TE Connectivity Ltd. (TEL) Q1 2017 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the TE Connectivity First Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Vice President of Investor Relations, Mr. Sujal Shah. Please go ahead.

Good morning. Thank you for joining our conference call to discuss TE Connectivity’s first quarter 2017 results. With me today are Chairman and Chief Executive Officer, Tom Lynch; President, Terrence Curtin; and Chief Financial Officer, Heath Mitts. During the course of this call, we will 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 the accompanying slide presentation that address the use of these items. The press release and related tables, along with the slide presentation, can be found on the Investor Relations portion of our website at te.com. Finally, for participants on the Q&A portion of today’s call, I would like to remind everyone to limit themselves to one follow-up question to make sure we are able to cover all questions during the allotted time. Now, let me turn the call over to Tom for opening comments.

Thanks, Sujal and thanks everybody for joining us today. We had an excellent start to fiscal 2017, delivering revenue growth, margin expansion and earnings growth well above the midpoint of our guidance. Improving markets coupled with strong execution across our segments drove this performance. I will provide some highlights and context for our Q1 results and then I will turn it over to Terrence to provide more detail on our performance and outlook. TE’s strategy has been driven around three key pillars for sometime now. First, our focus on harsh environment applications, these applications demand engineering and manufacturing excellence, which provides competitive differentiation. TE stands out as a company with a broad range of harsh application knowledge and products that can provide solutions to customers anywhere in the world. Second, driving our TEOA operating system throughout the company to improve customer service and productivity and reduce our fixed cost footprint. You can see and feel the benefits across the company and through feedback we received from our customers. Third, consistently execute on our balanced capital allocation strategy, which has enabled us to make strategic acquisitions that have expanded our harsh environment portfolio, while consistently increasing dividends and buying back significant amounts of stock. Since becoming a public company in 2007, we returned approximately $12 billion to shareholders and bought back 184 million shares. We expect to maintain our balanced capital strategy returning two-thirds of free cash flow to shareholders and using one-third for acquisitions. The cumulative effect of this strategy enabled us to grow share on the markets we serve and transform our portfolio with more growth opportunities, while consistently returning capital to our owners through a strong cash return business model. The net effect is that a $1 of revenue today drives 50% more adjusted EPS than 5 years ago. This quarter’s results reflect the benefits of this strategy. Organic sales growth was 7%, driven primarily by strong demand throughout our businesses in Asia; adjusted operating margins exceeded 17%; and adjusted EPS was $1.15, well above the midpoint of our guidance. We delivered another strong quarter of orders growth, with growth across all three segments. We continue to perform very well on harsh applications and are getting growth and profit to contributions across the portfolio. In the Communication segment, we saw year-over-year organic growth in data and devices earlier than our expectations. This is driven by ramps of high-speed solutions at cloud infrastructure customers. I am pleased that the multiyear transformation of D&D has resulted in a refocused portfolio that will drive growth and higher profitability for the segment. We are also performing well in our acquired businesses, with a growing design win pipeline that gives us confidence for future growth. The first quarter demonstrates the strength of our business model. For the full year, we are expecting to expand adjusted operating margins by 50 to 70 basis points on 4% organic growth, with margin expansion being driven by all of our three segments. Versus our prior view 90 days ago, we are raising our full year organic revenue outlook by 100 basis points and our adjusted EPS guidance to $4.40 at the midpoint. Currency exchange rates are expected to impact full year adjusted EPS by $0.16 versus our prior view, and this is factored into our guidance. I am pleased that we are growing adjusted EPS 11% year-over-year even with the negative impact of the stronger dollar. Terrence and Heath will go through the moving pieces in more detail as we go through the call. Terrence, I will turn it over to you.

