TE Connectivity Ltd

Ladies and gentlemen, thank you for standing by and welcome to the ETE Connectivity second quarter earnings call for fiscal year 2020. At this time, all lines are in listen-only mode. Later, we'll conduct a question and answer session. To ask a question during that time, you'll need to press star 1 on your telephone. If you require any further assistance, please press star 0. As a reminder, today's call is being recorded. I would now like to turn the conference over to your host today, Vice President of Investor Relation, Sujil Shah. Please go ahead.

Good morning, and thank you for joining our conference call to discuss TE Connectivity's second quarter 2020 results. With me today are Chief Executive Officer Terrence Curtin and Chief Financial Officer Heath Mitz. During this call, we will be providing certain forward-looking information, and we ask you to review the forward-looking cautionary statements included in today's press release. In addition, we will use certain non-GAAP measures in our discussion this morning, and we ask you to review the sections of our press release and the accompanying slide presentation that address the use of these items. The press release and related tables, along with the slide presentation, can be found on the investor relations portion of our website at te.com. Due to the large number of participants on the Q&A portion of today's call, we're asking everyone to limit themselves to one question to make sure we can give everyone an opportunity to ask questions during the allotted time. We 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, Shijal, and thank you, everyone, for joining us today to cover our second quarter results, insights around what we're seeing in real time, and how this is expected to impact us as we look forward. We are all living through a challenging environment brought about by the global COVID-19 pandemic. When we had our last earnings call just 90 days ago and provided our outlook, it was before the initial onset of COVID in China, and we did not include any expected impacts in our quarter two guidance. I'm very pleased that despite the impacts, we were able to deliver the results in line with the expectations and meet the commitments we made to our customers as well as our shareholders during the quarter. Before I get into the results, I do want to thank our employees. As you all know, we are a global company with engineering and manufacturing operations around the world, and the safety of our employees has been a primary concern. I would like to express my gratitude and appreciation to our teams for their dedication as we navigate the COVID-19 crisis and continue to effectively serve our customers as they also were trying to figure out how to navigate this crisis. A few things that I think stand out in our response to this crisis. First, as a company, we were able to prioritize the safety of our employees while demonstrating strong execution with our customers. Our engineering, customer service, and other non-manufacturing teams adapted well to remote and online work to ensure innovation and service to our customers. I also believe we demonstrated operations resiliency. In China, we brought back our plants online relatively quickly, considering the environment, and steadily increased utilization levels to minimize the impact in the quarter. All of our factories are open and running in China, and Heath will highlight where we are in manufacturing in Europe and North America in his section a little bit later. And lastly, I believe we demonstrated agility, and it gives us confidence about our ability to continue to adapt to changing conditions. Our employees have been extraordinary in supporting our communities, customers, and each other. And what I've seen in the past few months gives me confidence in our position coming out of this crisis. We'll talk more about what we expect over the next few months, but I am proud of the performance, resilience, and flexibilities of our team in this quarter. So if you could, let me start talking about results, and they'll begin on slide three, and I'll frame out the key points of today's call. We delivered sales that were in line with our guidance and adjusted earnings per share that was above the high end of our guidance range with strong performance across all three of our segments. Adjusted operating margins were above 16% and reflect the diversity of our portfolio and the early execution of cost reduction actions, placing TE in a position of strength in a time of continued uncertainty. Another key point is that our balance sheet is strong and we have ample liquidity. A key part of our business model is a strong free cash flow engine that is resilient in periods like this. We expect to generate well in excess of $1 billion of free cash flow this year, and we also have $2.3 billion of liquidity available. Also, as we look forward, there is limited visibility of future demand. We do expect to see greater COVID-19-related impacts in our business in the second half, with particular market weakness in transportation as well as in the commercial aerospace market. As a result, we are estimating that our sales could be down approximately 25% sequentially into quarter three from our quarter two levels. And lastly, as we look beyond the crisis, we do remain excited about where we position TE strategically. I'm convinced we'll get through the crisis and there is no change to our margin expansion plans and the expectations we've shared with you. We expect to improve our earnings power by continuing to execute footprint consolidation plans while accelerating additional cost reductions in light of the weaker demand environment. When markets do stabilize and return to growth, we are well positioned to benefit from a recovery in China, which is about 20% of our business, as well as a broader recovery in the automotive and transportation markets. And the other thing that's great with our cash flow is that we will continue to invest in content growth opportunities to enable outperformance versus underlying end markets. And we will continue to benefit from the secular trends across the businesses and where we position TE. So if you could, I'd appreciate if you could turn the slide floor and at four, and I'll get in to review a few additional highlights from the second quarter. Sales of $3.2 billion were in line with our guidance and it was down 6% on a reported basis and 5% organically year over year. Our orders grew sequentially and we sold a book to bill of 1.05. And these orders reflect that our customers securing supply chain of components in an uncertain supply and demand environment. In fact, our orders in the quarter were higher than we expected when we started the quarter. But I think a key point is that late in the quarter, we did see a fall off in orders in certain businesses, which continued into April. And I'll discuss that and more when I talk to the next slide. From an earnings perspective, our adjusted operating margins were above 16%, and adjusted earnings per share of $1.29 exceeded the high end of our guidance, driven by the strong execution of our teams in all segments. And reinforcing my earlier comments on our cash-generative business model, year-to-date free cash flow was up 34% versus the prior year, and in the second quarter, free cash flow was approximately $310 million, with