Ladies and gentlemen, thank you for standing by. Welcome to the TE Connectivity reports fiscal first quarter results. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Keith Kolstrom, Vice President of Investor Relations. Please go ahead.

Good morning, and thank you for joining our conference call to discuss TE Connectivity's first quarter 2012 results. With me today is our Chief Executive Officer, Tom Lynch; and our Chief Financial Officer, Terrence Curtin. During the course of this call, we will be providing certain forward-looking information, and we ask you to review the forward-looking cautionary statements included in today's press release. In addition, we will use certain non-GAAP measures in our discussion this morning, and we ask you to review the sections of our press release and the accompanying slide presentation that address the use of these items. The press release and related tables, along with the slide presentation, can be found on the Investor Relations portion of our website at te.com. [Operator Instructions]. Now let me turn the call over to Tom for some opening comments.

Thanks, Keith, and good morning, everyone. If you'd please turn to Slide 3, Q1 was a slow start to the fiscal year for us. We anticipated a slow start, but it was softer than expected. Sales in the first quarter of $3.3 billion were up 3% overall versus last year and were down 3% organically. And this excludes currency translation in the ADC acquisition. And the sales level was about 3% below the guidance range. And I'll come back to this in a minute. Adjusted earnings per share were $0.66, $0.04 below the midpoint of our guidance range driven by the revenue shortfall. Free cash flow was $85 million in Q1, which is in line with our expectations, and orders were $3.2 billion in Q1, with the book to bill excluding our SubCom business of 0.98. Now as we came off a strong fiscal year '11, we did expect the first quarter of our fiscal year '12 to be down sequentially by more than just normal seasonality because of continued inventory corrections and the slowdown in the telecom market, particularly the North American telecom market. Our Q1 guidance was a sequential decline of about 5% to 7% in revenue and approximately $0.15 EPS. We ended up being down 9% in revenue and 18% in EPS. When we reaffirmed our guidance at our Investor Meeting in early December, revenue and earnings were tracking in the range. However, sales dipped below this rate in the last 4 weeks of the month, particularly in our European businesses and in the North American telecom market. This impacted our Network and CIS segments and more than offset another strong quarter in our Transportation business where revenue grew 7%. Despite the lower sales volumes in Q1, we were able to maintain our adjusted operating margins above…

Thanks, Tom, and good morning, everyone. If you could please turn to Slide 4 and let me give you an update on the sales performance. Total company sales of $3.3 billion were up 3% year-over-year on an actual basis but down 3% organically. The slight year-on-year increase was driven by 7% growth in our Transportation Solutions segment and the acquisition of ADC, which contributed $185 million of additional quarter 1 sales. And to remind you, we closed that acquisition back in December of 2010. Partially offsetting these positives were organic declines in the Network Solutions segment of about 3% and the Communication and Industrial Solutions segment of 13%. On a sequential basis, our sales declined 9% from our 13-week fourth quarter revenue with $3.6 billion. Our quarter 1 guidance was based on an expected sequential decline of about 5% based on the 13-week fourth quarter. As Tom mentioned, larger-than-expected declines in North American telecom spending and our businesses that serve the European infrastructure and industrial markets show the additional weakness versus our guidance. Geographically and on an organic basis, our sales declined year-over-year in Europe by 7%, while the Americas and Asia were essentially flat. Now let me give you some highlights to the key markets in each of our segments, and as I talk through this, all changes I mention are on an organic basis, which excludes the effect of currencies. So if you could please turn to the next slide. In our Transportation Solutions segment, sales increased 7% versus the prior year. In the automotive market, our sales increased 7% versus the prior year, with sales being up 14% in Asia and 12% in the Americas. Sales in Europe were about flat, and in China, our sales were up 13%. Global vehicle production was approximately 20 million units…

