Sujal Shah - TE Connectivity Ltd. Thomas J. Lynch - TE Connectivity Ltd. Terrence R. Curtin - TE Connectivity Ltd. Heath A. Mitts - TE Connectivity Ltd..

Amit Daryanani - RBC Capital Markets LLC Wamsi Mohan - Bank of America Merrill Lynch Jim Suva - Citigroup Global Markets, Inc. (Broker) Mark Delaney - Goldman Sachs & Co. Shawn M. Harrison - Longbow Research LLC Craig M. Hettenbach - Morgan Stanley & Co. LLC.

Ladies and gentlemen, thank you for standing by, and welcome to the Q4 2016 TE Connectivity Earnings Call. At this time, all participant lines are in a listen-only mode. Later, there will be an opportunity for your questions. Instructions will be given at that time. As a reminder, this conference call is being recorded.

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

Good morning and thank you for joining our conference call to discuss TE Connectivity's fourth quarter and full year 2016 results. With me today are Chairman and Chief Executive Officer, Tom Lynch; President, Terrence Curtin; and Chief Financial Officer, Heath Mitts.

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 addresses 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 comments..

Thanks for joining us today. I'm going to review the highlights of Q4 and the full year and preview fiscal 2017 guidance, then I'll turn it over to Terrence to cover our performance in more detail. Before I get started, one more reminder that our fourth quarter included 14 weeks this year. Please turn to slide three.

Fiscal 2016 was a very good year for TE. I'm especially pleased with our Q4 results which included record adjusted earnings per share above the high end of our guidance and record free cash flow. We also finished the year with strong orders, setting us up for a good start to our 2017 fiscal year.

A key takeaway is that on both a 13-week and 14-week basis, the company had a very good fourth quarter, exceeding our guidance in earnings and expectations in cash flow. Sales for the full 14-week quarter were $3.3 billion, essentially at the midpoint of our guidance. Excluding the extra week, sales grew 4% and 2% organically.

Adjusted EPS was $1.27 on a 14-week basis, $0.07 better than the midpoint of our guidance. On a 13-week basis, adjusted EPS was $1.14, up 27% over the prior year, and as I mentioned, a new record for us. Orders of $2.95 billion were up 11% year-over-year and up 1% sequentially excluding the extra week and our SubCom business.

Adjusted operating margin was 16.5% and free cash flow was approximately $600 million. We continue to execute our harsh strategy with the completion of acquisition of Intercontec at the end of the quarter, adding a very nice range of connectivity products to our Industrial Solutions product portfolio.

We also continue to execute very well in the SubCom business with the October announcement that TE was awarded the new Pacific Light Cable Network, a trans-Pacific system where TE is working with Google and Facebook. Q4 was a very good quarter and momentum is strong as we enter fiscal 2017. Now please turn to slide four.

We were able to beat our guidance and deliver double digit adjusted EPS growth despite a slower-than-expected economic environment. This is a good indicator of the multiple levers we have to drive performance. Our harsh businesses continue to perform well.

SubCom had an excellent year and we made several key acquisitions including Creganna, which established us as a leader in the market for minimally-invasive medical solutions, Jaquet which expanded our sensor position in the transportation market, and Intercontec which I mentioned earlier.

We also sold our Circuit Protection business to narrow our focus in the Communication segment. From a financial perspective, sales were $12.24 billion; adjusted EPS was $4.08, $0.08 above our original guidance; and free cash flow exceeded our expectations at $1.6 billion.

We maintained strong operating margins of 15.8% for the full year with operating margins in the 16%-plus range in the second half. Adjusted EBITDA margins remained strong at 20.6% in a very low growth market. We also returned $3.1 billion to shareholders in dividends and stock buybacks. Now I'll take a minute to highlight our fiscal 2017 guidance.

We expect revenue of $12.3 billion to $12.9 billion, which represents total growth of 5% and organic growth of 3% at midpoint using a 52-week baseline in fiscal 2016. We expect adjusted EPS of $4.19 to $4.49, representing 10% growth at midpoint and another year of double digit EPS growth when compared to the 52-week base of $3.95 in 2016.

Before we move on, I wanted to recognize that this is the first earnings call since our announcement that Terrence Curtin will become CEO in March. I couldn't be more confident about the choice of Terrence. I also want to welcome Heath Mitts who joined us as CFO a couple of months ago.