approximately $430 million being returned to shareholders during the quarter. Going forward, we remain committed to our dividend, but we'll continue to evaluate our share buyback plans in light of the uncertain market conditions. As we look forward, we are withdrawing our guidance for the full year, but we are providing a high level view of quarter three as compared to quarter two. For the third quarter, we believe that our sales could be down approximately 25% sequentially with a roughly 45% sequential fall through to adjusted operating income on the sequential revenue decline. This reflects the order trends we're seeing with market weakness driven primarily in the transportation and commercial aerospace markets, along with some inventory and supply chain corrections that I will discuss. While we can't influence the market environment or how COVID will impact our customers, we remain committed to execute on the leverage we can control to drive our cost reduction and footprint consolidation plans while continuing to invest in the long-term growth and content opportunities of TEE. So please turn to slide five and let me get into the order trends, not only in the quarter, but also what we've seen since quarter M. For the second quarter, orders were at $3.4 billion and stronger than expected as customers secured supply of components in an uncertain supply chain environment, particularly in China. While we were impacted by the COVID-related shutdowns in China early in February, I am pleased with how quickly we brought our 18 factories back online. Due to the high levels of automation, our revenue was minimally impacted in the quarter, and we were able to maintain production to meet our customer commitments, even with periods of labor shortages. I believe this demonstrates that our core manufacturing capability is a source of differentiation, both for TE as well as our customers. As you can see on the chart, We've laid out the sequential orders for quarter one and quarter two, so I'm not going to spend as much time on the actual numbers in quarter two, but I want to spend time on what we're seeing in late March through April to provide a more accurate picture of demand going forward as the Americas and Europe were being impacted by COVID. In transportation, we saw a drop off of orders that started both in auto and commercial transportation late in March and continued into April. As you know, our customers have closed factories starting late in March in Europe and North America. I'm also sure you've seen some of the announcements discussing the plant closures as well as the assumptions of when production can return. In industrial, we saw erosion of orders in commercial aerospace, but we had ongoing strength of orders in our defense business, our medical business, and our energy business and our energy business services, the power utilities of the world. In communications, we have seen stronger demand in data and devices for cloud-based applications as data centers build out further capacity to handle the increase in high-speed data traffic and storage, as well as China recovering. And in China, which represents about 20% of our sales, In March and into April, our orders have basically returned to pre-lunar New Year levels before the COVID outbreak occurred in China. So we are seeing a recovery in China across many of our businesses. So let me turn to slide six, and I can frame how these trends connect to our sales view of quarter three. And this is a new chart that we included for you. We are highlighting some of the major sequential drivers from quarter two to quarter three in our assumptions on this slide, but I do want to highlight we aren't capturing all the puts and takes of our different businesses in the quarter. Directionally, we are expecting sales to decline approximately 25% sequentially into quarter three, and we put these into four buckets. The first bucket is around auto production. We do expect auto production globally to decline by approximately one-third sequentially from the 18 million vehicles globally produced in the second quarter to approximately 12 million vehicles being produced in the third quarter, which is aligned with IHS's view. This production decline in auto will drive about half of our sequential decline of total company revenue. The second bucket... is an expected reduction in commercial aerospace market of approximately one-third due to lower production by the large airframe manufacturers. So these first two buckets are really market related. The third bucket is around the auto supply chain. And with our second quarter auto sales well ahead of production, and I'll talk about that, there was a component inventory build by our customers in the quarter. As a result, we expect approximately $200 million of inventory adjustments by our customers in the third quarter. And this should be a temporary effect as that inventory bleeds off. And then the fourth bucket covers supply chain impacts outside of auto. DE and our customers have a number of factories that are temporarily shut down due to COVID-19 as a result of government actions. We expect the resulting supply chain disruptions to impact a number of our other businesses, and this will cause a reduction of approximately $100 million in the quarter as we go through this quarter. I want to highlight, you know, this is the near-term impact that we're seeing due to the pandemic. But longer term, we expect to continue to benefit from broad secular trends across our businesses, you know, based upon the leading market positions that we've built. So let me now turn briefly to discuss segment results in the quarter. And, you know, we probably did it with the full details on slide seven through nine for your reference. I'm just going to touch it high-level verbally. In our transportation segment, sales were down 5% organically year over year with declines in each of our business. Auto sales were down 2% organically with global production declines being down 20%. Our relatively stronger performance was driven by our customer supply chain builds ahead of factory closures, as well as the continued benefit of content growth. While we are in a volatile demand environment, we continue to expect increased production of hybrid and electric vehicles and ongoing adoption of autonomous features, which will continue our market outperformance that we've had for quite some time now. In sensors, I want to highlight that we recently completed the acquisition of First Sensor, which will now be included in our financial results beginning in the third quarter. In the industrial segment, our sales declined 3% organically year over year as we expected. We saw declines in commercial aerospace and industrial equipment as a result of the market weakness. However, we are seeing stability in defense, medical, and energy due to positive underlying trends and expect those businesses to continue to be stable as we move through the rest of the year. In communications, sales and margins came in as we expected, and while data and devices declined in the second quarter, we are seeing growth in high-speed and cloud applications, and expect this to continue into our third quarter. So with that as a backdrop, let me turn it over to Heath, who will get into more details on the financials, and then I'll come back and cover our expectations for the third quarter.