Thanks, Terrence. Please turn to Slide 14. I touched a little bit on this earlier, but let me reiterate our outlook. For the second quarter, we expect our sales to be in the range of $3.3 billion to $3.4 billion. This is down slightly versus the prior year on an organic basis and about flat sequentially. On a year-over-year basis, we expect the Transportation segment to be up approximately 3%, Networks down about 4% and CIS down about 10%. CIS continues to be adversely impacted by weaker spending in our DataComm and industrial businesses, as well as channel adjustments as Terrence mentioned. But we do think it has bottomed out, and we expect the channel inventories to be close to normal at the end of the second quarter. Our adjusted earnings per share are expected to be $0.64 to $0.68, about flat with Q1. For the full year, sales are expected to be $13.8 billion to $14.2 billion, which is flat to slightly up versus 2011 on an organic basis and at currency rate -- at current rates, currency translation would be about a $300 million headwind versus last year, and this is the weaker euro. Midpoint of our guidance is $14 billion and our major assumptions are auto production growth, 3% to 80 million vehicles year-over-year; second half seasonal increases in telecom and energy infrastructure; and an improvement in our CIS markets in the second half of the year compared to the first half, driven by the channel getting in balance and seasonality. Adjusted EPS for the year are expected to be $2.90 to $3.10 compared to 2011 adjusted EPS of about $3.03. And this $3.03 excludes the extra week in last year. So essentially, we're calling our current outlook for 2012 to be flat with 2011. Now if…

[Operator Instructions] Our first question comes from the line of Amit Daryanani. He is with RBC Capital Markets.

Maybe just to start off on the CIS segment, could you just talk -- when you look at this 13% organic decline in sales, how is that different in terms of sales to OEMs versus sales to the channel? And I'm assuming the softness came fairly late in the quarter. What's the conviction it's going to recover? Because you guys are actually talking about I think about 20% plus growth in the back half versus the first half.

Amit, I would -- a couple of things. Let me -- the first part of that question would be it's pretty balanced across a little more in the channel because of the inventory correction. So clearly, the downturn there, I'd say, the channel adjustment later in the quarter more than early in the quarter. And if you look at the normal seasonal patterns of the business, we would expect -- I mean, that business typically will be stronger in the second half, and we also believe just that the absolute inventory levels at our customers, we know how much inventory we have in the channel and it's down. And it went down quite a bit in the first quarter. So those are the data points that give us some confidence. The OEMs we talk to, I'd say, are cautiously optimistic, but it's as much about seasonality and the channel getting back in balance as anything.

And I guess here, Tom, if I listen to most of the semi company that seem to be talking about the industrial side potentially starting to bottom out, do you think that could just be a reflection that you have much shorter lead times, so you're potentially going to see that bottoming out at quarter delay than all the semi companies are seeing right now?

Yes, I think that's it. And that's typically -- we would typically be 3 to 4 months after the semis in certain industries. So yes, I think your point is right on that.

And just finally, on the Transport side, fairly impressive margin performance. Could you really just talk about what drove margin expansion in the December quarter when sales, I think, were down about $100 million? And then as you look through fiscal '12, can you maintain this high 15% margin run rate in that segment?

Let me talk a couple of things. Certainly, from the standpoint that we were very pleased with our Transportation segment performance in the quarter even though it did get a little bit softer in Europe. When you look at it, we did go up close to 16%. We do think we'll be maintaining around 15% from the years, so some of it was a little bit of timing on the margin, Amit. But we do think that the Transportation segment, even with the slightly lower global auto production, will stay about 15% for the entire year.

Okay, the next question comes from the line of Amitabh Passi with UBS.

I just wanted to follow up on the first question. Again, looking at your CIS segment, particularly DataComm and Industrial, I mean the sequential decline, I think, if the numbers are correct, are almost in the order of 20% to 30%. And I don't think we have seen these level of declines since the sort of the downturn in '08, '09. So I just wanted to understand better. I mean, OEM demand I don't think is contracting to that level, but from your perspective, you could maybe shed a little more light in terms of which pockets of these end markets are you seeing the greatest weakness. And then what gives you, I guess, or where do you expect sort of the most recovery as you look forward?

Well, there's 3 big pieces in our industrial business, which would be -- well, 2 big pieces. There is the general industrial market, which is equipment makers, rail, solar, things like that and also appliance, we include for purposes of this. So those businesses end market demand and appliance has been down. We're starting to see that level off. In the general industrial market, it's been drifting down, but the channel has been drifting down at a much steeper rate because about half of our business in industrial we serve through the channel. So when we see the business ramping up, if you would look at our trends over time, as that market begins to grow, we tend to grow ahead of it as inventory gets laid in to support the OEM's build plans. And then when the turns down, we tend to contract faster than it. On DataComm, I would say that we do quite a bit of business through the channel in DataComm as well, but I think there it's more of an end demand, continues to be weak at the big equipment makers. So that, I think, is going to last a little longer than industrial.