Heath is getting up to speed very quickly and will be a strong partner for Terrence. Now I'll pass it over to Terrence and he will review our performance in more detail..

Thanks, Tom. And good morning, everyone. Before we get into the segment results and updates, I'd like to cover our orders for the quarter, which will help provide the foundation for the trends that we're seeing in our business as well as our expectations for 2017.

If you could please turn to slide five, and this shows our order trends on both a 13 and 14-week basis excluding our SubCom business. I'll speak to our orders on a 13-week basis so you have an apples-to-apples comparison versus last year and last quarter. Orders were up 11% year-over-year and our book-to-bill was 1.03.

On a sequential basis, we saw 1% growth which is stronger than normal seasonality as we typically experience a slight sequential decline. So we're clearly pleased with the order momentum as we enter into 2017. Geographically, we saw order growth in all regions on an organic basis.

The strength overall was driven by Asia, both in China, as well as outside of China, with order growth of 22%. Europe and the Americas orders grew approximately 3%, and those regions remain steady with continued growth in orders.

From a segment perspective, in Transportation, orders increased 15% year-over-year and were up 3% sequentially as China auto OEMs increased production ahead of the expiration of government incentives at the end of the calendar year.

Industrial segment orders grew 15% year-over-year due to the Creganna acquisition, and on an organic order basis, they grew 4% with growth across each of our three Industrial businesses. Sequentially, Industrial orders declined in line with typical seasonality.

In the Communications segment, excluding SubCom, we saw sequential growth of 4% driven by both our Appliances and Data/Device businesses. In Data and Devices, we are seeing increasing momentum in the business as product exits are largely behind us.

And year-over-year orders were up if you exclude the impact from the sale of our Circuit Protection business. Now let me spend a minute on SubCom, as this business continues its strong momentum.

As Tom mentioned, we were recently named as the supplier of trans-Pacific system with Google and Facebook, and with $1 billion of backlog, we expect SubCom to grow again in 2017. Please turn to slide six to discuss the segment results, and let me kick it off with our Transportation segment.

Segment sales grew 5% organically in the quarter on a 13-week basis, with strong growth in Auto and Commercial Transportation. This was offset by weakness in Sensors that was driven by industrial-related markets like we've talked about the past few quarters.

Our Auto sales in the quarter were up 6%, in line with our expectations and ahead of auto production growth of 3% during the quarter due to content gains. Growth was driven by strength in Asia and in Europe partially offset by declines in North America.

Going forward, we continue to expect our Auto business to grow ahead of auto production, driven by electronic content growth and a rich pipeline of platform ramps from design wins that we generated over the past several years.

In our Commercial and Transportation business, we delivered very strong performance with organic growth of 4% year-over-year despite a very challenging end market in North America. Our performance was driven by strength in China and Europe, and this was partially offset by declines in North America.

Turning to Sensors, we saw overall growth of 4% that was driven by the acquisition of Jaquet. We did see a 2% organic decline as we continue to be impacted by the weaknesses in the industrial-related markets, which make up more than half of our sensor sales.

We continue to see strong design win momentum in the automotive space for sensor applications and expect to begin to see meaningful revenue from these programs beginning in fiscal 2018. Adjusted operating margins in the segment were 19.6% and were in line with our expectations and were up sequentially 20 basis points.

For the full year, the segment delivered 5% organic growth and 19.2% adjusted operating margins. If you could please turn to slide seven, let me move over to the Industrial Solutions segment. On an overall basis, segment sales were up 16% year-over-year due to the acquisition of Creganna.

On a 13-week organic basis, revenue in the segment declined 2% driven by weakness in the Oil and Gas and an overall slow Industrial Equipment environment. Geographically, we continue to see North America as weak, Europe as stable and China improving.

I'll provide some color now on sales growth in our industrial businesses and this'll be on a 13-week basis. In the Industrial Equipment area, we saw 15% growth driven by the Creganna acquisition, which is performing ahead of our expectations. We continue to be excited about the growth potential in this minimally-invasive medical market.

On a pro forma basis, if we had owned Creganna this time last year, our growth would have been greater than 10%.

Excluding Creganna, the Industrial Equipment business declined 7% organically with softness in all regions but did show first half to second half growth of 7% as markets recovered from the first half inventory correction that we talked about earlier in the year.

