Keith Kolstrom - Vice President, Investor Relations Thomas Lynch - Chairman, Chief Executive Officer Robert Hau - Chief Financial Officer, Executive Vice President.

Mike Wood - Macquarie Wamsi Mohan - Bank of America Merrill Lynch Matt Sheerin - Stifel Amit Daryanani - RBC Capital Markets Shawn Harrison - Longbow Research Jim Suva - Citi Mark Delaney - Goldman Sachs William Stein - SunTrust Robinson Humphrey Sherri Scribner - Deutsche Bank Steven Fox - Cross Research Amitabh Passi - UBS.

Ladies and gentlemen, thank you for standing by. And welcome to the TE Connectivity First Quarter Earnings Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions) And as a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Keith Kolstrom, Vice President of Investor Relations. Please go ahead..

Thank you. Good morning and thank you for joining our conference call to discuss TE Connectivity's first quarter fiscal 2014 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, I would ask for -- participants on the Q&A portion of today’s call that everyone try to limit themselves to one follow-up question to allow enough time for everyone to get their questions in during the allotted time. Now, let me turn the call over to Tom for some opening comments..

Thanks Keith and good morning everyone. If you turn to Slide, I think its Slide 3 that's the summary of our results. The company is off to a very good start in Q1. The majority of the markets we serve continue to improve and we are executing well. Following are some of the key highlights of the quarter.

Orders increased 8% in the quarter and our book-to-bill is 1.03 excluding our SubCom business. This is the third consecutive quarter of organic orders growth. And the strength was broad based across all regions and in the majority of our businesses. Organically sales were up 7% overall and up 8% excluding SubCom.

The transportation market continues to be very strong and we are the clear leader in this market and capitalizing on the strength. Our industrial markets and our telecom markets continue to improve in the quarter. This more than offset continued weakness in SubCom and DataCom.

Adjusted operating margins were 14.6% up 220 basis points over the prior year, stronger revenue, productivity gains driven by our TEOA program, increased savings from restructuring and metal tailwinds drove this improvement. We are on track to exceed 15% adjusted operating margins for the full year at $14 billion sales level.

Adjusted earnings per share of $0.82 was up 26% versus last year and $0.06 better than the mid-point of our guidance. Free cash flow is $266 million and put us on track for another year of 10% plus cash flow as a percent of revenue.

As a result of the strong Q1 and strong orders performance, we are raising the mid-point of our full year adjusted EPS guidance by $0.10 to $3.75. This is an increase of 16% versus our prior year performance. And additionally, our Board has recommended that at our annual meeting in March, our shareholders approve a 16% increase in the dividend.

Please turn to Slide 4. This Slide summarizes revenue by segment. I will now go into each segment in more detail unless I indicate otherwise all changes are on an organic basis which reflects the effect of currencies, acquisitions and divestitures. Please turn to Slide 5.

We had another strong quarter in transportation sales of $1.44 billion were up 14% over the prior year and orders were up 13% with the book-to-bill of 1.02. Global auto demand continues to be strong running a little head of historical long-term vehicle growth levels. Vehicle production in the quarter was about 20.8 million units up 4% from last year.

Revenue from the heavy truck market was also very strong in the quarter due to the improving economy and the acceleration of purchases and advance of new emission standard in Europe and China. And as I said last quarter, the Deutsch acquisition is really helping in this market. Revenue grew in all regions this quarter.

Europe was up about 11% due to strong exports and slight improvements in local demand. We are encouraged by increased new car registrations across most of Europe in December, the first time it's been this broad based in a while.

We do believe pent-up demand and gradual improvement in the economy are driving this and expect to have another solid revenue year with our European customers. In the Americas, revenues were up 15% due to continued strong demand and share gains from our investments made during the downturn.

We expect solid production growth to continue through FY 2014. Asia revenues were up 17% with 30% growth in China and 27% in Japan. We expect to continue our momentum across Asia through the year. Our margin improvement was due to a combination of favorable mix with more heavy trucks than the industrial transportation market.

Stronger overall volume, productivity improvements driven by our TEOA program and favorable metal cost. We expect another quarter of double-digit growth in Q2 and mid to high-single digit sales growth in the second half.

Please turn to Page 6, market demand in the industrial solutions segment continue to strengthen through the quarter and our revenues were up 6% and orders were up 9%. This performance was inline with our expectations.

Similar to last quarter, the industrial equipment, commercial aerospace and oil and gas market continued to have strong demand and we expect this to continue for the balance of the year. Our energy business grew 4% in the quarter, but we do see signs of softening in the next couple of quarters especially in Europe.

