Ladies and gentlemen, welcome to the Tyco Electronics second quarter earnings call. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Vice President, Investor Relations, Mr. John Roselli. Please go ahead.

Thanks, Rochelle and good morning. Thank you for joining our conference call to discuss Tyco Electronics' second quarter results for fiscal year 2009 and our outlook for the third quarter. With me today is our Chief Executive Officer, Tom Lynch and our Chief Financial Officer, Terrence Curtin. During the course of this call, we will be providing certain forward-looking information. We ask you to look at today's press release and read through the forward-looking cautionary statements that we have included there. In addition, we will use certain non-GAAP measures in our discussion this morning and we ask you to read through the sections of our press release and the accompanying slide presentation that address the use of these items. The press release and all related tables, along with the slide presentation, can be found on the Investor Relations portion of our website at tycoelectronics.com. Now let me turn the call over to Tom for some opening comments.

Thanks, John and good morning, everyone. Today, we are introducing a slide show to accompany our review here, so hopefully that's helpful for you and if you can move to slide 2, we will get started. As we expected, the weak global economic conditions did have a significant impact on our business this quarter as our sales declined 28% organically year-over-year and our adjusted operating earnings declined 85%. So it was a tough quarter from that perspective, although what we expected going into the quarter. Our adjusted earnings per share for the quarter were $0.14 and that does include a $0.07 benefit from a tax rate that was more favorable than our guidance rate. If you were to use our guidance tax rate of 30%, our adjusted earnings per share would have been in the middle of the guidance range we provided last quarter. The tax rate will tend to fluctuate a little bit at these income levels. Terrence will expound on that when he walks you through the financials in more detail in a few minutes. Our business conditions remain weak and visibility is limited, but we have seen our order rates stabilize over the last two months, last March and April, as compared to the weakening trends we were seeing at the time of our last call. In our businesses that serve consumer markets, which includes automotive, order rates have picked up over the last couple months. In our industrial markets, orders are still soft and weakening a bit. The good news is we are seeing stabilization in orders, but it is off a much lower base than the prior year, but things do feel a little bit better now than they did three months ago as inventories in the supply chain, particularly in the consumer market and…

Thanks, Tom and good morning, everyone. Let me start by reviewing our sales performance by segment and market and then I will review our earnings, cash flow and liquidity. So if you can turn to slide 4, this slide shows our overall revenue performance by segment. Overall, our total company sales were down 33% in the quarter or 28% on an organic basis. As you can see in the lower left hand corner of the slide, our business is serving the consumer markets, most of which are in the Components segment and to a lesser extent in the new Specialty Products segment, decreased 44% on an organic basis and these markets were the most affected by the economic slowdown. So let me turn to slide 5 and cover segment performance in more detail. Starting with our Electronic Components segment on the left hand side, our sales declined 45% in the quarter or 41% organically. The decline was broad-based across markets and geographies. On a regional basis, all three regions were down more than 35% year-over-year and we experienced declines in every major end market with the consumer-related markets, which are about 70% of the segment sales, declining 45% while the industrial and infrastructure markets that we serve were down 30%. Getting into specifics by the major markets in the segment. In the automotive market, our sales declined 49% organically, driven by an estimated 40% decline in global automotive production from 19 million units produced last year to approximately 11 million units in the current year quarter. We were also impacted by inventory corrections throughout the supply chain, which caused our sales decline to be higher than production levels. Geographically, all regions experienced a similar decline, and for quarter three, we do expect a sequential improvement in our sales driven by…

