TE Connectivity Ltd

Ladies and gentlemen, thank you for standing by and welcome to the TE Connectivity second quarter earnings call. At this time all lines are in a listen-only mode. Later we will conduct a question and answer session and instructions will be given at that time. If you should require assistance during today's call please press star then zero. 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 second quarter 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. 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. 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 Sujal and thank you everyone for joining us today to cover both our second quarter results and our increased outlook for 2019. And before I head into the slides let me provide a quick summary of the key messages in today's call and I want to start with the markets. Overall the market environment is largely unchanged from our last earnings announcement that we did back in January where we conveyed a weaker market environment in China as well as a slower global auto production environment. Based upon what we're seeing in our order patterns and customer discussions we're maintaining a view of the second half of our fiscal year that is consistent with what we said back in January. You know also despite this weaker market backdrop and some of our key markets I'm pleased with how we're successfully executing on our strategy and outperforming the markets in key areas due to the multiple levers of our business model. And when you think about the growth side of it I do believe we position T to benefit from secular trends and we talked to you a lot about content growth. And as we go through our presentation today you're going to see that content growth is enabling us to partially buffer and help perform the weaker market environment. And you're going to see this in automotive, commercial transportation, aerospace as well as our medical business. The other key thing about our business model is we're also executing on non-growth levers that we've highlighted related to margin as well as capital usage and this is very evident in our second quarter results. Now this year we do expect to keep adjusted earnings per share flat versus the prior year even with 400 million dollars of currency translation headwinds on sales and the declining auto production environment. As I talked about on our call 90 days ago we're defining success in 2019 from a financial perspective as delivering adjusted earnings per share in the second half that is above our 2018 exit rate while absorbing the weaker market and currency headwinds that we're dealing with. And we believe our second quarter results demonstrate traction towards this goal and ensures we're well set up for the future. And finally I do want to stress we're also taking a long-term view towards creating value and expect to execute to the business model targets through the cycle. I think what's really good about TEA is our strong cash flow generation model and that allows us to support sustainable organic growth while enabling return to capital shareholders while also looking at bolt-on acquisitions and these are all key levers in our value creation model. So with that as a quick summary let's get into slides and I'll get into slide three and I'll review the highlights in the second quarter. First of all I am pleased with our execution in the second quarter with revenue at the high end of our guidance and adjusted earnings per share of 15 cents above the midpoint of our guidance. Our results continue to reflect improvement in the resiliency and the diversity of our portfolio. The outperformance in the quarter versus our guidance was driven by our industrial and communication segments while our transportation segment was in line with our expectations. Our sales were $3.4 billion dollars down 4% -over-year on a reported basis and down 1% organically. Sales in the quarter included a headwind of approximately 150 million dollars in currency translation and by segment and transportation our sales were down 3% organically which was in line with our guidance and that was driven by global auto production segment declined of 8% in the quarter. Our industrial segment grew 5% organically which was ahead of our guidance driven by growth and commercial airspace defense as well as medical and our communication segment declined by 2% with weakness in Asia impacting both of our businesses in that segment but our revenue was better than we expected. Turning to earnings in the second quarter we had operating margins of 17% which is in line with our 2018 exit rate and up slightly sequentially. Our transportation margins were in line with our expectations and I do want to take a moment to reflect on the strong margin performance of our industrial and communication segment in the quarter. You know those who have been with us a while you know the reshaping that we've done in our portfolio in our communication segment over the past number of years. You know our focus was to get on higher growth, higher margin applications and we also had to do a lot of heavy lifting to drive improvements in our cost structure as well as our manufacturing footprint. When you look at the strong second quarter adjusted operating margins of 18% in the communication segment they're a direct result of our strategy and our teams execution and to really put a fine point on this back in 2019 this segment was a single-digit margin business and over the past couple of years we doubled the profitability of this segment based upon the strategic actions we took. You know what's nice about it you're also seeing it that we're applying some of that same heavy lifting in our industrial segment that we teed up a couple years ago when we mentioned to you that the segment was not earning where we thought it was entitled and in the quarter the industrial operating margins expanded to .8% reflecting revenue growth and benefit from the strategic actions that we're taking and certainly we're only partially way through that and Heath will get into more details on that later. Adjusted earnings per share of $1.42 exceeded the high end of our guidance and again was driven by the strong operational execution I just mentioned in industrial and communications. Our adjusted earnings per share includes a currency exchange headwind of six cents and adjusted EPS was flat -over-year despite this currency headwind. Free cash flow was also a highlight of the quarter and it was three hundred forty four million dollars. -to-date our free cash flow is four hundred thirteen million dollars and is up approximately forty five percent versus the prior year due to the positive impact of working capital. During the quarter we returned $338 million to shareholders through buybacks and dividends and this month we're pleased to announce that we signed a definitive agreement to acquire the Kisling Group a provider of high voltage and power management solutions. This Bolton acquisition further expands our portfolio for hybrid electric commercial vehicle applications and we do expect that this deal will close before the end of our fiscal year. Based upon our earning momentum in quarter two we are raising the midpoint of our guidance by 15 cents to take the total year up a midpoint to five dollars and sixty cents. We are maintaining the midpoint of our sales guidance at thirteen point six five billion dollars reflecting a second half that is consistent with our prior view. So with that as an overview of the quarter let's turn to slide four and I'll get into our order trends. For the second quarter orders came in as we expected and support the second half guidance. Our book to bill was 1.01 and orders grew sequentially by four percent with growth across all segments versus prior quarter. And the one thing I want to highlight is while overall orders were as expected there were some things we saw regionally that were different that we want to highlight. We did see an increase in order sequentially in China by nine percent which we believe indicates state stabilization in the markets we serve there while in Europe orders were down sequentially by two percent due to a softer end market across our business. Turning the orders by segment, transportation orders declined four percent -over-year as expected and we saw the similar trend sequentially that I just mentioned with stabilization in China while having a slightly weaker Europe. In the industrial segment orders grew three percent organically -over- year driven by aerospace defense and medical and in communications while orders were down -over-year they did grow nine percent sequentially driven by both our businesses in the segment in China data devices and appliances. So with that overview on orders let's get into the segment details and I'll start with slide five and we'll start with transportation. Overall for the segment sales were down three percent organically -over-year. Our auto sales were down five percent organically versus auto production declines of eight percent in the quarter. Our outperformance versus auto production continues to be driven by content growth from secular trends around electric vehicle and increase autonomous features. For the year we continue to expect to outperform auto production by four to six percent consistent with our content growth targets. In commercial transportation we grew two percent organically in the quarter versus global market declines of three percent without performance versus the market fueled by ongoing content and share gains. We saw growth in North America and Europe and this was offset by declines in Asia. Our sensors business grew one percent organically -over-year with growth driven by industrial applications. To highlight the design wins we continue to increase our design win value across a broad spectrum of auto sensor technologies and applications and year to date we have 450 million dollars in new design wins across transportation applications. For the segment adjusted operating margins were 17.5 percent and this was in line with our expectations. As we mentioned last quarter with the market pause we're seeing we are accelerating cost actions in the segment which will result in margin expansion in the second half. With that let's turn over to industrial and that starts on slide six. Overall the segment sales grew five percent organically -over-year. This was above expectations with growth being very strong in aerospace defense medical. In ADNM the business delivered a strong quarter of 13 percent organic growth driven by program ramps in both commercial aerospace as well as a ranking defense market. In industrial equipment sales were up one percent organically and it was really a tale of two cities. Our medical business grew 12 percent but this was offset by mid single-digit declines in the broader industrial markets certainly in factory automation. And lastly our energy business grew four percent on an organic basis driven by growth in North America. The industrial segment adjusted operating margins expanded 190 basis points over the prior year to 15.8 percent driven by strong operational execution by our team. We believe this performance shows our continued traction improving the profitability of this segment as we've laid out for you. While we do expect margins to decline slightly from the first half the second half due to the cost associated with factory consolidation efforts we remain ahead of our original expectations and do expect margin expansion for the full year compared to last year. Additionally our plans remain on track to expand adjust rating operating margins at the high team for this segment over time. So please turn to slide seven and I'll get into communication solutions. Communication sales declined two percent organically due to softness I mentioned earlier across Asia. It's important to remember that for this segment over half of its segment sales are in the Asia region. In data and devices sales were flat organically with growth and data center applications being offset by product weakness across Asia. And our appliance business was down four percent organically due to weakness in Europe and Asia partially offset by growth in North America. As I highlighted earlier adjusted operating margins were an exceptional 18 percent in a quarter and expanded 260 basis points year over year from strong operational execution. Now this margin performance is above our target levels and as a result of our strategy to focus on higher growth higher margin applications. So with that I'm going to turn it over to Heath I'll get in the financials and I'll come back and talk about guidance.

