TE Connectivity Ltd

The fourth quarter earnings calls for fiscal year 2019. At this time, all lines are in a listen-only mode. We will conduct a question-and-answer session. In order to ask a question during the session, you will need to press star 1 on your telephone. If you require further assistance, you will need to press star 0. I would now like to hand the conference over to our host, Vice President, Investor Relations, Sujul Shah. Please go ahead.

Good morning, and thank you for joining our conference call to discuss TE Connectivity's fourth quarter and full year 2019 results.

With me today are Chief Executive Officer Terrence Curtin and Chief Financial Officer Heath Mintz. 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 addressed 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, Sujol, and thank you everyone for joining us today to cover our 2019 results as well as our outlook for fiscal 2020. As I normally do before we go through the slides, let me frame out the key messages in today's call. First, I am pleased with our execution in the fourth quarter, delivering both revenue and adjusted earnings per share above the midpoint of our guidance. despite a market backdrop where many of our key markets are showing declines. Both in the fourth quarter and for the full year, our results reflect resiliency in our business model and successful execution on multiple levers that we can control to preserve margin, earnings, and cash flow performance despite the cycling we're seeing in certain end markets. And I think the real evidence of this resilience is that our adjusted earnings per share in 2019, being down only 1%, on an overall sales decline of 4% versus last year while maintaining 17% adjusted operating margins for the year. Another key element is that, you know, we always talk about our strong cash generation model and our free cash flow in 2019 was up 15% versus the prior year. And from that, how we used our capital, we returned $1.6 billion to our owners while continuing our bullpond acquisition strategy through which we deployed an additional $300 million of capital in 2019. Now, as we look forward into fiscal 2020, we expect that the majority of our markets, specifically in the transportation and communications segments, will decline at similar rates as they did in 2019. Our sales guidance also reflects the headwinds from currency exchange that we're dealing with, as well as ongoing inventory corrections that we're seeing throughout the supply chain, especially in our channel partners, which began late in 2019 and we expect to be completed by middle of fiscal 2020. A key point is that our strong content traction will partially offset these headwinds. You know, we continue to benefit from secular trends, whether it's electric vehicles, autonomy trends in the vehicle, next generation aircraft, factory automation or cloud computing. These trends are real. and the content gains that we're experiencing are real as well. You know, these content gains are enabling us to outperform even in declining markets and is buffering the market conditions that we're seeing both in 2019 and what we're assuming in 2020. Lastly, I am pleased that we initiated the cost actions we've reviewed with you during our calls, and we remain committed to execute on the levers under our control to improve financial performance as we move through 2020. And despite this market environment, I do want to emphasize that our investment thesis remains solid with a more resilient portfolio, leadership positions in attractive markets that benefit from secular trends, and leverage to drive margin and earnings resiliency. And these levers that we're pulling are helping position us to generate more earnings leverage as markets return to growth. So now I'll turn to the slides, and if you could, I would appreciate if you could turn to slide three. to briefly review the highlights from the fourth quarter. Our sales in the quarter were $3.3 billion and exceeded the midpoint of our guidance, representing a 6% decline on a reported basis and 5% decline organically year-over-year due to the market weakness I highlighted. On a sequential basis, our sales were down 3%, and on a year-on-year basis, our transportation segment was down 5% organically as we expected, and this was driven by global auto production declines as well as declines in commercial transportation markets. Industrial solutions grew 1% organically, and that was ahead of our guidance, primarily driven by continued strength in aerospace, defense, and marine. And lastly, our communications segment declined 18% organically, as we expected, driven by the inventory, the stocking, and the distribution channel we talked about last quarter. From an earnings perspective, adjusted earnings per share was $1.33, which exceeded the midpoint of our guidance, driven by strong execution, particularly in our industrial segment. Adjusted earnings per share declined only 1% on a sales decline of 6% versus the prior year, demonstrating the resiliency we are focused on driving through the cycle. And lastly, fourth quarter adjusted operating margins were as expected at 16.3%. From a free cash flow perspective, similar to the year, it was very strong at nearly $700 million, and we returned $332 million to our owners. And our capital strategy continues to include capital deployment to build out our portfolio inorganically, and also to further capitalize on the secular trends to drive future growth. So let's turn to slide four for some additional highlights on the full year, as well as to talk more about our guidance for 2020. For the full year, we delivered sales of $13.4 billion, and this was down 4% on a reported basis and 2% organically. Transportation was down 3% organically, driven by the market decline, and content growth in our strong global position resulted in outperformance versus a decline in global auto production of over 6%. Industrial solutions grew 3% organically, driven by growth in aerospace defense and marine and medical applications. and communications declined 7% organically, driven by market weakness and to stocking in the channel. You know, as we discussed in the last call, we saw these inventory trends by our channel partners that started on the order side in the third quarter and impacted our fourth quarter and will continue to impact us through the first half of 2020. For the full year, our adjusted operating margins were at 17% at the total company level, and we generate at 130 basis points of margin expansion in our industrial segment as we continue to execute on our multi-year margin expansion plans. We delivered adjusted