Thanks, Terrence. I'm now going to move to slide 12, which is our Q3 outlook. And please note that the outlook for Q3 does exclude our Wireless Systems business, as we will now be reporting that as a discontinued operation. For Q3, we expect our sales will be in the range of $2.35 billion to $2.45 billion, which is flat to slightly higher than Q2, but down 30% to 33% year over year on an organic basis. Last year's third quarter was really the high watermark and after that, that is when the business really began to deteriorate. So it is one of our hardest compares I would say, but business is still weak out there. As I mentioned earlier, in our consumer-related businesses, we expect sequential improvement in the 8% to 10% range while we would expect industrial to be down 5% to 7% and automotive will be low double digits is what we are expecting right now and based on the order rates we are seeing. We expect our adjusted operating income to be in the range of $40 million to $70 million and this is down a little bit from Q2 due to the continued impact of our inventory reduction efforts on our profitability. Q3 is definitely where the biggest impact of the production cuts is being felt, some impact in Q2, large impacts in Q3. We do expect this will be another 100 to 200 basis points worse impact than it was in Q2, but if sales continue to stabilize or slightly improve, we expect by the end of the third quarter inventory levels will largely be in line with our sales levels although, for sure, we are not taking our foot off the gas on reducing inventory. We expect our adjusted earnings per share from…

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

Just on the consumer side, right, from your comments and I think from a lot of other component companies, definitely sounds like we are starting to see stability and some inventory build, rebuild. But on the other side, you guys are talking about a 10% sequential growth. Now is that really a reflection of demand getting better or are you just seeing some possible pull-ins due to one-time benefits from the Scrappage Laws in Europe for example?

Amit, all of that is in Europe and Asia. None of that is happening in the US yet and it is more from inventory. A lot of governments have a variety of different, say, stimulus programs to encourage people, whether it is the scrapping of the old car, credits for new purchases. I don't think we have seen that really begin to hit in any significant way yet. I mean it remains to be seen how significant that will be, but clearly everybody slams on the brakes in inventory four or five months and that is finally getting to a point where there is just not enough inventory in the pipeline. So I would say it is more inventory right now.

Then just on the inventory aspect, and you guys actually did a pretty good job I think of lowering it and it was down 20% or so year-over-year. Your sales are still down 30%, so do we still take it that there is actually room for cash generation to be positive as we work down further inventory in the June quarter? Is that reasonable?

It will depend on how much inventory we do take out, but from that viewpoint, if you look at that $200 million, cash could be positive from a free cash flow perspective. We do have our interest payment in this quarter, which are semi-annual, which does create a little bit of a drag, but there definitely is potential for that.

Then just finally from me, the Electronic Component business, what sort of revenue run rate could we see that business start to break even?

If you look at components, certainly the margin impact of the inventory drag is the largest in components. That is the one that has had the most impact, obviously top line, which is where the inventory actions are there. So, when you look at it, the inventory is creating the loss you have seen there, as well as will create the loss to slightly go up sequentially as we continue to work through inventory. If you look at the cost actions and so forth, we would have to be higher than the levels are today, but it will depend upon the mix of revenue between the various businesses in there. So, from that viewpoint, the inventory burn is having a big impact there, but it will depend upon where business levels are between the businesses that are in there.

But it definitely sounds like you need more than just cost savings, right, to drive that and to break even a positive territory.

Between the cost savings and the inventory and a slight improvement in revenue, we would be close to breakeven.

The next question comes from the line of Brian White of Collins Stewart.

Just on the inventory frontier, if sales were pretty much in line with what you thought, why do we have so much excess inventory going into the June quarter?

Can you repeat the last part of that question?

It seems like sales are what you expected in the March quarter and a little bit of a growth here in the June quarter sequentially, so I'm just wondering why do we have so much excess inventory?

Brian, when you look at it and I'll go back to the last call, when you look at our inventory, we did state that we had higher-than-normal levels and it would take us multiple quarters to work that off as you are aware. Inventory, by the various industries, you can't switch between the industries. So we set a target out to get about $200 million out in quarter two. We drove that at a higher level at $326 million and our goal is to get it behind us by the end of Q3. So our goal has always been that this would be a multi-quarter process to work through and we exceeded the target that we actually set out here for Q2.

And another way to think about that, Brian, this is John, if you look at where we ended last year, we had around $2.1 billion of inventory. If you think about a $10 billion sales run rate, that is down about 30%. So, if you drop our inventory levels by 30%, that is roughly where we need to get our inventory to be in line with our sales run rate and we're not quite there yet.

Okay, it looks to me, I mean just looking at inventory to revenue throughout '08, you are at a mid-60% type level that maybe you would have more like 350 to 400 excess inventory, but you think it is 150 to 200.

