TE Connectivity Ltd. (TEL) Q2 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. And welcome to the TE Connectivity Second Quarter Earnings Call for Fiscal Year 2020. At this time, all lines are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, today's call is being recorded. I would now like to turn the conference over to your host today Vice President of Investor Relations, Sujal Shah. Please go ahead.

Good morning, and thank you for joining our conference call to discuss TE Connectivity's Second Quarter 2020 results. With me today are Chief Executive Officer, Terrence Curtin; and Chief Financial Officer, Heath Mitts. During this call, we'll be providing certain forward-looking information and we ask you to review the forward-looking cautionary statements, included in today's press release. In addition, we will use certain non-GAAP measures in our discussion this morning, and we ask you to review the sections of our press release and the accompanying slide presentation that address the use of these items. The press release and related tables along with the slide presentation can be found on the Investor Relations portion of our website at te.com. Due to the large number of participants on the Q&A portion of today's call, we're asking everyone to limit themselves to one question to make sure we can give everyone an opportunity to ask questions, during the allotted time. We are willing to take follow-up questions, but ask that you rejoin the queue if you have a second question. Now, let me turn the call over to Terrence for opening comments.

Thank you, Sujal, and thank you, everyone, for joining us today to cover our second quarter results insights around what we're seeing in real time, and how this is expected to impact us as we look forward. We are all living through a challenging environment brought about by the global COVID-19 pandemic. When we had our last earnings call just 90 days ago and provided our outlook, it was before the initial onset of COVID in China, and we did not include any expected impact in our quarter two guidance. I'm very pleased that, despite the impacts, we were able to deliver the results in line with the expectations and meet the commitments we made to our customers as well as our shareholders during the quarter. Now, before I get into the results, I do want to thank our employees. As you all know, we are a global company with engineering and manufacturing operations around the world and the safety of our employees has been primary concern. I would like to express my gratitude and appreciation to our teams for their dedication as we navigate the COVID-19 crisis and continue to effectively serve our customers as they also were trying to figure out how to navigate this crisis. A few things that I think stand out in our response to this crisis. First, as a company we were able to prioritize the safety of our employees, while demonstrating strong execution with our customers. Our engineering customer service and other non-manufacturing teams adapted well to remote and online work to ensure innovation and service to our customers. I also believe we demonstrated operations resiliency. In China, we brought back our plants online relatively quickly considering the environment and steadily increased utilization levels to minimize the impact in the quarter. All of our factories are open and running in China and Heath will highlight where we are in manufacturing in Europe and North America in his section a little bit later. And lastly, I believe we demonstrated agility, and it gives us confidence about our ability to continue to adapt to changing conditions. Our employees have been extraordinary in supporting our communities, customers and each other. And what I've seen in the past few months gives me confidence in our position coming out of this crisis. We'll talk more about what we expect over the next few months, but I am proud of the performance, resilience and flexibilities of our team in this quarter. So if you could, let me start talking about results and they'll begin on slide 3 and I'll frame out the key points of today's call. We delivered sales that were in line with our guidance and adjusted earnings per share that was above the high end of our guidance range with strong performance across all three of our segments. Adjusted operating margins were above 16%, and reflect the diversity of our portfolio and the early execution of cost reduction actions placing TE in a position of strength at a time of continued uncertainty. Another key point is that our balance sheet is strong and we have ample liquidity. A key part of our business model is a strong free cash flow engine that is resilient in periods like this. We expect to generate well in excess of $1 billion of free cash flow this year and we also have $2.3 billion of liquidity available. Also, as we look forward there is limited visibility of future demand. We do expect to see greater COVID-19 related impacts in our business in the second half with particular market weakness in Transportation as well as in the commercial aerospace market. As a result, we are estimating that our sales could be down approximately 25% sequentially into quarter three from our quarter two levels. And lastly, as we look beyond the crisis, we do remain excited about where we position TE strategically. I'm convinced we'll get through the crisis, and there is no change to our margin expansion plans and the expectations we've shared with you. We expect to improve our earning power by continuing to execute footprint consolidation plans, while accelerating additional cost reductions in light of the weaker-demand environment. When markets do stabilize and return to growth, we're well positioned to benefit from a recovery in China which is about 20% of our business, as well as a broader recovery in the automotive and Transportation markets. And the other thing that's great with our cash flow is that, we will continue to invest in content growth opportunities to enable outperformance versus underlying end-markets. And we will continue to benefit from the secular trends across the businesses and where we position TE. So if you could, I'd appreciate if you could turn to slide 4 and in four -- and I'll get in to review a few additional highlights from the second quarter. Sales of $3.2 billion were in line with our guidance. And it was down 6% on a reported basis and 5% organically year-over-year. Our orders grew sequentially. And we saw a book-to-bill of 1.05. And these orders reflect that our customers are securing supply chain of components in an uncertain supply-and-demand environment. In fact our orders in the quarter were higher than we expected when we started the quarter. But I think a key point is that late in the quarter, we did see a falloff in orders in certain businesses which continued into April. And I'll discuss that more, when I talk to the next slide. From an earnings perspective, our adjusted operating margins were above 16%. And adjusted earnings per share of $1.29 exceeded the high end of our guidance, driven by the strong execution of our teams in all segments. And reinforcing my earlier comments on our cash-generative business model, year-to-date free cash flow was up 34% versus the prior year. And in the second quarter, free cash flow was approximately $310 million, with approximately $430 million being returned to shareholders during the quarter. Going forward we remain committed to our dividend. But we'll continue to evaluate our share buyback plans in light of the uncertain market conditions. As we look forward, we are withdrawing our guidance for the full year. But we are providing a high-level view of quarter three, as compared to quarter two. For the third quarter, we believe that our sales could be down approximately 25% sequentially with a roughly 45% sequential fall through to adjusted operating income on the sequential revenue decline. This reflects the order trends we're seeing, with market weakness driven primarily in the Transportation and commercial aerospace markets, along with some inventory and supply chain corrections that I will discuss. While we can't influence the market environment or how COVID will impact our customers, we remain committed to execute on the levers we can control, to drive our cost reduction and footprint consolidation plans, while continuing to invest in the long-term growth and content opportunities of TE. So please turn to slide 5 and let me get to the order trends, not only in the quarter but also what we've seen since quarter end. For the second quarter, orders were at $3.4 billion and stronger-than-expected as customers secured supply of components in an uncertain supply chain, particularly in China. While we were impacted by the COVID-related shutdowns in China early in February, I am pleased with how quickly we brought our 18 factories back online. Due to the high levels of automation our revenue was minimally impacted in the quarter. And we were able to maintain production to meet our customer commitments, even with periods of labor shortages. I believe this demonstrates that our core manufacturing capability is a source of differentiation, both for TE as well as our customers. As you can see on the chart, we've laid out the sequential orders for quarter one and quarter two. So, I'm not going to spend as much time on the actual numbers in quarter two. But I want to spend time on what we're seeing in late March through April to provide a more accurate picture of demand going forward, as the Americas and Europe were being impacted by COVID. In Transportation, we saw a drop-off of orders that started both in auto and commercial Transportation late in March and continued into April. As you know our customers have closed factories starting late March, in Europe and North America. I am also sure you've seen some of the announcements discussing, the plant closures as well as the assumptions when production can return. In Industrial, we saw erosion of orders in commercial aerospace. But we had ongoing strength of orders in our Defense business, our Medical business, and our energy business. And our Energy business services the power utilities of the world. In Communications, we have seen stronger demand in data and devices for cloud-based applications, as data centers build out further capacity to handle the increase in high-speed data traffic and storage as well as China recovering. And in China, which represents about 20% of our sales and in March and into April our orders have basically returned to pre-Lunar New Year levels, before the COVID outbreak occurred in China. So we are seeing a recovery in China, across many of our businesses. So let me turn to slide 6. And I can frame how these trends connect to our sales view of quarter three. And this is a new chart that we included for you. We are highlighting some of the major sequential drivers from quarter two to quarter three and our assumptions on this slide, but I do want to highlight we aren't capturing all the puts-and-takes of our different businesses in the quarter. Directionally, we are expecting sales to decline approximately 25% sequentially into quarter three and we put these into four buckets. The first bucket is around auto production. We do expect auto production globally to decline by approximately 1/3 sequentially from the 18 million vehicles globally produced in the second quarter to approximately 12 million vehicles being produced in the third quarter which is in line with IHS' view. This production decline in auto will drive about half of our sequential decline of total company revenue. The second bucket is an expected reduction in commercial aerospace market of approximately 1/3 due to lower production by the large airframe manufacturers. So these first two buckets are really market related. The third bucket is around the auto supply chain. And with our second quarter auto sales, well ahead of production and I'll talk about that there was a component inventory build by our customers in the quarter. As a result, we expect approximately $200 million of inventory adjustments by our customers in the third quarter and this should be a temporary effect as that inventory bleeds off. And then the fourth bucket covers supply chain impacts outside of auto. TE and our customers have a number of factories that are temporally shut down due to COVID-19, as a result of government actions. We expect the resulting supply chain disruptions to impact a number of our other businesses and this will cause a reduction of approximately $100 million in the quarter, as we go through this quarter. I want to highlight this is the near-term impact that we're seeing due to the pandemic. But longer term, we expect to continue to benefit from broad secular trends across our businesses based upon the leading market positions that we've built. So let me now turn briefly to discuss segment results in the quarter and we provided you with the full details on slides, seven-through-nine for your reference. I'm just going to touch it high level verbally. In our Transportation segment, sales were down 5% organically year-over-year with declines in each of our business. Auto sales were down 2% organically with global production declines being down 20%. Our relatively stronger performance was driven by our customer supply chain builds ahead of factory closures, as well as the continued benefit of content growth. While, we are in a volatile demand environment, we continue to expect increased production of hybrid and electric vehicles and ongoing adoption of autonomous features which will continue our market outperformance that we've had for quite some time now. In sensors, I want to highlight that we recently completed the acquisition of First Sensor which will now be included in our financial results beginning in the third quarter. In the Industrial segment, our sales declined 3% organically year-over-year as we expected. We saw declines in commercial aerospace and industrial equipment as a result of the market weakness. However, we are seeing stability in defense medical and energy due to positive underlying trends and expect those businesses to continue to be stable as we move through the rest of the year. In Communications, sales and margins came in as we expected. And while data and devices declined in the second quarter, we are seeing growth in high-speed and cloud applications and expect this to continue into our third quarter. So with that as a backdrop, let me turn it over to Heath who will get into more details on the financials and then I'll come back and cover our expectations for the third quarter.