We also believe the defense portion of our business should pick-up a bit based on the resolution of the U.S. government budget. Looking forward, we expect another good quarter in Q2, the sales up about 6% due to the trend we discussed.

Please turn to Page 7, performance in our network solution segment was mixed in the quarter and overall in line with expectations. Sales of $713 million were flat versus the prior year. On the positive side, the telecom networks business grew 11% in the quarter driven by increased investments in fiber optics networks.

The enterprise business was up 6% with growth in all regions, offsetting that our DataCom business was down 8%. We are making progress in high-speed system wins, but we do continue to lag the market in mid and lower speed, which is where most of the volume is today.

The SubCom market continues to be slow in projects going into force but our backlog of awards continues to be strong. We still expect the business to pick up in the second half due to two new projects which we expect to come into force this quarter.

Margin in this segment were adversely impacted by two assets write-offs, excluding these write-offs adjusted operating margins were about last year.

We expect Q2 results to be up slightly versus Q1 and I would expect our normal seasonal second half pick up in the segment in addition to an increase in SubCom revenues as these new contracts come into force.

Adjusted operating margins in the second half are expected to be back to double-digit based on – low double digits based on the expected volume increase.

Please turn to Slide 8, revenue in our consumer solutions business was up slightly in the quarter, the overall trends in this quarter was similar to Q4 of last year, improving demand in the appliance market, declining PC demand and strength in tablets and smartphones.

We are capitalizing on the stronger appliance market where we have the leading market share. We have adjusted into the PC decline in our consumer devices business and are making gradual progress in smartphones and tablets. Adjusted operating margin in this segment was similar to the prior year.

In Q2, we expect revenue to be down 3% to 4% versus the prior year. However, adjusted margins are expected to be similar to the prior year levels. Now, let me turn it over to Bob Hau to cover the financials in more detail..

Thanks Tom and good morning everyone. A quick footnote of Tom's market comments, effective for the first quarter of fiscal 2014, we realigned certain businesses principally the relay products business within our segment reporting structure to better align our product portfolio.

Approximately $100 million of annual revenue, which was previously reported as part of the appliance business inside the consumer segment has been moved to the industrial equipment business in the industrial segment.

We have included a Slide in the appendix of today's presentation, which provides the impact of each of the quarters of fiscal 2013 and 2012 for reference. Now, let me discuss earnings which start on Slide 9. Adjusted operating income was $486 million up 25% from the prior year.

GAAP operating income was $479 million and includes $7 million of restructuring charges in the quarter.

As I mentioned on the earnings call in October, we anticipate a substantial reduction in the level of restructuring activities in fiscal 2014, which charges for the full year of approximately $50 million versus $311 million of charges in fiscal 2013. Adjusted operating margin was 14.6% up 220 basis points from Q1 last year.

The improvement is a continuation of a strong momentum that was achieved through the course of fiscal 2013 and a change versus the prior year is driven by 7% organic sales growth, productivity from TEOA, cost savings from restructuring actions taken in the last couple of years and favorable metal costs.

Adjusted earnings per share were $0.82 and GAAP earnings per share were $0.85 for the quarter. GAAP EPS included $0.01 of restructuring and other charges and $0.04 of income related to legacy shared tax liabilities. Turning to Slide 10, our gross margin in the quarter was 33.6%.

This is a 200 basis point increase versus the prior year due to volume increases – increased productivity from TEOA or lien programs and cost savings from restructuring. Total OpEx spending was $631 million in the quarter, which is up 5% versus the prior year.

The increase resulted primarily from increased selling expenses to support higher sales levels and increased variable compensation cost partially offset by cost savings attributable through restructuring actions.

On the right-side of the Slide, net interest expense was $29 million in the first quarter and I expect approximately $27 million of expense in the second quarter and similar levels through the remainder of the year. Adjusted other income which primarily relates to our tax sharing agreement was $7 million and in line with guidance.

In the second quarter, I expect other income of about $6 million. The adjusted effective tax rate was 26.1%, which was higher than our guidance of 24% to 25% due primarily to a one-time expense of approximately $10 million related to a change in tax laws in Europe.

I expect the tax rate to return to the 24% to 25% range through the remainder of the fiscal year. Turning to Slide 11, I will discuss our balance sheet and free cash flow. Cash from continuing operations was $387 million and our free cash flow in Q1 was $266 million. Net capital spending during the quarter was $121 million, or about 4% of sales.

I continue to expect capital spending rate to be approximately 4% to 5% of sales for the full year. Receivable days outstanding were 62 days, which is down slightly versus the prior year. And inventory days on hand were 74 days consistent with prior year levels. Both metrics remain in line with our expectations.