Thanks, Terrance, and good morning, everyone. Please turn to slide 10, where I will provide more details on the Q2 financials. Adjusted operating income was $519 million with an adjusted operating margin of 16.2%. Adjusted EPS was $1.29, exceeding the high end of guidance. GAAP operating loss was $415 million due to a one-time non-cash charge in the quarter of $900 million. This reflects a partial impairment of the goodwill associated with our sensors business. Also included are $22 million of restructuring and other charges and $12 million of acquisition charges. We continue to expect restructuring charges in the range of $200 to $250 million for this fiscal year. GAAP EPS was a loss of $1.35 for the quarter. It included non-cash charge of $2.67 related to the goodwill impairment and restructuring acquisitions and other charges of $0.08. On the other side, we also had a tax-related benefit of $0.12 related to the pre-separation tax matters and the termination of the tax sharing agreement shared previously. The adjusted effective tax rate in Q2 was 16.1%, and for the third quarter, we would expect a similar rate. If you turn to slide 11, sales of 3.2 billion were down over 200 million year over year, including an impact of 60 million from currency exchange rates, but we were able to maintain adjusted operating margins over 16% in the quarter, as I mentioned. As Terrance mentioned earlier, we already had a number of actions underway ahead of this downturn, which helped us maintain healthy operating margins. For the past two years, we have been executing our margin expansion plans in the industrial segment, and about a year ago, we kicked up our factory footprint consolidation efforts in transportation. We continue to execute on these plans and are accelerating in certain cost actions due to the recent drop in volumes. I now want to give you an update from an operational perspective. We are operating all of our factories in China and most of our factories throughout Asia. Most of our factories in Europe are operating, including the recent reopening of our factories in Italy and Spain. In North America, all of our factories are open in the US, but we do have some plants shut down in Mexico, including those serving automotive. Many of our customers are going through temporary shutdowns of their manufacturing operations in different regions, and all of this volatility has resulted in supply chain dynamics that Terrence discussed previously. In the quarter, cash from continuing operations was $481 million, whereas free cash flow was $311 million, and we returned $433 million to shareholders through dividends and share repurchases in the quarter. If you'll turn to slide 12 to review our cash flow and liquidity, and this is a newer slide that we thought pertinent for this call today. We have a history of strong free cash flow generation, and for the current year, our free cash flow is up 34% year to date versus the prior year. For our fiscal year, we expect free cash flow to be well above $1 billion. Our long-term capital strategy is to return two-thirds of our free cash flow to shareholders through dividends and share buybacks. We remain committed to paying our dividend, and we'll continue to thoughtfully evaluate sharing purchases in light of evolving market conditions. We're also reducing our plans for capital expenditures to approximately $575 million this year, which is a reduction of about $100 million from our prior view 90 days ago. However, and this is important, We remain committed to funding growth initiatives that will enable future growth opportunities, as that's the lifeblood of our company. We continue to execute on footprint consolidation plans and pursue additional opportunities to drive cost reductions. Across our businesses, we have units that are being impacted to differing degrees. And for those units that are most impacted, we are implementing selective furlough of employees that are largely tied to where our corresponding customers have temporary factory closures. We will continue to evaluate our cost structure as the demand environment evolves. We are in a strong liquidity position with 2.3 billion available. As the attached chart details, our debt maturity ladder is gradual. In early February of this year, we raised 550 million euro debt at 0% coupon. The use of the proceeds was for the acquisition of First Sensor and pre-funding of our pending $350 million debt maturity in June. At quarter end, we had a cash balance of approximately $800 million. Given our strong cash position, we have not needed to be in the commercial paper market for some time. We have a $1.5 billion undrawn revolver committed by a strong bank group. Within the revolver covenant, we expect to be well below the $3.75 rolling four-quarter debt to EBITDA ratio going forward. As a reference point, with our current debt-to-EVA-TA ratio of 1.5, we are well below that threshold. With that, I'll turn it over to Terrence to provide some additional commentaries about the forward look.

Thanks, Heath. And we have provided some details of our expectations going forward on slide 13, so let me summarize with a few comments around the words on that page. You know, for Quarter 3, From a market and demand perspective, we're expecting weakness to be driven by transportation and commercial aerospace, as I've said. In addition, we are expecting supply chain adjustments in auto, as well as broader supply chain impacts in other areas. And we expect the supply chain impacts, both in auto and other areas, to be temporary. As a result, our best estimate for the quarter is an approximately 25% sequential sales decline with an approximate 45% fall-through to adjusted operating income on that revenue decline. And this fall-through is greater than our typical fall-through due to the shortness and severity of the volume drop sequentially. During the call, we talked a lot about transportation on Comair, but I do think it's important that we highlight the areas that are continuing to stay stable as well as we benefit from, and they are defense, medical, energy, as well as data devices, and that's about a third of our revenue. The other thing is we are in an excellent position to benefit as auto demand returns, as well as China continues to recover. And while fourth quarter visibility is limited, many believe that our quarter three, the June quarter, will be the low point in global auto production. We expect that production will improve as we move past quarter three, and will benefit both from the production increases as well as inventory normalizing in the auto supply chain like I've talked about. While the demand environment is uncertain, I am pleased with our operations resiliency that we've shown and our ability to continue to serve our customers during this challenging time. We have an excellent pre-cash flow generation model with ample liquidity. And this allows us to continue investing content growth and other secular opportunities across our businesses to emerge stronger when our markets return back to growth. And with that, Sujal, let's open it up for questions.

Okay, Marcella, could you please give the instructions for the Q&A session?

At this time, I'd like to remind everyone, in order to ask a question, please press star and the number one on your telephone keypad. In order to have time for all questions, each participant is limited to one question. If you'd like to ask a follow-up, please reenter the queue. Your first question comes from the line of Sean Harrison from Loop Capital. Your line is open.