Got it. And then just as my follow-up for Terrence, again, going back to the CIS and perhaps even Network Solutions, are there any other leverage you have to maybe minimize the downward impact to margins? I mean, we're seeing CIS margins now go from 15% to about 8.7%. Just wondering what else can you do to maybe accelerate the margin recovery in the back half?

What we -- let's -- mainly the action we've been taking on the top have been mainly in CIS. We have been reducing our workforce in that area to basically resize with the demand expectations, and right now, we do expect in our guidance that the CIS business in the second half, with the actions and the volume, will get back up into the 12% to 13% OI range in the second half of the year. So certainly, we're being hit by the volume. To your point, we were down. In the first half, we still expect that to be down more than 10%. And we expect our second half really to get flat with prior year in CIS. So when you look at certainly we have the inventory corrections Tom talked about, we think with that, we will get our margins back up into the 12% to 13% range on being flat in the second half.

Next question comes from the line of Shawn Harrison with Longbow Research.

Just wanted to -- I guess, a clarification on the back half guidance in regards to distribution versus just seasonality, how much of that back half growth is distribution adding incremental inventory? Is there anything baked into that guidance? Or is it solely distribution stops getting worse and seasonality?

The back half, the $600 million, if you look at second have versus first half revenue, about $100 million of that is distribution. And it's not so much filling up the channel. It's really not draining the channel more than anything else. So it's where sell-through begins to balance with sell-in. So what we sell in equals what they're selling out. As opposed to their sellout is out of balance with sell-in now.

Have you seen regionally, I guess -- is it Europe just still the one area where the -- it's destocking the most and then the other regions that use distribution kind of more back to normal?

I would say Europe is the most, but there is still correction going on in Europe, U.S. and in Asia in the channels, but it's more pronounced in Europe because the end demand has been a little softer there. Whereas in the U.S., now I think we're seeing, in most of our markets, things pick up. It's the same -- and Asia has been fairly steady.

The next question comes from the line of Jim Suva with Citi.

This is Samuel Meehan actually on behalf of Jim Suva. Just taking a quick step back and I wanted to get a better sense of why the year-over-year is so soft, the midpoint of guidance being flat. And it still includes the ADC acquisition and presumably a boost to auto. You said it was supposed to be [ph] up 3% year-over-year and helped by the Thailand pushout of orders. Can you just go on to some details of what specifically is lagging and what management can do to improve that?

Full year-over-year guidance is what you're asking?

That's right. On a sales level, yes.

So the big change -- so you have -- well, we had ADC in 10 months last year, so there's a little bit of a pickup from ADC, $185 million. You have the euro, which is a couple of hundred million plus weaker year-over-year, and then you have the European end markets. Right now, we're calling off about $300 million year-over-year. The other piece is, telecom spending relative to our guidance for sure, is going to be a little down our last guidance.

Got it. And then just to confirm, the pending Deutsch acquisition is not included in the acquisition -- in the outlook. Is that correct?

That won't be in until it's closed.

Next question comes from the line of Craig Hettenbach with Goldman Sachs.

Tom, can you dig a little bit more into the auto market just by trends by geo and particularly what you're seeing in Europe, the local consumption versus how the export market looks like for your European customers?

Sure, I think it's mixed. Exports continue to be strong. We saw a little -- well, [indiscernible] Europe, the southern Europe market continues to be slow. That's been slow for a long time, and it's well below its normal demand and that's several years now. Germany, which is where we're strongest, is both pretty healthy as a local market, and of course, about half of that business gets exported. So -- and the U.S. and China and Eastern Europe are fueling the export market that we serve through the German OEMs. In Asia, I'd say it's steady. We're still seeing a recovery, particularly with the Japan OEMs from last year's earthquake, catching up with some pent-up demand. And the U.S. is growing double digits, and we're benefiting from that. So when you look at the big picture, year-over-year, European auto is going to be flat to slightly down for us. Asia will be up nicely. China will be up double digits. That's part of that. And the U.S. will be up double digits.

