U.S. Markets close in 4 hrs 47 mins

Edited Transcript of TEL earnings conference call or presentation 31-Oct-18 12:30pm GMT

Q4 2018 TE Connectivity Ltd Earnings Call

SCHAFFHAUSEN Nov 1, 2018 (Thomson StreetEvents) -- Edited Transcript of TE Connectivity Ltd earnings conference call or presentation Wednesday, October 31, 2018 at 12:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Heath A. Mitts

TE Connectivity Ltd. - Executive VP & CFO

* Sujal Shah

TE Connectivity Ltd. - VP of IR

* Terrence R. Curtin

TE Connectivity Ltd. - CEO & Director

================================================================================

Conference Call Participants

================================================================================

* Alvin J. Park

Stifel, Nicolaus & Company, Incorporated, Research Division - Associate

* Amit Jawaharlaz Daryanani

RBC Capital Markets, LLC, Research Division - Analyst

* Christopher D. Glynn

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

* Craig Matthew Hettenbach

Morgan Stanley, Research Division - VP

* Deepa Bhargavi Narasimhapuram Raghavan

Wells Fargo Securities, LLC, Research Division - Associate Analyst

* Jim Suva

Citigroup Inc, Research Division - Director

* Joseph Craig Giordano

Cowen and Company, LLC, Research Division - MD and Senior Analyst

* Mark Trevor Delaney

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Shawn Matthew Harrison

Longbow Research LLC - Senior Research Analyst

* Steven Bryant Fox

Cross Research LLC - MD

* Wamsi Mohan

BofA Merrill Lynch, Research Division - Director

* William Stein

SunTrust Robinson Humphrey, Inc., Research Division - MD

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for standing by. Welcome to the TE Connectivity Fourth Quarter and Final Year Results Conference Call. (Operator Instructions)

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

--------------------------------------------------------------------------------

Sujal Shah, TE Connectivity Ltd. - VP of IR [2]

--------------------------------------------------------------------------------

Good morning, and thank you for joining our conference call to discuss TE Connectivity's fourth quarter and full year 2018 results. With me today are Chief Executive Officer, Terrence Curtin; and Chief Financial Officer, Heath Mitts.

During 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 discussions 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.

Please keep in mind that when we announced the sale of our SubCom business last quarter and expect the transaction to close by the end of this quarter. With the sale, SubCom is reflected as discontinued operations and is not included in our results or guidance. Also, prior period have been recast to reflect SubCom's discontinued operations treatment. In our fiscal 2018, SubCom generated approximately $700 million in sales with a minimal contribution to adjusted EPS. Note that all prepared remarks on today's call will reflect TE continuing operations, unless otherwise noted. We've included Slide 15 in our earnings presentation, which shows recast financial information for continuing operations.

Finally, due to the increasing number of participants on the Q&A portion of today's call, we're asking everyone to limit themselves to one question to make sure we can give everyone an opportunity to ask questions during the allotted time. We're willing to take follow-up questions and ask that you really are rejoin the queue if you have a second question. And let me turn the call over to Terrrence for opening comments.

--------------------------------------------------------------------------------

Terrence R. Curtin, TE Connectivity Ltd. - CEO & Director [3]

--------------------------------------------------------------------------------

Thank you, Sujal, and thank you, everyone, for joining us today, and I'll cover our 2018 results as well as our outlook for 2019. As we're going to be going through both our fourth quarter 2018 as well as the full year '18 and the guide. I'd like to start with framing the key messages for today's call by referencing our long-term business model. To remind you back at our investor the earlier this fiscal year, we conveyed a long term business model 4% to 6% annual organic growth, where we would deliver 30 to 80 basis points of margin expansion and double-digit earnings per share growth, which we expect to deliver over full market cycle.

As Heath and I recast 2018, you're going to see strong a results that are well ahead of this business model on all fronts. On the sales front, margin front, earnings per share growth as well as capital generation and deployment. When we talk about what 2019 and over the past 3 months, we have seen changes in the macroenvironment, and our guidance for 2019 does reflect slower growth in certain end-markets that we'll highlight during this call. While this may call us 2019 to be slightly below our target business model, I want to make sure you do know we remain committed and are going to accelerate the leverage we told you about that are under our control to ensure we improve financial performance as we move through 2019.

So let me look back now to 2018 a little bit before I get into the slides. And I'm very proud of our results. I think the results show the power of our strategy as well as the execution of our teams. Some of the things I want to highlight before we jump into Slide 3 is some of the significant progress we feel we've made this past year in creating long-term value for our owners.

First off, as Sujal highlighted, we announced the sale of our SubCom business, which improves our portfolio by lowering our volatility, enhancing our long-term growth and margin profile and positioning TE for stronger returns on future investments.

Also during 2018, the revenue growth result which was 15% overall and 9% on an organic basis -- and 9% organically is $1 billion of organic revenue growth, I think demonstrates the significantly and of growth in the markets we serve.

We ended this year expecting 4% organic growth, and our strong out performance this past year once again reinforces the secular compact trends that drive our results in business model. We saw this illustrative among many of our markets including auto, commercial transportation, sensors, factory automation as well as appliances. On the earnings front, first, adjusted operating margins expanded a 100 basis points with increases in each of our 3 segments and the expansion being driven primarily by our industrial and communication segments, which we talked to you about as key drivers for margin expansion over many years now, and we saw some of the results here in '18. On an earnings per share we grew 26%, which represents strong performance versus our industrial technology peers.

And lastly, about our business model, it is the cash generation that I know we all like and generated $1.4 billion of free cash flow this past year and expanded return on invested capital by over 150 basis points, which reflect both our discipline and balanced capital strategy. So I do have confidence that our portfolio is well positioned to continue to generate growth ahead of the end markets we serve as we go forward.

So let's get into the slides and we're going to start with Slide 3, and I'm going to jump back over and just talk about the fourth quarter. And as we talk about the fourth quarter, as Sujal said, in containing operations which excludes SubCom, we delivered another quarter of above market performance with growth in all businesses. Sales were slightly ahead of our expectations at $3.5 billion and this represented 9% reported growth and 8% organic growth year-over-year. In transportation, we grew 8% organically, well above our markets with growth in each of the segments' 3 businesses. Industrial Solutions grew 6% organically, with growth across all businesses. And our Communications segment grew 12% organically with strong growth in both data devices and appliances.