Thanks, Tom and good morning everyone. Before we get into the segment results and updates that I typically go through, I want to cover our orders for the quarter, which help provide the foundation for the trends that we are seeing as well as of our expectations going forward. If you could please turn to Slide 4, which shows our order trends, excluding our SubCom business. Demonstrating our continued momentum that started late last year, orders were up 11% year-over-year, with the book-to-bill of 1.06. And on an organic basis, orders grew 10%. We saw organic orders growth across all three of our segments in quarter one, excluding SubCom. We also saw orders growth in all regions with particular strength in Asia, which grew 26% year-over-year, with strength in China. In Europe and the Americas, orders grew approximately 3% and 1%, respectively. In Transportation, orders increased 12% year-over-year and were up 4% sequentially as China OEMs increased production ahead of the expected expiration of government incentives at the end of the calendar year. Industrial orders grew 15% year-over-year due to the Creganna and Intercontec acquisitions and organic orders grew 4%, with growth across each of our three industrial businesses. In Communications, excluding SubCom and the sale of our Circuit Protection business last year, we saw year-over-year organic orders growth of 14%, including 7% growth in data and devices as we begin ramping high-speed connectivity that is benefiting from cloud applications as Tom mentioned. Please turn to Slide 5 so we can discuss our results by segment and let me start with Transportation. The first quarter was an excellent quarter for our segment, with sales growing double-digits year-on-year and adjusted operating margins expanding 340 basis points on increased volume and productivity improvements. Segment sales exceeded the expectations due to strength in China and Korea. Our auto sales were up 13% organically in the quarter, well ahead of auto production growth of 5% due to increased content from the secular trends we talked to you about around safe, green and connected, coupled with our very strong global leadership position. Growth was led by demand from China as the expected expiration of government incentives spurred demand in the quarter. Note that these incentives are now being faced out over the course of the year, so as we look forward, we expect that vehicle production growth in China will continue to be front-end loaded in the first half of 2017. For the full year, we expect 4% growth in vehicle production in China and 2% growth in auto production globally. While this assumption of 2% auto production growth globally is an increase from our prior view of 1%, this sell-side comes from the strength in the first half in China, with our outlook for the second half production being the same as our view 90 days ago. For the full year, we expect to continue to outpace the growth of production due to the continued benefit of content growth as well as share gains. Turning to Commercial Transportation, our team delivered another very strong quarter against still a tough backdrop. This was outperformance versus the market, with organic revenue up 16%, driven by a very strong heavy truck market in China, content growth due to the adoption of new emission standards and regulations as well as share gains. In our sensors business, the acquisition last year of Jaquet drove 3% growth overall. The business declined slightly on an organic basis, with growth in automotive applications and industrial applications being offset by softness in the North American heavy truck applications. We are expecting organic growth for the year in sensors and continue to expect a further growth inflection as we go into 2018 as further auto applications ramp the volume. For the segment, adjusted operating margins of 22% were up 340 basis points year-over-year, with strong flow-through on a double-digit organic sales and increase of productivity improvements. When you think about the segment margin, our margin expectations remained the same for the segment and you should continue to think of steady state transportation operating margins as 20% plus or minus to 1. Please turn to Slide 6, so I can discuss our Industrial Solutions segment, which performed in line on both the top line and on the margin side in quarter one. Industrial solutions sales grew 12% on a reported basis, driven by the Creganna and Intercontec acquisitions and generated 30 basis points of adjusted operating margin expansion, despite the 80 basis points of headwind from the declines in oil and gas. If we had owned Creganna and Intercontec in the year ago period, our growth for this business would grow up at 16% year-over-year, demonstrating strong performance of these acquired businesses. Industrial Equipment, we grew 1% organically, driven by strengthening market around the factory automation area as well as growth in medical. Aerospace and defense remained strong with 4% organic growth, driven by increased content on new airframe builds as well as momentum in defense programs. Oil and gas declined 24% as expected due to the weakened market conditions and we feel that our oil and gas business has now bottomed and expect this business to remain stable at the current level as we benefit from new programs ramping later in the year. Our energy business declined 3% organically, with growth in North America and Asia more than offset by the softness in Europe. Adjusted operating margins were in line with expectations and expanded 30 basis points year-over-year to 11.3%, which includes the oil and gas impact I mentioned earlier. Going forward, we do expect the industrial segment operating margins to expand over prior year levels in the second quarter and then further into second half throughout the segment. I would also like to note that we also included adjusted EBITDA margins on the chart show margins and margin expansion, excluding the impact from the acquisition related amortization. And you can see in the segment that the year-over-year adjusted EBITDA margins expanded 120 basis points to 16.4%. So please turn to Slide 7, so I can talk about communications solutions. Quarter one was a solid quarter from the Communications segment, including our achievement of a key milestone in our data and devices business. D&D has returned to organic growth following 3 years of decline from product exits as we refocused the portfolio within the business. Organic growth is occurring six months sooner than we expected in the business. I would also like to highlight that we also have a very strong quarter growth in our appliances business and we saw continued operational improvements throughout the segment that I will talk more about in a little bit. Organically, sales were up 3%, with reported segment sales down 4% year-over-year, due primarily to the sale of the Circuit Protection business in March of last year. Our appliance business has very strong quarter growth, with 14% organic growth year-over-year, driven by China market growth, share gains and strength in North America. The growth in D&D is the result of new ramps at cloud customers and a completion of our multi-year journey to refocus the product portfolio in key growth applications. D&D grew 2% organically in the quarter and now we expect organic growth for the full fiscal year. In addition to the growth that we are excited about, data and devices also doubled its top earning adjusted margin from a year ago and we expect this business to be an increasing contributor to the profitability of the Communications segment going forward. On SubCom, the business declined slightly in the first quarter as a result of program timing. Our momentum continues through this growth cycle and we continue to expect SubCom to grow approximately 5% in fiscal 2017 based upon our very strong backlog. For the Communications segment, adjusted operating margins were 13.2% for the quarter, down 70 basis points year-over-year. And if you remember, this time last year, we had a one-time benefit on our SubCom business related to an early program completion, which raised our first quarter ‘16 margin in the segment by approximately 400 basis points. If you would normalize for this impact, Communications’ adjusted operating margins expanded significantly in the first quarter of ‘17. And to really illustrate the progress that we have made in this segment over the past four quarters, adjusted operating margins have expanded from approximately 8% in the second quarter of last year to 13% in the quarter we just completed. And we are proud of that accomplishment. So let me turn it over to Heath and he will cover the financials.