Thank you Terrence and good morning everyone on the call. Please turn to slide eight where I will provide more details on the Q2 financials. Adjusted operating income was 581 million with an adjusted operating margin of 17 percent. Gap operating income was 530 million and included 42 million of restructuring and other charges and 9 million of acquisition charges. As we mentioned last quarter we have broadened the scope of our cost initiatives across our business and are accelerating cost reduction and factory footprint consolidation plans. As a result we are increasing our estimate of restructuring charges to 250 million dollars for the full year. With these initiatives we expect to exit the year with a more nimble cost structure which will help enable future margin expansion and earnings growth. Adjusted EPS was a dollar forty two exceeding the high end of our guidance range and included six cents of headwind from currency. We were able to maintain flat adjusted EPS year over year despite a reduction of revenue which demonstrates our ability to execute on multiple levels to drive earnings performance. Gap EPS was a dollar twenty six for the quarter and included restructuring and other charges of nine cents, tax related charges of four cents and acquisition related charges of two. The adjusted effective tax rate in the year we were able to execute was 15.4 percent. For the full year we expect the adjusted effective tax rate to be in the range of 17.5 to 18 percent. And versus the prior guide we have lowered our full year expectations due to the expected jurisdictional mix of global income. We continue to expect our cash tax rate to be lower than the effective tax rate for the year. As we continue to drive earnings growth in line with our business model we are looking at all levers under our control. In Q2 interest expense decreased 13 million year over year. We have taken advantage of the global interest rates and increased percentage of our borrowings and foreign currencies. Looking ahead we expect our quarterly interest expense to be in line with Q2 levels. Now if I can get you to turn to slide nine. Sales of 3.4 billion were down four percent year over year on a translation negatively impact sales by 154 million versus the prior year. Adjusted operating margins were 17 percent driven by strong operational performance. We expect margin expansion in the second half of the year as we see the benefit of accelerated cost actions. As Terrence noted I'm pleased with the progress we are making to drive long-term improvements in our cost structure. This really sets us up for a more nimble structure as we move into 2020 and beyond. In the quarter cash from continuing operations was 555 million and up 53 percent year on year. Pre-cash flow was 344 million with 179 million of net capital expenditures. We returned 338 million to our shareholders through evidence and share repurchases in the quarter and the first half 2019 pre-cash flow was 413 million an increase of 44 percent versus the first half of prior year. We expect that our pre-cash flow will exceed the prior year even with the increased level of restructure investment related to our cost initiatives. Our balance sheet is healthy and we expect cash flow to remain strong which provides us the ability to support organic growth investments to drive long-term sustainable growth while also allowing us to return capitals to shareholders and to continue to pursue bolt-on acquisitions. I'm now going to turn back over to Terrence to cover guides before Q&A.