Let me discuss sources and uses of cash outside of free cash flow shown on the right side of the slide. We began and ended the quarter with $1.4 billion of cash. During the quarter, we returned a total of $315 million to shareholders. We paid dividends of $103 million, repurchased about 4 million shares for $212 million.

We expect additional share repurchases of $150 million to $250 million per quarter during fiscal 2014. Our outstanding debt was $3 billion at the end of the quarter. Now, I will turn it back over to Tom..

Thanks Bob. Please turn to Slide 12, and I will cover our outlook. As I said earlier, this was a very good start to the year for TE driven by a strong transportation market, continued improvement in most industrial markets and strong execution across the company. And order trends were strong in most of our businesses.

Based on these trends, we expect Q2 revenue of $3.4 billion to $3.5 billion, which is an organic growth rate of 5% to 8%. We expect adjusted earnings per share of $0.88 to $0.92, an increase of 16% to 21%.

In Q2, we expect another strong quarter in transportation and a good quarter in the industrial segment, network and consumer results will be largely similar to Q1. For the full year, we expect revenue of $13.8 billion to $14.2 billion, which is organic growth of 4% to 7%.

We expected adjusted earnings per share of $3.55 to $3.85 and this is an increase of 13% to 19% and as Bob mentioned a $0.19 in our guidance from last quarter for the year.

Just to close, the momentum we saw in most of our markets in the second half of our last year has continued through the first four months of this year, these improving market conditions coupled with our operating leverage improvements driven by TEOA and the accelerated restructuring last year should enable us to deliver strong performance in fiscal 2014.

Now, let's open it up for questions, operator please..

Thank you. (Operator Instructions) Our first question comes from Mike Wood, Macquarie. Please go ahead..

Hi. Thank you. Congratulations on the quarter..

Thank you..

In terms of just some more color on the European growth on the transportation side, it looks like you are forecasting 3% vehicle production growth for the full year next quarter. Recently you have been exceeding that by a substantial margin in terms of your sales.

You have mentioned exports, how much of that is actually related to any kind of a pre-buy in the C&I side of the business in Deutsch related to the emission standards changing?.

There is clearly some of that, just to keep in mind of our total transportation, industrial transportation is in the neighborhood of 15%. So while it's definitely a good thing, it's not that much overall leverage on the segment.

The European light vehicle market has especially with the German OEMs significant amount of exports and a lot of that is premium cars to the U.S. and China where we have very nice content.

So that help to offset what has been for several years now weak global demand in Europe that is, as I mentioned, we are encouraged to see over the last couple of months and especially in December, our pick-up in year-over-year new car registration.

It's not a long trend yet, but it feels like in talking to our customers its moving in the right direction. So we expect another solid year with our European customers..

Okay. And in DataCom, you'd spoken previously about skipping a product generation there moving too quickly to more advanced speed connector. But you are redesigning that 10 gigabyte speed connector.

How is that acceptance going, are you just too late to kind of make traction in that particular product?.

I'd say we're doing well in high speed in terms of customer selecting us for next generation. It is going slower than we would have thought a year ago and that whole market if you watch the big equipment OEMs, there is a lot of dynamics in that market right now and the net effect for us is the switch to new higher speed solution it's taking longer.

So, it's going to be, I think a couple of years before we meaningfully move the – a meter in our DataCom business.

Given that I mean its good product line, important product line to us and it's also their products that ultimately move into other parts of our business down the road, but it's been slower than we would have thought for the reasons I said..

Okay. Thank you..

You're welcome. Thank you..

Thank you. Our next question comes from Wamsi Mohan, Bank of America Merrill Lynch. Please go ahead..

Yes. Thank you. Good morning. Which geographic regions did you see the strength in industrial transport. And Tom even for that 15% of revs you're talking about, what sort of growth did you actually see in that part of industrial transportation? And have a quick follow up on margins..

The overall growth was well north – was north of 10%, very, very robust double-digit. Again, some of that is go forward, we did see very nice growth in China and Europe, solid growth in the U.S.

What I would expect will happen is that will moderate especially in China and Europe where the new standards are being implemented, that will moderate in the second half, but I would expect the U.S. will continue to improve as the economy improves..

Thanks Tom.

On margins then should we expect the margins to sort of play out at this level, so maybe the mix becomes less of a benefit, but you continue to see volume growth as Europe improves through the course of year?.

Yes, Wamsi. That's a good way to think about it. We won't have as much favorable mix from the industrial transportation group. We will continue to see nice volumes and get the benefits of that. And the metal levels made them pretty steady now for couple of quarters.