Orders were up 4% organically with growth in each segment, but we did see our orders decline sequentially by 8% and this reflects both return to more typical seasonality for our business as well as slower market environment in certain markets. In the fourth quarter, we delivered 17% adjusted operating margins, expanding 110 basis points year-over-year with margin expansion across all segments. Adjusted earnings per share was $1.35, which was above our guidance and grew 19% versus the prior year driven entirely by operational performance. In fact, currency exchange and tax rates were actually headwinds to our results in the quarter.

Free cash flow was very strong at $670 million. And we've we returned over $500 million to our shareholders through both dividends and share repurchases.

So if you could please turn to Slide 4. Let me jump back to the full year for '18, and then also talk about our guidance for '19. For the full year of 2018, our sales were $14 billion up 15% on a recorded basis and 9% organically. Transportation grew 11% organically with 8% growth in auto versus a global auto production growth at less than 1%. And this demonstrate our performance versus the market due to content growth trends as well our strong global position.

Industrial Solutions grew 6% organically with growth across all businesses and benefit from content growth. And our Communication segment grew 11% organically with double-digit growth in both appliances and our data devices issuance. For the full year, our adjusted operating margins were up 100 basis points to 17.7%. But I do want to know that we exited the year at a 17% margin run rate, which represents a level of profitability that reflects a moderating macroenvironment. We delivered adjusted earnings per share of $5.61, which was up 26% over the prior year. As we look forward, we are providing fiscal 2019 guidance for continuing operations for sales of $14.1 billion and adjusted earnings per share of $5.70 at the midpoint. This guidance represents 1% reported growth and 3% organic revenue growth and low single-digit EPS expansion. Our guidance reflects moderating order trends that I'll discuss on the next slide, but we do expect growth in each of our segments and performance above our markets driven by content growth. The one big item is, while we have 3% organic growth and have what equate to about $500 million of organic revenue, as we've been highlighting currency exchange direction -- affects are changing from being a tailwind last year to being a material headwind in '19. And we expect currency exchange effects to negatively impact our revenue by $400 million. Adjusted earnings per share includes a $0.30 combined headwinds from currency effect as well as the higher tax rate that Heath will talk about.

With that being said, winds our EPS guidance would represent high single-digit growth were it not for these. While we can influence some market environment, we are going to execute on leverage we can control and accelerate cost reduction plans in the first half and expand margins and EPS in the second half.

So let's turn to Slide 5 and let me get into the order trends that have I've mentioned and where we see the markets and we'll get into it, both overall and by segment.

So on slide 5, as we discussed with you throughout 2018, we did have some markets that were running well ahead trend line. These include commercial transportation, factory automation and appliances. As we expected, we saw growth rates moderate from the first after the second half of this year and expect these markets to continue to normalize in 2019. We did see global auto production fall to less than 1% in 2018, with 2% production declines in the fourth quarter. This is different than what we talked about 90 days ago. Right now, we expect full year auto production to be flat in 2019, with first half production declining 2% year-over-year before improving in the second half. And offsetting some of this weakness, we continue to see good momentum in our Aerospace and Defense, medical and data and device end markets. If you look at orders on the slide, we saw 4% year-over-year growth on an organic basis. This was driven by growth in North America and Europe of 12% and 3% respectively and this was partially offset by a weakness in Asia, which declined by 2%. The slower growth rate we are seeing is reflected in the sequential decline that you see on the page in orders from quarter 3 to quarter 4 of 8%. You know we have been running a book-to-bill ratio above 1 for quite some time, and this quarter of book-to-bill of 0.99 reflects the slowing the of the certain markets that I just mentioned earlier and a return to more normal seasonal pattern for our business. And just to remind you since we haven't experienced these normal seasonal patterns in a while, we typically see mid-single-digit revenue decline sequentially from quarter 4 to quarter one, followed by a sequential growth in quarter 2 and additional growth in the second half, and that's in line with how we're guiding.

Looking at orders by segment, Transportation organic orders were up 4% with growth in automotive and in sensors. Industrial orders through 3% organically year-over-year with growth driven by Aerospace, Defense and Marine as well as medical applications. In Communications, we saw a year-over-year organic order growth of 4% that was driven by data and devices unit, partially offset by declines in appliances. And our guidance for revenue growth reflects trends we're seeing.

So let me get into our results by segment. And if you could please turn to Slide 6, we'll start with Transportation.

Transportation sales grew 8% organically year-over-year with strong growth in each of our 3 businesses. Our order sales were up 6% organically and an auto production environment that declined 2% in the quarter, again reinforcing our ability to outperform the end market due to secular [comp and] growth trends. When we will look at the quarter, we had solid growth in the Americas and China, while Europe was flat as customers were impacted by the WLTP implementation.

In commercial transportation, we continue to outperform the market with organic revenue growth of 15% year-over-year and double-digit growth across all regions and submarkets. But we have seen those orders reduce off of where we just had the revenue. Our sensors business grew very nicely, 10% year-over-year with growth across auto, commercial transportation as well as industrial applications. In the auto sensor's phase, we generated over $800 million of new design wins in 2018 and this brings our total design win value to over $2 billion since the beginning of 2016 across a broad spectrum of auto sensor technologies as well as applications.

For the segment, adjusted operating margins expanded 40 basis points year-over-year to 18.1%. As we've indicated, we have been creating investment to support strong pipeline of new design wins, including those in the electric vehicle and autonomous driving applications. At the same time, we have seen productions slow in both China and Europe causing a near-term correction in supply chain that has impacted margins for our business. We will balance near-term margin performance with long-term growth opportunities and are committed to getting margins back to our target level of around 20% in the second half of '19.

So if we can move to the Industrial Solutions, please turn to Slide 7 in the deck. The segment sales grew 6% organically year-over-year to $1.1 billion, with contribution from all businesses. In Industrial Equipment, organic growth was 4% led by strength in medical applications and a slower growth factory automation environment. Our AD&M business delivered nine percent growth with growth across all businesses and particular strength in Comair. And our energy business grew 8% on an organic basis with growth in all regions.

