TE Connectivity - Q1 2013

Transcript

Shawn Harrison (Senior Equity Research Analyst)

Ladies and gentlemen, thank you for standing by. Welcome to the TE Connectivity Quarter One Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. If you should require assistance during the call, please press star then zero. As a reminder, today's conference is being recorded. I would now like to turn the conference over to our host, Mr. Keith Kohlstrom. Please go ahead, sir.

Keith Kohlstrom (Head of Investor Relations)

Thanks. Good morning, and thank you for joining our conference call to discuss TE Connectivity's first quarter 2013 results. With me today are Chairman and Chief Executive Officer, Tom Lynch, and Chief Financial Officer, Bob Hau. During the course of this call, we will be providing certain forward-looking information, and we ask you to review the forward-looking cautionary statements included in today's press release. In addition, we will use certain non-GAAP measures in our discussion this morning, and we ask you to review the sections of our press release and the accompanying slide presentation that address the use of these items. The press release and related tables, along with the slide presentation, can be found on the Investor Relations portion of our website at te.com.

Finally, for participants on the Q&A portion of today's call, I would like to remind everyone to please limit themselves to one follow-up question. Now, let me turn the call over to Tom for some opening comments.

Tom Lynch (Chairman and CEO)

Thanks, Keith, and good morning, everyone. If you could please turn to Slide 3, and we'll get started. First quarter results were in line with our expectations as strong margin performance offset slightly weaker than expected sales, particularly in our Networks segment. Orders were up 3% versus the prior year to $3,100,000,000, and strengthened through the quarter in most of our businesses, primarily due to improved economic conditions in the US and China. And excluding SubCom, our book-to-bill for the quarter was 1.02, which compares to about a 0.98 last year. We also had another strong free cash flow quarter, generating $304,000,000, and of that, returned $267,000,000 to shareholders through dividends and the repurchase of approximately 5 million shares.

We expect to return over $1 billion to shareholders for the full year, as we also indicated on our prior call. I'm encouraged by the order trends, also encouraged by our strong execution on productivity and the traction we're making on the cost reduction programs we announced last quarter. As a result, we do expect increased sales and earnings in the second quarter, and we expect to deliver a strong second half. Please turn to Slide 4. Total company sales of $3,130,000,000 were down 1% versus the prior year and down 4% on an organic basis. Currency translation negatively impacted year-on-year growth by $43,000,000, and the Deutsch acquisition contributed $148,000,000 in revenue. Versus the prior year, revenue in our Transportation and Industrial segments were up low single digits due to the addition of Deutsch.

The Networks and Consumer segments declined in the quarter. The Networks decline represents a continuation of weak CapEx spending in many segments of the broadband network. Consumer was down slightly due to weak PC demand, more than offsetting our improving position in tablets and smartphones. By region, compared to the prior year, revenues were up 4% in the Americas, down 2% in Europe, and down 5% in Asia. Within Asia, China was up about 4%. However, the rest of Asia was down, primarily due to weakness in Japan. Please turn to Slide 5, and I'll provide some highlights of our segment performance. Transportation had another strong quarter of performance, with sales up 3% and adjusted operating income up 10%.

Overall, global light vehicle production was up slightly versus the prior year, with growth in the U.S. and China offsetting declines in Europe and Japan. Commercial vehicle production continued to be soft in Q1, but orders have strengthened early in the current quarter, and we expect sales in this segment to continue to grow in Q2. Please turn to Slide 6. Revenues and adjusted operating income in our Networks business were down 8% versus the prior year. As I mentioned earlier, the market for broadband network equipment, particularly in the wireline portion of the market, continues to be soft, and we don't expect to see this improve until late in the second half. Project activity in the SubCom business remains robust, but the funding continues to be slow, and we actually expect this business to bottom in the second quarter.

So we have a strong pipeline, but projects coming into force have been slow. With respect to the Networks segment overall, I still continue to be bullish, despite the fact that we're in this pretty extended lull in demand on the wireline side. The underlying trends would say that the network has to continue to be built out with small base stations coming and the need to drive fiber closer to home to get the data rates that consumers and businesses demand. We think the market will be coming back. It's been hard to call the timing, but we're still remain bullish on the underlying market trends. Now, during this lull, we've been pretty aggressive, as we mentioned last quarter, in taking costs out.

So, much like we did in automotive in the downturn, we're positioning this business for a really strong rebound in sales and earnings growth as demand picks up. Please turn to Slide 7. Revenue in the Industrial segment was up 2% as the Deutsch acquisition offset continued weak demand in the industrial equipment and solar markets. Adjusted operating margins of 12% were down as expected due to the low sales level. Based on normal seasonality and improving order trends, we expect steady sales and margin improvement over the balance of the year, and we expect our margin in this segment to be up several points by the end of the year. Please turn to Slide 8.

