Tom Lynch - Chairman, Chief Executive Officer Bob Hau - Chief Financial Officer Sujal Shah - Vice President, Investor Relations.

Amitabh Passi - UBS Amit Daryanani - RBC Capital Markets Craig Hettenbach - Morgan Stanley Mark Delaney - Goldman Sachs William Stein - SunTrust Shawn Harrison - Longbow Research Sherri Scribner - Deutsche Bank Jim Suva - Citi Ruplu Bhattacharya - BoA/Merrill Lynch Matt Sheerin - Stifel Mike Wood - Macquarie Securities Group Steven Fox - Cross Research.

Ladies and gentlemen, thank you for standing by. Welcome to the Q3, 2015 Earnings Release Conference Call. At this time all participants are in a listen-only mode and later we’ll conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] And as a reminder, this conference is being recorded.

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

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

During the course of this call we will be providing certain forward-looking information and we ask you to review the forward-looking cautionary statements included in today’s press release.

In addition, we will use certain non-GAAP measures in our discussion this morning and we ask you to review the sections of our press release and the accompanying slide presentation that address the use of these items.

The press release and related tables, along with the slide presentation, can be found on the Investor Relations portion of our website at te.com.

Finally, for participants on the Q&A portion of today’s call, I would like to remind everyone to limit themselves to one follow-up question to make sure we are able to cover all questions during the allotted time. Now, let me turn the call over to Tom for opening remarks..

Q3 was another quarter of solid execution as we delivered $0.90 in adjusted EPS, up 6% from last year and above the high end of our guidance. Adjusted operating margins continued to grow and we are up 50 basis points to 15.9% year-over-year. Organic growth was 4% and total growth was 11% excluding the negative impact of foreign exchange.

Our harsh environment businesses continue to perform well and generate strong profitability and overall I am pleased with our execution in what characterizes the mix demand environment and we’ll talk about that quite a bit on the call today. Automotive, Sensors, Commercial Air and SubCom led our growth.

However, revenue was below our expectations due to weakness in China and supply chain adjustments in some North American industrial markets. We saw order growth begin to slow midway through the quarter and order rates are now running about flat with last year.

For the fourth quarter we expect sales up 3% organically versus the prior year and adjusted EPS up 6% at the mid-point. For the full year we expect to deliver 5% organic sales growth and 10% adjusted EPS growth. This guidance is down from what we provided 90 days ago due to the continued weakness in emerging markets, particularly China.

In constant currency, full year adjusted EPS growth is expected to be 19% year-over-year. We had another good quarter of strategic progress in our Sensor business with key platform wins in automotives, consumer and security application.

Strategic rationale for the measurement specialties acquisition continues to play out very well and we are really excited about our prospects here. We now expect the Broadband Network Solutions sale to close in about 90 days earlier than originally expected and expect to use the year $3 billion of proceeds for share buybacks.

Now before I get into the details of our performance, I’d like to provide some color on what has changed in the market environment from our views 90 days ago. From a macro regional perspective, Europe continues to grow and it looks better than it did to us 90 days ago. The U.S.

is mixed with a bit lower growth than expected due to supply chain adjustments, let’s say the U.S. looks a little worse, but we do think this is mostly supply chain related and China has weakened with softness becoming more pronounced. From a segment perspective, transportation remains strong with the exception of China.

In the industrial solutions segment we see some softening in China and supply chain adjustments in the U.S. market. Communications, data and devices and applications are seeing the impact of a weaker China market. The main them of market here is, we are seeing a weakness in China.

Now please turn to slide three and I’ll go through a summary of our Q3 results. We delivered solid results for Q3 with adjusted EPS of $0.90 above the high end of guidance. Sales were $3.1 billion growing 1% year-over-year and up 4% organically, but weaker than expected as I mentioned earlier.

During the quarter we retuned $386 million to shareholders, which included $252 million in share buyback, significantly increasing the pace of repurchase from the first half of this year.

Company orders excluding SubCom were flat organically at $3 billion with the book-to-bill ratio of 1.0, and basically orders ran at the same run rate excluding SubCom as they were in Q2, which was below, about $100 million below our expectation. Out TEOA program continues to contribute towards higher margins and profitability.

Adjusted gross margins were up 50 basis points year-over-year and adjusted operating margins expanded to 15.9% up 50 basis points versus the prior year. During the quarter we continue to see strong performance in our harsh businesses with good organic growth in auto, sensors and commercial air.

In our SubCom business we grew strongly year-over-year while having another program come in to force growing the total value of programs in force to $1.5 billion. As I mentioned, our China businesses saw a weakening demand in the quarter and separately we also saw some inventory tightening in certain industrial markets in the U.S.

Currency translation rates impacted Q3 by $296 million in revenue, that unfavorably impacted Q3 and $0.10 in earnings per share year-over-year, excluding the impact of currency exchange rate, adjusted EPS improved by 18%. Now please turn to slide four for a summary of our guidance, which we’ll also come back to later.

For the full year we are projecting sales of $12.35 billion, up 3% from the prior year and 5% organically. We expect adjusted operating margins to exceed 16% with adjusted EPS up 10% at mid-point and nearly double that in constant currency. Our guidance assumes a 6% adjusted EPS increase in the second half versus last year.

