TE Connectivity - Q2 2014

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by. Welcome to the TE Connectivity Second Quarter Earnings Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. If you should require assistance during the call, please press star, then zero. As a reminder, this conference is being recorded. I'd now like to turn the conference over to Keith Kolstrom, Vice President of Investor Relations. Please go ahead.

Keith Kolstrom (VP of Investor Relations)

Good morning, and thank you for joining our conference call to discuss TE Connectivity's second quarter fiscal 2014 results. With me today are Chairman and CEO, Tom Lynch, and CFO, Bob Hau. During the course of this call, we will be providing certain forward-looking information, and we ask you to review the forward-looking cautionary statements included in today's press release. In addition, we will use certain non-GAAP measures in our discussion this morning. We ask you to review the sections of our press release and the accompanying slide presentation that address the use of these items.

The press release and related tables, along with the slide presentation, can be found on the Investor Relations portion of our website at te.com. Finally, I would like to remind everyone to please try to limit themselves to one follow-up question to make sure we're able to cover all questions during the allotted time.Now, let me turn the call over to Tom for some opening comments.

Tom Lynch (Chairman and CEO)

Thanks, Keith, and good morning, everyone. This was another good quarter for TE Connectivity on many fronts. The majority of the markets we serve are exhibiting solid growth trends, and this growth is fairly broad-based across most of the regions of the world. There are still some uncertain spots, but overall, I am encouraged by the trends. It's good to see other markets in addition to automotive picking up some steam. We're very well positioned in about 90% of the markets we serve, and virtually all of them have attractive underlying drivers, which require more of our highly engineered connectivity products.

The concept of the Internet of Things is real, and we are seeing it across almost all of our customers. I feel we are in an excellent position to capitalize on these trends because of the range of our technology and the extensive resources we have close to the customer around the globe. Our operational performance also continues to improve. This quarter, we delivered adjusted operating margin of 15.5%, up 190 basis points from last year, and we're on track to deliver 15%+ adjusted margins for the full year.

Strong productivity, driven by our TEOA program, and this is our business system that encompasses Lean, Six Sigma, and engineering design productivity, coupled with a much more balanced footprint, has resulted in very good operating leverage in most of our businesses. We're also benefiting from our strategic focus of building our harsh environment product portfolio. The company continues to generate strong cash flow with 6 straight years of free cash flow yield at or above 10% of revenue.

This gives us the flexibility to execute important strategic acquisitions such as SEACON, which I'll discuss a bit more further on, while still returning 2/3 of our cash flow to shareholders over time. Our philosophy is a balanced approach, which emphasizes organic investment, strategic acquisitions, and returning cash to shareholders through consistent dividend growth and share repurchase. Overall, the world feels more solid economically than it has in a while, and we are well positioned to capitalize on this. Now, let's go to the slides.

Please turn to slide three. Revenues in the second quarter were in line with expectation, and adjusted earnings per share was above our guidance range. We continued to see improvement in many of our end markets, and the fall-through to operating income on the year-over-year sales increases was strong. Here are some highlights of the quarter. Organically, sales were up 6% overall and up 7% excluding SubCom. The automotive, aerospace, oil and gas, industrial, and telecom businesses drove this growth.

This more than offset expected declines in the consumer devices and datacom businesses and continued project delays in our SubCom business. Adjusted earnings per share of $0.95 was up 25% versus last year and $0.05 better than the midpoint of our guidance. As I mentioned earlier, adjusted operating margins were 15.5%, up 190 basis points over the prior year, and we remain on track to exceed 15% for the full year as we continue to deliver strong operational performance across the majority of our businesses.

Free cash flow was $273 million, and we returned $281 million to shareholders in dividends and share repurchases. The annual dividend was increased 16% to $1.16 per share by our shareholders last month at our annual general meeting. This increase will be effective with the June dividend payment. This represents the fourth consecutive year of double-digit dividend increases. Our orders increased 4% organically in the quarter, and our book-to-bill was 1.03, excluding SubCom. Orders growth was broad-based, with growth in all regions and in line with our expectations.

For the full year, we are raising the midpoint of our adjusted EPS guidance by $0.03-$3.78. This is an increase of $0.17 versus our prior year performance. In the second half, we expect solid growth in the transportation market and continued steady improvement in most of our industrial markets. This, coupled with our strong Q2 performance, will more than offset continued delays in SubCom projects. The $3.78 compares to our original guidance six months ago of $3.65, a 13% increase. We entered this fiscal year expecting to deliver strong results and are on track to beat those original expectations.

Please turn to slide four. We announced the planned acquisition of the SEACON Group on April 2nd. This transaction is another step in strengthening our leadership in higher growth, harsh environment applications. SEACON has a 50-year history of supplying connectivity solutions for underwater applications, one of the harshest environments where superior quality and performance are required. Their leading portfolio of products and technologies is a very complementary fit with our existing solutions for the underwater oil and gas markets.

We currently have a nice business of about $150 million in revenue that has had solid double-digit growth over the last 5 years. The addition of SEACON will add over $115 million of revenue and bring our total business to $250 million. We'll also double our served market to over $1 billion. We expect to continue to generate double-digit revenue growth in this market going forward, as this acquisition positions us with a leading product offering. I first had the opportunity to meet the owners of SEACON several years ago. They have built a great business and an outstanding team.

The acquisition is expected to be accretive in year one, excluding one-time costs, and will be reported in the Aerospace, Defense, Oil and Gas business within our Industrial Solutions segment. We're very excited to welcome the SEACON group to TE. As we mentioned in our press release, we expect the acquisition to be finalized in the current fiscal year. Terrence Curtin, who is the President of our Industrial Solutions segment, is here and available for questions on this subject in the Q&A section. I'll now provide some detail by business with it, within each segment in the next four slides.

Unless I indicate otherwise, all changes are on an organic basis, which excludes the effect of currencies, acquisitions, and divestitures. Please turn to slide five. Transportation had another great quarter. Sales of $1.57 billion were up 13% over the prior year, and orders were up 7%, with a book-to-bill of 1.0. Global auto demand continues to be solid, and auto production in Europe was up both sequentially and versus the prior year, driven by exports and, importantly, improving local demand. Global vehicle production in the quarter was about 21.5 million units, up 5% from last year.