It is slightly above 200, if you look at that. It is not 350 to 400. Right now, if you look at the metric, we are around 82 days. We typically like to be in the 70s. So when you look at it, it is not as big of a number as you have. But to Tom's point, in these uncertain times, we are going to take it down as far as we can basically to make sure we get the most out of cash generation as well.

And also, Brian, I would say over time I believe we can run the inventory at less than the 70 days range. We are doing a lot from a process point of view. Probably if you were to say in your reductions this year, 80% is more of in the brute force category, you know, you just stop the press for this kind of thing. But we are making a lot of process improvement and I think one of the real opportunities for this company that we are very focused on is to run the business with less inventory, at the same time improve our delivery rate. So that is a key focus area.

And just on the auto front, have some of your customers come to you and asked for better pricing in the auto component area?

I would say not any more than usual. And what I mean by that is, there is always the pricing negotiations going on. To give you an example though, of that $150 million of additional business we bid on, a fair amount of that business we lost because of the price in the past. We didn't just all of a sudden change our price threshold to get it. Our point has been, we continue to invest. We have dedicated engineers; you can count on us; we are going to keep that. So far we have not seen any real change in price erosion across, and our position has been, volumes are down 30% below when we bid these jobs. So we understand everybody would like lower prices, but so far that is holding the day, and I think it is a good argument for us.

The next question comes from the line of Matt Sheerin of Thomas Weisel.

Back to the gross margin on your expectations past the June quarter, we understand the impact of the inventory reduction on gross margin this quarter. In fact, it sounds like it is going to be down again a little bit. But you also talked about, I think, the 200 basis point improvement when you get back to production levels. So is that what we should be thinking about, about whether it be September or December, the gross margin up a couple of points or so?

Yes. When you look at it, right now certainly the manufacturing margin, I'm going to take out the engineering because that is leverage that is in there. But if you look at the manufacturing margin, you are thinking about it right. At this level, manufacturing margin we would expect to be in the 26%, 27% range, manufacturing margin once we work through all of this, including just the impacts of the cost savings.

Okay. And then on the cash situation, could you just talk about what your short-term plans are for the cash in addition to, obviously, the requirements that you have with the restructuring charges and other things? Do we plan to take down the credit line more than you have now? I think you took it down $100 million this quarter.

Yes. Similar to what we said last quarter, we are not repurchasing shares. Right now, we are going to hold excess capital to provide flexibility around the balance sheet. We do have about $340 million outstanding on the revolver. And really what we will do is right now protect the balance sheet from a liquidity perspective, and there could be further debt reductions, especially when we get into the proceeds off the wireless sale.

The next question comes from Jim Suva of Citi.

I believe your financial goals were $12 billion in sales, 12% margins and $2 of EPS, coupled with a dividend payout of 20% to 25% of the EPS. Can you address that because it seems like we are pretty far from that EPS level and the dividend payout of 20% to 25%? I know you are committed for the next quarter or two, but should we expect that payout ratio and that financial goal timeline what we are looking at or do we need to adjust it accordingly now that there are so many acquisition or divestitures that are finished?

A couple things I would say. When we talked about the 12 at 12%, it is really to kind of give you a sense of what we are doing with the cost structure to drive the operating leverage. As I mentioned in my comments, when we looked at this program, make sure we draw the right balance, first and foremost, be financially solid at 10, the current run rate. With all the actions we have largely in place, I feel like we are there. That gives us the leverage then as we go from 10 to 12 to really see the operating leverage come through, which has been something, as you know, as we have talked over the past couple of years, has not been a strong suit of the company. It is something we are extremely focused on up and down in this company to get the operating leverage that I believe is inherent in the company. That would then translate to when $12 billion comes, and I guess that is probably a couple years out based on today's circumstances. But that would translate into roughly a $2 EPS. And then with respect to the dividend, we think the right level traditionally -- and I'm going back to 25% to 30% based on the kind of company we are, we committed six months ago to a dividend level; we are sticking with it. We have the cash to do it and with our Board, this is always the main topic of our August-September Board meeting, which is, what is your business plan for the next three to five years, let's go through the operating plan for this year and then we work through with the Board's approval what we think the appropriate dividend is. So that is really where we are. We are committed to the May and August dividend at $0.16 a share and the current rate and then take a look at that, which is our MO for our planning process.