When we look at the industrial space, we are continuing to see sustained momentum across a broad set of end markets. On the margin side of the segment, adjusted operating margins expanded a very strong 160 basis points year-over-year to 15% with opening leverage on the higher revenue. As we outlined earlier this year, we are a multiyear journey to optimize our factory footprint and reduce expenses to expand adjusted operating margins into the high teens. Our plans are on track as you can see in the fourth quarter. And we expect fiscal '19 to be a year of heavy lifting as we increase some investments to support factory consolidation activities leading to nominal margin expansion for this coming year, and this is consistent with the plan that we've been outlining to you to expand long-term operating margins in this segment.

So let's turn to Communications and that's on Slide 8. During the quarter, Communications grew 12% organically with data and devices and appliances delivering another quarter of very strong results. And it's nice that you get to see the true progress that our team has made in this segment without volatility of SubCom. In data and devices, we grew 17% organically with growth across all regions are driven by high-speed connectivity and data center applications and content growth from electronification trends. Our appliance businesses has grew 5% organically with growth in all regions as we continue to benefit from our leading global position. Adjusted operating margins were 16.8% in the quarter and expanded over 300 basis points from the prior year. For our Communication segment, going forward, we are targeting a long-term model low to mid-single-digit organic revenue growth with mid-to-high teen operating margins.

Before I get into guidance a little bit later, I do want to turn it over to Heath to cover the financials for the fourth quarter as well as for the full year.

--------------------------------------------------------------------------------

Heath A. Mitts, TE Connectivity Ltd. - Executive VP & CFO [4]

--------------------------------------------------------------------------------

Thank you, Terrence. Good morning, everyone. Please turn to Slide 9 where I will provide more details on the Q4 financials.

Adjusted operating income was $597 million with an adjusted operating margin of 17% and 110 basis points of margin expansion, driven by the strong 8% organic growth in the quarter. GAAP operating income was $570 million and included $22 million of restructuring and other charges and $5 million of acquisition charges. For the full year, restructuring charges were $140 million and I expect another year at this level as we continue to execute on optimizing the industrial footprint that Terrence mentioned earlier in improving the cost structure of the organization.

Adjusted EPS was $135 million up a very strong 19% year-over-year, driven by sales growth and operating margin improvement in all segments. GAAP EPS was $4.78 for the quarter and included a tax benefit related to utilization of net operating loss carry forwards. This benefit was partially offset by restructuring, acquisitions and other charges of $0.06. We ended 2018 with an adjusted effect of tax rate of 17.1% for the year versus our long-term model of 19% to 20%. As we look ahead to 2019, I expect a more normalized effective of tax rate at the low end of this range so closer to 19%. This results in a tax headwinds of approximately $0.14 in our 2019 guidance compared to our 2018 results.

If you turn to Slide 10. Adjusted gross for margin expanded 70 basis points in the quarter to 33.7%, with improvement from prior year, driven primarily by fall through on increased volumes. Adjusted operating margins were up 110 basis points year-over-year to 17% with strong organic growth driving leverage in the operating structure of the company. We are proud of the expansion as across all of our segments in Q4 and for the full year.

Adjusted EBITDA margins also expanded year-on-year to approximately 22% in the fourth quarter. In the quarter, cash and operations was $922 million and up 10% year-over-year. Free cash flow was $670 million and we returned $570 million...

(technical difficulty)

that I have discussed with you over the past year. This capital -- CapEx investment is for growth and as I've mentioned before have the highest return on investment for the company, which is contributing to the over 150 basis points of improved -- improvement in adjusted ROI see this year to 15%.

We continue to target mid-teens adjusted ROIC as we balance organic investments with acquisition opportunities. In fiscal 2018, we've returned $1.6 billion to shareholders through dividends and share repurchases and used a $153 million for acquisitions.

Our balance sheet is healthy and we expect cash flow to remain strong, which provides us the ability to support both return to our shareholders and the acquisitions over the long-term. Given where we are trading, our valuation is attractive. We'll take advantage of this opportunity and balance share repurchases with acquisitions that arrive this coming year. Also, as we've mentioned before, we are committed to returning the proceeds from the SubCom divestiture to our shareholders in addition to the buybacks from the normal share repurchase program.

Please turn to Slide 11 to summarize our financial performance for the full year and illustrate the progress we've made in each of our segments over the past two years as we execute on our strategy.

As Terrence mentioned, our performance was ahead of our business model in 2018 with 9% organic growth and a 100 basis points of adjusted operating margin expansion. This include double-digit organic growth in both Transportation and Communication segments. While we have margin expansion on all segments, I'm very proud of performance of our Industrial and Communication segments as we execute on the [levers] to improve the operating performance of these segments. The Industrial segment benefited from volume leverage this year and is making great progress on their margin expansion goals. In Communications, our results reflect a heavy lifting that our team did to restructure and reposition the data and device business over the past several years. We expect to apply the same process to our Industrial segment to drive margins to the high teens.

In transportation, our 2018 growth was well ahead of our initial expectations. While this is great for sales and earnings generation, we did experience some operational growing pains which unfavorably impacted the transportation margins. Fortunately, we feel these growing pains are well understood and have been taken actions to improve the efficiency of our operations within the segment. As Terrence mentioned, as he progressed to 2019, our expectations is that the Transportation margin gets very closer to our target margin rate. We continue to have significant growth opportunities in the transportation segment, we will continue to follow these investments while also balancing the operational improvement and the financial results.

I will -- with that, I will turn back over the Terrence.

--------------------------------------------------------------------------------

Terrence R. Curtin, TE Connectivity Ltd. - CEO & Director [5]

--------------------------------------------------------------------------------

Thanks, Heath. And let me get into guidance, I know I talked a little bit about it but let's [quick down] a while and if we can start on slide 12, let's start with the first quarter.

We expect first quarter revenue with $3.33 billion to $3.43 billion and adjusted earnings per share of one or $1.25 to $1.29. At the midpoint, this represents reported sales growth of 1% and organic sales growth of 3%. And adjusted EPS expect to be down from the prior year first quarter. Given the recent strengthening of the U.S. dollar, we expect a year-over-year currency exchange headwind in the first quarter to approximately $75 million and $0.04 in the quarter. Because the number dynamics in quarter 1 on a year-over-year compared basis, I think it makes more sense that we reference back to the quarter we just ended as a baseline when looking at our quarter 4 -- quarter 1 expected performance.

