泰科電子 (TEL) 2018 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And welcome to the TE Connectivity Q3 2018 Earnings Call. (Operator Instructions) And as a reminder, today's call is being recorded.

I'll now turn the conference call over to your host, Vice President of Investor Relations, Sujal Shah. Please go ahead.

Good morning, and thank you for joining our conference call to discuss TE Connectivity's third quarter 2018 results. With me today are Chief Executive Officer Terrence Curtin; and Chief Financial Officer Heath Mitts.

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

We ask you to review the sections of our press release and the accompanying slide 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.

(Operator Instructions) Now let me turn the call over to Terrence for opening comments.

Thanks, Sujal, and thank you, everyone, for joining us today to cover our third quarter results and updated outlook for 2018.

Before I get into the earnings slides, let me briefly recap our quarterly results and full year guide against the elements of our strategy and business model. Our results in the quarter demonstrate successful executions with ongoing investments to support an attractive and growing demand pipeline and another quarter of growth above markets in which we serve.

On the top line, we delivered 6% organic growth in the third quarter, and we also expect 6% organic growth at our midpoint for the full year. And this is at the upper end of our 4% to 6% long-term organic growth target.

Our revenue growth continues to be driven by secular trends and our focus on co-creating with our customers by leveraging our leading global position in this increasingly connected world. And this is enabling TE to consistently outgrow our end markets.

On the bottom line, adjusted earnings per share increased by 15%, and we're raising the midpoint of our full year adjusted earnings per share guidance, which also reflects 15% growth over the prior year.

This growth is consistent with our annual double-digit earnings growth target and our business model. From a capital perspective, our strategy remains balanced through share buybacks, dividends as well as a disciplined approach on acquisitions. And we continue to invest to support the organic growth opportunities in our business while maintaining ROIC levels in the mid-teens.

So if you could, let's look at the slides, and I'll start with Slide 3 to review the highlights from our third quarter.

We did deliver performance above our guidance with double-digit growth in revenue as well as adjusted earnings per share. Sales were $3.8 billion, representing 12% reported growth and 6% organic growth year-over-year. We saw organic growth across all TE's businesses with the exception of SubCom.

In Transportation, we grew 12% organically, well above our markets, with growth in each of our 3 businesses in the segment as well as in all regions.

In Industrial Solutions, we grew 5% organically with growth across all businesses and also in all regions.

And our Communication segment declined 6% organically as we expected. We did have 10% combined organic growth in data and devices and our appliances business, and this was more than offset by SubCom year-over-year declines.

On the earnings side, from a margin perspective, in quarter 3, we delivered 16.7% adjusted operating margins with margin expansion in both the Transportation and Industrial segments. And one of the key highlights of the quarter was that our Industrial segment margins were up a strong 150 basis points year-over-year.

In the Communications segment, margins declined as we expected due to SubCom where we had a tough year-over-year comparison versus very strong revenue in the third quarter last year, along with a margin impact from the program delay that we highlighted back in our first quarter earnings call.

The SubCom dynamics negatively impacted our adjusted operating margin by 90 basis points year-over-year in the quarter. And when I look at our overall earnings, I'm very proud that we delivered 15% adjusted earnings per share growth even with this headwind.

Earnings per share growth was an adjusted $1.43. And when you look at it, it's driven primarily by operational performance as well as the benefit from a favorable impact of currency translation.

Turning to the full year. We are raising our revenue and earnings per share guidance, reflecting stronger third quarter results, offset by incremental headwinds that are primarily due to foreign currency exchange rates, which changed from being a tailwind in the first 3 quarters to a headwind in our fourth quarter versus the prior year.

For the full year, we expect sales to be up 12% on a reported basis and 6% organically with adjusted earnings per share of $5.57, which is up 15% at midpoint, which looks a lot like the quarter 3 results we just delivered.

And when I think about this year and the progress that we've made in perspective, the guide we gave back at the beginning of the year back in November was 4% organic growth and $5.23 of adjusted earnings per share versus the 6% organic growth and 15% EPS growth that I've just talked about.

So let's turn to Slide 4 and I'll cover our order trends in detail. As you can see, when you look at the slide, we continue to see broad-based growth in orders across our 3 segments, which reinforce our growth outlook. Total orders excluding SubCom were $3.75 billion and our book-to-bill was 1.05.

Orders were up 15% year-over-year on a reported basis and 9% organically. We continue to see growth globally, with increases in organic orders in all regions. And by region, we had 16% order growth in the Americas, 8% in Asia and 4% in Europe.

Turning to orders by segment. In Transportation, orders increased 8% organically, with growth in all regions led by double-digit increases in both Asia and the Americas.

In Industrial, our orders grew a strong 12% organically year-over-year with momentum in our Aerospace, Defense and Marine business and strong order growth in our medical business.