Revenue from the industrial transportation business was again very strong in the quarter due to overall strength in the truck market and the impact of emission standard changes in Europe and China. Just a comment, our TE and DEUTSCH Industrial Transportation businesses are now fully integrated and performing very, very well. Transportation revenues grew double digits in all regions this quarter. Europe was up 12%, as I mentioned earlier, due to strong exports and improvement in local demand. In Europe, new car registrations were up in the March quarter.

In the Americas, revenues were up 10% due to continued solid demand and share gains. Asia revenues were up 18%, with a 34% increase in our business in China and 12% in Japan. We're the leader in China and continue to grow faster than the market. We continue to invest aggressively in talent and capacity there to further strengthen this position. Our margin improvement was due to a combination of favorable mix with heavy trucks in the industrial transportation market, the operating leverage that came with our volume increases and productivity improvements driven by our TEOA program.

As I mentioned last quarter, we expect revenue growth of mid to high single digits in the second half, as we do expect some moderation in the year-over-year auto production growth rates, which is typical. We expect adjusted margins to remain at or above the 20% level. Please turn to page six. Market demand in the Industrial Solutions segment was in line with our expectations in the second quarter. Revenues were up 4%, and orders were up 2% versus the prior year.

We are seeing a continued recovery in the industrial equipment business, with revenues up 8%, driven by demand in the factory automation and high-speed rail markets. The commercial aerospace and oil and gas markets were up 5% and continue to have strong demand. We expect this to continue for the balance of the year. As expected, our energy business was down slightly in the quarter as demand softened, particularly with the emerging market customers in Europe.

Adjusted operating margins continued to improve and were up 70 basis points versus the prior year as a result of the increased volumes, the benefits of accelerated restructuring, and productivity increases. Looking forward, we expect another good quarter in Q3, with sales up mid-single digits versus the prior year and continued margin improvement. Please turn to page seven. Sales in the Networks segment were down about 1% versus the prior year.

This was mostly in line with our guidance, except for further weakness in the SubCom business caused by additional project delays. Excluding SubCom, sales were up 2% organically. The Telecom Networks business grew 6% in the quarter, driven by increased investment in fiber optic networks, particularly in Europe. The enterprise business was up 5% due primarily to strength in the Americas. Our Datacom business was down 7%, in line with our expectations. The SubCom business is very slow, as the timing of awarded projects coming into force continues to delay.

We now project second half revenue of $150 million, with full year expectations down about $100 million from our prior guidance and from prior year. Due to these delays in the current quarter, we are anticipating a loss in SubCom in the third quarter. On a positive note, the AAE-1 project, which was announced yesterday, and this is a major project that connects Asia with Europe, worth more than $500 million, came into force last week, and we expect to begin the project late in the quarter. When we say came into force, that means we've got a sizable down payment.

This has been a very tough year in the SubCom market, but we are very well positioned with our wins over the last two years, and, and I remain confident that demand for bandwidth will drive another build cycle. Adjusted operating margins in the segment were down slightly versus the prior year, driven by the sales declines in SubCom and Datacom. We do expect seasonal second half pickup in the Telecom and Datacom businesses. Overall, segment revenue should be up about 10% versus the first half.

So to, to digest the networks business, the Telecom, Wireless, and Enterprise businesses, which comprise about $2 billion annual revenue, are growing again this year, after a couple of years of decline, and margins for the year will be double digits. SubCom is, we believe, at the very bottom now, and the Datacom business is starting to level out. And on a positive note there, our investments in high-speed solutions are starting to take hold. Please turn to slide eight. Revenue in our Consumer Solutions business was down 3% versus the prior year.

This was in line with our expectations, as lower customer demand in the consumer devices business more than offset growth of 5% in the appliances business. We continue to see improving trends in the appliance market, where we have the leading market share and very attractive operating margins. Adjusted operating margins in the segment were similar to the prior year, despite the revenue decline due to restructuring savings and metal tailwinds. In Q3, we expect revenues to be up slightly versus the prior year. Now I'll turn it over to Bob to cover the financials in more detail.

Bob Hau (CFO)

Thanks, Tom, and good morning, everyone. Let me discuss earnings, which start on slide nine. Adjusted operating income was $532 million, up 20% versus the prior year. GAAP operating income was $510 million and included $21 million of restructuring charges, 35% of which was in the network segment, and $1 million of acquisition-related charges in the quarter. We continue to anticipate full-year restructuring charges of approximately $50 million for the full year. Adjusted operating margin was 15.5%, up 180 basis points from Q2 last year.

The improvement versus the prior year is driven by the 6% organic sales growth, productivity from TEOA, cost savings from restructuring actions taken in the last couple of years, and favorable metal costs. Adjusted EPS were $0.95, and GAAP EPS were $0.87 for the quarter. GAAP EPS included $0.03 of restructuring and other charges and $0.05 of charges related to legacy shared tax liabilities. These tax charges are consistent with our overall expectations of settlement of these pre-separation tax issues.

Turning to slide 10, our gross margin in the quarter was 34.2%. This is a 200 basis point increase versus the prior year due to volume increases, increased productivity from our TEOA lean programs, and a cost savings from restructuring and metals. Total OpEx spending was $641 million in the quarter, which was up 5% versus the prior year. The increase resulted primarily from increased investments in sales and marketing and increased variable compensation costs, partially offset by cost savings attributed to restructuring actions.

On the right side of the slide, net interest expense was $26 million in the quarter, and I expect $26-$27 million of expense in both the third and fourth quarters going forward. Adjusted other income, which primarily relates to our tax sharing agreement, was $2 million. In the third quarter, I expect other income of about $8 million. The adjusted effective tax rate was 21.7%, which was lower than expected. This is partially offset by the lower other income and gave us a net benefit of about $0.02 to earnings per share.