So, while there is year-over-year tailwinds on a sequentially through the year, I wouldn't expect that. So I would think of the transportation business continued nice sales growth really solid sales growth in this margin neighborhood..

Wamsi, I would expect that mix to moderate which means the year-over-year margin expansion will slow. In this quarter we're looking at 440 basis points, we will continue to see that but I would continue to see very good margins across the segment going forward..

Great. Thanks a lot..

Thank you..

Thank you. Next, we'll go to line of Matt Sheerin with Stifel. Your line is open..

Yes. Thank you. Obviously you have had nice margin expansion in transportation; industrial as well. But looking at the other businesses, particularly the computing, the consumer business, what drives those margins? Is it volumes at this point? And looking within that business, I know you have some PC exposure.

You talked about weakness there; it looks like demand is beginning to stabilize.

And then also in terms of your position on the mobility side, what is your outlook in terms of market share opportunities there?.

So Matt regarding the margin question, I think your characterization is accurate that we are -- in the transportation and industrial business we're getting less due to volume and productivity.

In the networks and consumer business I feel good what the team is doing productivity-wise, but we're not getting the volume yet, different reasons overall in networks we got a very slow SubCom business and the DataCom that I already talked to. In consumer, while PC is hopefully the rate of decline will start to level off which will help us.

But we're making that's a slow steady progress in the tablets and smartphone, it doesn't really have – even though the product cycles are shorter than in the industrial business for sure, it's still you got to win one designing at a time.

So until we begin to see our overall volume in consumer devices get consistently over 5% or 6%, that's what it's going to take to begin to move the margin up. In the consumer Solutions segment the appliances business is a very nice margin business at about company average and starting to grow again with the improving economy..

Okay great. And then a question for Bob on the margins. In some of the commentary you talked about some materials benefits particularly metals.

But could you talk about other things like copper and gold for instance and any tailwinds there in terms of margins and benefits on costs?.

Yes. So overall in the first quarter, we did definitely see a tailwind of metals which for us is really copper, silver and gold. And those probably about $15 million, $16 million benefit in the quarter.

For the full year, we're actually expecting about $50 million or $60 million so that quarterly $15 million, $16 million or so will remain in effects for the balance of the year..

Okay. Thanks very much..

Thank you. We'll go to line of Amit Daryanani with RBC Capital Markets..

Thanks a lot, good morning guys. I've two questions as well. Maybe just start off on the transportation side. For the last couple of quarters, and especially the December quarter, your business was up 14%, production was up 4%.

If I look at that 10% of out performance, if you may, it seems to be a lot more than just content growth of the Euro -- E6 mandate helping you out. I'm curious; maybe you could talk about that 10%.

How much do you think is content versus potential share gains versus new platform wins? I'm trying to get a sense of can you sustain this kind of out performance going forward?.

Well, I think very strong performance for a couple of reasons, some of it is mix again with the industrial transportation business where we have a very strong position as a result of combining Deutsch with our legacy TE industrial transportation business.

And that business is growing much faster right now than the auto business which is still growing light vehicle is still up plus 10% for us. In certain markets in China, in the U.S. we think we continue to gain share, we really invested -- have invested in those markets particularly during the downturn and now that's starting to show up in our revenue.

So but and I do think you'd expect to see us drop down to high single digit growth in the second half of the year in the overall transportation segment. It feels like we gained a little bit of share year-over-year..

That is all. Then just on the network solutions side, demand has been challenging for you guys for several quarters now.

And if you think of the headwinds in DataCom and Subsea really, do you think you have to look at options to potentially further right-size this business, or do you feel comfortable looking at the book-to-bill that demand will come back in the back half and you just got to wait for that revenues to flow in? I'm just curious how you think about rightsizing the business versus waiting for demand in the back half right now..

Well, I think there are two different answers to that. SubCom, I think we're positioned, it's been slower than we thought. I'd be more worried if there wasn't as much project activity as there is, that those projects have to turn into come into force.

So we feel reasonably confident although this market has slid on us for the last two or three quarters but we're very strong in the market. I don't think we've ever been stronger in terms of our product offering.

So that market comes back with our strength in it we're confident we'll do very well and we think we'll start to see that in the second half. DataCom is a little bit different. We're not strong in that market. We have done a lot to adjust our cost structure to reflect that without -- we haven't reduced our engineering investment.

And so that we do have a significant engineering investment for IT type solutions there both in fiber and copper. As I mentioned, they are going slower, I don't, we have no intention to take more cost out of the business. It's an important business for us.

We believe it's really upside for us, but I think if you go back to where I thought would be a year from now, I thought that would be more deployment of high speed than there is, so it is definitely pushing out of the improvement in the business for us. But tweaking the strategy, yes, but no fundamental change to it..