In the Aerospace & Defense area, we had strong growth of 6% organically, driven by share gains in both commercial air platforms and defense applications. In Oil and Gas, similar to prior quarters, our sales declined by 27% due to the end market conditions in that area.

And finally, our Energy business had a very nice growth of 6% organically with growth both in China as well as in the Americas. From a margin perspective, adjusted operating margins were in line with expectations but down year-over-year.

The year-over-year decline is due entirely to the Oil and Gas business, which impacted segment operating margins by approximately 100 basis points year-over-year due to the revenue declines that we saw in that business.

We do expect the oil and gas impact to our margins to affect our comparisons to the first quarter of 2017 but then they'll be anniversaried as we get later into the year. For the full year, the Industrial Solutions segment delivered 1% actual growth and 12.3% adjusted operating margins.

Organically, the segment sales declined 3% for the full year but did grow 11% from the first half to second half following the inventory corrections that I mentioned that we experienced in the first two quarters. So, if you could please turn to slide eight, let me cover Communications Solutions.

During the quarter, the Communications segment revenue was down 1% organically on a 13-week basis. The SubCom business saw 13% year-over-year growth driven by strong execution from multiple projects that we have in force. For the full year, SubCom grew 25% in fiscal 2016.

In Appliances on a 13-week basis, our business grew 3% organically while Data and Devices declined 13% organically due to the effects of product exits. What was nice about Data and Devices, we did experience another quarter of sequential sales growth in the business in quarter four as the product exits are largely behind us.

Adjusted operating margin for the segment expanded 180 basis points sequentially and 240 basis points year-over-year due to the productivity improvements and restructuring actions we've taken in the segment.

For the full year 2016, Communications Solutions declined 2% organically driven by Data and Devices and generated 11.6% adjusted operating margins. Now let me hand it over to Heath who will cover the financials..

Thank you, Terrence. And good morning, everyone. To start off, I'm excited to join the TE team here and I look forward to getting to know the investor and analyst community over the coming quarters. Now if you'd please turn to slide nine, I'll provide more details on our Q4 earnings.

Adjusted operating income was $551 million with an adjusted operating margin of 16.5%. Excluding the extra week, our adjusted operating margin was 16%. Note that the operating income impact from the additional week was $55 million.

GAAP operating income was $517 million and included $30 million of restructuring charges driven primarily by Data and Devices and $4 million of acquisition-related charges. Adjusted EPS was $1.27 for the quarter. If you exclude the $0.13 contribution from the additional week, adjusted EPS was $1.14 and up 27% year-on-year, a new company record.

The growth above prior year was driven by an increase in operating income, incremental benefits from share buyback, and a lower adjusted effective tax rate of 13%. The adjusted tax rate was lower than prior guidance due to the mix of profitability by region and statute expirations in certain jurisdictions.

GAAP EPS was $1.22 for the quarter and included restructuring and acquisition-related charges of $0.05. For full year 2016, restructuring charges were $125 million, and I expect similar levels for 2017, driven primarily by activity in our industrial-related and acquired businesses.

Due to the benefit from the settlement of all pre-separation tax disputes with the Internal Revenue Service that was discussed last quarter, we ended 2016 with a full-year GAAP income tax benefit of $779 million and an adjusted effective tax rate of 18.5% for the full year. I expect a full-year adjusted effective tax rate of 20% for 2017.

Now if you'll turn to slide 10, our business is performing well in a challenging economic environment driven by the resiliency of our harsh portfolio and the execution of the TE Operating Advantage program or TEOA.

Adjusted gross margin in the quarter was 33.2%, a 70% [sic] 0.7% improvement from prior year driven by productivity improvements across the segments. Adjusted operating margins were 16.5% in the quarter, and going forward into 2017, we continue to manage our business tightly and will continue to invest for future growth in our harsh businesses.

Adjusted EBITDA margins help explain the profitability performance of our business including acquisitions. Adjusted EBITDA margins in Q4 were strong at 20.9%, which was up 20 basis points sequentially.

In the quarter, we had strong performance with cash flow from continuing operations of $782 million and free cash flow of $594 million, up a strong 53% from prior year. The growth was driven by significant improvements in working capital, and again, is reflective of the team's solid execution.