Sales in our Consumer segment were down 4% versus the prior year, with adjusted operating margins up 300 basis points and adjusted operating income up 32%. We're finally beginning to see the results of our efforts in tablets and smartphones and getting a increased number of design-ins with the important customers in this segment. However, this growth was offset by general weakness in the PC market, which is still a large portion of our Consumer Devices business. Adjusted margins improved in this segment over the prior year, primarily as the result of improved productivity and cost reduction actions. Now let me turn it over to Bob, who's going to cover the financials in more detail.

Bob Hau (CFO)

Thanks, Tom, and good morning, everyone. Let me discuss earnings, which start on Slide 9. Our GAAP operating income for the quarter was $293,000,000, which includes restructuring charges of $92,000,000 and Deutsch acquisition-related charges of $5,000,000. Adjusted operating income was $390,000,000, with an adjusted operating margin of 12.4%, up 30 basis points from Q1 last year. GAAP and adjusted EPS were $0.65 for the quarter. GAAP EPS included $0.15 of restructuring and other charges, and $0.01 of acquisition-related charges, offset by $0.16 of income related to tax items. The tax income was primarily related to the settlement of an audit of prior year tax returns as we continue to make progress on resolving our pre-separation shared tax liabilities. Please turn to Slide 10. Our adjusted gross margin in the quarter was 31.6%.

Despite sales that were slightly lower than expected, both gross and operating margins were above our outlook for the quarter as a result of increased productivity and rigorous cost and spending controls. Total OpEx spending was $599,000,000 in the quarter, and this was up about 7% versus the prior year, largely due to the addition of Deutsch. The right side of the slide details items on the P&L below the operating line. Net interest expense was $33,000,000 for the first quarter, about flat versus the prior year. I expect approximately $32,000,000 of expense per quarter for the remainder of the year. Adjusted other income, which relates to our tax sharing agreement, was $5,000,000 versus our outlook of $9,000,000.

On a GAAP basis, taxes were a benefit in the quarter, due primarily to the settlement of an audit in prior year tax returns, as I mentioned earlier. The adjusted effective tax rate was 23%, slightly lower than the 24%-25% guidance. Both adjusted other income and adjusted tax expense were lower, and the net effect was no impact to EPS compared to guidance. For the remainder of the year, I expect other income of about $8,000,000 per quarter and a tax rate of 23%-24%, which is slightly lower than what we guided last quarter. Please turn to Slide 11. Cash from continuing operations was $393,000,000. Our free cash flow in Q1 was a very strong $304,000,000. This was a very good start to the fiscal year, as free cash flow is typically the lowest in the first quarter.

We continue to expect free cash flow to approximate net income going forward. Capital spending during the quarter was $124,000,000, or about 4% of sales. This is consistent with historic levels of approximately 4%-5% of sales. Working capital levels are in line with our expectations. Receivable days outstanding were 63 days, and inventory days on hand were 74 days, both up slightly versus the prior year, primarily due to the addition of Deutsch. Our businesses continue to do a very good job managing working capital. Now let me discuss the sources and uses of cash outside of free cash flow, shown on the right side of the slide. We began the quarter with $1,600,000,000 of cash and ended the quarter with about $1,000,000,000. During the quarter, we returned a total of $267,000,000 to shareholders.

We paid dividends of $89,000,000 and repurchased 5,000,000 shares for $178,000,000. The cash flow statement shows a slightly lower dollar amount for share repurchases due to the timing difference on actual payment of funds. We continue to expect additional share repurchases of $150,000,000-$250,000,000 per quarter in fiscal 2013. Outstanding debt was $3,000,000,000 at the end of the quarter. As I discussed on last quarter's earnings call, debt was reduced by approximately $700,000,000 in early October, with the payoff of notes that had matured. We expect debt levels to remain at approximately $3,000,000,000 for fiscal 2013. Finally, on December 26th, Standard & Poor's raised their credit rating on TE from BBB to BBB+ with a stable outlook based on our stronger performance. Now I'll turn it back to Tom.

Tom Lynch (Chairman and CEO)

Thanks, Bob. Please turn to Slide 12. We are beginning to see some positive signs in the U.S. and China as orders strengthened during the quarter. I mentioned this earlier, and this momentum has continued into January, the first three weeks of January. All segments, except Networks, had a positive book-to-bill in the quarter, and our overall book-to-bill was 1.02, excluding SubCom. As a result, we are a little more optimistic that we will see continued demand improvement as the year progresses. Please turn to Slide 13. Based on the order trends, we expect revenue in Q2 to be in the $3,200,000,000-$3,300,000,000 range, and adjusted EPS in the $0.68-$0.72 range.

At the midpoint, revenue would be about flat versus the prior year, with EPS up 3%, and adjusted operating margins would be between 12.5% and 13%. We expect approximately $100,000,000 of restructuring charges in the second quarter as we are accelerating our cost improvement actions. On a year-over-year basis, revenues in the transportation segment would be up about 5%, primarily due to the addition of Deutsch, as growth in automotive is offset by a weaker demand for industrial and commercial vehicles. Networks will be down about 8%, primarily due to weakness in SubCom. Please turn to Slide 14.

