TE Connectivity plc (TEL) — Q4 2019 Earnings Call Transcript

Good morning and thank you for joining our conference call to discuss TE Connectivity's fourth quarter and full year 2019 results. With me today are our 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 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 2019 results as well as our outlook for fiscal 2020. As I normally do before we go through the slides, let me frame out the key messages in today's call. First, I am pleased with our execution in the fourth quarter, delivering both revenue and adjusted earnings per share above the midpoint of our guidance, despite the market backdrop where many of our key markets are showing declines. Both in the fourth quarter and for the full year, our results reflect resiliency in our business model and successful execution of multiple levers that we can control to preserve margin, earnings, and cash flow performance despite the cycling we're seeing in certain end markets. And I think the real evidence of this resilience is that our adjusted earnings per share in 2019 being down only 1% on an overall sales decline of 4% versus last year, while maintaining 17% adjusted operating margins for the year. Another key element is that we always talk about our strong cash generation model and our free cash flow in 2019 was up 15% versus the prior year. And from that how we used our capital, we returned $1.6 billion to our owners, while continuing our bolt-on acquisition strategy through which we deployed an additional $300 million of capital in 2019. Now, as we look forward into fiscal 2020, we expect that the majority of our markets, specifically in the Transportation and Communications segments, will decline at similar rates as they did in 2019. Our sales guidance also reflects the headwinds from currency exchange that we're dealing with, as well as ongoing inventory corrections that we're seeing throughout the supply chain, especially in our channel partners which began late in 2019 and we expect to be completed by the middle of fiscal 2020. A key point is that our strong content traction will partially offset these headwinds. Now, we continue to benefit from secular trends whether it's electric vehicles, autonomy trends in the vehicle, next-generation aircraft, factory automation, or cloud computing. These trends are real and the content gains that we are experiencing are real as well. These content gains are enabling us to outperform even in declining markets and is buffering the market conditions that we're seeing both in 2019 and what we're assuming in 2020. Lastly, I am pleased that we initiated the cost actions we reviewed with you during our calls and we remain committed to execute on the levers under our control to improve financial performance as we move to 2020. And despite this market environment, I do want to emphasize that our investment pieces remain solid with a more resilient portfolio, leadership positions in attractive markets that benefit from secular trends, and leverage to drive margin and earnings resiliency. And these levers that we're pulling are helping position us to generate more earnings leverage as markets return to growth. So, now I'll turn to the slides and then if you could, I would appreciate if you could turn to Slide 3 to briefly review the highlights from the fourth quarter. Our sales in the quarter were $3.3 billion and exceeded the midpoint of our guidance, representing a 6% decline on a reported basis and 5% decline organically year-over-year, due to the market weakness I highlighted. On a sequential basis, our sales were down 3% and on a year-on-year basis, our Transportation segment was down 5% organically, as we expected and this was driven by global auto production declines as well as declines in commercial transportation markets. Industrial Solutions grew 1% organically and that was ahead of our guidance, primarily driven by continued strength in Aerospace, Defense and Marine. And lastly, our Communication segment declined 18% organically, as we expected, driven by the inventory destocking in the distribution channel we talked about last quarter. From an earnings perspective, adjusted earnings per share was $1.33 which exceeded the midpoint of our guidance, driven by strong execution, particularly in our Industrial segment. Adjusted earnings per share declined only 1% on a sales decline of 6% versus the prior year, demonstrating the resiliency we are focused on driving through the cycle. And lastly, fourth quarter adjusted operating margins were as expected at 16.3%. From a free cash flow perspective, similar to the year, it was very strong at nearly $700 million and we returned $332 million to our owners. And our capital strategy continues to include capital deployment to build out our portfolio inorganically and also to further capitalize on the secular trends to drive future growth. So let's turn to Slide 4 for some additional highlights on the full year, as well as to talk more about our guidance for 2020. Through the full year, we delivered sales of $13.4 billion and this was down 4% on a reported basis and 2% organically. Transportation was down 3% organically, driven by the market declines and content growth in our strong global position resulted in outperformance versus decline in global auto production of over 6%. Industrial Solutions grew 3% organically, driven by growth in Aerospace, Defense and Marine and medical applications. And Communications declined 7% organically, driven by market weakness and destocking in the channel. As we discussed in the last call, we saw these inventory trends by our channel partners that started on the order side in the third quarter and impacted our fourth quarter and will continue to impact us through the first half of 2020. For the full year, our adjusted operating margins were at 17% at the total company level and we generated at 130 basis points of margin expansion in our Industrial segment, as we continue to execute on our multi-year margin expansion plans. We delivered adjusted earnings per share of $5.55, down 1% versus the prior year on a 4% sales decline. As I mentioned earlier, I'm very pleased with our free cash flow generation, which was up 15% to $1.6 billion and clearly this demonstrates our strong cash flow model. Now let me turn to the guidance