Got it. Thanks a lot and congratulation on a good quarter..

Thank you, Amit..

Thank you. Next we'll go to the line of Shawn Harrison Longbow Research..

Hi, I'm going to beat networks maybe dead in a bit. But even margins flat year-over-year I would have thought with the metals tailwind with a little bit of restructuring you would have been able to do better.

Is the margin at DataCom that much richer compared to everything else in the business and so that with DataCom being down so substantially year-over-year explains why margins would have been a little bit better?.

There is a number of points in I think Shawn around all that. The telecom business is growing and improving. The SubCom business is one of the lowest points in the last six or seven years. So we're getting really zero leverage out of that business right now. And we think we're at the bottom as I said earlier.

The DataCom business is, it's in a turnaround really for us, there is no question about that. So it has the potential for high margins. We did write a few assets off in networks, which further took a low margin lower but we think there is opportunity improvement, but it's not going to be sudden, we're going to need more volume.

I feel good about the cost structure because as you pointed out, we did take costs out we're just not getting the volume to take advantage of that right now. But in telecom, we have a leading product line in fiber optic, in SubCom we have a leading product line.

In DataCom we trail although for the future, we have a good product line but that's got to turn into reality. And in enterprise we have a solid product line in that business is historically a low growth business and we're right in there with that..

But let's say I take an optimistic, glass half-full view and two years out DataCom recovers, is the margin profile in that business better than kind of the networking average which should be mid teens and so you would get a I guess a greater lift as that business accelerates, is that what really needs to happen?.

Yes, we need more revenue and we need particularly the industry to start moving to high speed. When you dissect that business without getting into too much detail, the high-speed stuff is a lost leader and our core business while we're not a leader in mid to low speed solutions, it's a solid business.

We're just, we've been investing a fair amount in high-speed fiber and copper and so with very little revenue in there, it has the effect of exacerbating the margin on a downward -- in a downward way in that business..

Okay. And then just as a brief follow up.

Bob, I think last quarter was $60 million to $70 million in restructuring savings that were supposed to benefit the model this year, did that change?.

We're actually seeing slightly better than that. Right now restructuring is a little bit close to $70 million to $80 million..

Then the aggregate number of $100 million, did that change at all?.

No, a little north of that which is what we have been saying previously..

Okay. Thanks so much and congrats on the quarter and guidance..

Thank you..

Thanks Shawn..

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

Thank you and congratulations to you and your team there on good results. A quick financial question for Bob and that's on restructuring followed by a more fundamental question probably for your team. But I think you'd mentioned that restructuring looks like its going to be coming down lower this year.

Can you help us quantify that a bit more, I think you gave a little bit of numbers there. And is that then a recurring rate sustainable at that or were you looking at lower rate one-time this year, and if so it appears like this rate could be so low.

Are we looking at folding it into your normal operations? Then for the more operational question, when we look at content growth for vehicles, I think in the past you gave some commentary in kind of long-term 6% to 8%. With cars going more and more to hybrid and safety and emissions always continuing to improve.

Is there a chance of that 6% to 8% actually starts to increase or goes to the higher end or even above the higher end of that? Thank you..

Yes, Jim. It's Bob. On the restructuring, we spend about $7 million this quarter roughly inline with what we anticipated previous guidance and still guidance today is about $50 million on a full year basis that's down dramatically from prior years. Last year we spent just north of $300 million.

And we think ongoing natural restructuring charges of -- business of our size given the nature of our markets and then customers, it's probably $50 million to $75 million. So we're a bit below “normal” right now that's largely given the amount we spent last year.

And as we've said before, we talked a little bit about in our Investor Day, we are looking at ways to fold it in. I think it's important to describe it and disclose it externally whether investors dial it out or roll it back in, it's up to them, we'll give them the information.

One of the big reasons that we still have today adjusted earnings versus GAAP earnings and we're still dealing with the tax sharing agreement pre-split and some of those numbers can move significantly, would be very disingenuous to only talk about GAAP earnings.

But we certainly look to a) settling the tax sharing agreement over the next couple of years and b) much lower restructuring charges..

Hey, Jim. On your other question, we've typically talked about content of 4% to 6% and I do think that there is more likely for that to go higher than lower that's the way I would say.

And I walked around in Detroit last week and walked through the auto show and you can feel it you really, I mean we obviously see it in our business and its our biggest business, when you see 100 cars on the floor and you can track them with the features they have versus the prior iteration of a particular model you can feel it.

So I do think, it's more likely to go up slightly than down, those at a metered pace just because of the product cycles and it doesn't happen over night, designing new features but it's a really good trend and its why we're excited about the business so much.