Our outlook for the first quarter this year reflects the business returning to normal seasonal patterns that I discussed earlier. Combined with the slower growth in certain end markets. Our revenue guidance implies a 4% sequential decline in quarter 1 from quarter 4 which is in line with the mid-single-digit declines which we would typically expect. We expect operating margins to be slightly below our quarter 4 levels of 17% as we adjust to the slower environment. However, we expected the margin expansion from the first half to the second half, driven by leverage that we control resulting in a full year in adjusted operating margin expansion from the 17% exit level in 2018.

Talking by segments within the first quarter. We expect Transportation Solutions to be up low single digits organically. Auto revenue is expected to be up low single-digit organically versus a global decline in auto production of 2%, driven by weakness -- production in Europe and China. Our outperformance versus the market again reinforces the path that we drive from content growth. Industrial Solutions is expected to grow mid-single digits organically with growth across all businesses. And we expect Communications to be up mid-single digits organically, driven primarily by data and devices.

So let's move to the full year of '19 and if you can move to Slide 13, I'd appreciate it. As I said earlier we expect fully revenue of $13.9 billion to $14.3 billion, which represents reported sales growth of 1% and organic sales growth of 3% at the midpoint. Once again, when you think about the top line, going from where we just ended, it's about $500 million of organic sales growth offset by $400 million of currency headwind at the midpoint. Adjusted earnings per share is expected to be in the range of $5.60 to $5.80. We have the two headwinds, both in currency and tax that both Heath and I talked about. But without those headwinds, adjusted earnings per share would be growing at a high-single digit rate at the midpoint. And without these headwinds it would be closer to $6.

So let me provide some color on the segments on the full year, how we're seeing it from a market and a revenue perspective.

We do expect our Transportation Solutions segment to be up mid-single digits organically. Content gains are expected to drive mid-single digit organic growth in auto, even in a flat global auto production environment that we assume for 2019. We are expecting high single-digit organic growth in sensory driven by the ramp-up of new auto design, ones that we discussed earlier.

In Industrial Solutions, we expect to grow low single-digit through the organically with growth in Aerospace, Defense and Medical, being offset partially by slow growth in factory automation. And in Communications, we expected to be up low single-digit through the organically, driven primarily by our data and devices business.

So before we go to questions, I just want to recap some of the key takeaways from today's call. We delivered exceptional results in 2018 across all levels of our business model. And I think we demonstrated a positive impact of the portfolio changes we've made and the benefit from the global secular trends that have been a consistently drive growth ahead of markets we searched. As we move into '19, we are a slower growth environment which we have reflected in our guidance. And it's also important that we remain committed to our long-term business model and we do have levers to respond to these market conditions, and you'll see it -- in the first half or the second half margin expansion and EPS expansion that's included in our guidance.

And as always, we all appreciate from cash generation model that we have and we're going to continue our maintain our balance capital strategy to make sure we're driving value creation for owners.

So as I close, I guess I just want to thank our employees across the world for their execution through 2018 as well as their commitment as we go into 2019, to both our customers and our owners. And as we create a future that's safer, sustainable productive and connective.

So Sujal, with that, let's open it up for questions.

--------------------------------------------------------------------------------

Sujal Shah, TE Connectivity Ltd. - VP of IR [6]

--------------------------------------------------------------------------------

Okay, thanks [Kailey] Could you please read the instructions for Q&A session?

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question will come from the line of Amit Daryanani of RBC Capital Markets.

--------------------------------------------------------------------------------

Amit Jawaharlaz Daryanani, RBC Capital Markets, LLC, Research Division - Analyst [2]

--------------------------------------------------------------------------------

I guess, Terrence, given your expectations for auto production for the full year being flat, how do think China is going to stack up within those expectations? And how do you deal with the potential China stimulus, I guess, helping you guys over fiscal '19? If that's okay, [Heath] can you guide on that?

--------------------------------------------------------------------------------

Terrence R. Curtin, TE Connectivity Ltd. - CEO & Director [3]

--------------------------------------------------------------------------------

No, thanks, Amit. Let me get into the geographies as we see them, and that's assumed looking at our flat auto production environment. It is something versus 90 days ago. 90 days ago, we would've told you, we would've thought auto production in '19 would be similar to what we were [expecting] in '18, which 1% to 2% and it did turn flat based upon some of the dynamics we're seeing. By region, as we look at next year in that flat environment, it's really -- north America continues to be the continued flat environment it's been. We see European slightly down and we actually see Asia being slightly up. And that does include what we believe the stimulus that the Chinese government looks like they're put in here beginning in January on the smaller size combustion engines.

So when we look at our flat next year, I think we're going to have; Europe, slightly down; North America, flat; Asia, driven mainly by China will be slightly up.(inaudible)

--------------------------------------------------------------------------------

Operator [4]

--------------------------------------------------------------------------------

We go to the line of Christopher Glynn with Oppenheimer.

--------------------------------------------------------------------------------

Christopher D. Glynn, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [5]

--------------------------------------------------------------------------------

Just wanted to ask about the free cash flow outlook and how to think about conversion. The mid-70% plus conversion was a little light this -- in '18. CFO was clearly good but as we look into next year, just wondering on the swings, where does CapEx go? Is working capital kind of an opportunity on the slower growth?

--------------------------------------------------------------------------------

Heath A. Mitts, TE Connectivity Ltd. - Executive VP & CFO [6]

--------------------------------------------------------------------------------

Sure, Chris, this is Heath. I thinkif you think about our cash flow for 2018, a couple of things you should take into consideration. One, we constantly took up our CapEx year-over-year to take advantage of some very attractive growth opportunities, particularly in the transportation segment. And that's across-the-board, both auto, commercial transportation as well as Sensors. And many times in this market, you've got to invest in some things if you want to program, may be up to two years in advance of when you actually see the revenue. So that's a -- if I was looking at our CapEx and say that's a good indicator on our confidence towards our revenue pipeline there. The other thing is obviously we did eat through with the type of organic revenue growth that we're talking about for the year nearing double digits, we did use some working capital. As you think forward into 2019, slower growth, net working in capital, much it's going to come back into cash flow out of inventories and receivables. And then from a CapEx perspective, I would say it will moderate some from what we've spent this past year, but it's still going to be somewhere in that 800 range of CapEx.