of the lower part of the slide for fiscal 2020 at a high level and then at the end, I'll come back and provide more details for each segment and end market. So, for 2020, we expect sales of $13 billion and this is a decline of $450 million from 2019. When you think about that decline, about one half of that decline is due to the strength of the U.S. dollar and that's just creating a currency exchange headwind. The other half of the decline versus 2019 is really driven by two key factors. First, as I covered earlier, we are assuming that we will not be seeing end market recoveries in 2020. The markets that declined in 2019 are expected to show continued weakness in 2020, while markets like Aerospace and Medical, we continue to believe will have nice growth as an underlying market in 2020. The other part of the decline is that we expect inventory destocking that I mentioned already to continue through the first half of fiscal 2020 before normalizing in the second half. And as we've mentioned to you before, approximately 20% of our sales go through the distribution channel and the Industrial and Communication segments are the ones with the highest exposure to the channel. So, you're seeing that in our fourth quarter and you'll see that in those segments in the first half as that works through. While we cannot control these headwinds, our 2020 guidance includes the content benefit from the secular trends that we demonstrated over the past several years and this content will partially buffer the top line headwinds that we face as we go into 2020. Moving over to earnings, adjusted earnings per share, we expect to be at $5.05 at the midpoint. This includes an approximately $0.30 year-over-year headwind from the currency exchange I talked about already, as well as a higher tax rate that Heath will get into, and these two headwinds are the main majority of the earnings decline. In addition, we're going to continue to execute on the levers we can control, drive cost reduction, as well as footprint consolidation plans that we've laid out for you, while we're going to continue to invest in long-term growth and our content opportunities. We do expect to generate improvements in both margin and earnings per share as we progress through the year. So let's turn over to orders and that starts on slide five and really sets the basis for our guidance as we start the year. In the fourth quarter, organic orders were down 6% year-over-year and we did see a sequential slowdown with orders down 3% from quarter three, reflecting the end market and inventory correction trends I mentioned earlier. Our book to bill in the quarter was 0.97 and through our distribution partners, our book to bill was actually 0.90. So let me talk about this a little bit more and you're going to see the segment details on the slide, so let me talk by region and what we see sequentially. First, we did see improvements in China on organic orders sequentially, but this was more than offset by declines in Europe and North America. By segment, Transportation was flat sequentially, but we did see sequential declines in Industrial and Communications segments, and those declines were really driven by the destocking that were seen by our partners. When we talk about our distribution channel partners, orders were down double-digit sequentially in the fourth quarter, so they actually weakened further from what we saw in quarter three from an order perspective. And we continue to see distribution sell-through run at a lower level than market demand. And we do expect these trends to continue until the end of our second quarter. So let's get into our results by segment and I'm going to start on slide six with Transportation. During the quarter, Transportation sales were down 5% organically year-over-year as we expected. In auto, sales were down 4% organically, driven by global auto production declines. In commercial transportation, our sales were down 14% organically, which reflects broad market weakness across the regions, as well as some supply chain corrections that have been noted by some of our customers. Our sensor business was flat organically, with growth in Industrial applications, offset by declines in Transportation applications. And on the margin perspective for the segment, adjusted operating margins were 17.6%, as we thought. So let's move over to Industrial on slide seven. Segment sales grew 1% organically year-over-year above our expectations, with growth driven by our aerospace and defense, as well our medical businesses. Our aerospace, defense and marine business delivered another strong quarter with 13% organic growth and that's driven by content gain from new programs in both commercial aerospace, as well as defense. In Industrial Equipment, sales were down 8% organically, driven by both weak market conditions and factory automation, as well as inventory corrections. And that was partially offset by 5% organic growth in medical applications. Our energy business was up 2% organically, with growth in North America and China offsetting declines in Europe. Our adjusted operating margins in the segment expanded 50 basis points over the prior year to 15.5%, driven by strong execution by our team. And I am pleased that we remain on track with our multi-year margin expansion plan that was evidenced by the 130 basis points of adjusted operating margin expansion for the full year for the segment. So let me turn to Communications Solutions on slide eight. In Communications, both our data and device and appliance sales were down 18% organically and that was in line with our expectations. We saw demand-driven weakness across all regions, along with inventory destocking in the distribution channel. This segment has the highest percentage of business going through the distribution channel, so there is greater impact from channel dynamics in this segment. Adjusted operating margins were 12%, which was impacted by the volume-driven sales decline. And for this segment, we continue to focus on achieving adjusted operating margins in the mid-teens, and we're utilizing levers to achieve target margins along with the demand returning to more normalized levels. So, with that as a backdrop on the segment side, let me turn it over to Heath to cover the financials, and I'll come back later and talk guidance.

