Q4 2019 Earnings Call
Ladies and gentlemen.
Thank you for Sandy buying and welcome to the Te connectivity conference call.
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I would now like to him the conference over to our House, Vice President Investor Relations, Phil Jones show. Please go ahead.
Good morning, Thank you for joining our conference call to discuss Te Connectivitys fourth quarter and full year 2019 results.
With me today, our Chief Executive Officer parents curtain, and Chief Financial Officer Heath Mitts.
During this call we will be providing certain forward looking information. We ask you to review the forward looking cautionary statements included in today's press release.
In addition, we will use certain non-GAAP measures in our discussion. This morning, and we ask you to review the sections of our press release and the accompanying slide presentation that addressed the use of these items.
Press release and related tables, along with the slide presentation can be found on the Investor relations portion of our web site at TV Dot com.
Due to the large number of participants on the Q on a portion of today's call are asking everyone to limit themselves to one question to make sure. We can give everyone and opportunity to ask questions. During the allotted time, we are willing to take follow up questions, but aspect you rejoin the queue. If you have a second question.
We turn the call over the terrorist for opening comments.
Thank you. So it's all one thank you everyone for joining us today to cover our 2019 result, as well as our outlook for fiscal 2020.
That's 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 a market dropped backdrop, where many of our key markets are showing declines.
But we tend to fourth quarter and for the full year results reflect resiliency in our business model and successful execution on multiple levers that we can control to preserve margin earnings and cash flow performance. Despite the cycling we're seeing in certain end markets.
I think the real evidence of this resilience is that our adjusted earnings per share in 19 being down only 1% when an overall sales decline of 4% versus last year, while maintaining 17% adjusted operating margins for the year.
Another key element is that you know, we always talk about our strong cash generation model.
And our free cash flow and 29, King was up 15% versus the prior year.
And from that how we used our capital we returned $1.6 billion or owners, while continuing our bolt on acquisition strategy for which we deployed an additional $300 million a cap on 2019.
Now as we look forward into fiscal 2020.
We expect that the majority of our markets specifically in the transportation and communication 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 and 29 team and we expect to be completed by middle of fiscal 2020.
A key point is that are strong content traction will partially offset these headwinds.
We continue to benefit from secular trends, whether its 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 a real as well.
You know these content gains are enabling us to outperform even in declining markets and as buffering. The market conditions that were seeing both in late 2019, and what we're assuming in 2020.
Lastly, I am pleased that we initiated the cost actions. We've reviewed with you during our calls and we remain committed to execute on the levers under our control to improved financial performance as we move through 2020.
And despite this market environment I do want to emphasize that our investment thesis remains solid.
With a more resilient portfolio.
Leadership positions in attractive markets, a benefit from secular trends and levers to drive margin and earnings resiliency.
And these levers that we're pulling our helping position us to generate more earnings leverage as markets returned to growth.
So now I'll turn to slide and if you could I would appreciate if he could turn to slide three 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% declined organically year over year due to the Mark Nick market weakness I highlighted.
On a sequential basis or sales were down 3%.
And on a year on year basis, or 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 Marine.
And lastly, our communication segment declined 18% organically as we expected driven by the inventory de stocking 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 the sales decline of 6% versus the prior year demonstrating the resiliency, we're 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 was very strong at nearly $700 million and we returned $332 million to our owners.
And our capital strategy continues to include capital deployment, the build out our portfolio Inorganically.
And also to further capitalize on the secular trends to drive future growth.
So, let's turn to slide four for some additional highlights on the full year.
As well as to talk more about our guidance for 2020.
For the full year, we delivered sales at $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 on our strong global position resulted in outperformance worse, a decline in global auto production of over 6%.
Industrial solutions grew 3% organically driven by growth in aerospace defense in Marina medical applications.
And communications declined 7% organically.
Driven by market weakness and de stocking in the channel.
You know as we discussed in the last call. We saw these inventory trends by our channel partners that started in the order side in the third quarter and impacted our fourth quarter and will continue to impact us through the first half to 2020.
For the full year adjusted operating margins were 17% at the total company level and we generated 130 basis points of margin expansion in our industrial segment as we continue to execute on our multiyear margin expansion plans.
We delivered adjusted earnings per share a $5.55 down 1% versus the prior year on a 4% sales declined.
As I mentioned earlier I'm very pleased with our free cash flow generation.
Which was up 15% the $1.6 billion and clearly this demonstrates our strong cash flow model.
Now, let me turn to the guidance at 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 markets.
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 had one.
The other half of the decline versus 19 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.
We believe we'll have nice growth as an underlying market in 2020.
The other part of the decline is that we expect inventory de stocking that I've 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 communications segments are the ones with the highest exposure to the channel. So youre seeing that in our fourth quarter and you'll see that in those segments in the first half that's that works through.
While we cannot control these headwinds our 2020 guidance includes the content benefit from the secular trends that we've demonstrated over the past couple of years.