Overall, the adjusted tax rate for the first half of the year was 23.8%, and I expect the adjusted tax rate to be in the 24% range through the remainder of the fiscal year. Turning to slide 11, I'll discuss our balance sheet and free cash flow. Cash from continuing operations was $453 million, and our free cash flow in Q2 was $273 million. Net capital spending during the quarter was $159 million, or 4.6% of sales. I continue to expect capital spending rate to be approximately 4%-5% of sales for the full year.

Receivables days outstanding were 63 days, and inventory days on hand were 73 days, each up 2 days versus the prior year. Inventory levels were slightly elevated, as we expect increased revenues in a number of our businesses in the second half. Now let me discuss sources and uses of cash outside of free cash flow, shown on the right side of the slide. ... We began and ended the quarter with $1.4 billion of cash. During the quarter, we returned a total of $281 million to shareholders. We paid dividends of $102 million, and repurchased about 3.1 million shares for $179 million. As Tom mentioned earlier, we expect the SEACON acquisition of $490 million to close in the current fiscal year. Outstanding debt remained at $3 billion at the end of the quarter. Now I'll turn it back to Tom.

Tom Lynch (Chairman and CEO)

Thanks, Bob. Please turn to slide 12, and I'll cover our outlook. Based on the trends I discussed earlier, we expect Q3 revenue of $3.54 billion-$3.64 billion, up 3%-6%. The project delays in SubCom are negatively impacting our growth rates by approximately 1%. We expect adjusted EPS of $0.96-$1.00, which is an increase of 9%-14% over the prior year. In Q3, we expect continued strong results from both the Transportation and Industrial segments. The Consumer segment is expected to be up slightly, and Networks, excluding SubCom, is expected to be about flat versus the prior year.

Please turn to slide 13. For the full year, we expect revenue of $13.8 billion-$14.1 billion, up 4%-6% versus the prior year. We expect adjusted EPS of $3.72-$3.84, an increase of 15%-19%. Relative to prior guidance, the story is Transportation is stronger and SubCom is weaker. We expect to have another, a very, another strong year of cash flow, and we're using that cash in a manner that is consistent with the plan we have discussed over the last several years.

Namely, investing to grow the business organically with investments in, manufacturing capabilities and capacity in emerging markets, as well as increased investments in R&D and sales and marketing. Strategic acquisitions like the SEACON Group, that accelerate growth in attractive markets, and returning cash to shareholders through dividends and share repurchase. Just to close, I'm encouraged by the positive signs in most of our markets we serve and feel very good about our overall execution.

I really believe we're well positioned for future growth and expect to deliver strong performance for the remainder of the fiscal year and beyond. So now, let's open it up for questions. Operator, can you open it up for questions, please?

Operator (participant)

Thank you. Ladies and gentlemen, if you wish to ask a question, press star, then one on your touchtone phone. If you're using a speakerphone, please pick up the handset before pressing the numbers. Once again, if you do have a question, press star one at this time. Our first question goes to the line of Mark Delaney from Goldman Sachs. Please go ahead.

Mark Delaney (Managing Director and Senior Equity Analyst)

Thanks very much for taking the question. Tom, I was hoping first you could elaborate a little bit more on the outlook in the SubCom business. I understand it's weaker in the near term, but you also mentioned some, a new award coming into force. And maybe you can help us understand, with the order pipeline, what that implies for revenue potential in the subsea business as you start to think into fiscal 2015.

Tom Lynch (Chairman and CEO)

Thanks, Mark. As you know, we're not really gonna talk about fiscal 2015 until the end of the year. But in the SubCom business, there's really three components of the business. The biggest part is building the communication systems, and that's the piece that's really down right now because of the project pushouts. The smaller pieces are maintenance and our oil and gas business, which is fairly steady.

And this AAE-1 award, which we were awarded many months ago, but took a while to come into force, is good news, but it's happening a lot later than we thought, which means we're underutilizing our assets right now. As that comes into force late this quarter, early next quarter, we believe that'll start to ramp.There's several other projects that we've been awarded that are close to coming into force, but they're also been taking longer. So I think once we get two to three projects to complement sort of the ongoing business, then we'll start to, to ride up the, the upswing of the cycle.

Mark Delaney (Managing Director and Senior Equity Analyst)

That makes sense. Thank you for that. And then for my follow-up question, I'm hoping we can get a little bit more detail on the recent acquisition or the proposed acquisition of SEACON, and what are the expectations there in terms of margins? And if you plan to do any restructuring in that business, or if it's already having the cost structure that you'd expect it to have longer term?

Tom Lynch (Chairman and CEO)

I'll say a few things, then I'll ask Terrence to elaborate. I'd say, though, this isn't really a cost synergy play, this is an expanded market play. So we're really doubling the size of our served market and bringing a full system now to the customer. So that's the attractive part, and it's higher than company margins for sure, because of the very highly engineered and extreme harsh environment nature of the business. Terrence, you want to elaborate on that?

Speaker 15

Sure, Tom. Hello, everyone. When you look at SEACON, I think a couple of things, maybe to paint a picture of where we play today in the underwater space from an interconnect perspective and what SEACON brings to us. First off, when you look at our position today, we're exposed to about a $400 million market, which is very focused on high-performance cable, as well as connections around the power element. SEACON very nicely adds about $115 million of revenue. It is extremely profitable, about 30%+ EBITDA.

And when you look at it, really opens up our market from $400 million to over $1 billion, as Tom said. ... So what they bring is really along the optical and fiber side, connections that happen underwater, they're very wet mateable. And when we look at this market overall, we've been able to basically grow our small position from $70 million, over $150 million today. What it really does is give us a rounded out portfolio in some of the harshest environments.

And we believe with the combined portfolio, with the trends we see in underwater and oil and gas, we'll be able to continue to grow the combined, well north of double-digit growth going forward. So happy with the acquisition and what it brings. To Tom's point, it is very much around growth, and really making sure we capitalize on this market. That is a very fast-growing market and one of the fastest in the industrial space, from a segment perspective.

Mark Delaney (Managing Director and Senior Equity Analyst)

Thank you very much.

Operator (participant)

Thank you. Next, we'll go to line of Wamsi Mohan from Bank of America Merrill Lynch. Please go ahead.