Thank you, Terrence, and good morning everyone. Please turn to slide 9 for more details on the Q4 financials. Adjusted operating income was $538 million with an adjusted operating margin of 16.3%, as we anticipated. The GAAP operating income was $444 million, which included $71 million in restructuring and other charges and $23 million in acquisition charges and other items. For the full year, restructuring charges totaled $255 million, which is less than we expected due to the timing of certain footprint actions. It's important to note that these actions are complex, leading to some charges being pushed to 2020 from late 2019. However, our overall restructuring plans remain unchanged. Consequently, I expect restructuring charges to remain at similar levels in fiscal 2020 as we continue optimizing our manufacturing footprint and improving our cost structure. Adjusted EPS was $1.33, down 1% year-over-year, but we managed to preserve adjusted EPS despite a 6% decline in sales, demonstrating our capability to implement various strategies to enhance earnings performance. GAAP EPS for the quarter was $1.11, including $0.22 from restructuring, acquisition, and other charges. The adjusted effective tax rate in Q4 was 15.1%, and our full year 2019 adjusted effective tax rate was 15.5%. The ongoing Swiss tax reform is set to increase our effective tax rate to the high teens in the future. For 2020, we expect an adjusted effective tax rate between 18% and 18.5% due to these tax reform changes. Importantly, we do not anticipate any impact on our cash tax rate, which will remain below our reported effective tax rate, around the mid-teens. Moving to slide 10, our full year results highlight the strong performance of our portfolio in a declining demand environment. Sales decreased by approximately $550 million year-over-year, with around $400 million attributed to currency exchange rates. Despite the 4% decline in sales, our adjusted EPS only saw a 1% reduction. Adjusted EPS was $5.55, and we maintained 17% adjusted operating margins despite the sales drop. Adjusted EBITDA margins were around 22%, reflecting the robust cash performance of the business. For the full year, free cash flow rose by 15% to $1.6 billion, with net capital expenditures at just over 5% of sales. We remain committed to our balanced capital deployment strategy, having allocated $300 million toward acquisitions that will enhance our sensing and electric vehicle technologies. This amount does not include the first sensor acquisition we previously announced, which is expected to close sometime next spring or early summer. Our ROIC for the year is strong in the mid-teens, and we continue to target mid-teens ROIC while balancing organic investments with acquisition opportunities. Our balance sheet remains healthy, and we anticipate strong cash flow, providing flexibility for organic growth investments to drive long-term sustainable growth, while also enabling us to return capital to our shareholders and pursue bolt-on acquisitions. I am pleased that our team responded swiftly and effectively throughout the year, helping to mitigate the effects of weaker sales on our margins and EPS performance. As expected, we will continue to balance structural cost actions with long-term growth investments to ensure the sustainability of our business model. With that, I'll turn it back over to Terrence for guidance.