And in our Communications segment, excluding SubCom, we saw year-over-year organic orders growth of 8% with growth across all regions and in both of the businesses.

So if you can please turn to Slide 5, let me get into segment results and we'll start with Transportation. Transportation sales grew 12% organically year-over-year with strong growth in each of our 3 businesses. Our [auto] sales were up 10% organically on 4% global auto production growth in the quarter.

Our strong growth above market continues to illustrate the positive impact of content growth in our auto business, along with the benefits of our global leadership position. We had 16% organic growth in the Americas, 11% growth in China and 9% growth in Europe, as we continue to benefit from our new project [launch titles] as well as share gains.

Our performance continues to reflect content growth from the secular trends in this market, and we expect to benefit as adoption increases for both connected and electric vehicles. We continue to increase our investment to support TE's momentum in these emerging growth applications, and we're extremely well positioned with leading-edge solutions and an increasing pipeline of design wins across our global OEMs.

In our commercial transportation business, we continue to outperform the market with organic revenue growth of 22% year-over-year, with balanced growth across all regions and strong growth within each submarket.

We continue to see momentum in the heavy truck area as well as growth in the agriculture, mining and construction markets.

And in sensors, our business grew 8% organically year-over-year, with growth across auto, commercial transportation and Industrial applications. This growth is driven by the design wins we've been discussing over the past 2 years, and we continue to see strong design win momentum, particularly in auto applications.

In fiscal 2018, our year-to-date, we've generated 600 million of new sensor design wins in auto applications. This brings a total design win value to $1.8 billion since the beginning of 2016 across a broad spectrum of auto sensor technologies and applications, which will certainly set the business up for strong growth as we've talked to you about.

Turning to operating margin for the segment. Margins were in line with expectations at 19.3%, and they were up 20 basis points year-over-year and reflect investments to capitalize on our strong design win momentum in both connectors and sensors.

So please turn to Slide 6 and we'll discuss our Industrial Solutions segment. Segment sales grew 9% on a reported basis and 5% organically as we expected. Adjusted operating margins were 14.4% and expanded 150 basis points year-over-year from operating leverage on higher revenue.

As we've talked to you about, we've earned a multiyear journey to optimize our factory footprint and lower expenses to expand adjusted operating margins into the high teens in this segment. And I really feel the results you see in this quarter show the progress that we're making on this journey.

So let me move to the -- highlight the performance by business in the segment. In industrial equipment, organic growth was 6%, which is in line with our mid-single-digit targeted long-term growth rate. We saw growth across all regions and strength in both factory automation and medical applications.

In our AD&M business, we saw 6% organic growth, driven by commercial aerospace and defense. And we continue to see growth in both of these markets as defense continues to improve.

In Energy, our business grew 2% on an organic basis and this was driven by strength in the Americas, offset by weakness outside the United States.

So please turn to Slide 7, and I'll discuss our Communications Solutions segment. As I said earlier, the segment declined 6%, which was in line with our expectations and driven by the year-over-year declines in our SubCom business.

Our momentum in our data, device and applications business remained strong and they have both company organic growth of 10% on a combined basis. In data and devices, we grew 11% organically with growth across all regions, driven by high-speed connectivity and data center applications and content growth from electronification trends, where TE is providing integrated solutions.

In our appliances business, we continued our strong performance with 9% organic growth with growth in all regions and continued share gains. We continue to benefit from the secular trends that include safety, efficiency and miniaturization in the appliance market as well as leveraging our leading global position.

And in SubCom, our revenue declined to $184 million. The primary contributor to the year-over-year decline in SubCom was a tough comparison versus the third quarter last year, which we had revenue of $270 million in the quarter.

Overall, this market remains in the healthy elongated cycle we've been talking to you about and our backlog remains at $1 billion.

For the segment, adjusted operating margins were 11.9%. And as we discussed over the past couple of quarters, segment margins are running below our targeted mid-teen operating margins due to the delayed SubCom program ramp and the project accounting nature of this business.

With that, I'll turn it over to Heath to get into the financials.

Thank you, Terrence, and good morning, everyone. Please turn to Slide 8, where I will provide more details on the Q3 financials.

Adjusted operating income was $628 million with an adjusted operating margin of 16.7%, leveraging a strong growth of 6%. GAAP operating income was $558 million and included $65 million of restructuring and other charges and $5 million of acquisition charges.

For the full year, I continue to expect the restructuring charges of approximately $150 million, driven primarily by activity in our Industrial Solutions segment as we optimize our footprint and make structural improvements in SG&A across the company. This is consistent with what we've talked about in the past.

Adjusted EPS of $1.43, up a very strong 15% year-over-year, was driven by sales growth as well as the benefit from currency translation. GAAP EPS was $1.29 for the quarter, included restructuring and other charges of $0.13 as well as acquisition-related charges of $0.01.