For the fourth quarter we expect sales up 3% organically over the prior year and adjusted EPS up 6% at the mid-point of guidance. Given the weakness in China in supply chain adjustments I mentioned earlier, we are adjusting our full year guidance down by approximately $150 million in revenue and $0.04 in adjusted EPS.

We now expect to deliver 5% organic growth and 10% adjusted EPS growth. With the cumulative move of the dollar versus world currencies during our fiscal year, 2015 FX headwinds are approximately $925 million in revenue and $0.32 in EPS versus last year.

If it were not for the impact of FX, we would be generating 11% revenue growth and 19% adjusted EPS growth year-over-year. All in all we are delivering a pretty solid year in what I’d call a murky environment and we’ll talk more about that as we go through the call. Now I’ll turn it over to Bob to cover the segment results and financials. .

Thanks Tom and good morning everyone. Please turn to slide five for Transportation Solutions. Revenue grew 4% organically in the quarter, in-line with our expectations. The automotive business grew 6% organically, with growth in all regions, while global vehicle production was down 0.3%.

For the full year we continue to expect growth in excess of two times auto production due to share gains and increased electronic content. Our Commercial Transportation business was down in the quarter due to continued significant weakness in the off-road vehicle market and weakness in the China heavy truck market.

Sensors continue to outperform expectations and are gaining momentum with both existing and new customers. Assuming we had owned measurements and AST last year, our total year-over-year growth in sensors was 10% in Q3.We gained multiple new wins in automotive, consumer and security applications in the quarter.

We continue to aggressively build this business and our unmatched customer pacing and engineering resources are a significant asset for TE as proven by our new wins.

Total transportation adjusted operating income was $317 million in Q3, down 2% year-over-year as expected, the strong operational performance offset by FX, weakness in commercial transportation and ongoing planned investment from sensors to support a growing pipeline of opportunities.

Margins actually expanded year-over-year in each of our three business units; automotive, commercial transport and sensors. However the mixed caused by high sensors growth combined with weaker commercial transport revenue impacted the margin rate for the segment overall.

In Q4 we expect to grow actual and organic sales in the mid single digits despite weakness in China in commercial transport, slightly lower than our prior expectations. Please turn to slide six.

Revenue in our Industrial Solutions segment declined 1% organically year-over-year versus an assumption of low single digit growth when we provided guidance in April. Industrial equipment business unit was up 1% organically, with growth in Europe offsetting weakness in the U.S.

In our Aerospace, Defense and Oil and Gas business, continued strength in commercial aerospace was offset by 37% decline in our oil and gas business, resulting in a 5% organic decline for AD&M in total. Our energy business was flat organically as growth in China and the Americas was offset by declines in Europe.

Adjusted operating income was $109 million in Q3, down 11% year-over-year, due to unfavorable FX and significant decline in a higher margin oil and gas business, more than offsetting improvement in commercial aerospace. In Q4 we continue to expect similar market trends as Q3 resulting in organic revenue decline in low single digits.

Please turn to slide seven. Our Communications Solutions segment grew 12% year-over-year on an organic basis driven by our strong position in the growing SubCom market. This more than offset market weakness across our China businesses, coupled with a planned exist of low margin products in data and devices.

Adjusted operating income of $71 million was up 163% year-over-year and adjusted operating margin more than doubled to 10.3% from 4.2% a year ago due to robust SubCom growth. Heading into Q4, we expect revenue to growth mid-single digits on an organic basis, driven by the SubCom projects in force.

We now have five programs in force with the announcement in May of the New Cross Pacific cable network with the NCP consortium. Please turn to slide eight, where I’ll provide more details on earnings. Adjusted operating income was $497 million, up 5% versus the prior year despite significant FX headwinds.

The growth versus the prior year is driven by our TE operating advantage efforts to improve safety, quality, cost and delivery, as well as volume leverage.

GAAP operating income was $469 million and included $18 million of restructuring and other charges, most of which were divested stipulated costs and $10 million were acquisition related charges in the quarter.

Adjusted EPS was $0.90 for the quarter, $0.03 above the midpoint of guidance and $0.05 above prior year driven by strong productivity, restructuring savings and cost management. GAAP EPS was $0.85 for the quarter. GAAP EPS included acquisition related charges of $0.01, income from tax items of $0.01 and restructuring and other charges of $0.05.

For the full year 2015 I expect approximately $100 million of restructuring and other charges. This represents an increase from prior guidance, driven by product exits in data and devices and resizing for a smaller oil and gas business.

We expect roughly $0.27 of restructuring and other charges and $0.18 of acquisition related charges which will more than offset reserve reversals of $0.33 from tax liabilities for the full year. Turning to slide nine, our adjusted gross margin in the quarter was 33.6%.

This is an expansion of 50 basis points versus the prior year, driven primarily by growth in the harsh environment businesses in SubCom and productivity gains from our TEOA initiatives. Adjusted operating margins expanded 50 basis points driven by productivity, restructuring savings and cost management.

Total operating expenses were $552 million in the quarter, with increases from acquisitions and RD&E to support growth in sensors. Cash from continuing operations was $524 million and our free cash flow in Q3 was $391 million.

Free cash flow was impacted by the timing of tax payments in the quarter and both gross and net capital expenditures were down $30 million year-over-year. I currently expect the capital spending rate to be approximately 5% of sales for 2015. I’ll remind you we’ve added a balance sheet and cash flow summary in the appendix for additional details.

And now I’ll turn it back over to Tom..