Thanks, Heath, and let me get into guidance. Let me start with the first quarter, that's on slide 11 and certainly our year builds off of this first quarter. So as I highlighted earlier, the order patterns we saw in the fourth quarter, we do expect that our revenue in the first quarter will be between $3 billion and $3.2 billion and adjusted earnings per share of $1.10 to $1.16. At the midpoint, this represents declines on reported sales of 7% in total and organic sales of 6% year-over-year. Our sales guidance for quarter one represents a 6% sequential decline and this is greater than a typical seasonal decline, which is more like lower single digits. It reflects the weakness in the end markets, as well as the ongoing effects of destocking in the distribution channel that I highlighted. Adjusted EPS is expected to be down $0.16 from the prior year, driven by the market-related sales decline as well as a stronger dollar. We do expect operating margins to be slightly below our Q4 levels due to the sequential sales decline. However, we do expect as we go through the year, we're going to see improved margin and earnings performance. If you look at it by segment for the first quarter, we expect Transportation Solutions to be down mid-single-digits organically with high single-digit declines in global auto production and broad weakness in commercial transportation markets. Industrial Solutions, we expect to be flat organically and we expect to continue to have nice growth in our aerospace and defense and medical applications. But this is going to be offset by weakness in industrial applications especially around factory automation. In our Communications segment, we expect to be down mid-teens organically and the story in the first quarter is very similar to the story we just talked about in the fourth quarter, and is driven by the continued inventory destocking in the distribution channel that we see. So let's turn to slide 12 and I'll cover the full year guidance. We expect full year sales of $13 billion at midpoint, representing year-over-year declines in reported sales of 3% and organic sales decline of 2%. Adjusted earnings per share is expected to be $5.05 at the midpoint, which includes year-over-year headwinds of approximately $0.30 from currency exchange and tax rates that we mentioned earlier. So let me talk a little bit about the markets and I'll go through them by segments as normal. So for the full year, we expect Transportation Solutions to be down low single digits organically. We expect our organic auto sales to be flat to down low single digits for the full year. And what we've seen over the past couple of quarters is that we saw global auto production to get to a run rate of around 21 million vehicles per quarter and it ran at both the third and fourth quarter of our fiscal year. And what we expect is that this level of quarterly production is going to remain roughly consistent through 2020. And with this assumption, it results in mid-single-digit global auto production declines for fiscal 2019. We do expect content growth to enable us to continue to outperform these weaker auto end markets. And when you think about commercial transportation as part of the segment, we do expect commercial transportation markets to be down high single digits in 2020, which caused the sales decline in this business to be in line with the market due to some of the inventory corrections that we expect in the early part of the year. And we do expect growth in our sensors business unit this year, driven by the ramp up of new auto wins. Turning over to Industrial Solutions. It is expected to grow low single digits organically, with growth in aerospace, defense, and medical being offset by decline in factory automation applications. And in Communications, we expect to be down mid-single digits organically with both data and devices and appliances being impacted by the continued broad market weakness and inventory destocking in the distribution channel. And with this market framing it's also the way we're thinking about how do we continue to size the organization correctly around these markets as I mentioned earlier. So before I turn it over to questions, just some other things I want to highlight and some of it to reiterate what I said at the front. We have built a strong portfolio with leadership positions in the markets we serve and this portfolio is performing significantly better than last time we went through a market cycle. The content growth that we talked about is enabling outperformance even in a declining market and it's actually allowing buffering versus some of these weak market conditions of 2019 and 2020. And the trends like I said earlier whether it's electric vehicles, autonomy features in a vehicle, next-generation aircraft, factory automation, or cloud computing these are going to continue for quite some time. Additionally, we are demonstrating strong execution on our multi-year Industrial margin expansion plan and remain on track for high teen margin in that segment, and I do feel we're executing on what we can control through our restructuring plans that we've increased across all segments not just Industrial enabling us to take advantage to get greater leverage when we do have markets return to growth. I finally want to highlight our cash flow generation continues to be strong, whether it's in a good market or not and it was proven by the 50% increase year-over-year. And it does allow us to maintain a consistent capital strategy with both what we've done on returning capital to owners, as well as improving the portfolio to bolt-on acquisitions. So, before we close, I do want to thank our employees across the world for their execution in 2019 as well as their continued commitment to both our owners and our customers and a future that is safer, sustainable, productive, and connected. So Sujal, with that, let's open it up for questions.