The adjusted effective tax rate in Q3 was 16.9%. Looking ahead, we do expect a sequential increase in rates in Q4 resulting in a full year adjusted tax rate in the 18% to 19% range. Longer term, you should continue to view our tax rate at approximately 20%.

Now, if I can get you to turn to Slide 9. Adjusted gross margin on the quarter was 32.4% with year-over-year decline driven primarily by SubCom where Terrence outlined the moving pieces earlier. Given the relative strength of the rest of our portfolio, I'm pleased that we were able to offset the SubCom-driven margin pressure and maintain our overall adjusted operating margins of 16.7%.

In the quarter, cash from operations was a strong $800 million and free cash flow was $504 million. On a year-to-date basis, cash from operations is up 5% versus last year, and year-to-date free cash flow reflects the impact from increased capital investments.

As I mentioned last quarter, given the rich pipeline of organic opportunities, we are increasing our capital investment this year to be approximately 6% of sales. And, as you know, this investment to support growth has the highest return on investment for the company. We continue to target mid-teens adjusted ROIC and have seen nice improvement year-over-year in our ROIC, so I'm pleased with those results.

We also returned $382 million to shareholders through dividends and share repurchases. And we've included a balance sheet and cash flow summary in the Appendix for additional details.

So before I turn this back to Terrence, let me just share our perspective on the trading policy and tariffs as there are obviously many questions. While some of our products are directly affected by recently implemented U.S. tariffs, only a very small percentage of TE products are actually impacted. Our strategy has always been to manufacture close to our customers to be aligned with our customers' supply chain strategies. Our global position and footprint help mitigate TE from tariffs' impacts. However, for those products that are impacted, we are committed to working closely with our customers to minimize the impact. And we are proactively looking at a combination of actions, including further optimizing current supply chains, continuing to leverage our global manufacturing footprint, and in some cases, implementing surcharges to customers. I would like to reiterate that as a global company, TE is a proponent of free and open trade; tariffs and restricted trade policies create friction, uncertainty and added costs for businesses engaged in global markets. So we'll provide an update on any future impacts when we issue our fiscal 2019 guidance later this year and give you a sense for any impact that it would have in terms of future year guidance.

So with that, I'm going to turn it back over to Mr. Curtin.

Thanks, Heath. And let me get into guidance, and we'll start with the fourth quarter on Slide 10.

When you look at the fourth quarter, we expect fourth quarter revenue of $3.59 billion to $3.69 billion and adjusted earnings per share of $1.31 to $1.33. At the midpoint, this represents reported and organic sales growth of 5% and adjusted earnings per share growth of 6%.

We do expect our fourth quarter to look like -- a lot like our third quarter with the exception of currency and tax impacts. When you think about the recent strengthening of the U.S. dollar, we now expect a year-over-year currency exchange headwind of approximately $50 million and $0.02 in the quarter.

Currency has been a tailwind for the first 3 quarters of the year, so that is going to flip. In addition, our expected tax rate is a headwind of $0.02 versus the prior year, so operationally, quarter 4 looks pretty similar to quarter 3.

If you move by segment, we expect Transportation Solutions to grow high single digits on both our reported and organic basis, driven by all 3 businesses. In Industrial Solutions, we expect to grow mid-single digits organically with growth across all businesses in line with our long-term model. And in Communications, we expect to be down low single digits with continued above-market growth in both data and devices and appliances, and we expect SubCom revenue being at similar revenue levels as we just had in the third quarter.

So let me turn to the full year, and if you can move to Slide 11, please. For the full year, we now expect full year revenue of $14.58 billion to $14.68 billion, representing $1.5 billion of increased revenue year-over-year. At our midpoint, this represents 12% reported and 6% organic growth.

If you take the $1.5 billion of increased revenue and break it down, it's about $850 million due to organic growth. We're also benefiting $250 million from mergers and acquisitions, and the benefit of about $400 million from currency translation.

From an adjusted earnings per share, our growth is expected to be up 15% at midpoint, driven by the flow-through from our sales growth as well as the benefit of currency translation. Versus our prior guidance, we are increasing revenues slightly at the midpoint and adjusted earnings per share is up $0.02 to $5.57.

We expect our strong performance that we had in quarter 3 to be partially offset by the stronger dollar and a slightly weaker outlook for SubCom.

So let me get into color by our segments in our full year guidance. We expect our Transportation Solutions segment to be up in the high teens on a reported basis and up low double digits organically on assumption of approximately 2% global auto production growth in 2018. Our outperformance continues to reflect the content growth and share gains that we talked to you about and the momentum that we have.

In commercial transportation, we expect to continue to outperform our end market, and we expect continued growth in sensors based upon the pipeline wins that I highlighted for you earlier.