Thanks Terrence and good morning everyone. Please turn to Slide 10 where I’ll provide more details on the Q2 financials. Adjusted operating income was $519 million with an adjusted operating margin of 16.2%. Adjusted EPS was $1.29 exceeding the high end of guidance. GAAP operating loss was $415 million due to a onetime noncash charge in the quarter of $900 million. This reflects a partial impairment of the goodwill associated with our sensors business. Also include are $22 million of restructuring and other charges and $12 million of acquisition charges. We continue to expect restructuring charges in the range of $200 million to $250 million for this fiscal year. GAAP EPS was a loss of $1.35 for the quarter and included non-cash charge of $2.67 related to the goodwill impairment and restructuring acquisitions and other charges of $0.08. On the other side, we also had a tax-related benefit of $0.12 related to the pre-separation tax matters and the termination of the tax sharing agreement shared previously. The adjusted effective tax rate in Q2 was 16.1%. And for the third quarter we would expect a similar rate. And if you turn to Slide 11. Sales of $3.2 billion were down 2 -- were down over $200 million year-over-year, including an impact of $60 million from currency exchange rates. But we were able to maintain adjusted operating margins over 16% in the quarter as I mentioned. As Terrence mentioned earlier, we already had a number of actions underway ahead of this downturn which helped us maintain healthy operating margins. For the past two years, we have been executing our margin expansion plans in the Industrial segment. And about a year ago, we kicked-off our factory footprint consolidation efforts in Transportation. We continue to execute on these plans and are accelerating certain cost actions due to the recent drop in volumes. I now want to give you an update from an operational perspective. We are operating all of our factories in China and most of our factories throughout Asia. Most of our factories in Europe are operating with the – including, the recent reopening of our factories in Italy and Spain. In North America, all of our factories are open in the U.S. but we do have some plants shutdown in Mexico, including those serving automotive. Many of our customers are going through temporary shutdowns of their manufacturing operations in different regions and all of this volatility has caused – has resulted in supply chain dynamics that Terrence discussed previously. In the quarter, cash from operation – from continuing operations was $481 million whereas free cash flow was $311 million and we returned $433 million to shareholders through dividends and share repurchases in the quarter. If you'll turn to slide 12 to review our cash flow and liquidity and this is a newer slide that we thought pertinent for this call today. We have a history of strong free cash flow generation and for the current year our free cash flow is up 34% year-to-date versus the prior year. For our fiscal year, we expect free cash flow to be well above $1 billion. Our long-term capital strategy is to return two-thirds of our free cash flow to shareholders through dividends and share buybacks. And we remain committed to paying our dividend and we'll continue to thoughtfully evaluate share repurchases in light of evolving market conditions. We are also reducing our plans for capital expenditures to approximately $575 million this year, which is a reduction of about $100 million from our prior view 90 days ago. However, and this is important, we remain committed to funding growth initiatives that will enable future growth opportunities as that's the lifeblood of our company. We continue to execute on footprint consolidation plans and pursue additional opportunities to drive cost reductions. Across our businesses we have units that are being impacted to different degrees and for those units that are most impacted we are implementing selective furlough of employees that are largely tied to where our corresponding customers have temporary factory closures. We will continue to evaluate our cost structure as the demand environment evolves. We are in a strong liquidity position with $2.3 billion available, as the attached chart details our debt maturity ladder is gradual. In early February of this year we raised €550 million debt at 0% coupon. The use of the proceeds was for the acquisition of First Sensor and pre-funding of our pending $350 million debt maturity in June. At quarter end, we had a cash balance of approximately $800 million. Given our strong cash position, we have not needed to be in the commercial paper market for some time. We have a $1.5 billion undrawn revolver committed by a strong bank group. Within the revolver covenant, we expect to be well below the 3.75 rolling four-quarter debt-to-EBITDA ratio going forward. As a reference point with our current debt-to-EBITDA ratio of 1.5 we are well below that threshold. With that, I'll turn it over to Terrence to provide some additional commentaries about the forward look.