Thank you Heath and as I get into guides let's start with the third quarter on slide 10 and a lot of this is going to build on the things we already highlighted. So based upon what we're seeing in the end markets and the order trends third quarter revenue is expected to be 3.4 to 3.5 billion dollars with adjusted earnings per share of a dollar 41 to a dollar 45 and at the midpoint this on sales this is reported in organic sales declines of 4 percent and 1 percent respectively and the difference that you have between the reported and organic is the ongoing strength of the US dollar which we expect to have a headwind year over year from which is about a hundred twenty million dollars in sales and six cents in EPS in the third quarter. Similar to the second quarter we expect to offset this headwind from an adjusted EPS perspective and our adjusted EPS at the midpoint is slightly up over the prior year. By segment we expect transportation solutions to be flat organically. Our order revenue is expected to be flat to down slightly versus a mid single digit decline in global auto production that is still going to be driven by weakness in China and Europe. Our outperformance versus auto production again reinforces the positioning that we've done to benefit from content growth with the key secular trends in that market. In industrial solutions we expect to grow low single digits organically with continued growth and aerospace defense and marine and medical applications and these are going to be offset partially by a weaker factory automation market that we're seeing. And in communications we expect to be down mid single digits organically year over year but I think the important thing to note is sequentially we're going to continue to see that segment revenue improve over the second quarter levels. So let's turn this side and I'll get into the full year guidance. As I mentioned earlier we're reiterating the midpoint of our revenue guidance and the range that we're going out with is a range of 13.55 billion to 13.75 billion in revenue. This continues to represent flat sales organically and a reported sales decline of 2% due to the currency translation headwind that I mentioned earlier of a $400 million. Adjusted earnings per share is expected to be in the range of $5.55 per share to $5.65 per share. An increase of 15 cents at the midpoint from our prior view. I'm very proud that we expect to keep adjusted earnings per share flat versus the prior year even with the 16 cents of currency translation headwinds and the We expect transportation solutions to be flat organically. We expect auto sales to be roughly flat organically with auto production now expected to be down 5% in our fiscal year which is at the weaker end of the range we indicated last quarter. Content gains will continue to enable outperformance versus the production environment. We continue to We expect to be consistent at approximately 22 million vehicles per quarter through our fiscal year. So we had that in the second quarter. We expect 22 million units to be made in the third quarter and fourth quarter. And lastly in transportation we are expecting continued growth and sensors in both industrial and auto applications. Turning to industrial solutions we We expect sales to be up low single digit organically with growth driven by aerospace, defense and medical applications. And in communications we expect to be down low single digits organically driven by the age of market weakness that's affecting both of these businesses. So before we turn it over to questions I just want to provide a quick summary of the call. First off we We expect that you remain committed to our long-term business model and you're continuing to see the positive impact of our diverse portfolio with our industrial and communications segments performing above expectations in the quarter with strong operating margins as well as earning contributions. Secondly the market environment we laid out 90 days ago is largely unchanged with our non-growth leverage of our business model and have increased the midpoint of our earnings guidance. We are maintaining flat adjusted earnings per share growth even with FX and auto production headwinds. And finally as we indicated last quarter we anticipate to demonstrate earnings per share performance in the second half that is above our exit rate in fiscal 18. The leverage we are pulling this year are expected to enable increased earnings in business model performance when markets return to growth as he mentioned. So before I close I do want to thank our employees across the world for their execution in the second quarter and also their continued commitment to our customers and a future that is safer, sustainable, productive and connected. So with that Suzil let's open it up for questions. Okay thank you. Kayla can you please give the instructions for the Q&A session.