Thanks Bob. Please turn to slide 10 and I’ll cover our outlook at a higher level with additional details provided in the slide. Despite the softer market condition we are experiencing in China, we expect to deliver another solid quarter in Q4 with revenue of $3.1 billion up 3% organically year-over-year.

We expect adjusted EPS of $0.93, an increase of 6% year-over-year. Our Q4 outlook does include a significant headwind from currency exchange rates, which are negatively affecting our guidance by approximately $244 million in revenue and $0.10 per share in EPS versus the prior year.

Our fourth quarter performance will be driven by the continued strong performance of our automotive business and momentum in SubCom and contributions from our recent acquisitions. Industrial is expected to continue to be somewhat soft and will continue to be impacted by the uncertainty in China and ongoing weakness in oil and gas.

Please turn to slide 11. Note that the total impact of currency exchange rates for the year is approximately $925 million versus the prior year and $0.32 in EPS.

To really provide a baseline for the performance of our business, revenue would be growing 11% and adjusted EPS would be growing by 19% year-over-year or not for the negative impact of the stronger dollar relative to other currencies.

Now before we open it up for Q&A, I thought I’d just add a few comments that I think are really important about our company. TE is the world leader in Connectivity and Sensor Solutions and building a leading position in Sensor Solutions, which is a great place to be in the increasingly connected world.

And kind of just stepping back, Q3 organic growth is higher than last year, a little lower than our guidance, but its higher than last year. Q4 is a little lower.

They have different mix, but nonetheless we are delivering solid organic growth in the second half, in a pretty uncertain economy and growing very solidly when you include the harsh environment M&A that we did last year. As I mentioned, we are growing earnings almost 20% on 10% constant currency growth.

This was a big year to really support our harsh environment strategy and I think it’s working very well. And on that subject, the harsh environment businesses continue to perform well despite the recent weakness in China. Q3 and Q4 organic growth is in the 2% to 3% range and 4% plus for the full year and 12% at constant currency.

Over the last three years we grew the harsh environment business over $1.6 billion in revenue and that’s including the foreign exchange headwinds. We grew the operating profit of those businesses about $500 million, again at current exchange rates and this portfolio now makes up about 80% of the company.

And as we said before, the margins are well above company average. So I feel really, really good about the strength of our harsh business and the resiliency of our harsh businesses. If you go back, this has powered about a 300 basis point improvement in operating margins since 2012.

Sensors is a very exciting new growth platform with substantial sales and margin growth opportunity and we’re just at the very beginning of providing integrated packaging solutions. It’s very, very early, but I’ve talked to a lot of customers about this and the opportunity is real and will be another source of growth for the company.

And the net of all this is, over the past several years we’ve really transformed TE into what I’d call an industrial technology company. Overall I think though this company is performing very well. We’re positioned very well. We do view the recent softness to be temporary.

We don’t have a crystal ball of course, but when we look at the fundamental drivers underlying all our businesses, we feel very good about them. It reinforces the strategy we have. That strategy is pretty straight forward and we look forward to continuing to execute it very aggressively and delivering solid performance across the company.

So with that, we’re going to open it up for Q&A..

[Operator Instructions] And we do have a question from Amitabh Passi of UBS. Your line is opened..

Hi guys, good morning. Tom I had a question and then maybe a follow up for the rest of the team. Just on your transportation solution segment, operating margins came in below 20%. I think you attributed part of that to mix weaker commercial transportation. It also looks like ongoing investments in sensors.

I just want to get a sense whether we should expect that sort of level now to persist for the next couple of quarters and then as a follow up you intriguingly mentioned a few design wins in the automotive segment and sensors. I was wondering if you could touch on that and maybe provide a greater insight..

Obviously on the second question, we can’t say too much as I’m sure you understand, but as far as the margin goes, we expect the margin to continue to be in the 20% range plus or minus depending on mix. As Bob pointed out, the three major segments in the business, all improved their margin year-over-year.

Sensors margins are lower than industrial transportation and automotive as expected and that’s why I mentioned its one of the real opportunity to continue to grow profitability as we scale that business. So we don’t see anything short of a significant volume decline.

I think when we’re running the 4% to 5% growth rate, we have the momentum to continue to deliver strong margin. So plus or minus 20% a little bit is what I would expect over the next several quarters..

Okay.

Can I squeeze another follow up there?.

Of course..

Okay, thanks. And then maybe just on the supply chain adjustments you talked about. Again, I don’t know if you have any visibility or insight. I mean is this a one, two quarter phenomena. Just generally how you expect the supply chain and the potentially excess inventories to be digested here in the near term..

I mean we do have some insight, because we are large through the channel, right. So we have a very big business through the channel which serves tens of thousands, actually hundreds of thousands of end customers.

So we feel like that’s kind of a statistically sound base of information to look at and the channel was pretty robust in the first half just like our industrial businesses as everybody was expecting a little bit stronger second half and we have seen that tighten up. We’ve seen it tighten up on sell through and sell-ins.

I think the good news is coming out of the last big downturn, everybody in the supply chain is very glued together in terms of what’s going on, so we react much quicker than we did.

Of course it’s hard to predict with a ton of confidence how long it will last, but what our forecast reflects is it starts to abate through the fourth quarter, our fourth quarter and that by the time we get into the first quarter it should be largely behind us from the industrial part of the business.