Hi, morning, everybody. Good to hear from you. Good morning, Sean. Terrence, I wanted to just go to that last comment of, you know, auto production into the second half of the calendar year and just Maybe an idea of how much you could bounce back just upon a normalization of production schedules into the September quarter. I know IHS has a pretty robust figure out there. Maybe that's not realistic, but bounce off of $12 million. And then secondarily, do you get the same type of margin uplift as production recovers versus the downtick you're seeing in the margin profile this quarter?

Sure. Thanks, Sean, for the question. And when you think about automotive, let me just take a step back first. And where did we think auto production was going to be before COVID started? And even last quarter, and I know we talked about this $200 million supply chain impact, we thought the world was getting stable before COVID and there was going to be about 21 million units made per quarter on the planet. And last quarter, it was 18 million. And moving from that 21 to that 18, a big chunk of that was China as China got impacted by COVID. and a little bit elsewhere in the world. As we move to this 12 million, from the 18 million to the 12, we are seeing China production tick up, but we're also seeing in the western parts of the world the impacts of the factory closures in Europe, in North America, and that's probably going to be down collectively in the western world about 50%. So, you know, 5-0. And as we look forward, You know, our customers are going to continue to ramp. You know, so when you think about the 12 million unit impact, I think it is reasonable to assume you're going to get an improvement into the fourth quarter as auto factories ramp back up. And then in addition, we'll get the benefit as the supply chain works out. So I think there's a couple of factors that point to this quarter being a low point. And in quarter three, as production comes back online, we get further recovery in China. as well as we move back up. Where it'll be in the fourth quarter, there's lots of numbers out there. You mentioned IHS, but we do think quarter three would be the low point. The other thing on your fall down question, we would expect as we start to get whatever that level of production increase is, we do expect we'll get fall up at a pretty significant rate. It's the levers that Heath talked about that we've been doing on the cost side coming into this, which we're proud that we had those going that'll give us some levers to work on during this but I do think you can expect a pretty healthy fall up no different than the fall down and it doesn't change how we think about what we're entitled to for a margin in the markets and in a place like auto where we are have a leading position I think crisis is like this we've only gotten stronger and we're going to get stronger out of this one as our customers look for the partners that are going to be there for and they're going to see their form everywhere in the world.

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

Your next question comes from a line of Abmit Daryani from Evercore. Your line is open.

Good morning, guys. Thanks for taking my question. Good morning. I guess, Terrence, I'm curious, in a post-COVID world, Do you see market share dynamics accelerate in favor of larger companies, and do you think trends like integrated solutions for connectors and sensors are becoming more attractive to folks? I guess I'm just trying to understand, when we've gone through recessions in the past, have you seen TE benefit from share gains as you go through recovery?

You know, it's a great question, and thanks for it. I think what you see as companies go through, we have benefited through these crises to gain shares. And I think back to 08 and 09 a little bit, while the company's very different, we did gain share because of the financial stability we have that Heath talked about, and also our global customers really looking to how do we get deeper and who's going to support them. And I actually believe that what you saw in our operational performance in the second quarter, we did benefit where other people couldn't deliver, we could. And as people were trying to secure supply chain, they were looking for who could keep their supply chains going in an uncertain time. So I do believe it's a differentiation point. I do think, as we've always told you, share doesn't move in big chunks in our industry. But they're going to be looking for the partners as they look forward. And I think between how our engineering teams were able to shift over to online innovation. We didn't see a tail off in projects. And also how we've been adapting our supply chain and also not only ours, also helping our supply chain partners that are below us understand the safety protocols we expect because they are an extension of us. I'm pretty proud of what we accomplished and I do think it creates opportunity for more stickiness as we come back. And I do think it's share opportunity and that's one of the things we view positively about this crisis.

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

Your next question comes from the line of Dita Raghavan from Wells Fargo. Your line is open.

Hey, good morning, all. The backdrop is what it is, not much to control there. So I'm going to ask a little bit of a forward-looking question, just like the prior two. You touched upon this a little bit, Terrence, but could you point to some specific signs of recovery we should be monitoring for here in Europe and North America, especially automotive verticals? I mean, granted, we understand it won't be the same playbook as China or even the trajectory as China in terms of strength. That's one part. Secondarily, if you look at your overall portfolio, what are some of the verticals that we think that we should be looking for to believe that you know, some segments that recover early and some that probably recover with a lag. Thanks.

Sure. No, thanks, Deepa. And I'm probably going to spend more time on the second part of your question because I do think it's important, and I also think we spent a lot of time on the script framing, you know, what we're seeing in auto and Comair. But, you know, when you think about our portfolio, there is a third of our portfolio that is feeling very little impact or minor impact. and our data and device cloud business. Actually, we continue to see an acceleration in those orders. Our medical business has been very stable. Our energy business has been stable and as we've been talking to you, defense has stayed stable and remains at a very high level. That envelope, there's about a third of TE that I would say right now is very stable from an order perspective. You know, we may have some areas where in countries where a government's asked us to stay shut for a little bit. But those indicators, I think, are continuing to remain stable and I feel good about how our teams are performing there. That's about a third. Then there is, you know, I would say our industrial equipment business as well as our appliance business. We do see some softness there. Both are benefiting from the recovery in China. Both have big China presences, but they are being impacted in the West. And, you know, I do think they'll stay soft in the West. They have different underlying drivers. And, you know, in the industrial business, that would probably come back to more as how does CapEx play out over time is what you would look at there. The third business is clearly transportation. I think it does come into auto builds. And, you know, I think we spend a lot of time on that. But what I would also always highlight to you, remember our unique position versus many companies. We are global. We are stronger in Asia and Europe than North America. So I do ask you as you look at builds, and I know this group does, you know, the Asian and European builds are very important with North America sort of being a lower impact. And I know sometimes just being in the United States, we look at the U.S. builds more than the global builds. But I think as Asia comes back and Europe comes back. You know, they are stronger positions and very important to us. And then the last market that I haven't talked about that I would say I don't think I'm going to surprise anybody is the ComAir space. The ComAir space, which is around $550 million of annual revenue for TE, and I know in the comments I said we expect it to be off a third in sort of our waterfall from Q2 to Q3. you know, we do think that's a market that's not going to be coming back near term. You know, I think there's many other, you can look at what Boeing has said, what Airbus is saying and elsewhere. That's one that's going to be down for a while. So I think, I hope that answers the gamut of what, you know, you can look at some of the indicators. And I also think it relates to some of the underlines. And I appreciate the question.

