TE Connectivity plc (TEL) — Q1 2015 Earnings Call Transcript

Good morning and thank you for joining us today. Today we'll be discussing TE Connectivity's first quarter results along with the announcements to sell our Broadband Network Business to CommScope. With me today are Chairman and Chief Executive Officer, Tom Lynch; and Chief Financial Officer, Bob Hau, who will provide an overview of the transaction, review our first quarter results and guidance and then talk about TE going forward. We will conclude with a Q&A session. 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. 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're able to cover all the questions during the allotted time. Now let me turn the call over to Tom for opening comments.

Thanks, Sujal, and good morning to everyone. Certainly, a very exciting time for our company and we have a lot to cover this morning and let me start by covering the transaction we announced earlier this morning. Earlier this morning, we announced a definitive agreement to sell our BNS business, which consists of TE's Telecommunication Enterprise Networks and Wireless business to CommScope. CommScope is an industry leader and we believe they are the right company to lead our BNS team and business forward. Our BNS team has built a successful business and I want to thank them for their contribution, innovation, leadership, and commitment to TE over the years, and we look forward to working closely with CommScope to close out the transaction. Our decision to sell BNS is really a key step in our strategy to continue to focus on strengthening the company's leadership position in the attractive connectivity and sensor market where we provide solutions that are essential for the connected world. As you know, earlier this year, we made the strategic decision to establish a leadership position in the sensor business. We believe that focusing on connectivity and sensors, with special emphasis on harsh environment solutions, positions TE to provide our customers with an unmatched range of solutions and to further accelerate sales and profit growth. When this transaction is complete, 90% of our revenue will be focused on providing connectivity and sensor solutions, which enable our customers to capitalize on the megatrends of safer, greener, smarter, and more connected. As billions of devices, objects, and people become part of the internet of things, TE technology will play an increasingly key role. We have an unmatched range of products to meet these needs and unmatched resources facing the customer, designing and supplying the products. Following the close of the transaction, 80% of our revenue will be focused on providing solutions for harsh environment applications, up from 50% several years ago. This has been a major focus of our strategy and I am very pleased with our progress and the results, which we will touch on in more detail when we review the quarter. TE has a decade-long track record of clear leadership and meeting the demand of connectivity and harsh applications. This is our sweet spot, and importantly, the transaction will enable us to continue to maintain a very balanced capital allocation strategy. We intend to use the bulk of the proceeds from the transaction for share repurchase while we also continue to aggressively invest organically and inorganically. Now please turn to Slide 5 and I'll provide an overview of the transaction. The value of the transaction is $3 billion in cash with the valuation of approximately 10 times adjusted EBITDA. We believe this is an attractive valuation for the business, which generated $1.9 billion of revenue in fiscal 2014. We expect the transaction to be neutral to adjusted earnings per share one year after closure when you factor in the use of the proceeds. Our guidance provided this morning includes BNS; however, moving forward, BNS will be reported as a discontinued operation. As I mentioned earlier, the majority of the proceeds of the transaction are expected to be used for share buyback with the flexibility to make strategic investments. The Board has authorized an increase to our share buyback authorization by $3 billion, making our total share repurchase authorization now approximately $3.7 billion. We do expect the transaction to close by the end of calendar 2015, subject to customary closing regulations. Now I'm going to shift over to the quarter and talk about the highlights in the quarters and then I'll hand it off to Bob Hau, who will go into the quarter in some detail. So Slide 7 provides a summary of our Q1 results. We delivered strong results for Q1 with organic revenue growth in line with expectations and 20% adjusted EPS growth year-over-year. Total company orders were $3.7 billion, up 9%; excluding SubCom, orders were up 4%. Book-to-bill excluding SubCom was 1.03%. We continue to execute our strategy to strengthen our leadership position in harsh environment applications with harsh business revenue growth of 10% year-over-year. We continue to grow faster than the market in China in our harsh environment businesses. TEOA continues to drive profitability and enhance our margins. Adjusted gross margins were up 100 basis points year-over-year, and adjusted operating margins expanded to 16%. We're really pleased with the performance of Measurement Specialties and AST and have been successful in obtaining new sensor design wins across multiple market segments. I would say these acquisitions have pretty much seamlessly come into our company. For fiscal 2015, we're holding our full year adjusted EPS guidance at the midpoint of $4.20 despite a much worsening headwind from FX. We expect continued strong performance from our harsh businesses and the continued recovery of SubCom to offset this FX headwind. And then lastly, our Board has recommended an increase in the dividend to $1.32 per share. This is the fifth consecutive year of double-digit increase in the dividend. Our shareholders will vote on this proposal in March and it should go into effect in June. With the most recent move of the dollar versus world currencies, our 2015 FX headwinds are now approximately $900 million in revenue and $0.35 in earnings per share versus last year. Versus the full year guidance we provided last quarter, we have an incremental impact of $500 million on the revenue line and $0.20 per share. Despite this headwind, we're maintaining our full year adjusted EPS guidance of $4.20, which delivers double-digit earnings per share growth. I have to say we feel pretty good about this performance.

