TE Connectivity plc (TEL) — Q2 2019 Earnings Call Transcript

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 a 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 ensure 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 results 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 earning 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 into 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 the 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 to orders by segment, Transportation orders declined 4% year-over-year as expected, and we saw a 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 in margin expansion in the second half. With that, let's turn over to Industrial and start 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 into 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 included $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 $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 the 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 was $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 of 2019, free cash flow was $413 million, an increase of 44% versus the first half of the 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. As I move into the guidance, let’s start with the third quarter on Slide 10, building on what we previously highlighted. Based on our observations in the end markets and new order trends, we anticipate third quarter revenues to be between $3.4 billion and $3.5 billion, with adjusted earnings per share expected to range from $1.41 to $1.45. At the midpoint, we are seeing reported and organic sales declines of 4% and 1% respectively, primarily due to the ongoing strength of the US dollar which we expect to impact sales by approximately $120 million and result in a $0.06 reduction in EPS for the third quarter. Similar to the second quarter, we believe we can offset this headwind from an adjusted EPS perspective, expecting our adjusted EPS at the midpoint to show a slight improvement compared to the previous year. By segment, we anticipate Transportation Solutions to remain flat organically, with overall revenue expected to hold steady or decline slightly against a mid single-digit decline in global auto production, influenced by ongoing weaknesses in China and Europe. Our outperformance relative to auto production reinforces our strategic positioning aimed at benefiting from content growth driven by key secular trends in that market. In the Industrial Solutions segment, we project low single-digit organic growth, supported by strong performances in aerospace, defense, marine, and medical applications, although these will be partially offset by challenges in the factory automation market. For Communications, we expect organic revenue to decrease by mid single-digits year-over-year, though we anticipate sequential improvement in segment revenue compared to the second quarter. Now shifting to Slide 11 for the full year guidance, we reaffirm the midpoint of our revenue guidance at a range of $13.55 billion to $13.75 billion. This reflects flat organic sales and a reported sales decline of 2% due to currency translation headwinds I mentioned earlier, totaling around $400 million. We expect adjusted earnings per share to come in between $5.55 and $5.65, marking a $0.15 increase at the midpoint compared to our previous outlook. I’m proud that we project to maintain adjusted earnings per share at levels comparable to last year despite facing a $0.16 currency translation headwind and a challenging auto production environment. Regarding our annual segment guidance, we expect Transportation Solutions to remain flat organically, with auto sales projected to be about flat as well, while auto production is now anticipated to decrease by 5% during our fiscal year, aligning with the lower end of our previous guidance. Content gains will help us outperform in this environment. We still assume global production will remain constant at around 22 million vehicles per quarter throughout our fiscal year, as observed in the second quarter, and we expect the same production levels for the third and fourth quarters. Lastly, in Transportation, we are optimistic about continued growth in sensors for both industrial and automotive applications. As for Industrial Solutions, we expect low single-digit organic sales growth fueled by aerospace, defense, and medical applications. In Communications, we anticipate low single-digit declines, primarily due to market weaknesses in Asia that are impacting both segments. Before we open the floor for questions, I’d like to summarize our discussion. We remain committed to our long-term business strategy, and our diverse portfolio is yielding positive results, with our Industrial and Communications segments performing beyond expectations this quarter while maintaining strong operating margins and contributions. The market landscape we outlined 90 days ago remains stable, particularly regarding our order partners in China. Despite a weaker market environment, we are executing effectively on our business model and have upgraded the midpoint of our earnings guidance. We continue to project flat adjusted earnings per share growth despite FX and auto production challenges. Lastly, we aim to showcase improved earnings per share in the second half, surpassing our exit rate from fiscal '18. The strategies we are implementing this year are expected to enhance earnings and overall business performance when the market recovers, as Heath noted. Before I conclude, I want to extend my gratitude to our employees worldwide for their hard work in the second quarter and their ongoing commitment to our customers and a future that is safer, sustainable, productive, and connected. 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.

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 envelope looks 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 a big positive margin beat?