Thank you. Holly, could you please give instructions for the Q&A session?

Yes. Good morning. Thanks very much for taking the question. I'm hoping to better understand the linearity...

Hey, Mark.

Good morning. Yeah. I'm hoping to better understand the linearity to our revenue and EPS in fiscal 2020 that's assumed in guidance. And maybe you can provide some more color on how the company is expecting revenue and earnings to grow off of the 1Q 2020 base and what the key variables are that lead to that improvement?

So yeah, Mark, thanks for the question. And certainly, the first quarter is based upon the order trends we saw. And the other trends, I would say, reflect the market structure I sort of laid out. But then we also have which will impact the first half what we are experiencing through some of the corrections that we're seeing through channel partners. So when you think about the first half what you're going to see is, you are going to see us under-earning on the top line probably in the magnitude of about $100 million of what we normally we do due to the channel corrections that we're experiencing. And when we think about that, and I know I talked about it in the script, our channel business runs about $2 billion a year and that ran about $500 million a quarter. And that's running about $100 million less than it normally runs. And that's due to we're seeing sell through being down in the high single digits, and certainly we're not seeing that in our market. So the inventory corrections that we're experiencing, we are seeing and that's going to complete through the end of the second quarter. So that's a headwind we're going to have in the first half that will normalize. And some of our assumptions around that was, we did actually see our channel partners' inventory come down slightly in the fourth quarter, but that's going to be with us through the first half. When you sort of adjust for that headwind, really what you see as you go through the year is pretty normal seasonality. We aren't assuming that markets are recovering. As I said in my opening comments, there are markets that are strong aerospace, medical. We expect the trends in those markets are going to stay that way through 2020, and you see that in our Industrial Solution segment performance not only this year, but as we guide for next year. When you get in around the Transportation segment, we do expect auto production to stay at that 21 million unit run rate, which is sort of flattish production throughout the year. So we aren't expecting rebound there or in commercial transportation. So, when you think about the market shape, the market shape is really just once you adjust for the channel destocking, it's going to adjust our normal seasonal pattern, which is we go up a little bit into quarter two, a little bit up further in quarter three and sort of stay there. So there really is a market recovery in the guidance we came out with on. From an earnings perspective, I think there is a couple of things. Certainly, the channel part is creating some pressure on our margin that will reverse as that normalizes in the second half. And when you think about the progression for the year, it's probably about split between 50% of the margin improvement and earnings improvement is due to the revenue improvement, once it destocks the other 50 is cost actions 50%. So it's pretty balanced with the actions we have talked to you about. So, the linearity reflects market environment that is sort of a continuation of what we're seeing this year.

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

Hi, morning everybody. Just maybe I ask a finer point as a follow-up of Mark's question. As you've had a lot of restructuring the past couple of years and more into fiscal 2020 what would you expect kind of the run rate EBIT margin for the three businesses to be as we exit 2020 and build on it in 2021? Just to get a better idea of the savings flow through as volumes recover.

Shawn, this is Heath. We have restructuring activity happening across all three segments. To address Terrence's earlier point regarding the markets, we are seeing and expect organic performance to decline by 2% next year, with a more significant drop in the Communications segment. As we approach the end of this year, we anticipate being closer to our current run rate from the second half of 2019, likely around 17 as we finish next year. When examining each segment, you should expect a gradual increase from our entry point into 2020 leading to the exit points for all three segments. Our goal for Industrial has always been to move its operating margins from the low teens to consistently reach the mid to high teens. We are slightly ahead of schedule on that multi-year aim, as evidenced by the year-over-year improvement in Industrial this year. Transportation also has potential for growth, especially as some operations related to the restructuring plan cease. The extent of that growth in 2020 versus 2021 will depend on the timing of those changes. Communications, being the smallest segment, will naturally experience more volatility in margins due to its size. Nonetheless, over time, this business should average to the mid-teens in operating margin, although it is currently facing significant volume declines.