For the full year, I'm pleased to report that we generated nearly $1.6 billion of free cash flow, signaling a very healthy business. Looking ahead, we continue to expect free cash flow to approximate net income and capital expenditures to be approximately 5% of revenue.

We remain committed to our disciplined long-term capital strategy of a balanced return of free cash flow to shareholders while still having ample free cash flow available for acquisitions. In 2016, we returned $3.1 billion to our shareholders through dividend and share repurchases.

Our balance sheet remains strong with reasonable debt levels and an ability to continue to support the return of capital and acquisitions going forward. We have added a balance sheet and cash flow summary in the appendix for additional details. And with that, I'll turn the call back over to Terrence..

Thanks, Heath. And now I'll cover our guidance for the first quarter and the full year of 2017. So, if you could please turn to slide 11 for the first quarter outlook.

We expect first quarter revenue of $2.95 billion to $3.05 billion and adjusted earnings per share of $0.98 to $1.02, representing sales growth of 6% and 3% on an organic basis, and 19% adjusted EPS growth at the midpoint. Following record adjusted EPS and strong orders in the fourth quarter, our guidance represents a strong start to our fiscal 2017.

By segment, we expect Transportation Solutions to grow mid-single digits both organically and on an actual basis. This is above expected auto production growth levels of 2% in the first quarter, driven by China, as well as Europe. Commercial Transportation growth, we expect to be driven by Asia.

In the Industrial segment, we expect it to grow double digits overall due to the Creganna and Intercontec acquisitions and will be flat organically, with the weakness in oil and gas market offsetting growth in our Aerospace & Defense business. We expect low single digit organic growth in the Communications segment driven by Appliances and SubCom.

If you could now turn to slide 12, and I'll cover the full-year guidance. For the full year, we expect revenue in the range of $12.3 billion to $12.9 billion and adjusted earnings per share of $4.19 to $4.49.

This represents 5% overall growth, 3% organic growth and 10% adjusted earnings per share growth at the midpoint versus 52 weeks fiscal 2016 results. I feel very good about our ability to drive 3% organic growth and double digit adjusted EPS growth in this challenging economic environment.

This is in line with our overall business model and proves that our harsh strategy is delivering while we continue to benefit from the secular trend of content growth across our harsh businesses. We expect our Transportation segment to be up mid-single digits organically on 1% global oil production growth next year.

And this reflects content growth trends as well as share gains from the programs we've won in the past. Commercial Transportation we expect to outperform its end market again this year, benefiting from content expansion in the heavy truck market. And we expect our Sensors business to grow 7% in total year-over-year.

In the Industrial segment, we expect it to be up low single digits organically with continued gains in Commercial Aerospace and Defense, momentum in interventional medical applications driving the growth and also stabilization in our Oil and Gas business.

In the Communications segment, we expect to be up low single digits organically with growth driven by Appliances and SubCom. As I said, momentum in SubCom remains very strong with the $1 billion that we have in backlog, benefiting from the buildout of the cloud, and we expect growth in the mid-single digits in SubCom in 2017.

Now let me turn it back over to Tom for some closing comments..

Thanks, Terrence. To reiterate, 2016 was a very good year for TE and we're expecting another very good year in 2017 with 5% overall sales growth, 3% organic growth, operating margin expansion and double digit adjusted EPS growth excluding the additional week in 2015.

Our harsh strategy is definitely delivering, with 80% of our revenue driven by harsh environment applications. These products are highly engineered and developed at the application architecture level, providing a wide moat around our solution.

Over the past five years, we have averaged mid-single digit growth across our harsh businesses and have multiple levers to continue to drive margin expansion. We have remained active in shaping our portfolio to focus on harsh applications.

Over the past year, our acquisitions have given TE a leading position in solutions for the minimally-invasive medical market, expanded our portfolio of industrial connectors, and bolstered our offering of sensors for the auto market. At the same time, we returned over $3 billion to shareholders through buybacks and dividends.

Over time, we have maintained consistency with our capital strategy, returning nearly $12 billion to shareholders since we became a public company nearly 10 years ago. Moving forward, we expect free cash flow to approximate net income and continue to expect to return two-thirds of our free cash flow to shareholders and use one-third for acquisitions.

While there will be cyclicality, the markets that TE serves have strong underlying secular trends driven by the megatrends of safe, green and connected.