Thank you, Terrence and good morning everyone. Please turn to Slide 8, where I will provide more details on Q1 earnings. Adjusted operating income was $536 million, with an adjusted operating margin of 17.5%, driven by strong organic growth of 7%, productivity improvements and favorable mix. GAAP operating income was $486 million and included $47 million of restructuring charges and $3 million of acquisition related charges. For the full year, we expect restructuring charges of approximately $150 million, driven by footprint consolidations from recent acquisitions and structural improvements. GAAP EPS was $1.13 for the quarter. Adjusted EPS was a new record for the first quarter at $1.15, it was up 37% year-on-year and significantly above our guidance range set 90 days ago. Additional demand from China and productivity improvements drove the performance above our guidance to midpoint of $1. The 37% growth above prior year is driven by all of the levers we have in our business model. We benefited from volume fall through, on increased sales, acquisitions support, share buyback and a lower adjusted effective tax rate of 19.2%. Versus our guidance view of Q1, the currency exchange headwind was greater than expectations at $45 million of revenue and $0.02 of EPS. As a point of reference, our guidance is simply the dollar to euro conversion of 1.10 and the dollar strength has significantly hits the euro and it gets most major currencies in the quarter. For the full year, we are expecting currency exchange rates to unfavorably impact revenue and adjusted EPS by $300 million and $0.16, respectively versus prior guidance. I continue to expect full year adjusted effective tax rate of 20% for fiscal 2017, which is higher than the ETR last year. While nothing has changed in our tax rate assumptions, I want to point out that year-over-year, we get an EPS benefit in the first half of fiscal ‘17 and have an EPS headwind in the second half of fiscal ‘17. Remember that our third quarter of 2016 and fourth quarter of 2016 tax rates were 17% and 13%, respectively. With our 20% tax rate assumption this year, we expect to see year-over-year EPS headwind in the second half of approximately $0.13 due to the difference in our tax rates. This is not a change versus our guidance from 90 days ago, but I wanted to provide some color on the timing. Page 16 of our slide deck contains a bridge that provide the details for the first half and second half. Please turn to Slide 9. As Tom mentioned in his opening remarks, our solid results reflect the impact of our transition to a higher margin, harsh environment portfolio, our focus on TEOA and our capital strategies. Our business is generating higher operating leverage as a result of the strategy and each dollar of sales generates 50% more adjusted EPS today than it did 5 years ago. Adjusted gross margin in the quarter was 34.8%, a 140 basis point improvement from prior year, driven by volume fall-through on increased volumes, productivity improvements, favorable mix and savings from portfolio actions with D&D. As noted earlier, adjusted operating margins were 17.5% in the quarter, up 180 basis points year-over-year. In the past, we have discussed how our business model outlines that TE can generate 50 basis points of adjusted operating margin expansion on organic growth of 5% to 7%. However, with the transformation of the portfolio and continued successful execution of our TEOA initiatives, we believe that we could generate 50 to 70 basis points of adjusted margin expansion in 2017 on 4% organic growth, which demonstrates our strong organic model. We will also increasingly discuss adjusted EBITDA at the segment level to help explain the cash earnings of our businesses as it exclude the impact of amortization from acquisitions. For TE, adjusted EBITDA margins in Q1 were strong at 22.7% and up 190 basis points year-on-year. To show the progress that we have made, adjusted EBITDA margins are up over 500 basis points from 5 years ago. Cash from continuing operations was $404 million and free cash flow was $218 million in the quarter. We returned $234 million to shareholders through dividends and share repurchases in the quarter. Looking ahead, we continue to expect free cash flow to approximate net income, capital expenditures to be approximately 5% of sales. We remain committed to our disciplined long-term capital strategy of a balanced return on free cash flow to shareholders, while still having ample free cash flow for acquisitions. As a point of reference, we have increased the dividend per share by approximately 300% since becoming a public company. Our balance sheet is strong, with reasonable debt levels and then the ability to continue to support the return on capital and acquisitions going forward. We have added a balance sheet and cash flow summary in the appendix for additional details. Now, with that, I will turn it back to Terrence.