And this content will partially buffer the topline headwinds we face as we go into 2020.
Moving over to earnings adjusted earnings per share, we expect to be a $5 in five at the midpoint.
This includes an approximately 30 cents a year over year headwind from a current the currency exchange I talked about already as well as a higher tax rate that Heath will get into and these two headwinds over the main majority of the earnings decline.
In addition, we're going to continue to execute on the levers we can control to drive our cost reduction as well as footprint consolidation plans that we've laid out for you what 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 progressed through the year.
So lets turn it over to the 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 to our book to Bill was actually 0.90.
So let me talk about this little bit more and you're going to see yes. 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 on industrial communications segments and those declines were really driven by the destocking that we're seeing by our partners.
When we talk about our distribution channel partners orders were down double digits 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 and end 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 almost store 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 reflect broad market weakness across the regions as well as some supply chain corrections that had been noted by some of our customers.
Our sensor business was flat organically with growth in industrial applications offset by declines and transportation applications.
And on the margin perspective for the segment adjusted operating margins were 17.6% as we thought.
So, let's move or 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 as our medical businesses.
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 and medical applications.
Our energy business was up 2% organically with growth in North American China offsetting declines in Europe .
Our adjusted operating margins in the segment expand a 50 basis points over the prior year to 15.5% driven by strong execution by our team.
And I am pleased that remain on track with our multiyear 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 communication solutions on slide eight.
In communications, both our data device and appliance sales were down 18% organically and that was inline with our expectations.
We saw demand driven weakness across all regions, along with inventory de stocking 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 the segment.
Adjusted operating margins were 12%, which was impacted by the volume driven sales decline.
And for the 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 level.
So with that as a backdrop on the segment side, let me turn it over to he's to cover the financials and I'll come back later in the guidance.
Thank you Terence and good morning, everyone. Please turn to slide nine were I will provide more details on the Q4 financials.
Adjusted operating income was 538 million with an adjusted operating margin of 16.3% as we expected.
The GAAP operating income was 444 million and included 71 million of restructuring and other charges and 23 million of acquisition charges and other items.
For the full year restructuring charges were 255 million now this is lower than we expected due to the timing of certain footprint actions and keep in mind.
These actions are complex activities. So there is some that have moved from that where the charges will be taken so late in 2019, those have moved into 2020, but nothing fundamentally has changed with our overall restructuring plans.
As a result, I expect restructuring charges to be at similar levels in fiscal 20, as we continue to execute on optimizing manufacturing footprint and improving the cost structure of the organization.
Adjusted EPS was $1.33 down 1% year over year, and we were able to preserve adjusted EPS. Despite the sales decline of 6% as parents mentioned.
It's demonstrates our ability to execute on multiple levers to drive earnings performance.
GAAP EPS was $1.11 for the quarter included restructuring acquisition and other charges of 22 cents.
And the adjusted effective tax rate in Q4 was 15.1% our full year 19, adjusted effective tax rate was 15.5%.
The Swiss tax reform, which is in the process of being enacted currently which we mentioned last quarter result in our effective tax rate increasing to the high teens going forward.
For 2020, we expect an adjusted effective tax rate of between 18 and 18.5% due to these tax reform changes. However, importantly, we do not expect an impact to our cash tax rate, which will stay below our reported MTR. So in the mid teens for cash tax rate.
Turning to slide 10.
Our full year results demonstrate strong performance in the benefit of our portfolio position in what turned out to be a declining demand environment.
Our sales were down approximately 550 million year over year, which included approximately 400 million impact from currency exchange rates.
On the 4% sales decline we saw in only 1% reduction in adjusted EPS. Adjusted EPS was closer to 55 cents, we were able to maintain 17% adjusted operating margins. Despite the sales decline.
Adjusted EBITDA margins were approximately 22% and reflect the strong cash performance of the business.
So for the full year free cash flow increased by 15% to 1.6 billion with net capital expenditures represented a little were 5% of sales.
We remain committed to our balance capital deployment strategy.
Deployed 300 million for acquisitions that will strengthen our sensing and electric vehicle technologies and please note. This does not include the first since our acquisition that we announced previously and should close sometime next spring or early summer.
ROI see for the year remains strong in the mid teens and we continue to target mid teens ROI see as we balance organic investments with acquisition opportunities.
Our balance sheet is healthy and we expect cash flow to remain strong which provides us the flexibility to utilize cash to support organic growth investments to drive long term sustainable growth, while also pursue allowing us to return capital to our shareholders and continue to pursue bolt on acquisitions. So I'm pleased with that our team react.
Quickly to pull the levers and our business model throughout the year helped mitigate the impacts of the weaker sales on our margin and EPS performance as you should expect we will continue to balance our structural cost actions.
And our long term growth investments to ensure the sustainability in our business model.
I will turn back over to Terence cover guidance.