--------------------------------------------------------------------------------

Operator [7]

--------------------------------------------------------------------------------

We'll go next to the line of Wamsi Mohan of Bank of America Merrill Lynch.

--------------------------------------------------------------------------------

Wamsi Mohan, BofA Merrill Lynch, Research Division - Director [8]

--------------------------------------------------------------------------------

I was hoping, Terrence, you can talk a little bit about the linearity this year, given the fact that you're starting off with this assumption of 2% decline in auto production and ending for the full year at flat. How should we think about the seasonality different this year relative to let's say last year? And, Heath, perhaps you could address like what specific steps you are taking to accelerate cost savings year-end? How we should expect our profitability, linearity also to progress through the course of the year?

--------------------------------------------------------------------------------

Terrence R. Curtin, TE Connectivity Ltd. - CEO & Director [9]

--------------------------------------------------------------------------------

Thanks, Wamsi, for the question. Let me talk a little about the seasonality because it's something in the environment, I think all of us have had for the past couple of years, some cases are seasonality hasn't been typical. But when you look at our guidance and even when you see the orders, orders did grow during the quarter, certainly at a slower rate than we've seen. But you saw the sequential decline that I mentioned. And that is pretty typical for our business. And so when we look at our guide for this year, we are [pretty] guiding that historical seasonality, which is the first quarter comes downs a bit of the fourth, you get a little bit more growth in the second and then certainly the third it is typically our strongest and then a little bit of moderation into the fourth. So our guide as we looked at where orders were, does show a more natural shape. From the standpoint of, clearly, and it goes all the way back on this question, when you have an environment that goes from 2% rose to declining a little bit like in auto, you are going to get a little bit supply chain movement that we are dealing with that's reflected in our guidance. But I'll let Heath talk a little bit about what we're going to do for lending on the probability side.

--------------------------------------------------------------------------------

Heath A. Mitts, TE Connectivity Ltd. - Executive VP & CFO [10]

--------------------------------------------------------------------------------

Sure, and Wamsi, I appreciate the question. There's a couple of things that we've talked about in the past, which we described and continued to describe as a multiyear journey. More specifically, that's our industrial footprint optimization, and that's not -- we been well underway with that as we worked our way through 2018 and certainly, a bit more aggressively in 2019. I would say from a segment perspective, some of the bigger actions that we're taking in '19 and the industrial footprint, we'll see much more significant margin rate improvement as we get into actual 2020. This is kind of a year internally that we've said, a year of execution for our industrial team as there's a couple of very large sites that are coming off-line. And if that happens, those are not things that happen overnight so this has been a progress for a while. I think we'll see is modest or flat margins in industrial segment in 2019. And as we go into -- as we exit the year, you would be -- you would expect some significant improvement there. The other thing we have got to take a look at it is, we just sold a business for roughly $700 million of revenue and what that does create an element or stranded cost that we have to address in our structure. And that does put near-term pressure on our margins as we pullout that amount of revenue without that amount of cost. So we'll be addressing that. We've already begun taking the steps and we'll continue to do so through the first part of this year. So you expect our second half margins and aggregate for the company to be higher than the first half as we tackle these things.

--------------------------------------------------------------------------------

Operator [11]

--------------------------------------------------------------------------------

We go to the line of Craig Hettenbach with Morgan Stanley.

--------------------------------------------------------------------------------

Craig Matthew Hettenbach, Morgan Stanley, Research Division - VP [12]

--------------------------------------------------------------------------------

(technical difficulty)

--------------------------------------------------------------------------------

Terrence R. Curtin, TE Connectivity Ltd. - CEO & Director [13]

--------------------------------------------------------------------------------

I'm sorry about that, we're going to go to the next question, please. And Craig, we had a bad connection. We will come back to you.

--------------------------------------------------------------------------------

Operator [14]

--------------------------------------------------------------------------------

We'll go to the line of Joe Giordano with Cowen.

--------------------------------------------------------------------------------

Joseph Craig Giordano, Cowen and Company, LLC, Research Division - MD and Senior Analyst [15]

--------------------------------------------------------------------------------

So can we go through what, kind of, what you're seeing in the supply chain? I know Heath, we talked last like on the year-on-year in auto last year there was a headwind, I think it was like 150 basis points from kind of supply chain inflation and some stuff you had to do on a logistic side to expedite. Can we talk about what we're seeing now? Is that kind of pressure accelerating, moderating a little bit? And implications on auto margins there?

--------------------------------------------------------------------------------

Heath A. Mitts, TE Connectivity Ltd. - Executive VP & CFO [16]

--------------------------------------------------------------------------------

Sure, I think that when we think about supply chain, there's a couple of pieces here. I'm going to tackle the first half then I want Terrence that to grab the second. There's certainly some things that we have dealt with relative to our operational matters if all our supply chain and availability of parts of the good things and then through our factories and the cost to expedite some of that. Much of that is behind us or we're on the better end of that journey in terms of the pain points that has caused. Albeit we're never going to let our customers down in terms of critical component of their supply chain. So we at times have to do things that drive inefficiencies in our factories to make sure we get out. And some of the capital that we've spent this year, in addition to the growth programs, has gone to address those types of matters. I feel that we've grown to right into that journey, but again, the opportunity to see margins march up as we progress in -- as we progress through the year. And then to relative to supply chain and some of our prepared remarks that is causing some air pockets in our demand for sales of what -- Terrence, go on please.

--------------------------------------------------------------------------------

Terrence R. Curtin, TE Connectivity Ltd. - CEO & Director [17]

--------------------------------------------------------------------------------

Yes, certainly, Joe. On the other part there. No, we have seen in certain markets, customers get conservative in inventory levels. While we see things like POS staying in this moderating growth environment. We have due to some of the inflationary pressures you're seeing elsewhere as well as I think some of the tariff affects actually pause a little bit. So we are seeing that as part of our moderation. It's very different depending upon the market dynamics. Markets that are at top, we don't see it. Markets that are moderating a little bit, we are seeing some pauses in the supply chain, in the purchasing activity that we see. As typical, those type of facts work through in 3, 4 months and we do see it in certain markets right now.