For the full year, we expect sales in the range of $13,300,000,000-$13,700,000,000, and adjusted EPS of $3.05-$3.25, and the midpoint of $3.15 is consistent with our prior guidance on lower sales of about $200,000,000. At the midpoint of this guidance, adjusted EPS would be up about 10% on revenue growth of about 2%. We expect a total of approximately $225,000,000 of restructuring charges for the full year, and this is an increase of $25,000,000 versus prior guidance, as we plan to accelerate several actions in response to the current slow environment. We do expect stronger than normal earnings improvement in the second half, and I'll highlight the key reasons for that.

Global auto production is expected to improve slightly in the second half compared to the first half. We are expecting a modest pickup in networks and industrial solutions demand relative to the first half of the year, and slightly up versus the second half of last year, which was not very strong. We do expect SubCom revenues to return to $125,000,000 per quarter in the second half. We have won the awards, and now they need to go into force. As I mentioned, the key there is getting the funding, but we believe we're getting closer. Momentum in our consumer device business continues. We have a number of new products we're launching that will go into the market in the second half.

So, that's another key milestone for us in this business, contributing to the sales growth. And then, we're expecting a continuation of the slow but steady recovery in the industrial vehicle market. As I mentioned earlier, the orders in that market segment have been very strong over the last four to five weeks. And then last, but certainly not least, we expect to continue the margin improvement due to our lean programs and the accelerated cost improvement actions. So about half the revenue increase in the second half is seasonally related. Say, the other third is we're expecting stronger markets for automotive, commercial, aerospace, industrial. And then another third is we have some significant new product launches, particularly in our consumer and fiber businesses, network businesses.

I think the key point is, at the margin rate we're delivering now, we've continued to improve operating leverage. So please turn to Slide 15. Before we move to Q&A, I wanted to review the 3 scenarios I laid out for fiscal 2013 on the last call. These scenarios really summarize how we expect it to perform at different sales levels, which I think is important to understand. To recap, at the low-end scenario, revenue would be flat year-over-year, and we expect it to generate about 5% adjusted EPS growth as a result of productivity improvements and the benefit of share repurchases. The midpoint scenario assumed 3% sales growth with a modest economic pickup beginning in the second half, and adjusted EPS growth of approximately 10%.

At the high end of the range, a stronger recovery in the second half is assumed, with sales growth of 5% and EPS growth of 15%. What happened in the first three months of the year? Sales in the first quarter were slightly lower than expected. Margins were stronger due to the increasing impact of our productivity programs and cost and spending controls. Free cash flow continued to be very strong, and it was, in fact, stronger than anticipated. Order rates did improve through the quarter in the vast majority of our businesses.

So when we take that all in and all the data points in the macro world, these results and current order trends lead us to a view for the remainder of the year that anticipates revenue at the low to midpoint of prior guidance and adjusted EPS at the midpoint. Revenue levels remain tough to predict in this environment, but on the positive side, we've got off to a great start with our productivity and cost reduction initiatives, and we expect to carry this through the balance of the year. We expect another strong year of cash flow and expect to return over $1 billion in capital to our shareholders this year. As Bob mentioned earlier, we continue to expect $150,000,000-$250,000,000 of share repurchase per quarter in fiscal 2013.

In addition, our board has recommended a 19% increase in the dividend to $1 per year. This increase would be effective with the June quarter and is subject to shareholder approval at the March annual meeting. So again, I think the bottom line for us is our strong cash flow and improving operating leverage should enable us to deliver very attractive earnings growth, even at a low sales growth rate. So with that, let's open it up for questions.

Shawn Harrison (Senior Equity Research Analyst)

Of course, and ladies and gentlemen, on the phone lines, if you do wish to ask a question, please press Star, then One on your touchtone phone. You'll hear a tone indicating you've been placed in queue, and you may remove yourself from queue at any time by pressing the Pound key. If using a speakerphone, please pick up your handset before pressing the numbers. And once again, if there are any questions, please press Star then One at this time. Our first question today comes from the line of Amit Daryanani with RBC Capital Markets. Please go ahead.

Michael Wood (Equity Research Analyst)

Good morning, guys. Just a question, I guess, on the automotive segment. If you could maybe talk about, you know, the softness that you saw in the December quarter, specifically in EMEA, if this was more demand-driven, or do you think there's an inventory correction that's occurring over there that could persist over the next, you know, couple of quarters, especially related to, you know, dealer-registered vehicles, if you may? Maybe if you just talked about that part of the business and the inventory correction, that would be helpful.

Tom Lynch (Chairman and CEO)

Sure. I think in the automotive piece, it's more demand driven, Amit, to your point about the low new registration. That's offset a little bit by the fact that, you know, the high-end, half the cars there are being exported to other parts of the world, where in China and the U.S., where the economies are picking up again. We didn't see too much inventory. I think inventory in the auto chain, value chain, or supply chain is in good shape. We did see some inventory corrections the last couple of quarters in the industrial vehicle market, but now we're starting to see that turn around. So I'd say that's how I would summarize it.

Michael Wood (Equity Research Analyst)

Got it. And so the expectation would be that that segment or the automotive in general should improve as you go forward through fiscal 2013, right, on a revenue basis?

