Tom Lynch – Chief Executive Officer Bob Hau – Executive Vice President & Chief Financial Officer Terrence Curtin – President, Industrial Solutions Keith Kolstrom – Vice President, Investor Relations.

Mark Delaney – Goldman Sachs Wamsi Mohan – Bank of America Merrill Lynch Mike Wood – Macquarie Capital Amit Daryanani – RBC Capital Markets Matt Sheerin – Stifel, Nicolaus & Co.

Shawn Harrison – Longbow Research Amitabh Passi – UBS Jim Suva – Citigroup William Stein – SunTrust Robinson Humphrey Steven Fox – Cross Research Sheri Scribner – Deutsche Bank.

Ladies and gentlemen, thank you for standing by. Welcome to the TE Connectivity F2Q Earnings Call. (Operator instructions.) As a reminder this conference is being recorded. I would now like to turn the conference over to Keith Kolstrom, Vice President of Investor Relations. Please go ahead..

Good morning and thank you for joining our conference call to discuss TE Connectivity’s F2Q 2014 results. With me today are Chairman and CEO Tom Lynch and CFO 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 section 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 www.te.com. Finally I would like to remind everyone to please try to limit themselves to one follow-up question to make sure we’re able to cover all questions during the allotted time.

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

organically sales were up 6% overall and up 7% excluding Sub Commp. The automotive, aerospace, oil & gas, industrial and telecom businesses drove this growth. This more than offset expected declines in the consumer devices and Data Comm businesses and continued project delays in our Sub Comm business.

Adjusted earnings per share of $0.95 was up 25% versus last year and $0.05 better than the midpoint of our guidance.

As I mentioned earlier adjusted operating margins were 15.5%, up 190 basis points over the prior year, and we remain on track to exceed 15.0% for the full year as we continue to deliver strong operational performance across the majority of our businesses.

Free cash flow was $273 million and we returned $281 million to shareholders in dividends and share repurchases. The annual dividend was increased 16% to $1.16 per share by our shareholders last month at our annual general meeting. This increase will be effective with the June dividend payment.

This represents the fourth consecutive year of double-digit dividend increases. Our orders increased 4% organically in the quarter and our book-to-bill was 1.03, excluding Sub Commp. Orders growth was broad based with growth in all regions and in line with our expectations.

For the full year we are raising the midpoint of our adjusted EPS guidance by $0.03 to $3.78. This is an increase of $0.17 versus our prior year performance. In the second half we expect solid growth in the transportation markets and continued steady improvement in most of our industrial markets.

This, coupled with our strong F2Q performance, will more than offset continued delays in Sub Comm projects. The $3.78 compares to our original guidance six months ago of $3.65, a 13% increase. We entered this fiscal year expecting to deliver strong results and are on track to beat those original expectations. Please turn to Slide 4.

We announced the planned acquisition of the SEACON Group on April 2nd. This transaction is another step in strengthening our leadership in higher growth harsh environment applications.

SEACON has a 50-year history of supplying connectivity solutions for underwater applications, one of the harshest environments where superior quality and performance are required. Their leading portfolio of products and technologies is a very complimentary fit with our existing solutions for the underwater oil & gas markets.

We currently have a nice business of about $150 million in revenue that has had solid double-digit growth over the last five years. The addition of SEACON will add over $115 million of revenue and bring our total business to $250 million. We’ll also double our served market to over 1 billion.

We expect to continue to generate double-digit revenue growth in this market going forward as this acquisition positions us with the leading product offering. I first had the opportunity to meet the owners of SEACON several years ago. They have built a great business and an outstanding team.

The acquisition is expected to be accretive in year one excluding one-time costs and will be reported in the Aerospace, Defense, Oil & Gas business within our Industrial Solutions segment. We’re very excited to welcome the SEACON group to TE. As we mentioned in our press release we expect the acquisition to be finalized in the current fiscal year.

Terrence Curtin, who is the President of our Industrial Solutions segment is here and available for questions on this subject in the Q&A section. I’ll now provide some detail by business within each segment in the next four slides.

Unless I indicate otherwise all changes are on an organic basis which excludes the effects of currencies, acquisitions, and divestitures. Please turn to Slide 5. Transportation had another great quarter. Sales of $1.57 billion were up 13% over the prior year and orders were up 7% with a booked to bill of 1.0.

Global auto demand continues to be solid and auto production in Europe was up both sequentially and versus the prior year driven by exports and importantly improving global demand. Global vehicle production in the quarter was about 21.5 million units, up 5% from last year.

Revenue from the industrial transportation business was again very strong in the quarter due to overall strength in the truck market and the impact of emissions standards changes in Europe and China. And just a comment, our TE and Deutsche Industrial Transportation businesses are now fully integrated and performing very, very well.

Transportation revenues grew double digits in all regions this quarter. Europe was up 12% as I mentioned earlier due to strong exports and improvement in local demand, and in Europe new car registrations were up in the March quarter. In the Americas revenues were up 10% due to continued solid demand and share gain.

Asia revenues were up 18%, with a 34% increase in our business in China and 12% in Japan. We’re the leader in China and continue to grow faster than the market. We continue to invest aggressively in talent and capacity there to further strengthen this position.

Our margin improvement was due to a combination of favorable mix with heavy trucks in the industrial transportation market, the operating leverage that came with our volume increases and productivity improvements driven by our TEOA program.