In Industrial Solutions, it's essentially unchanged from our prior guidance with reported growth expected to be up high single digits and organic growth up mid-single digits. The primary growth drivers remain industrial equipment, commercial air as well as defense.

And in Communications, we continue to expect Communications to be down low single digits on both a reported and an organic basis, with growth in data and devices and appliances being more than offset by declines in SubCom. We continue to expect strong combined organic growth in data and devices and appliances for the year.

So before we go into questions, I just want to highlight some key takeaways as I think about the [coal.] I think we continue to execute very well against our strategy and business model and expect to deliver 6% organic growth and 15% adjusted EPS growth for the full year, which is in line with our business model.

We continue to benefit broadly from global secular trends, and consistently driving growth ahead of the markets we serve. And you see that through the broad growth we have in the business and the businesses that I highlighted today.

We continue to look at increasing our investments to support organic growth and our attractive and growing pipeline and design wins, particularly in auto, is going to continue to support future organic growth; and Heath talked about increasing capital to 6%, and that's a key indicator as we continue to make that be our best investment.

For the full year, we expect our Transportation margins to be at our target level of approximately 20%. And a strong margin expansion year-over-year that we demonstrated at Industrial I think is a really good step of where we're going with the margin in that segment.

And the Communications segment, it's going to be a drag on TE margin in 2018 due to the program delay that we talked to you about in SubCom. Also, I think it's key that we're generating strong cash flow, and we're maintaining a balanced capital strategy. And we are improving our ROIC about a point this year.

And the multiple levers that we continually review with you remain intact to drive continued double-digit earnings growth that will drive further value creation for our owners.

So as we close, the one last thing I want to do is I do want to thank our employees around the world for their execution in the third quarter as well as their continued commitment to our customers in making sure we trade a future that's safer, sustainable, productive and connected.

So Sujal, with that, let's open it up to questions.

Allan, can you give the instructions for the Q&A session?

(Operator Instructions) Our first question will come from the line of Craig Hettenbach with Morgan Stanley.

Question for Heath on the Industrial margins. The 150 basis point year-over-year increase looks like mostly probably operating leverage in the business. Yet you're talking about some of the restructuring activities on more of a forward-look in terms of footprint. So can you just talk about what you are seeing today and how you envision Industrial margins going forward?

Craig, thanks for the question. You know, honestly, the improvement that you've seen, not just in this quarter but for the full year outlook for 2018 for our Industrial margins, there is some belt tightening in there. But largely, we're seeing the benefit of the organic flow-through -- the organic growth flow-through as the business is -- we've got all business units growing in that segment. I would tell you that the charges that we're incurring today relative to restructuring generally have about 2-year payback. Some of these are outside the U.S. which tends to lengthen the payback period, as you know. So the restructuring activity and the benefit from those, which we've talked pretty extensively about to all of you, really starts to kick in more at 2019 and much more pointedly in 2020 as some of these big facility moves are completed. So keep in mind that what we've talked externally about is about a 300 basis point journey on operating margin expansion there. Certainly, we attributed about 2/3 of that towards footprint optimization, and about 1/3 of that through the flow-through on the growth side. We're seeing the growth side of it now and the restructuring piece is yet to come, but we're pleased with the team's progress there. There's been a real heightened focus.

And next, we'll go to the line of George -- pardon me, Joe Giordano with Cowen.

This is Tristan in for Joe. You had a very strong operational results that was somewhat, I guess, masked by the SubCom business. It was expected but still [an offset.] Are you looking to maybe be a bit more proactive on a potential divestment there?

Thank you for your question. And as you all know, that, while it's a good question, is not a new question. Our SubCom business is a unique asset that I've always told you about. While it's a good business, it is a business that is unique. So it's a business we feel as long as we own it, we have to operate it. But it is something we always look at if there were offers on it. Clearly, we said this for a long time, there hasn't been. But as we own it, it needs to be run. And when you look at this year, we expected the business to be down overall going from a very healthy level of $1 billion. And we told you earlier, $700 million to $800 million, certainly, it's at the low end of that range. We feel good about the cycle that we're in. It is a healthy cycle, and you see that in our backlog. But clearly, the disappointment this year -- and that business is the program delay that we teed up early in the year, that is impacting our margin. It also slows things down. We do expect that program to wrap up in '19. And we feel, as we go forward, it will be performing more like it has performed in the past than it is this year. So I feel good about where the business is positioned, feel where it is in the cycle. Certainly, this program delay that we've had around new technology has created a headwind, that I'm very proud that the rest of the business has been able to make up for it as we've had margin expansion in both Transportation and a strong step that Heath talked about to the prior question. So we'll continue to work through it. We always look at alternatives for SubCom but I've been saying that since I've been CFO here for 10 years. So thanks for the question.

We'll next go to the line of David Leiker with Baird.