Thanks Tom, and good morning, everyone. I'll start with the transportation on Slide 8, a business that continues to perform exceptionally well and extend our leadership position. In Q1, we grew 8% organically with OEM vehicle production growth of less than 1%. This performance reflects the steady increase in content growth, coupled with our broad-based share gains over the last several years. Q1 was our first quarter owning Measurement Specialties, and the integration momentum of this business is ahead of our expectations. Within the first 90 days, we secured a new integrated sensor and connector design win in medical applications and have engaged new automotive applications. We continue to expect our total sensor business to grow above market due to our unique combination of technology, resources, and broad deep customer relationships. Total transportation adjusted operating income was $345 million in Q1, up 16% year-over-year with 80 basis points expansion in adjusted operating margins due to volume growth, favorable mix, and strong productivity execution. Looking forward, we expect another good quarter in Q2 with actual sales growth up in mid-single digits. Please turn to Slide 9. Our Industrial Solutions segment performed well in Q2 with 3% actual and organic sales growth, representing the sixth consecutive quarter of year-over-year growth for this segment. Industrial equipment was flat organically, with growth in China offset by market softness in Europe and Japan. In Aerospace, Defense, Oil, and Gas, we saw 8% organic growth driven by continued strength in commercial aerospace. We received many questions about revenue risk from falling oil prices, and our exposure is actually quite limited. As a result, we would expect continued strength in commercial aerospace to more than offset slight weakness in our oil and gas business. In our energy business, we saw 1% organic growth with gains in the Americas, offsetting market softness in Europe and China. Adjusted operating income was $101 million in Q1, up 1% versus the prior year, and we continue to invest in footprint optimization and go-to-market resources to accelerate profitable growth. For Q2, we expect to grow low single digits with mid-single-digit growth organically. Turning to Slide 10, our Network segment grew 2% year-over-year on an organic basis, driven by growth in our SubCom business as a result of projects that are ramping ahead of schedule. We're increasing our revenue outlook for SubCom to approximately $650 million for fiscal 2015 and expect our three large projects, which recently came into force, to contribute over $900 million over the next two to three years. Our Broadband and DataComm businesses declined versus the prior year, impacted by regional declines and project delays. In Q2, we expect total network solutions revenue growth in the high teens organically, driven by SubCom with Broadband and DataComm up slightly organically. If you turn to Slide 11, I'll discuss our Consumer Solutions segment. In consumer devices, we continue to narrow our focus in order to improve profitability while continuing to invest in technologies that are important to the company as a whole, such as miniaturization, antennas, and wearable enablers. Today we're announcing plans to combine our Consumer Devices and DataComm business units. The customers we serve in these businesses are converging and much of the underlying technology and products are quite similar. This is the next key step to accelerate the performance in these businesses, which are core to our connectivity portfolio. Please turn to Slide 12, where I'll provide more details and earnings. Adjusted operating income was $555 million, up 14% versus the prior year. The growth versus the prior year is driven by improved manufacturing productivity across the company and volume leverage. GAAP operating income was $477 million and included $27 million of restructuring and other charges, most of which were in the Consumer Solutions segment and $51 million of acquisition-related charges in the quarter as expected. Adjusted EPS was $0.98 for the quarter above the high end of guidance, driven by strong productivity, mix, and cost management. GAAP EPS was $1.14 for the quarter, and GAAP EPS included acquisition-related charges of $0.09, restructuring and other charges of $0.06, and income related to tax items of $0.31. The tax item primarily stems from the effective settlement of essentially all pre-separation tax matters, with the exception of the intercompany debt issue. We're currently scheduled for litigation in February of 2016 if no settlement can be reached prior to that time. For the full year 2015, I continue to expect approximately $50 million to $75 million of restructuring and other charges, reflecting $0.10 at the midpoint of our guidance, up slightly versus last year. We expect roughly $0.22 of charges associated with recent acquisitions, which we will more than offset by gains from the settlement of tax liabilities. Turning to Slide 13, I'll discuss the financial metrics that are tied to the TE operating advantage or TEOA. Our adjusted gross income in the quarter was 34.6%. This is an expansion of 100 basis points versus the prior year, driven primarily by productivity gains from TEOA initiatives and leverage on additional volume. Adjusted operating margins expanded 140 basis points, driven by productivity and operating expense leverage. Total operating expenses were $643 million in the quarter, with SG&A decreasing versus the prior year and R&D increasing to $184 million, mostly from acquisitions and the support growth primarily in transportation. Total operating expenses were 18.6% of sales, down 40 basis points from the prior year. Cash from continuing operations was $295 million, and our free cash flow in Q1 was $162 million. Free cash flow was impacted by the timing of tax payments and SubCom project activity. Gross capital expenditures were up slightly year-over-year, and net capital expenditures were up $16 million versus the prior year. I expect the capital spending rate to be approximately 5% of sales for 2015. I note we added a balance sheet and cash flow summary in the appendix of this slide for additional details.