Certainly, Scott, and I appreciate your question. Looking back, when we embarked on our industrial journey a couple of years ago, we envisioned margins reaching the high teens. One key point we discussed was the need to evaluate our footprint and undertake significant adjustments. The performance this quarter is not primarily linked to those footprint changes; rather, it's about achieving growth in the segment alongside other cost management efforts as we refine our operations. It's encouraging to observe the potential for improvement in these industrial markets. We expect to enhance our position further as we implement additional changes to our footprint in the upcoming quarters, which may slightly affect segment margins in the short term but will contribute to long-term margin expansion. During the quarter, we focused on gaining volume and realized benefits outside our footprint initiatives. It’s also worth noting the strong growth we’re seeing in aerospace and medical sectors, which are critical from a content perspective. We achieved this despite encountering a softer environment in factory automation, particularly in Europe and Asia. Therefore, the positive results stemmed from our efforts beyond footprint adjustments, highlighting the potential for growth as we implement those changes in the latter half of the year.

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 at 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 that 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 times are staying pretty steady as well. So they are typically attributed to 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 a decent spot.

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 a 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 a very opportunistic chance for us to take advantage of where the interest rates lie.

So I wanted to ask about the auto restructuring that you guys announced here. So over the last couple of years you have had to spend a 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. We need to keep in mind that we are a global auto supplier, which means we produce in regions aligned with our customers' supply chains. The expansion we've undertaken to meet demand, particularly where we've gained content, has been significant, with investments in rapidly growing areas like parts of China and Mexico, where we’ve observed extensive supply chain activity. The restructuring efforts we're implementing are about taking advantage of a slower global auto production environment. This allows us a moment to reassess operations in locations that are less strategic to us, without affecting areas where we've heavily invested. It’s essential to utilize this opportunity because once growth resumes, operations become more chaotic and relocating manufacturing can be challenging. Although there's never a perfect time for restructuring, we aim to benefit from the current demand slowdown. However, some restructurings, especially those outside the US, may incur higher costs and longer payback periods, but we chose to proceed with these changes. Over the next year, we plan to absorb some of these expenses in our fiscal year 2019 and continue this transition.

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?

Thank you, Craig. As we've mentioned before, the acquisition of Measurement and the subsequent bolt-ons have greatly enhanced our technology. This leads to significant synergies that strengthen our leadership in the global automotive sector and our industrial transportation business, where we hold a strong market share and have access to all major OEMs. A key advantage of our transportation business is our balanced leadership position globally, allowing us to collaborate with virtually every OEM. The synergy we achieve is evident as automotive customers view us primarily as an automotive company, enabling us to integrate our processes and quality at scale, which has been demonstrated through our recent successes and strong customer access. From a competitive standpoint, the sensor space is fragmented, with no single dominant player. Importantly, as the number of sensors in vehicles increases, we benefit from a favorable long-term trend driven by developments in electric vehicles and autonomous features, where we fit into the overall physical network of the car. Competitive advantages are emerging from our ability to provide both advanced technology and scalability as a trusted supplier. Currently, we estimate about $2 in content per vehicle from sensors, but with our growing pipeline of wins, we anticipate seeing that rise to $5 to $6 per vehicle in the next five years. Given the market fragmentation, we expect to identify additional opportunities for growth both organically and through further acquisitions over time.

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. 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 environment 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.

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 a 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.

Could you provide further clarity on the recent commentary regarding the macroeconomic situation in China mentioned in the prepared remarks? Specifically, how does the reported 9% sequential increase in orders from China relate to typical seasonal patterns in the region? Additionally, can you share more insights on customer feedback or market trends that bolster your confidence in discussing broader improvements in the Chinese macro environment? Thank you.

I would say, Mark, let's start with the typical seasonal patterns in China. The December quarter is usually our strongest due to favorable production conditions. However, this year, we did not observe that trend. Instead, we experienced more stability, with an increase in orders from December to March, which is usually a period of decline. We saw significant growth in our Transportation and Communications segments, both achieving double-digit increases. Additionally, inventory levels for cars are improving. It's also important to note that while production in China is expected to decline by double digits year-over-year, the momentum for electric vehicles remains strong. We anticipate about 50% growth in electric vehicles in China this year, covering both hybrids and electric models, potentially reaching nearly 2 million units compared to about 1.2 million last year. Our investments in the electric vehicle market are paying off, and we are not witnessing a slowdown in this segment at all in China. Overall, based on our positioning, order trends, and customer feedback, we sense stability and improvement in China.

