has been the inefficiencies and where we see that going in terms of progress towards remediation on that. And we feel good about our ability to expand margins in the other 2 segments as well. So I think we're going to be off to a good start here in our -- this first quarter and we'll continue to update you as the year progresses.

Can we have the next question, please?

That will be from the line of Shawn Harrison with Longbow research.

Hopefully, my math is right and I'm not working off a candy hangover. But if we got a 2-year payback on last year's restructuring program and this year's as well, it's maybe $150 million, I'd say, if, I guess, benefits that potentially come to the P&L. Are there any offsets? I know commodities are up and things like that, that would negate kind of that easy math of $150 million of potential benefits from the 2 years of restructuring?

Well I think -- your math seems a little rich, but there certainly are some things. We don't bridge every last little thing. There's no doubt that commodity pressures are embedded in our guidance. If you were to just look at just commodities alone, and freezed that today, it's probably $0.10 of headwind in the quarter -- or, I'm sorry, for the full year, if commodity prices stayed where they are today for 2018, we're not going to go through all the moving pieces because we've got productivity initiatives or restructuring initiatives, things like that, to offset those types of things.

But certainly, it's a balanced view of where those things -- where those types of costs reside as well as some of the investment levels. We are -- we have a very rich revenue pipeline right now across most of our business and we're making investments in both OpEx as well as in CapEx. So engineering and in capital expenditures to make those -- to handle this type of outsized revenue growth relative to our markets. So it's a balanced view but certainly there's puts and takes. Restructuring impact does help us, there's no doubt, not just in the short term but the long term, in terms of the optimized footprint going forward and -- but we're making investments in other places, as well.

Okay. And just a follow-up, if I may. Terrence, last quarter, I think you may have mentioned that you were seeing a little bit of a disconnect between longer-term orders relative to immediate-term kind of bookings that you'd guide to. Have you seen that normalize a bit with distribution, maybe selling, matching, sell through a little bit more, evenly here through October?

Yes, Shawn. Yes, I did mention that last quarter. And in some ways, we did see some things expanding out. When you look at the orders, orders have stayed pretty consistent quarter 3, into quarter 4, as I mentioned. The other thing I would say is we are seeing from our channel partners sell-through and sell-out rates, so us selling into them and spare POS out, are mirroring each other, so we see inventory turns staying very healthy. We don't see inventory building up. And from that viewpoint, I think things are reasonably in balance where we see things right now. So where things are, especially, in the quarter where typically they get a little weaker because in many cases it's our end of the year in December, it's staying pretty solid.

Can we have the next question, please?

That will be from the line of Jim Suva with Citi.

Two quick clarification questions. First is on the restructuring. I believe you said $150 million. Was that for fiscal year ending 2017 or outlook for '18? And what would the outlook for restructuring cost be for '18?

Jim, this is Heath. It's actually both. Approximately $150 million for '17 and we expect similar levels for '18.

Okay, great. And then the changes in tax, is that [reduce] relative to your recent acquisitions or some change in tax filing or the sourcing of your income? Or how should we think about what's going on with your taxes? And is this rate expected to continue to increase assuming no political tax reform?

Our rate is not -- our guidance rate of 19% to 20% for the year does not contemplate any kind of tax reform as we're not going to speculate on what that may look like. But I would tell you -- being as global as we are, and our construct is a fairly complicated journey to go through and decipher, well, what that moving parts are going to be on tax rates. Some of it is jurisdictional mix in terms of the increase. And there was also a few, a handful of small discrete things that benefited us in '17 that we do not anticipate repeating in '18 around statute expirations that we have reserved for, that we benefited from in 2017 that do not happen again in '18.

But I think probably more importantly, I would steer you towards the fact that our cash tax rate is -- we're still inside of our ETR for '17 and we'll continue to be inside of that 19% to 20% for next year. So our cash tax rate tends to run roughly 150 basis points below our published effective tax rate, which is, I'd say, the more important metric as we think about.

Okay. Then my last question is on the transportation. With transportation revenues being up year-over-year, but margins being down year-over-year, you mentioned supply chain inefficiencies or something. Can you go into a little bit detail of exactly what is going on there? Because I believe this is now the second quarter of that. And I think you said through the December quarter, so that would be 3 quarters of -- it seems like an awful long time to remedy some challenges for a company like yourself, who has been in this industry for decades.

Well, if you look at the revenue growth, Jim, and this revenue growth is far outside of what the market growth is. And we're winning, and our content wins have been great on the top line. Some of the challenges that is the supply chain reacting to our ability to get certain types of parts. And so there's in-sourcing activities going on, most of the cost is related to expedite freight charges, spending more money on things to get things to our customers in a more timely manner, is costing us a fair amount of money to do that.