earnings per share of $5.55, down 1% versus the prior year on a 4% sales decline. As I mentioned earlier, I'm very pleased with our free cash flow generation, which was up 15% to $1.6 billion, and clearly this demonstrates our strong cash flow model. Now let me turn to the guidance at the lower part of the slide for fiscal 2020 at a high level, and then at the end I'll come back and provide more details for each segment and end market. So for 2020, we expect sales of $13 billion, and this is a decline of $450 million from 2019. When you think about that decline, about one-half of that decline is due to the strength of the U.S. dollar, and that's just creating a currency exchange headwind. The other half of the decline versus 19 is really driven by two key factors. First, as I covered earlier, we are assuming that we will not be seeing end market recoveries in 2020. The markets that declined in 2019 are expected to show continued weakness in 2020, while markets like aerospace and medical we continue to believe will have nice growth as an underlying market in 2020. The other part of the decline is that we expect inventory of the stocking that I've mentioned already to continue through the first half of fiscal 2020 before normalizing in the second half. And as we've mentioned to you before, approximately 20% of our sales go through the distribution channel, and the industrial and communication segments are the ones with the highest exposure to the channel. So you're seeing that in our fourth quarter, and you'll see that in those segments in the first half as that works through. While we cannot control these headwinds, our 2020 guidance includes the content benefit from the secular trends that we've demonstrated over the past several years, and this content will partially buffer the top-line headwinds that we face as we go into 2020. Moving over to earnings, adjusted earnings per share, we expect to be at $5.05 at the midpoint. This includes an approximately $0.30 a year-over-year headwind from the currency exchange I talked about already, as well as the higher tax rate that ETH will get into, and these two headwinds are the main majority of the earnings decline. In addition, we're going to continue to execute on the leverage we can control to drive our cost reduction as well as footprint consolidation plans that we've laid out for you, while we're going to continue to invest in long-term growth and our content opportunities. We do expect to generate improvements in both margin and earnings per share as we progress through the year. So let's turn over to the orders, and that starts on slide five and really sets the basis for our guidance as we start the year. You know, in the fourth quarter, organic orders were down 6% year over year, and we did see a sequential slowdown with orders down 3% from quarter three, reflecting the end market and inventory correction trends I mentioned earlier. Our book-to-bill in the quarter was .97%. And through our distribution partners, our book to bill was actually 0.90. So let me talk about this a little bit more. And you're going to see, you know, the segment details on the slide. So let me talk by region and what we see sequentially. First, we did see improvements in China on organic orders sequentially. But this was more than offset by declines in Europe and North America. By segment, transportation was flat sequentially. but we did see sequential declines in industrial communication segments, and those declines were really driven by the destocking that we're seeing by our partners. When we talk about our distribution channel partners, orders were down double digits sequentially in the fourth quarter, so they actually weakened further from what we saw in quarter three from an order perspective, and we continue to see distribution sell-through run at a lower level than in market demand. And we do expect these trends to continue until the end of our second quarter. So let's get into our results by segment. I'm going to start on slide six with transportation. During the quarter, transportation sales were down 5% organically year over year as we expected. In auto, sales were down 4% organically, driven by global auto production declines. In commercial transportation, our sales were down 14% organically, which reflects broad market weakness across the regions, as well as some supply chain corrections that have been noted by some of our customers. Our sensor business was flat organically, with growth in industrial applications offset by declines in transportation applications. And on the margin perspective for this segment, adjusted operating margins were 17.6%, as we thought. So let's move over to industrial on slide 7. Segment sales grew 1% organically year over year above our expectations with growth driven by our aerospace and defense as well as our medical businesses. Our aerospace defense and marine business delivered another strong quarter with 13% organic growth and that's driven by content gained from new programs in both commercial aerospace as well as defense. In industrial equipment, sales were down 8% organically driven by both weak market conditions and factory automation, as well as inventory corrections. And that was partially offset by 5% organic growth in medical applications. Our energy business was up 2% organically, with growth in North America and China offsetting declines in Europe. Our adjusted operating margins in the segment expanded 50 basis points over the prior year to 15.5%, driven by strong execution by our team. And I am pleased that we remain on track with our multi-year margin expansion plan that was evidenced by the 130 basis points of adjusted operating margin expansion for the full year for this segment. So, let me turn to communication solutions on slide eight. In communications, both our data and device and appliance sales were down 18% organically, and that was in line with our expectations. We saw demand-driven weakness across all regions along with inventory, the stocking, and the distribution channel. This segment has the highest percentage of business going through the distribution channel, so there is greater impact from channel dynamics in this segment. Adjusted operating margins were 12%, which was impacted by the volume-driven sales decline. And for this segment, we continue to focus on achieving adjusted operating margins in the mid-teens, and we're utilizing levers to achieve target margins along with the demand returning to more normalized levels. So with that as a backdrop on the segment side, let me turn it over to Heath to cover the financials, and I'll come back later and talk guidance.