As I mentioned last quarter we expect revenue growth in mid- to high-single digits in the second half as we do expect some moderation in the year-over-year auto production growth rates, which is typical. We expect adjusted margins to remain at or above the 20% level. Please turn to Page 6.

Market demand in the Industrial Solutions segment was in line with our expectations in F2Q. Revenues were up 4% and orders were up 2% versus the prior year. We are seeing a continued recovery in the industrial equipment business, with revenues up 8% driven by demand in the factory automation and high-speed rail markets.

The commercial aerospace and oil & gas markets were up 5% and continue to have strong demand. We expect this to continue for the balance of the year. As expected, our energy business was down slightly in the quarter as demand softened, particularly with emerging market customers in Europe.

Adjusted operating margins continue to improve and were up 70 basis points versus the prior year as a result of the increased volumes, the benefits of accelerated restructuring and productivity increases. Looking forward we expect another good quarter in F3Q with sales up mid-single digits versus the prior year and continuing margin improvement.

Please turn to Page 7. Sales in the Network segment were down about 1% versus the prior year. This was mostly in line with our guidance except further weakness in the Sub Comm business caused by additional project delays. Excluding Sub Comm sales were up 2% organically.

The Telecom Networks business grew 6% in the quarter driven by increased investment in fiber optic networks particularly in Europe. The Enterprise business was up 5% due primarily to strength in the Americas. Our Data Comm business was down 7% in line with our expectations.

The Sub Comm business is very slow as the timing of awarded projects coming into force continues to delay. We now project second half revenue of $150 million with full-year expectations down about $100 million from our prior guidance and from prior year. And due to these delays in the current quarter we are anticipating a loss in Sub Comm in F3Q.

On a positive note, the AAE1 project which was announced yesterday, and this is a major project that connects Asia with Europe worth more than $500 million, came into force last week and we expect to begin the project late in the quarter. And when we say “came into force” that means we’ve got a sizable down payment.

This has been a very tough year in the Sub Comm market but we are very well positioned with our wins over the last two years, and I remain confident that demand for bandwidth will drive another build cycle. Adjusted operating margins in the segment were down slightly versus the prior year driven by the sales decline in Sub Comm and Data Comm.

We do expect seasonal second half pickup in the Telecom and Data Comm businesses. Overall segment revenue should be up about 10% versus the first half.

So to digest the Networks business, the Telecom, Wireless and Enterprise businesses which comprise about $2 billion annual revenue are growing again this year after a couple years’ of decline and margins for the year will be double digits. Sub Comm is we believe at the very bottom now and the Data Comm business is starting to level out.

And on a positive note there are investments in high-speed solutions that are starting to take hold. Please turn to Slide 8. Revenue in our Consumer Solutions business was down 3% versus the prior year.

This was in line with our expectations as lower customer demand in the consumer devices business more than offset growth of 5% in the appliances business. We continue to see improving trends in the appliance market where we have the leading market share and very attractive operating margins.

Adjusted operating margins in the segment were similar to the prior year despite the revenue decline due to the restructuring savings and metals tailwinds. In F3Q we expect revenues to be up slightly versus the prior year. Now I’ll turn it over to Bob to cover the financials in more detail..

Thanks, Tom, and good morning everyone. Let me discuss earnings which start on Slide 9. Adjusted operating income was $532 million, up 20% versus the prior year.

GAAP operating income was $510 million and included $21 million of restructuring charges, 35% of which was in the Networks segment, and $1 million of acquisition-related charges in the quarter. We continue to anticipate full-year restructuring charges of approximately $50 million for the full year.

Adjusted operating margin was 15.5%, up 190 basis points from F2Q last year. The improvement versus the prior year is driven by the 6% organic sales growth, productivity from TEOA, cost savings from restructuring actions taken the last couple of years, and favorable metals costs. Adjusted EPS was $0.95 and GAAP EPS was $0.87 for the quarter.

GAAP EPS included $0.03 of restructuring and other charges and $0.05 of charges related to the legacy shared tax liabilities. These tax charges are consistent with our overall expectations of settlement of these pre-separation tax issues. Turning to Slide 10, our gross margin in the quarter was 34.2%.

This is a 200 basis point increase versus the prior year due to volume increases, increased productivity from our TEOA Lean programs, and a cost savings from restructuring and metals. Total OPEX spending was $641 million in the quarter, which was up 5% versus the prior year.

The increase resulted primarily from increased investments in sales and marketing and increased variable compensation costs, partially offset by cost savings attributed to restructuring actions.

On the right side of this slide, net interest expense was $26 million in the quarter and I expect $26 million to $27 million of expense in both F3Q and F4Q going forward. Adjusted other income, which primarily relates to our tax sharing agreement, was $2 million. In F3Q I expect other income of about $8 million.

The adjusted effective tax rate was 21.7% which was lower than expected. This is partially offset by the lower other income and gave us a net benefit of about $0.02 to earnings per share.

Overall the adjusted tax rate for the first half of the year was 23.8% and I expect the adjusted tax rate to be in the 24.0% range through the remainder of the fiscal year. Turning to Slide 11 I’ll discuss our balance sheet and free cash flow. Cash from continuing operations was $453 million and our free cash flow in F2Q was $273 million.

Net capital spending during the quarter was $159 million or 4.6% of sales and I continue to expect the capital spending rate to be approximately 4.0% to 5.0% of sales for the full year. Receivable days outstanding were 63 days and inventory days on hand were 73 days, each up two days versus the prior year.