Using auto as an example, these trends are driving the need for more sensors and connectors to support increased safety features, autonomous driving systems, higher emission standards and infotainment.

TE benefits directly from these trends, and this is reflected in our transportation guidance for fiscal 2017 where we expect to grow mid-single digits on 1% auto production growth. We see similar drivers in our Industrial and Communications businesses, which will enable us to grow content. TE has multiple levers to drive revenue and EPS growth.

As the world leader in connectors and sensors, we have unmatched technology and global presence. With over 7,000 engineers, we are setting the pace for new product and technology development and are driving our customers' roadmaps with integrated solutions which TE is uniquely positioned to provide.

And all the work we've done over the last several years has translated into each dollar of revenue today is delivering 40% more EPS than five years ago. These are very exciting times for TE, and I'm proud of what we have accomplished this year.

I'm also very happy that Terrence is succeeding me, as he's been instrumental in establishing TE's global leadership position in connectivity and sensor solutions and strengthening the company's financial performance to drive value for our shareholders.

We've prepared Terrence for this role over several years, and I will continue on as Executive Chairman of the Board, making sure this is a seamless transition. So, thank you. And now let's open it up for questions..

Thank you. And our first question is from the line of Amit Daryanani from RBC Capital Markets. Please go ahead..

Thanks. Good morning, guys. So, I guess I was going to ask you about the threat of Russia hacking a subsea cable, but you guys covered that earlier today. I guess....

(27:33).

That's your first question..

I guess the first official question will be, Transportation orders were up rather strong, I think up 25%. Terrence, I think you mentioned that China was the driver for that. So, maybe you could just talk about what the trends look like excluding the China benefit.

And would that suggest that maybe this 1% production estimate you have is perhaps more H1 or first half heavy for you guys?.

Amit, I think a couple of things. When we look at the orders, we saw nice orders. I think when you look at Automotive, we saw nice orders in Europe. We also saw very strong orders in Asia. As I mentioned, clearly, China was a big part of it. And North America has been the trends we've been seeing.

I think when you look at next year and we talk about the 1% production growth, the first quarter we do see 2% production growth, really driven, as we've seen, some acceleration in production in China. And then, I think you're going to see it be more 1% or less for the rest of the year.

We do think China, when we look at the 1%, is going to be about 3% production growth for the overall year in that 1%. We do expect Europe to sort of be low single digit production growth and North America to be flat when we look at it through next year.

So, I think when you look at the first half, you'll see China normalize during the first half of this year is the way we're looking at it, with a little bit stronger in the first quarter..

That's helpful. And then, I guess, Industrial segment, margins at 13.4% I think were down year-over-year by 40, 50 basis points. Is your mix some part (29:05) of it? But just help us understand, I mean, revenues are obviously much stronger today than they've been before.

What gets you to that 15%, 16% op margin ZIP code on that segment? And could you get there by the end of this year?.

I think when you look at the Industrial segment, as I said in my comments, right now we are being impacted about 100 basis points due to the impact of the oil and gas market. And to frame that for everybody again, our Oil and Gas business went from probably $200 million in 2015 (29:39) down to $125 million in 2016.

So, we did have a pretty sharp decline, and that was high-margin business that has impacted the overall segment. So, I do feel good we've improved the margins net of that effect, if you remove that effect, and we do expect margin expansion next year in this segment.

I don't think we're going to get up to 15% next year, to your question, because we still have a pretty low organic growth in that segment. And that growth is going to be driven by Aerospace & Defense, certainly in the medical space, and we're also going to need some more volume to get up towards that 15%.

But we have been doing cost actions and do expect the margin to improve next year and to be a contributor for total TE margin expansion..

Perfect. That's it for me. Thank you, guys..

Thanks..

Thank you..

Thanks, Amit.

Could we have the next question, please?.

Next is the line of Wamsi Mohan with Bank of America. Please go ahead..

Yes. Thank you. Good quarter. And congrats, Heath, on the new role. As we look at autos here, I mean, if we look at 2016 for the full year, there was 2% to 2.5% production growth, you guys did about 3.4% growth organic in autos.

Your guidance here inarguably – which is prudent given the weakness that we're seeing across different regions -- of 1% production growth is implying a 5% growth in transport.