And as a quick follow-up on the wireless divestiture, are there any remaining liabilities left from that specifically related to what is remaining or the New York state contract, which didn't go as optimal as planned? How should we think about any residual impact?

Well, we clearly retain that liability. As you know, we wrote off about $110 million last quarter, of which $50 million was related to the drawdown by the letter of credit. We have filed affectively suit in the New York Claims Court. We like our position very much. This system that the state decided to discontinue is up and running in other places around the country as advertised. So I don't believe we have any material exposure beyond what we have recorded. I mean this has to play out, but we're going after this in an aggressive way because we believe that we delivered the system that we signed up to deliver. That would be the major liability.

And the next question comes from the line of William Stein of Credit Suisse. Please go ahead.

Thanks. First, just a small follow-up on Jim's question. At the $12 billion revenue run rate and 12% operating margin, do you guys have a target operating and free cash flow level?

It would continue to be. As we said historically, we would expect our free cash flow will approximate net income. That has not changed.

Okay. Then about the plant closures, that's the last of the real restructuring that's still left. I assume the 12%, $12 billion relates to when the plant or the manufacturing restructuring is done. Is that correct and what is the current view on timing of finishing the manufacturing footprint adjustment and what would it look like in terms of number of plants?

Yes, you are correct and I will go back in time a couple years when we laid out the plan, which was to get us from about 123 plants, south of 100. We are tracking right to that. I think Terrence mentioned 19 finished, six in progress. If you go back to that original plan, that is really tracking very well to the original plan. So that is an important part of the $300 million that we talked about $150 million to $175 million annual savings from that, about a three-year payback on the investment. Since then, we have identified some additional fixed costs to take out of manufacturing, plus the $100 million in SG&A. So that is how you get to the $300 million. So we are largely through that. We don't have to start any new plants to hit that number. We have to finish off these six that are well underway now.

When is the plan to finish those?

That will be in early to mid 2010, which is in line with the original plan. We said that program would be finished about then and that is where we are headed.

Great. And one other one if I can. I was just kind of surprised to hear you talk about new opportunities in automotive. I think you mentioned $150 million new opportunities that you are bidding on. I would imagine that is with one of the big U.S. [ODEs] because it is where you have been less strong. I'm wondering what the strategy is around that. Why is this a new focus?

It is more than U.S. Some of the shakeout in the supplier base applies globally and by the way, anything that is US-related is taken with great care, but it is much more than U.S. Clearly, automotive is in tough straits right now and our business is in tough straits, but the dynamics in the business or the characteristics of the business are still fundamentally sound. And if you look at almost any automaker and particularly the European automakers and the Asian automakers, their three fundamental focuses are safe, green and connected. That is all electronics-driven. I mean that is all electronics-enabled I should say. As we've said before I believe, if you talk about alternative energy engines, whether they be all electric or hybrid vehicles, there is a lot more electronic content in that, which means there is more of our content. So while things are very tough when the production is down 40% in the second quarter of number of vehicles, the trends there aren't changing and we are the leader in the industry and it is not an easy industry to get into because quality, track record, the ability to invest. I mean most of where we spend our engineering dollars today is two to four years out on the next generation of vehicles. So it's still an important part of our strategy. From the beginning, two years ago, we said the most important part of our restructuring strategy is to significantly reduce our fixed cost base in that business. That is on track. It's being overwhelmed by the volume decline. But keep it as healthy as possible in the short term and take the costs out, be selective on where we want to grow and by the way, we are discontinuing some product lines too. We are phasing out product lines that aren't in our sweet spot. It's really strengthening the mix of the business within automotive that we're focused on and being very, very selective of chasing North America.

The next question comes from the line of Shawn Harrison of Longbow Research. Please go ahead.