This is Joe Vruwink for David. When we look at Transportation organic growth and try to reconcile what that is relative to end market production, it looks like your above-market growth is going to be around 9% this year. It was 9% last year. But just relative to the guidance of 4% to 6% content growth, it certainly seems like it has been better than that. It can sustainably be better than that. Why can't TE sustain a high single-digit level of auto growth above and beyond this 4% to 6% target?

Thank you for your question. And when we look at it, as we just shared with you back in our Investor Day, we think long term, that 4% to 6% is right above production. When you look at this quarter, production was a little bit stronger this quarter. It was up about 400 basis points in the quarter, and we grew about 10% in automotive. I think the key is, we continue to invest in the design wins that we have. You are going to continue to see and even if we think about like, next year, we still view the world's going to have about a 2% production environment. So when you sit there and you think about that 2% production environment similar to this year, I think you would be in the high single digits in that type of production environment based upon the momentum we have and the design wins and that we're investing behind. So when we look at it, we feel the momentum we have not only from what we do and the wins we have, but also we're globally positioned to capitalize for any little moves that happen on global production is one of the great things about our businesses, our global deployment and our customer breadth.

That will come from the line of Christopher Glynn with Oppenheimer.

So back to SubCom. I think the production and approval process has been resolved relative to that project, so just wondering how the visibility is shaping up for magnitude, degree, uncertainty around margin tailwind for that segment into next year. Maybe on a neutral rev basis and then separately viewed to backlog converting to some revenue lift there?

So a couple of things. The backlog is strong, as I mentioned, around $1 billion. So I think when you look at next year, I think it's fair to say to your assumption, it looks a lot like this year's top line. And what we expect that you'll see is, as this program works off, it is a program that will work off in '19. You get the margin lift and I think you need to think about it as the Communications segment, and you'll see segment margin to move up from they're right now, sub-12 back up into the mid-teens that we've talked to you about for the segment. And you'll see that into next year.

That will come from the line of Wamsi Mohan with Bank of America.

Terrence, can you address what some of the puts and takes were in the Transportation segment as it pertains to margins. Did it tick down a bit in the quarter? You called out some of the investments to drive future growth. I was wondering if you can help, be a little more specific on what those are. And any color on the magnitude of those investments? And the possibility of ongoing higher basis investments?

Thanks, Wamsi. Again, I guess, first of all, I want to be clear. Our margin in Transportation came in where we expect it. So I don't believe it was a surprise to us where the margin came in at. And we do expect, for the year, it will be at that 20%, which we've always told you plus or minus a point where it would be. So I feel actually good about the margin in the business. There are investments that we've talked to you about. Heath talked about CapEx increasing up to 6%. That's primarily in our Transportation business. And clearly, when we spend capital, that goes into gross margin. But I want to go back maybe to the question that was asked earlier, the organic engine that we have in automotive is very significant. Certainly, we talk about it in percentages. But just to frame it a little bit, we grew organically our Transportation business by $700 million last year. We're doing it by $800 million this year. And that's really north of 20% increase in that one business over the past 2 years, if you really go back. And we are trying to make sure we keep up with those type of demand profiles and also putting the capacity in for the pipelines we have. So we have increased up CapEx. We have increased up R&D. And now, you'll see that in quarters, you'll have timing off a little bit, but we are completely committed to the 20%-plus or minus. And we're going to continue to make the investments for what is the best return, which is organic growth and we've been doing that. And we're going to continue to highlight that for you. So thank you for the question.

That will come from the line of Shawn Harrison with Longbow Research.

Just on kind of the third quarter versus fourth quarter dynamics, particularly maybe in Transportation, but in any of the other businesses. Do you feel as if there was any maybe pull-forward of demand? And the reason I ask that is, it feels like seasonality is coming back into the business, maybe, that we haven't seen over the past 12 to 24 months.

Shawn, this is Heath. There is some typical seasonality, specifically in auto, that generally makes Q4 a little bit lower than Q3. But generally, as we look at it, our third quarter and our fourth quarter looked pretty similar in terms of our outlook. The challenge is in terms of the earnings side, is that FX turns on us and goes from being a tailwind to a headwind and then tax is significantly higher in the fourth quarter. So the 2 of those together is worth about $0.10 sequentially in terms of the third quarter versus the fourth quarter. Otherwise, when you kind of look around the other businesses, they look pretty similar. And we're just battling some of the, I'll say, nonoperational pieces. And obviously, some of the things from SubCom that Terrence has already highlighted.

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

Can you just -- Terrence, I think you talked about $1.8 billion of total design wins you've had, and I think there was a comment around sensors specifically. What's the cadence you think of that revenues starting to ramp over time? And really -- you've had really good growth in sensors being 7% to 8% for a few quarters. But do you see that stepping up to maybe double-digits as you go next year, given the backlog and the design wins [you are sitting at?]