All right. And the next question comes from the line of Wamsi Mohan with Bank of America.

This is Ruplu, filling in for Wamsi. Just looking at the guidance for the second half, you're guiding operating margin to be about 14% and the full year for 13%, but that doesn't include the Deutsch acquisition. Just trying to understand how Deutsch would affect that. Do you think that you would get to the 14% by year end if once that's layered in?

When you look at it, you're right how we put it in. Due to the timing of regulatory processes, it was a little -- we don't -- we would not include that until the timing gets more certain. So from that viewpoint, certainly that will be additive, both the EPS when it closes in the timing that's left in the year. Deutsch could improve the margin little bit, but I don't think it would been bring the full year margin up from what's low 13s included in our guidance up to 14% for the year.

I see. Okay. And just the last question on book to bill, looks like even with the slowness overall, book to bill for the first quarter in both CIS and Network Solutions, it was better than the fourth quarter. And you mentioned a positive book to bill going into January. So based on the trends that you're seeing, do you think that book to bill in CIS and Network Solutions can actually be positive in the March quarter?

It's tracking that way right now. So if it continues, yes. What we saw -- just to kind of recap for the company, October and November of last year, we are at a 1 book to bill. We dipped in December. We're back up slightly over 1 in January. Now we need to see it more than 3 weeks. But I would say it is giving us some confidence. And if you look at where our orders were running relative to last year in January, we're running 4% to 5% above that.

Next question comes from the line of William Stein with Crédit Suisse.

I'm hoping to beat this distribution horse a little bit more, given that, that was a big problem in the quarter. And yet, you've done a lot of consolidation among your distribution partners. Can you talk a little bit about percent of revenue through distribution now, your rev rec policy on sell-in or sell-through and what you can do to improve visibility in that segment? Then, I have a follow-up if that's okay.

Well, to it -- you have a couple of questions there. Number one, with what we've done so far, we still have about 15% of our total sales through distribution. That's moved up maybe a point with the changes we've made. On revenue recognition, we record revenue when the title transfers when we actually sell in. So we don't do it like the semis that do it on sellouts. So from that viewpoint, we do record revenue when we sell in, and they take the inventory. On visibility, I mean, certainly, they are a channel. We do talk to them, but certainly, this has been deeper from what they communicated to us when we do our forecasting. And from that viewpoint, I don't know how we improve that visibility, but we continue to have discussions and it does -- similar to the semi comment made earlier, it does look like we are in the bottoming here.

Can I talk about auto production for a minute? Can you remind us what your prior full year or I guess this is on your fiscal basis, auto production estimates were? And your sales in that market, I think, suggests that you're gaining share. Can you talk to us about how that trend has maybe changed or improved over time? And what gives you the confidence that it will continue in that direction?

Sure. When you look at it -- last call, we talked about basically a global auto production, around 82 million units, and as we said, we expect it to be 80 million now. With the decline really being driven by Europe as those production estimates have moderated and really, as part of what Tom said on our guidance estimate, we have reduced our automotive revenue by about $100 million per year for the production declines in Europe. So we still, even on a 3% auto production increase globally, we do expect to grow about twice that amount this year based upon our share as well as content increases.

The next question comes from the line of Matt Sheerin with Stifel, Nicolaus.

Question on cost controls, I know you had some cost cutting measures in the September quarter on weaker demand. Doesn't sound like you've implemented anything incremental here. And is that, Tom, due to the fact that you are expecting somewhat of a snapback in the rest of the year, in the second half of your fiscal year?

Matt, a few things: One, we have cut additional cost in the quarter. I mean, part of our -- where we can select, we do. And so even with short-term changes in demand, there is some element of our cost structure we can flex. We do try to protect our ability to flex up though. So you're right. That's why the margin when you get down to 10%, we lose over a point in margin because we do believe that several other markets are bottoming out. But we definitely reduce costs in the quarter, and we flexed down and up, I think from the end of the third quarter, we're down 6,000 people. Some of that is temporary. Some of that's flexing out. It's difficult things, but we do flex within the quarter as well, and of course, we tighten down discretionary spending. Plus, the second part of your question I would say we do expect demand to improve toward the -- end of this quarter and into the second half. So we're making sure we'll be ready for that.