Just a follow-up on the restructuring question. By my math, it looks like there is about $150 million of fixed costs that have been removed here to date. The remaining of the manufacturing saves I'm guessing are going to be very back-end loaded until the facilities close, if that is correct. Just wondering about the timing of the additional OpEx savings, how we should see those role on?

OpEx savings, for the most part when you say OpEx, I'm talking RD&E and SG&A. They are in, so we were able to execute those quicker, Shawn. So that $100 million structural, that is in place and I think you saw our SG&A this quarter actually came in lower than we guided last quarter based upon executing on those moves quicker. Footprint, definitely as Tom said, on the six factories that are still in process. Some of those will go into early next year, middle of next year, but the bulk of it is in place.

You are in the ballpark on your estimate though there.

Okay, and then the other side of that, the $500 million in variable costs that have been removed to date, how should we expect those to come back as demand eventually recovers? I'm expecting it to be very gradual, but maybe if you could just kind of give me some idea of how to maybe model that as we look out into 2010 or 2011 if demand comes back, just to think about that dynamic.

The way I would think about it is some of it is definitely going to come back because it is in the categories of where there has been a freeze on raises, elimination or in most cases elimination of bonuses, extreme cutbacks on discretionary travel, anything like that. So you swing the pendulum very far as is needed. I would think about it this way, kind of the first billion dollars in revenue back, you would expect a couple hundred million of that to come and then a little bit less because in order to remain competitive in certain areas, you'll need to give some raises and things like that. I mean we have a very tight fist around that $500 million. Right now, it's managed literally daily across our business. So it would gradually flow back and we want to keep out as much as we can frankly. When we talk around our targets now, we're talking around $300 million permanent, but it wouldn't be at all back in until you get to well north of $12 billion in revenue.

Okay. And then just I guess two final quick questions. Raw material costs, I know that you're still working through some of the higher priced purchases made back in the latter part of calendar '08. As those roll off, what should we expect to see any P&L benefit in 2010? Then just on the Network Solutions business, I want to just get a clarification. It sounds like you are saying you are not going to see any type of seasonal uptick here in the June quarter or did I hear that incorrectly?

First, on metals, you are right on how you have it. Inventory reduction that we are in the middle of and on the fixing we did at the end of last year, it is taking us longer to work through the fixing than we anticipated in the first and second quarter. So right now, we are still buying copper in the mid-to high 2s for when we do procure it. We are not buying a lot right now as we work through it. So as you look at it, as you go into next year, if we stay at these types of levels, we would only probably buy 130 million pounds of copper. You can separate the price on that from mid to high 2s versus a market price and multiply it by the volume. And like we've said, we would anticipate about half of that may have to come back through pricing when we did raise it, but I think that's the way you think about it. On Network Solutions, typically you are right and in the comments I made. Our utility business where we serve in the energy market, as well as the service provider side, we typically get a summer increase because of weather being better. Right now, with where capital spending are in those markets, we would expect that to really be flat sequentially.

Let me just add a little bit to that. I would say that is what we see right now in our order rate. If you take the other two parts of the network, our telecom plant business, the part of that business that is growing is the carriers around the world deploying fiber networks. And as you have seen the last three years, that tends to be lumpy. We really have a very nice product line there and have strengthened our share in the U.S. and our strongest base is in Europe. That continues to be a little bit of a lumpy business, but it doesn't tie directly to economics. And then I would say thirdly in our enterprise or our building networks business, we are starting to see a little bit of a flattening out of the decline, which we had expected.

And the next question comes from the line of [Steven Fox] of CLSA. Please go ahead.

I guess just going back over the auto business a little, you mentioned the sharp decline in auto production worldwide since a year ago. Were you guys rightsizing the business? If you talked about the 19 million units going down to 11 million, where, in your mind, do you need to get your own production to match up against expected demand over the next few years? And then just secondly, what is the implications for the margins in the auto business? Is there any permanent impairment that we need to worry about?