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

Your next question comes from the line of Christopher Glenn from Oppenheimer. Your line is open.

Thank you. Good morning. I was curious to hear you talk about, Terrence, the U.S. factories and facilities up and running in Mexico, still pockets of shutdowns. Are there any key differences between government mandates and how those roll through in their respective production regions and and also any major impacts of just how people, workers, are responding independent of government mandates.

Now, thanks for the question, and I know Heath went through in the prepared comments of where have we seen things. What we have seen is government responses are very different, and I would say the vast majority of the world, because of where our products go, we have been deemed essential, and we have been able to run to make sure that our products continue to go out and all the applications they support. There are countries that have taken broader shutdown. Heath mentioned in Europe. We had some in Italy and Spain that were more severe than elsewhere. We had to take those down. Those factories are coming back up. And then also in Mexico, Mexico has been one that, has gone a little bit narrower of what they deem as essential. It's been much more around medical as well as food processing. And they've been sort of individually bringing other industries on, and we're sort of following that lead. So we are partially running in Mexico. And so the government answers around the world have been very different. So that's one element. On the people side, certainly we need to do the things that keep our employees safe. And being a global company, as China went through COVID, we learned a lot of practices that were able to get us up in China quickly, what China regulations put in, and we've been rolling those around the world. And it's one of the things that I think our supply chain team has done a tremendous job, as well as our crisis team, to really make sure, whether it's protective equipment, temperature screening, and you can keep going, How do we change some of the layouts of our factories to make sure you don't have concentrations of people? There are things, you have some retraining of employees to make sure that they're comfortable at the environment they're coming back into. It's also, we continue to invest in automation. That's something I do believe the investments we've made over the past handful of years around automation have also allowed us to be less labor intensive in certain parts of the world than we were five, 10 years ago. You know, like everybody, it's very complex. We're working through it, and certainly for those areas, you know, that are ramping back up, you know, we have full procedures around how do we get our employees back to work, how do we prioritize our employees to come back to work to really make sure we keep them safe.

Okay, thank you, Chris. Thank you. We have the next question, please.

Your next question comes from the line of YMCA. Mohan from Bank of America, your line is open.

Yes, thank you. Good morning. Hey, Terrence. Hey, Terrence. Hey, can you compare how TE is different this downturn versus the last downturn? It feels like the break-evens are quite different. Trough margins appear a lot higher than they did last time around. And if I could, what would decremental margins have looked like in your fiscal 3Q without the supply chain adjustments. Thank you.

All right, Wamsi, I guess I have to take this question because Heath wasn't here in 08 and 09, so I guess it's pointed at me. As we talked to Eladi about, and, you know, I know some companies have gone out and said, you know, as they're thinking about the guy, they compare to 08 and 09 as how they're modeling their playbook. I think there's some things that are similar today versus 08 and 09. But I would tell you there's a lot of things that are a lot different. With all the moves we've made to portfolio, where we position TV, the cost action we've taken. So let me try to summarize what's the same a little bit, but also the things that I think we've improved the business and the portfolio. The one thing that I would say is probably the number one thing that is the same is the cash generation model we have. You know, our cash generation will be very resilient during these times. And as you all know, we use working capital in times of growth. And one of the things that when you do get a little bit of a cycle like this and you have some of these, we're going to generate free cash flow. We're going to adjust CapEx around capacity. We're going to invest in growth CapEx. And, you know, I think that's one of the things that has always allowed us back to the question earlier, to get stronger during crises, because we can continue to invest around growth, but also keep our strong cash generation model going. That's the big thing that I think is the same. Now, when you think about things that are different, you know, our portfolio is a lot more focused and a lot stronger than it was in 08, 09. And, you know, the businesses we are in all have secular trends. that we position TE around, and we've gotten rid of the businesses that don't have those trends. And, you know, if you look here today, in 08, 09, we had no growth telecom businesses. You had a lot more consumer electronics, and we built up platforms like medical. So I do think the portfolio is more focused and stronger. The other thing that I would say that is also very different is our automotive business. While we did have a sizable automotive business back then and we have a sizable business today, it's a very different business. While it was always global, China makes up 25% of the car production on the planet, and 08 and 09 are dead, and our leading position here is special. I would also tell you our automotive business going into the last crisis was company average business from a margin perspective. Our margin in our transportation segment going into this crisis is a lot higher than it was, and it was a lot of the cost actions we initiated out of the last crisis that we continue to work on, and Heath talked about that we were teeing up. And, you know, overall, the company's in better financial shape. You know, our margin is 300 basis points higher today than it was in 08-09, just going into a crisis. And our balance sheet is in a very much more healthy place So when I sit there, you know, if auto production changes, we will be impacted. When I think about the health of TE and things like that, what we've done to the cost position and strengthened our position in markets we wanted to be in, as well as not being in markets we didn't want to be in, I think it's positioned as well to be a strong company going into a crisis that will get stronger coming out.