Inventory levels were slightly elevated as we expect increased revenues in a number of our businesses in the second half. Now let me discuss sources and uses of cash outside of free cash flow, shown on the right side of this slide. We began and ended the quarter with $1.4 billion of cash.

During the quarter we returned a total of $281 million to shareholders. We paid dividends of $102 million and repurchased about 3.1 million shares for $179 million. As Tom mentioned earlier we expect the SEACON acquisition of $490 million to close in the current fiscal year. Outstanding debt remained at $3 billion at the end of the quarter.

Now I’ll turn it back to Tom..

Thanks, Bob. Please turn to Slide 12 and I’ll cover our outlook. Based on the trends I discussed earlier we expect F3Q revenue of $3.54 billion to $3.64 billion, up 3% to 6%. The project delays in Sub Comm are negatively impacting our growth rates by approximately 1%.

We expect adjusted EPS of $0.96 to $1.00 which is an increase of 9% to 14% over the prior year. In F3Q we expect continued strong results from both the Transportation and Industrial segment. The Consumer segment is expected to be up slightly, and Networks excluding Sub Comm is expected to be about flat versus the prior year. Please turn to Slide 13.

For the full year we expect revenue of $13.8 billion to $14.1 billion, up 4% to 6% versus the prior year. We expect adjusted EPS of $3.72 to $3.84, an increase of 15% to 19%. Relative to prior guidance the story is Transportation is stronger and Sub Comm is weaker.

We expect to have another very strong year of cash flow and we’re using that cash in a manner that is consistent with the plan we have discussed over the last several years, namely investing to grow the business organically with investments in manufacturing capability and capacity in emerging markets as well as increased investments in R&D and sales and marketing, strategic acquisitions like the SEACON Group that accelerate growth in attractive markets and returning cash to shareholders through dividends and share repurchase.

Just to close I’m encouraged by the positive signs in most of our markets we serve and feel very good about our overall execution. I really believe we’re well positioned for future growth and expect to deliver strong performance for the remainder of the fiscal year and beyond. So now let’s open it up for questions. .

Thank you. (Operator instructions.) And our first question comes from the line of Mark Delaney from Goldman Sachs. Please go ahead..

Thanks very much for taking the question. Tom, I was hoping if first you could elaborate a little bit more on the outlook for the Sub Comm business.

I understand it’s weaker in the near term but you also mentioned a new award coming into force, and maybe you can help us understand with the order pipeline what that implies for revenue potential in the subsea business as you start to think into F2015..

Thanks, Mark. As you know we’re not really going to talk about F2015 until the end of the year but in the Sub Comm business, there’s really three components of the business. The biggest part is building the communications systems and that’s the piece that’s really down right now because of the project push-outs.

The smaller pieces are maintenance and our oil & gas business which is fairly steady. And this AAE1 award which we were awarded many months ago but it took a while to come into force is good news but it’s happening a lot later than we thought, which means that we’re underutilizing our assets right now.

As that comes into force late this quarter, early next quarter, we believe that’ll start to ramp. There’s several other projects that we’ve been awarded that are close to coming into force but they’ve also been taking longer.

So I think once we get two to three projects to complement sort of the ongoing business, then we’ll start to ride up the upswing of the cycle..

That makes sense, thank you for that. And then for my follow-up question I’m hoping we can get a little more detail on the recently proposed acquisition of SEACON.

I mean what are the expectations there in terms of margins and if you plan to do any restructuring in that business, or if it’s already having a cost structure that you expect it to have longer term..

I’ll say a few things and then I’ll ask Terrence to elaborate. I’d say this isn’t really a cost synergy play; this is an expanded market play. So we’re really doubling the size of our served market and bringing a full system now to the customer.

So that’s the attractive part and it’s higher than company margins for sure because of the very highly engineered and extreme harsh environment nature of the business.

Terrence, do you want to elaborate on that?.

Sure, Tom. Hello everyone. When you look at SEACON, I think a couple of things maybe to paint a picture of where we play today in the underwater space from an interconnect perspective and what SEACON brings to us.

First off, when you look at our position today we’re exposed to about a $400 million market which is very focused on high-performance cable as well as connections around the power element. SEACON very nicely has about $115 million of revenue.

It is extremely profitable; about 30% plus EBITDA, and when you look at it it really opens up our market from $400 million to over $1 billion as Tom said. So what they bring is really along the optical and fiber side, connections that happen underwater – they’re very wet-matable.

And when we look at this market overall we’ve been able to basically grow our small position from $70 million to over $150 million today.

What it really does is give us a rounded out portfolio in some of the harshest environments, and we believe with the combined portfolio, with the trends we see in underwater and oil & gas, we’ll be able to continue to grow the combined well north of double-digit growth going forward. So we’re happy with the acquisition and what it brings.

To Tom’s point it is very much around growth and really making sure we capitalize on this market that is a very fast-growing market, and one of the fastest in the industrial space from a segment perspective..

Thank you very much..

Thank you. Next we’ll go to the line of Wamsi Mohan with Bank of America Merrill Lynch. Please go ahead..

Yes, thank you, good morning. Tom, in Networks you’ve been divesting $20 million or so of revenues each quarter over the last two quarters. Can you tell us what these underperforming assets are and how much more there is to go? And I have a follow-up..

Sure, thanks Wamsi. In Data Comm we did that last year and we’re coming to the end of the compare, but we were in for a long time the magnetics business – basically coils that are used to help set frequencies in these products, really a commodity product that had a number of competitors.