Yes, just to add to Tom's first question -- first comment, we've taken our temporary workers down by about 20% since June, and that continued through the first quarter. And I think that's why you saw some of the resiliency in the operating margin. So about 2/3 of the 6,000 Tom mentioned are out of our temporary workers, and then the other element was our workforce itself.

Okay, that's helpful. And on the Transportation group margins, which obviously were very strong, looking at a mix change with euro, weaker than expected this year, does that have any more of a negative impact on margins, the weaker euro because of mix and because of the dollar content higher in vehicles in Europe? Or does that not make a difference?

No. I think one thing is that where the weaknesses is, is in more with the non-German OEMs, and we have a little less content there and in the more high-end content, in the German OEMs as well. So no, I don't expect any margin pressure from that other than the normal flow-through on MOT's [ph] revenue.

All right. And the next question comes from the line of Sherri Scribner with Deutsche Bank.

I just wanted to get a little bit of detail on your thinking for the second half of the year. I know you've talked about some strong seasonality in the CIS segment. In terms of automotive, I would assume that would be relatively flat with some growth. And then telecom, I assume there'd be some seasonality. But wanted to get some detail on the growth expected in those different segments.

Sherri, this is Terrence. So when you look at CIS and Network Solutions for the first half, the second half, both of them will be up about 15% first half to second half. Whereas, automotive will be up slightly about 3% first half to second half. So you're right. When you look at CIS, as I mentioned, that would be basically getting back flat year-on-year. And then Networks, it would be up about 4% year-over-year, second half to second half. So that's how we're looking at it. And as Tom said, a big chunk of that seasonality but also some inventory -- lack of inventory correction in the second half in CIS.

And then thinking about the network markets, what gives you the confidence that we'll see seasonality with that type of strength in the second half of the year? Are you expecting that some of the issues with acquisitions are going to be resolved? Is it primarily related to the distribution channel? How do you feel comfortable with that half-over-half growth?

Part of it is -- and look, I think there is an element of uncertainty for sure. But part of it is the decline was so abrupt in Q4 and Q1. And what our customers are telling us was there's -- a significant part of that was related to what was going to play out in the U.S. So until that was sorted out, where should I spend and how should I spend? So we think that's sort of the unnatural part of the decline, and we would expect that to catch up. And again, we're listening to our customers. And also, when you look at the need for more coverage and more capacity, that's only going to get worse, and we know that there's CapEx constraints that all companies have to go through. So it's really a little bit of a bounce back off of a very, very low point, as well as coming out of the winter into the spring and the summer when you have the natural increase in build. But I'd say if you were to sort of handicap all of the major segments, there's probably a little more uncertainty with this one.

And Sherri, the other thing I would add is that basically assumes -- we're sort of assuming a flat to slightly down global telco CapEx picture.

All right. The next question comes from the line of Mike Wood with Macquarie.

Can you give us a little bit more color in terms of just the timing in the telco spending that you just mentioned with the freeze in CapEx by like AT&T and what Verizon is doing and how you think that can actually trend throughout the year given the timing of like announced -- the whole M&A picture?

Yes. So I think as I just said, down almost 20%. The first quarter levels of our total telecom business was down about 24% from where it was in the second half of last year, so a pretty substantial decline. Our second half assumption is about flat with the second half of last year. So yes, I think there is some uncertainty there, but we're not looking for a huge boomerang above last year's spending level. So our assumption for spending -- telecom spending on our kind of equipment versus what we thought a quarter ago is down, clearly down.

And what are you seeing with some of ADC's key products like the DAS?

DAS is very big in the U.S. and was very slow in Q4 and Q1. There are many things that where there was just no spending.

The next question comes from the line of Anthony Kure with KeyBanc Capital Markets.

Just wanted to touch on the comment around energy and the expected improvement in Europe. Can you just talk about what markets you're expecting the improvement in and sort of what's driving that?

That comment was meant to be broad based, not just Europe. We did see similar to a lot of our businesses towards the end of December, a little bit of a contraction there as December ended. But my comments that I made on the script really related to global energy, not just Europe. And also, that is a business that does have very pronounced seasonal patterns in our Q3 and Q4 due to it being in the outside environment. So it does include seasonality plus the continued demand we're seeing around the world.