When you look at it -- Amit, thanks for the question. And I think it's very similar to what we've been telling you. What's great is the amount I'm talking about is in automotive only. So we -- also, you saw in the growth outside of automotive and sensors was very strong as well. But in automotive, you know how these programs come in. We start winning them. They take 2, 3 years to actually start from production and they ramp. And so as we told you back on Investor Day is, we do expect you're going to start seeing double-digit growth in our automotive as these layer in. They will layer in over time. Certainly, programs ramp over time. And in many ways, it supports how we are going to get north of $5 per vehicle in sensor content that we talked to you about. So I think the momentum that we've had just continues to be that the pipeline that we built, the technologies that we acquired with Meas are -- we're able to get to our commercial teams and really make sure we're creating value. And that's layering in, and I feel very good about the momentum to really make sure that sensors in automotive, you're going to continue to see nice growth, as these things come into production and get billed to our customers.

We'll go now to the line of Jim Suva with Citi.

I know you gave some nice comments on the global tariff and M&A. But I wanted to see if you had any actually discussions or actually any actions with some of your customers. I know like in the Industrial segments, there's been some recent moves of some Industrial companies talking about higher cost of goods sold like steel and aluminum tariffs. Are they talking to you about changing your location of manufacturing, supply relationships or anything going on actively on that front?

Jim, thanks for the question. And to give some examples. So number one, we are not a big steel user. As you all know, we start from base metals to basically copper and gold and certainly resins that we use. And certainly, that's what our engineers use as a lot of our basic building blocks. So on the import costs, while we have a little bit of tariffs, it's not that big. Really, the discussion we have with our customers -- and you know our model. Our model is to design close to our customers and then they align to their supply chain. So in regard to where we serve our customers directly, there is lots of discussions around supply chain. Do we need to be moving some of production to certain parts as they look at their supply chain as well as just the whole logistics flow because there are logistic flows that I think people are trying to understand. Is there a way toward to tariff satellite? So there are real live discussions, as you know, it's very fluid. In areas where it is unavoidable that we have tariffs or things that we go through our channel partners, there will be surcharges for tariffs that we cannot mitigate through manufacturing moves or supply chain moves. And that will be a surcharge that we would do [out] where it's unavoidable. So that's where it is right now. As you can imagine, with somebody that sells more than 500,000 discrete SKUs, it is very tactical right now. It's very much a lot of engagement with our customers, which I feel very fortunate with our close business model with our customers. We are going to work with them to make sure that they can stay competitive. And if we have to move some things around for the long term, we will. So thanks, Jim.

We'll go to the line of Matt Sheerin with Stifel.

So a question regarding some of the supply chain issues that we're hearing about, specifically component shortages, capacitor shortages, where they seem to be hitting some of the EMS companies. Are you seeing any rescheduling or any mismatch of parts that customers that may be affecting your business?

No, Matt. So -- and as you know, we don't do those [exits.] So we haven't seen any rescheduling. Clearly, there is shortages in certain areas. Capacity is sold out. We've not seen any impact. And you can see that on our orders, we are not seeing demand impacts. As we told you before, our lead time overall has remained relatively stable, but we do have some pockets in certain product categories that we are extended just due to how the demand has increased. But I would say that's a minor part of our business, but we have not seen any demand changes where a customer has told us because they can't get a capacitor or another type of passive that they want us to stop shipping or slow down. We have not seen that in any material way.

We'll go to the line of Mark Delaney with Goldman Sachs.

A question on Subsea. I think I had about a 50 bps drag to the corporate margin last quarter. And if I heard correctly, Terrence, you said it's about 90 bps this past quarter. So trying to better understand the reason that's maybe a bit larger of an impact now. And just to clarify on how we should think about that improving, should we think about the magnitude of the impact abating on a somewhat linear basis as we move through fiscal '19? Or does the magnitude stay at this kind of a level and it's not until the program is done that it then goes away?

Mark, let me add some color. Thanks for your question. The difference between the 90 basis points and the 50 basis points is really -- our SubCom business had a great quarter last third quarter. It had $270 million of revenue. So that 90 basis points I referenced was really a year-over-year reference of what it did in TE's margin year-over-year. So that's what that 90 is. The 50, you're right. That's the program delay impact that we've been seeing at the total company level, what the impact has been. So the 90 basis points is a very high volume last year. Certainly, good flow-through on it. It's just getting the volume more normalized, but the 50 basis points is correct on the program delay. On linearity, I think when you look at it, it's going to be as the program wraps up. And that program will wrap up. And what you'll have is, as that program wraps up, you'll see margin increase and work its way up back to where we expect the segment to be. And that will be through '19.

We'll go to the line of William Stein with SunTrust.