So it just didn’t fit the kind of highly engineered criteria that we have for our business. You take that out, the business is down single digits. Some of that is market; some of that is clearly we’re kind of a mid-tier player in the current 15 GB speeds, but that’s pretty much behind us, the exit of product lines in that business..

Okay great, thanks. And in the Networks business clearly Sub Comm has a large negative impact on margins, but can you give us some sense how the ex-Sub Comm margins trended in the segment in the current quarter and how much restructuring benefits flowed into this quarter? Thanks..

our core connector business is improving and we’re making a sizable investment in high-speed copper and fiber because that’s where the world is going. And we want to lead there, and early wins position us well but that’s not going to become serious revenue for a few years. And the Sub Comm margins are way down because the volume’s way down..

Got it, thanks a lot..

Thank you. Next we’ll go to the line of Mike Wood with Macquarie. Please go ahead..

Hi, thank you. In Automotive, your view for 1% to 2% EMEA growth for next quarter, I’m curious how that floats with the kind of mid-single digit growth we’re seeing in vehicle registrations in Western Europe exiting the quarter roughly at a 10% growth rate. I’m curious what the production versus demand trends are you’re seeing there..

Yeah, you’re talking about the production growth in Europe..

Yes..

Yeah, I mean that’s what the industry’s projecting right now and it’s corroborated by what our customers are guiding us on to produce relative to local production. But remember we have consistently grown in Europe as well as some of the higher-end vehicle makers there because so much of their product is exported.

I think what’s really positive about this is there’s absolutely overall growth in Europe locally, so that says that the economy’s, you know, it’s not robust by any stretch but it’s improving and that’s broadening the base of car sales over there; whereas we’ve really benefitted up until the last two quarters by the export market which is a high content market.

This is putting a broader base on it..

Okay, and can you also comment on there was a large telco carrier in the US that just announced plans to roll out fiber in the US in a number of cities – what trends just that you’re seeing overall in terms of the fiber deployment and whether or not you’re seeing any pricing pressure in that segment as those carriers increase CAPEX in that area..

Mike, it’s really a carrier-by-carrier thing around the world. So that particular carrier you’re talking about, well we do well with all the carriers in the US and we’re benefitting from that.

A little more pricing pressure than normal, which with the fiber volume up… This is the second year in a row where the fiber portion in the Networks, our revenue is up double digits.

And one interesting thing that’s happening in that market is the copper piece is finally getting to a small enough piece where the decline in copper isn’t directly offsetting fiber, and that’s why we’re starting to see the growth because carriers are investing in the fiber portion of the business.

And that 4% I talked about, that 4% to 5% that we expect to grow this year, that’s closer to high-single digits in fiber. So we are definitely seeing it.

There’s a lot of positive trends I would say – new players announcing they’re going to build fiber networks, net neutrality kind of wearing down in the US, of course just the tremendous requirement for more bandwidth.

So the trends look better right now, feel better, are better I would say – those underlying trends – than they have been for a long time as drivers for our part of the business, so we’re optimistic but we need to see it turn into a higher revenue growth rate for sure..

Thank you..

Thank you. And now we’ll go to the line of Amit Daryanani from RBC Capital Markets. Please go ahead..

Perfect, thanks, good morning guys.

Two questions from me, one just on capital allocation – can you just touch on your capital allocation thought process as you get through the back of the year, or given the fact that you have to have a cash outlay of $490 million for SEACON does that change the buyback process on a go forward basis at all?.

Thanks, Amit, this is Bob. Overall as you know our capital strategy is broadly set around continuing strong free cash flow which we anticipate will approximate net income out into the future; and that allows us to fund the capital requirements of the business.

In order of priority we’ll continue to fund organically – that’s capital investments as well as R&D that we spend 4% to 5% of sales and capital. We spend about 5% in R&D and we anticipate that continuing out into the future. After the organic investments we’re certainly looking for value-creating strategic acquisitions.

And then long-term over a period of time we expect two thirds of our cash to go back to shareholders through dividends which we’ve been increasing as earnings increase – a s Tom pointed out in the upfront comments four years in a row of double-digit increases, and as recently as last month a 16% increase for the annual dividend.

And we also do share buyback. And the SEACON acquisition perfectly aligned with that strategy. It’s a $500 million, $490 million of cash outflow, we’ll pay with cash on the balance sheet..

Got it.

And I guess, Tom, I was wondering if you could maybe spend some time talking about how do you think about divestures broadly on a go-forward basis or when to deemphasize parts of your business? I recall that when you guys had actually spun out a telco divesture is actually a very big part of the story of how you guys were able to improve margins.

I’m curious, as you look at your portfolio, especially the networking piece of your business or parts of it, how do you evaluate divestures on a go-forward basis?.

Well, a couple ways, Amit. I think first and foremost when we came out and looked at the portfolio and shored up the strategy around connectivity there had to be a couple criteria, right? It had to be related to the strengths we had.

So we weren’t interested if the most part of the business had no relation to the rest of the businesses and we couldn’t leverage our strengths, so that’s why we did quite a bit.

I’d say the portfolio we have now is all related to connectivity, and when you think of the internet of things there’s the network that enables that and there’s everything that’s connected to it, and we’re right in the middle of both of those. So we like that position very much.

Networks has been a slow business for sure the last couple years but I’m still very bullish on the underlying dynamics, all the things I mentioned on the last question, that say they’re going to drive it. So if you look at the telecom, enterprise, wireless, you’ve got to push fiber more into the network.

