TE Connectivity Ltd Earnings Call Nuggets: Transportation Margins and European Auto Sales

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

Transportation Margins

Amit Daryanani – RBC Capital Markets: I have a question and a follow-up. First, maybe you guys could just touch on the Transportation margins, it improved by 90 basis points, I think sequentially to 19.8%. Maybe just talk about how much of this expansion was due to mix versus leverage. And then going forward, do you think these margins are sustainable in terms of there’s no onetime benefit that you guys may have had in the June quarter?

Tom Lynch – Chairman and CEO: The answer to the last question, no I don’t – there weren’t any unusual one-time benefits in that business in the quarter. We’re really getting the volume leverage and we’re getting the operating leverage from cost actions we took several years ago. And we’re getting much better in that business at core productivity, which, historically, was not a strong suit but is becoming a strong suit. As far as sustainability, I think an important thing to keep in mind, we’re performing very well, but auto production is going to be up 2% to 3% this year, which is the historical average. So there’s not a windfall on auto production. It feels a little better than that in the U.S. because the U.S. is up, but Europe and Japan, for example, this past quarter, have been down. So I think this is just many years’ worth of improvements in a number of areas, and at the same time, continuing to invest in that business to make sure we stay ahead on the innovation and technology curve.

Amit Daryanani – RBC Capital Markets: I guess my follow-up, maybe – I guess to clarify, Tom, we should still be thinking of 25% conversion margins within the Transportation segment, I want to make sure that that’s the right way to think about it. And then the Networking side, the 300 basis points of margin expansion you guys had this quarter was much better than what I was thinking. Can you maybe talk about was it already just driven by revenue leverage, because I think most of that restructuring benefit is supposed to be a fiscal ’14 story, so I’m assuming there’s more margin expansion left going forward even if revenues don’t improve substantially?

Tom Lynch – Chairman and CEO: Regarding the Transportation, 25% fall-through, I think that’s the right way to think about it over the cycle. In an up-cycle, you might get a little more than that. In a down cycle, you’re going to get more negative than that. But on average, we see at about 25%. In Networks, I would say there’s two pieces. There’s the continued improvement in productivity and we’re getting volume. As you know, that segment has – that’s been down for several years now and we’ve been hurt by that. But we took advantage of that to continue to tighten up the cost structure. It isn’t really from the restructuring we introduced this year or we started this year; that’s not going to kick in until next year.

European Auto Sales

Nicholas Jones – Citigroup: This is (Nicholas Jones) on behalf of Jim Suva. Could you talk a little bit about what you’re seeing in European auto sales as far as like registrations versus production, because I noticed your outlook came down another percentage point for full year outlook?

Tom Lynch – Chairman and CEO: Well, with respect to Auto in Europe, I would say our Auto business has consistently strengthened relative to our outlook for the year. It’s been partially execution on our part but a better market generally every quarter than we expected. In Europe, it’s definitely soft. New car registrations were down 6% or 7%. Some think they’re bottoming; I hear that. But we do benefit from the fact that we’re very strong – we’re strong across Europe, but particularly strong with the German OEMs and significant portion of their business is export to the U.S. and China. So the strength in the U.S. and China is definitely helping those OEMs.

Nicholas Jones – Citigroup: Do you think Europe is kind of stable and is going to look up next year, or is it still going to remain soft maybe for another year or two?

Tom Lynch – Chairman and CEO: I’ll tell you, that’s hard to call. I think for us we just stay close to the customers, make sure our lead times are tight. The recent trends, and I think the industry is calling stabilization somewhat flat to slightly up next year. We’ll be giving you our view of that in November when we talk about our fiscal year ’14.

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