Wamsi Mohan (Managing Director and Senior Equity Research Analyst)

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

Tom Lynch (Chairman and CEO)

Sure. Thanks, Wamsi. In Datacom, we did that last year, and it, you know, we're coming to the end of the compare, but we were in, for a long time, the magnetics business, basically coils that are used to help set frequencies in these products, really a commodity product, that had a number of competitors. So it just didn't fit the highly engineered, you know, kind of criteria that we have for our business. You take that out, the business is down single digits. Some of that is market, some of that is clearly, you know, we're kind of a mid-tier player in the current 15 gigabit speed. So, but that's pretty much behind us, the exit of product lines in that business.

Wamsi Mohan (Managing Director and Senior Equity Research Analyst)

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

Tom Lynch (Chairman and CEO)

Yeah, I'd say just generally commenting on the comments, the telecom enterprise and wireless piece, which we would think together as our broadband business, which is about a $2 billion annual business, margins trended up in the quarter, and they're trending up for the year. That business, as I said, was down 4% last year. It's up 4% this year, and that's two-thirds of the segment. In Datacom, margins are still down. That's really two components.

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

Wamsi Mohan (Managing Director and Senior Equity Research Analyst)

Got it. Thanks a lot.

Tom Lynch (Chairman and CEO)

You're welcome.

Operator (participant)

Thank you. Next, we'll go to the line of Mike Wood from Macquarie. Please go ahead.

Mike Wood (Associate Director)

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

Tom Lynch (Chairman and CEO)

Yeah, oh, you, you're talking about the production growth in Europe?

Mike Wood (Associate Director)

Yes.

Tom Lynch (Chairman and CEO)

Yeah, that's, I mean, that's what the industry is projecting right now, and it's corroborated by what our customers are guiding us on to produce relative to local production. But remember, we've consistently grown in Europe as well as sort of the higher-end vehicle makers there, because so much of their product is exported. I think what's really positive about this is there's absolutely overall growth in Europe locally. So that says that the economy's, you know, it's not robust by any stretch, but it's improving, and that's broadening the base of car sales over there, whereas we've really benefited up until the last two quarters from the export market, which is a high-content market. But this is putting a broader baseline.

Mike Wood (Associate Director)

Okay. And can you also comment on, there was a large telco carrier in the U.S., just re-announced plans to roll out fiber in the U.S. in a number of cities. What trends just you're seeing overall in terms of the fiber deployment and whether or not you're seeing any pricing pressure in that segment as those carriers increase CapEx in that area?

Tom Lynch (Chairman and CEO)

Mike, it's really a carrier by carrier thing around the world. So that particular carrier you're talking about, well, we do well with all the carriers in the U.S., and we're benefiting from that. I don't, you know, a little more pricing pressure than normal, which is with the fiber volume up, this is the second year in a row that the fiber portion of the network, our revenue is up double digits.

And one interesting thing that's happening in that market is the copper piece is finally getting to a small enough piece where the decline in copper isn't directly offsetting fiber, and that's why we're starting to see the growth, because carriers are investing in the fiber portion of the business. And that's that 4% I talked about, the 4%-5% we expect to grow this year, that's closer to high single digits in fiber... So we are definitely seeing, there's a lot of positive trends, I would say.

New players announcing they're gonna build fiber networks, net neutrality kind of wearing down in the U.S. Of course, just the tremendous requirement for more bandwidth. So the trends look better right now, feel better, are better, I would say, those underlying trends than they have been in a long time as drivers for our part of the business. So we're optimistic, but we need to see it turn into a higher revenue growth rate, for sure.

Mike Wood (Associate Director)

Thank you.

Operator (participant)

Thank you. Now we'll go to the line of Amit Daryanani from RBC Capital Markets. Please go ahead.

Amit Daryanani (Senior Equity Analyst and Managing Director)

Perfect. Thanks a lot. Good morning, guys. Two questions from me. One, just on capital allocation. Could you just touch on your capital allocation thought process as you get through, you know, the back end of the year, given the fact you, you have to have a cash out there, $490 million for CCON, does that change the buyback process on a go-forward basis at all?

Bob Hau (CFO)

Yeah. Thanks, Amit. It's Bob. You know, overall, as you know, our capital strategy is broadly set around continuing strong free cash flow, which we anticipate will approximate net income out into the future. That allows us to fund the capital requirements of the business in order of priority, and we'll continue to fund organically. That's capital investments as well as R&D, that we spend 4%-5% of sales in capital. We spend about 5% in R&D, and we anticipate that continuing out into the future. After the organic investments, we're certainly looking for value-creating strategic acquisitions.

And then long term, over a period of time, we expect 2/3 of our cash to go back to shareholders through dividends, which we've been increasing as earnings increase, as Tom pointed out, in the upfront comments, 4 years in a row of double-digit increases, and most recently last month, a 16% increase, for the annual dividend, and we also do share buyback. And the SEACON acquisition perfectly aligned with that strategy. It's a $549 million of cash outflow. We'll pay with cash on the balance sheet.

Amit Daryanani (Senior Equity Analyst and Managing Director)

Got it. And then I guess, you know, Tom, I was wondering if you could maybe spend some time just talking about how do you think about divestitures broadly on a go-forward basis, or when to de-emphasize parts of your business? You know, I recall when you guys were actually spun out of Tyco, divestiture was actually a very big part of the story and how you were able to improve margins. I'm curious, as you look at your portfolio, especially the networking piece of your business or parts of it, how do you evaluate divestitures on a go-forward basis?

Tom Lynch (Chairman and CEO)

Well, a couple ways, Amit. I think first and foremost, when we came out and looked at the portfolio and shored up the strategy around connectivity, it had to meet a couple criteria, right? It had to be related to the strengths we had. So we weren't interested in an end of, you know, in the most part, a business that had no relation to the rest of the businesses, and we couldn't, we couldn't leverage our strengths, so that's why we did quite a bit.

I'd say the portfolio we have now is all related to connectivity, and when you think of the Internet of Things, there's the network that enables that, and there's everything that's connected to it, and we're right in the middle of both of those. So we like that position very much. Networks has been a slow business, for sure, the last couple of years, but we don't see- we're still-- I'm still very bullish on the underlying dynamics, all the things I mentioned on the last question, that say it's gonna drive it.

