TE Connectivity Ltd. (TEL) Q2 2016 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Q2 Earnings Call. At this time, all lines are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to our host Mr. Sujal Shah. Please go ahead.

Good morning and thank you for joining our conference call to discuss TE Connectivity’s second quarter results. With me today are Chairman and Chief Executive Officer, Tom Lynch; President, Terrence Curtin; and acting Chief Financial Officer, Mario Calastri. During the course of this call, we will be providing certain forward-looking information. We ask you to review the forward-looking cautionary statements included in today’s press release. In addition, we will use certain non-GAAP measures in our discussion this morning. We ask you to review the sections of our press release and accompanying slide presentation that address the use of these items. Press release and related tables, along with the slide presentation, can be found on the Investor Relations portion of our website at te.com. Finally, for participants on the Q&A portion of today’s call, I’d like to remind everyone to limit themselves to one follow-up question to make sure we are able to cover all questions during the allotted time. Now, let me turn the call over to Tom for opening comments.

Thanks for joining us today and please turn to slide three and we will review the highlights on today’s call. Q2 was another quarter of good execution and what continues to remain a sluggish global economic environment, adjusted earnings per share of $.90 with $0.2 better than the midpoint of our guidance on sales of $2.95 billion which was slightly below of the midpoint of the guidance. Strong operating performance across the company more than offset continued market softness across our industrial businesses. Our adjusted earnings per share was down $0.01 versus the prior year, but foreign exchange headwinds of approximately $0.02. On a constant currency basis, adjusted EPS was up 1% year-over-year. Adjusted operating margins were 14.9% in line with our expectations, but the adjusted EBITDA margins of approximately 20% in the quarter. For the full-year, we are reiterating the midpoint of our guidance of $12.3 billion in revenue and $4 and adjusted Earnings per Share, representing an increase of 11% over prior year EPS. We expect to return to revenue growth in the second half and to generate double digit EPS growth. Our outlook for organic growth 3% down slightly compared to our guidance of 90 days ago. Our auto business remain solid the industrial inventory correction is largely behind us and SubCom continues to build momentum. Our recent acquisition of Creganna is known our guidance as well. These positive factors are offsetting the lower-than-expected growth in most industrial markets and slow growth in our non-transportation business in China. Our EPS growth is benefiting from cross controls, the benefits of our share buyback and bit of a lower tax rate. We have developed multiple levels [ph] to drive earnings growth in a slow economy. During the quarter, we returned $1.2 billion to shareholders including $1.1 billion in share buybacks. We expect to continue to take a balanced approach with our capital strategy, returning approximately two/third of our free cash flow to shareholders over time with one/third of free cash being used for acquisitions. We generated $165 million of free cash flow in the quarter and $400 million in the first half of the year. We expect our normal strong second half cash generation to continue. We also continue to strengthen the company's harsh environment portfolio. In March, we completed the sale of our circuit protection businesses. Earlier this month, we completed the acquisition of Creganna, doubling the size of our medical business to about $500 million in revenue and establishing TE as a leading provider of solutions to the high-growth minimally invasive medical market. This morning, we also announced a small sensor acquisition, which will strengthen our portfolio of sensor technologies serving the transportation market. In our SubCom business, we continue to gain momentum with the recently announced award our project called Hawaiki, which is the new trans-Pacific cable system linking Australia and New Zealand to the mainland United States. This award will generate over $200 million in revenue over the life of the project and this business has a backlog of awarded projects of $1 billion. I’ll now turn it over to Terrence Curtin, who’ll cover our performance in more detail.