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

Okay, Marcelo, could you please give the instructions for the Q&A session.

[Operator Instructions] Your first question comes from the line of Shawn Harrison from Loop Capital. Your line is open.

Hi, good morning everybody, good to hear from you.

Good morning, Shawn.

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

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

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

Your next question comes from the line of Amit Daryanani from Evercore. Your line is open.

Good morning guys. Thanks for taking my question.

Hi, good morning.

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

It's a great question and thanks for it. I think what you see as companies go through, we have benefited through these crisis to gain share. And I think back to 2008 and 2009 a little bit, while the company is very different, we did gain share because of the financial stability we have that Heath talked about. And also our global customers really looking to how do we get deeper and who's going to support them. And I actually believe that what you saw in our operational performance in the second quarter we did benefit. Where other people couldn't deliver we could. And as people were trying to secure supply chain, they were looking for who could keep their supply chains going in an uncertain time. So I do believe it's a differentiation point. I do think as we've always told you share doesn't move in big chunks in our industry. But they're going to be looking for the partners as they look forward. And I think between how our engineering teams were able to shift over to online innovation, we didn't see a tail-off in projects and also how we've been adapting our supply chain and also not only ours also helping our supply chain partners that are below us understand the safety protocols we expect because they are an extension of us. I'm pretty proud of what we accomplished. And I do think it creates opportunity for more stickiness as we come back. And I do think, it's share opportunity and that's one of the things we view positively about this crisis.