So if you look at the telecom enterprise wireless, you've got to put fiber more into the network, whether it's, and even if you don't believe in fiber to the home, high bandwidth to the home with a, you know, a small cell network requires a lot more fiber than you have today. G.fast, you know, what's coming as the next generation of V, call it very, very, very fast DSL in the next couple of years, needs to be much closer to the home, which needs to have a fiber connection to offload it.

And then as you just get LTE all over the place, you need a much more robust fiber backhaul to take advantage of it. So when we look at all those qualities, we say there's gonna be investment. We're starting to see signs of it picking up. We're seeing a much more broad base of that around the world. I think so we haven't changed our fundamental strategic view of the business, we haven't changed how we see it fitting in the portfolio.

Amit Daryanani (Senior Equity Analyst and Managing Director)

Got it. I guess, Tom, I think initially you made a comment saying you guys are very well positioned in about 90% of the markets you serve. Maybe I'll just hear, what are the 10% you think you're not well positioned in, and is that the divestiture potential for you guys?

Tom Lynch (Chairman and CEO)

Well, those two are consumer devices, so that's about $700 million of revenue, where we're, you know, we're, we're not a lead player there, and we don't have the best sockets. But that's such a. It's a core business to us. I mean, it's, we do everything there, we do every place else, so it's same capital, same material, et cetera. And I'd say datacom. But in datacom, we have tremendous momentum around the next generation of high speed, with the product, the product's in the market, the product's been selected by a variety of customers.

Now, the transition from the current speeds that are out there in data centers and in the wireless network to higher speeds takes time. But I'm really excited about there is the decisions we made four or five years to develop the high-speed era. They have some proof points now. I'd say both of those businesses are core connector businesses, right? They are part of the $10.5 billion of which you'd refer to as the connector business. And, you know, that business from end to end, some businesses are stronger than others, but overall, an incredibly strong business.

Amit Daryanani (Senior Equity Analyst and Managing Director)

Perfect. Thanks a lot.

Tom Lynch (Chairman and CEO)

Welcome.

Operator (participant)

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

Matt Sheerin (Managing Director and Senior Equity Research Analyst)

Yes, thanks, and good morning. Just a couple of questions for me. On the industrial solutions business, you had nice year-over-year improvement in operating margin. As you look forward through the rest of the fiscal year, do you think you can get those margins to the company average around 15%? And is that coming mostly from leverage on volume, or is there more restructuring benefits from that?

Tom Lynch (Chairman and CEO)

I'd say it's a combination of things. You know, clearly, the most important thing is volume. But we feel, as I mentioned in my earlier comments, we feel good about the momentum and the order rates we've seen for the last three quarters, continuing into this quarter, support continuing revenue growth, that when we're in that kind of 4%-6% revenue growth, that business has very nice operating leverage with the improvements over the last couple of years.

So yeah, I mean, we expect the margin to continue to march up, and I think as we said in Investor Day, we see that as a business that, over the next couple of years is well over the 15% company average, you know, that we have today. Very bullish on that business, both from a growth aspect and the markets we play in and the products we have, as well as the improvements in operating leverage that'll deliver higher margins.

Matt Sheerin (Managing Director and Senior Equity Research Analyst)

Okay, thanks. And Bob, you mentioned in your commentary about metals, lower metals costs having a benefit on your gross margin. Can you help quantify that either year-over-year or sequentially? And how does that impact your model going forward?

Bob Hau (CFO)

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

Matt Sheerin (Managing Director and Senior Equity Research Analyst)

You're not seeing any impact on pricing as customers see the benefits of those, that your benefits, where they're asking for lower pricing and pass through?

Tom Lynch (Chairman and CEO)

Hey, Matt, this is Tom. I would say price erosion's up a little bit, so it's hard to, you can't completely look at those two disconnected. It's, you know, the business doesn't work with kind of across-the-board increases or decreases. It tends to be negotiation by negotiation. But net of the two, it's a net benefit, I'd say, because the, you know, the price erosion increase is less than the benefit we're getting. If you were to just simply say, "Hey, take out all the metal tailwind benefit, how are you doing?" We're still slightly above 15%.

Matt Sheerin (Managing Director and Senior Equity Research Analyst)

Okay, thanks a lot.

Tom Lynch (Chairman and CEO)

Welcome.

Operator (participant)

Next line goes to Shawn Harrison from Longbow Research. Please go ahead.

Tom Lynch (Chairman and CEO)

Hello, Shawn.

Shawn Harrison (Associate Director of Research and Senior Research Analyst)

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

Tom Lynch (Chairman and CEO)

You're talking about SubCom, Shawn?

Shawn Harrison (Associate Director of Research and Senior Research Analyst)

SubCom, yes, sorry.

Tom Lynch (Chairman and CEO)

It's in that range. Yeah, relatively, $0.03-$0.04 from where, in the quarter.

Shawn Harrison (Associate Director of Research and Senior Research Analyst)

Okay. And then just the size of the programs coming or that came into force as well as coming into force in terms of just that opportunity.

Tom Lynch (Chairman and CEO)

The one that came into force is the biggest one we had in the backlog, about $500 million. And the others are less than that. They're more in the $150 million-$200 million range. And coming into force soon, you know, we've been awarded them, and we work closely with the customer. So I think if they come into force in the next couple of months, that will shore up next year, and next year will be better than this year. And Shawn, the AAE contract that just came into force, we'll start that later this quarter, and that'll take us through 2016 to complete that program.

Shawn Harrison (Associate Director of Research and Senior Research Analyst)

Okay. And then just as a follow-up on networks, I see where, I guess, you know, the telecom, the wireless aspect, even the enterprise coming back and, you know, you have visibility now into a double-digit EBIT margin in the back half of the year. But if I add everything up, I mean, it looks as if, just in terms of maybe over the next two years, it's gonna be tough to get to a mid-teens EBIT margin without further restructuring. Do you think further restructuring within networks is possible or is needed to get to, let's say, a 15%+ EBIT margin?