Thanks Tom and good morning everyone. Before we get to the segment updates, I want to provide brief insights into our order patterns, which will help provide baseline for our results as well as the expectations. If you could turn to slide four please, and it shows order trends excluding our SubCom business. Overall, orders improved again sequentially and are above the low levels on approximately $2.6 billion that we experienced in the fourth quarter of 2015. And if you remember in the fourth quarter of last year, when we began to experience the supply chain impact related to the slowing in China as well as the industrial markets. We have seen recovery in orders and both of these areas and feel that the supply chain correction affect have completed in our second quarter as we expected. Certainly, we are pleased with the recovery in the orders, however the slow to recovery running behind original expectations in certain areas. Specifically in China, we previously thought [ph] that orders were continue to accelerate through the rest of the year while we believe the auto orders in China will continue to recover. We are now expecting orders outside of auto this will remain at the current levels that we are experienced in the second quarter. Let me now talk about the orders by segment. Overall transportation orders remain solid and in auto, our orders were negatively impacted by near-term customer backlog adjustment that related to a change in their schedule. I want to highlight this did not impact demand, it’s really just a change in one of our customers processes. We continue to experience strong order trends both in Europe and in Asia in automotive. In industrial, orders grew 5% sequentially with growth in both our direct customer orders as well as those I go through our channel partners and distribution. As I stated earlier, the industrial inventory correction is now behind us and in Communications excluding SubCom, our orders grew 4% sequentially with a Book to Bill of 105 [ph] with improvement in both our plans and data and device business. As Tom mentioned, in SubCom it continues its momentum with new Hawaiki new program and will record that order as a booking in our third quarter. If you could please turn to slide five I’ll discuss Transportation Solution results in the second quarter. Overall sales grew 3% in the segment organically in the quarter with growth across our businesses. Our Auto sales growth in the quarter was driven by strength in China as well as in Europe. For fiscal 2016, we continue to expect global auto production to be up 2% to 2.5% with growth in all regions as strong growth in China. We remain confident that our auto business can grow ahead of auto production driven by electronic content growth as well as a risk pipeline of platform ramps from designs wins that we generated over the past several years. In commercial transportation, sales grew 1% organically year over year driven by the heavy truck sector in both China and Europe. North America heavy truck markets continue remain weak, along with continued weakness in global construction and Ag markets. We’re pleased that organic orders were up year-over-year as well as sequentially as we continue to perform very well in this business the top economic backdrop. Turning to Sensors, we saw 2% organic growth as we did began to feel the impact of weakness in the industrial markets in our sensor business and just the highlight for you about 40% of our Sensor sales going to the industrial markets. We do continue to see strong design momentum and long cycle transportation and industrial applications that we expect will drive future growth. From a margin view point, adjusted operating margins in the segment were 19% and were in line with our expectations and were up sequentially. The decline year-over-year was driven by currency impacts as well as investments for growth. We anticipate adjusted operating margins for the second half to continue to improve and should be at similar levels as a second half of last year. If you could please turn to slide six and I’ll discuss the Industrial Solutions segment. Revenue in the segment declined 7% organically year-over-year in the second quarter. Geographically, we continue to see trends across our businesses that are consistent. Europe is stably growing in many markets. North America continue to see weakness due to oil and gas as well as the supply chain corrections that impacted us the past couple of quarters and China remains sluggish. We continue to be impacted by the oil and gas market with sold 42% organic reduction in sales year-over-year and the decline in oil and gas drives half of the organic decline in the segment in the second quarter. Low oil and gas prices continue to have a derivative effect of other areas of the industrial segment including factory equipment as well as helicopter demand with affects our aerospace business. We have included the impacts in our results as well as in our guidance. In aerospace and defense, our commercial aerospace business grew year-over-year and this was more than offset by the declines in the defense business due to supply chain affects that we’re carrying in the distribution channel. Our energy business was down 2% organically with declines in Asia and Europe partially offset by growth in the US. As we look forward, we expect the industrial segment to grow sequentially and we expected to be essentially flat organically year-over-year in the third quarter and we expected the return to growth in the fourth quarter now that the inventory corrections are behind us. Adjusted operating margins were down year-over-year primarily by declines in the higher margin oil and gas business, but they were up sequentially. We do expect adjusted operating margins to continue to improve in the second half benefitting from increased volumes as well as the cost of action that we initiated. If you could please turn to page seven to talk about Communications segment. In the second quarter, the segment had revenue of $606 million, which was down 10% and 8% organically year-over-year and it was slightly ahead of our expectations. Our SubCom business saw solid year-over-year growth driven by strong execution from multiple projects of course and as Tom mentioned earlier, the total value programs of course is approximately $1 billion. We now expect SubCom to grow approximately 20% year-over-year and this is an improvement versus our expectation 90 days ago. Our data and devices and appliance businesses were impacted by distribution inventory corrections as I mentioned earlier and we believe these are behind us as we head into the second half of the year. Additionally, data and devices growth is impacted by the product exits we’ve been highlighting all year as part of the repositioning effort and as discussed will impact our growth rate throughout this year. Adjusted operating margins in the segment declined 60 basis points year-over-year in line with our expectations and we do expect improvements to adjusted operating margins as we continue through the second half. Now let me turn it over to Mario, who’ll cover the financials.