Thanks, Heath. So now, I will get into our guidance for the second quarter as well as for the full year of 2017. So, if you could please turn to Slide 10 and I will follow up with the quarter two outlook. We expect second quarter revenue of $3.025 billion to $3.125 billion and adjusted earnings per share of $1.05 to $1.09, representing sales growth of 4% on both the recorded and on an organic basis and 19% EPS growth at the midpoint. This guidance does include the impact of a stronger dollar, which we expect to be a $60 million headwind to sales and a $0.03 headwind to EPS on a year-over-year basis. Following two consecutive quarters of record adjusted earnings per share and strong orders in the first quarter, we expect our second quarter adjusted EPS to also be a quarterly record and our guidance represents a strong first half of fiscal 2017. By segment, we expect Transportation Solutions to grow mid single-digits organically and low single-digits on a recorded basis due to the impact of the dollar. This is above expected auto production growth levels of 2% in the second quarter, where exact growth will be driven by Asia and in Europe. Commercial transportation growth is expected to be driven by China. In industrial solutions, we expect to grow mid-teens overall through the Creganna and Intercontec acquisitions and we will be up low single-digits organically. And in communications, we expect mid single-digit organic growth, with growth in all three of our businesses. Now if you can turn to Slide 11 and let me cover full year guidance. Relative to our prior view 90 days ago, we are raising our organic growth expectations for 2017 by 100 basis points and raising the midpoint of our adjusted EPS guidance, with better operational performance more than offsetting the headwinds from the strengthening dollar that Heath highlighted. While we are raising our guidance for the full year, we are maintaining our previous view of the second half by keeping our second half organic growth expectations consistent with our view, 90 days ago. I believe this is prudent given the uncertainty in the macro environment. And when you look at the implied trends for first half to second half, please keep in mind the impact of the stronger dollar and the tax dynamics that Heath mentioned earlier and we have some slide details in the back of slide material for your reference. For the full year, we expect revenue in the range of $12.2 billion to $12.6 billion and adjusted EPS of $4.30 a share to $4.50 a share. This represents 3% reported growth, 4% organic growth on the top line and 11% adjusted EPS growth at the midpoint versus 52 weeks of fiscal 2016. Relative to our prior view of revenue guidance, reported revenue growth is down 200 basis points due to the $300 million impact from the currency exchange rates. Our organic growth is up 100 basis points, reflecting improvement in the transportation and communication segments. We are raising the midpoint of adjusted EPS from $4.34 to $4.40, which in essence, includes a $0.22 increase due to operational improvements and better performance from our acquisitions. Then this is offset by $0.16 of headwind from the stronger dollar. So really, highlighting the strong business model Heath and Tom talked about. I do feel very good about our ability to drive 4% organic growth, expand the operating margins by 50 to 70 basis points and generate double-digit adjusted EPS growth in this uncertain macro environment. This is an improvement and demonstrates as the portfolio is delivering, while we continue to benefit from the secular trend of content growth across our businesses. While much of our operating margin expansion in the past few years have been driven by our transportation segment, I am pleased that in 2017 our operating margin expansion will be driven by all three segments, with more contribution from communications and industrial. So before the full year guidance and thinking through the segments, we expect transportation solutions to be up mid single-digits organically, on 2% auto production growth reflecting content growth trends and share gains. We also expect commercial transportation to outperform its end market again this year, benefiting from content expansion in the heavy truck market. And we expect sensors to grow mid single-digits in total year-over-year. Industrial Solutions’ organic growth guidance is not changing from 90 days ago and we continue to expect growth to be up low single-digits organically, with continued gains in commercial aerospace and defense as well as medical. Communications is expected to be up mid single-digits organically, an increase versus our prior year view due to the strength in appliances and data and devices. And as I mentioned earlier, we’ve hit a milestone of improved performance in the D&D business. Progress and growth and profitability is ahead of our prior expectations. We now expect organic growth for D&D in fiscal 2017 in the low single-digits and momentum in SubCom remains strong. And we continue to expect growth in the mid single-digits for the year in SubCom. Before I turn it back to Tom for closing comments, I do want to highlight that this is Tom’s last earnings call as our CEO, after doing about 40 of these earnings calls with you all. And I do want to say on behalf of the leadership team as well as our 70,000 employees I want to publicly thank Tom for his leadership over the past 10 years. So with that, Tom I will turn it back over to you for closing comments.

Thanks, Terrence. I appreciate that. Well, to sum things up, this was a great quarter and positions TE for another very good year of performance. Our portfolio is focused on the right markets and we are the leader in the vast majority of these markets. We are consistently improving our customer satisfaction growing margins and earnings per share and returning capital to shareholders. Most importantly though we have a strong passionate organization across the globe that really is dedicated to providing our customers with an extraordinary experience. It’s making a difference. Our customers have given us the feedback. They have given us more opportunity and it’s definitely showing up in the financials. As this will be as Terrence mentioned, my last earnings call, hard to believe, where does the time go, I also want to take a moment to thank all of our investors and the analysts who have covered us. I really have enjoyed our relationship over the past 10 plus years. And it’s been very rich. And most importantly, I want to thank the entire TE team for the greatest experience of my career. It’s hard to imagine that you could be this fortunate to work with a team like this for this long. In March, Terrence will succeed me as CEO in a very well-planned transition. Terrence is uniquely positioned to take TE to the next level of performance and I really – I just couldn’t feel any better about this succession. I am really – we worked together for – since the beginning. He has been a driving force in building this company and he has a clear vision, for taken in a really strong team to work with, to go there. So I will miss it, for sure, but it is the right time to turn it over to this team. So with that, let’s open it up for questions.

Okay. [Operator Instructions] Your first question comes from the line of Wamsi Mohan from Bank of America. Please go ahead.

Yes. Thank you good morning. Tom, good luck. It’s been a pleasure and hey, you are handling all the ratings here on a high note with all-time margin highs. So for my question, you had really strong auto revenue performance relative to production growth in the quarter reflecting some really strong content growth, I was wondering if you could share some color around this content growth where that was strongest regionally and some other drivers that supported it, any color around that. And it looks like when I look at your full year guide for the Auto segment revenues relative to production, it looks like that relative growth delta sort of slows down for the course of the year, so is that just conservatism or what are the dynamics that you are seeing there and I have a follow-up?

Yes. Wamsi, let me take that. When you look at it, the first quarter what was a very strong quarter and it was driven at Asia. We saw I think, continued trends around sort of North America being flat, but we also did have growth in Europe. When you think through the content, it’s broad based. It is not one application and I think really when it comes to the perfect content and the share gains, it represents our strong global position that we have throughout automotive. I think when you look at the year, like I said in the guidance, we did expect automotive in the second half of the year production to slowdown versus the first half. We kept that the same. We still feel when you get to the second half, while production globally, we assume to be relatively flat. We are going to still drive mid single-digit organic growth, improve that organic content and growth story. So it’s just one of the elements of how production is with the strong Asia part in the first half, a lot of it is driven by China. But the content along all the trends we have, whether it’s electronification of the car, how the car gets more connected or around the green side of the car, how emissions and electronics get put them on. So it isn’t one specific area, it’s really the combination of all the trends we talked to you about.

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

Hey Wamsi, it’s Terrence again. So as you know, we produce where our customers consume. So when you look at our footprint and a lot of the work that we have done to get our capacity to the right part that Tom and Heath talked about in their prepared comments, we feel very good about where our footprint is aligned with where our customers are. So we are fairly balanced when it comes to that element. How the border tax comes out, I think we all have to sit there and wait to see how that does. When we sit there today, we like where we are positioned manufacturing wise and we will keep you all updated. Clearly, on things and tax related to repatriation, being a Swiss company, that doesn’t really impact us positively or negatively. So from that viewpoint when we look at the guidance we gave you, it’s pretty much a steady-state guidance as we think about it.