Ladies and gentlemen if you wish to ask a question please press star, send one on your touch phone phone. You will hear a tone indicating you've been placed in queue and you may remove yourself from queue at any time by pressing the pound key. If you are using a speakerphone please pick up the handset before pressing the numbers. Once again if you have a question please press star one at this time. Our first question comes from the line of Scott Davis with Mellius Research. Please go ahead.

Hi good morning guys. Hey

Scott. I wanted to just dig a little bit into the industrial business because the margin performance there was well above what we had and I think back at the envelope look like incremental margins almost close to 70% here and you know use the word strong operational performance but you know that can mean a lot of different things so can you help us understand you know I know the guide is for that not to necessarily continue at the same exact level but can you help us understand at least what happened in the quarter that led to such a big positive margin beat. Sure Scott and thanks for the question and you know when you when I'm going to take a step back a little bit you know when we started our journey in industrial a couple years back we certainly laid out a picture where we saw margins getting into the high teens and one of the things that we talked about was we had to you know look at our footprint and do a lot of heavy lifting on the footprint. When you look at the performance in the quarter it really is not around the footprint roots. It is around getting some growth in the segment as well as other cost actions we've been taking as we're tightening up the business and I think one of the things that's nice is you're seeing the fall through potential in these industrial markets. We're also going to be able to get additional levers as some of the things that we're doing on the footprint over the next couple quarters even if the margin of segment may come back a little bit but long term to make sure we get further margin expansion going forward. So during the quarter when you look at it it was truly around getting some volume also sort of the non footprint flow through going on and you see the nice growth both in aerospace as well as medical which are two of the markets that are key from a content perspective and we did it even with an industrial market that we did see the factory automation side got certainly in Europe and Asia a softer environment there so we also did it in an environment where not every business unit was humming so it truly was outside footprint actions and I think it shows the potential and the traction we have to get it out when those footprint actions come into place as we execute them in the second half. Okay thank you. Thank you Scott. I'll stick to the one question rule. Thank you guys. Thank you Scott. We have the next question please.

Our next question comes from the line of Sean Harrison with Longbow Research. Please go ahead.

Good morning everybody and my congratulations on the results in the quarter. Thank you Sean. What are you seeing in terms of inventory either at your direct customers or through distribution in terms of where you want that inventory to be and maybe how long it will take to get to kind of a normalized level.

Sean I appreciate that and one question that's about three questions and one question. When you look at inventory you know one of the things we talked about last quarter as we highlighted markets being a little bit slower with what we saw from our order trends and I mentioned it on the call sequentially we saw orders increase about 4% and what was nice about that was you started to see orders increase in China up about 9% sequentially which is a pretty good indicator inventory has normalized in China and I would also say if you look at the end customers in car inventory for the automotive business itself they've come down closer to a normalized level. They were elevated so I would say in China it feels that process has worked through. Europe I would say we do see probably inventory being a little bit ahead and you know certainly the order trends support that and specifically to go to auto car inventories were a little bit elevated so some of the softness we're seeing in Europe is not surprising and from a distributor perspective inventories are pretty much in line with where we would expect so we are seeing distributors having excess inventory I do think that has worked through and I would also say our lead inventory lines are staying pretty steady as well so they're typically attributes with the sequential orders and our lead lines that keep inventory checks so I would say we're in the later parts maybe a little bit in Europe but overall it feels inventory is in a decent spot. Okay thank you Sean we have the next question please.

The next question comes from the line of Christopher Glenn with Oppenheimer please go ahead.