That’s the kind of forecast, that’s what we’re hearing from the market, so that’s the best insight we have right now..

Okay, thanks Amitabh.

Can we have the next question please?.

Our next question comes from Amit Daryanani of RBC Capital Markets. Please go ahead..

Thanks a lot. Good morning guys. I guess to start off with, Tom I look at the guide you guys are providing right now, adjusting to that next scale wind, your sort of reducing your forward expectations for the full year by about $235 million, $240 million.

Could you talk about how much of that is really due to the softness in China that you’re talking about and how much of that is perhaps due to the product exist in data and devices that you guys are undergoing?.

Amit, I think the way to think about that, the $240 million narrow before the tailwind from FX, is really a spread relatively evenly across all three of our segments; transportation, industrial and communications.

All three of them are seeing the implication of slower China and then we’re also seeing the implication of the supply chain or inventory adjustments really in our industrial and appliances business in those last two segments..

Got it, that’s helpful. And then if I just think of the transportation segment with China slowing down, Europe seems to be holding up well to you guys so far.

I’m curious, what’s your thought on – how much of your Europe exposure you think ends up as exports to China essentially and do you think that could be another level on concern you will have to contend with as you go down the next few quarters..

Well, just to put it in – our China auto business is now flat to slightly down. It’s really the first time since probably the financial crisis and well that’s what we got reflected in the fourth quarter. So we are definitely seeing less imports into China of high end vehicles.

I think you’ve heard several OEMs report their outlook for their China sales. So we’re seeing some of that. I believe we have that reflected in our European automotive numbers. We generally have pretty good visibility.

Its again not perfect visibility, but we’ve taken our overall China numbers down quite a bit and I think it would be important to highlight that. Quarter-over-quarter we’re going to be down about 12% in China revenue; that’s last year’s fourth to this year’s fourth and its pretty broad based as Bob said.

And the overall $240 million that Bob referred to, about two-thirds of that is China and Latin America, of course China being the biggest piece. It had been slowing; it slowed more abruptly. I think this is key quarter to see is that seems like maybe things are settling down over there now over the last few weeks.

It’s just now begun the bottom out and recover, because we think the core fundamentals of a large population, a growing middle class, growing incomes, urbanization, a place for all of our businesses, particularly where we’re strong, which is harsh environment and as I mentioned, harsh businesses overall are still growing slightly despite a broader slowdown in China..

Okay, thank you Amit.

Can we have the next question please?.

Our next question comes from Craig Hettenbach from Morgan Stanley. Your line is open..

Yes, thanks. Just following up on some of the commentary on China weakness. Have you seen any change more broadly on the automotive side in terms of production forecasts you get.

Like what OEMs are doing in this environment? Are they cutting back slightly to reflect that or any type of additional information on the production side would be helpful?.

I mean what we’re – with our customers at the OEMs are telling us is in the fourth quarter they plan longer than usual in China shutdown; a week, maybe some after two weeks, so there’s definitely a goal to balance inventory throughout the channel, including cars on the lot. Now the inventories aren’t crazy.

I think they’ve been keeping them pretty tight there, but definitely reflect the slowing demand. .

Got it. And then if I could switch gears just to the MES, the commentary that that acquisition has gone well, any specific anecdotes you can talk about in terms of as you look to leverage that through your broader distribution channel, through you customer relationships.

Like what type of upticks you are seeing from that as they potentially benefit from a much broader platform at TEL..

Sure. I think the broad anecdote, we can’t get too specific yet as you know customers have their requirements, but a consistent anecdote is particularly in starting with auto and across several of our harsh environment businesses.

We are spending a lot of time with customers where we bring in the product and technology express for measurement and get them into places where they couldn’t get in before and we’re seeing a lot of bidding activity resulting from that, because they are really a fine, fine engineering and technology and product company.

I think as I’ve mentioned on these calls before, we knew them quite well and certainly expected that and that’s why we acquired them, but the deeper we got, the more engineers and applications engineers, we got to know the better we even felt about that, so where it’s kind of interesting.

In some ways the biggest challenge we have is which one is the pick, because there’s a lot of opportunities to pick one. I mean as Bob mentioned we are ramping up our resources in a thoughtful way in that business, so that we can take on more and more design opportunities. But it’s pretty broad based.

I’d say that it’s definitely focused in the harsh, although we had some – we can’t talk about it too much, but some really key wins in consumer that its very good business. Again, because these are highly engineered components and packaged in a way that they can perform their function no matter how they are treated by the consumer.

So we’re pretty excited about that.

So I’d say it’s been a good almost first year, about a year now of working with this team and the back end, bringing lien into the operation, figuring the best place out, where to make things, putting the organization together, that’s all done, so we feel like that first year where your figuring things out and how do you best work together, how do you leverage strength but not turn off the small company, but I think I’d give us very high marks for that and now we’re really going on the defensive what’s getting in from of customers..

Okay, thank you Craig.

Can we have the next question please?.

Our next question comes from Mark Delaney from Goldman Sachs..

Yes, good morning and thanks very much for taking the questions. The first question was just some clarification on the comments about some of the monthly trends that you’re seeing with the business.

Tom I understand you talked about seeing some weakness beginning during the June quarter and I think you commented that on a year-over-year basis bookings are pretty flat.

Could you just clarify if you’ve seen any stabilization in the monthly order patterns or you’re still seeing some month to month declines in the bookings?.