Tom Lynch (Chairman and CEO)

I mean, I'd answer it this way: If the growth that, that we expect, you know, seeing signs in SubCom, seeing nice signs in broadband, and believe we're with the discontinued products and the new products that are coming, we should be back into a growth in datacom. You know, when we get to with the restructuring that we've done in the last year, which is pretty significant, we'll start to see the benefit when revenue in the segment's growing 5%-6%. If for some reason we're wrong on that growth rate again, and it's a smaller business, you know, we won't need as much infrastructure, but I don't really, I don't believe that. But as, as we've done in the past, you'll see we'll adjust accordingly.

Shawn Harrison (Associate Director of Research and Senior Research Analyst)

How much-

Tom Lynch (Chairman and CEO)

We could march it back up to, you know, near that mid-15, and it depends on how fast the growth comes back.

Shawn Harrison (Associate Director of Research and Senior Research Analyst)

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

Tom Lynch (Chairman and CEO)

Overall, Sean, we took obviously a significant amount of restructuring last year across the company, spent a little over $300 million. That's tailing off dramatically this year, about $50 million. Last year, if I recall, Networks was about 40% of that spend across the organization. As I indicated in my opening comments, we took some restructuring charges, about $21 million in the most recently completed quarter, second quarter. About 75% of that was related to networks. So as Tom pointed out, heavy restructuring is behind us. We expect kind of a net benefit of $115 million of run rate savings in 2015 from that restructuring actions. We're getting about $70 million-$80 million this year, so an incremental $40 million next year.

Shawn Harrison (Associate Director of Research and Senior Research Analyst)

The spend would be equivalent to the saves in terms of just ballparking a percentage?

Tom Lynch (Chairman and CEO)

Correct. That's probably a fair allocation.

Shawn Harrison (Associate Director of Research and Senior Research Analyst)

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

Tom Lynch (Chairman and CEO)

Thanks.

Thanks, Shawn.

Bob Hau (CFO)

Thanks, Shawn.

Operator (participant)

Thank you. Next, we'll go to line of Amitabh Passi from UBS. Please go ahead.

Amitabh Passi (Technology Analyst)

Hi. Thank you. Tom, I wanted to try the portfolio question from a slightly different vantage point. If I look at network solutions, and I look at energy networks along with consumer, you know, these have been segments that have been quite challenging. You did talk about network solutions improving, but I'm curious, as you think about M&A, is there opportunity to further bolster these segments? Or do you think this is largely a volume-related weakness that, you know, as business and demand trends improve, these segments do better? Or do you see M&A potential as well in telecom networks and energy networks?

Tom Lynch (Chairman and CEO)

Well, let me take each of them real quick, individually. Energy, I would say, we've always looked and been interested in an M&A in that business. It's, you know, really, it's been slow. It really follows the economy. We expect it to growth to resume. It's been especially slow in Europe, but it's a good business. It's a, you know, a business that's right around the company average margin, and that margin has been improving. Whenever we grow more than 3% or 4%, we see nice margin lifts. So I'd consider that a real solid business, that steady contribution.

Consumer, I don't see M&A in consumer. I think that's really, we have to win more sockets, as we would say, and more strategic sockets. I think we've really upgraded some areas where we were very weak in that business, which was operationally. We have, I consider a crackerjack operational team there now, and as we just have to persevere with the designs and get some design wins there. And that's revenue related. You're absolutely right. We need to grow more revenue there. And the third one was networks in general, telecom, wireless.

I don't think. I don't see anything significant in M&A there because in our push to network, I mean, we made the move to take leadership in fiber when we acquired ADC. And while the revenue hasn't materialized like we thought, the insurance policy, the cost side, we've taken a ton of cost out. So we feel that business. We're well positioned in our portion of the network.

We really do have the best fiber product, connectivity product line across the world. It's—we see it in the high win rate we have. That's a volume play. That's a very nice gross margin business that's higher than the company average gross margin, so that's a leverage play, and we're starting to see signs with, you know, this 4% growth range this year. So they're all kind of in a little bit different perspective, but that's at a high level, a way to think about it.

Amitabh Passi (Technology Analyst)

Got it. And then just as a quick follow-up, I was intrigued by a comment where you'd said, even if you're not a believer in fiber to the home, and I just wanted to get a sense from you, are you seeing a preference for wireless alternatives or next gen copper alternatives, which seems counter to some of the gigabit ethernet movement that we're seeing in the industry, where I thought we were seeing maybe the industry pivot back towards fiber to the home. So would love to get your thoughts there.

Tom Lynch (Chairman and CEO)

It's mixed. I mean, when we look at our business, we know we need to be, you know, be able to support multiple different network architectures, and they range from kind of HFC, the cable side, going deeper, you know, the normal cable network going deeper with more fiber. We're benefiting from that. Some carriers, you know, really believe in fiber deep and fiber to the home. I'd say they're benefiting from that. DSL is really not sufficient anymore, but it takes time to change it, and that's what you're hearing with one of the carriers, that they're gonna get very aggressive in response to another new carrier slash search company.

Amitabh Passi (Technology Analyst)

Yep.

Tom Lynch (Chairman and CEO)

Around the world, it's different. There's parts of Europe that are aggressively building fiber to the home. There's other parts that are waiting for G.fast, which is the super fast VDSL, but that requires more fiber. There's Australia, New Zealand, building fiber to the home, and even with the change in government, while that's slowed down a bit, they're still... It's either gonna be it's probably gonna be more selective to fiber to the home, but fiber deep.

But if you're gonna deliver, if content providers are gonna, like they're negotiating now for dedicated bandwidth from the carriers, you're gonna have to push fiber deeper in the network to get that, because LTE does have some limitations. So I think it's kind of timing of investments, but we are starting to see a little more positive signs, and optimistic that maybe this cycle in our end of the network, which I'd call the, you know, the bandwidth-rich portion of the network, is starting to come back. But we need to see, you know, we need to see that consistently before I'm comfortable that it's actually here.

Amitabh Passi (Technology Analyst)

Excellent. Thank you.

Tom Lynch (Chairman and CEO)

You're welcome.

Operator (participant)

Thank you. Next, we'll go to the line of Jim Suva from Citi. Please go ahead.