--------------------------------------------------------------------------------

Operator [18]

--------------------------------------------------------------------------------

We'll go to line of Shawn Harrison of Longbow Research.

--------------------------------------------------------------------------------

Shawn Matthew Harrison, Longbow Research LLC - Senior Research Analyst [19]

--------------------------------------------------------------------------------

This is probably the last time ever you'll have this question, but SubCom, what was previously the embedded earnings forecast for that business in 2019 prior to the sale? And do you anticipate through buyback and cost reduction actions that you'll be able to fully offset any dilution from that sale?

--------------------------------------------------------------------------------

Heath A. Mitts, TE Connectivity Ltd. - Executive VP & CFO [20]

--------------------------------------------------------------------------------

Well, Shawn, this is Heath. We didn't get into disclosing given where we were in the process internally, what the impact would would've been for our '19 numbers because we had a pretty good indication early on during our budget process where it was going to fall out. So did try to put in '19 number on their [reap] someone speculation at this point. In terms of the diluted impact, obviously, we're -- it did not have a material amount of profitability as you review the numbers that we disclosed in the 8-K that were sent out earlier today, you'll see that there was not much profitability in that business, in our fiscal '18 numbers. So from that perspective, which was obviously, a number that was -- had been -- we worked through the quality issue with the -- with one of our contracts and that had certainly an unfavorable impact to the business' overall margins. But as we think through more of a normalized piece for SubCom relative to the price that we've gotten and the shares we're going to purchase back, I would say that on year-over-year perspective you'll see a very moderate amount of dilution, and you'll obviously, when we normalize the numbers and uptick our gross margins and our overall operated income.

--------------------------------------------------------------------------------

Operator [21]

--------------------------------------------------------------------------------

We go to the line of Matthew Sheerin with Stifel.

--------------------------------------------------------------------------------

Alvin J. Park, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [22]

--------------------------------------------------------------------------------

This is Alvin Park on behalf of Matt Sheerin. In just in terms of the content spread with the auto production growth, the quarter had 8% organic growth in transportation on 2% decline, implying a spread of roughly 10 points. Just wondering how management's viewing that spread come fiscal year '19? And if that spread cadence can be maintained? Or if you see a compression? Just any color on that that.

--------------------------------------------------------------------------------

Terrence R. Curtin, TE Connectivity Ltd. - CEO & Director [23]

--------------------------------------------------------------------------------

A couple of things. let's go back to what we believe that spread should be and that spread, like we said in our investor day, is that mid-single-digit spread, both from the trends we had around electronification contents train -- chain -- change due to both, what's happened to electric vehicle as well as autonomy and the connected car. So that spread does not change. This past year, certainly, our performance was well ahead of that, but as we look at next year in a flat environment, we believe our auto business will grow mid-single digits, right? And that content that we've always said. On a quarter, or a period, you will get programs that make it and move out. But long-term from that 4% to 6% and mid- to single-digit content is what we expect based upon the program we're seeing to drive up to the content for vehicle we've always talked to our owners about. So while we may have a little bit of a supply chain effect in quarter 1, we feel very good at it in the flat environment we're going to grow that mid-single-digit where we're guided for the year.

--------------------------------------------------------------------------------

Operator [24]

--------------------------------------------------------------------------------

We are going to go back and try Craig Hettenbach line again from Morgan Stanley.

--------------------------------------------------------------------------------

Craig Matthew Hettenbach, Morgan Stanley, Research Division - VP [25]

--------------------------------------------------------------------------------

So, Terrence, just a question on this [venture] called you out $800 million in fiscal '18. Can you talk about in areas where you're winning, kind of, where you're differentiating towards the competition? And then as part of that, I know the company has talked about, kin of, leveraging the core connector technology with sensors. And what type of traction you're seeing that as a go-to market with all of the OEMs.

--------------------------------------------------------------------------------

Terrence R. Curtin, TE Connectivity Ltd. - CEO & Director [26]

--------------------------------------------------------------------------------

Sure, thanks Craig. And -- So first off, we talked about the winds that I mentioned in the call. You see the momentum we've continued to have and those sensor winds of over $2 billion, and you've also seen we're starting to see the growth on the auto programs as we've always told you that when you went on an auto programs it takes year for that actually to launch. And you're seeing that and we continue that momentum there and that'll help the growth where we're guided in sensors next year. When we bought Meas, it was always around how do you take their great product bag and technology bag they have and really get it focused on vertical applications. And our first approach was very much around what we leverage TEs and the transportation space. And I think that's what you see. It is very broad. The sensor space's is a very broad space. It is a space where it is internal divisions we compete against with, some small companies, some some larger companies. And our wins, we're competing against back-fragmented space. What I would say, from applications -- the application, we feel very fortunate because we're starting a little bit from a clean slate since Meas didn't have much automotive business, and I think we're really driving wins where they're differentiated. And whether that or other things around electric vehicles, certainly around humidity, temperature, pressure, it's a very broad base that we feel good about and we're go to continue to leverage it. We'll also looking for other verticals that we should be looking at sensors [knack] I would say that's still -- how do we scale that, it's still some of the opportunity we have as a company. And -- but early [at a gate] it was very much transportation focused.

--------------------------------------------------------------------------------

Operator [27]

--------------------------------------------------------------------------------

We'll go to the line of Jim Suva with Citi.

--------------------------------------------------------------------------------

Jim Suva, Citigroup Inc, Research Division - Director [28]

--------------------------------------------------------------------------------

And thus far you've provided great details. One follow-up I have is, in your prepared comments you mentioned about rightsizing and realigning some of the businesses. As we look into the 2019 and looking at your reporting lines of businesses, where can we see the most focus for that right lining of those businesses, maybe by segments, about where the most effort we'll be? And is kind of a near-term pressure pause on the margins of those businesses before they get better? And is it all internally planned? Or it is also driven by some of the political items that are going on with the tariffs adding to that? Or would that be incremental depending upon how that all sources -- sorts out?