And even if you don’t believe in fiber to the home, high bandwidth to the home with a small cell network requires a lot more fiber than you have today.

G.fast, you know, what’s coming in the next generation, call it very, very, very, very fast DSL in the next couple years, needs to be much closer to the home which needs to have a fiber connection to upload it. And then as you just get LTE all over the place you need a much more robust fiber backhaul to take advantage of it.

So when we look at all those qualities we say there’s going to be investment. We’re starting to see signs of it picking up. We’re seeing a much more broad base of that around the world. So we haven’t changed our fundamental strategic view of the business, so we haven’t changed how we see it fitting in the portfolio..

Got it. I guess, Tom, initially you made a comment saying you guys are very well positioned in about 90% of the markets you serve.

I guess I was curious of what are the 10% you think you’re not well positioned in and is that the divesture potential for you guys?.

Well those two are consumer devices, so that’s about $700 million of revenue where we’re not a lead player there and we don’t have the best sockets. But that’s such a, it’s a core business to us. I mean we do everything there we do every place else, so it’s the same capital, same material, etc.

And I’ll say Data Comm but in Data Comm we have tremendous momentum around the next generation of high speed, with the product and the product’s in the market, the product’s been selected by a variety of customers.

Now the transition from the current speeds that are out there in datacenters and in the wireless network higher speed takes time, but what I’m really excited about there is the decisions we made over four or five years to develop high speed, they have some proof points now.

I’d say both of those businesses are core connector businesses, right? They are part of the h$10.5 billion of what you’d refer to as the Connector business, and that business end-to-end… Some businesses are stronger than others but overall it’s an incredibly strong business..

Perfect, thanks a lot..

You’re welcome..

Thank you. And next we’ll go to the line of Matt Sheerin with Stifel. Please go ahead..

on the Industrial Solutions business you had nice year-over-year improvement in operating margin.

As you look forward through the rest of the fiscal year do you think you can get those margins to the company average around 15%? And is that coming mostly from leverage on volume or is there more restructuring benefits from that?.

I’d say it’s a combination of things. Clearly the most important thing is volume, but we feel as I mentioned in my earlier comments, we feel good about the momentum and the order rates we’ve seen for the last three quarters continuing into this quarter, support continuing, revenue growth – we’re in that kind of 4% to 6% revenue growth.

That business has very nice operating leverage with the improvements over the last couple of years. So yeah, we expect the margin to continue to march up and I think as we said at Investor Day we see that as a business that over the next couple of years is well over the 15% company average that we have today.

So we’re very bullish on that business both from a growth aspect and the markets that we play in and the products we have as well as the improvements in operating leverage that’ll deliver higher margins..

Okay, thanks. And Bob, you mentioned in your commentary about metals, lower metals costs having a benefit on your gross margin.

Can you help quantify that either year-over-year or sequentially and how does that impact your model going forward?.

Yeah, year-over-year it was about $17 million, $18 million in the current quarter, F2Q. And we expect about $15 million to $20 million per quarter in the second half of the year, consistent with prior guidance..

And you’re not seeing any impact on pricing as customers see the benefit of those, the Euro benefits where they’re asking for lower pricing in pass through?.

Hi Matt, this is Tom. I would say price erosion is up a little bit so it’s hard, you can’t completely look at those two disconnected. The business doesn’t work with kind of across the board increases or decreases; it tends to be negotiation by negotiation.

But net of the two it’s a net benefit I’d say because the price erosion increase is less than the benefit we’re getting. If you were to just simply say they take out all the metal tailwinds benefit, how are we doing? We’re still slightly above 15%..

Okay, thanks a lot..

And we’ll go next to Shawn Harrison from Longbow Research. Please go ahead..

Good morning, Tom.

Back of the envelope is it about maybe a $0.03 earnings headwind versus kind of your expectations? And then just also if you could maybe size the total programs, I guess the one that came into force and the ones that could potentially come into force in the next couple quarters?.

Are you talking about Sub Comm, Shawn?.

Yes..

It’s in that range, yeah – it’s $0.03 to $0.04 from where [we were] in the quarter..

Okay, and just the size of the program that came into force as well as the ones coming into force as far as the opportunity..

The one that came into force is the biggest one we had in the backlog, about $0.5 billion and the others are less than that – they’re more in the $150 million to $200 million range and coming into force soon.

We’ve been awarded and we work closely with the customers, so if they come into force in the next couple of months that will shore up next year and that’ll be better than next year..

And Shawn, the AAE contract that just came into force, we’ll start that later this quarter and that’ll take us through 2016 to complete that program..

Okay. And then just as a follow-up on networks I see where I guess the telecom, the wireless aspect, even the enterprise coming back – and you have visibility now into a double-digit EBIT margin in the back half of the year.

But if I add everything up it looks as if in terms of over the next two years it’s going to be tough to get to a mid-teens EBIT margin without further restructuring.

Do you think further restructuring within Networks is possible or is needed to get to let’s say a 15% EBIT margin?.

I’d answer it this way. If the growth that we expect, seeing signs in Sub Comm, seeing nice signs in broadband and believe that we’re, with the discontinued products and the new products that are coming we should be back into growth in Data Comm.

With the restructuring that we’ve done in the last year which is pretty significant, we’ll start to see the benefit with revenues in the segment growing 5% to 6%. If for some reason we’re wrong on that growth rate, again, and it’s a smaller business there is the propensity that we won’t need as much infrastructure.