Thank you, Terrence, and good morning, everyone. Please turn to slide 9 where I will provide more details on the Q4 financials. Adjusted operating income was $538 million with an adjusted operating margin of 16.3% as we expected. The GAAP operating income was $444 million and included $71 million of restructuring and other charges and $23 million of acquisition charges and other items. For the full year, restructuring charges were $255 million. Now, this is lower than we expected due to the timing of certain footprint actions. And you keep in mind that These actions are complex activities, so there is some that have moved from where the charges will be taken late in 2019. Those have moved into 2020, but nothing fundamentally has changed with our overall restructuring plans. As a result, I expect restructuring charges to be at similar levels in fiscal 20 as we continue to execute on optimizing manufacturing footprint and improving the cost structure of the organization. Adjusted EPS was $1.33, down 1% year-over-year, and we were able to preserve adjusted EPS despite a sales decline of 6%, as Terrence mentioned. This demonstrates our ability to execute on multiple levers to drive a range performance. Gap EPS was $1.11 for the quarter and included restructuring, acquisition, and other charges of $0.22. The adjusted effective tax rate in Q4 was 15.1%, our full-year 2019 adjusted effective tax rate was 15.5%. The Swiss tax reform, which is in the process of being enacted currently, which we mentioned last quarter, results in our effective tax rate increasing to the high teens going forward. For 2020, we expect an adjusted effective tax rate of between 18 and 18.5% due to these tax reform changes. However, importantly, we do not expect an impact to our cash tax rate, which will stay below our reported ETR, so in the mid-teens for a cash tax rate. Turning to slide 10, our full-year results demonstrate strong performance and the benefit of our portfolio position in what turned out to be a declining demand environment. Our sales were down approximately $550 million year-over-year, which included approximately 400 million impact from currency exchange rates. On the 4% sales decline, we saw an only 1% reduction in adjusted EPS. Adjusted EPS was $5.55, and we were able to maintain 17% adjusted operating margins despite the sales decline. Adjusted EBITDA margins were approximately 22% and reflect the strong cash performance of the business. So for the full year, free cash will increase by 15% to $1.6 billion, with net capital expenditures representing a little over 5% of sales. We remain committed to our balanced capital deployment strategy. We deployed $300 million for acquisitions that will strengthen our sensing and electric vehicle technologies. And please note, this does not include the first sensor acquisition. that we announced previously and should close sometime next spring or early summer. ROIC for the year remains strong in the mid-teens, and we continue to target mid-teens ROIC as we balance organic investments with acquisition opportunities. Our balance sheet is healthy, and we expect cash flow to remain strong, which provides us the flexibility to utilize cash to support organic growth investments to drive long-term sustainable growth while also allowing us to return capital to our shareholders and continue to pursue bolt-on acquisitions. So I'm pleased that our team reacted quickly to pull the levers in our business model throughout the year to help mitigate the impacts of the weaker sales on our margin and EPS performance. As you should expect, we will continue to balance our structural cost actions and our long-term growth investments to ensure sustainability in our business model. With that, I'll turn it back over to Terrence to cover guidance.