Tom Lynch (Chairman and CEO)

Yes.

Michael Wood (Equity Research Analyst)

Right. As a follow-up, if we just talk about the industrial segment, just touch on the margin declines you saw. I mean, it was fairly severe on a sequential and year-over-year basis. Maybe just talk about what happened there, and more importantly, you know, the path to go back to 15% margin in that segment. Is that gonna be more revenue-driven, or do you think some of these cost takeout initiatives you have could help out that segment, especially in the back half of fiscal 2013? Thank you.

Tom Lynch (Chairman and CEO)

Hey, to answer the second part of your question first, it'll be both revenue and cost, which the cost piece is well underway. The drop-off is in high-margin items. I mean, it's that business that's over 50% through the channel into that, into the industrial equipment portion of our industrial solutions segment. So that tends to be very high-margin. We are seeing signs that the channel is starting to replenish. We need to see a little more of that before we'll get good move from cautiously optimistic to bullish. But it has a, I guess, you could use the word mix to describe it.

It's just high-margin business that dropped off and then coupled with the solar business that was twice the size as it is today, a year ago, because of everything that went on with the shift to China and then the ultimate significant collapse of the business. But I'm pretty confident of our ability to drive the, the margins back up to near company average or company goal over the next four or five quarters.

Shawn Harrison (Senior Equity Research Analyst)

We do have a question from the line of Shawn Harrison with Longbow Research. Please go ahead.

Hi. I wanted to focus in on, I guess, the cost profile, both, you know, the savings generated this quarter from, you know, raw materials and efficiency gains and kind of what you have left there, and then also the accelerated restructuring program, the $225,000,000 this year. What does that mean for restructuring savings for fiscal 2013?

Tom Lynch (Chairman and CEO)

Shawn, I guess the second question, the $225 restructuring, we begin to get a little bit at the end of the year, but most of this doesn't start to hit until next year, given the nature of, you know, plant realignment and shutdown, things like that. So, yeah, for example, we've announced about half some already, which is where we spent the $100,000,000. Now we need to. Once you announce, you need to move equipment, transition it to the receiving plant, and that will typically take, you know, sometimes a year. So as we said last quarter, we didn't really expect to see too much benefit. Maybe a little. I mean, we're pushing and accelerating very hard, maybe get a little bit at the very tail end of the year.

Bob Hau (CFO)

Shawn, the other aspect, you heard Tom say that the restructuring charge for fiscal 2013, prior guidance was $200,000,000, now $225,000,000. So not only are we accelerating the actions we had already kind of laid out, but there's a slight increase in the restructuring charge and the actions we're taking. That will translate into about $85,000,000 worth of annual savings. We previously said we'd see $75,000,000 of annual savings as we exited 2014, so full year benefit in 2015. That $75,000,000 is now $85,000,000, so there is a higher return for the increased spending.

Shawn Harrison (Senior Equity Research Analyst)

In the raw material savings you saw this quarter, I mean, where do you think you've eked out as much as you can from that, or will we see more benefits as the year goes?

Tom Lynch (Chairman and CEO)

I think we'll see more benefit. That was a nice contribution to our gross margin. It's a program we call the War on Material. It's been driven hard for several years here, and it includes everything from upgrading the capability to the organization, to, you know, how we design products, to faster localizing of material sources. And over the last couple of quarters, all that heavy lifting really started to come into fruition. So I would expect to continue to see, you know, this level of productivity through the balance of the year. And it's one of the reasons why we're optimistic about the ability to improve margins over the balance of the year.

Shawn Harrison (Senior Equity Research Analyst)

And then just as a follow-up, you know, network solutions taking maybe a little more bearish view. If I exclude the subsea business coming back in the second half and, you know, the broadband project, what gives you confidence in that, the business bounces back over the next 12-18 months? I know you're taking more restructuring charges, but it, I just didn't get a good sense today that you have maybe a lot of confidence in that bouncing back.

Tom Lynch (Chairman and CEO)

I thought we'd have more confidence by now, but it's, it's not quite where I'd like to be, to your point, Shawn. We're seeing signs. It, it's, as you go, you need to go around the world. So in the emerging markets, there's still double-digit growth. Pockets of growth in Europe. I think, the U.S. finally had a little bit of growth in the first quarter in, in our, in our revenue, which says that some of the, investment is moving back into the wireline. Really, a lot of spending has been around expanding capacity on existing towers and, and then just deploying LTE, of which we don't participate that much in our networks business.

I think the next phase, which we thought would happen a little faster, I think is taking a little longer, which is pushing small base stations out in, you know, further near the, the home or the office, because they're not gonna be building that many, many more towers. And those base stations, there's gonna be a lot of fiber connectivity to that. And then we believe, you see what some of the carriers around the world are doing. They're upping the, you know, the bandwidth they're providing to the home, and it is a way to, raise the, raise the price. So we're the- we haven't changed our view on the underlying thesis of this business, which is you got to have the bandwidth, and over time, it's gonna continue to get...