Jim Suva (Managing Director and Senior Technology Analyst)

...Thanks very much. Just a quick clarification point, and then my two questions. On the clarification, I assume, or maybe let me know if I'm right or wrong, that the pending acquisition of SEACON is not in your sales and EPS outlook because it's still pending, or maybe I'm wrong with that. And then along with that questioning, can you help us understand the margin profile of this business? It seems like it would be accretive to your margins, but just not sure on that. And do you have to do any cost realignments with them?

Like, are they located physically where some of your plants are and you can integrate the two plants together? Are we looking at another round of restructuring, or does it sound as though I'm quite happy, you know, how you have it? And then my second question is on a different topic, is about the consumer side. Is you've kind of been talking about trying to get this, you know, some wins for quite some time organically.

It seems like either it's not happening or you've got the wins and they're gonna come. But can you help us understand this? Is your confidence there a lot higher, or is there still just a lot of wood to chop or a lot more effort still to turn around the consumer business, which has been underperforming for multiple years?

Bob Hau (CFO)

Yeah, Jim, it's Bob. On SEACON, you are correct that we do not have an impact from the acquisition in our outlook. We expect that deal to close still later this year, and it will close late enough in the year that it will have zero to negligible impact on the overall results for 2014. Obviously, we expect it to close this fiscal year, and so it'll be an impact in 2015. In terms of margin profile and our plans for restructuring sort of thing, I'll turn it back to Terrence to address that one.

Speaker 15

Thanks, Bob. Jim, it's Terrence. In relationship to your question, you know, SEACON, as Tom covered on the slide, is about $115 million in revenue, and has above 30% EBITDA. So from your viewpoint, yes, it will be above company average margins, help both the segment and the company in that regard. When we look at what they do, this is not a cost play, so when you look at restructuring, there is no big restructuring or plant consolidations in relation to this acquisition. It's really around growth, but certainly, I'm sure there'll be some acquisition costs that Bob and Keith will call out to you, just due to, you know, typical acquisition things, but not restructuring.

Tom Lynch (Chairman and CEO)

Jim, on the consumer side, I would say, we're, you know, we're performing better in the newer parts of the market, but it's not enough to move the needle yet. So let me. Elaborating on that, the PC and feature phone business part of consumer is still bigger than the tablet and smartphone business. The PC and feature phone business, which is where we still have a little better position, you know, in a market that's shrinking. That's gonna cross over sometime in the next year, but. So we're growing almost at the market in tablet and smartphones, but it's just not enough to move the meter.

So we have won some significant awards, but it's still, it's not big enough yet to to grow the business. I'd say we're better in terms of our talent, our engineering, the products we're bringing out, but it's gonna still take us a while to move the performance up.

Jim Suva (Managing Director and Senior Technology Analyst)

Thank you very much.

Operator (participant)

Thank you. And next, we'll go to the line of William Stein from SunTrust. Please go ahead.

William Stein (Managing Director and Senior Technology Analyst)

Great. Thank you for taking my question. I'm wondering if you can talk about, in the automotive segment, any effect from the, Euro 6, implementation regarding particulate emissions that comes into force later this year. Is that having any effect on the business today?

Tom Lynch (Chairman and CEO)

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

What we've been pleasantly surprised by is that it's still the demand is still strong, stronger than we would have expected at this time of year, six months ago, which reflects, I think, more economics underlying that, meaning things are picking up and people are investing. So, and the fundamental benefit of the emission standards is it's more electronics and it's more content for us. So yeah, we're starting to see the benefit of that.

William Stein (Managing Director and Senior Technology Analyst)

Great. And then the follow-up is, again, on the subsea business. Not wanting to beat a dead horse, but, you know, this business has surprised you to the downside this year. You obviously have a better view into your business than we do, so you have ways to look at it and forecast it that should be superior to ours. But what can we look at when we understand that your position is very strong in this market, you're doing well, very well in terms of winning mandates, but the projects aren't coming into force? Is that an interest rate-related thing, a credit-related thing, a network bandwidth-related issue? How can we think about the likelihood of more of these projects coming into force?

Tom Lynch (Chairman and CEO)

Well, there's multiple factors. The interesting thing, on one hand, it's a finite number of projects. But on the other hand, there's each project could be affected by different things. So pre-financial crisis to now, one of the things in a project that has to happen for a project to get funded is that if it's a consortium or a group of entrepreneurs, as we would call it, the bandwidth has to be pre-sold. It used to be you could pre-sell 60%-70% and get the project funded. Now you have to sell 100%-120%.

It's taken longer for that. I think in general, what you see, the carriers who were really drivers 4 or 5 years ago and are less so today, it's a function of where they're putting their investments. So that's the latest thing. So it's been a variety of things where some of these big jobs are coming from. This last one, you know, it's two destination points are Hong Kong, I think, and France, and 30 branches in between, which the good news is, it's a big job. The challenging news is that's an awful lot of approvals and permitting. So even if you have your money together, you got to make sure you have all that.

So that takes a while. So I'd say there's a lot of things. When we kick the tires on modeling the bandwidth and making sure, you know, something hasn't happened, I think we conclude that you've got to build, you know, the next build cycle is coming. Just to put it in perspective, the last cycle from trough to trough was 12 years. If you look at the trough of the last cycle to where we are right now, 2014, it was actually a 12-year cycle. Trough to peak can typically be 7 or 8 years. In that 12 years, you have 3 or 4, what I'd call, tough years, and 3 or 4 good years, and 3 or 4 great years.

Over the cycle, it's a good business, a really, you know, nice contributor to the company, well above cost of capital. We believe that this 2014 is that next real trough, and it's higher than the last trough because there is just more building, and we have this oil and gas adjacency that we didn't have early in the last cycle. So it is—it's been a little tough to forecast for us for sure. I think the last point I'd make about putting in perspective, if you look at last year, the business contributed $0.06-$0.07 a share, roughly 2% of our total earnings per share.