So, could you help sort of talk a little bit maybe in a little bit more detail around some of the share gains and increased comp and drivers that you sort of alluded to on the call which gives you confidence that you can bridge this wider gap of almost four points incremental growth from a content perspective? And I have a follow-up..

Sure. Thank you for the question. Actually, when you look at it, earlier in this year, as we covered, there were some supply chain corrections that we had in China early in the year, as well as North America sort of middle of the year. And now that we're in a pretty stable environment to where we're at today from a production.

I think you're going to see that content growth to that separation. And it is around both content and share gain, Wamsi. It's not one or the other.

And I think you've seen that both in our fourth quarter, you've seen that separation come back from our growth rate in a pretty stable production environment, and also in our first quarter guidance, where we're guiding mid-single digits on 2% production. So, I think there's proof around our business model.

And our business model, as we've told you, in a low growth production environment, you can have 6% of content and then a little bit of price give-back that sort of gets to that mid-single digit around this 1% production environment.

And we feel very confident with the gains we have and all the global platforms we're on, even in a 1% production environment we can drive that type of growth..

Thanks, Terrence. And as my follow-up, your Transport segment margins on a year-on-year basis were lower despite significantly higher revenue. Can you help us dimension the investments you're making in Transport? Is it all in Sensors? And the magnitude and pace of investments in 2017 versus 2016 that we should expect. Thanks..

Sure, Wamsi. We're definitely investing in Sensors, as we've been saying all year, with the significant design wins we're getting in the automotive side, which won't hit revenues till 2018. So, we're investing ahead of revenue for sure.

We're also continuing to invest in the harsh connectivity side and in this integrated solutions area because it's a very promising space. When you dissect it a little bit more, the pure auto connector margins and industrial transportation margins have held up really well in the year. So, most of this is because of investment in Sensors.

If we hadn't have done that, you'd have seen our margins about flat year-over-year..

Great. Thanks, Heath..

All right..

Thank you, Wamsi.

Can we have the next question, please?.

The next question is the line of Jim Suva with Citi. Please go ahead..

Thank you very much. In the past, your company has been pretty firm on kind of an equation of – for Transportation of global SAR (33:54) growth plus content growth less ASP growth equals organic growth.

Have those numbers remained the same? And is there a chance where that content growth could actually accelerate as we're starting to see more and more the car of the future catch on or is it just that is just such a small part of the overall bucket? And then my second follow-up question is, on the Subsea business that you're winning, which is nice to see that, is there anything different with this round of the terms and covenants such as better visibility or worse or similar profitability or worse or better? And also, I assume that simply because it's not being funded by governments or the telecom operators that the funding is probably more in place versus past cycles, so maybe a little bit more visibility.

If you can touch on that, that would be great. Thank you..

Yeah. We might have to have you repeat the second question. My memory, I'm not sure I'll hold it all. But regarding content, Jim, that's only if you look back to four or five years ago, we would've said if we were guiding 1% production growth, we would probably have been guiding 3%, maybe 4% revenue growth.

Today, we're guiding 1% and we're guiding 4% to 5% revenue growth. So, that's a combination of content and designing, continued designing for us. And there's no question that as the emission standards increase and you see more of a push for hybrid and electric vehicles, that's a tailwind for content.

And it's been relatively slower than people have expected, but in China, for example, there's a huge push by the government there to transition to electric vehicles. So, that's a real positive trend for us and we're very, very well positioned in the electric vehicle and the hybrid electric vehicle with our content.

So, yes, I think over time as the penetration of HEV vehicles increases, we're going to be seeing more content growth. We'd also, just in general, we expect content to grow about 6% over the next four to five years in the vehicle. So, it's a really good, sustainable, long-term trend that we're well positioned to take advantage of..

And then, Jim, I'll take your SubCom question. And if I miss any of it, just hit me at the end because there was about four questions in there I think. Overall, I think when you look at the cycle we're in, one of the things that's really nice about the cycle, I don't think it changes the visibility much, but the customer base is different.

It is not your traditional carriers. It is actually the cloud operators. So, it is those cloud operators that are very concerned how do they make sure they have capacity as they come out with their service offering. And that has changed the customer profile than what it was five, 10 years ago. So, they are much more active in owning the systems.