That fiber is gonna continue to get closer to home, but it has taken longer than we thought. So, we think a little bit of a, you know, an uptick by late this year, but we're not counting on anything, you know, not a bounce. I wouldn't say it's a bounce. It's just sort of a gradual pickup. That's our current projection.

Shawn Harrison (Senior Equity Research Analyst)

We do have a question for the line of Sherri Scribner with Deutsche Bank. Please go ahead.

Michael Wood (Equity Research Analyst)

Hi, thank you. I just, I don't know if I missed it, but did you give the number of orders this quarter?

Tom Lynch (Chairman and CEO)

I think we did. We said it was our book-to-bill was 1.02 for the quarter, excluding SubCom.

Michael Wood (Equity Research Analyst)

But you didn't-

Tom Lynch (Chairman and CEO)

$3.1, $3.1 billion.

Michael Wood (Equity Research Analyst)

Okay. And then just looking at the order rates, it seems like everything is improving with the exception of networking. Just wanted to get a sense of, were you seeing improvements throughout the quarter, and do you think you'll see consistent improvements in orders as we move through the year in all the segments? Maybe a little more detail in the segment areas. Thanks.

Tom Lynch (Chairman and CEO)

Yeah, we, that is our current view, that starting with transportation, I mean, not big increases because it's running pretty, pretty strong right now, but a pickup. I think the industry is forecasting 1 million more cars, acute first half, second half, so, you know, that's a little lift in the business, first half, second half. We are seeing signs, talking to our big OEM customers in the industrial business and the distributors. We're seeing orders for distribution pick up. So I think once everybody got through sort of the first wave of January uncertainty in D.C., we did see orders pick up.

So four out of our last six weeks, if you take the two holiday weeks out, orders were pretty robust, which was more than in prior years at this time of the year, because this can be a pretty soft time, and often a time it's very hard to call. So then you go into the consumer business. We definitely have nice momentum, albeit we're still small in tablets and smartphones, but we have more designs than we did last year at this time. We're executing them well. So those orders are picking up, PC is going down, but I would expect consumer business will gradually ramp. The second half should be higher than the first half, because we have some significant new products we're launching there. And the balance of industrial energy expect to be steady.

It's been a little slow, particularly in Europe, but starting to see signs that that's loosening up a little bit, and that's a very seasonal business. So as we come out of the second quarter and go into third and fourth, our telecom and energy businesses pick up because they're outside businesses, so there is a typical kick to that. So there's nothing that's probably the biggest jump from first half to second half is SubCom, but we have all the awards. It's just those awards working through the funding. So and of course, that's the business where we can jump the most. So I think it's pretty balanced, with networks showing the lowest growth, I think we're not bearish, but we're conservative, I hope.

Shawn Harrison (Senior Equity Research Analyst)

We do have a question for the line of Steven Fox with Cross Research. Please go ahead.

Michael Wood (Equity Research Analyst)

Thank you. Good morning. Two questions. First of all, on the consumer segment, I believe you just did 9% margins in that segment, which is a nice recovery. Given, Tom, given all the product shifts that you mentioned for the next few quarters, what does that imply for the consumer margins going forward? And where could they go, maybe longer term? And then secondly, you mentioned one-third of the second half recovery would be around new products. I was wondering if we could get some key examples of what you're referring to there. Thanks.

Tom Lynch (Chairman and CEO)

Sure. We would expect a consumer had a nice pickup from, of course, nowhere to go, but up, you could say, from this time last year to 9%, and really well run, you know, to get there, launching new products, we mentioned before, new team. Our expectation is to pick up another point or two in the operating margin through the year. So, you know, the target is to be at the end of the year in double digits in this business. We believe when we model it, and it is, in many ways, the hardest to predict business because the cycles are the shortest. But we do have a nice infrastructure in Asia to support this business, so it's low-cost infrastructure. Most of our leadership team is there, so we're on the ground close to the customer.

We believe this can be, you know, low double digits, nice return on capital, nice earnings growth model. We would expect this business to grow, core organic growth to be higher than the other businesses. Part of that because of the share, and part of it, the nature of, you know, the growth of smartphones and tablets, et cetera. So I'd say the important thing for us in this business is to get double-digit margin by the end of the year.

Michael Wood (Equity Research Analyst)

And then just on the new products?

Tom Lynch (Chairman and CEO)

The second part of your question was new products?

Shawn Harrison (Senior Equity Research Analyst)

Yeah, just sort of examples of, of what you were referring to in terms of helping the second half.

Tom Lynch (Chairman and CEO)

You can imagine we can't get into too much. But look, our we're really focused on miniaturization in the connector space. So high speed, really high speed, high performing, high reliable cables, and then antennas, flexible antennas, so that they're design friendly for the device designer. So those are the three big things, and we have new products coming in all those. We've launched some new products in the first half as well, but we have another round of that coming in the second half that has some potentially higher revenue associated with it if we execute and the demand for the end products are there.

Michael Wood (Equity Research Analyst)

All right. That's very helpful. Thank you.