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

Your next question comes from Mark Delaney from Goldman Sachs. Your line is open.

Yes, good morning, and thanks very much for taking the question. Good morning. Good morning. I was hoping to better understand how TE is thinking about its content per car opportunity. I realize you already described some near-term inventory adjustments in the auto market for the completed quarter and for the current quarter, but if you put that aside, is there any change to how you're thinking about your content per car opportunity, either because of pricing dynamics or delays in new car launches? Thank you.

No, thanks, Mark, and I'll take that. And, you know, what's interesting is we don't. You know, as I said earlier, the emission requirements in places like Europe are not changing. We also believe, even with this change in production, the number of global hybrid and electric vehicles will still be up year over year. Even a lower production environment And all the production growth that's being taken out are combustion engines. So the four to six percent that we've always talked to you about, when we look through where our growth is coming from, our engineering projects, as well as the trends, certainly electric vehicles are continuing to accelerate. We've talked to you before, autonomy is probably a little bit further out. But net-net, the four to six percent content opportunity continues to be real.

and it hasn't changed the way we think about. Okay, thank you, Mark. We have the next question, please.

Your next question comes from the line of Joseph Gorodano from Cohen. Your line is open.

Morning, Terrence. Morning, Heath. This is Francisco for Joe.

How's it going? Can you guys expand on the $900 million impairment charge that you guys took this quarter, please?

Sure. This is Heath. You know, this is related to our sensors platform, most of which was acquired in 2014 with the acquisition of measurement specialties. So, you know, there's been subsequent acquisitions that have come into that platform over the years of smaller size. But there's been a downturn in those markets here for a while, and particularly in the industrial space, which is about half of our sensors business. We've seen a downtick here going back several quarters, as well as following the trends that we've seen in other industrial businesses, as well as in the commercial transportation space, which is about a quarter of the sensors business. So, you know, that factored in with an outlook that is consistently down with everything else we've talked about today, did push us to take a harder look at where we sat relative to the accounting treatment of that, and we had made an election in the quarter to take that charge based on the accounting rules that govern that. It's a non-cash charge, and it kind of right-sizes the carrying value from an accounting perspective. Okay, thank you. Can we have the next question, please?

Your next question comes from the line of Craig Hettenbach from Morgan Stanley. Your line is open.

Yes, thanks. Hey, Tara, just wanted to follow up on understanding there's a lot of pressure on auto production, but just going back to the content theme, particularly from a sensor pipeline perspective, just curious prior to these disruptions, how you were feeling about kind of design when activity for sensors and any update on just the work you're doing, the combination of sensors and connectors?

Yeah, sure, Craig. Thanks for the question. And, you know, when we think about it, you know, the revenue pipeline we have around sensors and automotive continues to stay robust. Certainly it's going to be impacted by lower production builds on the planet. So, and that ties in to a little bit what Heath talked about, you know, in the prior question. But that momentum, as you continue to see how sensors need to play in a car and actually around whether it goes to electric and current sensing, what happens on autonomy, as well as the momentum of our TURP, our revenue pipeline, that momentum still stays strong, similar to the engineering projects that I said. So nothing has changed there. Certainly it's being impacted by the end market downturns in auto and industrial transportation, like he said. But when we think about the opportunity, about that content, that opportunity has not changed per vehicle. It's really the number of vehicles made has been impacted.

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

Your next question comes from the line of Samik Chatterjee from J.P. Morgan. Your line is open.

Hi, good morning. Thanks for taking my question. This is actually Bharathan for Summit. So continuing on the automotive market, I just had one question. So what are you seeing in terms of order trends or erosion, specifically in the China automotive market? I mean, the latest IHS data we saw yesterday is showing some stability, although at a low level, in the automotive production outlook for China. So are you starting to see the same stabilization in order trends as well? Thank you.

Yeah, well, a couple of things that when it comes to China, you know, China, we have seen production increase and production will increase off of the low quarter two levels that you have in China. And we do expect, you know, production as our customers have ramped up. So, you know, that is in, I would call it a healing process. The other thing that I think was a nice data point to have is that in March, there was about $1.3 million Cars sold in China, certainly the consumer element needs to come back. But that alone, if it stayed at that March rate, would be about a 16 to 17 million unit SAR based upon the March sales. So all those factors need to continue to improve. But we do see increased production. And the production decline from quarter two to quarter three is really in Europe and North America that we highlighted earlier.

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

Your next question comes from the line of David Leiker from Baird. Your line is open.

Good morning, everyone. Hey, David.

Good morning.

So I'm looking at the slide on transportation solutions where you say your sales are down 2% organically. would build down 20%. Normally, that gap would be a function of content gains or mixed shifts, but it sounds like supply chain is a piece of that and maybe a large piece of it. I might have missed that, but if there's a way that you can quantify how much of that variance between the build rates and your revenues came from supply chain, that might end up reversing on you here later in the year.

David, hey, it's Terrence. When we talked about quarter two to quarter three being down sequentially, there was an element of auto production going from 18 to 12 million. We also estimate, back to those data points that you've said, there was about $200 million where our customers were putting orders on us. We delivered with what we were able to continue to get our factories up. That $200 million is what will turn here in the third quarter. And that's one of the numbers we highlighted in quarter two to quarter three. And the simple way to think about it, our auto revenue in the quarter was pretty much as we expected. We thought there was gonna be 20 million cars made in the plant, there was 18. Three million vehicles times $65 gets you to about the 200 million that we're estimating that was, hey, revenue that you could sort of say, probably should have been in quarter three. We were able to ship it in quarter two as people were really trying to deal real time with COVID-19. And that'll work through and normalize as we go through quarter three.