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 the Kissling Group. We're excited about this business because it closely aligns with industrial transportation applications. Our strong position in industrial transportation presents good opportunities for synergy as we integrate it into that unit. If you attended our Investor Day, we discussed applications of electrification in commercial vehicles, which is where this acquisition will primarily assist us. It enhances our existing product technology, including our relay and contactor technology for automotive electric vehicles. In commercial vehicles, especially heavy trucks, we need to achieve higher voltage rates than those in traditional automotive electric engines. Kissling's technology allows us to reach 1000-volt capabilities, which is crucial for these requirements. I'm confident that our team will effectively integrate this acquisition, given the progress they're making. It's a bolt-on opportunity, generating about $50 million in revenue with good profitability, aligning well with our strategy for bolt-ons. As mentioned in the script, we anticipate it will close later in our fiscal year, which will contribute to our results in 2020 and beyond.

Thank you for taking my question. I have a follow-up regarding the previous discussion on electric vehicles in China. If we observe stabilization in the overall auto market, do you believe this will focus more on vehicles with higher content, such as electric vehicles or those equipped with advanced safety features that need additional sensors and connectivity? Additionally, do you think this trend could lead to further improvements in your content growth story in the near term?

A couple of things, I mean. Do you want to frame? The 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.

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 a 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.

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 considering your question, I realize that I don't know which peers you are referring to. There are certainly some product categories, like passives, where we don't participate but still face lead time challenges. There are also semi-elements in the semi-category that we don't compete with, and I don't see them as competitors. I view our business model as distinct, which is why we refer to ourselves as being in industrial tech. We benefit from our content, but we also have different advantages compared to others that I believe are more secular than our model, despite experiencing some inventory supply chain impacts. Overall, I believe we have positioned ourselves well around secular trends. I feel that the content we've focused on and the effort we've put into our portfolio, along with our organic investments, have allowed us to withstand some weaker market conditions. In addition, with respect to our non-growth strategies, we're actively working to ensure we maintain earnings, particularly in the automotive sector, which is significant for us but currently facing a negative environment. I can't make direct comparisons to the peer you're referencing, but the results from this quarter and our guidance demonstrate how we've enhanced our portfolio and leveraged our strategies to uphold earnings even when the market slows down, while also addressing the margin areas we've discussed.

I had a margin question across your segment. So, what's the transportation segment margin in Q2? 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.

Thank you, Deepa. I appreciate the questions. Going into the quarter, the transportation margin turned out to be right in line with our expectations. We saw that both the communication and industrial margins were slightly better than anticipated, resulting in a 17% margin, which exceeded our initial expectations for the quarter. If we analyze these margins, Terrence mentioned in his prepared remarks that there have been efforts in the communication sector to adjust the business footprint, and we are very pleased with the current state of CS margins at this point. Since it is the smallest of our three segments, it may experience more volatility due to smaller figures, and while 18% might be on the optimistic side, achieving margins in the mid to high teens is satisfactory for our communication margin business, providing high returns as it is not heavily capital-intensive. Overall, we are happy with our progress in CS and most restructuring efforts are now behind us. Regarding industrial margins, we've been transparent about our goal to improve them significantly over the past couple of years, and we've already seen an increase of a couple hundred basis points from a few years back. This improvement is part of our ongoing efforts from 2019 through 2021, and we are slightly ahead of our original fiscal year 2019 goals in this regard. For transportation, the segment has expanded rapidly in recent years, which led us to invest in its growth, impacting margins somewhat. With global auto production currently facing recessionary conditions, we are experiencing additional pressure on production. However, this situation also provides us with an opportunity to implement restructuring efforts, as I have mentioned in previous questions. Looking ahead, we expect to finish the year with margins significantly higher than where we are now. While I do not foresee us reaching 20% imminently, the path toward that target is already in progress. Margins for the transportation segment in the second half of the year will be better than those in the first half, partly thanks to the restructuring we have already undertaken.

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.