Okay. Thank you, Amit. Could we have the next question please?

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

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

Sure. Thanks Deepa. And I'm probably going to spend more time on the second part of your question, because I do think it's important. And I also think we spend a lot of time on the script framing we're seeing in auto and comm air. But when you think about our portfolio, there is a third of our portfolio that is feeling very little impact or minor impacts. And our data and device, cloud business actually we continue to see an acceleration in those orders. Our medical business has been very stable. Our energy business has been stable. And as we've been talking to you, defense has stayed stable and remains at a very high level. That envelope there's about a third of TE than I would say right now is very stable from an order perspective. We may have some areas where -- in countries where governments asked us to stay shut for a little bit. But those indicators, I think are continuing to remain stable and I feel good about how our teams are performing there. That's about a third. Then there is I would say our industrial equipment business as well as our appliance business. We do see some softness there. Both are benefiting from the recovery in China. Both had big China presences. But they are being impacted in the west and I do think they'll stay soft in the west. They have different underlying drivers. And in the Industrial business that would probably come back more as how does CapEx play out over time is what you would look at there. The third business is clearly Transportation. I think it does come into auto builds. And I think we spend a lot of time on that. But what I would also always highlight to you remember our unique position versus many companies. We are stronger in Asia and Europe and North America. So I do ask you as you look at builds and I know this group does the Asian and European builds are very important with North America sort of being a lower impact. And I know sometimes as being in the United States we look at the U.S. builds more than the global builds, but I think as Asia comes back and Europe comes back they are stronger positions and very important to us. And then the last market I haven't talked about that, I would say, I don't think I'm going to surprise anybody is the comm air space. The comm air space, which is around $550 million of annual revenue for TE and I know in the comments, I said, we expect it to be off a third and sort of a waterfall from Q2 to Q3, we do think that's a market that's not going to be coming back near term. I think, there's many other. You can look at what Boeing has said what Airbus is saying and elsewhere that's one that's going to be down for a while. So I think -- I hope that answers the gamut of what you can look at in some of the indicators. And I also think it relates to some of the underlying. And I appreciate the question.

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

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

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

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

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

Your next question comes from the line of Wamsi Mohan from Bank of America. Your line is open.

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

All right, Wamsi. I guess I have to take this question, because Heath wasn't here in 2008 and 2009. So I guess, it's pointed at me. As we talked to a lot of you about and I know some companies have gone out. And said as they're thinking about the guide they compare it to 2008 and 2009, as to how they're modeling their playbook. I think there are some things that are similar TE today versus 2008 and 2009. But I would tell you there are a lot of things that are a lot different. With all the moves we made in the portfolio, where we positioned TE the cost actions we've taken. So let me try to summarize, what's the same a little bit. But also the things that I think we've improved the business and the portfolio. The one thing that I would say is probably the number one, thing that is the same it's the cash generation model we have. Our cash generation will be very resilient during these times. And as you all know, we use working capital, in times of growth. And one of the things that when you do get a little bit of a cycle like this. And you have some of these we're going to generate free cash flow we're going to adjust CapEx around capacity we're going to invest in growth, CapEx. And I think that's one of the things that's always allowed us back to the question earlier to get stronger during crisis', because we can continue to invest around growth. But also keep our strong cash generation model going. That's the big thing that I think is the same. Now when you think about things that are different, our portfolio is a lot more focused and a lot stronger than it was in 2008 and 2009. And the businesses we are in, all have secular trends that we position TE around. And we've gotten rid of the businesses that don't have those trends. And if you look here today in 2008 and 2009's, we had no growth telecom businesses. You had a lot more consumer electronics. And we built a platform like no other. So, I do think the portfolio is more focused and stronger. The other thing that I would say, that is also very different is our automotive business. While we did have a sizable automotive business back then and we have, sizable business today. It's a very different business. While it was always global China makes up 25% of the car production on the planet in 2008 and 2009 -- it didn't. And our leading position is special. I would also tell you, our automotive business going into the last crisis was company average business from a margin perspective. Our margin in our Transportation segment going into this crisis is a lot higher than it was and a lot of the cost actions, we initiated out of the last crisis that we continue to work on. And Heath talked about that we were teeing up. And overall the company's in better financial shape. Our margin is 300 basis points higher today than it was in 2008 and 2009, just going into a crisis. And our balance sheet is in a very -- much more healthy place. So, when I sit there what if auto production changes we will be impacted? When I think about the health of TE and things like that what we've done to the cost position. And strengthened our position in markets, we wanted to be in as well as not being in markets we didn't want to be in. I think it's positioned us well to be a strong company going into a crisis that will get stronger coming out of.