--------------------------------------------------------------------------------

Heath A. Mitts, TE Connectivity Ltd. - Executive VP & CFO [29]

--------------------------------------------------------------------------------

Jim, see, I appreciate the question. But you know, my perspective in terms of where our efforts and focuses are, certainly, what we've talked about relative to the industrial segment is unchanged. We have been undertaking, we continue to undertake some footprint consolidation activities. We will in 2019 because there's some investment that get made as we do, we were running parallels, things move to different regions and things like that, you won't see a ton of margin expansion in fact that probably, guide you to model of roughly flat year-over-year at the segment level with an expectation that as we exit the year, you'll start to see this tick up as some of the bigger cost locations come offline. So that's an organized effort, largely the team that rightsized our data device business over the last several years, that same team is now evolved with the industrial segment and they're well on their way in terms of what they've been working on towards that goal. As we think about Transportation, I think what you'll see, you'll see where we exited this year with Transportation in terms of 2018. There are certainly some activities in place to make sure that we are sized correctly as well as in the right areas. My expectation is that you'll continue to see the margins tick up as we move from quarter-to-quarter sequentially and certainly from the first half to second half and realize the benefit of some of those actions that are underway. While we're still investing and we wrote profile of that business because that business continues to have strong trend, nothing has changed from that perspective in terms of where we're going within the transportation world, whether it's the sensors business that Terrence talked about, or certainly in commercial transportation and auto that have benefited from the trends of electronification of vehicles. So there'll be a balance there but as you model the year you should expect margins to tick up sequentially as well as certainly first half to second half. And then Communications, right? Now Communications is a business that certainly, from a margin perspective is -- finished 2018 very strong. The data device business and appliance businesses, which would be only to be used left to that segment, right? They're both doing well, you'll see more growth out of data devices this year. And then appliances, I think you'll see a little bit slower growth because we have come to enjoy outsized growth relative to those end markets but you'll still see nice numbers there. From a margin rate perspective, this is a little bit less about restructuring and more about growth from where our focal points are, but you got to -- but no, that's just a lot of small numbers. You can see some volatility quarter-to-quarter within that segment as any one quarter could have better mix than another quarter and so forth, and you don't have quite the (inaudible) variability in there that may be we once had. So just keep an eye on that. But if you wanted to guide mid-to-high teens for that segment, I think that's a fair place.

--------------------------------------------------------------------------------

Operator [30]

--------------------------------------------------------------------------------

We'll go to the line of Mark Delaney with Goldman Sachs.

--------------------------------------------------------------------------------

Mark Trevor Delaney, Goldman Sachs Group Inc., Research Division - Equity Analyst [31]

--------------------------------------------------------------------------------

So can we talk more about commercial transportation, specifically? And -- the commentary about some slowing in orders as you exited the fiscal year. Was that a broader-base comment? Or is that more specific to China? And then just maybe remind us how much of the commercial and transportation businesses China exposed?

--------------------------------------------------------------------------------

Terrence R. Curtin, TE Connectivity Ltd. - CEO & Director [32]

--------------------------------------------------------------------------------

No, I think when you look at our Commercial Transportation business, we've had tremendous growth for the past couple of years there and a lot of it has been driven by the truck market in China. And it's been both a market benefit as well as a content benefit. About half of our growth over the past couple of years has been content driven, and I think it's what our teams have done, they're very pleased with. What we have seen is, certainly, China from a truck perspective, we do expect that to be down so we are going to get impact for that as well as the supply chain affects that go with that. So China is a big driver of it that drives that overall market, with (inaudible) shifted. If you look at that business today, that business today is about 30% China, the rest of it would be in the west between Europe and Americas. So I think it's one of the things that was a much smaller penetration for us historically. I think it's a real success. And lot of content win there, but the market is -- we see some market changes there.

--------------------------------------------------------------------------------

Operator [33]

--------------------------------------------------------------------------------

We'll go to the line of Deepa Raghavan of Wells Fargo Securities.

--------------------------------------------------------------------------------

Deepa Bhargavi Narasimhapuram Raghavan, Wells Fargo Securities, LLC, Research Division - Associate Analyst [34]

--------------------------------------------------------------------------------

I wanted to talk about free cash flow a little bit more in detail. Just given all the cash -- all the incremental cost actions that you're taking, would that be a little bit more of a headwind to free cash flow into '19? And the second part of that is, I don't know the cash profile of your SubCom business. Just curious how does your free cash flow settle for '19 just given your incremental cost actions and your SubCom exit?

--------------------------------------------------------------------------------

Heath A. Mitts, TE Connectivity Ltd. - Executive VP & CFO [35]

--------------------------------------------------------------------------------

Thank you, Deepa, good question. So relative to the amount of restructuring cash, as I mentioned, we guided throughout 2018 and we did our -- the P&L impact on the restructuring would be about $150 million. You can assume about 75% of that was real cash versus, I'll say noncash charges inside that. We ended the year about $140 million. And I would tell you that from modeling, I think $150 million is probably a good number as we think about it. As we progress through the year, we'll keep everyone updated if that number changes and we update our forecast relative to that. But I don't see relative to how we thought about the cash flow impact of the restructuring in 2019 to have a material difference from how it impacted us in '18 from a cash perspective. The biggest benefit that we're going to get from cash perspective is certainly working capital back off on see, now we're [that] so I'll say more moderate growth rates versus the organic trends that we have been at, and that'll have a better -- a more significant impact driving our cash higher. As we think about SubCom, SubCom is a business that at times very lumpy cash flow. So the cash flow of that business did not always follow necessarily where revenue and profit followed in that business, just by the nature of when you receive progress payments and money that was received upfront from time to time as well as when projects were commissioned you might receive a limp fall towards the back end of the project. So it was very lumpy as we think about that business in 2018 relative to '19, obviously, we've pulled those numbers out from a discontinued operations perspective. But not going to have a significant impact from how I would think about cash conversion.

--------------------------------------------------------------------------------

Operator [36]

--------------------------------------------------------------------------------

We'll go to the line of Steven Fox with Cross Research.