I would say, it feels like its stabilizing. Week to week things bounce around, but we’re really kind of running at this ex-SubCom level to $2.9 billion to $3 billion order rate..

Okay, that’s helpful and then for a follow up question, I’m going to focus on SubC. I guess a two part question. First, it seems like the comments for the fiscal ’15 revenue guidance, just a little bit above 700, it seems like a real small downtick versus the comments for $720 million on the last conference call.

So can you maybe just help us understand – I know its small, but if anything’s kind of changing that’s driving that slight change to the revenue forecast for SubC for fiscal ’15.

And then second part on SubC, just given the new award that you’ve won, what sort of visibility do you have into fiscal ’16 revenue in the SubC business?.

Mark, your right. There is an ever so slight decline, $720 million to $712 million, $715 million, something like that if I remember correctly and that’s really just the timing of some material coming in, when we get it loaded on the ship.

This is a project business and so as you progress, as material comes in, all you need is a vendor to be late by a week and you lose some revenue, but it is purely timing so no implication of that whatsoever. In terms of ’16, two of it to give guidance for ’16, but obviously we’ve done well this year.

We feel good about adding the fifth program in force and we’re spending that this year and that’s now $1.5 billion enforced for us..

Thank you..

Okay, thank you Mark.

Can we have the next question please?.

The next question comes from William Stein from SunTrust..

Thanks for taking my question. Tom, earlier you mentioned that you saw part of the slowdown extending through the fiscal Q4 guidance and likely ending in Q1.

So this clarification is really about whether that’s the China related weakness or the North American sort of channel adjustments you’re seeing or that it relates to both and what gives you the confidence to have the view that this ends by the end of fiscal Q4. Thank you..

Sure, thanks Will. Really my comment about we think it will – based on what we’re seeing and hearing now, worked its way through in Q4 as the North America industrial and part of that is end demand is still, its slower.

It feels slower than what we’re hearing in the second half and first half, but it’s not off that much and we still have a pretty healthy American economy, even though I think most of us feel it’s not growing the way we thought it would. It’s still growing in all the indicators like payrolls and things, so.

And then when we just look at the sell in and the sell through, what we’re hearing is that that should start to work its way through by the end of our fiscal year, that’s our best estimate at this time. China is harder to tell. I think just because data is harder to get.

I mean kind of the only data you have is your own data and we have seen China can move up very quickly as well. So I’m more uncertain about that Will and I mean last year we had a tremendous first quarter in China. Actually we had a pretty good first half and saw it again, the same for the second half, so it’s harder to tell there.

I wouldn’t be surprised if this has kind of leaked in through the first quarter, but that’s a guestimate based just on recent order trends..

Okay, thank you Will. Next question please. .

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

Hi, a two part initial question if I may and then a brief follow-up. On the BNS business and then also the proceeds, is the BNS business still running at kind of a $0.53 EPS run rate for the year.

And then on the proceeds in terms of deploying that, is that on top of the typical buyback where you’ve been spending $150 million to $250 million a quarter, so we’d see say $200 million on average of buyback and then $600 million or $800 million a quarter of incremental buyback once the deal closes..

Yes Shawn, the BNS business as you know is now recorded in our discontinued operations. I would say it is broadly or generally performing as we expected through the sale process. In terms of proceeds, we have a practice or a capital requirement approach of $150 million to $250 million per quarter share repurchase.

We did $252 million this most recently completed quarter. We expect to be in the market in the fourth quarter. Once the BNS transaction closes, that will be an additional $3 billion or that we’ll be able to return the majority of that back to the shareholders. That’s in addition to our appointment of our operating free cash flow..

Okay, and then as a brief follow up, Tom as you could just remind us and I guess delineate between the content you have per vehicle in China versus say Europe, so the declines we’re seeing in China auto production.

Just to weight that a bit and how much of what you’re seeing right now is truly declines in production versus some other factors in terms of maybe mix going against you..

I would say it’s definitely production related. Our content in China is SubC. It’s much higher in Europe, but there can be a mix effect that it’s kind of interesting over any period of time that we look at, it just doesn’t – the numbers are so big, its 80 some million cars being sold.

With the math kind of almost moved itself out unless you had a pneumatic shift. I mean we were worried coming out of the last downturn that the world is going to go to buying small cars and that is going to have an impact on our content and we didn’t see any of that.

Now the exciting thing about China is content is growing faster in China cars, both local and multinational and how far in China right now are local SUVs where we have really no content and our content in China regardless of whether the local Chinese auto maker or multinationals, really almost exactly the same.

In fact a little higher with the locals because we provide a little more to them than we would the OEM, which is a real strategic advantage that we started back in the downturn. So I guess the short answer Shawn is or the long answer is we are not really seeing that much impact.

If at all its kind of in the $0.10 to $0.20 range of content per unit mix at this point..

Very helpful Tom, thanks so much..

Right, thank you Shawn.

Can we have the next question please?.

The next question comes from Sherri Scribner from Deutsche Bank..

Hi, thanks. I was curious – I don’t know if I missed it, but did you give a number for global vehicle production in this quarter and then also could you give us some detail on how much China is as a percent of revenue for the three different segments.

I know that Asia Pacific is about a third of your business, but maybe some metrics around how big China is by different segments would be helpful..