I would say this, the team has done a nice job and when you are talking about adding stamping and molding machines, it tends to be a fairly long lead time. These are not things you go buy off of a retail floor; you have to order them, commission them, install them, and get them up and running. And we are aggressively doing that. I would say that the quarter we just finished, that we're talking about today, we peaked out in terms of those inefficiencies. We are seeing real time that those costs are starting to come down. But it will be behind us by the end of this quarter, largely. So yes, it was a 3-quarter journey. It happens.

I'd say the revenue growth, the demand for our products drove it and we're on top of it. But there's no doubt that, that has caused some pain points for the team as they've had to respond aggressively towards this. And it did impact that. We noted in the call that it impacted segment margins by about 150 basis points in the quarter. So we would have grown margins that would have been up in the mid-19% range, absent these inefficiencies. So -- but we do feel good and we'll be back from margin rate perspective in the first quarter back well north of 19% and feel good about where the year's going to end for transportation.

Can we have the next question, please?

That will be from the line of Amit Daryanani with RBC Capital Markets.

This is Irvin Liu dialing in for Amit. I had a question about SubCom, you talked about the business being impacted by projects' timing issues. If I'm not mistaken, I think last quarter you indicated that the business would be flat year-over-year in fiscal '18. I guess from a timing perspective, can you just provide or give us a sense of what's changed versus 90 days ago?

Yes, this is Terrence. Couple of things. SubCom is very different than the rest of our businesses. So this is much more of a project construction-based business, so how projects come in, how we have to permit those projects, also how our customers want to get those construction projects built. And when we look at it, it does get a little bit lumpy and it's been like that forever.

So when you sit there, nothing's really changed about the business. We feel good about the backlog being around $1 billion, which is where it's been now, plus or minus a little bit for multiple years. And it gives us confidence about the cycle being elongated versus what we've had historically. And that cycle, once again, is around a need for data and our cloud provider customers and that's what's great even about that our latest award includes that.

So as we look into next year, like I said in my comments, we look at the project funding, it looks like we're going to be in that $800 million to $900 million range as we go into next year, we'll have to see how projects fill in. But right now, I don't think anything's changed from last quarter, it's just what we expect it to be up at this higher point of the cycle plus or minus a little bit.

That's helpful. And just as a follow-up, as I look at your Communications Solutions business, particularly, in Data and Devices and Appliances, you indicated that growth in Asia was a major driver of your performance. Is it possible to talk about some of the underlying demand trends on sort of an ex-Asia basis?

Yes, couple of things. So in Appliances, it is your traditional drivers, and it is around appliance-built home starts. And really this year, I would say, outside of Asia, traditional appliance, it was sort of a low single-digit market. We were able to grow faster than that due to our leading position as well as content wins we've had. But really, we benefited from an air conditioning cycle in China that was much stronger. And you saw that grow throughout the year.

And Data and Devices, it's really a global business when you think about how those customers act. We did see strength in Asia really around cloud and how -- who we sell to as the cloud builds out. But when we sit there going forward, we do see, Asia will always be a big driver when it comes to Data and Devices, period, just due to where the product is made and also where the design is done. So outside the United States isn't as relevant -- outside of Asia, sorry, isn't as relevant for Data and Devices when it comes to revenue.

Can we have the next question, please?

That will be from the line of Steven Fox with Cross Research.

2 questions for me. First off, you've mentioned both content wins and market share gains. I was wondering if you could just talk a little bit about the market share gains for a few minutes in terms of what's driving that, where they're most prevalent and assume maybe we should exclude the data business, since that seems to be a specific product cycle for you guys. But outside of data, can you talk about market share gains? And then I have a follow-up.

Yes, certainly, there's an element there of what we track, Steve, both regionally and I think when you take the share gains ex-content, we feel very good about our momentum in auto, globally. We also feel very good on share momentum in our ICT business. And I would also say, if you jump into industrial, both in what we've been able to accomplish in the industrial side, both on the factory automation as well as medical side.

When you get into excluding data as you are on Appliance, I would tell you, we've had tremendous momentum from a share gain in Asia over many years now, taking our leading position, more of a Western position around Europe and the United States. And actually, as our Asian customers have become more global players than they were historically, really driving share gain wins in Asia through all the major appliance manufacturers. So when you look at share gains that are ex-content or electronification, really, they're the markets that we see it in, in more of our traditional products.

And then just as a follow-up, the Hirschmann acquisition, obviously, makes sense, but it seems to suggest maybe you're expanding your look at what you're going after in auto around connected applications. Is that correct? And if so, what does it say for, maybe, other deals in that area or do you have enough now to do more in terms of just getting (inaudible) connected and stuff like that?

Steve, on Hirschmann, I don't think it would say, it's different. I do think it's things that we actually do already of how we get a little bit deeper in it. So when you look at Hirschmann, and Hirschmann, what it does is really the antenna technology. And how that integrates into the tuners and the rest of the software, are some things that we've done already in our automotive business. So what we get excited about, it's an area where we've had traction organically and we do typically look at where we have traction organically or inorganic, similar to what we did with Sensors and similar to what we did with medical.