Thanks Bob. Please turn to Slide 14 and I'll cover our outlook at a high level with additional details provided in the slide. We expect to deliver another solid quarter in Q2 with revenue of $3.55 billion to $3.6 billion, up 3% to 6% year-over-year and in line with our normal seasonal patterns. We expect adjusted earnings per share of $0.98 to $1.02, an increase of 3% to 7% year-over-year. Our Q2 outlook does include a headwind from currency exchange rates which are negatively affecting our guidance by approximately $250 million in revenue and $0.10 per share versus the prior quarter. Our second quarter performance will be driven by the continued strong performance of our harsh environment businesses, the building momentum in SubCom, and contributions from our sensor and oil and gas acquisitions. This is more than offsetting the significant FX headwind. Now, if you'll turn to Slide 15, for the full year, we expect to deliver another year of double-digit adjusted EPS growth, despite these strong FX headwinds. We have a number of catalysts for growth. The strong secular trend is increasing electronic content, especially in harsh applications, our expansion into the high growth sensor market, and the recovering SubCom business. For the full year, we now expect revenue of $14.45 billion to $14.85 billion, up 5% versus the prior year, and this reflects 6% organic growth. And note that the total impact of currency exchange rates is approximately $900 million versus the prior year. Our new revenue guidance represents $150 million of incremental organic growth versus our October view with increases in transportation, industrial appliance, and SubCom. And as I mentioned earlier, we're maintaining our adjusted EPS guidance to a range of $4.05 to $4.35 per share, representing year-over-year growth of 11% at the midpoint. Just for clarity, compared to our prior guidance last quarter, this represents a $0.20 operational improvement offsetting a $0.20 headwind from foreign exchange. To provide a baseline for the performance of our business organically, adjusted EPS would have grown in the neighborhood of 20% year-over-year at constant currencies, but due to the negative impact of a dollar. The good news is we're offsetting this with strong performance in the business. I am now going to spend a few minutes talking about how we think about TE going forward post the BNS sale. In the nine years I've been here, I've never felt better about the opportunities facing the company and our ability to seize them. These mega trends of safer, greener, smarter, and connected represent a market opportunity of approximately $165 billion for connectivity and sensor solutions. We are the leading provider of these solutions. These markets are expected to grow at roughly 2X GDP over the long term driven by this increase in electronic content in virtually every industry. Please turn to Slide 18 and I'll give you a few examples of the accelerating content story. In the automotive market, we're capitalizing on our leadership in connectivity to become a leader in sensors and our customers are very excited about the combination. This combination of connectors and sensors represents a potential of approximately $400 of content for the average vehicle. Today we're the clear leader with content of slightly above $60 per vehicle. So there is a lot of opportunity, and we're investing in the resources to capture more of it. In the commercial aerospace market, there are going to be about 37,000 new planes expected to be delivered over the next 20 years, all of which will have a significant increase in electronic content. On top of that, TE content is increasing pretty significantly in almost every platform as a result of the increased organic investments over the last several years, coupled with the very strategic Deutsche acquisition, which is going very well. Our customers increasingly see us as a solutions provider, which is driving up our content per design opportunity. We're getting to do things we hadn’t had the opportunity to do a few years ago. In some cases, where we bring a broader solution, we can actually see our content go up eight to 10 times over prior models. In the industrial equipment market, electronic content is also increasing due to a variety of reasons, but you can see the big increases in factory automation, robotics, and the smart factory. We see it all over the world, and all of these require more sensors and more connectivity, and we are very well positioned with these product lines. Please turn to Slide 19. As you know, the core of our strategy over the past several years has been to strengthen our leadership in harsh environment applications. Post the BNS transaction, this will represent approximately 80% of our business. Harsh environments demand excellent engineering and manufacturing, and the typical application we're involved very early with our customers in the design phase. They're increasingly relying on us to provide the products, sensors pass more signal, operate in higher power environments, and take less space and weight. This is our specialty, and we see increasing system knowledge in these applications is very important. That is the strength of ours. These solutions typically have a lot of stickiness because the cost of change is high, and our customers rely on the value we provide and continue to ask us to do more. We are having a very positive reaction, as I said earlier, to the expansion of our sensor capabilities because that gives us more options to meet customer needs, and these are customers that are typically looking to reduce the number of suppliers in order to get more strategic suppliers and simplify their own supply chain. In the harsh environment markets, we've been steadily increasing inorganic and organic investments. We've expanded engineering and field resources at a faster rate and sales growth over the past several years, and our performance in TEOA is consistently driving up quality performance and our margin performance. Please turn to Slide 20 and I'll wrap things up before we go to Q&A. The summary of today is, going forward, TE will be more focused than ever on what we do best. 90% of our portfolio will be focused on sensors and connectors, and almost 80% will be in harsh environment applications. We have the broadest and deepest sensing and connectivity solutions on the market, and we will continue to strengthen this portfolio to be our customer's best choice. We also feel this portfolio will enable us to accelerate our sales and profit growth and continue to make TE a top choice for investors. So with that, let's open it up for questions.

Thanks and congrats on a nice guide and asset sale, guys. Maybe to start with the fiscal '15 guide, I am just curious how do you think commodities are playing out in the guide? My math is that it's a $0.08, $0.09 benefit for you guys, but I think your hedges could delay this. So curious how commodities are playing out and any updated thoughts on potentially looking to start hedging FX as we go forward given how severe the impact has been for you guys?

Hi Amit, thanks. I would say we're definitely seeing commodity costs come down as you know. With copper, our strategy has always been to hedge that to match cost with price and the timing of the cycles out there. So in particular, the big decline in copper prices that's happened recently will start to flow into us late in the year, which should provide a nice tailwind going into early next year.