Sure. At a high level China is running in the 17%, 18% of our total business, that’s total company. It’s much higher than that in data and devices. Part of that is because most of the production is in China and it is sometimes hard to in those kind of businesses to where is consumption locally and where is consumption globally.

Our auto business which runs over $1 billion is our local consumption..

Okay..

And then the other part of your question Sherri is that auto production volumes for the fourth quarter. Well, we have in our current guidance auto production for the fourth quarter globally, about $21 million vehicles, up about 2.5% year-over-year. That gets it to the 2% on a full year basis, just under $87 million vehicles..

And did you have a 3Q number?.

3Q was down three-tenths of a percent, about 21.5 million, 21.7 million units..

Okay. And then can I just ask the question about the transportation segment. I think your long term goal has been to grow that segment in the high single digits and it looks like we’re tracking a little bit below that.

This year I know there has been some puts and takes, but what’s your view overall of the ability to continue to grow that segment in the high single digits. Thanks..

Thanks Sherri. I think at historical production levels of about 3% and the last three years is going to average out. If you take next year’s estimates this year and last year, it’s going to average out to about that. We would expect to do that, especially with our expansion into sensors which will go – we’re kind of going from a very low base there.

Yes, I think that production grows in that 3%. We expect to grow two plus ex production, which is what we’re doing this year. So for example, this year production is growing 2% and we’re growing 6% plus.

So we still see it on hold and I think we really feel good about this year’s performance, because it proves out what we’ve been saying about the pipeline of wins that we’ve had over the last four or five years and that we’re growing our win rates faster than the market’s growing and now that’s showing up in kind of this multiplier production effect.

So if you go back four or five years, we were always saying 1.5 times production and now we’re over 2 times production and as we begin to ramp the sensors business over the next several years, that will increase it even more. So we feel very good about this great auto business of ours..

I’d say in the current quarter or to me the current year, we’re definitely seeing the headwind from FX impacting the overall growth. If you back that out, transportation is well above the 6% to 8% and that’s also got the benefit of the acquisition. Our guidance is mid single digits organically.

That’s below that 6% to 8% long term rate and that’s really driven by slower commercial vehicle, both in heavy truck declines in the second half of this year and slower off road, but long term we still believe the 6% to 8%..

Thank you, Sherri.

Can we have the next question please?.

The next question comes from Jim Suva from Citi..

Thank you very much. Congratulations to you and your team. On slide six of your prepared handouts entitled Industrial Solutions, I was taking a look at the operating margins.

I know unless the questions have been focused on transportation, which is like I said, but kind of looking away from the other areas for the potential improvement, the operating margins for industrial solutions came down pretty meaningfully year-over-year and yes of course the actual and organic sales came down 5% to 1%, but the 100 basis point decline in operating margins is a pretty big gap.

Can you talk just a little bit about that, because to me it seems like this is one area of meaningful improvement that you can give to the company and is it really tied now to sales for the future of this company or restructuring, are you doing some plant consolidation or how should we think about what actions your actively doing or would you simply tie the sales for improving this turnaround of this, several of which is below corporate average.

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Thank you, Jim. Well yes, the margin decline as we pointed out there is really two big factors, right.

The oil and gas business is down 30%-plus and that’s the highest margin business in the segment and FX and we have a strong European industrial footprint, particularly in energy and in industrial equipment and they are strong margin businesses, so particularly energy which has been slow, thus our equipment business actually has been pretty good.

If you go through the make-up of the business and talk about who knows how long this oil and gas thing is going to last, but that team has managed to despite a 35% decline in revenue, keep the margin in solid double digits and the piece we bought, which is more in the service and support side than the new project side is still in the 20% plus range.

So what I would say is our aerospace defense business is very strong, was there above company average margins. Our oil and gas are low right now, but again who knows when, but as that grows, that inherently because of its harshest environment characteristics and higher margin business.

Industrial equipment is the one that’s the big fragmented business that serves multiple industries, lots of small customers that we’ve been steady improving. Growth slowed down a little bit right now, but that’s where you are seeing us in the past and continuing to fine tune our manufacturing network.

TEOA is especially important there in this slow volume high mix business. But those margins today are at about company average withholding it down right now, oil and gas and energy; energy because the Europe oil and gas is just something that happened in the market. We still believe and are committed to this, say above company average margin business.

.

And for that pressure from oil and gas, you’re just going to wait for it to come back or do you like proactively make some plant adjustments….

We kept the margins in double digits by being very proactive. I mean super proactively, Bob you want to add on to that. .

Jim, as I mentioned in my opening comments, we’ve now increased our restructuring charge for $100 million. Part of that is communications, restructuring and part of that is oil and gas. So we’ve definitely been taking action this year..

Okay, and then as a quick follow-up for the stock buyback you had mentioned that the BNS is looking to close about – I mean a little bit earlier than expected, within 90 days.

Can you remind us and investors about your cadence or appetite for the stock buyback and time that you are going to do? I think it’s about a $3 billion sales proceeds, and what timing that one should expect the stock buyback. It looks like the acquisition, divestiture is going to close a bit earlier. .

Yes, so we had been indicating we expected that transaction to close by the end of the calendar year.

We now see that closing within the next 90 days or so and as you indicate, its $3 billion of proceeds and we have said really since the date we announced the transaction back in January, that it would be – the vast majority of those proceeds would be used for share buyback and we have not indicated the specific timing of that. .

Great. Thank you very much. .

Great, thank you Jim.