And I’ll just say a little specificity around Europe is our first half of '12 will be slightly below our first half of '11 in Europe in energy and about equal with the second half. So to Terrence's point, we're not counting on growth in Europe. That's part of this broader -- the EUR 300 million -- the guidance change across our European businesses, and energy's part of that.

The next question comes from the line of Steve O'Brien with JPMorgan.

Stepping back for the big picture, back in December, TE raised its organic growth expectation, longer-term organic growth expectation to 7% to 9% up from 6% to 8%. Are there anything that you're seeing now in terms of your end markets or the longer-term outlook that kind of have you questioning that organic goal and the whole sort of 20 by 15 plan? And just pointing out that auto right now and even Network Solutions clearly seem to be tracking towards the lower end of the guidance range even after -- even as we go into the second half of 2012.

Well, I would say that the climb up, as we indicated there, there's a steepness to it. It's a little bit steeper, but I don't feel, as I said at the end of my comments, I don't feel different about the fundamentals. I think a weak quarter or 2 always gives pause for reflection, but if you think of the things that are driving it, creating more efficient energy with the requirements that are in automotive, in cars around the world, increasing requirements for emission improvement, in commercial vehicles for emission improvement, the whole new commercial aircraft rollout that's underway and we're benefiting from the buildout of broadband. Yes, it's a little slower than we thought this quarter and next quarter. But, boy, it's still in the beginning of the digital age really when you look at that. So everything that we model and the way the network looks like, we're still really happy to have the best fiber portfolio. So I don't think we don't feel different about the fundamentals. Could the timing be off a little bit? Yes. But we've also seen the way things bounce back after being depressed for a quarter or 2. So I still like our position.

Great then. And things do sometimes tend to bounce harder than we always expect, on the upside, too. On the raw materials and margin front and pricing pressure, I guess, a couple of different topics but all getting back to margin. I mean, are you seeing more OEM pricing pressure? And is there heightened pricing pressure with potential reductions in the cost of raw materials? In other words, OEMs seeing the drop in copper are asking for a reversal to any of the pricing concessions that may have happened last year.

Well, I think there's always pricing pressure. No question. I think -- I don't think it's materially different. I think we face it all the time. I mean, if you look at copper, it dipped down for a while. Now it's bounced back up. And when it dipped down, we probably got a little more question about that, but we were adjusting prices to a level of copper that was lower than it was even 3 to 6 months ago. I think it's just a fact of life in this business that we have to always contend with, and I think we're doing a better job than we've done in the past with it, both on pricing and productivity. But it's not going away.

Next, we go to the line of Shawn Harrison with Longbow Research.

Just one brief follow-up, looking at CIS, getting back to a 15% EBIT margin, I know at least a minimum is the long-term goal. But what revenue level do you project TE needs to be at to deliver that type of revenue given what we've seen with commodities about your price increases, cost reductions, et cetera?

If you look at that from a CIS specific standpoint, you would probably need to be in the 1.3 to 1.4 per quarter level roughly, Shawn. So when you look at, you would need to be up towards that level.

All right. Next, we go to the line of William Stein with Crédit Suisse.

I wanted to ask about the Consumer Devices end market. It looks like you merged that with your computers end market. Is that right? And on a merged basis, it looks like they're down 15%. Did that surprise? And can you talk to us about the split between those 2 end markets?

That did not surprise. That was completely in line with our expectations that we laid out. So when you look at it, one of the reasons it was merged was just the convergence of devices. It is difficult to break out tablets and mobile devices, so that’s why they were put together, and it was in line with our expectations.

And Touch seemed to have a good quarter. Is that Sensitive Objects working? Or is that your traditional business? And maybe just [indiscernible]

The traditional business. Sensitive Object technology is very promising, and we have our first product in the market with that. It's a very little bit of revenue right now, but that's an exciting technology. But it's about -- the improvement is in the traditional business.

There are no additional questions. Please go ahead.

Thanks, everyone, for joining the call today. Please, as always, feel free to call either myself or Matt Vergare with any follow-up questions throughout the day. Thanks very much.

Thank you.

That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. Replay will be made available to you. You may now disconnect.