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

Yes, thank you. Good morning. Heath can you talk a little bit about free cash flow in 2020? You had a very strong growth in free cash flow in 2019 despite the revenue performance, and I was wondering if you could kind of help bridge 2019 with 2020, any major puts and takes that you see?

Sure. Thanks for the question, Wamsi. We are pleased with our cash flow performance. We've discussed the markets, earnings, and margins, but ultimately, cash is still king. We feel confident in our operating model, which allows us to report capital efficiently. We're optimizing working capital and reducing our CapEx spending, but this should not be misinterpreted as a decrease in our commitment to funding growth activities, which remain strong. We're also leveraging investments made in the previous year to add capacity in certain regions, facilitating our current restructuring efforts. As we move into 2020, there will be some restructuring expenses related to severance. Looking ahead, I anticipate that our CapEx for 2020 will be similar to what we experienced in 2019. I expect our working capital to remain resilient and for there to be a consistent conversion between cash and net income as we approach FY 2020. Overall, it’s a positive outlook.

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

Hey, guys, thanks for taking my questions. This is Joe on for Will.

Hey, Joe.

I think you guys said you deployed about $300 million in acquisitions last year and you have two more on the come the SMI and First Sensor. I'm just wondering what kind of sales and EPS boost you'd imagine in aggregate in fiscal 2020 from all these deals you've done?

Joe, thank you for your question. Our current outlook indicates a minimal amount of acquisitions. Year-over-year, we anticipate about $50 million of top-line impact, which translates to approximately $0.01 of EPS. Looking ahead, particularly at First Sensor, which is the larger of the acquisitions, we have not factored in any contribution to our guidance due to the uncertainty surrounding the timing of its closure. Once First Sensor is finalized, we will provide an update. Annually, the sensors business is projected to generate around $175 million and is relatively profitable. As we integrate it, we will adjust our overall guidance as needed.

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

Hey, good morning.

Hey, Joe, good morning.

As you look at your global production auto estimates, what market of the three majors that you play and you think is that most risk in terms of just the market itself getting weaker from here? And if I could just ask if you can clarify your comments about content on commercial vehicles being declining roughly like your commercial vehicle sales declining roughly with market why is that kind of shifting towards a less of a content spread there? Thanks.

Sure, Joe. Let me address that separately. First, regarding global auto production, it feels stable around 21 million units per quarter, similar to what we experienced in 2019. We've seen some reductions in inventory levels, and regulatory changes in Europe have contributed to this stability. Looking at 2020 by region, Asia, including China, is expected to be down by mid-single digits, Europe is down about 2% after experiencing higher declines in 2019, and the Americas, particularly the U.S., will see a slight decrease in low single digits. I don’t anticipate any aggressive movements in any region. China remains a key area to watch as we hope to see demand pick up with lower inventory levels. Overall, I believe we are well balanced at that 21 million units as we move through the year. Additionally, we have a globally balanced approach in planning our programs for the year and by region, so shifts in one area will benefit another. Now, turning to your question about commercial transportation, we expect that market to decline by high single digits. As we highlighted in our fourth quarter results, we've been observing supply chain corrections from our OEM customers that began in the fourth quarter and will extend into the early part of next year. This segment operates more directly for us rather than as a distribution business. For next year’s revenue guidance, we anticipate aligning our performance with the market since the gains in content will have to counterbalance some of the effects from the supply chain issues. We’ve seen strong content growth over the past three years, and we’ll need that momentum to navigate the supply chain challenges, projecting that we might meet or even exceed the market due to these early year effects in 2020.

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

Hey, guys. Thanks and good morning.

Good morning, Matt.

Just one question, good morning. I wanted to ask about your auto business. Are you seeing any impact from the GM strike this quarter and as you look ahead to the December quarter? Also, regarding the commercial transportation and HVOR market, where there has been an inventory build in the supply chain, do you expect that to take a couple of quarters to normalize, similar to the distribution channel? Or does your outlook for end market growth differ in any way?