This year, it's gonna be a negative 1%, earnings per share because of the third quarter. So I think it's down to, you know, the volatility is still high, but the impact is low, and as this thing starts to ramp up again, we should see steady contributions. If the AAE-1 deal had not signed, then I'd be a lot more nervous. That's a big deal. That'll get us going. And then what we've also seen in the upcycles, it's not a perfect predictor, but when a big job like this goes, it tends to mobilize the other ones because there is a limited amount of ship capacity.

So, this was getting this job. We got to go through the valley in Q3 in the business, but getting this job is a big, big step up. And then we gotta get a couple other two of these to come into force, and we work hard to help our customers do that.

William Stein (Managing Director and Senior Technology Analyst)

That's helpful. Thanks, Tom.

Tom Lynch (Chairman and CEO)

You're welcome.

Operator (participant)

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

Steven Fox (Managing Director)

Thanks. Good morning. Just a couple quick questions. First, on the auto side, Tom, you mentioned some market share gains. I was wondering if you could elaborate on that, as well as some more aggressive investments in China for auto and whether that's also driving market share gains. And then, secondly, with regard to the acquisition, I was just curious if you could just discuss a little bit how well positioned or not well positioned they are from a distribution standpoint, and whether there could be some sales synergies there like you've seen with Deutsch. Thanks.

Tom Lynch (Chairman and CEO)

On the auto side, as you know, we are strong in every region. If you go back in time, four or five years, really, our weakest region was the U.S. And the downturn was extremely painful, but it gave us the opportunity because in this part of the value chain, we're the, you know, the leader. We invested in the U.S. when it was down. You know, we did things like adjust our cost to sales cost structure, but we invested in engineering, and we went after programs. And our estimation is we've moved our U.S. share up about four points over that time. So that was positive.

In China, we provide a very broad range of services and products to our customers. We've been expanding our engineering there. Our entire China automotive team is local. It's a very seasoned, experienced team. We are expanding our capacity there because, not only because the market's expanding, but because we're, we're doing more and more there for that market. If you go back in time, there was a lot of things imported into the market, and that's, we're reducing that quickly, and that's part of, you know, the footprint adjustment we were, we were doing in Western Europe during the downturn.

So those two things, plus we continue to add engineers across the world in automotive. It's a business that's very, it's, you know, it's a lot of projects that you have to work on with the customer, and when you're, when you-- we're, we're so strong on all these customers, and we keep pouring engineers in, that's how we're able to build a $200 million sensor business from nothing when we weren't in the sensor business. So, you know, it is our sweet spot. We keep investing in it aggressively. Terrence, you want to comment on SEACON again?

Speaker 15

Yeah, sure. When you look at SEACON, and to your question, Steve, in relationship to channel and distribution, when you look at this market, it is a much more direct market. So this—we're going to sell into and where we sell in today with our current portfolio, as well as where SEACON sells into, you're selling into the manufacturers of the drilling systems, certainly the ROV systems, all the instruments and lights, as well as the equipment that goes on the ocean floor. So when you look at it, it's a much more direct relationship than channel serve.

I think what's very nice about both our go-to-market position as well as SEACON, you know, they have bases in Norway, U.K., U.S., Mexico, as well as they also have a nice field service support around the world that supports their product to the people working in the oil and gas industry. So it is a much more direct model than, you know, what we saw in DEUTSCH, where we were able to leverage our channel scale. So it's much more direct than, than, a channel play.

Steven Fox (Managing Director)

Great. Thanks very much. I appreciate the color.

Operator (participant)

Thank you. Our last question goes to the line of Sherry Scribner from Deutsche Bank.

Kirti Shetty (Project Coordination and Trade Finance Analyst)

Hi, this is Kirti Shetty here, calling on behalf of Sherry Scribner. Tom, I just had a question for you, actually. In your opening comments, you mentioned majority of the markets are exhibiting solid growth trends. I just wanted to understand what demand trends you're seeing, or do you still see customers as being cautious? Are you seeing any reductions in customer forecasts? Thanks.

Tom Lynch (Chairman and CEO)

Thank you. Yeah, let me go through that. So clearly, auto and industrial transportation continue to grow. There's robust growth there. We really haven't seen that change much. As I mentioned, we'll see that the second half growth year-over-year in those markets will be less than the first half growth. Some of that's seasonal, some of that's just it's been hotter than normal in the first half. Industrial equipment is growing with 8% order growth. That's another third or fourth.

So that's a sign, and you see it in a lot of the industrials reporting. Capital spending is starting to break loose. We see that. That seems to be a pretty steady sign right now. I'm not seeing any warning signs that that would change. Commercial aerospace, a lot of new planes being built, the whole fleet being rebuilt, and that's another area where we've gained share, and our content is up significantly. So we see that. And in the appliance business, new home sales in the U.S., appliance picking up in Asia, particularly China, which is a good sign because that's consumer spending in China.

And by the way, I talked about our China business being up 34% in automotive. It was up 20+% overall, with four of our five markets, four or five of our markets up double digits. So it's fairly broad-based. What's not growing, I'd say the datacom market is not really growing right now, and you can see that in others, folks who provide that equipment. Certainly not growing for us. Consumer, growing, but I talked about the trends that we're not really fully participating in the trends.

And of course, the one that's, you know, the one that's challenging right now is SubCom, but that's just timing in our view, and we have a good position there. So if I compare to last quarter, I compare to this time last year, definitely feels more robust, broader base. You look at the number of countries that we ship to around the world, there's more where we have higher sales growth this quarter than we did last quarter and last year. All good signs. I'd say nobody's celebrating. You know, we're still very mindful that the last five years have been unpredictable, if anything, so you know, we keep running the business accordingly.

Kirti Shetty (Project Coordination and Trade Finance Analyst)

Okay, great. Thanks. That was helpful. I just also wanted to, just following up on that, just, get an idea on the long-term growth targets. If you maintain, what you had previously provided, for example, 6%-8% in transportation and 4%-7% in network, four to six in industrial, and 3%-5% in consumer, do you still maintain that, or do you see a change in that long-term target?

Tom Lynch (Chairman and CEO)

That's still how we see the long term.

Kirti Shetty (Project Coordination and Trade Finance Analyst)

Okay, great. Thank you.

Tom Lynch (Chairman and CEO)

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

Operator (participant)

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