Yeah, thanks, Ethan. You know, let me get into guidance. Let me start with the first quarter. That's on slide 11, and certainly, you know, our year builds off of this first quarter. So, as I highlighted earlier, you know, the order patterns we saw in the fourth quarter, you know, we do expect that our revenue in the first quarter will be between $3 billion and $3.2 billion, and adjusted earnings per share of $1.10 to $1.16. At the midpoint, this represents declines in reported sales of 7% in total and organic sales of 6% year-over-year. Our sales guidance for quarter one represents a 6% sequential decline, and this is greater than our typical seasonal decline, which is more like lower single digits, and it reflects the weakness in the end markets as well as the ongoing effects of destocking in the distribution channel that I highlighted. Adjusted EPS is expected to be down 16 cents from the prior year, driven by the market-related sales decline, as well as a stronger dollar. We do expect operating margins to be slightly below our quarter four levels due to the sequential sales decline. However, we do expect as we go through the year, we're going to see improved margin and earnings performance. If you look at it by segment for the first quarter, We expect transportation solutions to be down mid-single digits organically, with high single-digit declines in global auto production and broad weakness in commercial transportation markets. Industrial solutions, we expect to be flat organically, and we expect to continue to have nice growth in our aerospace and defense and medical applications, but this is going to be offset by weakness in industrial applications, especially around factory automation. In our communication segment, we expect to be down mid-teens organically, and the story in the first quarter is very similar to the story we just in the fourth quarter, and it's driven by the continued inventory to stocking and the distribution channel that we see. So let's turn to slide 12, and I'll cover the full-year guidance. We expect full-year sales of $13 billion at midpoint, representing year-over-year declines in reported sales of 3% and organic sales decline of 2%. Adjusted earnings per share is expected to be 505 at the midpoint, which includes year-over-year headwinds of approximately 30 cents from currency exchange and tax rates that we mentioned earlier. So let me talk a little bit about the markets, and I'll go through them by segments as normal. So for the full year, we expect transportation solutions to be down low single digits organically. We expect our organic auto sales to be flat to down low single digits for the full year. And what we've seen over the past couple of quarters is that we saw global auto production sort of get to a run rate of around 21 million vehicles per quarter, and it ran that in both the third and fourth quarter of our fiscal year. And what we expect is that this level of quarterly production is going to remain roughly consistent through 2020. And with this assumption, it results in mid-single-digit global auto production declines for fiscal 19. We do expect content growth to enable us to continue to outperform these weaker auto end markets. When you think about commercial transportation as part of the segment, we do expect commercial transportation markets to be down high single digits in 2020, which caused the sales decline in this business to be in line with the market due to some of the inventory corrections that we expect in the early part of the year. And we do expect growth in our sensors business unit this year, driven by the ramp-up of new auto wins. Turning over to industrial solutions, it is expected to grow low single digits organically with growth in aerospace, defense, and medical being offset by decline in factory automation applications. And in communications, we expect to be down mid-single digits organically with both data and devices and appliances being impacted by the continued broad market weakness and inventory to stocking in the distribution channel. And with this market framing, it's also the way we're thinking about how do we continue to size the organization correctly around these markets, as I mentioned earlier. So before I turn it over to questions, just some other things I want to highlight, and some of it will reiterate what I said at the front. You know, we have built a strong portfolio with leadership positions in the markets we serve, and this portfolio is performing significantly better than the last time we went through a market cycle. The content growth that we talk about, it is enabling outperformance even in a declining market. And it's actually allowing buffering versus some of these weak market conditions of 2019 and 2020. And the trends, like I said earlier, are real, whether it's electric vehicles, autonomy features in a vehicle, next-generation aircraft, factory automation or cloud computing. These are going to continue for quite some time. Additionally, we are demonstrating strong execution on our multi-year industrial margin expansion plan and remain on track for high team margin in that segment. And, you know, I do feel we're executing on what we can control to our restructuring plans that we've increased across all segments, not just industrial, enabling us to take advantage to get greater leverage when we do have markets return to growth. And I finally want to highlight, you know, our cash flow generation continues to be strong, whether it's a good market or not, and it was proven by the 15% up year over year. And it does allow us to maintain a consistent capital strategy with both what we've done on returning capital to owners, as well as improving the portfolio through bolt-on acquisitions. So, before we close, I do want to thank our employees across the world for their execution in 2019, as well as their continued commitment to both our owners and our customers, and a future that is safer, sustainable, productive, and connected. So, Sujal, with that, let's open it up for questions.

Thank you. Polly, could you please give instructions for the Q&A session?

Yeah, thank you. And again, at this time, I would like to remind everyone, in order to ask a question, simply press star, then the number 1 on your telephone keypad. In order to have time for all questions, each participant is limited to one question. If you would like to ask a follow-up question, simply please reorder into the queue by pressing star 1. Your first question comes from the line of Mark Delaney with Goldman Sachs.

Yes, good morning. Thanks very much for taking the question. I'm hoping to better understand the linearity. Good morning. Yeah, I'm hoping to better understand the linearity to a revenue and EPS in fiscal 20 that's assumed in guidance. And maybe you can provide some more color on how the company is expecting revenue and earnings to grow off of the 1Q20 base and what the key variables are that lead to that improvement.

