TE Connectivity Ltd. (TEL)

TEL 
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TE Connectivity Ltd. (TEL)

F1Q13 Earnings Call

January 23, 2013 8:30 AM ET

Executives

Keith Kolstrom – VP, IR

Tom Lynch – CEO

Bob Hau – EVP and CFO

Analysts

Amit Daryanani – RBC Capital Markets

Shawn Harrison – Longbow Research

Sherri Scribner – Deutsche Bank

Steven Fox – Cross Research

Amitabh Passi – UBS

Matt Sheerin – Stifel Nicolaus

Jim Suva – Citi

Anthony Kure – KeyBanc

Mike Wood – Macquarie

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the TE Connectivity Quarter One Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, today’s conference is being recorded.

And I would now like to turn the conference over to our host, Mr. Keith Kolstrom. Please go ahead, sir.

Keith Kolstrom

Thanks. Good morning and thank you for joining our conference call to discuss TE Connectivity’s first quarter 2013 results. With me today are Chairman and Chief Executive Officer, Tom Lynch; and Chief Financial Officer, Bob Hau.

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 please limit themselves to one follow-up question.

Now, let me turn the call over to Tom for some opening comments.

Tom Lynch

Thanks, Keith, and good morning, everyone. If you could please turn to slide three and we’ll get started. First quarter results were in line with our expectations, as strong margin performance offset slightly weaker than expected sales, particularly in our Network segment.

Orders were up 3% versus prior year to $3.1 billion and strengthened through the quarter in most of our businesses, primarily due to improved economic conditions in the U.S. and China. And excluding SubCom, our book-to-bill for the quarter was 1.02, which compares to about a 0.98 last year.

We also had another strong free cash flow quarter generating $304 million. And of that, returned $267 million to shareholders through dividends and the repurchase of approximately 5 million shares. We expect to return over 1 billion to shareholders for the full year as we also indicated on our prior call.

I’m encouraged by the order trends, also encouraged by our strong execution on productivity and the traction we’re making on the cost reduction programs we announced last quarter. And as a result, we do expect increased sales and earnings in the second quarter and we expect to deliver a strong second half.

Please turn to slide four. Total company sales of $3.13 billion were down 1% versus the prior year and down 4% on an organic basis. Currency translation negatively impacted year-on-year growth by $43 million and the Deutsch acquisition contributed $148 million in revenue.

Versus the prior-year, revenue in our Transportation and Industrial segments were up low single-digits due to the addition of Deutsch. The Network and Consumer segment declined in the quarter. The Network decline represents a continuation of weak CapEx spending and many segments of the broadband network. Consumer was down slightly due to weak PC demand, more than offsetting our improving position in tablets and smartphones.

By region, compared to the prior year, revenues were up 4% in the Americas, down 2% in Europe, and down 5% in Asia. Within Asia, China was up about 4%. However, the rest of Asia was down primarily due to weakness in Japan.

Please turn to slide five and I’ll provide some highlights of our segment performance. Transportation had another strong quarter of performance with sales up 3% and adjusted operating income up 10%. Overall, global light vehicle production was up slightly versus the prior year with growth in the U.S. and China offsetting declines in Europe and Japan. Commercial vehicle production continued to be soft in Q1, but orders have strengthened early in the current quarter, and we expect sales in this segment to continue to grow in Q2.

Please turn to slide six. Revenues and adjusted operating income in our Network business were down 8% versus the prior year. As I mentioned earlier, the market for broadband network equipment, particularly in the wireline portion of the market, continues to be soft. And we don’t expect to see this improvement till late in the second half.

Project activity in the SubCom business remains robust, but the funding continues to be slow. And we actually expect this business to bottom in the second quarter. So we have a strong pipeline, but projects coming into force have been slow.

With respect to the Network segment overall, I still continue to be bullish despite the fact that we’re in this pretty extended lull in demand on the wireline side. The underlying trends would say that the network has to continue to be built out with small base stations coming and the need to drive fiber close to the home to get the data rate that consumers and businesses demand. We think the market will be coming back. It’s been hard to call the timing, but we’ll still remain bullish on the underlying market trends.

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