But I don’t believe that, but as we’ve done in the past you’ll see we’ll adjust accordingly. We could march it back up to near that mid-15%. It depends on how fast the growth comes back..

How much restructuring is left in terms of I guess savings to come into the business over the next let’s say 12 to 18 months, in terms of dollar amount?.

Overall Shawn, we took obviously a significant amount of restructuring last year across the company and spent a little over $300 million. That’s tailing off dramatically, this year about $50 million. Last year if I recall Networks was about 40% of that spend across the organization.

As I indicated in my opening comments we took some restructuring charges of about $21 million in the most recently completed quarter, F2Q. About 75% of that was related to Networks. So as Tom pointed out heavy restructuring is behind us. We expect kind of a net benefit of $115 million of run rate savings in 2015 from those restructuring actions.

We’re getting about $70 million to $80 million this year, so an incremental $40 million next year..

And the spend would be equivalent to the saves in terms of just ballparking a percentage..

Correct, that’s probably fair..

Gotcha, thanks so much, Bob, and congrats guys on the progress in the quarter..

Thanks, Shawn..

Thank you. And next we’ll go to the line of Amitabh Passi from UBS. Please go ahead..

Hi, thank you. Tom, I wanted to try the portfolio question from a slightly different vantage point. If I look at Network solutions and I look at energy networks along with Consumer, these have been segments that have been quite challenging. You did talk about Network solutions improving.

But I’m curious, as you think about M&A is there opportunity to further bolster these segments or do you think this is largely a volume-related weakness, that as business and demand trends improve these segments do better? Or do you see M&A potential as well in telecom networks and energy networks?.

Let me take each of those real quick individually. Energy I would say we’ve always looked at and been interested in M&A in that business. Really it’s been slow; it really follows the economy and we expect its growth to resume.

It’s been especially slow in Europe but it’s a good business, it’s a good cash generation business, a business that’s right around the company average margin and that margin has been improving. Whenever we grow 3% to 4% we see a nice margin lift, so I’d consider that a nice solid business that’s steady contribution.

Consumer, I don’t see M&A in Consumer. I think that’s really we have to win more sockets as we would say and more strategic sockets. I think we’ve really upgraded some areas where we were very weak in that business which was operationally.

We have what I consider a crackerjack operational team there now and we just have to persevere with the designs and get some design wins there, and that’s revenue related. You’re absolutely right – we need to grow more revenue there. And the third one was Networks in general, telecom, wireless.

I don’t see anything significant in M&A there because in our push to the network, I mean we made the move to take leadership in fiber when we acquired ADC. And while the revenue hasn’t materialized like we thought, the insurance policy, the cost side, we’ve taken a ton of costs out.

So we feel that business, we’re well positioned in our portion of the network. We really do have the best fiber, the best connectivity product line across the world. We see it in the high win rate we have – that’s a volume play.

That’s a very nice gross margin business that’s higher than the company average gross margins so that’s a leverage play and we’re starting to see signs of this 4% growth range this year. So they’re all kind of in a little bit different perspective but that’s at a high level way to think about it..

Got it. And then just as a quick follow-up, I was intrigued by your comment where you’d said even if you’re not a believer in fiber to the home.

And I just wanted to get a sense from you, are you seeing a preference for wireless alternatives or next-gen copper alternatives which seems counter to some of the gigabit Ethernet movement that we’re seeing the industry, or I thought we were seeing maybe the industry pivot back to where it’s fiber to the home.

So I would love to get your thoughts there..

It’s mixed. I mean when we look at our business we know we need to be able to support multiple different network architectures, and they range from kind of HFC, the cable side going deeper, you know, the normal cable networks going deeper with more fiber – we’re benefitting from that. Some carriers really believe in fiber deep and fiber to the home.

I’d say they’re benefitting from that. DSL is really not sufficient anymore but it takes time to change it, and that’s what you’re hearing from one of the carriers, that they’re going to get very aggressive in response to another new carrier/search company. Around the world it’s different.

There’s parts of Europe where they’re aggressively building fiber to the home, and there’s other parts that are waiting for G.fast which is the super-fast VDSL, but that requires more fiber.

There’s Australia/New Zealand building fiber to the home and even with the changing government, while that’s slowed down a bit it’s probably going to be more selective with fiber to the home but fiber deep.

But if you’re going to deliver, if content providers – like they’re negotiating now for dedicated bandwidth for the carriers, you’re going to have to push fiber deeper into the network to get that because LTE does have some limitations.

So I think it’s kind of timing of investments but we are starting to see a little more positive signs, and we’re optimistic that maybe this cycle on our end of the network – which I’d call the bandwidth-rich portion of the network – is starting to come back. But we need to see that consistently before I’m comfortable that it’s actually here..

Excellent, thank you..

You’re welcome..

Thank you, and next we’ll go to the line of Jim Suva from Ciri. Please go ahead. .

on the clarification, I assume or maybe let me know if I’m right or wrong that the pending acquisition of SEACON is not in your sales and EPS outlook because it’s still pending? Or maybe I’m wrong with that.

And then along with that questioning, can you help us understand the margin profile of this businesses? It seems like it would be accretive to your margins but I’m just not sure on that.

And do you have to do any cost realignments with them? Like are they located physically where some of your plants are and you can integrate the two plants together? Are we looking at another round of restructuring or is it sound, everyone’s quite happy with how you have it? And then my second question is on a different topic about the consumer side, is you’ve kind of been talking about trying to get some wins for quite some time organically.