Well, yeah, Mark, thanks for the question. And certainly the first quarter is based upon the order trends we saw. And the order trends, I would say, reflect the market structure I sort of laid out. But then we also have, which will impact the first half, what we're experiencing through some of the corrections that we're seeing through channel partners. So when you think about the first half, what you're going to see is you are going to see us under-earning on the top line, probably in the magnitude of about $100 million of what we normally would do due to the channel corrections we're experiencing. And when we think about that, and I know I talked about it in the script, you know, our channel business runs about $2 billion a year, and that ran about $500 million a quarter, and it's running about $100 million less than it normally runs. And that's due to we're seeing sell throughout being down in the high single digits, and certainly we're not seeing that in our market. So the inventory corrections that we're experiencing are we are seeing that's going to complete through the end of the second quarter. So that's a headwind we're going to have in the first half that will normalize. And, you know, some of our assumptions around that was we did actually see our channel partners inventory come down slightly in the fourth quarter. But that's going to be with us through the first half. When you sort of adjust for that headwind, really what you see as you go through the year is pretty normal seasonality. We aren't assuming that markets are recovering. As I said in my opening comments, you know, there are markets that are strong, aerospace, medical. We expect the trends in those markets are going to stay that way through 2020. And, you know, you see that in our industrial solutions segment performance not only this year, but as we guide for next year. When you get in around the transportation segment, you know, we do expect auto production to stay at that $21 million unit run rate. which is sort of flattish production throughout the year sequentially. So we aren't expecting rebound there or in commercial transportation. So when you think about the market shape, the market shape is really just once you adjust for the channel to stocking is sort of just our normal seasonal pattern, which is we go up a little bit into quarter two, a little bit up further in quarter three, and sort of stay there. So there really is no market recovery in the guidance we came out with on it. From an earnings perspective, I think there's a couple things. Certainly, the channel part is creating some pressure on our margin. That will reverse as that normalizes in the second half. And when you think about the progression for the year, it's probably about split between 50% of the margin improvement and earnings improvement is due to the revenue improvement. Once it's destocked over, the other 50 is cost actions, 50%. pretty balanced with the actions we've talked to you about. So, the linearity reflects a market environment that is sort of a continuation of what we're seeing this year.

Okay. Thank you, Mark. Can we have the next question, please?

And your next question comes from the line of Sean Harrison with Longbow Research.

Hi. Morning, everybody. Just maybe to ask a finer point as a follow-up to Mark's question. as you've had a lot of restructuring, you know, the past couple of years and more into fiscal 20, what would you expect kind of the run rate EBIT margin for the three businesses to be as we exit 2020 and build on it in 2021? Just to get a better idea of how the savings flow through as volumes recover.

Well, Sean, this is Heath. I think you could, you have to, we have restructuring activity going on in all three of the segments. Okay. And so, Now, to Terrence's point earlier on the markets and so forth, we are seeing, you know, and we continue to expect organic performance next year down 2%, and it's a little bit steeper in the communications segment even. So as we look at it, you know, we will be exiting the year, and we anticipate exiting the year next year – closer to our existing run rate here for the second half of 2019. So, kind of in that 17-ish number in terms of exiting next year. As you break it down by segment, you would expect continued kick-up from our entry point into the exit points for each of the three segments. You know, our plan for industrial has always been how do we consistently get it in from from where it historically had been in the low teens operating margins to get it consistently in the mid to high teens. We're a little bit ahead of schedule on that multi-year journey, as you saw the year-over-year improvement in industrial this year. Transportation certainly has room to move up, particularly as some of the plans come offline that are part of the overall restructuring plan. how much of that we see in 2020 versus as we go into 2021 is still to be determined based on the timing of getting those offline. And then in communications, listen, it's the smallest of the three segments, so you're always going to have the most volatility in margins there just by the law of small numbers. However, as you look at it over time, that business should average out somewhere in the mid-teens from an operating margin perspective. they're obviously battling up against a fair amount of volume depression right now.

Okay, thank you, Sean.

We have the next question, please.

And your next question comes from the line of Wamsi Mohan with Bank of America.

Yes, thank you. Good morning. Heath, can you talk a little bit about free cash flow in 2020? You had a very strong growth in free cash flow in 2019 despite the revenue performance, and I was wondering if you can help bridge 2019 with 2020, any major puts and takes that you see.

Sure. Thanks for the question, Wamsi. Listen, we're pleased with the cash flow performance. I mean, we talk a lot about the markets here and earnings and margins and so forth, but at the end of the day, cash is still canyons. And we feel very good about our ability to, in this environment, our operating model allows us to rip working capital out pretty aggressively. So between working capital optimization, we obviously are spending less in CapEx in this environment, but don't misinterpret that for anything in terms of funding growth activities. That still remains strong. We're also taking advantage of some of the investments we've made when we were spending more in the prior year to add capacity in certain regions, that this is allowing us to move some of the restructuring that we're doing now. Now, there will be some restructuring dollars put into play as we go into 2019 in terms of mainly severance expense and so forth related to those restructuring activities, but as we look forward, I would anticipate a similar level of CapEx in 2020 as we just experienced in 2019. I would expect our working capital to stay resilient, and I would expect a similar type of conversion, if you will, between cash and net income as we think about FY20. So it's a good story. All right. Thank you, Ante. Next question, please.

And your next question comes from the line of William Stein with SunTrust.

Hey, guys. Thanks for taking my question. This is Joe on for Will. Hey, Joe. You said you deployed – hey, how are you? You said you deployed about 300 million in acquisitions last year, and you have two more on the come with SMI and first sensor. I'm just wondering what kind of sales and EPS boosts you'd imagine in aggregate in fiscal 20 from all these deals you've done.