So let me take the second one because it builds on the question before you, Matt. So we do expect that's going to take a couple of quarters. I would say it's similar to distribution channels, but I would say it's not in the distribution channel. So, yes, we did see that. You saw our performance in the fourth quarter in commercial transportation was down about 14% and we do expect we're going to get that correction work through here in the early part of 2020. On the first part of your question on the GM strike, it really doesn't have a big impact on us because of how global we are. We're fortunate that every major OEM is a customer of TE. And I think it shows our global strength, so while certainly that strike has impacted production a little bit it really doesn't play in much to our numbers.

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

Yes. Thank you. Question for Terrence just looking through just what's kind of difficult market conditions. Is this a period to kind of look more internally focused in terms of making it sure you execute through to a difficult market? Or at the same time are there opportunities in kind of M&A in terms of maybe some dislocations out there? So just want to get a sense of how you're writing the business and how M&A comes into play here.

It's a combination of both. Last year was a time when overall our markets were negative, despite strong growth in areas like aerospace and medical. We invested in capital and expanded our sensor platforms, as Heath mentioned, and we also made additions to the electric vehicle platforms, which are trends we are committed to and that are creating content opportunities. Similar to the earlier question, we have added a couple more sensors, one smaller and one from First Sensors, which has just been finalized. We will continue to seek ways to strengthen our portfolio because we believe that these secular trends can drive growth despite the cyclical nature of the markets. Whether it's in automotive or factory equipment, we will experience cycles and periods of inventory corrections in supply chains. We need to maintain balance and be effective capital deployers throughout these cycles, rather than focus solely on one aspect. We have demonstrated our ability to do both and have maintained a disciplined approach to capital over the years, and I expect that to continue.

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

Thank you very much. I believe Terrence mentioned during the Q&A about a three-quarter inventory adjustment, if I heard that correctly. Was that adjustment applicable across all end markets, or was it more specific to areas like industrial or automotive? Also, can you provide an update on the timeline? It seems like we could expect to reach a healthier equilibrium in inventory by mid-next year. If possible, could you break down the inventory situation and the duration for adjustments by end markets? Thanks.

Thank you for the question, Jim. As I mentioned last quarter, we began noticing this trend in our orders. It has affected our revenue this quarter, particularly in our Communications and industrial equipment markets within the Industrial segment. When considering these businesses, especially through the electronic distribution channel, we expect the effects to continue, having felt them in our recently closed fourth quarter. We anticipate this trend will carry into our first quarter and should conclude by the end of our second quarter. So, this is a temporary challenge for us, primarily affecting those markets. Additionally, I mentioned the industrial commercial transportation market, specifically in heavy trucks, which is also influenced by direct supply chain factors that we noticed in the fourth quarter. We believe a similar trend will follow elsewhere. We feel that our inventory levels are adequate and align with demand and underlying market content. Therefore, the markets showing significant declines are mainly experiencing the repercussions of the adjustments we are currently undertaking.

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

Thank you. Good morning.

Hi, Chris.

Hi, Heath and Terrence and Sujal. On the sensors comment, I think, I heard positive growth next year for thought relative to auto wins. Just wondering if you could kind of range how that expectation might unfold and maybe in terms of platform mix and take rates, but also broader how you see the inflection for your sensors business ramping over the next couple of years say on the basis of flattish production?

Yes, Chris, that's a good question. This year, our sensors business growth was not as strong as we anticipated, primarily due to slow demand in the heavy truck market and some aspects of the auto market. The program ramps we've discussed have progressed more slowly than expected because of these underlying market conditions. Unlike our auto business, our sensors sector does not have the advantage of widespread presence across all OEMs, resulting in more variability. Looking ahead to next year, we believe that auto ramps and the industrial sector will drive growth for our sensors business. However, a significant portion of our sensors sector continues to be tied to the heavy truck market, which will influence our results. You will also see the auto wins we've mentioned, which are projected to be over $2 billion, continuing to ramp up. While production challenges have muted our performance this year, we are optimistic about growth next year, even as the auto and industrial transportation markets provide support.