Thanks, Terrence and good morning everyone. Please turn to slide eight, where I will provide more details on earnings. Adjusted operating income of $440 million was in line with guidance and down 13% year-over-year due to currency impacts investments in transportation and the lower volume impacts that Terrence mentioned earlier. GAAP operating income was $535 million and included $4 million of acquisition related charges and net restructuring in other credit of $99 million primarily driven by again on the sale of our Circuit Protection business. Adjusted EPS was $.90 for the quarter down $0.01 from the prior year with reduced volume from higher margin products and negative impacts from currency exchange rates offsetting incremental benefits from share buyback. Excluding the $0.02 [ph] impacts from foreign currency, adjusted EPS was up $0.01 from the prior year period. GAAP EPS was $1.06 for the quarter driven by net restructuring and other credits of $0.17 primarily due to the circuit protection sale I just mentioned. We expect approximately $100 million of restructuring charges for the full-year, a $50 million increase from prior guidance. Regarding tax, it should continue to obtain [indiscernible] long-term adjusted tax rate as approximately 23% to 24%. Due to the mix of profitability in different reductions, we now expect our adjusted tax rate to be slightly lower this year. As we mentioned last quarter, Tyco International on behalf of they entered into an agreement with the IRS to resolve all disputes related to the previously disclosed intercompany debt issues. During the quarter, we made net pre-separation tax payments to the IRS of approximately $140 million to prevent further accrual of interests and penalties and help drive this settled and behind us in the near future. As you may know the Treasury Department should propose tax regulations earlier this month. One proposal addresses the tax characterization of certain intercompany financing arrangements. Multinational companies, TE utilizes intercompany financing for efficient capital deployment. We're in the process of analyzing these proposed regulations for any potential perspective impact on TE. Turning to slide nine, while we remain in the challenging environment, our performance was in line with our guidance and we expect improvement across our operating metrics in the second half. Our adjusted gross margin in the quarter was 32.6% a decline from last year and mostly driven by lower volume in areas like oil and gas and distribution, which have higher-margin than company average. Adjusted operating margins declined 150 basis points consistent with our gross margin performance. Total operating expenses were $523 million in the quarter down 5% from the previous year, reflecting strong spending controls. Continue to tightly manage discretionary spending while balancing our continuing investment into our Harsh businesses. Moving to cash flow and capital deployment in the quarter, cash from continuing operations was $155 million and our free cash flow was $165 million down from prior year levels due to timing of certain tax payments, but still up in the first half versus last year. We expect full-year free cash flow to approximate net income. We continue to have a balance capital allocation. In the second quarter, we returned $1.2 billion to our shareholders including $1.1 billion in buybacks. In the quarter, we bought back $19 million shares executing against our commitment of returning the proceeds from the broadband networks divestiture. Over the past 18 months, we have returned approximately $4.3 billion to our shareholders to buybacks and dividends. As Tom mentioned earlier, we expect to continue to take a balanced approach with our capital strategy going forward. We are also including a chart on adjusted EBITDA margins, which helps explain the profitability performance of our businesses including acquisitions. Adjusted EBITDA margins in Q2 were 20% and show our margin resiliency despite lower sales levels. Continue to be pleased with the operating performance of our business especially in light of the challenging macro backdrop. We've also added a balance sheet in cash flow summary in the appendix for additional details. Now let me turn it to back to Tom.

Thanks, Mario. Before I get into Q3 guidance on slide 10, let me provide some perspectives on why we will return to growth in the second half. As you know our first half was characterized by several year-over-year macro headwinds. Unfavorable foreign exchange due to the significant strengthening of the dollar against most major currencies, the significant decline in year-over-year oil prices, which resulted in over 40% decline in our higher-margin oil and gas business, overall industrial markets weaken leading to a supply chain corrections with OEM and our channel partners, which we believe are now behind us and weakness across most China markets. In the first half, the factors that impacted us significantly and in the second half most of these headwinds are reduced. As a result, we expect to returned to revenue growth and strong double-digit EPS growth driven by our Harsh strategy and the many levers and operating model. Now, I'll cover the Q3 Outlook. We expect Q3 revenue of $3 billion to $3.2 billion, up 1% on an actual base since flat organically and adjusted Earnings per Share of $1 to $6, up 14% year over year at the midpoint. We expect growth in transportation and industrial, which include approximately $60 million from the Creganna acquisition. This is offset by declines in communications from the sale of the circuit protection business and the continuation of our strategy to exit certain product line in data and devices. We do expect continued growth in our SubCom business. Now please turn to slide 11. We are reiterating our full-year guidance of $12.3 billion in revenue and $4 and adjusted EPS at the midpoint. On a full-year basis, continued strong performance of our transportation segment, the addition of the Creganna acquisition and growth in our SubCom business more than offsetting the negative impact of exchange rate softer industrial markets especially oil and gas in China. As mentioned earlier, the full-year and fourth-quarter include the 53rd week, which contribute approximately $200 million of revenue. On this full-year outlook includes unusually high Q4 revenue on EPS level compared to Q3. So I'll walk you through that. As previously mentioned, this year's fourth quarter includes an extra week, which contributes approximately $200 million of revenue and approximately $0.10 per share of earnings. Excluding the 53rd week revenue is increasing approximately $40 million from Q3 to Q4. So the way to think about this is the $240 million revenue will flow through to earnings at a 25% to 30% rate and this coupled with our typical productivity accounts for the significant sequential increase in EPS. Let me just wrap up with a few comments. As we mentioned earlier, the global economic environment continues to be sluggish. Despite this, we expect to generate another year of solid performance. Our focus on Harsh environment driving TEOA through the organization, strong cash flow and a consistent return of capital policy continues to enable us to significantly strengthen our earnings leverage. The dollar of revenue today generates about 40% more EPS than five years ago. This is serving us very well on a slow growth economy and will deliver accelerated earnings growth that the global economy improves. Now, let’s open it up for questions.