Joe, I appreciate the question. The current outlook that we just guided to assumes a fairly de minimis amount of acquisition. I think there's year over year, there's about $50 million of top line impact. As you can imagine with businesses just coming online, that's only a penny or so of EPS. The As we look forward, particularly in the first sensor, which is the more sizable of the deals, given the uncertainty of the timing of when that's going to actually close, we have not included anything in our guidance relative to first sensor. As that closes, we will certainly update that. But on an annualized basis, first sensor is about a $175 million business. and reasonably profitable. So, as we bring it into the fold, we'll update our overall guidance accordingly. Okay, thank you, Joe. Can we have the next question, please?

Okay, your next question comes from Joe Giordino with Cowan.

Hey, guys, good morning.

Hey, Joe, good morning.

Hey, as you look at your global production auto estimates, What market of the three majors that you play in do you think is at most risk in terms of just the market itself getting weaker from here? And if I could just ask if you can clarify your comments about content on commercial vehicles being declining roughly, like your commercial vehicle sales declining roughly with market. Why is that kind of shifting towards less of a content spread there?

Thanks. Sure, Joe. Yeah, let me take... So first off, on global auto production, you know, when you sit there, it does feel, and even when we think about next year, I'm going to keep on going back to this 21 million units a quarter. We have been dealing with, in 2019, you know, areas where you had the amount of cars all not being worked down. That helped. You had some of the regulation that happened in Europe. And it does feel, when we look at the past couple of quarters, pretty stable around 21 million units. Now, what that means by region as we look at 2020, it does sort of say Asia, including China, is down about mid-single digits. You have Europe down about 2% after, you know, being down by single digits in 19. And it does actually show for the first time in a while, we would tell you the Americas and the U.S. will be down slightly low single digits. So, when I look at those, excuse me, I don't view one as aggressive. Certainly we have to continue to see probably China is always the one that you sit there and, you know, as inventory has come down, we still would like to see demand pick up. But net-net, I think at that 21 million units, we're pretty balanced as we go through the year. And the other thing I would just say is, you know, we are very globally balanced that, you know, we plan all the basic programs on the year and regionally. So, you know, if one shifts a little bit versus another, you know, we're going to benefit from that. So let me turn to the second part of your question on commercial transportation. You know, the commercial transportation market, like I said in my comments, we do expect to be down by single digit as a market. We are experiencing, and you saw in our fourth quarter results, we are seeing supply chain corrections by our OEM customers. That started in the fourth quarter, will go in the early part of next year. That is really not a distribution business for us. That's more of a direct business for us like most of our transportation segment. So as we look at next year and how we guide for next year, we're sort of assuming that our revenue for that market will equal the market because the content gained will need to absorb some of the supply chain effects. So content, like you've seen over the past three years, We have very good content momentum. We're just going to need some of that content to absorb some of the supply chain. So next year, we're sort of assuming we'll be more market and actually exceeding market due to some of the supply chain effects we're going to feel early in 2020. Okay.

Thank you, Joe. Can we have the next question, please?

And your next question comes from the line of Matt Sharon with TFL.

Yes, thanks. Good morning. Just one question. Good morning. Just related to your auto business, do you have seeing any impact from the GM strike, both this quarter and as you look out to the December quarter? And just to follow up on the commercial transportation and the HVOR market, where there has been the supply chain inventory build, Are you expecting that to take a couple of quarters just as you are the distribution channel, or does your outlook in terms of in-market growth differ at all?

So let me take the second one because it builds on the question before you, Matt. So we do expect that's going to take a couple of quarters. I would say it's similar to distribution channel, but I would say it's not in the distribution channel. So, you know, we did see that. You saw our performance in the fourth quarter in commercial transportation. was down about 14%, and we do expect we're going to get that correction work through here in the early part of 20. On the first part of your question, on the GM strike, it really doesn't have a big impact on us because of how global we are. You know, we're fortunate that every major OEM is a customer of TE, and I think it shows our global strength. So, you know, while certainly that strike has impacted production a little bit, it really doesn't play in much to our numbers.

Okay. Thank you, Matt. Can we have the next question, please?

The next question comes from the line of Craig Heddenbeck with Morgan Stanley.

Yes. Thank you. Question for Terrence. Just looking through just what kind of difficult market conditions, you know, is this a period to kind of look more internally focused in terms of, you know, making sure you execute through a difficult market or, you know, at the same time, are there opportunities kind of for M&A in terms of maybe some dislocations out there? So I just want to get a sense of how you're running the business and how M&A comes into play here.