We -- also historical production rates that tended to be 2% to 3%, we think for the next few years or the industry I should say think that could be up a point, a point and a half and that was a very, very low growth in demand for local demand in Europe. I think that most of the trends are positive.

In China, you have dealers starting to finally expand in the tier three to six cities, so you’re going to – we expect to continue to have a robust automotive market there.

So the combination of more likely upside in production than downside versus the historical rate and more likely upside in content than outside, I think makes it a very attractive market for many, many years..

Great. I think I got my numbers.

Of the 4% to 6% that is content growth and 6% to 8% is then when you add on the global SAR or the global units of auto production and so 6% to 8% is what the sales rate is and content of 4% to 6% is that kind of what you're seeing?.

Yes. That's what we're seeing. And that's and of course netted into that is price, which is moving up a little but where as you can see in our margins we're able to give the customer the price that they need and keep the margins moving in the right direction..

Great. Thank you and congratulations again to you and your team..

Thank you. Next question is from Mark Delaney, Goldman Sachs..

Great. Thanks very much for taking the question and congratulations on a strong quarter. I don't understand on the margins there has been a tremendous amount of year-over-year improvement in the adjusted operating margin, 14.6% this December quarter versus about 12.5% a year prior.

I am hoping you can help me understand within the March quarter guidance maybe the bridge from last year. So specifically, by my math, the March quarter implied operating margin guidance is right around 15%? And then the revenue level at the midpoint is pretty similar to the revenue that you guys did for the September 2013 quarter.

I would think that there is maybe some metal pricing benefits versus the September 2013 quarter and then some restructuring benefits that are coming through.

Given that you did the 15.7% in the September quarter, I'm just trying to hope you can walk me through how you are thinking about getting to the 15% or so in the March quarter of fiscal 2014?.

I'd describe it, Mark, is steady -- continued steady volume growth where we'll get the lift there. The metal difference isn't that much from two quarters ago. It's been a nice tailwind but it's not that much incremental.

We are investing more there is no question so we are -- we believe continuing the strength in the product line and just continuing to invest in the emerging markets and engineering and selling. So we are continuing to invest. But over all would expect to continue to drive the margin up and we were pleased with the productivity.

Our price erosion is up a little bit not dramatically but there is no question that has typically happened with particularly copper hanging around at this rate for a while relative to where it was 18 months ago that customers are expecting appropriately some of that back. So we have pluses and minuses but net-net very good momentum in the margin..

Understood. Thank you for that. For my follow-up question at the Analyst Day Tom and Bob, you guys talked about looking at doing a more acquisitions, I think may be on the tuck-in type of size.

Can you give us an update on how that's progressing?.

Well, it's -- we did the two big once and we've been continuing to build our pipeline especially focused in anything related to transportation and the broader industrial markets. So we keep plugging a way there, it's an active pipeline. We're always talking to people but we're thoughtful about it.

Number one, really fit strategically and obviously we would be -- got to be able to create value with it. But we expect it to be a – an important part of how we grow the company on an ongoing basis.

But we feel good about the organic momentum particularly obviously in transportation and industrial and we have to continue to – we have to get it going in the other two..

I understood. Thanks and congratulations again on a good quarter..

Thank you, Mark..

Thank you. Next, we'll go to line of William Stein with SunTrust Robinson Humphrey..

Good morning. Thanks for taking my question. I'm hoping you can clarify the comments about the changes in demand in the automotive end market related to the new emission standard. I assume you are talking about Euro 6.

Can you clarify whether that relates to light cars or a heavy trucks and to verify your comments about pull-in in light cars to get ahead of this rollout?.

Yes, well, let me – I'm glad you asked. So I can clarify it. It's really in the truck market for instance. So that's where we see what looks like accelerated demand we've had, the older version trucks because the new ones are more expensive, not an unusual thing in this market it's not the major thing driving us.

We believe improving economic environment plus the age of the trucks on the road are an even bigger part of that. But clearly for the first half of this year the very high growth rates of course in the industrial transportation which is only 15% of transportation are being driven by the – our customers ordering are really good..

Great. That's helpful. And if I can ask one follow-up. I'm hoping to hear a bit about demand in inventories in the channel relative to your direct business..

The channel was a little bit slower in December than we expected, it's still a solid business. So we did see the kind of – it's really not unusual calendar year end inventory tightening. I think not a big number and not different from our expectation kind of in line with our expectation.

So when you look at it more sequentially from our fourth quarter into the first quarter definitely a little bit softer because of adjustment. But, I don't see any overhang or anything like that out there and talking to our distributor partners..

Great. Thank you..

Thanks Will..