[Operator Instructions] We’ll go to the line of Amit Daryana with RBC Capital Markets.

Thanks a lot. Good morning guys. I have two questions for me. Tom may be carrying on what you saw at the call with, the September quarter guys [ph]. Historically I think in September revenues seem to be down a little bit sequentially 2% by my math. So, could you maybe talk about what will be the comfort [ph] that sales could be up $43 million sequentially in organic basis? And then on EPS line, I guess the same thing you know [indiscernible] gives you $0.10; the $40 million would give you another $0.02, $0.03. I still struggle to get the entire $0.20 that you got to implant for September.

Hi, Amit. I think there is a little static on the line, try to get through this. Yeah, normally if you go back over many years, we had a few years we’re up slightly in the fifth quarter few years, we were down slightly, I mean the last year was the free unusual year because that is where China and the Industrial price reduction began to occur. This year the pattern to coming into the fifth quarter is different. We have industrial markets improving; we have China well not quite as much as we thought it would be. For sure, the Auto market is improving as we expected. So, that's really the difference accounting for us, a slight sequential improvement as opposed to what we could just stay overtime and it’s been kind of a. [inaudible]. We also pickup $240 million in revenue sequentially a lot of leverage come with it and that's [indiscernible] think we’ll sure be in a 25% to 30%. The restructuring has been going on through the year continues to flow in an aggregate so they'll be a better benefit in Q4 and Q3 and then a normal productivity momentum, which marches through the year. So when you add all that up, that’s how you get, its looks like a pretty significant hockey stick or you feel it back and say it's a small hockey stick.

Fair enough. That is helpful to kind of get the leverage there. And then, I guess just the transportation segment I think you guys actually took up the production or unit expectation up modestly for autos. But the organic growth I think went from high single digit to mid single digit. Could you maybe just talk about what are the variables that leading to the lower organic growth within transportation for the year?

Hi, Amit, it’s Terrence. Two things, [indiscernible] for Auto production estimate. We’ve been around that 2% to 2.5% since last quarter and really that is China be middle to higher single digits, Europe being about 1%, US about 4%. So that’s we have not those assumptions. When you look overall at the transportation organic growth primarily driven by the comments I made around sensors. We did reduce our expectation for the year around sensors organic growth to really related to the impact of the industrial markets. So the growth we have there was lower this quarter than we thought and we are seeing order impacts due to some of the industrial impact that we’ve seen elsewhere on the sensor business.

Perfect. Thank you, guys.

All right. Thanks, Amit. Next question please

Next question comes from the line of Wamsi Mohan with Bank of America.

Yes. Thank you good morning. Terrance, you pointed out strengthen Autos in Europe and China. I was wondering if you could talk about the order patterns in North America and Auto. Are you seeing any signs of deceleration in order patterns that is concerning to you at this point and I have a follow-up?

Wamsi, thanks for the question. So, the one top comment I made around the backlog adjustment that was in our U.S. business and that was really scheduling change by did not have anything to do with demand, but we have seen in North America. We have seen some leveling of order patterns, as how with I must say there is an acceleration or deceleration outside that specific adjustment with that customer, but otherwise I would say --.

Okay. Great thanks and as my follow-up, transportation margins saw an year-over-year decline despite organic growth of 3% and reported to flat. Can you address what the moving pieces are? I think you called effects and some increase than last months, what are those increase in last month specifically? If you could any color on that? Thank you.

When you look at those increased divestments, you know we had a tremendous manual program wins both in our Sensor business as well as in the automotive business, as you know the long cycle business. So we have been putting investment in just of both those programs. So it’s mainly an engineering and product launch teams both in sensors as well as automotive around this program and then benefit us for two three years.

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

It will come from Sherri Scribner with Deutsche Bank. Please go ahead.

I think I wanted to get a sense of what drivers you’re confident that the industrial segment will improve in the back half of the year. It sounds like you think China is going to be relatively flat, but potentially I think you’re saying that the inventory situation is better. So, just trying to understand what makes you comfortable that things will get better in the second half? Thanks.

Sure. Thank you I’ll comment and then I’ll ask Terrence to answer it. I think a couple of things. One, when we look at inventory in the supply chain both that our direct customers and our channel customers, it feels like that pack a balance right now and that’s what our channel partners feels well. So that’s when the business started to go a little bit flat now, last year the supply chain adjustment negatively. So we’ve been going through that. We do China gradually picking up. So and it really began to turn down in the second half of last year and in the fourth quarter of last year. So some of that is to compare, I don’t think we’re not producing a robust industrial market. It’s really, things getting more imbalanced and then we’ll have the benefit of the Creganna acquisition, which is in our industrial segment. So, Terrence do you want to add more color to that.