Can we have the next question please?.

The next question comes from Wamsi Mohan from BoA/Merrill Lynch..

Yes, good morning. Its Ruplu filling in for Wamsi. Tom, just a high level question to start. Can you just give us your thoughts on the overall product portfolio? Are you done with the product exists that you were doing in the data and devices segment and overall is there any more opportunity to rationalize the product portfolio. .

I think the product portfolio is pretty solid right now, and I’ll cover about a few exceptions for that comment. We are still rationalizing in data and devices.

Our strategy there is to really focus on our core connectivity business, which is a good business for us and move out of what we’ve now seen to be commodities and things like that, and that’s going well and that’s why you see such big declines in that business, because we are elegantly in treating our customers well, but existing those products.

Across the rest of the portfolio, I think you will see more adding than subtracting. And whatever we do on the subtraction would be more fine turning around – hey we don’t, this range is a commodity, it’s not really strategic, we don’t need it to sell other products, we don’t want to put our energy into it.

I would rather you know anything that widens this harsh environment mode and sensor business is where our inorganic and organic investments are going. If you see further exits, it will really be around the edges. .

Okay, thanks for that. And then just for my follow-up. You talked about the heavy truck market being weak in China.

Can you talk about the other -geographies; are you seeing weakness in any other place apart from China in that market?.

I think in North America as you know it’s been a very hot market, the last couple of years. The growth rate is slowing but no surprise there, we’ve all expected that. But we expect heavy trucks to continue to grow. We actually expect China to kind of rebound eventually.

It’s hard to call, but you went through a nice surge with the adoption of Euro 4 and really, the government really drove that hard.

So at a period where trucks were going down and content was going way up, and there has been a little shift in China to smaller trucks, but we believe with all the infrastructure building over there that’s going on, that will swing back to larger trucks which are much more efficient and there is a lot of opportunity in China to improve the transportation of goods industry, and that play to our strength, because that’s more content.

So I think in a little bit longer term, probably hopefully late next year you will start to see China pick-up. The U.S. continues to be okay and Europe has been pretty solid. The challenge in the industrial transportation market has been off-road.

As we know the agriculture, industry has been really not investing due to where foreign prices are and you have the commodity industry, you have the spillover effect of oil prices down. So construction, although is mixed, it’s starting to level off. All those industries have been a drag over the last few years.

So what I think will happen over time is you will see those industries begin to recovery because of pent up demand.

You will get a lower growth rate in heavy trucks and this business will over time return to kind of a low single digit production growth rate, which is very attractive for us because we have so much content and we’ve grown our content so much over the last couple of years. .

Thanks. I appreciate the color. .

Thank you, Ruplu.

Can we have the next question please?.

The next question comes from Matt Sheerin from Stifel. .

Yes thanks. Most of the questions have been answered, but I did want to go back to the commentary about the distribution inventory correction that seems to be going on.

Could you give us a sense of what you are seeing on a sell in basis versus sellout and expectations for where do you think investors are going to go and what do inventory days look like at distribution now versus where they should be. .

Days are up a little bit, but I think it’s more single digit in days and my conversation with the distributors again I think everybody has been managing it, we are all managing it much better than we did over the last time around because of what we’ve learnt.

So I mean clearly the first half, we had nice growth in our sell-in in the first half and sell through was pretty solid too, but we began to see late second quarter early Q3 sell through began to slow a big and that’s when the inventories began to build a little bit and I think we were like lets jump on this quickly and get things in balance.

So I don’t think it’s a big horrendous deal, but it’s enough to have our third quarter being slightly down in the change and probably our fourth quarter relatively flat, but that’s why we think the coming into Q1 sell through and inventory levels are back to where they should be.

Again, I don’t – it’s not a major disruption, but it is a fine tuning which I think is good, just because it’s so good when it’s happening, because you are selling that. But I think it is good because the system is more in balance. .

Okay, that’s helpful and just a quick question for Bob.

Your share count assumption for the quarter in your guidance, what’s that?.

So we expect that in fourth quarter we’ll continue with that, between $150 million to $250 million range, so call it 1 million or 2 million share reduction in the quarter..

Okay, thanks a lot guys. .

All right, thank you Matt.

Can we have the next question please?.

Our next question comes from Mike Wood from Macquarie Securities Group. .

Hi, thanks for all the information. [Indiscernible] to breakout the SubCom charge is what you are trying to do with increasing margins in the mobile device sub segment.

Can you just give us more color of what’s happening in those two sub markets?.

The sub segments are data in devices Mike. .

So yes, SubCom end is on the mobile device side where you are exiting some lower margin product. How successful are you in getting that margin up in the mobile device side. .

Yes, so on the mobile, we would call it data and device business. If we combine those businesses, we announced that earlier in the year because customers are converging, technologies are becoming more similar and frankly we needed to reduce costs in those two businesses, which are our two weakest business. So we are still in the turnaround.

I think we have some good wins, we have some losses. I don’t think there is enough there to say from a market perspective we are changing our position.

We are changing our cost structure and we are getting back into the product range which we do best, kind of core connector clientage for the board type of connector power connectors, where we are very good and that we want to put a lion’s share of our energy around.

So it’s still in the kind of midway through the turnaround I would say, stabilizing but not exciting from a profitability point of view. We still have work to do to reestablish the growth and get the margins up to double digit. On the SubCom side as Bob mentioned seems steady progress in the market. We continue to have a high win rate.