Clearly from a financing perspective, it creates a different financing cycle because they do have the capital versus in the past it would be part of a telco operating budget or somebody had to go raise financing for the project. So, I think it helps accelerate the cycle a little bit. But it does come down to their offerings in the cloud.

And I think what's great that you've seen in the programs we've won, we've had programs in the Atlantic, also the Pacific here and there are activities all around the cloud demand and the service offerings they have.

So, when you look at the cycle, it's very good that it's a different customer base and I think we've done a good job adapting to a different customer base, and I think that's why you're seeing the strong wins, coupled with the technology we bring, have been very strong.

And I think when you look at profitability, the profitability is sort of where we expect it to be at this point in the cycle.

At these levels, and we'll have these levels again next year, you're going to be around company average margins, maybe a little bit less, but excellent return on capital versus the company's WACC and feel good that we have the backlog in place that secures 2017, and now we have to continue to win projects to secure 2018..

Great. Thanks so much for the details..

Thank you..

Thanks, Jim..

Thanks, Jim.

Could we have the next question, please?.

Next question is the line of Mark Delaney with Goldman Sachs. Please go ahead..

Yes. Good morning. And thanks very much for taking the questions, and congratulations to all of you on your new roles. First question is on the Sensor outlook. I think the comment was expecting 7% growth in Sensors in fiscal 2017.

Can you talk about is that organic or is that including the benefits of Jaquet? And then related to that, there was a comment about starting to see some new programs ramp in Automotive and Sensors, but then Sensors and Industrial were weak. And that actually surprised me.

I thought when the Measurement Specialties deal was done, some of the earlier growth would have come in Industrial and the design-in cycles for Auto were going to take a little bit longer to ramp. So if you could just better explain where you're starting to see some of that automotive sensor content gain, that'd be helpful..

Yeah. Sure. The 7% number I quoted on the call does include Jaquet. So, when you look at it, it's split pretty much organic and inorganic, that 7%, pretty evenly between the inorganic and organic. You're exactly right when you think about Measurement.

Measurement really did not have an automotive business, and that's one of the reasons we liked their portfolio so that we can build that out. So, the program wins that we have really when it comes to Auto, they won't be kicking in until 2018. So, we're not getting the benefit of the growth.

Certainly as Tom talked, we're spending ahead to industrialize those programs and win those programs. And what's great about those programs -- they're among various technologies we'd gotten with Measurement as well as they're in multiple regions of the world. So it's not concentrated in one area.

So we really like the breadth that we're winning as that will come in into 2018. When we look at the market conditions, because Measurement was very much focused on the industrial markets, they were getting us some of the impacts of the industrial markets that I've talked about in our Industrial segment.

So, anything around general industrial, test and measurement has been slowing; that's what you see in the organic impact that we've had.

We have seen some pick-up across those industrial businesses similar to what we've seen in our Industrial segment, that has given us the confidence for the 3.5%, 4% organic growth next year that's implied in our guidance. But the Auto program still will not be coming in meaningfully until 2018..

That's helpful. And then for a follow-up question on the outlook for the China auto market, you talked about expecting some normalization in China after the December quarter. I was hoping for a clarification.

I mean, do you think when you talk to your customers that because of the end of the incentives at the end of this calendar year that they're pulling forward production and maybe some of this is shipping into inventory, or did you just mean you're going to be starting to have more difficult comps as you go into calendar 2017?.

No. I think when you look at China auto production, we expect China auto production to be up 3% year-over-year. So, slower than it's been, and some of that is because of the activity this year on the small engine incentive. That small engine incentive ends in December, and we've seen actually some acceleration in orders before that as they build.

I think when you sit there, we will have production in China step down quarter one to quarter two. But then, we do expect to come back into growth to more normal levels later in the year.

So, I think when you think about our Automotive business this year and ahead, you're going to see production in the first half to be a little bit more in the first quarter and then the second quarter due mainly to that China phenomenon. And we aren't assuming any new incentives right now in our guidance.

We're sort of assuming that it's they end in December..

Thank you..

Okay. Thanks, Mark.

Could we have the next question, please?.

Next question is the line of Shawn Harrison with Longbow Research. Please go ahead..

Hi. Morning, everyone..

Good morning..

Good morning, Shawn..

Wanted to bridge just the flat organic in Industrial at the beginning of the year with a stronger growth rate exiting the year.