Thanks I had a question about the debt restructuring if that's the right word looks like your kind of weighted average cost of debt was approximately cut in half and probably done at the beginning of the second quarter can you just explain a little more of the mechanics of how that goes?

Sure Chris this is Heath you know as you know a substantial part of our business is conducted outside the US and we have a fair amount of exposure in Europe and in parts of Asia particularly in Japan and so you know as we've monitored the situation and the spread of the interest rates being what they are we did take advantage of a series of cross currency swaps to take advantage of where the interest rates lie today and it does set us up in a better position it doesn't change anything with our maturity ladder related to when we have debt and future refinancing but it doesn't but it does take advantage of where those cash flows are generated in those regions and our ability to take advantage of that through a series of cross currency swaps so you know as we look at it going forward the next few quarters for sure the interest expense should be very similar to the quarter we just reported and you know into the future and until we have to start refinancing into higher priced debt so it was a very opportunistic chance for us to take advantage of where the interest rates lie. Thanks Chris we have the next question please.

The next question comes from the line of Joe Giordano with Cohen please go ahead.

Hey guys good morning. Hey Joe good morning. So I wanted to ask about the auto restructuring that you guys announced here so you know over the last couple of years you've spent a ton of money to bring that business up to handle the demand ramp that you guys have seen and the content ramp that you guys have seen so talk to me about how you kind of ramp that down in an efficient way where you're not kind of undoing the things that you just spent money to do.

Well sure Joe this is Heath you know it's again remember we're a global auto supplier right so we're producing in regions where our sales have been pretty good and the expansion that we've had to keep up with the demand particularly where we said and benefit from the content gains has been pretty tremendous and those investments have been in parts of the world where that are growing the fastest mainly in parts of China and parts of Mexico and so forth where we've seen a lot of activity in terms of supply chain growth. So the restructuring activity that is going to is really what we're doing is we're taking advantage of a slower global auto production environment where we actually can take a pause for a moment in a couple of places that are less strategic to us in terms of proximity to supply chains not impacting places where we've invested in heavily. So you know we're taking advantage of the opportunity because when things return to growth it gets more hectic and it's a little bit tougher to move manufacturing activity around and you know it's never a great time to do restructuring but we're going to take advantage of the low in the demand. Having said that some of these restructurings particularly things outside the US can get a little more expensive and the paybacks are a little bit more elongated but we've elected to get those done over the next year or so and we're going to take some of those charges in our FY19 and push through this activity over the next year change.

Thank you

Joe. Can we have the next question please?

The next question comes from the line of Craig Hedenbach with Morgan Stanley. Please go ahead.

Yes thank you. Question for Terrence thanks for the details on the oil sensor design wins year to date. You know just looking as you build that book of business can you talk about you know why TEL is winning, you know how you stack up relative to incumbents in the market and in any synergies that you see in terms of having both kind of sensors and connectors as you go to win business. No thanks

Craig and you know when you look at it you know as we've always mentioned to all of you measurement brought when we did that acquisition and a couple of the bolt-ons we did afterwards they brought with us technologies and I think when you think through the synergy we have it really is around our leading global automotive position and also our industrial transportation business which is one of the leading business and you know we have leading share and it gives us access to all global OEMs. It's one of the I think special things about our transportation business is you know our leadership positions balance globally and we are with essentially every major OEM. So the synergy that we really get is you know our automotive customers look at us as an automotive company and how do we bring our customers together to process our quality and to scale things and that's what we're doing with these wins and it's great that customer access that we have is the big synergy. From a competition perspective you know the sensor space is very fragmented. It's not just one company out there and what's really nice is when we're coming in with it some number of sensors in a car continue to so it does have a very nice secular trend with it with all the things we're talking about whether it's electric vehicle as well as autonomous features and we play in that physical network you know sort of bumper to bumper in the car. But the other thing competitively is they're seeing us bring both technology as well as our scale and you know being a trusted supplier is all coming together that is why we talk about while today we might have about $2 of content per vehicle and sensors with the pipeline of winter we're seeing that well doubling up to $5 to $6 share per car over the next five years and I think it's with the fragmentation of the market it's going to continue to be an opportunity area where we're going to continue to build on both organically and then organically over time. Thank you Craig. Can we have the next question please?

The next question is from Juan Z. Mohan with Bank of America. Please go ahead.

Hi, thank you. Terrence if you look at the auto revenues versus production you still have a three point outperformance. Can we view this as a trough gap versus production given there was some inventory adjustment presumably in the quarter and if production is flat from here for the next few quarters but Europe is weaker why do you expect content outperformance to sort of that gap back to a single digit level? Thank you.