There continues to be a lot of bid activity. The cloud players are very active in this. So that, we pointed out before, that’s a big change from the primary drivers were before.

But fundamentally we think it’s a good change, because there is a tremendous desire for high quality service and plenty of bandwidth, because that’s so integral for the total value proposition of those players. So we think that’s a fundamentally good driver and backlog now for $1.5 billion.

So I would say, we continue to see more approved points that we are in the uptick site. We are feeling good, pretty good through ’16.

You got to keep knocking off several wins a year control the pipeline, but overall we feel good that, ‘Sure, SubCom is on the way back up and we are getting our arms around the date and devices business from a strategy and a cost structure. We can see, this where we want to be. .

Great and then on MES it seems like if I back into the numbers it would roughly similar contribution versus last quarter to the segment. Has that seen any impact yet from China? I believe China was just under 20% of sales and is that expected of any is there any restructuring actions taking off at that weakness. .

I would say, I’d call it a consistent quarter. Although certainly we are going to see is China in general slows down. We’ll see an impact but not significant and overall, growing very nicely organically as I mentioned. Our sensors business, if we had owned AST and measurement this quarter last year, that business grew 10%.

So certainly seeing some nice growth overall. .

I would say in China, sensors are not as established in the vehicles over there, so particularly in the local vehicles. So you have kind of a more, an additional demand for that in order to become competitive, you need to put more features in.

So we feel that’s an extra demand driver and the only per say restructuring that’s going on is where we are combining for scale. We are not doing in response to market conditions, oh! Its growing slower so we are taking part of that. We are investing in the businesses as I said from that perspective, so that we can win more deals and growth faster. .

Great, thank you. .

Okay, thank you.

Can we have the next question please?.

And our next question is from the line of Steven Fox from Cross Research. .

Thanks. Just one question for me. I’m just a little confused still by the increase in the restructuring charges understanding what you just said. But you expressed a lot of positive statements around the harsh environments in general, but you are downsizing oil and gas.

And then along the same lines your are doing some product pruning, which I would has been an ongoing effort for a number of years. I’m just curious how that – what that has to do with restructuring and whether that was also in response to end markets. Thanks. .

Yes Jim, I’ll let Bob add to this too. Oil and gas is adjusting to the 35% decline in the business and the natural uncertainty about everything that’s going on around oil, which does a run come back in, when do oil prices go up, etc… The remainder of the increase is related to kind of the phase of, accelerating the phase of data and device.

So that’s what is related to. We are really not restructuring in any other business, Bob. .

Yes, the vast majority of our restructuring to-date and will be for the year is in the communication segment and in oil and gas in particular. Oil and gas last year was at $300 million business. We are going to exist a $200 million clip.

That really calls for some pretty significant restructuring and then data and devices in combination of the product exits that we’ve really been underway for call it, 12 to 18 months and closer into that 12 months, plus the combination of the old Datacom and the consumer business drove us to take some additional costs out.

But we are not taking our costs in our harsh environment growing to your other question, Mike’s question on measurement, we are not talking out cost where we’ve got growth opportunity. .

Understood and then just real quick. I understand the need to sort of keep your plans for a buyback close to your, best for now. But I mean when the closes can we expect some kind of signals around how you plan to execute or use that $3 billion in proceeds or is this sort of going to be statuesque and learn about sort of on a backward looking basis. .

I think one of the hallmarks of TE has been some pretty good transparency and once the deal closes and we get into the activity, we’ll give you some color about what our expectations are. .

And our last question comes from the line of William Stein from SunTrust. .

Thanks for taking my follow-up.

So with the pull-in of the timing of the BNS sale, can you just highlight to us what the regulatory approvals that you are still waiting on are and with regard to the $3 billion consideration, understanding that you’ve told us that you expect to use the majority for buybacks, would you consider another acquisition potentially in the sensory area.

At the Analyst Day you were – the company I would say was still constructive on its intention to acquire in that space and I wonder if think could be an opportunity to readdress that. Thank you..

Well, let me address the second part of that question. I think that the strength of the company is our strong cash flow, a really strong capital structure, strong operating leverage and all that provides choices, right.

So we clearly have an active M&A pipeline, sensors and harsh environment are very important to us and where we get the right opportunity to strengthen those businesses we would see them. Of course it has to be at the price that we think fits with our strategy and our return goals. So yes, I mean the bottom line is we can do both.

That’s really the simple method, we can do both. And if you look back the last few years that’s what we have done. We bought MES, we bought AST, we did a significant buyback. I think that’s really one of the strengths of TE. .

And then in terms of the timing well, we pulled it in a bit from end of the calendar year to now within 90 days. We have really three large regulatory hurdles; U.S., Europe and China. We have U.S. and Europe, so we are awaiting China and of course there are a number of other countries that have the right and obligation to weigh in.

But it’s really those big three and of course then where comp stocks in the midst of integration planning that we are helping them with, obviously and let them comment on that progression, but it really is at this point a regulatory hurdle with China. .

Great, thanks very much. End of Q&A.

All right. Thank you, Will. If you have follow-up questions please contract Investor Relations at TE. Thank you for joining us this morning, and have a great day. Thanks everybody. .

Thank you. .

Ladies and gentlemen, that does conclude our conference today. We’d like to thank you for your participation and for using AT&T Teleconference. You may now disconnect..