Thank you, David. We have the next question, please.

Your next question comes from the line of David Kelly from Jefferies. Your line is open.

Good morning. Just a quick question. Thanks for taking my question. Just a quick one on distribution channel exposure. I think you referenced in the slide deck ongoing industrial corrections. Just wondering if you could give us some color into what you're seeing in data and devices and appliances as well, and maybe more broadly, how do you see channel health shaping up into the back half of the fiscal year here?

No, thanks for the question, and certainly we've been talking a lot about end markets, and we do typically talk about channel. You know, over the past six to nine months, we've been in an element of where our channel partners have been correcting, and what I would say we've seen is that correction of their inventory position seems to have normalized as we've ended March, probably across our markets with the exception of being our industrial business. And, you know, in total, T.E., channel is up to about 20%. So what we've seen from POS trends, which is what our distributor is selling out, outside of transportation and Comair type of markets, have been pretty steady. So we're watching those indicators to see if there's inventory builds. It feels okay right now, but there is the industrial market that feels like it has a little bit too much inventory in it. And certainly with the demand impacts, We're going to have to keep an eye on it, but right now it feels stable outside of transportation and common air.

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

Your next question comes from the line of Jim Suva from Citigroup. Your line is open.

Thank you very much. When we hear about the commercial aerospace and also, to some extent, the transportation industry of autos and trucking, We also hear about the OEMs talking about price concessions to suppliers and having to do things or change things. While a lot of the commentary prepared was on about the unit production, can you talk about expectations for price concessions or is that other parts of the supply chain that you see happening? And any thoughts around that? Thank you.

Sure, Jim. Thanks for the question. So when you look at it, our pricing environment has been relatively stable. And when I say stable, we do give in automotive and places like that productivity back to our customers. And there are annual negotiations. There are annual negotiations around the investments we make as well as the volumes they hit. So those discussions will be coming up. What I would anticipate, similar to other crises, You know, our price erosion will stay pretty much at the historical rates it's been at based upon the value we provide. So I don't see us having an acceleration of price erosion. You know, it is a key element of when we talk earlier about where, you know, we believe entitled margins for this business can be. You know, price is part of it. And, you know, I don't see an acceleration that's going to happen in price erosion because there's also certainty of supply that's also needed at the same time. And I think our position we have both from an innovation and a manufacturing with our customers, create a proper balance that we'll be able to keep it where it's been.

All right. Thank you, Jim. Thank you so much.

Thanks, Jim.

Your next question comes from the line of Matt Sheeran from Stifle. Your line is open.

Yes, thanks, and good morning. So a question just regarding some cost-cutting actions. Heath, you talked about It sounded like just ongoing cost-cutting actions that you've been doing and then some furloughs, but nothing incremental in terms of taking any fixed costs out. So what are your thoughts there, and at what point do you take that next step to do some further consolidation, particularly if we're in a longer recession and the auto market doesn't recover as quickly as maybe you think?

Well, Matt, I appreciate the question and the follow-up. So let me just try to clarify a few things. You know, as we discussed and you mentioned earlier in your question, you know, for the past couple of years, we've been talking pretty transparently about what we're doing in the industrial space. And then about a year ago, talked about, you know, several, initiating several auto, generally auto-related factory footprint consolidations. So we weren't caught flat-footed with this. Now, the severity and the sharpness of a sequential downturn of 25% will certainly is something that is challenging to deal with from a margin perspective in a 90-day window. However, our focus continues to be on permanent cost reductions. Obviously, we'll do things like furloughs where our customers have furloughed and we don't want people staying around our factories, but You know, when we think about cost reductions and incremental cost reductions, they tend to be in the form of permanence so that our extra trajectory when we move back into periods of growth will be stronger than when we entered it. That's a combination of both accelerating some of the things that we already had in place, which this reduction in demand does allow us to accelerate some, just given that we have the ability to ramp up inventory builds and some of the other things that are important, any kind of transfer. But we are also evaluating and moving pretty quickly through additional restructuring actions. So if my comments were light on that, I apologize. We will be doing some things. Now, on the factory side, those are underway, and I don't think there's something we have to start with a clean piece of paper on, but The business will be right-sized, but we're focused on what we look like and more permanent perspective as we leave and that move that it makes in terms of our overall margins as we get back to levels of more normalcy on that particular front. And you also have to remember, if you just step away from auto for a second, we have chunks of the business that are actually fairly stable or at full production. Terrence mentioned defense, data devices, technology. you know, certainly our medical and our energy businesses, those are businesses that, you know, we're in full production just to keep up with our customers right now. So it's a little bit different flavor depending on which chunks of our business that we look at. But auto specifically, you know, we'll make sure we're sized right for not just, you know, what we think the next couple of quarters are going to look like, but what it looks like for, you know, in our FY21 and FY22. And I think that's important to keep that in perspective.

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

Your next question comes from the line of William Stein from SunTrust. Your line is open.

Great. Thank you for taking the question. Steve, a moment ago, you talked about performance of sensors in the industrial and market, and coincidentally, I think there was some progress on the first sensor acquisition late in the quarter. Can you update us on the status of the integration of that company and its product portfolio in your future plans in that category? Thank you.