--------------------------------------------------------------------------------

Steven Bryant Fox, Cross Research LLC - MD [37]

--------------------------------------------------------------------------------

So a couple of questions for me please. First of all, obviously, it's been a pretty sizable thing in the industry's outlook for auto production. It sounds like some of it is actually related to some spot plant shutdowns. So I'm trying to understand, like, the risk between now and the end of the year that you see may be some more unexpected plant shutdowns, how much that is already factored into your guidance? And then you would deal with, sort of, that to avoid extra inefficiencies? And then I have a follow-up.

--------------------------------------------------------------------------------

Terrence R. Curtin, TE Connectivity Ltd. - CEO & Director [38]

--------------------------------------------------------------------------------

Well, Steve, first off, we've taken the data that we see here from our customer interactions as well as where do we see order forecast. So we have all of that, that when you look out here you, sort of, say before the end of the year -- I'm assuming calendar year. We get order from our customer because it is a just-in-time industry, that's there. So feel that what we are going out with reflex of shutdowns, certainly, that we saw some of it take advantage of Europe, specifically, and that was also the WLPP which I think is less around Europe shutdowns, but certainly, regulation and I think everybody's trying to catch-up on. So I feel that where we've guided reflects the areas that we've heard from our customers. And what we've been doing, as Heath mentioned, there are areas where you get into an adjustment like that, we have to adjust our operations for and that's what we doing across auto (inaudible) business is going to grow 5% mid-single-digit next year in a flat environment. So when we look at it, we have to adjust from running a 10% like we had almost this year down to about half of that growth and that's what we're working through right now.

--------------------------------------------------------------------------------

Operator [39]

--------------------------------------------------------------------------------

We'll go next to line of William Stein with SunTrust.

--------------------------------------------------------------------------------

William Stein, SunTrust Robinson Humphrey, Inc., Research Division - MD [40]

--------------------------------------------------------------------------------

The last time we had a meaningful slowdown in automotive that is the credit crisis and I'm certainly not saying that's what unraveling today, but during that time, we saw a pretty significant inventory reduction across the supply chain. That triggered meaningfully below unit growth for your transport sales despite the content growth story that was in full swing at that time as well. So it sounds like you think that the current environment is, sort of, a one-and-done pause quarter or maybe something like that, very short but very small. What gives you the confidence to guide that way for -- at least that's how feels for the year?

--------------------------------------------------------------------------------

Terrence R. Curtin, TE Connectivity Ltd. - CEO & Director [41]

--------------------------------------------------------------------------------

I think a couple of things will -- I think you have to get that we're auto build (inaudible) and some of it as last year's first quarter was very strong build and we could see a moderation occur here, adjusting like just we said, little bit in Europe, a little bit in China. North America has been flat for 3 years. So I don't think we've been in an accelerated automotive environment, we've been in a decelerating auto production environment when it comes to growth for multiyears now. Certainly, we thought it was going to be more like 1% to 2% growth going into '19, it's little bit short for that, stound as your. So I do think auto production has been adjusting and from that viewpoint, we think it's appropriate. When you look at auto production, we see it basically being about 24 million units for first three quarters and then actually going to $22 million like it normally does. So when we look at our flat, some of that's related to compares of where do we see production. And certainly there is pauses in place like Europe, right now, with WLPP and certainly China's adjusting, but we expect Asia to have fluid single-digit growth. Is nowhere close to the growth it had 3, 4 years ago.

--------------------------------------------------------------------------------

Operator [42]

--------------------------------------------------------------------------------

We have a follow-up from the line of Joe Giordano of Cowen.

--------------------------------------------------------------------------------

Joseph Craig Giordano, Cowen and Company, LLC, Research Division - MD and Senior Analyst [43]

--------------------------------------------------------------------------------

I know you guys are generally pretty conservative in your guide, but let's just say we do have a further deterioration in end market conditions and you guys do have a pretty high-volume fixed-cost phase. Given the spending that you're planning on doing to rightsize everything, how quickly could you tamper spending to, kind of, deal with the slower growth environment than you're currently contemplating?

--------------------------------------------------------------------------------

Heath A. Mitts, TE Connectivity Ltd. - Executive VP & CFO [44]

--------------------------------------------------------------------------------

Well, Joe, I mean, I think it's a fair question, certainly, we contemplate a lot of different scenarios as we put together these plans and the teams rally around and in terms of levers that can be pulled. There are levers that we're pulling now relative to just the overall softening of the general macro situation and everything we've talked about over the last hour. There'll be additional levers that certainly we have queued up that if things worsened and you expect us to pull those. So how quickly can we pull them, well, pretty quickly. We have -- this wouldn't be started from scratch, we've done the work and we take a look at it, but no different than you would expect us to in preparing the company for various sets of macro conditions. At the same time, we will balance out the growth here. We're not -- these are businesses, we start talking about things like automotive across-the-board and Aerospace and so forth that when you're winning programs you're being specked in to programs with our customers that sometimes you're going to have to swallow hard in the near-term to [use the test] in the long-term. And I think, if you look at our history of the -- even well before I got here, company's done a good job of balancing that out to make sure that we keep our customers happy and that we don't lose something because of shortsightedness. So there'll be a balance that are some [self help thing] that certainly we will execute on and have been executing on and you'll see those start to be reflected in the financial results at the same time that there's a level of agility that we talked about internally and that we have queued up to allow us pull those levers when and if they happen.

--------------------------------------------------------------------------------

Sujal Shah, TE Connectivity Ltd. - VP of IR [45]

--------------------------------------------------------------------------------

Looks like we have no further questions, so I want to thank everybody for joining us this morning. If you do have follow-up questions, please contact Investor Relations at te.

Thank you, and have a great day.

--------------------------------------------------------------------------------

Operator [46]

--------------------------------------------------------------------------------

Thank you. And ladies and gentlemen, today's conference will be available for replay after 10:30 a.m. Eastern Time today, running through midnight on Wednesday, November 7. You may access AT&T replay system by dialing 1 (800) 475-6701 and entering the access code of 454471. International participants may dial (320) 365-3844.

That does conclude your conference for today. Thank you for your participation and for using the AT&T Executive TeleConference Service. You may now disconnect.