No. I think, surely Tom said is very well. Last year fourth quarter is when oil and gas as well as lot of the channel and inventory effect head us. So in some ways it’s a weak compared to the fourth quarter last year on an organic basis, but we do see that leveled out, I think the third quarter as we talked about that have been flat year-on-year, I think seems to be industrial world is relatively flat right now. So I think we’re getting those supply chain affects behind us and oil and gas as well as we continue to expect to be very strong market and as Tom mentioned

Great, that’s really helpful. And then trying to ask a quick question on the communications margins, they were down year-over-year and I would have talked maybe would have been a bit stronger given the subsea businesses higher. How should we think about the subsea business impacting that margin as we move through the years revenue is stronger? Thanks.

Subsea, yeah communications as you know the mix of kind of three businesses are very good appliance business. Subsea business that is growing and first quarter margins were very high because we had to close out of the job in subsea. We expect to take couple of more quarters and that really pass the margin in the first quarter. Second quarter is more normalized for subsea. So I expect subsea will gradually improve. The data and devices margins will start to improve later this year, but we’re feeling more optimistic about that. We did we were taken certain protection out that was been in the second quarter, but that is not in the balance of the year. So when you go business by business appliance, strong margins study, SubCom take the first quarter out in the little bit of abrasion growing at volume growth and data and devices always to start improving next year based on what we see right now.

Okay, thank you Sherri. We have next question please.

Thank you and that’ll come from the line of Craig Hettenbach with Morgan Stanley.

Great, thanks. Question on Creganna, understanding at just close, but if you can just give some anecdote in terms of customer engagement number one, number two, just kind of what that does few more broadly and kind of the medical opportunity is that?

. : I think secondly as we talked about the second part of your question around what those are do, which really nice about Creganna does for us. It really round out of the portfolio. So just to remind everyone, 90% of that integrated solution of we’ll have internally. I think the other thing that is very powerful not only their position in engineering, but worse position in the world really balances that medical platform and they fill it not only the manufacturing or could the engineering until the gap we had around strong presence. And then, clearly bringing in 225 engineers and know that space, really doubled our engineering capability. So really have a very nice platform to continue to build up on and very early, but very excited that as well.

The one thing I would add Terrence is, we can’t Creganna in China, but outside of the China and our robust platform across China had an existing medical business there in that market is maybe order minimally engaged because you have growing huge population and aging population and don’t have the affordability. So this we’re really excited about helping them scale much better to the in China.

Got it, thanks. And then, as my follow-up on the tuck-in announced this morning, if I look back to me the number of tuck-ins and then many deals to kind of built it based that you have today. So just your strategy in the sense from market, it feels like that’s the market is very fragmented. There is a lot of growth, there is a lot of opportunities, but could we expect more along these lines in terms of you’re doing these type of $40 million, $50 million type revenue deals?

Craig, I think you said it very well. The number one, it’s a very fragmented margin and what we liked about, what was announced today really is this is a speed sensor that product company that really placed very strongly into the transportation both in the industrial transportation side as well as automotive in the turbo charger applications. So I think when you look at the sensor space, you’ll continue to see two things similar to this that has continue to built out portfolio as well as what we historically and continue to grow this business. So very excited about the business we announced last night and help us strength us in the transportations business.

Thanks for that.

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

And it will come from Shawn Harrison with Longbow Research. Please go ahead.

Hi, good morning everybody.

Hi, Shawn.

Just the buyback -- just to be clear on the math. Is there about $1 billion now available on the buyback and should we assume the June quarter get you back to the normal guidance of say 150 to 250 type of activity?

Hi, Shawn. This is Mario. We’re still have about familiar $1.3 billion of authorized and just to remind that in terms of what we talked about in the comments, our strategy remains very much consistent with about and a reminder of what we have accomplished last 18 months and then, Tom if you want to add anything.

Sure. I would say yes. We’re going to get back fairly to the lower end of the normal range in the next couple of quarters. We bought back $3 billion over the last nine months. We did make Creganna acquisition, but we feel these two/thirds, one/third split really works for us. We haven’t seen anything that changes our view, is it from a strategic point of view that’s the sensible capital allocation and as you know all of you’ve been following us for a while. They’ re experience we’re at the higher in two/third’s return to capital and then there is curious when we make any kind of sizeable acquisition whereas to below that.

Okay. That’s helpful and as a follow-up just on auto in general, maybe it’s a two-parter. Have you seeing any impacts from the earthquake in Japan, I think Toyota was take around of $0.5 billion customer I mean some 20 or 11 are correct and then, just also on what you think the impact of China stimulus is on the business this year and how that got affect the business rolling in the fiscal’17?