Craig, it's a combination of both. Clearly, I think you've seen last year, and last year turned out to be a year where our Net-net, our markets were negative overall, despite very strong growth in places like aerospace and medical. And we deployed capital. We added to the sensor platforms, as he said. We also added something in electric vehicle platforms. And they're trends that, you know, we're committed to. And, you know, they're driving content opportunities. So no different than the earlier question. You know, we have a couple more sensor ones, one smaller one, SMI, that just closed for sensors out there. We're going to continue to look at how do we strengthen this portfolio because we do like around the secular trend how that can drive growth. And, you know, the markets are cycling. And, you know, whether it's automotive, whether it's factory equipment, you know, we are going to have these cycles. We are going to have periods where inventory corrects in supply chain. And I think we have to just stay balanced and be good capital deployers through a cycle, not stop, do one or the other. And I think, you know, we've shown we can do both. And I think we've been pretty disciplined when it comes to capital over the years, and I expect we're going to stay that way.

Okay, thank you, Craig. We have the next question, please.

Your next question comes from the line of Jim Suva with Citi.

Thank you very much. I believe it was Terrence who mentioned on the Q&A about three-quarters of an inventory adjustment, if I heard that correctly. And if so, was that on all the different end markets, or was that more specific to, say, industrial or auto? And can you maybe update us about, you know, it sounds like that that would then put us towards mid-next year about being in a more healthy equilibrium state for inventory. But if you can kind of break it down by the end markets about inventory and the duration for the adjustment for equilibriums. Thanks. Thanks.

You know, Jim, thanks for the question. And, you know, as I said, we started to see this in our orders as we talked last quarter to you. We started to see the orders do it. And, you know, really how it's impacting our revenue. It impacted us this quarter. You see it in our communications and in the industrial equipment market of our industrial segment. So when you think about those businesses, and that's really through the electronic distribution channel, We expect that that end started, and we start to feel it in our fourth quarter we just closed. And in those three businesses themselves, you're going to see that continue into our first quarter, and we expect it to end by the end of our second quarter. So that's really a temporary headwind that we have, and they're the markets you're going to see it the most in, Jim. The other market that I did mention, which is in transportation, is industrial commercial transportation, which is the heavy truck. That's more of a direct supply chain that we're feeling. You saw in the fourth quarter, we think it's going to follow a similar pattern. Elsewhere, we feel inventory is pretty good and, you know, is tracking pretty much to demand and underlying market plus content. So it's really those couple markets, and you can actually see it in the slides, those markets that are showing down double digit. They are typically the ones that you're going to see seeing some of the impacts of the corrections that we're going through.

All right. Thank you, Jim. Can we have the next question, please?

And your next question comes from the line of Christopher Glenn with Oppenheimer.

Thank you. Good morning. Hey, Chris. Hey, Ethan Terrence. On the census comment, I think I heard positive growth next year relative to auto ones. Just wondering if you could kind of, you know, range how that expectation might unfold and you know, maybe in terms of platform mix and take rates, but also broader how you see the inflection for your sensors business ramping over the next couple of years, say, on the basis of flattish production?

Yeah, so, Chris, good question. And, you know, if you look at this year, our sensor business growth was below where we thought it was going to be, mainly due to what we saw in the heavy truck as well as, you know, some of the auto and market demand. market being a lot slower than we expected. So some of the growth that we've talked to you about, about program ramps, has been slower due really to underlying markets. And our sensors business does not have the benefit of the broad base of being on every OEM like our auto business. So you will get a little bit more lumpiness on there. As we go into next year, we do sort of view the auto ramps and the industrial space with the drivers of growth for the sensors. We're still going to have, we still have a big chunk of our sensors business that's in heavy truck. that's going to be impacted by that market. And then you're going to continue to see those auto wins we talked about, well over $2 billion, continue to ramp up. So you're going to continue to see that content separation that we have been showing in sensors versus underlying production. Unfortunately, this year it's been muted by production, but we do expect that's going to continue, and that's some of the reasons we're excited that we'll be able to grow next year, even though auto and industrial transportation markets aren't going to really be helping us.

Okay, thank you, Chris. Can we have the next question, please?

Yes, your next question comes from the line of Deepa Reckhaven with Wells Fargo Securities.

Hey, good morning, all. So my question is on automotive. Terrence, what's your sense on how long the auto weakness can last in what are some of the drivers you're monitoring that can help provide visibility into any sort of inflection to growth when that were to happen? I mean, you touched on China being a wild card, we understand, but that's one part of the question. Second is, also, can you talk about some of the steps that TE is taking to keep or gain market share in the current environment? Thank you.