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

Thanks Wamsi.

Thanks Wamsi.

Could we have the next question please?

Next question comes from the line of Craig Hettenbach from Morgan Stanley. Please go ahead.

Yes. Thanks. First question, I just wanted to touch on kind of the content near-term environment, as you said you may be taking a hopefully conservative approach to the back half of the year and not flowing this through, but just I feel like we have been here in the last few years a couple of times where there has been some glimmers of expansion and it kind of fades, so anything different you are seeing from customers or any types of inflections, design-ins, things like that, that you kind of compare and contrast where we are today versus the last few years?

What I would say Craig, I think there is a couple of things. One of the things, if you look to the quarter, it’s very broad based across all our businesses. And that’s something you haven’t seen in a while. I would also say both through our direct customer relationships, I would also say our channel partners you will see some confidence in some of their activity. The other thing that I would say is – it is across – all orders grew in all three regions. So there is to your view, some glimmer of I think it shows the background around our markets, but I would also say there is still uncertainty in the macro when you deal with things like the currency rates that while we have capped our back half the way it is from where we guided. So when we sit there, I do think you are going to continue to see improvement. Clearly, you are going to see improvement in our Industrial and Communications segment as we go through the year. I think the order trends for some of the comments we made show very strong trends that we are excited about. And then also the element around D&D growth. That’s not a headwind thereafter. We did a lot of pruning to get that business focused on applications where we thought we could get paid for the great engineering and serve our customers for that we do. So I do think there are some positive glimmers of momentum not only in the business, but in the markets we serve. So, I do think it feels a little different from the backdrop than it was a year ago or even during certain times last year.

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

Absolutely, certainly when you think about integrated products and where we bring [ph] sort of giving much more than just an interconnect product, but other technologies like sensors and sometimes even some of our cable technology on the material side, it does go broader than transmission. I know we use the transmission example as one to bring it to life, but it is then brake applications. It is then track applications. It’s throughout the auto, is where we get those. So it is much broader than that and probably what we should do is break some of those and there is the life as we talk to investors. I know we have been talking a lot about the transmission example. But Craig, I think the important point is, when you see the content growth that we are driving above production like we did in the first quarter and what we guided for the year in auto, it shows integrated solutions that help drive that content up. That’s why we have confidence that over time, what we do around $60 today, over the next 5 years, we can take up to that $80 range, not only from the trends that we benefit from, but also bringing those integrated solutions to our customers and we become more important to them and serve to many where they are in the world.

Okay. Thanks.

Thanks Craig.

Thanks Craig. Could we have next question, please?

Your next question comes from the line of Amit Daryanani from RBC Capital Markets. Please go ahead.

Thanks. I have two as well, but first, congratulations and best of luck Tom, on your next chapter.

Thanks Amit.

I guess just start to with on transportation side Terrence, could you just quantify – did you say 20% off margins plus or minus 100 or 22% for the rest of the year. And within that, just what sort of headwind do you think you have in transportation right now, from Sensor segment margins being below the transportation averages and if you could quantify clarify that part for us?

Sure my comment was 20% Amit, plus or minus 1%. So I appreciate you being aggressive. Well and on the sensors, sensors actually – we all know that, that’s running single-digit as we continue to invest ahead of the range that we have ahead of us that will begin in 2018. So we do think that, that will be a lever over time as those programs ramp, but we saw a significant investment in those programs. So as we talk to you, we do think that app will get up to mid-teens EBITDA over time, but we are going to make investments and plan to ramp this programs and we are from a margin perspective, investing ahead. So I do think that’s something that we will have a little bit more of detail on it, but it will help the transportation margins over time.

Got it. Eventually, it will be 22% plus or minus 100, just not right now. I guess maybe a follow-up, if I look at your full year guide, right, either on the op margin expansion that you guys are talking about, or really the EPS growth, it all seems very first half heavy to me, the back half margin, I think implied flat EPS probably down I think in the back half and again, the tax rate adjustment is a big factor there. But I guess just talking about given the strength you are seeing in end demand, auto book is really good, your book-to-bill is really strong, it doesn’t seem like you are extending this positivity into the back half of the year. What holds you back and what refrains you from doing that right now?

This is Heath. I think we are taking a prudent view of the back half of the year, just with the – certainly we are benefiting the first half from some very strong Asia auto, but the broadening strength across the portfolio is encouraging. And we will continue to update you as we move along throughout the year. I would say we just want to make sure that people well understand the second half impact of the higher sub tax rate relative to some lower tax rates we had in prior year in the second half. And then the FX – the anticipated FX headwind is more significant in the back half. So from those will impact, how we think about is year-over-year second half EPS, from a margin perspective, we admittedly, the 17.5% is everything pointing in the right direction for mix and everything else in the quarter and we are taking a prudent view as we look through the back half of the year. But there is nothing that I say artificially inflates that 17.5% and nor do we expect something that comes in, that is significantly unfavorable other than just the operating activities in the back half of the year.

Perfect. Thanks a lot and congratulations on a nice win guys.

Thank you.

Thanks.

Could we have the next question, please?

Your next question comes from the line of Jim Suva from Citi. Please go ahead.