Hi, Shawn, it’s Terrence. Thanks for the question. I think first of all let’s take Japan, what I would say of Japan, I think you’re sizing Toyota not right. When you sit there and you think through the earthquake in Japan, clearly that’s a poor situation that we’re monitor with our customer you know we have not seen any disruptions yet as part of assuming normal pattern, but demand that it may impact some timing little bit, but we’re talking to our customers constantly and make it sure, we’re helping that anyway that can stay more through you know that tragically in Japan. On China stimulus I think that’s a little more of a complicate question that when you look at it, we did get it back in our first quarter as China’s overall production so we talked about that. What we have seen is China comeback to about 6% production environment here both, which is pretty much in line with the EDP, I don’t think we know whether the China stimulus accelerated some production or demand, but we do sort of view that China production long-term will stay around GEP from China. So, I don’t think we’re for off right now. I think we’ll have to see as stimulus if there is any timing affect, but right now we feel pretty good as production has re-stimulated those from the first quarter being very slow.

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

Mark Delaney with Goldman Sachs. Please go ahead.

Yes good morning and thanks very much for taking the questions. The first one is a follow-up on the Q4 guidance and you’ve talked about some of the top down factors that you’re think about in terms of different end markets. Can you help us understand is there anything you’re getting from specific customer forecast that are giving lot of visibility that Q4 is up sequentially from Q3? Anything kind of the I thought normally four to six weeks, so it seems like it’s more top down driven, but if you have a bottom-up reconciliation that giving you more confident that’ll be helpful I think.

We have lot of customers. So there is a lot of data point, I would say the biggest indicators are just one-one, and will be said in industrial. So we do see that sequential growth in orders and it continued in the April pretty solidly. So that gives us confident, it’s not slam down. The channel partners are pretty much back to positive seeing POS in line with the increasing demand and reflecting inventory levels in the channel back in line. So these are all positive indicators in few records this time last year. Those indicators were starting to; they were raising caution going the other way. So that would give us some optimism. Again, we’re not expecting a boom from Q3 to Q4. I think it’s just where the cycle is this time versus prior years and of course that I always keep reminding you of that extra week. It’s confusing all of us, but yeah there is an extra week there. So when you strip that out, we’re talking about $40 million in revenue pickup, but right now feels, we think that balance I mean you know, we’ll know a lot more at the end of the third quarter, but when we look at what the channel pattern is versus prior years, when we look at our industrial business this quarter sequentially and seeing it both in the OEM customers and the channel customers that will give us that confidence. Terrence you want to say something?

No. I think you said it very well.

Okay. I appreciate the color and then follow-up question on the tax rate commentary and kind of actually two parts. So I think 23% to 24% was the comment. What sort of affect should we expect for the potential settlement around the Tyco liabilities as should we be looking for any other income line? Are there changes there? And then, can you just clarify does the long-term guidance of 23% to 24% include what you think of potential impact might be around earnings stripping regulation or you just have another chance to better put that into numbers?

I think that what we talked about in the comments, our expectation from longer-term remains 23% to 24% that does not include any additional regulations related above any potential from there. We’re still looking at it and when it comes to the second half, we do expect it will be a little bit lower than the 23% to 24% and that’s mostly driven around distribution of profitability more than expectation around.

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

Got the line of William Stein with SunTrust, please go ahead.

Hi. Great, thank you for taking my question. I’m still having trouble understating your comments about the transportation segment. I think that you noted that automotive is at least as strong as it look previously and it’d be downward adjustment to the full-year guidance at segment is related to the sensor business. So you’re seeing, it sounds like you’re seeing industrial sensor applications roll-off just at the same time that you expect the rest of the industrial exposure to starting. So maybe step by reconciling that and then I’ll have a follow-up to be?

Let me start with that. I think we’re on where to think about the venture piece for that is growth is slowing whereas in the connector part of the business in which growth was down right, because of inventory correction fell. Now we expect what’s going to happen in the second half of the year in the industrial connectivity business. Last we met a little bit of growth in Q4, but sensors with a different story, this really growth is slowing, reflecting, the certainty out there. Terrence, you want to talk more about transportation?

Yeah. Tom he said it well. When you think through the interconnect we saw industrial about 50% of glossary distribution in sensor is very little down. So what we seen we’ve actually our sensors industrial actually comedown and slow more like our direct customers. So Tom is very much right on it and the rest of the transportation is like we said in the comment, we see a production environment staying steady at 2% to 2.5% growth certainly China being the big driver. Europe being slight so we see that continues to be solid and transportation when you say it’s down a little bit it really has to do with that sensor.

So the follow-up there is, within transportation sensors are still quite small and 10% or 15% of the transport and suspect what’s really driving the full-year differences some you made a comment on the prepared remarks around a supply-chain or some other inventory adjustment that one of your customers is making in North America. Can you help us situation is better said is we really trying to understand if this what’s going on here in this sort of valid lead as to what’s going on the industry or is this particular to TEE in a very temporary and then snaps back or is there a bigger problem here? Thank you.