Tom Lynch (Chairman and CEO)

Sure.

Shawn Harrison (Senior Equity Research Analyst)

We do have a question from the line of Amitabh Passi with UBS. Please go ahead.

Michael Wood (Equity Research Analyst)

Hi, thank you. Bob, just a clarification. Looks like the implied EPS for the back half of the year is about $0.90 a quarter versus the $0.65 and $0.70 in the first half. You may have touched on this, just curious, you know, how do you see that ramp in the back half? And it seems like implied operating margins will be almost kind of in the mid-30s%.

Tom Lynch (Chairman and CEO)

Yeah, so you're correct about $0.90 per quarter in the back half, and that's really driven by a combination of the seasonal growth that we naturally see. So we typically see an outsized portion of our earnings in the second half of the year, given the sales growth that we see driven by seasonality, plus the new products that Tom talked about. The other benefit we have is in our cost reduction programs, whether it's our lean efforts with the TEOA, TE Operating Advantage, our war on material that we talked about earlier, getting both raw and component material costs down on a year-over-year basis, continue to accelerate that. And of course, the accelerated restructuring, as well as slight increase in restructuring, all benefit us as we enter the second half of the year.

Michael Wood (Equity Research Analyst)

Got it. And then just as a follow-up for you, Tom, you touched on network solutions. You talked about the potential small cell opportunity. We've also heard some, you know, some updates from AT&T, Deutsche Telekom. Just wondering, what kind of visibility do you have into any sort of potential builds with these two large operators? And any sense of timing, do you think they're more a twenty fourteen type event? Do you think you could see some benefit this year? Just, just some thoughts around at least some of the more publicly announced updates from some of the larger carriers.

Tom Lynch (Chairman and CEO)

Well, there's been definitely big announcements of total amounts of spending, and then you got it, the devil's in the details where it's gonna be spent.

Michael Wood (Equity Research Analyst)

Correct.

Tom Lynch (Chairman and CEO)

I think for us, we would expect a slight increase in the spending in the US, in our section of the network, and probably a little more than that in Germany. But it is a carrier by carrier. You really have to go carrier by carrier. I'd say in the greenfield, building fiber quickly, in the US, it went through a significant investment in the sort of 3-5 years ago, pushing for the traditional telcos, pushing, you know, fiber and video, on that fiber, close to the home or to the home, depending on the operator, and then a lull there. So now we see the pickup, and, you know, but the carriers in the US are talking about significantly increasing speeds.

I think that that's the best news for us because that push puts the pressure on everybody else. And as you get to 200 Mbps, 300 Mbps that people are talking about, and even in some of these experimental systems that are being built at 1 Gbps, you really got to bring fiber right to the home. So, I mean, we're very bullish. We've been off on the timing, and we're adjusting the cost structure accordingly, but we continue to be bullish that it only takes a couple of these operators to really drive it deep, because then they begin to deliver quite a different experience to the consumer and enable a lot different experiences. So, that typically, based on my history in the cable industry, that typically will lead to everybody getting more aggressive.

But all of our customers have to figure out their business model, and I think-

Michael Wood (Equity Research Analyst)

Are there any regulatory hurdles that you think need to be cleared, both in Germany and the U.S., for deployments to accelerate?

Tom Lynch (Chairman and CEO)

I don't think anything significant, no. Not that I'm aware of.

Michael Wood (Equity Research Analyst)

Okay. Thank you.

Tom Lynch (Chairman and CEO)

You're welcome.

Shawn Harrison (Senior Equity Research Analyst)

We do have a question from the line of Matt Sheerin with Stifel Nicolaus. Please go ahead.

Michael Wood (Equity Research Analyst)

Yes, thanks. Good morning. Just a question regarding the accelerated restructuring program. Could you be more specific about the areas? I know you talked about networking, industrial, consumer. Could you parse that out? And on the networking business, is that where you're taking the biggest cut? Because with the depressed revenue, even X sub C, trying to figure out what revenue runway you need to get to, to get back to double-digit operating margin.

Tom Lynch (Chairman and CEO)

As we laid out this last time, Matt, it hasn't changed that much. We've just found more. I'd say that's really the, you know, we're digging for every opportunity, and three months, three more months went by, and we identified another, you know, $25,000,000 investment with a pretty good payback. And it's going to be primarily in networks and consumer. I think it's fine-tuning in industrial. There's some difficult work there to get the footprint in order and rebalance. But fundamentally, those businesses are pretty healthy, and we're pretty confident as the revenue comes back, we have significant operating leverage.

But when you look at the margin levels of consumer and networks, we needed to take a lot of cost out, and, you know, we found it, and we, we think we can do it without really mortgaging the upside of revenue. So I think we're running, I believe, around 3.4 annual, somewhere in that, in that, for that segment. We probably need to get, let's say, into the three, or 3.2 rather. We're running about 3.2. We probably need to get to 3.4, 3.5, to get to the, to the double digits. I would expect at 3.6, we should be somewhere in the 12%-13% range. There's a lot of leverage in the biz.