Yes, so first starting from an impact, you're right. You're a little bit heavy given the timing of the hedges and how those play out around the metals, copper, gold, and silver. It's probably a $0.05, $0.06 benefit to 2015 and, of course, if metals continue where they're at, it will be a nice tailwind for us into 2016. In terms of currency, as you know we are largely naturally hedged from a transactional standpoint. We have factories around the globe and we build locally for our local customers and so from a transactional standpoint, we don't have much exposure, and where we do, we actually do hedge the remaining exposure. From a translational standpoint, which is the impact that Tom talked about in his opening remarks, we do not hedge, and I think you'll find a vast majority of the companies that have foreign currency exposure on a translational standpoint, don't hedge those currencies that would be taking a bet on where those currencies will be going, and I don't want to take that bet.

Fair enough. And then I was wondering if you could just maybe touch on the Transportation Solutions business, that you guys had really impressive organic growth in the December quarter; your order book looks like it remains fairly robust. The auto production environment I think has been fairly stable over the last 90 days, so I am curious, do you think content growth broadly is starting to pick up from the 5%, 6% threshold that you have in the past or do you guys think you see more market share wins, what's driving the strength on the transportation organic growth basis?

Content is increasing, but the key factor during this period is the market share we gained three to four years ago. This particularly involves the design wins we secured after the crisis when we continued to invest in engineering and our global automotive business. In areas where we weren't the leaders, apart from being the leader in the U.S., we saw significant potential in China and made substantial investments there. We've also consistently invested heavily in Europe, which has proven beneficial. Ultimately, the design wins we achieved are responsible for our current position and will take time to fully materialize. We expect content to keep increasing, likely in the range of 4% to 6%, possibly around 4.5% to 6% or 4.5% to 6.5%. However, this is influenced by the mix and other factors, with our recent design wins playing a critical role in our growth.

Okay. Thank you, Amit. Can we have the next question please?

Hi guys. Thank you. And congrats again from my end. I guess Tom, my first question for us is how are you thinking about the rest of the portfolio, particularly if we look at some of the underperforming segments and at your networks, DataComm, consumer solutions, maybe if you can just give us an update in terms of the rest of the portfolio?

As Bob mentioned on DataComm and consumer, we actually decided to and we're announcing that real-time that we're putting those businesses together into one business. The customers are all becoming the same. There was always customer overlap and now it's converging more and more especially in China. The technology, particularly the core connectivity technology that goes inside a box is very similar. So we see a much more opportunity to leverage that, and this is going to help our scale and cost-effectiveness, which we need to drive the profitability up. So that's the plan there, and I think it's important that people understand that DataComm and consumer are very, very core to the business. I view them as core as automotive because it's another range of products. If you think of a company like ours, our specialty is connecting, and we're building specialty in sensors and those applications at knowledge; they go into a variety of different applications that happen to be stronger in some than others, but the core technology, the core science, the physics, the manufacturing practices, the supply chain, they're all very similar, they're all practically identical. So those are core businesses, and the strategy really is to be more selective because the profit pools have changed a lot more in consumer and DataComm than they had in the long-cycle industrial, transportation-type businesses. With respect to energy, energy, I've used as a very good solid business for us. It's been a little less of expectation for the last couple of years because it's Europe more than anything else. We're growing ahead of market in the U.S. We have a nice niche, a strong niche position because we're selective in China, but we expect as the energy grid has to be upgraded in Europe that we're well positioned, and it's a very focused well-run business.

Excellent, and then just as a follow-up Bob, on industrial… Excellent. And then, just as a follow-up, Bob. On industrial solutions, can you maybe remind us again what needs to occur to structurally drive margins potentially into the mid to upper-teens? And then maybe just related, can you just clarify what the gross margin was for BNS?

From an industrial solutions standpoint, we've seen some nice margin lift in that business over the last couple of years. We've now got six consecutive quarters of growth. So we're seeing some volume leverage that will flow through. As I mentioned, in the current quarter, we're down just slightly on a year-over-year basis, really driven by some investments we're making in footprint optimization, moving some product around to get it in the right factories, as well as some investments in go-to-market resources. Our sales folks, product people that support our customers as they develop their next-generation products to make sure we're there with them. Both of those actions will continue to drive costs out to the footprint optimization, as well as top-line revenue growth. So the 13% is slightly below company average right now, but we'll see that continue to expand in the later part of this year and obviously into the future.

And what I'd add to that is that in our aerospace business, it is well above company average. And our industrial equipment business is right at maybe slightly below company average, but we expect it to be at or above company average in the next two quarters. And it's the energy business which is really suffering from a very slow market right now that has pulled that down. But I'm pretty confident that with a slight uptick in sales, I mean when we're at 1%, you don't get much operating leverage, and the team has done a good job of holding their margin there. But that will pick up. I mean it's only going to probably be at 3% to 4% grower, but when that happens, we have a lot of operating leverage in that business. So, as we've said before, we view this business, and we expect this business to be kind of a high-teens operating margin business and that's the moves we're making to ensure we get there.