We have a question from Sherri Scribner, Deutsche Bank..

Hi. Thank you. I just wanted to dig a little bit into the improvement you're expecting in the second half of the year in networking and consumer business. I know you talked about some orders that you're anticipating. And it sounded like you're expecting some additional strength in the SubCom market.

So I was just hoping for a little more detail on the strength in the networking piece in the second half of the year..

Networks, we'll typically have a seasonal peak. So in telecom especially primarily in telecom weather get better, we see the business pick up. So we're really in that business pretty much looking for a similar pick up first half, second half that we saw last year.

SubCom is much more related to contracts coming into force and the big thing is we're counting on two contracts to drive that. We got the contract, find the contracts all that. So we would expect that they'll go into force but until they do anything can happen. So that's a big thing driving network.

In consumer, it is a little more of continuing to getting traction. In appliance, I would say if the economy continues to improve, that business naturally follows the economy. So that's less seasonal and more economic related. Consumer of course has its peak in the quarter, the quarter and a half before the Christmas season.

But we're not looking for anything dramatic in the second half in the consumer business and even relatively and that's a small business for us. So relatively it's nice but absolutely in terms of it, affect on the overall company is kind of a penny a quarter, I think Bob in that range. So it's not a big lever. We're trying to make it a bigger lever..

Okay. And then based on the guidance if I do the math, it looks like it's a midpoint for your fiscal 2014 guidance at $14 billion in revenue.

Your operating margins are somewhere around 15.5%, I know you've said that you could do plus 15% but are you comfortable with sort of a 15.5% operating margin for the year and that would suggest some decent operating margin leverage in the second half?.

Yes, sure. At midpoint to that $14 billion the operating margin is above 15.3%.

And yes, export we are comfortable with that given the progress we saw going through much of last year and in the first quarter around overall benefits of our lien initiatives what we thought TEOA as well as the improved benefits from restructurings and metals tailwind gives us confident so that, that 15.3% and that generates the $3.75 earnings at mid-point..

Okay. Is that assuming that SG&A is relatively flat from first quarter levels or do you see some declines in that based on the productivity improvements? Thanks..

Overall for the year, SG&A is about 13.5% of sales..

Okay. Thank you..

Thanks..

Thanks Sherri..

Thank you. We have a question from Steven Fox, Cross Research..

Thanks. Good morning. Just going back to the operating margins for a second, if I look at the transportation and industrial margins, it seems like there was a greater drop through effect on both sides of the business on a quarter-over-quarter basis.

So on the positive sales from transportation you pull down greater than average drop through and the reverse was happening on industrial.

Can you just sort of breakdown how much more was related to metals in those segments versus – I don't believe there was a lot of restructuring but what else was driving that because I'm just (inaudible) those numbers? Thanks..

Hi, Steve. I think I'd point to the two things. Number one, better volume better revenue left in those two segments so you'd get the benefit of the buying leverage into our factories. And then from a metal standpoint in particular relative to networks, the other three segment that's much more metal content.

So you see that $15 million or $16 million of year-over-year benefit really layered into the other three segments where networks doesn't participate. All of our businesses clearly involved in TEOA and lead, but there is a significant extra lever when you get volume leverage..

But when you compare auto or transportation or industrial as well is -- there is sales per part in transportation higher so that's a higher volume business than industrial sales.

You're not going to typically have the same fall through but we feel in the industrial business overall there is nice opportunity to fund the metal margin improvement through TEOA, we'll further along with that in transportation than we are in industrial, so we expect to see the same kind of improvements..

Great. That's helpful. And then just quick follow up on China, Tom.

Given how fast it is growing, could you just talk a little bit about within the China market especially on the auto side where you think you're picking up share from a content standpoint, is it helping or hurting the overall content growth for the company within auto given the mix differences and why you think you're picking up that share little bit more color would be helpful.

Thanks..

Sure, thanks. Well, I think the momentum piece is, I mean we've been in China a long time and we are – I mean our whole team is local. So, we have a very, very strong seasoned team that is a local team that's been in the business a long time that's been developed by our other teams around the world.

So we have a lot of know-how there and we work with every customer. And we bring the bear the technologies from the other parts of the world. We're strong. We're as strong with the local customers as we are with the multinationals.

While the content per vehicle in the locally produced cars is less, it's rapidly rising at a greater rate because in order to compete in that market you have to have the features that the multinationals have. So, I think that while the overall contents for vehicle in China is less than it is. And Germany for sure it's raising at a faster rate.

And in China for the local customers, we provide a much -- in some cases a much broader product range than we do other places because the customers need the expertise.