It's high gross margin business in network, so and it'll be higher with the costs we're taking out and the synergies we continue to extract across all the businesses. One of the reasons we put those four businesses together, because they all basically are in the same industry, and in many cases, touching the same customer. So the goal was to become much more, you know, efficient than they were grouped in other segments.

Michael Wood (Equity Research Analyst)

Got it. And on the use of cash, you talked about the dividend and buybacks. Not much mention on acquisitions. I know in the last couple of quarters, you've talked about doing niche, sort of, tuck-in deals, nothing really big. Is that still part of the strategy? And any specific areas where you're looking to fill Deutsch?

Tom Lynch (Chairman and CEO)

We haven't, we really haven't changed our strategy. You know, for the-- if you could find the right opportunity at the right price, we, we would like to be bigger in energy and industrial. They're really good businesses. They play to our strength, highly engineered, high quality, reliability, got to last the life of the piece of equipment. I mean, that's what we do best. So, we have a number of opportunities that we're looking at, but there's nothing really even warm, I would say. And we've also, to ourselves, we want to make sure we fully capitalize on Deutsch. I feel very good about the integration on that. But we're careful, you know, let's get that under our belt and running well before we would do anything else. I mean, we're looking and, and knocking, though.

Michael Wood (Equity Research Analyst)

Okay, thank you.

Shawn Harrison (Senior Equity Research Analyst)

We do have a question from the line of Jim Suva with Citi. Please go ahead.

Michael Wood (Equity Research Analyst)

Thank you very much, and congratulations to you and your team there at TE Connectivity. I have two questions. The first one is on the networking. Can you talk to us a little bit more about, you know, your confidence in that? Like, are the carriers giving you roadmaps for these small base stations? Because it just seems like the whole LTE upgrade cycle so far, you guys are not positioned to capture that. So, you know, are you actually getting firm orders from that, or is that, you know, hypothetical, what you foresee happening? It just seems like it, this segment continues to disappoint, and so I'm just trying to get the disconnect about why it's not coming to fruition.

Tom Lynch (Chairman and CEO)

I think-

Michael Wood (Equity Research Analyst)

From the perspec-

Tom Lynch (Chairman and CEO)

... I wouldn't use the word hypothetical, Jim, but I would say it's, it's still at the architecture stage. And so there isn't really much. What's being deployed, that's called small base stations today, are these digital antenna systems. But that's not really what the carriers and the equipment providers are really thinking when they say small base stations. So small base stations are on the drawing board, in test, you know, pilots in the field, but it's not being deployed, I would say, yet.

Michael Wood (Equity Research Analyst)

What's the typical timeline for deployment of that?

Tom Lynch (Chairman and CEO)

Well, I think when it starts, it's gonna be a long, drawn-out deployment because you're talking about really taking these base stations, almost like cable amplifiers today. You know, you see for every so many houses, you have a green or brown box that has a cable amplifier in it. I mean, that's almost what a small base station is. It's getting something to repower the six, you know, boost the signal close to your house. Today, the only thing you really have are the towers, and they're running out of capacity with all the data that's going through them. And as you know, that it's not very easy to get a new tower built. But it'll be a long, I would expect, it to be a long deployment as small base stations get rolled out.

I mean, as I said, what we're selling right now, and we're seeing a little pickup, is more the traditional backhaul, more up the current. There's more fiber going up the current towers and antennas. They're switching off slowly from coax. So there's changes in the network that way, that way, that we're benefiting from. But, I mean, the big, the big, the big one for us is when fiber to the home continues to pick up, and it is at different pockets around the world. It's just not broadly deployed and small base stations get deployed, that's when we would expect to see a pop, a nice pop in our demand.

Michael Wood (Equity Research Analyst)

Great. And then my follow-up question is, on the operating margin, I believe you guys had a goal of 15%, and there were certain revenue metrics of when you thought you'd hit that, as well as the timeline of hitting that 15%. Can you just refresh my memory on that?

Tom Lynch (Chairman and CEO)

Sure, Jim. I think right now we feel in the $15,000,000,000 revenue range. It's down a little bit from what we've said. That's part of the, you know, the goal of the restructuring, to accelerate that. And if we can do it faster, we will, without upsetting the apple cart. But think about it as, you know, 15% in the $15,000,000,000 range. Six months ago, we were talking about $15,000,000,000-$16,000,000,000 range, so we're pulling that in.

Michael Wood (Equity Research Analyst)

And then the timeline?

Tom Lynch (Chairman and CEO)

Well, if you take our forecast, let's see, it would probably be sometime late next year, you'd start getting at a $15,000,000 run rate.

Michael Wood (Equity Research Analyst)

Thank you, and congratulations to you, you and your team at TE Connectivity.

Tom Lynch (Chairman and CEO)

Thank you.

Shawn Harrison (Senior Equity Research Analyst)

We do have a question for the line of Anthony Kure with KeyBanc. Please go ahead.