So a couple of things. Let me clarify. Production being flat is really sequential production being flat Juan Z. It wasn't year over year. We do expect in our third quarter as I said production is going to be down 5% mid single digit and we also expect to be down 5% for the year. So when you look at it year to date we basically have separation of about 500 basis points which is right square in the middle of our 4 to 6% content growth target we've always said so we're sort of right in the middle of it and you will have inter-quarterly due to supply chain movement around it so we always ask you to look at it over multiple quarters and with what we're seeing with the program wins we've had in electric vehicle and as well as the featured launches we have we do expect in a flat environment our auto sales are going to go up sequentially from here even in a flat environment due to some of those program launches so I feel very good about the 4 to 6%. I think you've seen it now for a number of years you're seeing it in a negative production environment and I think it's been pretty evident in the numbers we've talked about. Okay thank you Juan Z. We have the next question please.

The next question comes from the line of Steven Fox with Cross Research please go ahead.

Hi good morning just a question on Europe Terrence you mentioned some incremental weakness there I was wondering what the chances are that we continue to see further weakness there how you factor that in for the guidance and its implications maybe for some of the restructuring that you're doing over there.

Thanks. Yes Steve thanks for the question. We did make in weakness so the overall environment was if you look at it macroly the same as 90 days ago but China got stronger Europe got weaker and so we do plan that Europe was incrementally weaker and actually why we're at the minus 5% in auto production versus the 4 to 5% last quarter is really due to Europe from a production getting a little weaker so I think we have appropriately dialed it in. To Heath's comments earlier around the restructuring you know we're going to be making sure our supply chain is balanced to where it needs to be and we're taking advantage of the pause and most of the actions we're looking at would be outside of North America so I do think they're appropriately pointed to where we see the weakness.

Great that's helpful thank you. Thank you Steve. Thanks Steve. We have the next question please.

The next question comes from the line of Mark Delaney with Goldman Sachs please go ahead.

Yes good morning congratulations on the nice results. Thanks for taking my question. I was hoping to follow up on the commentary about the China macro situation that was spoken to in the prepared remarks. Maybe you can help us better frame the I think you said 9% sequential increase in China orders. How does that compare to normal seasonality in China and then any other commentary in terms of what the customers are saying or trends by end market that give you some confidence to talk about some improved macro trends in China more broadly. Thanks.

Well I would just say Mark just maybe start with how you normally sequentially see China. Normally the December quarter in China for us is our strongest due to that specifically a very strong production environment. That being said certainly we did not see that. So we're seeing more stability and what we actually saw when we would typically see a December to March quarter have a decline in orders it actually increased and you know we saw increases in our transportation segment as well as our communication segments both in double digit. That being said we also do see the inventory levels around cars improving and the other thing that I think is pretty important around China as we talked about is electric vehicles and while China's production is going to be down double digit year over year the electric vehicle momentum in China really has not changed and what's great in how we position ourselves is we think this year you have about a 50% growth in China electric vehicles between hybrid and full electric vehicles going on in China approaching close to 2 million units versus being about a million two last year and really where we've invested to make sure we take advantage of that electric vehicle trend we aren't seeing slowdown in that category of vehicle at all in China. So I think the way we position certainly where we pointed as well as the order trends and what we're hearing from our customers we do have a feel of stabilization and improvement in China. Okay thank you Mark we have the next question please.

The next question comes from the line of William Stein with SunTrust please go ahead.

Great thanks for taking my question. You're welcome. The acquisition that you mentioned I'm hoping you can provide some details as to the applications, profitability, size, growth that you know any characteristics of that would really help. Thank you. First of all let's talk about it is the Kisling Group I said it during our pre-remarks and what we're excited about with it and I'll get into some of it is this actually this business plays very close in the industrial transportation applications and what we look at you know coming into our industrial transportation you all know how strong our position is there provides good opportunity for synergy as we bring it into that unit. The other thing if you were out of a investor day we did talk about some applications around where do we see electrification in commercial vehicles which is really where this is primarily going to help us and when you look at it and it really builds on our product technology that we already have through some of our relay and contactor technology that we bring to automotive electric vehicles but in a commercial vehicle and certainly heavy truck where you're bringing it in you have to get the voltage rates that are much higher than a traditional automotive electric engine and what's really nice about what Kisling does it gets us up to a thousand volt technology which is important in those applications and I feel very good it's going to talk in and our team is going to do a nice job with it and you know you see what they're doing on the content already. From the sizing you know it is a bolt on it's about 50 million dollars in revenue good profitability and it really talks in with our strategy how we think about bolt ons and I think I said in the script we expect it's going to close later in our fiscal year and you know it'll be more something that will benefit 2020 and beyond than 2019. Okay thank you Will, can we have the next question please?

The next question comes from line of David Kelly with Jefferies please go ahead.