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

Good morning, all. So my question is on automotive. Terrence, what's your sense on how long the auto weakness can last? And what are some of the drivers you're monitoring that can help provide visibility into any, sort of, inflection to growth when that were to happen? I mean you touched on trying to being a wildcard we understand but that's one part of the question? Second is also can you talk about some of the steps that TE is taking to keep or gain market share in the current environment? Thank you.

So, a few points to consider. We not only pay attention to what our customers say, but we also analyze global sales and inventory trends. The trends regarding electric vehicles are continuing to gain momentum. They've strengthened in Europe, but in China, there has been a slight slowdown. Overall, though, the trend towards electric powertrains is clearly on the rise, with Europe leading the way. If we look back at 2019 and into 2020, while electric vehicles still make up a small portion of the market, both electric and hybrid vehicles are expected to increase significantly year-over-year, approaching about 50%. This trend benefits us as well. We are also monitoring the autonomy aspect, which seems to have been slightly delayed. With reduced production in the automotive sector, there is a heightened focus on electric vehicle powertrains over autonomy. While features will continue to advance towards full autonomy, achieving Level 5 autonomy is likely further down the line. We benefit from both electric vehicle and autonomous technologies, but electric vehicles represent a larger opportunity for us. We are seeing inventory levels normalize worldwide, and we're adjusting accordingly. As mentioned, our cost planning will help us stay flexible in this weaker auto market, allowing us to fine-tune our cost structure to adapt to current conditions and the other markets we serve.

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

Hi. Good morning. Thanks for taking the question. I just wanted to ask on the corporate level or the broader level. You mentioned a couple of times today, the resilience in the earnings performance in fiscal 2019 despite kind of the revenue declines that you saw. And then, that's kind of evident in the fourth quarter results as well, but when I kind of dial forward to the fiscal 2020 guidance it goes the other direction where you have modest kind of 2% decline in revenue, but you have a higher decline in the earnings performance. And even when I exclude kind of FX or tax impact, but still kind of probably a bit more higher earnings decline than the revenue. So, I'm just wondering can you help me bridge what changes between fiscal 2019 and 2020 on that front? Is it more reflective of kind of it becoming more difficult to drive cost out or reduce cost in commentary of a year as revenue comes down or volume comes down?

Thank you for the question. This is Heath. We've decreased from where we were a couple of years ago to our recent guidance of about $1 billion while maintaining operating margins in the high teens, so there's nothing to apologize for. However, your observation is valid. With our current level of operations and the ongoing restructuring, including changes in our manufacturing sites, there will be times when we experience some margin compression, especially with overlapping activities as we wind down some locations while others ramp up. This will be evident throughout FY 2020 due to expenses we've incurred in FY 2019 and anticipated changes in early 2020. Additionally, we expect to see increases in currency and tax rates, which will affect earnings by around $0.30 year-over-year. We'll keep you updated on that. Overall, I believe the team is concentrated and has a chance to finish FY 2020 strong, navigating what looks to be a challenging environment. We feel confident about our ability to respond positively as the cycle shifts across all our businesses and as our cost structure and business mix evolve.

Okay. Thank you, Samik. May we have the next question please?

Yes, thank you. Thanks for taking the follow-up. So your content, I think came in around 4% the low end of the range for 2019. How much do you think that this was timing related versus mix related and other things that you see given your design wins and things like that that can drive 2020 content growth towards the higher end of the range?

Thanks, Wamsi for the follow-up. We remain confident in the range of 4% to 6%. This year has seen a decline in production, which can cause some supply chain effects, similar to what we previously mentioned. At times, our content during market growth has exceeded the high end of our range. I don't anticipate any changes to our mix versus the 4% to 6%. We feel good about this range. While our quarterly results might show some variation due to supply chain issues, we are optimistic about maintaining 4% to 6% as we move into next year and beyond. This creates a buffer against the negative market conditions, which is clear given the current environment we are facing. Our content trends have remained consistent over the past three to four years, providing us confidence, as well as the momentum we are observing and our partnerships with customers.

Okay. Thank you, Wamsi. I want to thank everybody for joining our call this morning. And if you have further questions, please contact Investor Relations at TE. Thank you, and have a nice day.