Thank you very much. Many of the questions and comments before this were focused on the auto sector and transportation, which is rightfully so. So, I think my follow-up questions I will ask on the other segments. And that is two questions I will ask them at the same time. First on industrial, we do note that oil prices are up year-over-year. So, one would hope that maybe that would help out with, say, the industrial segment some, is that starting to kick in or maybe I am off on what the key performance leading indicators are that you are looking at or how should we think about that? And especially with the new Presidential Trump administration signing in things like Keystone products, EPA changes and things like that, how should we think about it? And then my follow-up question is on the SubCom business, you mentioned last year you’ve got a benefit of course, but your guidance on SubCom looks a bit different than say some of the other customers and competitors who are seeing extremely strong SubCom pipelines. And I was just kind of curious about what you are seeing on the SubCom side? Thank you.

Sure, Jim. Let me take both of those. So let’s start with oil and gas. Number one is when you look at our oil and gas business, we basically are seeing stabilization. And that stabilization, we are happy to see certainly we hope upside comps as oil moves, but right now, I would say as we see it from the programs we are exposed to is much more around stabilization than I would say any ramp up. The other element that I would say when you think about our oil and gas business, it is very much around oceanic oil. So pipelines, land-based, we are not strong in that. So on that, it is important to understand this is really around offshore oil and gas and the indicators around that are really offshore rigs. So where we see things right now is it’s still stable in our guidance, and hopefully, we get some benefit from some of the things that President Trump is talking about that those kick in and help them back to get us little bit more upside in industrial. But that’s not assumed right now. On SubCom, we feel very good about where we are at. Similar really, not much has changed since the last quarter. Our guidance for the year is to be up 5% that will put us well over $900 million in revenue. Our backlog, we are booked for the – so really when we look at the programs that we win throughout this year, it’s really around 2018. So, 2017 is very locked and loaded. Our team is working very hard to execute to the backlog with where we are from an execution perspective and really program – it’s a pipeline of programs that we are quoting and trying to win, it’s still very active. So we still think we are in a growth phase, but I would just say, right now, the 5% that we talked about last quarter being up year-over-year, even though we were down a little bit due to timing in the first quarter, we feel right in front of us and it’s really around execution for us this year. So clearly, benefit from cloud applications, not only in SubCom, you’ve heard it in D&D, where we have also had that benefit. The hyperscale customers and we are getting benefits in both the segments from them.

Okay, thank you for your details. Much appreciate it.

Thank you, Jim.

Thanks, Jim.

Could we have the next question, please?

Your next question comes from the line of Shawn Harrison from Longbow Research. Please go ahead.

Hi, good morning. I wanted to just, I guess, get the earlier recovery within data and devices and maybe just kind of what brought about the earlier recovery? Did the winds ran faster? And maybe just what could be the growth rate within that business going forward since we really don’t have a comp for the past couple of years given that the pruning in the business sales and everything else?

Sure, Shawn. If you look at it, it really comes down to penetration on high-speed applications and with the growth on how they are ramping with some of the cloud infrastructure providers and hyperscale customers. So really when you look at it, those customers are probably about 20% of our data and device businesses today. We have been focused on it. And the adoption that we are seeing and the ramps that they have done have been a little bit quicker than we expected. So, I think the momentum that you have been waiting for and we have been waiting for, we are very pleased at 6 months ahead and it actually shows the design wins and the execution momentum we are getting in the business, again, to drive growth. 90 days ago, we told you we were probably going to be flat in data and devices for the year organically and with growth in the second half. We closed 200 basis points here. We do think it will be in the low single-digit for the year, but I think you are going to get growth throughout the year. And I think the real thing about you should assume right now is that we believe this business can be a low single-digit organic grower right now and it’s really going to be as we continue to build our product focus there, how much higher can we take it. And I would still say, what’s great is we are at that inflection point that we have been waiting for and it’s a real testament for the team getting that momentum sooner and certainly been focused on the customer’s organization. So clearly pleased with where we are with it, because it’s also focused on the right customers and getting wins with the right customers, everywhere in the world.

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

Sure. Well, a couple of different angles there. We did inch up the restructuring comments from 90 days ago and largely there is not one item on there that drives it. There is a list of several things, particularly around some footprint consolidation that continues to go on, or deals for acquisitions that have been completed over the last few years. And marginally, that’s facility consolidation. And then there are some structural things that we look at and we will continue to be ongoing, I’d say for this year and probably into the early part of next year, just in terms of how organized and the layers within the company. So more to come on that, but I think we are sharpening our pencils certainly. Not all $150 million of that restructuring would be cash charges. There is some things in there that are non-cash that we will talk about later in the year. So, more to come on that, but in the M&A side, certainly we are active. Intercontec has been a great performance out of the gate. We are also very pleased with the performance on the medical side, Creganna – well, both of those are well ahead of the deal model expectations and are executed very well. And Creganna, we will anniversary here little bit late this quarter, in terms of the fresh full year on our portfolio. The Medical space has continued to have legs to it. And so looking at things along that, maybe not the same size necessarily of ground type transaction, those things are a little bit closer to the Intercontec size or something, plus or minus in that range that have good margins and where we can get to a return on invested capital may be a little quicker than historically we have, so lots of opportunity out there, but we will be choosy and spend the shareholders’ dollar wisely.

Right, that’s grateful and congrats on the quarter and Tom thanks for all the help. I appreciate it.

You are very welcome. Thank you.

Could we have the next question?