Well. It is actually just have customers getting these orders into and they change their process. So it does affect the numbers, it does not affect demand and that did impact our orders, but it did not impact the demand we’re seeing from customers. So really it’s just their process about they give orders, they changed more real-time to giving us the firm and that adjustment impacted our orders, but it doesn’t impact the demand patterns at all.

What I add will is just to help the understanding, what I would add will is our automotive business will grow more in the second half than the first half. So we’re not the mixes are changing you know North America flat flattening a bit China picking up, Europe steady, but when you step back to your question, hey is there something going on here? We actually are going to have stronger auto business in the second half than the first half, the overall sensor business growth rate lower in the second half than the first half.

Just one last comment, the 2% and 2.5% production environment we do expect to be the high single-digits around the business.

Thank you.

All right. Thank you. We have the next question please.

It comes from Steven Fox with Cross Research.

Thanks. Good morning. Two questions from me. First was just getting back to the transportation margins. I understand the investments are going on and I’m just curious if you can just give us some bigger picture comments on how you’re managing those against our own short-term expectations from margins in that segment versus what’s in the expanding opportunity for growth and then I’ll had a follow-up?

Sure. So aggregate for three pieces of our transportation segment. Automotive, as Terrence said very strong business expect to grow mid to high single-digits on 2% to 3%, 2.5% production growth margins there remain strong. Sensors is below the transportation averages as you know with the acquisition with tremendous opportunity to move those margins up and we are investing at we’re increasing our R&D investment at a faster rate than our sales growth in sensors because the opportunity is still great and customers absolutely like another strong resilient technology rich company providing sensors into the transportation market and we are getting significant design and that requires engineers since been our plan from day one acquisition. And then in the industrial transportation business, which is the highest margin business in the group. We are I think we’re navigating very well maintaining our margins in a very really negative growth environment, our growth is just because of our wrong position in China, in Europe is offsetting, North America. So we’re really within the segment. We manage those businesses separately based on the dynamic in opportunity. And Terrence said in his comment, we’re pretty confidence that we’ll margins approve again sequentially basic point Q1 to respect that March to continue in the second half of the year with a little bit of volume growth over the first half of year because there is a lot of operating leverage in this business.

So, just pushback on the second point around sensors, so was it safe to understand and this was sort of un usual quarter in terms of the investment levels versus revenues actually ramping with some new programs and that gaps starts to close going forward or does it stay at these levels for a little while. If you could sort of qualify that? And then, my follow-up question was just to get an update on the CFO search. Thanks very much.

Firstly, it is ramping. We began increasing our sensors investment late last year and certainly as we’ve been programmed we thought design wins especially in longer cycle business, there will be a gap. So I don’t think its ennobling [ph] but it’s something we have to invest ahead and even in this programs. So it is a ramp that you’re going to see in sensors. But we will expect as we—

One more comment before the I just I think it’s really important if you look at the transformation of the company to Harsh environment, auto businesses the down set definition and you know for us that engineer, high barriers intensity, the capital allocation strategy. You see how that enables us even in the slow growth market to make strategic investment something like sensors, which is going to be a big business for us. And so, yeah we have decided not to really change our strategy there even that we have already leveraged to drive the earnings growth that we set up six months ago. Well, $3 billion $4 billion in revenue and $4 EPS and that’s part of the story too an important work. On the CFO search we’re active as you can imagine, we have several internal candidates we’re going to the external candidates obviously a critically important job, but I feel good about it, we have a very strong financial organization across the company and the team is doing great you can tell in an effective way been with 10 years very well and from mentioned, yeah that’s an everyday and I would expect in the next couple of months will be make announcement.

Great. I appreciate the color.

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

Thank you and that’ll come from Jim Suva with Citi. Please go ahead.

Thank you very much. When you mentioned on the prepared remarks as well as a little bit on the Q&A about your automotive customer changing its supply chain a little bit. Can you give us some details like, did you benefit from that in prior quarter or it sound like this quarter you have some weakness associated with that? Do you then in the future weakness but it seems like at the end of the day, the supply-chain has to all connected and was that changed I assume lead by the customer and then rolled-out globally to them or already has it centre to around petroleum or diesel or electric or HV? How should we think about kind of what’s going on there and is this a rippling changed the industry? Then my question or follow-up would be on the intercompany debt, I know you mentioned that the past historical IRS settlement is in work near interest for and I also correct to say that the new regulations also potentially and our due impact, current debt structure amongst the company and if so can you quantify or let us know about anything around that or is it all decently backward stating and going forward there are no considerations? Thank you.