Two quick ones. First, I think you mentioned resins a moment ago, our contacts have indicated that cost for [leads] and maybe some other input materials have been rising. So I'm not talking about shortages of caps that would be sort of a -- not related to your supply chain. This is related to your supply chain. And I'm wondering if that's impacting margins at all? And whether you're adjusting prices in response to that through the channel?

William, this is Heath. When we went out with our original guidance for the year, we talked some about what was embedded in our guidance. And that was about $0.10 a share of pressure on our earnings relative to commodity inflation. And as you know, we have hedging programs in place and everything, so you don't see a ton of volatility up or down based on the way it smooths into our cost structure. However, your point is valid. There is some pressure out there on some of the commodities, metals and resins. And we're -- it's impacted us. That $0.10 has probably grown to closer to $0.12 as you see it reflected in our results. We've got productivity programs in place, and we're going after it. But there's a little bit of additional headwind, especially as we exit the year on that. But the team is focused. We've got a world-class supply chain organization that's going after it and challenging some of those things. And where we do have more of those types of pressures that we have to realize, certainly our commercial teams are in sync on that relative to price increases. And you would expect pricing to stay pretty similar or we have opportunities to raise price especially through our distribution channel. Those types of things. Those are proactively being done. So -- but in context of the commodities inflation, the input side. And then where we have direct relationships, certainly those are fluid dialogues but it's not lost on our customers either in terms of how we recover there and/or share in some of the [pitch] points. But we're geared up pretty well to handle these types of pieces. And as we get closer to 2019, William, what I would say is, certainly we'll quantify that again. But you shouldn't expect us to be using this as a major excuse because we are going to be ramping up our material sourcing programs as well to offset some of those pressures. But I appreciate your question.

We'll go next to the line of Deepa Raghavan with Wells Fargo.

Good cost control on the SG&A line. Just curious if those are from some of the structural changes you are targeting? Or was there something temporary this quarter? Example, belt tightening just given ForEx headwinds, et cetera.

Deepa, I appreciate the question. This is Heath. If you're looking at our operating expenses in general, whether that's SG&A, component of that or in total. Certainly, we're tightening the belt and we've talked about some of the activity that we've done to reduce structurally our SG&A. That still is in place and that will continue forward as we're looking at a lot of different opportunities and there's a heightened focus on that. Having said that, I think the quarter came in a little bit lighter than the way I thought. I would look at it more on a full year basis and the relative improvement that we're targeting. We've talked about taking a full 100 and change basis points out of our operating expense structure. Certainly, we're ahead of that in the quarter, but I'd say that when you look at a more normal -- full year normalized basis, [of course that step is still] part of the journey.

We'll go to the line of Sherri Scribner with Deutsche Bank.

Terrence, if you look at the business environment, we've been in a relatively strong business environment and we've seen some benefits for TE in the Transportation and Industrial segments. I guess, when we think about the fourth quarter guidance, there's a bit of a deceleration in organic growth expectations. Can you maybe talk to what's driving that slight deceleration? Is it related to the business environment? Maybe some commentary on what you're seeing on the demand trends and what's driving that.

Actually -- Sherri, thanks for the question. Honestly, I don't see that we're seeing deceleration. I think one of the things, while our organic growth has changed, I think one of the things is, SubCom also had a very strong fourth quarter last year as well as third. You really take our organic growth without SubCom, we would have told you 9% this quarter instead of 6% and 8% in the fourth quarter versus 5%. So we will still have SubCom having a strong fourth quarter last year. So when we look across and this go back to my order activity, what we see is, while auto production has been bouncing around 2%, the content wins that we see clearly are staying where they're at. Markets that we see continuing to have very strong momentum in addition to auto, sensors we talked about during the call as well as commercial aerospace, defense, medical, we really see strength in those markets. And certainly, in where we are affected by the cloud like in our data and devices, we continue to see strong momentum and we would expect that to continue. I think the markets, we continually talk to you about that we would [say in the lead.] They have to get to a more normalized growth. Certainly, our Industrial Transportation business, our appliance business and our Industrial factory automation business looks like it's getting there sort of where we are. You saw the growth this quarter, it's good. So they are the only 3 that when we look at and we say, we're waiting for them to get to more normalized growth because we are benefiting from some supply chain bump-ups. And I think as we look going forward, we expect they'll get to a more normalized growth pattern. But net-net, I would say it's very healthy. You saw it in the book-to-bill, you saw it in our order rate to be in double digit and you saw the broad-based nature of it, that it's still a very constructive economic environment. But in some of our businesses, we're not going to grow 20% a year for 4 years. It has to normalize.

And that will come from the line of Mark Delaney with Goldman Sachs.

The follow-up question was on the automotive end market. I realize TE had very good results in the quarter. Some of the supply chain like Daimler and Osram have lowered their guidance. So I'm curious, did TE see any impact and was just able to overcome it? Or did you not hit impact at all?