It seems like either it’s not happening or you’ve got the wins and they’re going to come.

But can you help us understand is your confidence there a lot higher or is there still just a lot of wood to chop or a lot more effort still to turn around the Consumer business which has been underperforming for multiple years?.

Yeah, Jim, it’s Bob. On SEACON you are correct – we do not have an impact from the acquisition in our outlook. We expect that deal to close still later this year and it will close late enough in the year that it will have zero to negligible impact on the overall results for F2014.

Obviously we expect it to close this fiscal year and so there’ll be an impact in F2015. In terms of margin profile and our plans for restructuring sort of thing, I’ll turn it back to Terrence to address that one..

Thanks, Bob and Jim, it’s Terrence. In relation to your question, yes, SEACON as Tom covered on the slide is about $115 million in revenue and has above 30% EBITDA. So from your viewpoint yes, it will be above company average margins of both the segment and the company in that regard. When we look at what they do, this is not a cost play.

So when you look at restructuring there is no big restructuring or plant consolidations in relation to this acquisition. It’s really around growth but certainly I’m sure there’ll be some acquisition costs that Bob and Keith will call out to you just due to typical acquisition things but not restructuring..

And Jim, on the Consumer side I would say we’re performing better in the newer parts of the market but it’s not enough to move the needle yet. So let me elaborate a bit on that.

The PC and feature phone business part of Consumer is still bigger than the tablet and smartphone business, and the PC and feature phone business which is where we still have a little better position in a market that’s shrinking – but that’s going to cross over sometime in the next year.

But we’re growing almost at the market in tablets and smartphones but it’s just not enough to move the meter. So we have won some significant awards but it’s still not big enough yet to grow the business.

So I’d say we’re better in terms of our talent, our engineering, the products we’re bringing out but it’s going to still take us a while to move the performance up..

Thank you very much..

Thank you. And next we’ll go to the line of William Stein with SunTrust. Please go ahead..

Great, thank you for taking my question.

I’m wondering if you can talk about in the Automotive segment any effect from the EURO 6 implementation regarding particulate emissions that comes into force later this year? Is that having any effect on the business today?.

We see it for sure and especially in the truck market, so in a couple areas. It’s more content. We said earlier in the year we saw some pull forward as is typically what happens when there’s a change in standard if a customer has the ability to pull some spending forward that costs them less they’ll do that. So we saw a benefit from that.

What we’ve been pleasantly surprised by is that it’s still, the demand is still strong – stronger than what we would have expected at this time of year six months ago, which reflects I think more economics underlying that meaning things are picking up and people are investing.

And the fundamental benefit of the emissions standard is it’s more electronics and it’s more content for us, so yes, we’re starting to see the benefit of that..

Great. And then the follow-up is again on the subsea business, not wanting to beat a dead horse but this business has surprised you to the downside this year.

You obviously have a better view into your business than we do so you have ways to look at it and forecast it that should be superior to ours, but what can we look at when we understand that your position is very strong in this market, you’re doing very well in terms of winning mandates but the projects aren’t coming into force.

Is that an interest rate related thing, a credit related thing, a network bandwidth related issue? How can we think about the likelihood of more of these projects coming into force?.

Well, there’s multiple factors. The interesting thing, on one hand it’s a finite number of projects but on the other hand each project could be affected by different things.

So pre financial crisis till now, one of the things in a project that has to happen for a project to get funded, if it’s a consortium or a group of entrepreneurs as we would call it, the bandwidth has to be presold. It used to be you could presell 60%, 70% and get the project funded. Now you have to sell 100% to 120%. It’s taking longer for that.

I think in general what you see, the carriers who were really drivers four or five years ago are less so today. It’s a function of where they’re putting their investment so that’s the [landscape]. So it’s been a variety of things.

Where some of these big jobs are coming from – this last one, its two destination points are Hong Kong I think and France, and 30 branches in between, which the good news is it’s a big job. The challenging news is that’s an awful lot of approvals and permitting, so even if you have your money together you’ve got to make sure you have all that.

So that takes a while. So I’d say there’s a lot of things. When we kick the tires on modeling the bandwidth and making sure something hasn’t happened I think we conclude that you’ve got to build, the next build cycle is coming. Just to put it in perspective, the last cycle from trough to trough was twelve years.

If you look at the trough of the last cycle to where we are right now, 2014, it was actually a twelve-year cycle; and trough to peak can typically be seven to eight years.

And in that twelve years you typically have three or four what I’d call tough years and three or four good years and three or four great years, and over the cycle it’s a good business that really is a nice contributor to the company, well above cost of capital.

We believe that this 2014 is that next real trough, and it’s higher than the last trough because there’s just more building and we have this oil & gas adjacency that we didn’t have early in the last cycle. So it’s been a little tough to forecast for us for sure.

I think the last point I’d make about putting it in perspective, if you look at last year the business contributed $0.06 to $0.07 a share, roughly 2% of our total earnings per share. This year it’s going to be a negative 1% earnings per share because of F3Q. So I think it’s down.

The volatility is still high but the impact is low, and if things start to ramp up again we should see steady contributions. If the AAE1 deal had not signed I’d be a lot more nervous. That’s a big deal.

That’ll get us going and then what we’ve also seen in the up-cycles, it’s not a perfect predictor but when a big job like this goes it tends to mobilize the other ones because there is a limited amount of [shipped] capacity.