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

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

Yes. Good morning, and thanks very much for taking the question.

Good morning. Mark.

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

Thanks, Mark, and I'll take that. And what's interesting is we don't. As I said earlier, the emission requirements in places like Europe are not changing. We also believe even with this change in production the number of global hybrid and electric vehicles will still be up year-over-year even in a lower production environment and all the production growth that's been taken out are combustion engines. So the 4% to 6% that we've always talked to you about where we look through where our growth is coming from our engineering projects, what are the trends. Certainly, electric vehicles are continuing to accelerate. We've talked to you before autonomy. It's probably a little bit further out. But net-net, the 4% to 6% content opportunity continues to be real and it hasn't changed the way we think about it.

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

Your next question comes from the line of Joseph Giordano from Cowen.

Good morning, Terrence. Good morning, Heath. This is Francisco on for Joe. Can you guys expand on the $900 million impairment charge that you guys took this quarter please?

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

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

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

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

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

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

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

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

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

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

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

Good morning everyone.

Hey David. Good morning.

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

David. It's Terrence. When we’ve talked about quarter two to quarter three being down sequentially, there was an element of auto production going from 18 million to 12 million. We also estimate back to those data points that you've said, there was about $200 million where our customers were putting orders on us, we delivered with what we were able to continue to get our factories up. That $200 million is what will turn here in the third quarter. And that's one of the numbers we highlighted in quarter 2 to quarter 3. And the simple way to think about it, our auto revenue in the quarter was pretty much as we expected. We thought there was going to be 21 million cars made in the plant. There was 18 million. It's 3 million vehicles times $65 gets you to about the $200 million that we're estimating that was hey revenue that you could sort of say probably should have been in quarter 3. We were able to ship it in quarter 2, as people were really trying to deal real time with COVID-19. And that will work through and normalize as we go through quarter 3.

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

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

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

Thanks for the question. And certainly we've been talking a lot about end markets and we do typically talk about channel. Over the past 6, 9 months, we've been in an element of where our channel partners have been correcting. And what I would say we've seen is that correction of their inventory position seems to have normalized. As we've ended March probably across our markets with the exception of being our Industrial business and total TE channel is up to about 20%. So what we've seen from POS trends which is what our distributor is selling out outside of Transportation and comm air type of markets, have been pretty steady. So we're watching those indicators to see if there's inventory builds. It feels okay right now, but there is the Industrial market that feels like it has a little bit too much inventory in it. And certainly with the demand impact and we're going to have to keep an eye on it. But right now it feels stable outside of Transportation and comm air.

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

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

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

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

All right. Thank you, Jim.

Thank you so much.

Thanks, Jim.

Your next question comes from the line of Matt Sheerin from Stifel. Your line is open.

