TE Connectivity Ltd Earnings Call Insights: Automotive Segment and Cost Profile

TE Connectivity Ltd (NYSE:TEL) recently reported its first quarter earnings and discussed the following topics in its earnings conference call.

Automotive Segment

Amit Daryanani – RBC Capital Markets: Just a question I guess on the Automotive segment. If you could maybe talk about the softness that you saw in the December quarter specifically in EMEA, this was more demand driven or do you think there is a inventory correction that is occurring over there that could persist over the next couple of quarters specially related to dealer registered vehicles if you may? Maybe if you just talked about that part of the business and the inventory correction that will be helpful.

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Thomas J. Lynch – CEO: Sure. I think in the Automotive piece it’s more demand driven, Amit. So your point about the low new registrations that’s also a little bit by the fact that the high end half the cars there are being exported to the parts of 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 are starting to see that turnaround. So I would say that’s how I would summarize it.

Amit Daryanani – RBC Capital Markets: So the expectation would be that that segment or Automotive in general should improve as you go forward through fiscal ’13, right, on a revenue basis?

Thomas J. Lynch – CEO: Yes.

Amit Daryanani – RBC Capital Markets: If we just talk about the Industrial segment, can you just touch on the margin declines this time it was fairly severe on a sequential and year-over-year basis. Maybe just talk about what happened there and more importantly, the path to go back to 15% margin in that segment is that going to 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 ’13?

Thomas J. Lynch – CEO: To answer the second part of your question first, it will be both revenue and costs, of which the cost piece is well underway. The drop off, it’s an high margin item. I mean, it’s that business that over 50% through the channel ended out in 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 will get – we could move from cautiously optimistic to bullish but it has a, I guess you could use the word mix to describe it, but it’s just high margin business that dropped off. Then coupled with the solar business that was twice the size 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 am pretty confident of our ability to drive the margins back up to near Company average or Company goal over the next four or five quarters.

Cost Profile

Shawn Harrison – Longbow Research: I wanted to focus in on, I guess the cost profile, both the savings generated this quarter from raw materials and efficiency gains and kind of what you have left there, but then also the accelerated restructuring program, the $225 million for this year, what does that mean for restructuring savings for fiscal ’13?

Thomas J. Lynch – CEO: Shawn, I guess the second question the $225 million restructuring. We began 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 plant realignment and shutdown, things like that. So, for example we’ve announced about half of them already, which is where we spent the $100 million. Now we need to – once you announce you need to move equipment, transition it to the receiving plant and that will typically take some time of the year. So, as we said last quarter, we didn’t really expect to see too much benefit, maybe a little – we’re pushing and accelerating very hard, maybe get a little bit at the very tail end of the year.

Robert Hau – EVP and CFO: Shawn, the other aspect. You heard Tom say this, the restructuring charge for fiscal 2013 prior guidance was $200 million, now $225 million, so now we’re accelerating, the actions we had already kind of laid out, but there is a slight increase in the restructuring charge and the actions we’re taking that will translate into about $85 million worth of annual savings, we had previously said we’d see $75 million of annual savings as he exited ’14, so full year benefit in 2015, that $75 million is now $85 million. So, there is a higher return from increased spending.

Shawn Harrison – Longbow Research: In the raw materials savings you saw this quarter, do you think you have eked out as much as you can from that or will you see more benefits as the year goes?

Robert Hau – EVP and CFO: I think we’ll see more benefit. That was a nice contribution to our gross margin. It’s a program that’s been – we call that we’re on material. It’s been driven hard for several years here and includes everything from operating the capability to the organization to how w 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 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 – Longbow Research: Then just as a follow-up, Network Solutions, taking maybe a little more bearish view of, if I exclude the subsea business coming back in the second half and the broadband project, what gives you confidence in that the business bounces back over the next 12 to 18 months? I know you are taking more restructuring charges, but I just didn’t get a good sense today that you have maybe a lot of confidence in the bouncing back.

Thomas J. Lynch – CEO: I thought we would have more confidence by now, but it’s not quite where I would like it to be, to your point Shawn. We’re seeing signs, you need to go around the world, so in the emerging market 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 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 then just deploying LTE of which we don’t participate that much in our Networks business. So, 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 further, near the home or the office because they are not going to building that many more towers and those base stations, there’s going to be a lot of fiber connectivity to that. Then we believe, you see what some of the carriers around the world are doing, they are upping the bandwidth they are providing to the home and it is a way to raise the price. So we haven’t changed our view on the underlying thesis of this business which is we got to have the bandwidth and over time it’s going to continue to get fibers and continue to get closer to home but it has taken longer than we thought. We think a little bit of an uptick by late this year but we are not counting anything – not about, I wouldn’t say it about, it’s just sort of a gradual pickup. That’s our current projection.

A Closer Look: TE Connectivity Ltd Earnings Cheat Sheet>>