But when you think Hirschmann, there were things we were doing that might've been a little bit on the lower tech scale than what Hirschmann did. And what this really allows us to do is continue to build our penetration around the connected car infrastructure, really around the physical network that happens in the vehicle. So that's within vehicle. So it's a natural extension of what we're doing. And we're happy to have Hirschmann as part of our team and that opens up a bigger content envelope than what we were doing historically.

So it actually -- it allows us to continue to build on our strong content momentum that we've talked to you about and opens up a bigger area that we can also take Hirschmann more global than they've been because they've been very European-centric and how did we take that technology with our strong auto position. So I would say, it's a go-to-market play, it's also getting core technology grow a little bit broader. I wouldn't say it's completely different than what we do, though. That would be the only thing I would modify from what your question was.

Can we have the next question, please?

That will be from the line of Matthew Sheerin with Stifel.

This is Alvin Park speaking on behalf of Matt Sheerin. In the past and currently you've mentioned that cloud and hyperscale infrastructure has been a big driver for Data and Devices. Could you just be able to give more detail on the materiality of that in the segment as well as your growth expectations for fiscal year on that segment?

So when you take it -- and I'm going to talk higher level -- when you take our Data and Devices business, you sort of break it down. You don't have much exposure in consumer anymore. That was what Heath talked about, as we moved away from that to really point our engineers at harsher environments. So when you think about our Data and Devices business, there's an element of it, probably about 30%, 40%, that relates to traditional telco infrastructure. There's an element that also relates to wireless and then there's an element that relates to the cloud. And certainly, cloud being both servers as well as the emerging hyperscale providers that we all talk about a lot.

So when you sit there, really, the traditional telco infrastructure has been pretty muted. I think you've seen that. On the wireless side, we're waiting for some of the 5G rollouts that are upcoming over the next couple of years to really be -- help that piece of the pie. Plus clearly, when you take this year, the growth has really been driven by the cloud and our hyperscale customers. And that has created, I would say, almost all the growth we've had in our Data and Devices business this year and has offset some of the slowness in the traditional telco and wireless infrastructure. So that's the way I would ask you to think about it in response to your question.

Can we have the next question, please?

That will be from the line of Sherri Scribner with Deutsche Bank.

It is Adrienne Colby for Sherri Scribner. Within Industrial Solutions, commercial Aerospace continues to be a bit of a drag. Just wondering if you could provide some color on the ongoing timing issue and also if you could talk about the trends you're seeing in oil and gas, just trying to understand better what was weighing on Energy in the quarter?

So let me take your first question. So commercial aerospace, clearly, that's about almost 50% of what we do in our Aerospace and Defense business. And when you sit there, the content wins we had, we feel very good about, both with both aero frame manufacturers. What we've seen is a sluggishness throughout the supply chain on the build rates, and really, that's been something that has been happening all year. And so we feel very good with the content. And clearly, as that momentum picks up, as build rates and the supply chain work through, that's the sluggishness we're talking about.

On oil and gas, oil and gas in not our Energy business. Our Energy business is much more around power transmission, distribution and generation. The oil and gas business is in our Aerospace and Defense and Marine business. And I would say that business was very flat this year. We continue to see stabilization in that market. We expect slight growth next year but it's still running around $120 million per annum. And we're not expecting some big rebound in that as we go into our '18 guidance.

Can we have the next question, please?

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

This is Timothy Sweetnam on for Mark. My first question is on automotive. How is TE thinking about the increased auto purchase tax in China in 2018 within its guidance?

When you sit there, we look at auto productions. And so right now, when we're sitting there, we do sort of view auto production next year in China to be relatively flat to this year, up low single digit. So when we sit there, clearly, this year, we had very strong growth, about 9% production growth in China. So as the incentives have worked off, and the tax you talked about, we do expect a more muted China production next year. And that's included in our 1% global auto production.

Despite that, we feel very comfortable that we're going to grow mid-single-digit on that backdrop of global production. And what's really nice about our global positioning in automotive is, we really see that Europe will be a big growth driver next year, based upon our content wins. So you're going to hear us talk a little bit more about Europe as we go in the next year, while this year has been very much around China and Asia. In automotive, you're going to see our European strength based upon our very global position that we have.

That's helpful. And as a follow-up, the sequential revenue guide in 1Q fiscal '18 is more benign than typical seasonality. Can you discuss what the main driver or drivers of that are?

Sure. We have largely -- we would agree with you, but largely stirred by the stronger order auto rates coming out of the fourth -- coming out of our fourth quarter, where we see the world. So as we're looking at it, we had pretty strong orders across all of the businesses and across all regions. So it's a lot of going back to what Terrence has been talking about in the last few minutes around content and market share. We feel very, very good about it. But agree that it's not the normal season -- seasonal step down that we would normally see.

Looks like there's no further questions. So if you have any more questions, please contact Investor Relations at TE. Thanks for joining us this morning and have a great day.

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