I’ll take the first point and I’ll allow Mario to take the second one. Number one, in terms of customer, so when you look at program I think that look at they changed their process. So certainly this was something that built up overtime that’s why they did the process. They gave us very forward-looking orders that’ll be recorded as orders of backlog. Now they moved to be a more with articulated and that had scheduling him up and they are going to head with orders more frequently that does create a debugging in our world. It does not impact programs that we won with our customers throughout the world. So when we look at this, this is something that is very and does not impact programs and can’t get into individual diesel versus electric versus combustion engine and it isn’t there and over time we will just get those orders in more frequently than having schedule back and forth. Now I’ll let Mario turn over to sector piece on your tax question.

Sure. On the tax question, first of all on the settlement, we did mention that we have made a big payment to the IRS effectively, stops the accrual of interest on that liability which basically takes out most of the impact of the settlement when we would like to settle. So we already have included in our guidance the fact that we have made that payment that impacts our tax rate. On the second element, as far as the rights that are put in place, first of all those rights – those proposed rights are perspective though they do not have any impact on our current [indiscernible] company and again its complicated matter that we are getting our head around, but no, there is no impact to current in top of that decision that position.

Great. Thank you very much.

Thank you.

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

Thank you. That will come from Mike Wood with Macquarie. Please go ahead.

Hi. Good morning. Thanks for squeezing me in. I realized your visibility is very good on the auto platforms, can you just give us your incremental enthusiasm or concerns over just where your share will be moving over the next several years and has there been any platform wins on the passenger vehicle side from measurement specialists?

Yeah, sure. Thanks. Yeah, I mean, I couldn’t I have to contain my optimism around the automotive business globally and with our presence and range of technology, it’s becoming more and more important. So we have a significant share in the connectivity business, but over the last five years, we believe we increased at five points. That is quite an accomplishment and it really is that these solutions get more complex and all we have to do is kind of look under the hood, see how different it is in the last five or six years. The connectivity in the sensing solutions are more complex. On the connectivity side, we continue to win at a rate faster than we have in the past, which is why I think we said a few times. If you go back five years and we talk about a 2% production environment, we would have talked about 3% to 4% revenue to TE environment. Now we believe that’s a 5% to 6% and that’s really more market share than it is content. So I expect we will continue to inch up our market share because of the range of capability we have in this, just for example hyper electric vehicles, the difference in our designing in the last three years or so the first – the prior five years is 2x to 3x. So at that market now continues to pick up. We have a high content and we are extremely well positioned with all the leading platforms. So we feel good about that. On the sensors side, we have one significant design edge technology and our go-to-market and our strength we bring and the credibility we bring to our auto customer. We are an auto supplier through and through and we are doing that for 50 years, so they like the technology and they trust us and we are wining important awards. They are not showing up in revenue yet, but that will be in the next couple of years, but – that’s why when we talked earlier incredibly enthusiastic and feel that actually ahead of the hypothesis we had with [indiscernible] about our ability to bring their technology into this – the auto market, which is the best market for Sensors. Eric, do you want to add anything to that?

No, I think Tom just said it well and also even with the small acquisition and we continues to get confident and leverage our go-to-market in the transportation area like Tom said, so I think our program wins, we’ve been getting the other thing that’s nice about it is they are on all geographies at the world, it’s not just concentrated one geography, which actually leveraged with that that we have in our auto business. We always talk to you all about.

Great. And as a follow up on the industrial orders, can you just give us the breakout of the OEM trend versus the distributor order trends in the quarter?

Yeah, sure, Mike. [Indiscernible] when you look that the trend in the quarter between the two that you had what we saw on the OEM side, year-over-year was relatively flattish and then on the channel side, we were still down year-over-year, but what’s nice is it was getting back to where last year’s order levels were which give us confidence that when we get to the third and fourth quarter our channel sales versus last year will be up because we did have that correction in the fourth quarter. The other thing that Tom mentioned that I think support our channel partners have seen positive POS, they are seeing a book to bill greater than one. So it’s not only our order patter as we talk to our channel partners, they have also seen their book to bill go back above one as well as positive POS, so it’s combination of those factors that we see.

Great, Thank you.

Thank you.

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

That will come from Mark Delaney with Goldman Sachs. Please go ahead.

Appreciate you talking the follow-up. Just a follow-up on that tax rate question. Once the Tyco liability is settled should we be thinking about the other income from Tyco and Covidien going to zero, so tax rate 23% to 24% but assume no other income from that going forward?

Mark, sorry, let me clarify. The way you should think about it is that the settlement is going to be basically EPS [indiscernible] and there is going to be a [indiscernible] between the other income that’s going to go away and tax rate is going to get lower. But this far into the guidance what we talked about the 23 to 24 and being a little bit lower in the second half does not include the sum. So we are just now including the settlement, but you should think about it as EPS neutral because we have done the prepayment to the IRS would basically stop the accrual on the.

Okay. Thank you, Mark. We have no further questions.

So thank you very much for your time this morning. If you have more question please contact Investor Relations at TE. Have a great day.

Thank you everyone.

Thank you everyone.