And in terms of BNS, we don't provide operating margin by segment, but we have said in the past and continue to be public with the operating margin for the broadband networks business is slightly above company average, nicely into the double-digit level.

Gross margin, right?

It's operating margin.

Okay.

All right. Thank you, Amitabh. Could we have the next question please?

Hi. Congratulations. First question just on the upside that you called out in the quarter of Measurement Specialties. Is that coming from end market growth or has there been any tweaks that you've put into the business so far?

Hi Mike. Thank you. I would say the current situation is mostly influenced by the market. We haven't had the opportunity to significantly impact sales growth because our main focus has been on integration to fully understand our assets and establish priorities. Our biggest challenge, which is a positive one, is having more opportunities than we can handle, making it a top priority. However, getting started and achieving the numbers previously projected for Measurement was crucial. Our internal sensor business continues to perform strongly, benefiting from a very robust market, which is encouraging and aligns with our strategic goals. The reason behind this is that we're receiving more requests for proposals and participating in bids from customers in challenging sectors, clients we are familiar with, and now we are bidding using MEAS technology. Although this won't generate revenue for a few years, it's promising to see such rapid progress. This illustrates the strength of our collaboration, leveraging our go-to-market resources and global supply chain alongside MEAS' extensive engineering team and technology pipeline. We are just one quarter into this partnership, and while one quarter is not definitive, we are pleased with the positive start we've observed.

Great. And for my follow-up, and I understand if you can't provide detail on this, but given your new focus which is primarily on harsh, these critical use applications typically carry high margin. So do you have a longer-term margin goal for the company given this new focus, or also just a new benchmarking peer set that you're measuring your performance on?

I'd say the way to think about it, Mike, is no, we have not set like we did years ago, the 15% margin goal. When we set that we felt that was really critical to prove that the company had reached the point of strong operating capability. Now, it's about driving a growth of 5% to 7% consistently, and we would expect to drive 50 basis point plus margin growth. Of course, all of our businesses have aggressive targets for sales growth and margin growth with TEOA. It's how we decide what parts of the portfolio to go after. But we have not set a new sort of external margin threshold that we want to reach. Will we? Maybe. We want to get through the divestiture of BNS and the integration of MEAS. But I think generally, if you listen to us, we think we can maintain and continue to drive strong transportation margins. We think there's room in industrial margins. The BNS margin will be a net sale accretive to the company. And we have pretty much all upside in the consumer device margin and the DataComm margin because they are low. So there's a lot of margin drivers in the company. And I think you see it in Q1 where we hit, and we had some nice mix in Q1 for sure. So maybe we got a few 20 or 30 basis points more than the typical, but we're knocking on the door of 16, and we feel good about that.

All right. Thank you, Mike. Could we have the next question please?

Okay. We'll move on. We'll go to your next question. That question comes from the line of Matt Sheerin from Stifel. Please go ahead.

Yes. Thanks and good morning. Just another question regarding the sale of the networking business. It looks like a portion of the DataComm business has been carved out within the sale to CommScope. Is that the wireless part? And could you tell us what the run rate of your DataComm business is now?

None of the DataComm business has been carved out. Wireless, to your point, is a broad term. So when we talk about wireless in our networks business, we're talking about distributed antenna systems, but any of the wireless products that DataComm has have stayed with DataComm. What is in BNS today?

Got you. And just regarding the Measurement Specialties, I know the sensor business is sitting within your transportation business, but Measurement also sells into industrial and consumer markets. Will that business also be working with your other segments in terms of cross-selling and sales opportunities, or will these run on a standalone basis?

Now from day one, that's what we did. That's one of the things I'm most pleased about that in all of our relevant businesses, most relevant businesses where we want to broaden the sensor opportunity quickly, there's a lot of activity in automotive, a lot of activity in industrial transportation, a lot of activity in medical, significant activity in aerospace even though that's a much longer cycle. To be able to bring sensor solutions to the table to a big customer enhances your standing with that customer, and significant activity in the appliance business. So we've already mapped the people in our traditional businesses into the sensor business with some ground rules that we don't overwhelm the new sensor team. But I am very pleased with the collaboration and the sensibility that everybody is using in how to pursue opportunities but not get out ahead of our headlights. And we've got a couple of design ins already which frankly happened sooner than I thought.

Matt, that's one of the reasons you may have noticed in our Transportation Solutions slide in the presentation. We are now reporting three different business units within the Transportation Solutions segment; automotive, commercial transport, and sensors to provide visibility into the sensor business that is, as you point out, more than just automotive.

Got it. Okay. Thanks very much.

Yeah.

All right. Thank you, Matt. Could we have the next question please?

Thank you. Good morning. Just on the transaction, first of all, in terms of use of proceeds, I understand where investing in your stock could be a good way to neutralize EPS dilution, but can you just sort of give us a sense of where you stand versus pursuing other acquisitions and may be could be even more accretive use of funds?