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

Matt, I appreciate the question and the follow-up. So let me just try to clarify a few things. As we discussed and you mentioned earlier in your question, for the past couple of years we've been talking pretty transparently about what we're doing in the industrial space. And then about a year ago talked about several -- initiating several auto -- generally auto-related factory footprint consolidation. So we weren't caught flat-footed with this. Now the severity and the sharpness of a sequential downturn of 25% will certainly -- is something that is challenging to deal with from a margin perspective in a 90-day window. However, our focus continues to be on permanent cost reductions. Obviously we'll do things like furloughs where our customers have furloughed and we don't want people staying around our factories. But when we think about cost reductions and incremental cost reductions they tend to be in the form of permanent, so that our exit trajectory will move back into periods of growth will be stronger than when we entered it. That's a combination of both, accelerating some of the things that we already had in place, which this reduction in demand does allow us to accelerate some just given that we have the ability to ramp up inventory builds and some of the other things that are important to any kind of transfer. But we are also evaluating and moving pretty quickly through additional restructuring actions. So if my comments were light on that I apologize. We will be doing some things now on the factory side. Those are underway and I don't think there's something we have to start with a clean piece of paper on. But the business will be rightsized, but we're focused on what we look like and a more permanent perspective as we leave in that move that it makes in terms of our overall margins as we get back to levels of more normalcy on that particular front. And you also have to remember if you just step away from auto for a second we have chunks of the business that are actually fairly stable or at full production. Terrence mentioned defense, data and devices certainly our medical and our energy businesses those are businesses that -- we're in full production just to keep up with our customers right now. So it's a little bit different flavor depending upon, which chunks of our business that we look at. But auto specifically we'll make sure we're sized right for not just what we think the next couple of quarters are going to look like, but what it looks like for -- in our FY 2021 and FY 2022. And I think that's important to keep that in perspective.

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

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

Thank you for taking the question. Heath, a moment ago you talked about performance of sensors in the industrial end market. And with it actually I think there was some progress on the First Sensor acquisition in the quarter. Can you update us on the status of the integration of that company and its product portfolio and in your future plans in that category? Thank you.

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

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

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

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

No. On any one quarter, you're never going to have a perfect 4% to 6% because of all the supply chain elements that happen. So there wasn't anything specific. And the supply chain impact let's face it – it is an estimate on our behalf with all the moving parts we have. But the content that we see happening the 4% to 6% there's no change in that. And you should look at that over a year period or so not one quarter.

Okay. Thank you.

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

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

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

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

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

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

Hi. Thanks for allowing me back in. Heath, just a follow-up on both kind of the restructuring and kind of the normalized goals. To be clear, there is no change in kind of the normalized margin profile you're searching – you're targeting for any of the three business lines? And then second, I think you've done $650 million – or that you're targeting in 2018, 2019 and 2020 about $650 million of restructuring. Where are you in terms of the payback of those restructuring actions? Are you a third of the way through it right now or even less?

Well, Shawn I appreciate the question. The normalized margins for the business as we've talked about, right which is TS up in the high teens towards 20 number; IS consistently in the mid- to high teens; and then CS kind of in that low to mid-teens consistently growing up towards that number. That has -- those are unchanged. Now, we're going to need to see in certain cases volume come back to support some of those things. But the longer-term actions that we're taking to take out more permanent cost will certainly help close some of that gap. So, as I think about the restructuring that we've done most of it's been fairly programmatic things that we've done that are very specific to facility moves within Industrial and then subsequently transportation and that continues on for the charges that we anticipate taking in this fiscal year FY 2020. The payback on those is kind of about a three-year payback which is a little bit longer than your traditional payback if you were doing things in the U.S. But you got to remember as we've discussed before some of the plants were taken offline are in jurisdictions where the cash outflow to get those things offline is a bit longer. So, the blended payback is about three years. I would tell you we're at different points depending upon which facility we're talking about. For obvious reasons, they've had different start and stop dates and there's challenges that in some cases are created based on this current situation with COVID-19, meaning that there are certain factors that maybe on the receiving end have certain things that have slowed so that's harder to do. And there's other things that have sped up because we're able to go through operational matters that are specifically inventory builds that our balance sheet can certainly support and allow us to get those costs out sooner. So, there's a blend in where we are. If you were just to ask me to try to frame all that up and for TE in total, I would say we're kind of halfway through that process. Sometimes a charge on the P&L can be taken a year plus before you actually see the savings come out just based on how the accounting for it works relative to when the costs are actually eliminated. So, there is a bit of a lag in terms of that. Thank you for the question.

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

Ladies and gentlemen, your conference will be made available for replay beginning at 10:30 A.M. Eastern Standard Time today April 28th, 2020 on the Investor Relations portion of the TE Connectivity's website. That concludes your conference for today.