TE Connectivity Ltd

Thank you for standing by and welcome to the TE Connectivity first quarter earnings call for fiscal year 2020. At this time, all lines are in a listen-only mode. Later, we will conduct a question and answer session. As a reminder, today's call is being recorded. I would now like to turn the conference over to our host, Vice President of Investor Relations, Sujal Shah. Please go ahead.

Good morning, and thank you for joining our conference call to discuss TE Connectivity's first quarter 2020 results. With me today are Chief Executive Officer Terrence Curtin and Chief Financial Officer Heath Mitz. 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 discussion this morning and we ask you to review the sections of our press release and the accompanying slide presentation that address the use of these items. The press release and related tables, along with the slide presentation, can be found on the investor relations portion of our website at te.com. Also, within the industrial segment, we have broken out sales for our medical business separately from industrial equipment. On slide 17 and on our website, you will see eight quarters of historical revenue for the medical business and industrial equipment for your reference. There is no change to our segment reporting or those numbers. Due to the large number of participants on the Q&A portion of today's call, we are 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 are willing to take follow-up questions, but ask that you rejoin the queue if you have a second question. Now let me turn the call over to Terrence for opening comments.

Thank you, Shuzo, and thank you everyone for joining us today to cover our first quarter results as well as our increased outlook for fiscal 2020. As I normally do before we get into the slides, I do want to frame out some of the key points that Heath and I will bring out during today's call. First is that things are playing out as we expected when we provided our original guidance to you 90 days ago. Our expectations of markets in fiscal 2020 is essentially unchanged. Our order patterns are indicating stability, and the distribution to stocking that we talked about for a few quarters is trending as we expected. Now, in addition to the things playing out, I'm also very pleased with our execution in the first quarter. And this is against the continued challenging market backdrop. We delivered revenue above the guidance midpoint and adjusted earnings per share above the high end of guidance, driven by strong operational execution across our segments. Based upon our strong first quarter, we are raising our full year guidance to reflect the outperformance in the first quarter And we're maintaining a view of the second half that is consistent with our guidance that we gave you 90 days ago. And then finally, there are two things that we've talked about with you and we're focused on within this market backdrop that we're operating in. First is we're going to continue to focus on content growth that will enable outperformance versus the underlying end markets that we position TE around. And we are continuing to benefit from these secular trends across our businesses. The second key thing is that we continue to improve our earnings power by executing on cost actions and footprint consolidation plans, which we will expect to generate higher margins and earnings from the first half to the second half of our fiscal year. So with that as a quick summary, let's get into the slides, and let me ask you to turn to slide three, and I'll get into some of the highlights from the first quarter. Sales of $3.2 billion exceeded the midpoint of our guidance representing 5% year-on-year declines on both reported and organic basis driven by market weakness. While a number of our markets are challenging, we continue to demonstrate content growth across our business, and this can be whether it's an electric vehicle or autonomous features in transportation, next-generation aircraft, and non-invasive medical procedures in our industrial segment or cloud computing and communications. By segment, transportation, was down 6% organically, as we expected, driven by production declines in both the auto market as well as commercial transportation market. Industrial solutions saw growth 1% organically, which was ahead of our guidance, driven by continued strength in AD&M, medical, and energy. And our communications segment declined 14% organically, as we expected, driven by continued inventory to stocking in the distribution channel, which we've been talking about for a few quarters. As we've highlighted to you, supply chain adjustments take a few quarters to play out, and this is happening as we expected, supported by our orders increasing sequentially and our book-to-bill ending the quarter at 102, and I'll cover that when I cover the order slide in a few minutes. From an earnings perspective, adjusted operating margins were approximately 16% as we expected. Adjusted earnings per share was $1.21, which exceeded the high end of our guidance, driven by higher sales and execution of our cost initiatives. On a 5% sales decline, adjusted earnings per share declined at a similar rate, demonstrating strong operating performance and the benefit of pulling levers to reduce costs in an uncertain market environment to preserve earnings resiliency. From a cash flow perspective, our free cash flow was very strong during the quarter at approximately $245 million, and we returned approximately $300 million back to our owners through dividends and share repurchases. I want to be clear that our capital strategy continues to include capital deployment to build out our portfolio inorganically and capitalize on secular trends to drive future growth. Now let me turn over and talk about our full year guidance briefly, and I'll come back towards the end of the call and get into more details about it. For the full year, this does reflect the upside in our first quarter and a view of the second half that is consistent with our prior view. We now expect sales of $13.05 billion. The sales guidance assumes organic declines for the year of 1% to 3%. On a year-on-year basis, our sales guidance reflects a decline of approximately $400 million. Half of this is due to currency exchange rates, and the other half is driven by the market weakness and distribution inventory to stocking, which we discussed with you last quarter. We are raising the low end of our adjusted EPS guidance to get to a midpoint of $5.10. This midpoint continues to include $0.30 of year-over-year headwinds from currency and tax impacts, which is the same as our guide from last quarter. While we can influence the market environment, I am pleased that