Is it solely just product ramps in Aerospace & Defense that you highlighted and some other factors? Are you expecting underlying demand to accelerate as you migrate through fiscal 2017 within Industrial?.

Shawn, when we look at it, I think what you have is – you mentioned one of the key drivers. Our Aerospace & Defense business is almost a third of the segment, and we do expect that to be mid-single-digit growth, similar to what we experienced this past quarter and we're guiding into the first quarter.

We see the programs there and we also see some Defense programs kicking in that are share gain as well. So, that is a big driver. The second big driver is as medical becomes organic growth later half of the year, like I talked about in Creganna, that's – the minimally invasive market is a 7% growth market. We're growing about 10% pro forma in that.

So, we feel good about those two being the big drivers in the Industrial market next year. When you get into oil and gas and general industrial, we're sort of saying it stays pretty flattish.

So, I think some of the growth that you're going to see in some of these areas that have been a little bit more of a headwind, we're saying is flat to low single growth to get up to that low single digit organic growth. But they're the major drivers that we're looking at right now as we go into next year..

Yeah. Another thing I would add is that first half of last year, remember, had the inventory correction in it. So, you do get a little bit of a benefit of the compare..

Okay.

And if I may follow up on just the medical comment with one other, what is the run rate of the medical business right now? And my follow-up question would be that, are we expecting to get to a normalized share repurchase range of, let's say, what was it, $150 million to $250 million a quarter for fiscal 2017?.

The medical business from a run rate right now, we sit there. Next year, it will be about $500 million, both on our legacy business, as well as what we've done with both Creganna and AdvancedCath. So, they'll be north of $500 million next year, Shawn, is where we'll be running. And then I'll let Heath answer the share repurchase..

Shawn, I think we just entered the year. I think a more normalized rate to assume out of the gate is probably closer to $100 million per quarter. We'll evaluate it as the year progresses and see where M&A layers into that as well.

But I think an assumption of probably a full-year share repurchase of somewhere between $400 million to $500 million in total is probably a good starting point for the year. And we'll see where M&A comes in and update you as the year progresses..

Okay. Thanks, Heath. Congrats, everybody, on the new roles..

Thanks, Shawn..

Thank you..

Thank you, Shawn.

Can we have the next question, please?.

Next question is from the line of Craig Hettenbach with Morgan Stanley. Please go ahead..

Yes. First, just a question on the near-term environment. If I look on a 13-week basis, the bookings up sequentially in what is kind of a seasonally slow bookings period.

So, any other context what you're seeing in terms of the supply chain and indications from customers that it's performing a little bit better?.

Craig, it's great question. I think what we've seen across the supply chain is actually stability. I would say lead times are staying pretty tight. People aren't taking a lot on, but there's a lot of stability and I think you saw it in how we talked about the regions.

And even markets like oil and gas, it does feel like it's around this, for us, revenue of $30 million a quarter. So, overall, from a supply chain perspective, I think lead time coming into us as well as, as we're selling out, feels stable and it does feel constructive as we're going into 2017..

Got it.

And then just as a follow-up on the comment of 40% greater earnings power on incremental revenue, and certainly you've had margin expansion, you've had share buyback contribute, as you move forward, what would you say would be the big levers to drive stronger earnings growth relative to revenue?.

Well, I think the big one is growth, right? We're continuing to fine tune the cost structure as always. But going forward, I'd say the big one will be driving harsh environment application growth in the 5% to 7% range.

And that has a lot of leverage with it which we think will drive 40 to 50 basis points of operating margin improvement with a consistent buyback program, that's how you really add up to this 10%-plus EPS growth. So, still multiple levers to go, and a fair amount of improvement yet to continue to be realized, which is exciting..

And I think 2017 guidance we gave this morning is right along that. So, you get to see the multiple levers.

With the mid-single digit top line guidance, which is organic plus a little bit of inorganic, the margin expansion, as well as share buyback, you really get to see all the levers that are – all of them working together to get to that double digit growth we guided to for 2017..

Great. Thanks..

Thanks, Craig..

Thank you..

Okay. Thank you, Craig..

We have no further questions. So, if you have questions, please contact Investor Relations at TE. Thank you for joining us this morning, and have a great day..

That does conclude our conference for today. Thank you for your participation. You may now disconnect..