First, thank you, Steve. We have a strong pipeline that we've discussed previously, which is heavily targeted. As always in these situations, the timing of progress can be unpredictable. We have our priorities and how they align. The good news is that, as demonstrated last year, we can make significant advancements with initiatives like SEACON, Measurement in AST, and pursue notable acquisitions while still achieving a balanced return of capital through dividend increases and share buybacks. Although we may not spend $2 billion on capital every year, we are ready to seize the right opportunities when they arise. We believe that our solid operational performance can still improve, with a focus on enhancing our top line. Our customers are looking for more from us due to our strong integration and packaging capabilities, which we excel in across sectors like automotive, industrial transportation, aerospace, and defense, and are beginning to implement in industrial markets. This broad spectrum of connectivity and sensors is highly valuable to our customers, and we continually seek to expand in this area. Therefore, you can expect us to maintain a healthy blend of mergers and acquisitions along with capital returns.

Great. To clarify a couple of comments, Tom, regarding the Measurement Specialties business, you're indicating that the revenues reported today primarily stem from the company's acquired business portfolio. However, the teams have already collaborated and identified some sales synergies that we should begin to see over the next few quarters. Could you elaborate on what these immediate opportunities involve? Thanks.

As we mentioned during the acquisitions, the sales and design in sales synergies take time, typically around years two and three. In the short term, these synergies will come from two main avenues. First, we have more people selling to our customers, which means we can offer more existing solutions simply because we have a broader presence. We anticipate beginning to see some of this towards the end of the year. Secondly, our channel team, led by John Wainwright, is collaborating with our channel partners to pinpoint which products can be effectively sold through these channels. We see this as the quickest revenue synergy. However, the longer-term synergies will develop as we integrate sensors into wires and specific applications, whether in industrial or medical fields. This process typically takes a few years before it generates revenue, in line with our acquisition strategy.

Great. That's very helpful. Congratulations on the transaction.

Thank you, Steve. Could we have the next question please?

Good morning and congratulations on the results. I wanted to discuss two topics regarding the broadband networks business being sold and the stock buyback. It seems that the earnings contribution from that business this year would be around $0.40 to $0.45, which would result in at least a 50 basis point increase in margin once the business is sold. I'm curious why you don't consider accelerating the buyback sooner, as it appears you don't have significant leverage to address that gap within the next 18 to 24 months.

Thank you for the question, Shawn. Regarding profitability, we're slightly above what you mentioned, but that's a reasonable estimate. Concerning the share buyback, as we mentioned earlier, we expect the deal to finalize by the end of the year, meaning the $3 billion in cash won't be accessible until then. However, we are currently active in our ongoing share buyback program. We conducted buybacks in the recent quarter and will keep doing that as part of our capital return strategy. Once the $3 billion becomes available, we will ramp up those buyback efforts.

Okay. And then there's a follow-up, with the combination of DataComm and consumer devices, EBIT margin is probably best-case scenario right now, or maybe mid-single digits other than revenue synergies. How do you see the margins for that business long-term? Can it be add a mid-teens EBIT margins, and what steps need to be taken other than just bring yourselves of low-margin business to get there?

Sure. You need to look closely at the details. In both of our core connector businesses, the EBIT margin is significantly above expectations. In DataComm, we are investing in high-speed solutions, and while we are tracking product line profitability, those lines are currently losing money because they are still in the investment phase and just beginning to take shape. The core business, which focuses on miniaturizing connectors for servers, storage, and smartphones, is performing reasonably well, though it doesn't have the same high operating margin as our industrial sectors. The real question is whether we can successfully carry out our R&D initiatives. Although we are already selling these products, they haven't yet gained traction across various industries. We are committed to exploring the necessity for high-speed solutions greater than 5, 10, or 12 gigabits in data centers and other applications, so we are developing fiber and copper connectivity for speeds above 25 gigabits. These are strategic investments within the DataComm sector. Additionally, we are investigating advanced technologies that are primarily applicable to consumer products, where initial applications may not yield high returns. Some manufacturing processes are also being applied due to trends in miniaturization. Over the years, we've also seen our ability to miniaturize swiftly impact our automotive business, which has become increasingly important in recent years. The good news is that we do not just need to focus on cost reduction, as doing so could render the business unviable. Two-thirds of our operations are solid and can improve, while one-third consists of our investments. We set milestones to assess whether we have the right technology and the market's acceptance of it. When we notice that a technology isn't gaining traction, we reassess our strategy, as we did with the Magnetic product line we divested last year, believing we could offer a better solution. We consider all of our businesses as fundamentally connectivity-focused. Their future size in our portfolio remains uncertain, but they will certainly remain part of it.

Right. And just quickly, Tom. I'm sorry. The follow-up on the 25, 40 gig move. In the last time on the call, you thought maybe toward the end of the year you would see some greater adoption. Do you still view that as potential dynamic exiting the fiscal year?

I do. It's not going to be big in the numbers because it takes time. But the good news is we won contracts. The program management is starting to plan the installation and all good signs. But the rate of winning needs to increase for this to look like it is the business we thought it would be. We're not surprised it's kind of tracking to what we thought when we had a reset. The industry, with all the change it went through, began to embrace these kinds of things a little slower. But all the customers are saying they need to get there. It's just the rate at which they're going to get there.

Thanks so much, and congrats again.

Thanks.

Thank you, Shawn. Could we have next question, please?

Yes. Thanks so much. Quite a ride, Tom, in terms of I think of since the split from Tyco; a lot of portfolio management, arguably much better at this point. So with that, I'd love to get your thoughts in terms of oppose the latest sale, what that means in terms of that, the clarity of the strategy, the organization, and as you execute to the harsh environment going forward.