we continue to execute on leverage which we can control to drive our cost reduction and footprint consolidation plans, while continuing to invest in the long-term growth and our content opportunities. As we discussed last quarter, we expect to generate improvements in both margin and earnings per share as we move from the first half to the second half of this fiscal year. So with that as a backdrop of our first quarter results, let me get into order trends, and I'd ask you to turn to slide four. For the first quarter, our book to bill was 1.02, and this exceeded one for the first time since the second quarter of 2019 and reflects an improving supply chain as well as stability in certain end markets. Organic orders were down 2% year over year, but we did see orders grow sequentially, signaling stabilization in some of the key markets. When I talk about orders, I'm going to talk about them on a sequential basis, as this help lays out the foundation for our quarter two guidance and how we're thinking about the shape of our year. In transportation, orders declined slightly sequentially as we expected, driven by North America, and this was offset by growth in China. In Europe, in transportation, orders were essentially flat on a sequential basis. And as we think about the market, we continue to expect global auto production to be stable at a run rate of approximately 21 million units per quarter through fiscal 2020. Turning to industrial, our orders grew sequentially across all regions, and the growth was driven by ADNM as well as medical. In the communication segment, we saw strong sequential order growth in both appliances and data devices, reinforcing our expectation of growth in the second half. And as we talked about the distribution channel from an overall basis, and certainly the channel impacts our CS segment the most, as well as our industrial equipment business and industrial, our orders did decline 10% year over year, as we expected. But more importantly, we saw order growth grow double-digit sequentially, and it reinforced our view of the inventory normalization that we expect by the end of quarter two and will drive sequential growth as we get into the second half of the year. So with that being a summary of orders, let's get into the segment performance, and I'll start with transportation. That begins on slide five. Transportation sales were down 6% organically year over year as we expected. Our auto sales were down 3% organically driven by global auto production declines. Once again, we continue to outperform auto production due to content growth driven by the increase in electric vehicles as well as autonomous features in vehicles. In our commercial transportation business, sales were down 16% organically driven by weakness in North America and Europe, and this was partially offset by growth in China as a result of China's six emissions adoption, as well as content gains by us. In sensors, our sales were down 11% organically, and this was driven by the weakness in the commercial transportation and industrial end markets. In auto, our sensors revenue was flat year over year, despite production declines, and it reflects the ramps of the new design twins that we've been talking about for a number of years. From a margin perspective, adjusted operating margins were 17.4%, as expected, down year-over-year on lower volumes. So let's turn to industrial solution segment, and that starts on slide six. For the segment, sales grew 1% organically year-over-year, and this was above our expectations. Three of our businesses in the segment saw very strong growth, which was partially offset by ongoing weakness in the industrial equipment market. Our aerospace, defense, and marine business delivered another very strong quarter of 9% organic growth, driven by content growth and new programs in both commercial aerospace as well as defense. As Sujal mentioned earlier, we are now breaking out our medical business from our industrial equipment business to give you greater visibility to another area of growth within TE. Just as a reminder, in medical, we serve both the interventional and surgical imaging markets. And the key area of focus, from an application perspective, are areas around minimally invasive medical products. What's great here is we are a partner of choice to premier OEMs, and our technology enables customers to build the medical devices that save lives, as well as reduce costs. What's really nice about what we built here is that our engineering capability, as well as track record of quality, medical expertise, and broad technical offering really differentiate TE in this market. From a performance perspective in the quarter, the medical business grew 7%, and it was driven by growth entirely by interventional applications. And this trend is one that's going to continue to drive growth for quite some time for us. In our energy business, had a very nice quarter. It was up 12% organically, and this growth was being driven by investments in renewable energies as well as infrastructure upgrades in certain parts of the world. In the industrial equipment business, our sales were down 15% organically, driven by both weak market conditions and factory automation applications, as well as this unit is being impacted by distribution inventory to stocking. From an earnings perspective, adjusted operating margins were down as we expected due to the cost from footprint optimization activities. And as we talked to you before, we continue to remain on track with our multi-year margin expansion plans for the segment. So with that, I'd like to turn to slide seven and let me get into communication solutions. Data devices sales were down 15% organically, and our appliance business sales were also down double-digit organically, and these were in line with our expectations. We saw demand-driven weakness across all regions, along with ongoing inventory to stocking in the distribution channel. As a reminder, this segment has the highest percentage of our business going through distribution, so they will always have a greater impact from channel dynamics than the other two segments. As I mentioned earlier, What's really nice is we did see sequential growth in orders for both of these businesses, which gives us confidence of growth as we move into the second half of our fiscal year. Margins in the segment were 12.1%, and they were impacted by the volume-driven sales decline. And we expect to return to mid-teen target margins in the second half as distribution channel normalizes to be more in line with market conditions. With that, I'm gonna turn it over to Heath, who will go through the financials in some more detail, and I'll come back and cover guidance in a little bit.