Sure. And, Will, thanks for the question. Listen, since there continues to be a very important part of our – that platform is an important part of our growth strategy, and we still feel very good about – despite the accounting treatment that we undertook in the quarter, we still feel very good about the long-term prospects of where we are. Terrence commented – on a question earlier related to the auto component of that revenue pipeline for sensors, which continues to be very strong. Now, some of those things, based on volume and so forth, have pushed to the right a little bit, but our design and wins continue to be very strong within auto sensors. We are very well positioned within the commercial transportation of sensors as well. Now, that's a business that we started feeling the pressure both on the sensor side as well as our connector, traditional connector side of the business, going back in the late summertime frame of last year, and certainly that has continued to be pressured. But we are very well positioned from a market share perspective there. So between auto and commercial transportation, that makes up about half of our sensors business. And then you get into the industrial piece of it. The industrial piece of it does touch a lot of different end markets, some of which are more attractive than others, but no different than our – industrial business within our industrial segment that we noted was down double digits organically, we are feeling similar pressures within that component of our sensors business. So as you see us move forward, you're going to see us talk about it. First sensor fills in a nice product gap for us. We are in a very good position in terms of that. That's been a long process to get executed on. We currently own just under three quarters of the shares As Terrence mentioned earlier, we'll begin to incorporate some of those financials and our results in this third quarter moving forward. Then there's additional processes that we follow with the German law and regulations to continue to bring the rest of those shares online. We feel very good about the progress on that. It's been a long process. But the product set and the manufacturing operations and what it brings to us is still very important. And so you'll continue to hear us talk about sensors as part of our growth. Okay, thank you.

Will, can we have the next question, please?

Your next question comes from the line of Joseph Spack from RBC Capital. Your line is open.

Thanks, everyone. I just quickly wanted to go back to your estimate of the auto supply chain impact, because if you back out that 200 million, you were sort of really more in line with global production in your second quarter. And I know you have a longer term outgrowth opportunity, but was there something specific to either mix or share that impacted this quarter?

No, on any one quarter, you're never going to have a perfect four to six because of all the supply chain elements that happen. So there wasn't anything specific. And, you know, the supply chain impact, let's face it, it is an estimate on our behalf with all the moving parts we have. But the content that we see happening at the four to six percent, there's no change in that. And you should look at that over a year period or so, not one quarter.

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

Your next question comes from the line of Nick Todorov from Longbow. Your line is open.

Thanks. Good morning, gentlemen. I understand a big portion of your auto inventory adjustments will occur in the June quarter, but I guess can you talk about your expectations regarding the stocking potentially lasting through the second half of the year? I mean, in other words, do you expect the correction to be a deep and quick one contained only in the June quarter, or do you see some spillover?

Well, you know, what we've said is, you know, some of the destocking, you know, in some cases, because of it being the automotive supply chain, the automotive supply chain is sort of, at least how I think about it, is sort of a six-week just-in-time supply chain. It's not an industrial supply chain or a channel supply chain that is very, very spaghetti-like. So, you know, when we sit there and the way that we're guiding is we sort of assume, you know, As our customers ramp back up, they will burn off this extra stock. Certainly, that's our assumption. Could it last a little longer? Potentially, but it will depend how they ramp. And certainly, they don't like a lot of excesses in the supply chain. So we viewed it would be probably over a three-month period was reasonable.

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

Your last question comes from the line of Sean Harrison from Loop Capital. Your line is open.

Hi. Thanks for allowing me back in. Just to follow up on both kind of the restructuring and kind of the normalized goals, to be clear, there is no change in kind of the normalized margin profile you're searching or you're targeting for any of the three business lines. And then second, I think you've done 650 or you're targeting, you know, in 18, 19, and 20, about 650 million of restructuring. Where are you in terms of the payback of those restructuring actions? Are you a third of the way through it right now or even less?

Well, Sean, I appreciate the question. The normalized margins for the businesses we've talked about, right, which is, you know, TS up in the high teens towards that 20 number, IS consistently in the mid to high teens, and then CS kind of in that low to mid-teens consistently growing up towards that number. Those are unchanged. Now, we're going to need to see in certain cases volume come back to support some of those things, but the longer-term actions that we're taking to take out more permanent costs will certainly help close some of that gap. So as I think about the restructuring that we've done, Most of it's been fairly programmatic, things that we've done that are very specific to facility moves within industrial and then subsequently transportation, and that continues on for the charges that we anticipate taking in this fiscal year, FY20. The payback on those is kind of about a three-year payback, which is a little bit longer than your traditional payback if you were doing things in the U.S., but you've got to remember, as we've discussed before, some of the Plants were taken offline are in jurisdictions where the cash outflow to get those things offline is a bit longer. So the blended payback is about three years. I would tell you we're at different points depending upon which facility we're talking about. For obvious reasons, they've had different start and stop dates and there's challenges that in some cases are created. based on this current situation with COVID, meaning that there are certain factors that may be on the receiving end of certain things that have slowed, so that's harder to do. And there's other things that have sped up because we're able to go through operational matters that are, you know, specifically inventory builds that our balance sheet can certainly support that allow us to get those costs out sooner. So there's a blend in where we are. If you were just to ask me to try to frame all that up and for TE in total, I would say we're kind of halfway through that process. Sometimes a charge on the P&L can be taken a year plus before you actually see the savings come out, just based on how the accounting for it works relative to when the costs are actually eliminated. So there is a bit of a lag in terms of that. Thank you for the question.

Thanks, Sean. Okay, it looks like there's no further questions. If you do have questions, please contact Investor Relations at TE. I want to thank everyone for joining us this morning. Thank you.

Ladies and gentlemen, your conference will be made available for replay beginning at 10.30 a.m. Eastern Standard Time today, April 28, 2020, on the Investors Relations portion of the TE Connectivities website. That concludes your conference for today.