From our internal strategy perspective, we've maintained a consistent approach. Our strategy map undergoes minor revisions every few years, but the core focus on connectivity has remained unchanged. Following our acquisition of Deutsche, we became more focused on harsh connectivity. We were progressing well and had a solid harsh business. When Deutsche became available, we seized the opportunity. We were also exploring the sensor business to determine its viability. Initially, we had some reservations, but after a breakthrough a few years back, we recognized that diversifying into sensors made sense. This was driven not only by the strength of the sensor business aligning with our skills but also by the convergence we observed in solutions. This shift prompted us to prioritize sensors as a key platform, leading us to reassess the significance of our network business. Although networks became an important aspect, they were not as central as before. We concluded that to build our broadband networks on par with our harsh divisions or potential sensors, we needed to enhance our product offerings significantly with a broader wireless capability, which was challenging to develop on our own. We then looked at other options for optimization, leading us to a strategic buyer who offered us more value than we could achieve on our own or through other avenues. This patience in pursuing the best solution paid off. Now, 90% of our focus is on connectors and sensors, with 80% on harsh applications. Our strategy remains consistent, with similar manufacturing methods and go-to-market approaches across these areas. Technology is shared across 90% of the business, which is exciting, especially as customers increasingly request our involvement earlier in the design process. The solutions we are providing today are aimed at optimizing for higher power, higher speed, and a smaller footprint in vehicle platforms, which opens up new opportunities for business growth. We are fully committed to this direction.

Got it. Thanks for that. As a follow-up on MEAS and sensors specifically, when we talk about growing that above market, can you give any context in terms of are there certain niches where they play where they are very strong that are growing faster than the market relative to utilizing your larger sales force and distribution channel that should drive growth too. Can you give any context in terms of how that shapes out?

Yeah. The business grew up with a very customer-focus which is good, but not so much an industry-focus. So going in when a customer here or there and really do well with that customer because in the smaller company you often say that catch 22 well, where do I get the resources. I don't want to get out ahead of my headlights. So we're bringing them into more; for example, appliance customers than they were in before. We're bringing them into more medical customers than they were in before. They weren't in automotive customers and we're bringing them in there. And in industrial transportation where they have a very nice business, the combination of their sensor business and our connector business, is very attractive to our customers. So that's how I really think about it if I hit your question.

It does. Thanks.

You're welcome.

All right. Thank you, Craig. Could we have next question please?

Yes. Thank you, good morning. Tom, you mentioned lower energy prices related to the oil and gas portfolio. However, are you observing any changes in purchasing behavior from a demand perspective in the transportation sector due to current gas prices? I have a follow-up for Bob.

I would say that our customers, Wamsi, anticipate some of that. But it's probably still too early. When we talk to them, they will tell us that is a typical trend. Gas prices go down in the U.S. with the improving economy, trucks go up, we like that. We have a lot of content on trucks. But I think it's too early to say that we're seeing the trends yet; although, the mix of content is still moving in a strong direction.

Right.

But if prices stay low that will help demand.

Okay. Great. Thank you. And Bob, can you talk a little bit about any synergies that might come from this divestiture, particularly because of maybe shared facility usage or overhead absorption? And what sort of things you intend to do operationally to offset some of that? And do you anticipate anything like site consolidation, etc? For the most part, from a factory standpoint, our BNS business had standalone facilities. So those facilities will transact with the field. So we don't have a lot of work from a standpoint of factory remaining in X% for or having to find a way to manufacture something that is in a facility that is going to be relatively segregated, so not a lot of work and worries there. There are, of course, some shared services activities, some corporate functions. We've got a year before the deal closes, and of course, we have a transaction services agreement post deal closure. So we've got some time to work through those issues. We don't anticipate it to be an issue one way or another.

Okay. Great. Thank you.

All right, Wamsi. Could we have the next question please?

Yes. Good morning, and thanks very much for taking the questions. I was hoping you could elaborate a little bit more on some of your prior comments about potentially looking to make some additional investments with the proceeds from the BNS sale. I know you talked about some of the product lines and you are excited to be an IOT-type focus company now with industrial and automotive. But maybe you could just touch on to how you are thinking about your end market diversification going forward? And just as you exit BNS, the exposure to auto and industrial would go up, and just if you could talk about your comfort levels with exposure to those markets. And as you're thinking about making investments, do you want to try and increase your exposure into other areas?