Good morning, thanks for taking mine and maybe a follow up on the previous China electric vehicle discussion if we start to see that overall auto market stabilize do you think that is more concentrated in higher contented vehicles whether it be electric vehicles or active safety enabled cars that require incremental sensor and connectivity content and do you think that maybe drives a further improvement in your content outgrowth story in the near term?

Couple of things I mean I do want to frame you know the China market is a big market overall and still you're probably looking at electric vehicles still being slightly below 10 percent of that market. Anytime you have that electric vehicle that does help us from a content perspective so you're going to have that content trend I don't think it's going to be concentrated you know near term in electric vehicles I think you have to play in all technologies and I think it's where we position ourselves very well that we can make the bets as you have to support combustion engines, hybrids as well as full electric and I think we're going to drive increased content from all of them. The other thing is certainly as you said autonomous features certainly there's a whole stepping stone you have to go through on autonomous features that need to get added before you even get near full autonomy and that's going to also continue to benefit us but it's those two trends together that give us so much confidence when we say four to six percent above production so you know if the market is flat we view we're going to grow four to six percent above market would be mid single digit growth whether it's in China or anywhere in the world and so those two big secular trends that you mentioned are so important for us and it's why we've made the bets to make sure where we have a leading position we're going to capitalize on Okay thank you David. Do we have the next question please?

The next question comes from the line of Jim Suva with Citi. Please go ahead.

Thank you very much. You announced the additional restructuring which appears from the press release to be focused on the transportation segment yet that is one of your more profitable segments and in the past you've you know talked about how you're doing so well there So what's changed or really different that causes you to do restructuring in this segment which appears to be doing quite well when you know it looks like you know these different areas of pockets and strength you have footprints there so we're just trying to figure out about what's really changed to have a need for incremental restructuring in automotive. Thank you.

Well Jim this is Heath. Thanks for the question. You know it really is the global footprint that we have and as the supply chains for our customers have shifted over time we need to make sure that we're always staying close to them and there are a couple of locations outside the US that are handful of locations that I would say we have the opportunity in a slower environment to continue to hone that model you know in terms of what's changed relative to the profile obviously you know some of the margins there we're running currently at our transportation margin below our target margin there and you know with negative auto production that puts pressure in addition to some of the other cost activities that we're working through in the segment and so obviously you know in a time when we have the opportunity to deal with capacity that's not being taken up by the higher global auto production it's the right time for us to dig into that and to further optimize that and what it really does is it lowers our fixed cost structure within that business which allows us when we return to more times of better organic growth really allows us to see better incremental margins and flow through Okay thank you Jim. Next question please.

The next question comes from the line of David Liker with Baird. Please go ahead.

Good morning this is Joe Verwing for David. Hey good morning. It certainly hasn't been a consistent message from the electronic supply chain regarding things like distributor lead times or inventory levels and so your comments stand out and are certainly on the stronger end of what we've been hearing Do you think when you step back and look at your business relative to the industry we might be seeing bigger market share gains or maybe the fact that TE skews towards higher content of applications and maybe that's the reason for the outperformance relative to some of your peers?

When I think about your question I do think I don't know what peers you're looking at Certainly there are some categories and passes and so forth which are product categories we don't play that still have lead time challenges and certainly there are semi-elements that depending upon what semi-category you're in we don't compete against those I don't view them as competitors I view our business model and it's why we talk about being industrial tech we get the benefit of content but we also do have different levers and some of those others that I would view are a little bit more secular than us even though we may have some of the inventory supply chain effects So net-net I do believe we've positioned ourselves around secular trends and like I said I do feel that the content we've positioned ourselves around and the hard work we've done in our portfolio and where we're making our organic bets have allowed us to buffer some weaker market and then also in the non-growth leverage you're seeing what we're doing to make sure we maintain earnings and what is auto is a big business for us is a negative environment so I can't compare to the peer you're comparing to but I do think what you're seeing in this quarter and also our gala shows how we improve this portfolio and also how we use our levers to make sure when it does get a little slower we can maintain earnings and also work on some of the margin areas that we've highlighted for you

Thanks Joe, can we have the next question please

The next question comes from the line of Deepa Raghavan with Wells Fargo, please go ahead

Good morning Terrence and he I had a margin question across your segment so what was the transportation segment margin in Q2, was that what you were expecting or was that below your plan and if you can comment just given the restructuring and stuff should we expect a pause to your 20% plus minus target or how soon do we get there, back up there conversely how sustainable is this industrial and commercial segment margin story Thank you