So that has helped us, that four, five years ago we decided to kind of get – I don't want to take services in the sense that we charge for services because we don't really do that, but we help a lot in the design of the electrical system for the local customers because they wanted to help. So that's helped us. That helped us a lot.

And you just see the continued expansion and especially demand for high-end cars. So while the low end car, overall there is lower content, you are selling a lot of premium cars particularly from Germany into that market where we have a significant content..

That's very helpful. Yes. Thanks very much. I appreciate it..

Thanks Steve..

Thank you. Our last question comes from the line of Amitabh Passi from UBS..

Hi. Thank you, Tom. I had a question and then a follow-up. I guess the first one was just a big picture question. It seems to me when you embarked on the ADC acquisition and Deutsch part of the motivation was to sort of diversify your growth drivers and your portfolio.

Yet if I look at the numbers today about almost 45% of your sales are coming from transportation and about 60% of your EBIT dollars.

So just curious as you look at your portfolio, and I know you touched on this but would like to get more details, is there an appetite maybe to accelerate the inorganic element to continue to sort of balance out the portfolio, both from a growth and profitability perspective?.

Amitabh, I would say the way the underlying strategy of Deutsch was harsh environment. So with our sweet spot, what we are best at and where we think the most value we can add and the most value we can extract is in the really harsh environment.

And so we are not – I'm not worried at all about the transportation business getting bigger if it's for natural reasons, right, the market is growing, we are strong. We do well there. The customers really value the full value proposition we bring to support them in every part of the world.

I think the industrial business benefited from those two, so half of the revenue it came from Deutsch, half one in transportation, half one into our industrial solutions business and (inaudible) which – now we have the almost $1.1 billion business as a result of that acquisition.

And again, enabling us to do other things that we wouldn't have otherwise done because of the width of the – breadth of the product line. So if you think of us, we like the harsh environment. That's where we are best at.

We are clearly better at it than we are in consumer and DataCom and networks are important to us and we think we have a lot of value add there. But, we are not really on a strategy to try to lessen our participation in transportation because if you just look at the underlying trends there, it's just more content and there is still a long way to go.

So we want to continue to be strong there. And of course, we want to – the way, I characterize our four businesses, transportation is a great business and we are really good at it. Industrial is a good business and we are good at it with the opportunity to be better.

Network solutions on a mix of solid business, we believe the fiber part is really a good business to be in because the bandwidth demand and we are good at it. And consumer we are getting better but we are not good. And we have a terrific team in there that's changing it and so we view that as opportunity – selective opportunity as we say.

So that's how we think of the portfolio and we think all four of the segments need to have the right attention in order to be the best. So we are not really trying to deemphasize transportation..

Okay. Perfect. Then just as a quick follow-up, I would like a little more insight into the telecom networks piece of network solutions. You grew almost 11% year-over-year. I think you are guiding to 5% growth. Verizon seems to be deemphasizing investments in wireline. MDN was the hot topic two years ago, it kind of fizzled out.

So just as you look at project activity which areas and regions are you most excited about and why after growing 11% in the first quarter, do you still think it's a mid single-digit growing segment this year?.

I mean, I think 11% was driven very strong by some wins in South America, some accelerated activity in Europe. We expect those to level off. There is uncertainty around MDN, it's still in an early stage far enough that I don't think anybody is going to turn back if there is a question of how deep will they drive the fiber.

And probably won't see everybody get fiber-to-the-home. But it's going to be fiber deep which is still a really good business. If you go back to the prior quarter it was a different part of the world, the important thing, the encouraging thing but we need to see it quarter after quarter after quarter is it just more project.

So we – as I think, I said in Investor Day there is a lot more projects in the last year than they were the year before that. But it tend to be a lumpy business. Our fundamental belief is that when you model data flow, you got to have the fiber network deeper than it is.

You don't have to go fiber-to-the-home to give the consumer a good experience, but you need to have fiber setting the offload even from a LTE network deeper than its generally in the network around the world, which is why we think its 5% to 6% growth business over time.

But it does take fortitude to ride through the cycle and last year we took a lot of cost out to make sure that whatever cycle it is that we are probably above cost of capital kind of return. So that's how we see it right now. We don't expect 11% growth over the balance of the year..

Okay. Got it. Thank you so much and good luck..

Thank you..

Okay. Well, thank you very much and for those of you like us who fought through the snow to participate, we appreciate it. Again, a good quarter and more than anything I think it reflects a lot of the actions we have taken over the last several years certainly it's very nice to see general economic improvement.

We are not giddy about – hey, all of a sudden we are in the high growth area. We continue to be focused and we look forward to talking to you in the not too distant future. Thanks for joining us..

Thank you. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect..