TE Connectivity Ltd. (TEL) Q2 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen thank you for standing by. And welcome to the TE Connectivity Second Quarter Earnings Call. At this time, all lines are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions]. As a reminder, today's call is being recorded. I would now like to turn the conference over to our host, Vice President of Investor Relations, Sujal Shah. Please go ahead.

Good morning and thank you for joining our conference call to discuss TE Connectivity's second quarter results. With me today are Chief Executive Officer, Terrence Curtin; and Chief Financial Officer, Heath Mitts. 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're willing to take follow-up questions, but ask that you rejoin the queue if you have a second question. Now let me turn the call over to Terrence for opening comments.

Thank you Sujal and thank you everyone for joining us today to cover both our second quarter results and our increased outlook for 2019. And before I get into the slides, let me provide a quick summary of the key messages in today's call. And I want to start with the markets. Overall, the market environment is largely unchanged from our last earnings announcement that we did back in January where we conveyed a weaker market environment in China as well as slower global auto production environment. Based upon what we're seeing in our order patterns and customer discussions, we’re maintaining a view of the second half of our fiscal year that is consistent with what we said back in January. Also despite this weaker market backdrop in some of our key markets, I’m pleased with how we're successfully executing on our strategy and outperforming the markets in key areas due to the multiple leverage of our business model. And when you think about the growth side of it I do believe we’ve positioned TE to benefit from secular trends and we talked to you a lot about content growth. And as we go through our presentation today you're going to see that content growth is enabling us to partially buffer and outperform the weaker market environment and you're going to see this in automotive, commercial transportation, aerospace as well as our medical business. The other key thing about our business model is we're also executing on non-growth levers that we highlighted related to margin as well as capital usage and this is very evident in our second quarter results. Now this year we do expect to keep adjusted per share flat versus the prior year even with $400 million of currency translation headwind from sales and a declining auto production environment. As I’ve talked about on our call 90 days ago we're defining success in 2019 from a financial perspective that’s delivering adjusted earnings per share in the second half that is above our 2018 exit rate while absorbing the weaker market, and currency headwinds that we're dealing with and we believe our second quarter results demonstrate traction towards this goal and ensures we’re well set up for the future. And finally I do want to stress we're also taking a long-term view towards creating value and expect to execute to the business model targets through this cycle. I think what’s really good about TE is our strong cash flow generation model and that allows us to support sustainable organic growth that while enabling return capital to shareholders while also looking at bolt-on acquisitions, and these are all key levers in our value creation model. So with that as a quick summary let's get into the slides and I’ll get into Slide 3 and I will review the highlights in the second quarter. First of all, I am pleased with our execution in the second quarter with revenue at the high end of our guidance and adjusted earnings per share of $0.15 above the midpoint of our guidance. Our results continue to reflect improvement and the resiliency and the diversity of our portfolio. The outperformance in the quarter versus our guidance was driven by our Industrial and Communications segments while our Transportation segment was in line with our expectations. Our sales were $3.4 billion, down 4% year-over-year on a reported basis and down 1% organically. Sales in the quarter included a headwind of approximately $150 million from currency translation. And by segment, in Transportation our sales were down 3% organically, which was in line with our guidance and that was driven by global auto production declines of 8% in the quarter. Our Industrial segment grew 5% organically which was ahead of our guidance driven by growth in commercial aerospace, defense as well as medical. And our Communications segment declined by 2% with weakness in Asia impacting both of our businesses in that segment while our revenue was better than we expected. Turning to earnings, in the second quarter, we had operating margin of 17%, which is in line with our 2018 exit rate and up slightly sequentially. Our transportation margins were in line with our expectations and I do want to take a moment to reflect on a strong margin performance of our Industrial and Communications segment in the quarter. Those who have been with us a while know the reshaping that we’ve done in our portfolio in our Communications segment over the past number of years. Our focus was to get on higher growth, higher margin applications and we also had to do a lot of heavy lifting to drive improvements in our cost structure as well as our manufacturing footprint. When you look at the strong second quarter adjusted operating margins of 18% in the Communication segment, they are direct result of our strategy and our team’s execution. And to really put a fine point on this, back in 2019, this segment was a high single-digit margin business and over the past couple of years we’ve doubled the profitability of this segment based upon the strategic actions we took. What's nice about it, you’re also seeing it that we're applying some of that same heavy lifting in our Industrial segment that we teed up a couple of years ago when we mentioned to you that the segment was not earnings where we thought it was entitled and in the quarter the industrial operating margins expanded to 15.8%, reflecting revenue growth and benefit from the strategic actions that we’re taking and certainly we’re only partially way through that, and Heath will get in more details on that later. Adjusted earnings per share of $1.42 exceeded the high end of our guidance, and again was driven by the strong operational execution I just mentioned in the Industrial and Communications. Our adjusted earnings per share includes a currency exchange headwind of $0.06 and adjusted EPS was flat year-over-year despite this currency headwind. Free cash flow was also a highlight of the quarter and it was $344 million, year-to-date our free cash flow was $413 million and is up approximately 45% versus the prior year due to the positive impact of working capital. During the quarter, we returned $338 million to shareholders through buyback and dividends. And in this month we are pleased to announce that we signed a definitive agreement to acquire the Kissling Group, a provider of high voltage and power management solutions. This bolt-on acquisition further expands our portfolio for hybrid electric commercial vehicle applications and we do expect that this deal will close before the end of our fiscal year. Based upon our earnings momentum in quarter two, we are raising the midpoint of our guidance by $0.15 to take the total year up at midpoint of $5.60. We're maintaining the midpoint of our sales guidance at $13.65 billion, reflecting a second half that is consistent with our prior view. So with that as an overview of the quarter let's turn to Slide 4 and I’ll get into our order trends. For the second quarter, orders came in as we expected and support the second half guidance. Our book to bill was 1.01 and orders grew sequentially by 4% with growth across all segments versus prior quarter. And the one thing I want to highlight is while overall orders were as expected, there were some things we saw regionally that were different that we want to highlight. We did see an increase in orders sequentially in China by 9%, which we believe indicates stabilization in the markets we serve there while in Europe orders were down sequentially by 2% due to a softer end market across our business. Turning the orders by segment. Transportation orders declined 4% year-over-year as expected, and we saw the similar trend sequentially that I just mentioned with stabilization in China, while having a slightly weaker Europe. In the Industrial segment orders grew 3% organically year-over-year driven by aerospace, defense and medical. And in Communications while orders were down year-over-year they did grow 9% sequentially, driven by both our businesses in this segment and China, data, devices and appliances. So with that overview on orders, let's get into the segment details and I'll start with Slide 5 and we will start with Transportation. Overall for this segment sales were down 3% organically year-over-year. Our order sales were down 5% organically versus auto production declines of 8% in the quarter. Our outperformance versus auto production continues to be driven by content growth from secular trends around electric vehicle and increased autonomous features. For the year we continue to expect to outperform auto production by 4% to 6%, consistent with our content growth targets. In Commercial Transportation we grew 2% organically in the quarter versus global market declines of 3% with outperformance versus the market, fueled by ongoing content and share gains. We saw growth in North America and Europe and this was offset by declines in Asia. Our sensors business grew 1% organically year-over-year, with growth driven by industrial applications. To highlight the design wins, we continue to increase our design win value across a broad spectrum of auto sensor technologies and applications and year-to-date we have $450 million in new design wins across transportation applications. For this segment adjusted operating margins were 17.5% and this was in line with our expectations. As we mentioned last quarter with the market pause we're seeing we are accelerating cost actions in this segment which will result to margin expansion in the second half. With that let's turn over to Industrial and starts on Slide 6. Overall, the segment sales grew 5% organically year-over-year, this was above expectations, with growth being very strong in aerospace, defense, medical. In AD&M the business delivered a strong quarter of 13% organic growth, driven by program ramps in both commercial aerospace as well as a strengthening defense market. In Industrial Equipment, sales were up 1% organically and it was really a tale of two cities. Our medical business grew 12% but this was offset by mid single-digit declines in the broader industrial markets, certainly in factory automation. And lastly our energy business grew 4% on an organic basis driven by growth in North America. The Industrial segment adjusted operating margins expanded 190 basis points over the prior year to 15.8% driven by strong operational execution by our team. We believe this performance shows our continued traction improving the profitability of this segment as we’ve laid out for you, while we do expect margins to decline slightly from the first half to second half due to costs associated with factory consolidation efforts. We remain ahead of our original expectations and do expect margin expansion for the full year compared to last year. Additionally our plans remain on track to expand adjusted operating margins in the high teens for this segment over time. So please turn to Slide 7 and I will get into Communications Solutions. Communications sales declined 2% organically due to softness I mentioned earlier across Asia. It's important to remember that for this segment over half of its segment sales are in Asia region. In data and device, the sales were flat organically with growth in data center application being offset by broad product weakness across Asia. And our clients business was down 4% organically due to weakness in Europe and Asia, partially offset by growth in North America. As I highlighted earlier adjusted operating margins were an exceptional 18% in the quarter and expanded 260 basis points year-over-year from strong operational execution. Now this margin performance is above our target levels and is a result of our strategy to focus on higher growth higher margin applications. So with that I’m going to turn it over to Heath, who will get in the financials and I'll come back and talk about guidance.

Thank you Terrence and good morning everyone on the call. Please turn to Slide 8 where I will provide more details on the Q2 financials. Adjusted operating income was $581 million with an adjusted operating margin of 17%. GAAP operating income was $530 million and include $42 million of restructuring and other charges and $9 million of acquisition charges. As we mentioned last quarter, we have broadened the scope of our cost initiatives across our business and are accelerating cost reduction in factory footprint consolidation plans. As a result, we are increasing our estimate of restructuring charges to $250 million for the full year. With these initiatives we expect to exit the year with a more nimble cost structure, which will help enable future margin expansion and earnings growth. Adjusted EPS was a $1.42 exceeding the high-end of our guidance range and included $0.06 of headwind from currency. We were able to maintain flat adjusted EPS year-over-year despite the reduction of revenue which demonstrates our ability to execute on multiple levels to drive earnings performance. GAAP EPS was $1.26 for the quarter and included restructuring and other charges of $0.09, tax related charges of $0.04 and acquisition related charges of $0.02. The adjusted effective tax rate in Q2 was 15.4%. For the full year we expect the adjusted effective tax rate to be in the range of 17.5% to 18%. And versus the prior guide we have lowered our full-year expectations due to the expected jurisdictional mix of global income. We continue to expect our cash tax rate to be lower than the effective tax rate for the year. As we continue to drive earnings growth in line with our business model, we are looking at all levers under our control. In Q2 interest expense decreased $13 million year-over-year. We have taken advantage of the global interest rates and increased percentage of our borrowings in foreign currencies. Looking ahead, we expect our quarterly interest expense to be in line with Q2 levels. Now if I can get you to turn to Slide 9. Sales of $3.4 billion were down 4% year-over-year on a reported basis and down 1% organically. Currency translation negatively impacted sales by $154 million versus the prior year. Adjusted operating margins were 17% driven by strong operational performance. We expect margin expansion in the second half of the year as we see the benefit of accelerated cost actions. And as Terrence noted I'm pleased with the progress we are making to drive long-term improvements in our cost structure. This really sets us up for a more nimble structure as we move into 2020 and beyond. In the quarter, cash from continuing operations was $555 million and up 53% year-on-year. Free cash flow $344 million with a $179 million of net capital expenditures. We returned $338 million to our shareholders through dividends and share repurchases in the quarter. In the first half 2019 free cash flow was $413 million, an increase of 44% versus the first half of prior year. We expect that our free cash flow will exceed the prior year even with the increased level of restructuring investment related to our cost initiatives. Our balance sheet is healthy and we expect cash flow to remain strong which provides us the ability to support organic growth investments to drive long-term sustainable growth, while also allowing us to return capital to shareholders and to continue to pursue bolt-on acquisitions. I’m now going to turn back over to Terrence to cover guidance before Q&A.

Thank you, Heath. And as I get in the guidance, let’s start with the third quarter on Slide 10, and a lot of this is going to build on the things we already highlighted. So based upon what we're seeing in the end markets and new order trends, third quarter revenues are expected to be $3.4 billion to $3.5 billion with adjusted earnings per share of $1.41 to $1.45. And at the midpoint this on sales -- this is reported and organic sales declines of 4% and 1% respectively, and the difference that you have between the reported and organic is the ongoing strength of the US dollar which we expect to have a headwind year-over-year from -- which is about $120 million in sales and $0.06 in EPS in the third quarter. Similar to the second quarter, we expect to offset this headwind from an adjusted EPS perspective, and our adjusted EPS at the midpoint is slightly up over the prior year. By segment we expect Transportation Solutions be flat organically, and overall revenue is expected to be flat to down slightly versus a mid single-digit decline in global order production that is still going to be driven by weakness in China and Europe. Our outperformance versus auto production again reinforces the positioning that we've done to benefit from content growth through the key secular trends in that market. In Industrial Solutions we expect to grow low single-digits organically with continued growth in aerospace, defense, and marine and medical applications and these are going to be offset partially by a weaker factory automation market that we’re seeing. And in Communications we expect to be down mid single-digits organically year-over-year but I think the important thing to note is sequentially we're going to continue to see that segment revenue improve over the second quarter levels. So let's turn to Slide 11 and I will get into the full year guidance. As I mentioned earlier we're reiterating the midpoint of our revenue guidance in the range that we’re going out with as a range of $13.55 billion to $13.75 billion in revenue. This continues to represent flat sales organically and a reported sales decline of 2% due to the currency translation headwind that I mentioned earlier, the $400 million. Adjusted earnings per share is expected to be in the range of $5.55 per share to $5.65 per share, an increase of $0.15 at the midpoint from our prior view. I’m very proud that we expect to keep adjusted earnings per share flat versus the prior year even with the $0.16 currency translation headwind and the declining auto production environment. So let me get into some color around our annual guidance for the segments. We expect Transportation Solutions to be flat organically. We expect auto sales to be roughly flat organically with auto production now expected to be down 5% in our fiscal year, which is at the weaker end of the range we indicated last quarter. Content gains will continue to enable outperformance versus the production environment. We continue to assume that global production units will remain fairly consistent at approximately 22 million vehicles per quarter through our fiscal year. So we had that in the second quarter, we expect 22 million units to be made in the third quarter and fourth quarter. And lastly in Transportation we are expecting continued growth in sensors in both industrial and auto applications. Turning to Industrial Solutions we expect sales to be up low single-digit organically with growth driven by aerospace, defense and medical applications. And in Communications we expect to be down low single-digits organically driven by the Asia market weakness that’s affecting both of these businesses. So before we turn it over to questions I just want to provide a quick summary of the call. First off, we remain committed to our long-term business model and you’re continuing to see the positive impact of our diverse portfolio with our Industrial and Communications segments performing above the expectations in the quarter with strong operating margins as well as earning contributions. Secondly, the market environment we laid out 90 days ago is largely unchanged with our order partners indicating stability in China. And as I mentioned early, with the weaker market backdrop, we're successfully executing on the non-growth levers of our business model and have increased the midpoint of our earnings guidance. We're maintaining flat adjusted earnings per share growth even with FX and auto production headwinds. And finally as we indicated last quarter we anticipate to demonstrate earnings per share performance in the second half that’s above our exit rate in fiscal ‘18. The levers we're pulling this year are expected to enable increased earnings and business model performance when market return to growth as Heath mentioned. So before I close I do want to thank our employees across the world for their execution in the second quarter and also their continued commitment to our customers and a future that is safer, sustainable, productive and connected. So with that Sujal let's open it up for questions.

Okay, thank you. Kale, can you please give the instructions for the Q&A session.

[Operator instructions]. Our first question comes from line of Scott Davis with Melius Research. Please go ahead.

I wanted to just dig a little bit into the industrial business because the margin performance there was well above what we had and I think spec of the envelop look like incremental margin is almost close to 70% here. And you use the word strong operational performance, but that can mean a lot of different things. So can you help us understand, I know the guide is for that not to necessarily continue at the same exact level, but can you help us understand at least what happened in the quarter that led to such big positive margin beat?

Sure, Scott and thanks for the question. When I take a step back, when we started our journey in industrial a couple of years back, we certainly laid out a picture where we saw margins getting into the high teens. The one of the things that we talked about was we had to look at our footprint and do a lot of heavy lifting on the footprint. When you look at the performance in the quarter it really is not around the footprint moves, it is around getting some growth in the segment as well as other cost actions we’ve been taking as we're tightening up the business and I think one of the things that’s nice is you're seeing the flow-through potential in these industrial markets. We are also going to get -- be able to get additional levers as some of the things that we’re doing on the footprint over the next couple of quarters even in the margin in the segment may come back a little bit but long-term to make sure we get further margin expansion going forward. So during the quarter when you look at it, it was truly around getting some volume, also sort of the non-footprint flow-through going on and it is nice that you're seeing nice growth both in aerospace as well as medical which are two of the markets that are key from a content perspective. And we did it even with an industrial market that we did see in the factory automation side Scott, certainly in Europe and Asia a softer environment there. So we also did in an environment where not every business unit was humming. So it truly was outside the footprint actions and I think it shows the potential and the traction we have together it up when those footprint actions come into place as we execute it in the second half.

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

What are you seeing in terms of inventory either at your direct customers or through distribution in terms of where you want that inventory to be and maybe how long it will take to get to kind of a normalized level?

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

The next question comes from the line of Christopher Glynn with Oppenheimer. Please go ahead.

I got a question about the debt restructuring, if that’s the right way. It looks like your kind of weighted average cost of debt was approximately cut in half and probably done at the beginning of the second quarter. Can you just explain a little more of the mechanics of how that goes?

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

The next question comes from the line of Joe Giordano with Cowen. Please go ahead.

So I wanted to ask about the auto restructuring that you guys announced here. So over the last couple of years you have to spend ton of money to bring that business up to handle the demand ramp that you guys have seen and the content ramp that you guys have seen. So talk to me about how you kind of ramp that down in an efficient way where you are not kind of undoing the things that you just spent money to do?

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

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

A question for Terrence, thanks for the details on the order, design wins year-to-date. Just looking as you build that book of business, can you talk about why TEL was winning, how you stack up relative to encumbrance in the market and any synergies that you see in terms of having both kind of sensors and connectors as you go to win business?

Thanks Craig and when you look at it as we’ve always mentioned to all of you, Measurement brought, when we did that acquisition and a couple of bolt-on we did afterward, take almost these technologies and I think when you take those synergies we have, it really is around our leading global automotive position and also our industrial transportation business which is a leading business and we have leading share and it gives us access to all global OEMs. It’s one of the -- I think special things about our transportation business is our leadership positions balanced globally and we're with essentially every maker OEM. So the synergy that we really get as is automotive customers look at us as an automotive company and how do we bring our processes, our quality into scale things and that’s what we're doing with these wins and it’s great that customer access that we have is the big synergy. From a competition perspective the center space is very fragmented; it’s not just one company out there. And what's really nice is when we're coming with it, number of centers in the car continue to increase, so it does have a very nice secular trend with it, with all the things we're talking about whether it’s electric vehicle as well as autonomous features and we play in that physical network sort of bumper to bumper in the car. But the other thing competitively is they are seeing offering both technology as well as our scale and being a trusted supplier it’s all coming together that is why we talk about while today we might have about $2 a content per vehicle in sensors with the pipeline of wins we're doing we’re seeing that well doubling up to $5 to $6 share per car in next five years and I think it’s with the fragmentation and the markets going to continue to be an opportunity area where we're going to continue to build on both organically and inorganically overtime.

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

Terrence if you look at the order revenues versus production, you still have 3 point outperformance. Can we view this as our cross-gap versus production given there was some inventory adjustment presumably in the quarter and if production is flat from here for the next few quarters but Europe is weaker, why do you expect content outperformance to sort of narrow the gap back to sort of mid single-digit level?

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

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

Just a question on Europe. Terrence you mentioned some incremental weakness there, I was wondering what the chances are that we continue to see further weakness there, how you factor that in for the guidance and its implications may be for some of the restructuring what you're doing over there? Thanks.

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

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

Just a bit of follow-up on the commentary about the China macro situation that was spoken to in the prepared remarks. Maybe can you help us better frame the -- I think you said 9% sequential increase in China orders, how does that compare to normal seasonality in China and then any other commentary terms of what the customers are saying or trends by end markets that give you some confidence to talk about improved macro trends in China more broadly? Thanks.

Well, I would say Mark just maybe start with how do you normally sequentially see China, normally the December quarter in China for us is our strongest due to that’s typically a strong production environment. That being said certainly we did not see that. So we're seeing more stability and what we actually saw where we would typically see the December to March quarter have a decline in orders, it actually increased. We saw increases in our Transportation segment as well as our Communications segments both in double-digit. That being said we also do see the inventory levels around cars improving and the other thing that I think is pretty important around China as we talked about is electric vehicles. While China’s production is going to be down double-digit year-over-year, electric vehicle momentum in China really has not changed and what’s great and how we’ve positioned ourselves is, we think this year we got about 50% growth in China electric vehicle between hybrid and electrical electric vehicles going on in China, approaching close to 2 million units versus being about 1.2 million last year and really where we’ve invested to make sure we take advantage of that electric vehicle trend, we're aren’t seeing slow down in that category of vehicle at all in China. So I think where we’re positioned is certainly where we pointed as well as the order trends and what we're hearing from our customers, we do -- we have a feel of stabilization and improvement in China.

Next question comes from William Stein with SunTrust. Please go ahead.

The acquisition that you mentioned, I’m hoping you can provide some details as to the applications, profitability, size growth, any characteristic that would really help? Thank you.

First off, let's talk about -- it's the Kissling Group I said it during our pre-remarks. And what we're excited about with it and getting to some of it is, this actually, this business plays very close into industrial transportation applications. And what we look at coming into our industrial transportation, you all know how strong our position is there, provides good opportunity for synergy as we bring it into that unit. The other thing, if you were at our Investor Day, we did talk about some applications around where do we see electrification in commercial vehicles, which is really where this is primarily going to help us. And when you look at it, it really builds on our product technology that we already have through some of our relay and contactor technology that we bring to automotive electric vehicles. But in a commercial vehicle and certainly heavy truck, where you bring it in, you have to get the voltage rates at a much higher than a traditional automotive electric engine. And what's really nice of what Kissling does, it gets us up to 1000-volt technology, which is important in those obligations. And I feel very good it's going to tuck in and our team is going to do a nice job with it. And you see what they're doing on the content already. From the sizing, it is a bolt-on. It's about $50 million in revenue, good profitability. And it really tucks in with our strategy on how we think about bolt-ons. And I think I said in the script, we expect it's going to close later in our fiscal year and it will be more something that will benefit 2020 and beyond in 2019.

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

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

A couple of things, I mean. Do you want to frame? China market is a big market overall, and still you're probably looking at electric vehicle still being slightly below 10% of that market. Anytime you have that electric vehicle, that does help us from a content perspective. So, you're going to have that content trends. I don't think it's going to be concentrated near term in electric vehicles. I think you have to play in all technologies, and I think it's where we position ourselves very well that we can make the best, as you have to support combustion engines, hybrids, as well as full electric. And I think we're going to drive increased content from all of them. The other thing is, certainly, as you said, autonomous features. Certainly, there's a whole stepping stone you have to go through an autonomous features that need to get added before you even get near full autonomy. And that's going to also continue to benefit us. But it's those two together that give us so much confidence when we say 4% to 6% above production. So if the market is flat, we view we're going to grow 4% to 6% above market with a mid-single-digit growth, whether it's in China or anywhere in the world. And so it's two big secular trends that you mentioned are so important for us. And that's why we made the bets to make sure where we have the leading position, we are going to capitalize on it.

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

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

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

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

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

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

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

I had a margin question across your segment. So, what's the transportation segment margin in Q2? Was that -- was that what you were expecting or was it below your plan? And if you can comment on just given the restructuring and so should we expect a pause to your 20% plus minus target? Or how soon do we get there, back up there? Conversely, how sustainable is this industrial and commercial segment margin story? Thank you.

Thanks, Deepa. And I appreciate the questions. Certainly, I would say this, we went into the quarter, the TS margin we ended up with was right in line with what we expected going into the quarter. We were a little bit -- the communication and the industrial margins were little bit better than what we expected. And that's reflected in 17% margin, which was higher than what we had gone into the quarter expecting to come out of it. If you break these margins down into pieces, right, Terrence talked in his prepared remarks about some of the activities that have been going on in CS relative to getting the footprint right into that business. And it's -- we're very pleased with where the CS margins have ended up at this point in the journey. I would say it's -- being the smallest of the three segments, it's going to have -- probably have a little bit more volatility because there is a little bit of lot of smaller numbers and maybe 18% is on the high side of our expectations. But certainly in the mid and at times high teens is a good place for our communication margin business and very high returns on that because it's not a terribly capital-intensive piece of our business. So, very pleased with where we are in CS. And for the most part, most of the restructuring activity is behind us. As we think about industrial, right, we've been pretty forthright in terms of our journey on the industrial margins to increase from just a couple of years ago north of 300 basis points moving forward. And we're certainly well on that journey. We're up a couple 100 basis points from where we were just a few years ago. And that is part of the activity that you'll continue to see as we step forward from '19 to '20 and from '20 to '21. And those activities are well under way as that journey for getting industrial to consistently be at mid to high margins, and we're a little bit ahead of pace on that relative to what our original FY '19 expectations are. For TS -- listen, TS has grown so quickly over the last few years that we have put some money into the business to help it grow. I would say that some of that has had an impact on the margins. And as we've seen auto production moving to recessionary condition that it's in today globally, but that obviously puts additional pressure on our production environment and allows us an opportunity to take advantage of this low and put some restructuring activity to work, as I've mentioned on some of the prior questions. In terms of what the margins going to be going forward, we'll exit the year at a much higher rate than we're at now. I don't anticipate us to be in a 20% number, but I do anticipate the journey back toward that 20% is well under way. The second half margins for transportation will be higher than in the first half of the year. And some of that is due to some of the restructuring that we've already completed.

The next question comes from the line of Matt Sheerin with Stifel. Please go ahead.

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

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

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

I wanted to take a minute to talk about the medical end market. It's not one we hear about too often. A couple of acquisitions a few years ago that were a little bit surprising. But from a sort of market position and perhaps even pricing perspective, but they are doing well now. Can you remind us what the exposure is? I know you have catheters even -- and can you just remind us a little bit about what that business is, how big it is and what the growth looks like today? Thank you.

Yes, certainly. It's in our industrial segment, Bill, and it is part of our industrial business unit and market that we disclosed. And it is about $700 million roughly annually what we do in industrial. And when you look at that $700 million, about $500 million of our medical business is completely focused around interventional applications. So, that can be things around heart, catheter going to the heart, also some -- some of that also going to the brain. And it really leverages our capabilities around what we do from a fine wire. Also the very special things that we do around packaging and mechanical applications, that isn't throughout TE. And what you saw in the quarter, you saw -- when we went into that business, it was an element to diversify our growth based upon capabilities we had. We did do Creganna, and we've done some small bolt-ons after that. But it is something when you look at the minimally invasive procedures, they're helping the outcomes getting to more cost-effective outcomes than traditional procedures and the 12% percent growth shows how we penetrated the major OEMs and our global position is very strong. So, we always say, we do expect that business to grow high single-digit and certainly, we are about this quarter with the program momentum we have. And I think similar to sensors, there's still a lot more opportunity as we continue to increase our penetration in the applications we are in today as well as other applications where we can bring our capabilities and drive synergy.

Okay. Thank you. Looks like we have no further questions. I appreciate all of you joining us on our call this morning. And if you have further questions, please contact Investor Relations at TE. Thank you, and have a great day.

Ladies and gentlemen, this conference will be available for replay after 10:30 a.m. today through Wednesday May 1, 2019. You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code 464389. International participants may dial 320-365-3844. Those numbers again are 1-800-475-6701 and 320-365-3844 with the access code 464389. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.