Your next question comes from the line of William Stein from SunTrust. Please go ahead.

Great. Thanks for taking my question. Congrats to everyone on the roles, especially Tom, you have really transformed this thing from the old Tyco.

Thank you.

But I did have a question on the sensor demand, it sounds like you are lowering that outlook modestly, we have thought that this would be sort of an accelerating market for content share and integration, can you offer us a little bit more detail on how that market is progressing for you now, how you expect it to perform over the next several quarters?

Yes. A couple of things, well, thanks for the question. Our expectations around sensors has not changed for the New Year. Overall, we expect growth to be mid single-digit. The only change we would have to be due to FX, so our expectation has not changed versus where we were. I think when you look at it, certainly, we did get impacted in our sensors business by the same thing that impacted our industrial business since we bought Measurement. And Measurement was very much focused on industrial applications. So as there was the industrial recession going on that impacted our Industrial segment, it did also impact the Measurement asset, then the growth was a little bit slower. What we really get excited about was when we bought Measurement, we basically signed up to scale that and use our go-to-market and take that great Measurement technology into different markets like automotive and to places like industrial transportation. And really, those program wins and that momentum there is very strong, that program pipeline is strong. But as you know, those programs don’t – one of the day and ship them in three months, they are programs that we have been building out past couple of years. And really you are going to see the growth of that, really in 2018 as when we are going to start having some of our launches. That’s why we are investing ahead in sensors and part of those programs. And in some cases, that they are integrated products. They are not just the sensor element, they are things that also have additional things on them. So we feel very good that we are leveraging our go-to-market to get those wins. Certainly, you are not seeing them in the numbers yet. And 2018 is when you are going to start to see those come through with revenue and going to be excited to show it to you in ’18 and shows you normalcy in 2017, is not just where the program ramps are.

It is actually really good color and my follow-up related to that is pretty brief. Those gains that you are ramping now in terms of the design wins, where we will see revenue in ‘18, would you expect those to wind up coming at the expense of another company already in that space or are these brand-new applications and I assume it’s mostly in automotive?

Yes. They are a big chunk order in automotive and they are among many technologies. So there you amended either temperature, the pressure, they are among many different technologies and in the sensor space the fragmentation around the sensor space, really make to that, you compete against different people not one competitor. So what’s really great about the programs we have won is they are among varying technologies, they are at different regions of the world, which really shows the strength of our go-to-market and then it also comes out some of that business case that when we bought Measurement to get these technologies, how do we leverage our go-to-market in places where we have very exceptional leadership positions like our Transportation segment, we are leveraging. So we will continue to share those as they ramp, but 2018 will be the year where you will start seeing it in the numbers versus just from our works.

Thanks and congrats again on the great print.

Thanks Will

Thank you. Could we have the next question?

Your next question comes on the line of Mark Delaney from Goldman Sachs. Please go ahead.

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

Thanks Mark.

The first question is just specifically on Asian auto, there is talk about some potential slowdown there on the call and if we strip out the FX impact, your 4.40 becomes 4.56 for full year guide and you guys were on a 4.60 run rate, so it seems even excluding FX, there is some slowdown baked into the business as we go through the year, is there anything you are actually seeing in the Asian automotive business that’s starting to slowdown either in terms of orders or customer conversations or is that just you are doing your best to forecast the potential change there for the back half?

When you look at it Mark, similar to last quarter, we knew there is this China incentives that was ending at the end of the first quarter. We expected a slide in China demand that the incentive is sort of phased out throughout the year. We do expect production to still stay strong into the second quarter, but there is still is an element of when you have incentives, this is pull forward demand. And so when we look at it and talking to our customers, they have told us things back to production to moderate in the second half versus a very strong level we are going to have in the first quarter and continue a little bit in the second quarter. So it’s not really different that while we pull forward, just we are getting a little bit decreased production due to the incentive being phased out. So when we look at the second half, the second half is identical to where we were 90 days ago and if there is more incentives around China, I would expect we would benefit from it, but they are not there yet. And we are really aligned with our customers. So like we said, we expect auto production in our third and fourth quarter to be relatively flat, globally. But we expect organic growth in our automotive business, even in a flat environment due to our content and share gains. So when you look at that year-on-year, we do expect growth in transportation in a flat backdrop production months right now.

That’s helpful. Follow-up question is on margin and the gross margin in particular came in very nicely at 34.8, I think it’s all-time high, certainly more than I was looking for, I think it was something unusual in there, but there is guidance it seems assumes margin to moderate as we go through the year, can you just tell us specifically, how should we think about the gross margin line and what sort of factors help to get to that 34.8 and why should we expect it to come down as we move through the year on the margin level?

Mark, I think it’s similar to the same answer that I provided earlier on the overall operating margin. I think in the quarter certainly, we benefited from the volumes being higher than I think would be certainly guided earlier. And then we also invested favorable mix in the quarter in terms of just geographically where things were delivered. So I don’t think we are looking at a significant drop in gross margins, but you could be with that a point or so.

That’s helpful. Thank you very much.

Thank you, Mark. Could we have the next question?

Your next question comes from the line of Steve Fox from Cross Research. Please go ahead.

Thanks. Good morning. First of all Tom, not to date myself too much, but if I think back to what you were handed when you took the job, I never would have thought you would have been this successful with the business, but congratulations.

Thank you very much.

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

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

No, I think you should take this Terrence, go ahead.