No, we really didn't see an impact because of our global position. So no different than we told you throughout the year, 2% auto production. While certain customers may have had some things they talked about. Osram has been staying pretty steady. And if you look at us operationally, both versus even 90 days ago, our Transportation top line is going to be pretty similar for 2018 than we told you 90 days ago. So -- and it's broad-based. It's broad-based across regions. So I feel very good about where we position ourselves. Certainly, we have something that's unique with the content, and where we play both into the connected car and the electric vehicle trends. Not everybody in the supply base has that opportunity. So maybe they have some of those impacts, but I feel the content momentum we've had as well as our global position, always gives us an opportunity to be isolated from one-off small events.

We'll go to Deepa Raghavan's line from Wells Fargo for a follow-up question.

Heath, Terrence, could you size up some of the possible ForEx headwinds into fiscal '19? And is there a sensitivity we should be thinking about, so we could right-size our model, just given the inflection point here?

Thanks, Deepa. And it's a fair question. We're obviously working it real time. If you look at the basket of currencies that we have, you've got to kind of look at when those kick in, in terms of the weakening, the strengthening dollar against that basket. Certainly at this point, it turns into a year-over-year headwind in our fourth quarter, which is where we're sitting at today. And then, as we get into next year, it has a little bit less of a pointed impact at today's rates in our early part of fiscal '19. And then it starts to kick in as a much more pointed headwind in the latter part of our second and third quarter. Again, as rates gets today. We're not economists, we're not trying to predict what the dollar is going to do. But we'll quantify that as part of the guidance. I would tell you though that it will be a net headwind for the full year '19. We are not going to quantify that externally yet, though, but -- and we'll keep an eye on what the dollar does.

And another follow-up question from the line of Amit Daryanani with RBC Capital Markets.

Heath, I guess, when I look at the total restructuring initiative, I think $150 million is the number that you guys have talked about. How do I think about the payback and when do you get the savings from that into your model? And very specifically on the Industrial side, let's say revenues are flat in '19, how much cost do you think is taken out of the model to margins? I'm trying to figure out how much the margins go up in Industrial specifically even if you don't have revenue tailwind from the cost-reduction initiatives?

Well, Amit, good question. The dollars that you see us incurring now, relative to restructuring, are for things that have been announced in terms of facility consolidations, largely. And there's still a couple more of those to come that you would expect to see in our fourth quarter results and then into the early part of '19. However, just because those were announced when we record the charge doesn't mean that the costs come out instantaneously. Those tend to be on an operational time line that continues to support our customers and everything else in those types of transitions. So it can be a couple of years, depending upon where the facilities are and I would tell you that we're still targeting high teens margin -- mid- to high teens margins for the segment, similar to what we talked about in our Analyst Day. But it's going to take us a couple of years to get there. 2019 actually is quite a big year operationally for our Industrial segment as some of these announced restructuring programs and site consolidations are being worked real-time. Some of that is captured in the charge that we took. Largely, though, that's around severance costs and so forth, earning asset impairments. And then there's real operational costs that are rolled through our results in 2019 relative to parallel production and these types of things in terms of move costs. So I wouldn't want to oversell that you're going to see another 100 basis point improvement in 2019 in Industrial, but I do think we'll continue to push the peanut forward on that. And then as you get into certainly 2020, when some of these sites officially go offline, you will see a more pointed impact.

And that will come from the line of Shawn Harrison with Longbow Research.

Wanted to just get your thoughts on the M&A environment. And the reason I ask is, maybe 2 weeks ago, one of your quasi competitors paid, I think, a pretty healthy multiple, at least on a sales basis, for an industrial connector company. And so are you seeing, if we're talking M&A, higher valuations out there in the market? Do you think this is maybe just kind of a one-off transaction?

Shawn, thanks for the question. I think like we shared with you, what Jeanne talked to you back in the [fall,] it is an expensive environment. And it's been an expensive environment. I don't think that's changed. It hasn't decreased from where we've been. I think the key when you think about TE is how we've talked to you about where bolt-ons play in, and where we -- they tie into that strategic value. And I think our strategy is very -- has stayed consistent as well as, how do we make sure we get the [current per] owners from ROIC over time? So net-net, I would say the environment still is frothy. And I think we're staying disciplined during that environment because we have something, I think, pretty special in the organic growth opportunities we have. So I don't feel we need to be compelled to do something like we told you on Investor Day. It's how do we continue to strengthen our portfolio long term and create value for the investors. So I think it is a balance with organic first, inorganic supporting it. And we're going to be looking at how we invest our incremental dollars or free cash flow. And like Heath and I have been talking about, we have taken it up on the organic side here this year to really make sure we hit the organic opportunities, which is the best return.

All right. Well, I want to thank everybody for joining us on the call this morning. And if you have further questions, please contact Investor Relations at TE. Thank you and have a great day.

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