So this was, getting this job… We’ve got to go through the valley in F3Q in this business but getting this job is a big, big step up; and then we’ve got to get a couple other, two of these to come into force and we work hard to help our customers do that..

That’s helpful, thanks Tom..

You’re welcome..

Thank you. Next we’ll go to the line of Steven Fox from Cross Research. Please go ahead..

Tom, you mentioned some market share gains.

I was wondering if you could elaborate on that as well as some more aggressive investments in China for Auto and whether that’s also driving market share gains? And then secondly with regard to the acquisition, I was just curious if you could just discuss a little bit how well positioned or not well positioned they are from a distribution standpoint and whether there could be some sales synergies there like you’ve seen with Deutsche.

Thanks..

On the Auto side as you know we are strong in every region. If you go back in time four or five years really our weakest region was the US, and the downturn was extremely painful but it gave us the opportunity because in this part of the value chain we’re the leader. We invested in the US when it was down.

We did things like adjust our cost of sales cost structure, but we invested in engineering and we went after programs. And our estimation is we’ve moved our US share up about four points over that time, so that was positive. In China we provide a very broad range of services and products to our customers. We’ve been expanding our engineering there.

Our entire China Automotive team is local. It’s a very seasoned, experienced team. We are expanding our capacity there not only because the market is expanding but because we’re doing more and more there for that market.

If you go back in time it was a lot of things imported into the market and we’re reducing that quickly, and that’s part of the footprint adjustment we were doing in Western Europe during the downturn. So those two things plus we continue to add engineers across the world in Automotive.

It’s a business that’s very… You know, it’s a lot of projects that you have to work on with the customer and when we’re so strong in all these customers and we keep pouring engineers in, that’s how we’re able to build the 200 million sensor business from nothing when we weren’t in the sensor business.

So it is our sweet spot and we keep investing in it aggressively.

Terrence, do you want to comment on SEACON again?.

Yes, sure. When you look at SEACON, and to your question, Steve, in relationship to channel and distribution – when you look at this market it is a much more direct market.

So where we’re going to sell into and where we sell into today with our current portfolio as well as where SEACON sells into, you’re selling into the manufacturers of the drilling systems, certainly the ROV systems, all the instruments and lights as well as the equipment that goes on the ocean floor.

So when you look at it, it’s a much more direct relationship than channel serve.

I think what’s very nice about both our go-to-market position as well as SEACON’s, they have bases in Norway, UK, US, Mexico as well as they also have a nice field service support around the world that supports their product too with people working in the oil & gas industry.

So it is a much more direct model than what we saw in Deutsche where we were able to leverage our channel scale. So it’s much more direct than a channel play..

Great, thanks very much. I appreciate the color..

Thank you. And our last question goes to the line of Sherri Scribner from Deutsche Bank. Please go ahead..

Hi, this is (Inaudible) here calling on behalf of Sherri Scribner. Tom, I just had a question for you, actually. In your opening comments you mentioned a majority of the markets are exhibiting solid growth trends.

I just wanted to understand what demand trends you’re seeing or do you still see customers as being cautious? Are you seeing any reductions in customer forecasts? Thanks..

Thank you. Yeah, let me go through that. So clearly Auto and Industrial Transportation continue to grow, there’s robust growth there. We really haven’t seen that change much.

As I mentioned we’ll see that the second half growth year-over-year in those markets will be less than the first half growth – some of that’s seasonal, some of that is it’s just been hotter than normal in the first half. Industrial equipment is growing with 8% quarter growth, that’s another third or fourth.

So that’s a sign and you see it in a lot of the industrials reporting that capital spending is starting to break loose. We see that, that seems to be a pretty steady sign right now. I’m not seeing any warning signs that that would change.

Commercial aerospace, a lot of new planes being built, the whole fleet being rebuilt and that’s another area where we gain share and our content is up significantly, so we see that. And then the appliance business.

So new home sales in the US and appliance picking up in Asia, particularly China which is a good sign because that’s consumer spending in China. And by the way, I talked about our China business being up 34% in Automotive. It was up 20% plus overall with four of five of our markets up double digits. So it’s fairly broad based.

What’s not growing? I’d say the Data Comm market is not really growing right now and you can see that in other folks who provide that equipment – it’s certainly not growing for us. Consumer is growing but I talked about the trends, that we’re not fully participating in the trends.

And of course the one that’s challenging right now is Sub Comm but that’s just timing in our view and we have a good position there. So if I compare it to last quarter, if I compare it to this time last year it definitely feels more robust, broader based.

If you look at the number of countries that we ship to around the world there’s more where we have higher sales growth this quarter than we did last quarter and last year – all good signs. I’d say nobody’s celebrating. We’re still very mindful that the last five years have been unpredictable if anything so we keep running the business accordingly..

Okay great, thanks, that was helpful. I just also wanted to just follow up on that, just to get an idea on the long-term growth target if you maintain what you have previously provided – for example, 6% to 8% in Transportation and 4% to 7% in Network, 4% to 6% in Industrial and 3% to 5% in Consumer.

Do you still maintain that or do you see a change in that long-term target?.

That’s still how we see the long term. .

Okay great, thank you..

You’re welcome. Okay, well thank you everybody. I appreciate you listening. Again, I think this was a real good quarter for us with progress on a number of fronts. I look forward to talking to you soon..

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Teleconference. You may now disconnect..