First off on production, Steve, we did go down to 11 million units. If you look at that and you annualize that that would be 44 million units of annual car production. We don't believe that that is the right level. So where we have been sizing the business right now is that that comes back to about a 60 million unit level versus the 73 million we had last year. So when you do look at it, we are sizing it for around a 60 million unit production level. And it is all for us to see when does that come back. Certainly we have lost a little bit of leverage in our automotive business going from 73 million to 60 million, that's why we are taking the costs out. Margin will be slightly less than where we have run historically, but that is built into the 12% at $12 billion model that Tom covered.

Then the final question comes from the line of Amitabh Passi of UBS. Please go ahead.

Just had a couple of quick ones. My first one had to do with the automotive business too. There's a lot of excitement around the scrappage incentives in Europe and what not. Just wanted to get your perspective. A, do you have any concerns that we are probably seeing some level of demand being pulled in and what do you think the potential ramifications are further down the road? And B, it seems like most of the increased volumes we have seen have been in smaller model cars. I'm just wondering how you sort of think about that in terms of your dollar content and potentially maybe incremental pricing pressures in these models?

Sure. So three things. I think what we are seeing in our business pickup is still more related to inventory correction. Most of the European and Asian automakers are just starting to increase production now or have plans to increase in May. So I don't think we have seen too much impact from a change in demand. We are not counting on it. I mean we are hopeful that it is going to happen, but it is not changing how we run the business. We are assuming that inventory gets corrected and this is going to last for a while. Our marching orders continue to take the structure down and continue to focus on attractive new programs and be flexible to respond when it comes. I think we are seeing the ability to do that in the third quarter as it evolves. Could you tell me the second part of your question again?

The second part was just it seems like most of the incremental volumes have been in what appeared to be smaller makes, smaller model cars.

I think that is definitely the case and electronic content is lower in that case, but relatively, it is still on the newer cars that come out of a similar, let's say, category, small car, midsize. There is more content because there is more airbags, there is the move in Asia and U.S. with (inaudible) brakes and I should say vehicle stability systems. There is more entertainment. The entertainment systems are moving from high-end options to more standard in some cases. But no question, a high-end vehicle has more content than a midsize or low end. So that is a little bit of pressure. We view that as more of a short-term thing because the whole history is people like to move up in cars. So we don't think that dynamic is going to change and it may be this way for a period of time for sure. Like I said, the way we are thinking about and the way we are managing the businesses, not assuming a recovery, being ready for one, but most importantly continuing to lower the cost structure so we can have an attractive business at much lower revenue.

Then just very quickly on your industrial markets, particularly some of the so-called late cycle markets, including your exposure to non-res construction. Do you have any concerns that we might actually see sort of a prolonged period of weakness in your industrial sort of segment? And then just wondering as the mix shifts, assuming consumer does relatively better, industrial maybe slightly worse, does that have any meaningful impact on your margins?

It puts a little pressure on the margins because generally the industrial margins are higher and they are more custom in nature, the products. We are concerned. The industrial markets are definitely lagging and this typically happens in the consumer markets. So I think there will be a lag effect on recovery. As we indicated, we expect industrial to be down in kind of 5% to 7% range sequentially in the third quarter.

just my final question and maybe this is for Terrence. If we were to normalize for the adverse impact on margins from your inventory work-down, assuming we get back to sort of "more normalized margins". As demand recurs and revenues grow, how do we think about incremental operating margins? I mean is it roughly in the 20%, 25% range as revenues sort of grow?

I think as Tom mentioned, early on, it should be higher because of the cost actions we have had, so I think you will be higher than that rate. I think once you hit the run rate, up above $12 billion, you will probably be in that range both early on because of the temporary actions we have and the suppression we want to keep on these lower levels, it should be higher than that.

Back to you, gentlemen.

Thank you, everyone for taking the time and Keith Kolstrom and myself will be around all day to take any follow-up questions you may have. Thanks, everyone.

Okay, thank you. Ladies and gentlemen, this conference will be made available for replay after 10:30 am today until May 6 at midnight. You may access AT&T executive playback service at any time by dialing 1-800-475-6701, entering the access code 992567. International participants dial 1-320-365-3844. Again, that access code is 992567. That does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference service. You may now disconnect.