Michael Wood (Equity Research Analyst)

Thanks. Good morning, guys. Just a couple quick questions. First, on the book-to-bill, as it relates to the different segments, specifically on the consumer side, could you just speak to, you know, given the shorter cycle nature of consumer products, does the first quarter book-to-bill reflect second quarter revenue only? Or does the order book here have a longer view than the shorter cycle nature of consumer products?

Tom Lynch (Chairman and CEO)

I would say, Anthony, generally, it would reflect it's a good indicator of the quarter to come. We did see, even in Q1, and part of the reason we were a little down on sales, 'cause with this kind of book-to-bill, we would have expected to be in the sales range for Q1. So what we did see was a little more scheduling out of orders, and it was almost a phenomena of, look, I wanna get in line, you know, it's the customer saying, "I wanna get in line for the order, but I don't really necessarily wanna take it in early January," depending, you know, could something, the fiscal cliff, et cetera. I think just that extra uncertainty and so trying to protect themselves. So that would explain to me a little bit of the book-to-bill.

So the encouraging thing is, in January, we've seen the book-to-bill get even stronger. So I, I think if it would've turned down, that would've said, "Oh, that was just a, you know, a pushing out of orders. We're really at a different order rate, and we're not seeing that much for the second quarter." So consumer itself, I would say, generally is indicative of the next quarter, generally.

Michael Wood (Equity Research Analyst)

Okay, so it doesn't reflect then the new products that are coming online in the second half?

Tom Lynch (Chairman and CEO)

Yeah, not the new products in the second half, no. There's no orders in for that.

Michael Wood (Equity Research Analyst)

Okay. And then my follow-up is just on a little bit more on the consumer. You mentioned the, you know, the obviously, the, the puts and takes within the business itself, PC being weaker. Can you just, remind us what the weighting is, PC versus smartphone and tablets for that business?

Tom Lynch (Chairman and CEO)

Let's take that out real quick here.

Keith Kohlstrom (Head of Investor Relations)

PC is about 35% of the business. Mobile and tablet is about 45%, and then the remainder would be business equipment, those types of things.

Michael Wood (Equity Research Analyst)

And-

Tom Lynch (Chairman and CEO)

In business equipment, it's everything from cameras to copiers to Nintendo and things like that.

Keith Kohlstrom (Head of Investor Relations)

Those would be the percentages for the Consumer Devices business within the Consumer Solutions segment.

Michael Wood (Equity Research Analyst)

Okay, great. Thank you.

Tom Lynch (Chairman and CEO)

You're welcome.

Shawn Harrison (Senior Equity Research Analyst)

We do have a question from the line of Mike Wood with Macquarie. Please go ahead.

Michael Wood (Equity Research Analyst)

Hi, good morning.

Tom Lynch (Chairman and CEO)

Good morning.

Michael Wood (Equity Research Analyst)

The outperformance to global vehicle production that you're expecting for 2013, can you provide some color on your visibility to that and the main drivers, whether it's luxury vehicle outperformance or content growth?

Tom Lynch (Chairman and CEO)

So make sure I understand your question, Mike. Our, you mean, our outperformance to vehicles, you mean us growing faster than?

Michael Wood (Equity Research Analyst)

Global auto production, correct.

Tom Lynch (Chairman and CEO)

Yeah. Well, I think there's a couple things there. There is the electronic content. So if production's growing 1% or 2%, you're gonna have anywhere, depending on the mix of cars in the world, anywhere from 3%-5% of content, then you're gonna have a couple% of price erosion. And it is different region by region. So if production's going up, you would expect our revenue to go up a little more than the production numbers. And then I think, you know, we have had strong performance, continuing to gain share in places like China and the US, where we really invested in both places in the downturn. And because of the fragile nature of a lot of supply chain at those times, we're able to garner a little more business. So that's why we've been tracking...

Those three things have been why we're tracking slightly ahead.

Michael Wood (Equity Research Analyst)

Okay, and does the $125,000,000 SubCom quarterly sales that you're expecting in the second half, is that more of a chunky drawdown of some of this shadow pipeline, or is that more of a sustainable pace that we should expect heading into your next fiscal year?

Tom Lynch (Chairman and CEO)

Right now, we would say that's more of a sustainable pace. In the past, when we've seen this kind of pipeline, it's usually a signal that we're going back into an upcycle, but we need to see that start to happen. So I think as some of these projects break loose in the next, you know, two quarters, that's gonna tell us a lot of where we, you know, is this cycle really starting to recover, or is it gonna stay on the bottom? I mean, I think we have enough signs that we're starting to see recovery, and then what will the slope be? You know, will we go back into another boom, or we go into a more steady build cycle? And that's too early to call.

Michael Wood (Equity Research Analyst)

Got it. Thank you.

Tom Lynch (Chairman and CEO)

Welcome.

Shawn Harrison (Senior Equity Research Analyst)

We do have no further questions in queue at this time. Please continue.

Tom Lynch (Chairman and CEO)

Thanks, everybody. We appreciate the questions, as always, and have a good week.

Shawn Harrison (Senior Equity Research Analyst)

Ladies and gentlemen, that does conclude your conference call today. Thank you for your participation and for using the AT&T Executive