Alright. Now, when you look at it clearly, we view that as an opportunity. When you get into any integration and one of the things that’s great about the business that we have always had is we benefit from electronics trends, but we also get integrated out due to electronic trends. Connectors can be integrated out by semiconductors and so forth, but because there are more electronics happening, it also creates in that content opportunity. I think when we look at it Steve, it’s really around it creates more opportunity because of the abilities we have and the value we provide to our customers. So why as we said there it’s why we get excited about our content in auto being able to grow from the 60 to 80 that we talked about, because what sensors brings to it, how we integrate these things in, I mean we probably aren’t to a turnkey level, but you describe how I think about it, but that integration we provide to allow some way to get to a turnkey level is very important. And that drives the content growth opportunity and the stickiness we have with our customers and our engineers basically create so much more opportunities. So we knew that’s a net-net opportunity. We don’t view its displacement, because we are very close to the architecture of the vehicle and what we do. And that is a very important factor as people continue to evolve the architecture. The world that we play in partnering with BOEs and the Tier 1s, both of them are our customers is really what we get excited about why I am so buoyant on the content opportunity. So it’s all plus.

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

I think when you look at it, I think you can always think that we have always a priority towards the components side, but even when you do take Creganna, that is doing more than just a component. So I think you will see things over time of that can add integration like skills. But I think it will be a balance of both and it will be how does it tie into our strategies in different markets. I think you have seen move into that with Creganna, but we had more the component they had much more a full assembly and integration capability that we had and that’s one of the things we get excited about the close of our customers and medical wanted that. And we would bring it organically alone. So I think you will see a little bit of a different answer in different markets, but I think you expect a little bit above from us.

Great. Thank you very much.

Thanks Steve.

Thanks Steve. Could we have the next question?

Your next question comes from the line of Matthew Sheerin from Stifel. Please go ahead.

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

Thanks very much.

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

Well, as we think about fiscal ‘17, we do not anticipate a material impact from that, but that’s largely because of our hedging programs that we have in place that protect us in the near-term. We will honestly monitor that as we go forward more thinking about the impact in 2018 and how we want to handle that from both the hedging as well as how we incorporate that into our cost pricing structure. But for ‘17, at this point, there is enough balance back and forth in terms of where we are seeing the different commodities move as well as where we have our programs in place, that we don’t anticipate…

I see and another quick follow-up. On D&D, you talked about cloud infrastructure and I think in the previous question you mentioned the cloud infrastructure opportunity represents roughly 20% of D&D, I think you mentioned hyper conversion and the likes, but could you give us some more color and details in terms of what penetration – what areas of penetration and what opportunities you look to see going forward?

When we look at it, we very much have focused portfolio around [indiscernible] applications. So went back 5 years ago, we would have talked to you about consumer electronics, devices and it’s very much as we have gone through our journey there to reposition. It’s been very much around high speed applications. And the great product for us we have around that which also includes miniaturization, but high speed de-coupled together. So when we sit there, it is really around the hyper scale providers certainly the big four and the people that also help them build out the cloud. So that’s the one that we have been penetrating very well. We are very pleased with that they are 20% of our D&D business today. And that’s going to be the area we continue to invest in on the high-speed side.

Thank you. Thank you very much.

Thanks. Could we have the next question, please?

Your next question comes from the line of Sherri Scribner from Deutsche Bank. Please go ahead.

Hi gentlemen. Thank you. I just want to ask the question sort of at a high level, if you think about the update that you are giving us versus 90 days ago, it sounds like there is a bigger FX headwind than originally thought due to the stronger dollar, but your organic outlook for transportation and industrial is really unchanged, maybe a bit more front end loaded, but on the communications side, it sounds like you have a bit more of a positive outlook for the full year, is that driven by sort of a reacceleration in SubCom through the year or is that driven by the better outlook in data devices, though I guess one is that sort of the right way to think about it and two, what’s driving that outlook in communications?

I think the first part of your assumption is accurate. Obviously, the strengthening dollar in the quarter versus our prior guidance has added some headwind to the year. We will quantify that at roughly at the current rates about $300 million versus our prior guidance on revenue. In terms of our outlook by segments, your comment – we are still projecting transportation to be mid single-digits, but on the higher side of mid single-digits than what we had thought 90 days ago. Industrial, right on track in terms of what our prior guidance is and you are correct on communications. We have moved that from low single-digits up to mid single-digits in terms of organic growth from Communications segment. That’s largely – that increase is largely driven by appliances and D&D though. SubCom is unchanged since our last projection. We feel good about the SubCom number. It’s all down to execution that’s fully booked up, but the change there with the bias towards the upside is coming from the better projections out of D&D.

Okay, great. And then can you give us some high level thoughts on what you are seeing geographically in the industrial business? Thanks.

Sure. Sherri, one of the things I mentioned was I am very pleased globally, geographically that across the – we had growth in all regions. When you look at the Industrial segment, we talked a lot about Asia with communications and transportation during our comments. We also had nice growth in industrial in Asia, for about 6% organically in Asia in the quarter. And orders drove about 18% in Asia as well, so on an organic basis. So we saw it there. We continue to see Europe in a nice position, organically sort of low single-digits. And lastly on an order side, in North America still is relatively flattish and in the industrial space for us, organically and we do expect that through the year, some of the comm air programs and medical that we will take up, but really, we see – we saw a lot of strength in Asia.

Thank you.

You’re welcome.

Thank you, Sherri.

Thanks Sherri. If you have further questions, please contact Investor Relations at TE. Thank you for joining us this morning and have a nice day.

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