Thanks, Mark. Regarding the first part of your question about increasing organic investments, we've observed a strong correlation between these investments and our performance, especially in challenging sectors where we excel. By increasing the number of engineers and field engineers in our industrial business, we can better support our diverse customer base in a fragmented market. In sectors like commercial air, automotive, and industrial transportation, we actively seek to place the right design engineers close to our customers. This strategy allows us to collaborate effectively and ultimately boost our business. You can see the impact of this approach in the growth rates of our commercial air, automotive, and industrial transportation sectors. Recently, we have applied this strategy to our industrial equipment and appliance businesses, which are high-margin sectors. Our extensive systems knowledge enables us to assist customers in designing their products and enhancing the performance of their electrical and electronic systems. We invest where our customers are open to it and where we can secure the right engineers. We're not holding back on automotive investments while we bolster our industrial units; instead, we're focused on growth driven by content. Last year, automotive production grew by 4.5%, and we expect around 2.5% growth this year, but we anticipate mid to high single-digit growth due to design wins and content growth. This trend remains strong, consistent over my nine years here, and positions us well across business cycles. Our margins have significantly improved since five or six years ago due to our enhanced effectiveness in design, which benefits our customers as well. Even with improved margins, we feel more prepared for potential downturns. Therefore, I welcome new design wins and relevant technology acquisitions in the automotive sector, as I believe the long-term outlook remains positive. Moreover, sensors and industrial markets are top priorities for our M&A strategy. We’ve been making smaller acquisitions, like SEACON and the recent purchase of a company in China called Sibas, which will expand our portfolio globally. You can expect us to continue making small technology acquisitions that enhance our solutions for customers, particularly relating to connectivity and sensors. Does that address your question?

Yes, that's very helpful. And then, for a follow-up, just on the SG&A, the dollars came down sequentially and I think the SG&A as a percentage of sales was at one of the lowest levels in several years. Maybe first just how much of that was some of the TEOA initiatives versus just FX causing SG&A to come down? And then maybe you can help us think about what the SG&A levels will run at going forward.

Mark, from a standpoint of the benefit, year-over-year, we've done about a 40 basis points. There are certainly benefits in both areas of TEOA. As you know, last year, we expanded TEOA from what had been a factory productivity and a lean product development process in our DNE organization to really be, as we call it TEOA everywhere in our G&A functions are now seeing the benefit of that. There's also definitely some tailwind from an FX standpoint. So it's a combination of both. And as we continue to see organic growth, we would expect that percent of sales to generate some leverage throughout the course of the year.

We are consistently investing in our digital initiatives to enhance the company's online presence and product information. This approach is crucial to our value proposition and will continue moving forward. While there are areas where we are not investing, we believe our back office is adequately equipped. Our strategic investments are focused on the S portion of G&A, and we are committed to deploying resources in the field, especially in challenging environments where solutions are more complex. Supporting our customers through field applications and engineering is vital. Additionally, we will invest in field resources and sensors, leveraging these opportunities for growth. Although this process may take a few years, we anticipate margin improvements and leverage across our SG&A will contribute positively to our growth trajectory.

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

Great. Thanks for taking my question and congratulations on a very strong operational outlook. First, I am hoping to get a clarification. When asked about margins, I think you said you wouldn't disclose gross margin. But the operating margin on BNS was above company average, nicely double-digit, that's surprising to me. Did I hear that right?

Yes. I believe I said, and should have said it is slightly below company average.

Got it. Okay. And then my kind of real question, I guess, is actually about SubCom. We spent a lot of time today talking about kind of what's core and in particular talking about harsh and then other things that you came to decide wanted course that you're divesting. This is an area that certainly I think sits in the category of harsh, but you've also talked about it as in a way, very different and potentially not core to the company, but of course, it's difficult to find a buyer. We're seeing your only real competitor, I think, in this space, Alcatel-Lucent, looking like they're to IPO this business. Understanding that the timing might not be right given the toughing position of that revenue. Is there something you could consider?

We could, yes. Are we? No. We've looked at this many times. The most important thing about the business is they're the best in the world at what they do. So when you start out with that, at least my philosophy is you got to be careful that you don't run away from a business too fast. And given the uniqueness of the business, it really is worth more inside the portfolio than out. Sure there are a lot of people who would love it but I know they either don't have the wherewithal to pay. If you contrasted to BNS, BNS is another good business. We weren’t sitting here with our finger on the red button, let's get rid of this thing was a strategic decision that it's not going to get as much priority as it did before sensors. It still can be a very good business. We think there is a good cycle or a solid cycle coming. And when we cross with the strategic buyer that could, but it at a price where they could get their value and we could get our value, it made total sense. And if you look at somebody else indicated earlier in the call, that's been kind of our approach to the businesses; you could call a niche business that are on the outside of the portfolio. In this case, SubCom is a niche, but it's a world leader in what it does, so it has real value. And I think it's going to be with us for a long time.

Great, thank you.

Thank you, Will. Can we have the next question please?

Hi, thanks. I was just hoping you could give us a little more detail on the pieces of the BNS businesses that you're just selling and what specifically those products are and how much of that came from the ADC acquisition?

Certainly. There are really three main segments of our business. The telecom segment accounts for half of our revenue, with equal contributions from ADC and TE. These segments focus on fiber optic and copper connectivity solutions which are essential for telecom and cable networks. They facilitate the connection from the signal source at cable head ends or central offices to residences or nodes nearby. Just over half of our business is within this category. Approximately 40% of our revenue comes from what we categorize as enterprise, which refers to structured cabling in enterprises or data centers. This includes the communication cables within offices that lead to outlets for devices like PCs, as well as wireless access points connected through these cables. This segment involves numerous small transactions globally. Lastly, we have a smaller portion of our business dedicated to the niche digital antenna segment, which is entirely sourced from ADC. Of our enterprise business, about 20% derives from ADC, and slightly more than half of our telecom revenue comes from ADC as well.