Thanks Deepa and I appreciate the questions certainly I would say this, as we went into the quarter the TS margin we ended up with was right in line with what we expected going into the quarter we were a little bit the communication and the industrial margins were a little bit better than what we expected and that's reflected in the 17% margin was higher than what we had gone into the quarter expecting to come out of it if you break these margins down into pieces Terrence talked in his prepared remarks about some of the activities that are going on in CS relative to getting the footprint righted in that business we're very pleased with where the CS margins have ended up at this point in their journey I would say it's being the smallest of the three segments it's going to have a little bit more volatility because it's a little bit of a law of smaller numbers maybe 18% is on the high side of our expectations but certainly in the mid and at times high teens is a good place for our communication margin business and very high returns on that because it's not a terribly capital intensive piece of our business so very pleased with where we are in CS and for the most part most of the restructuring activity is behind us as we think about industrial we've been pretty forthright in terms of our journey on the industrial margins to increase from just a couple of years ago north of 300 basis points moving forward we're certainly well on that journey we're up a couple hundred basis points from where we were just a few years ago and that is part of the activity that you'll continue to see as we step forward from 19 to 20 and from 20 to 21 and those activities are well underway as that journey for getting industrial to consistently be at mid to high margins we're a little bit ahead of pace on that relative to what our original FY19 expectations are for TS, listen TS has grown so quickly over the last few years that we have put some money into the business to help it grow I would say that some of that has had an impact on the margins and as we've seen auto production move into recessionary conditions that it's in today globally, that obviously puts additional pressure on our production environment and allows us an opportunity to take advantage of this lull and put some restructuring activity to work as I've mentioned in some of the prior questions in terms of what the margins are going to be going forward we'll exit the year at a much higher rate than we're at now I don't anticipate us being at the 20% number but I do anticipate the journey back towards that 20% is well underway the second half margins for transportation will be higher than we've run in the first half of the year and some of that is due to some of the restructuring that we've already completed

The next question comes from the line of Matt Sheeran with Steele, please go ahead

Yes, thanks and good morning Just a quick question Terrence on the commercial segment within transportation You had obviously very strong growth the last couple of years It's been soft but seems to be holding up better than the automotive segment Could you just talk about puts and takes in that business What you're outlook there I know there's a big content story there's also an EV story there Could you just talk about that?

Yes, certainly and thanks Matt for asking about it When we look at ICT that's construction, that's ag, that's class 8 trucks and certainly almost everything that has four wheels that isn't a car One of the things I think that's been very nice we capitalize on strong markets the past couple of years and those strong markets were really driven by China This year we have seen China decline and we think it's probably declined by about 6% but in North America we do expect the markets, they're up slightly and what's really good is that we're growing and you're seeing the separation and I would say five years ago we would not have expected separation it's really by the content momentum our team has done Certainly we've gotten into deeper penetration into China with our technologies Electric vehicles in heavy trucks are certainly earlier I mean later in the process than cars but it's also around the autonomy that happens in a commercial vehicle also drives a lot more content in a commercial vehicle We're getting it driven in the powertrain certainly as you have fuel emissions as always in this space but then also as you're getting the autonomous features cameras being added to trucks, agricultural equipment that's creating data flow on the commercial vehicle that's driving content and our team is doing a really nice job globally So net-net the content growth separation is similar to what we see in automotive in that 4-6 and I'm proud of what the team is accomplishing it will be great as we bring kissling in to what the team has been doing in that market

Thank you Matt

The next question comes from the line of William Stein with SunTrust, please go ahead

Great, thanks, I wanted to take a minute to talk about the medical end market It's not one we hear about too often We did a couple of acquisitions a few years ago that were a little bit surprising both from a market position and perhaps even pricing perspective but they're doing well now Can you remind us what the exposure is I know you have catheters even Can you just remind us a little bit about what that business is how big it is and what the growth looks like today Certainly it's in our industrial segment and it is part of our industrial business unit and market that we disclose and it is about $700 million roughly annually what we do in industrial and when you look at that $700 million about $500 million of our medical business is completely focused around interventional applications so that can be things around the heart catheter is going to the heart some that also go into the brain and it really leverages our capabilities around what we do from a fine wire also the very special things we do around packaging and mechanical applications that isn't throughout TD and what you saw in the quarter when we went into that business it was an element to diversify our growth based upon capabilities we had we did do Kregelna, we've done some small voltons after that but it is something when you look at those mentally invasive procedures they're helping the outcomes getting the more cost effective outcomes than traditional procedures and the 12% growth shows how we've penetrated the major OEFs are at global positions very strong so we always say we do expect that business to grow I single digit and certainly we were above this quarter with the program momentum we have and I think similar to sensors there's still a lot more opportunity as we continue to increase our penetration in the applications we're in today as well as other applications where we can bring our capabilities and drive synergy Okay, thank you. It looks like we have no further questions I appreciate all of you joining us on our call this morning and if you have further questions please contact Investor Relations at TE Thank you and have a great day

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