So, a couple of things. I think what we look at, you know, not only do what we hear from our customers, we do look what is happening from a sales perspective, inventory perspective around the world. And I would say the trends we've talked to you about, you know, whether it's electric vehicle, I would say electric vehicle trends continue to accelerate. Regionally, they've strengthened in Europe. Maybe China, with some of the pause, it's slowed down. But I would say net-net, when we think of the world, the electrical trend, the electrical powertrain trend, is accelerating, certainly with Europe being the leader of it. And even if you take 2019 going into 2020, even though electric vehicles are still a small part, both electric and hybrid are going to be closely up to about 50% year over year, even though a small part of the market. So we get the benefit of that. Clearly, we also are trying to also understand you know, autonomy is probably pushed out a little bit. I would say, you know, as all of us that are in the automotive space, you have less production. We all have to focus. And in that regard, you see more focus going on the electric vehicle powertrain versus autonomous. We're still going to move up autonomous by feature, but probably full level fives further out. And what's great is we benefit from both of those. And certainly electric vehicle is a bigger content item for us than autonomy like we talked to you about. So we look at the same production trends you look at. It does feel like inventory continues to normalize around the world. And certainly, you know, we're adjusting. And I think as Heath laid out on some of the cost plans, one of the things we're going to take advantage of, hey, this auto market is weaker than we thought. And, you know, what we laid out to you is how we're going to plan our cost structure too. So it's not just about setting expectations. It's also the things we're going to work to get our cost structure right, to put the flexibility we need, you know, in the auto market and the other markets we serve.

Okay. Thank you, Deepa. Can we have the next question, please?

Your next question comes from the line of CMIC, Chatterjee with J.P. Morgan.

Hi. Good morning. Thanks for taking the question. I just want to ask on the corporate level or the broader level, you mentioned a couple of times today the resilience in the earnings performance in fiscal 19 despite the revenue declines that you saw. And then that's kind of evident in the fourth quarter results as well. But when I dial forward to the fiscal 20 guidance, it goes the other direction where you have modest kind of 2% decline in revenue, but you have a higher decline in the earnings performance. And even when I exclude kind of FX or tax impact, there's still kind of probably a bit more higher earnings decline than the revenue. So I'm just wondering, can you help me bridge what changes between fiscal 19 and 20 on that front? Is it more reflective of kind of it becoming more difficult to drive cost out or reduce cost incrementally every year as revenue comes down or volume comes down?

No, and I appreciate the question. This is Heath. You know, listen, we've dropped from two years ago to where we just guided, right, about a billion dollars and still held operating margins in the high teens. And so, you know, there's nothing to apologize for there. However, your point is taken. You know, when we're operating at this level and we have this amount of restructuring activity going on, including footprint changes, meaning manufacturing sites coming offline. There is going to be periods of time when you do have some margin compression, certainly as you have duplicative activity going on as sites are coming offline while other sites are coming up. And we'll see some of that during FY20 for some of the things we've taken charges for already in FY19, as well as the anticipated changes that we see forthcoming or charges that we see forthcoming in the early part of 20. So there is that kind of activity going on. In addition to the fact that, you know, we are going to see, as you mentioned earlier, the currency and the tax rates tick up. Certainly that has about – that impacts about 30 cents a year per year on earnings. We'll continue to update that. But in general, I feel like the team is focused. We've got some opportunity to – to exit the year in FY20 in a pretty tough anticipated environment in a position that when we come out of this part of the cycle across all of our businesses, we feel very good to flex up on the uptick relative to the cost structure and relative to where the mix of business is going to be.

Okay. Thank you, Samik. We have the next question, please.

And again, if you would like to ask a question, please press star, then the number one on your telephone keypad. We have a follow-up question from the line of Wasami Mohan with Bank of America.

Yes, thank you. Thanks for taking the follow-up. So your content, I think, came in around 4%, the low end of the range for 2019. How much do you think of this? Was timing related versus mix related? And are there things that you see given your design wins and things like that, that can drive 2020 content growth towards the higher end of the range.

Thanks, Ramzi, for the follow-up. I mean, I think the range that we've talked to you about, four to six, we remain confident at that four to six. Certainly, when you take a year like this year where you have sort of a decline in production, you can get some supply chain effects. No different than we highlighted to you, sometimes our content, as the market was growing, was above the high end of our range. So I don't see anything from a mix versus the 4% to 6% changing. I actually would feel good with the 4% to 6%. Like I say, on a quarter, you may be off a little bit due to supply chain effects, but I feel pretty good about the 4% to 6% as we're going into next year, as well as long term. So, you know, it's creating a buffer versus a negative market. I think that's pretty clear with the backdrop of the environment we've been dealing with. And I think our content trend has been pretty consistent over the past three to four years. That gives us confidence in it with the wins we're seeing and also how we partner with our customers. Okay. Thank you, Wamsi.

Thanks, Wamsi. Thank you. I want to thank everybody for joining our call this morning. And if you have further questions, please contact Investor Relations at TE. Thank you and have a nice day.

And thank you. Ladies and gentlemen, your conference will be available for replay beginning at 10.30 a.m. Eastern Standard Time today, October 30, 2019, on the Investor Relations portion of CE Connectivity website. That will conclude our conference for today. You may now disconnect.