Thanks, Jason let me get into guidance, let me start with the first quarter. That's on slide 711, and certainly our year builds off of this first quarter.
So as I highlighted earlier the order patterns, we sold 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 declined to 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 was greater than our typical seasonal decline, which is more like lower single digits.
Flex 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 to have 16 cents from the prior year driven by the market related sales decline as well as the stronger dollar.
We do expect operating margins to be slightly below our quarter four 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.
And 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 in the quarter.
Fourth quarter, and it's driven by the continued inventory de stocking 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 and reported sales of 3% inorganic sales decline of 2%.
Adjusted earnings per share is expected to be five five at the midpoint, which includes year over year headwind to approximately 30 cents from currency exchange and tax rates that we mentioned earlier.
So, let me talk little bit, but the markets and I'll go through and by segments as normal.
So for the full year, we expect transportation solutions to be down low single digits organically.
We expect or 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 sold global auto production.
To get to a run rate of around 21 million vehicles per quarter and at brand that in both the third and fourth quarter of our fiscal year and what we expect is at 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 19.
We do expect content growth to enable us to continue to outperform these weaker auto end markets.
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 and our sensors business units 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 and factory automation applications.
And in communications, we expect to be down mid single digits organically with both data and devices and appliance is being impacted by the continued broad market weakness and inventory de stocking 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 question just some other things I want to highlighting some of it will reiterate what I said at the front.
Yes, 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 talk about it 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 real whether its 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, our multiyear industrial margin expansion plan and remain on track for high teens 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 returned to growth.
And I finally want to highlight our cash flow generation continues to be strong whether it's a good market or not and it was proven by the 15% up 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 through bolt on.
Acquisitions.
So before we close I do want to thank our employees across the world for their execution and 29 team as well as their continued commitment to both our owners that our customers and a future that a safer sustainable productive and connected so should we go with that let's open up questions. Thank you poly could you. Please give instructions for the QNX session.
Yes.
And again at this time I would like to remind everyone in order to ask a question simply press Star then the number one all your telephone keypad.
I wanted to have time for all questions. Each participant is limited to one question. If you would like to ask a follow up question. Please.
Please the order into the queue by pressing star one.
Your first question comes from the line of Mark Delaney with Goldman Sachs.
Yes. Good morning, Thanks, very much for taking the question, hoping to better understand our linearity.
Good morning, I am hoping to better understand the linear ready to our revenue and EPS in fiscal 2000 at assumed in guidance and maybe can provide more color and how the company is expecting revenue and earnings to grow off of the one Q2 thousand based on what the key variables are that lead to that improvement.
Well Mark Thanks for the question and certainly the forces. The first quarter is based upon the order trends, we saw and the order 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're 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 topline probably in the magnitude of about $100 million. What we normally would do due to the channel corrections, we're experiencing and when we think about that and I know I talked about it in the scrip.
Our channel business runs about $2 billion, a year and that ran about $500 million quarter thats running about $100 million less that normally Robinson, that's due to we're seeing.
Sell through out being down in the high single digits, and certainly we're not saying that in our market. So the inventory corrections that we're experiencing.
We are saying if thats going to complete through the end of the second quarter. So thats a headwind we're going to happen 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 thats going to be with us through the first half.
When you when you sort of adjust for that headwind really what you seem to go through the year is pretty normal seasonality.
We are assuming that markets our recovery.
As I said them in my opening comments now there are markets had a strong aerospace medical we expect the trends in those markets are going to stay that way through 2020.
And you know you see that our industrial solutions 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 21 million unit run right, which is sort of flattish production throughout the year sequentially. So we aren't expecting rebound there or in commercial transportation. So when you think about the market shape the market share.
Hey is really just once you adjust for the channel Destocking is four to adjust our normal seasonal pattern, which as 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 isn't a market recovery in the guidance. We came out this fall.
From an earnings perspective, I think Theres a couple things certainly the channel part is creating some pressure on our margin that will reverse has 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.
Payment is due to the revenue improvement once a destock over the other fiftys cost actions, 50%. So it's pretty balanced with the actions we've talked to you about so the linearity reflects.
Market environment that is one of a continuation of what we're seeing this year.
Okay. Thank you Mark we have the next question. Please.
Your and your next question comes from the line of Shawn Harrison with Longbow Research.
Hi, good morning, everybody.
Just maybe to ask a finer point.
Follow ups to Mark's question.
As you've had a lot of restructuring the past couple of years it in more into fiscal 20.
What would you expect kind of the run rate EBIT margin.
For the three businesses to be as we exit 2020 and build on in 2021.
Just to get a better idea of how the savings flow through as volumes recover.
Well, Sean this is Keith.
I think you could you have to we have restructuring activity going on in all three of the segments, Okay and so.
Now to Terence's point earlier on the markets and so forth, we are seeing and we continue to expect.
Organic performance next year down, 2% and it's a little bit.
Steeper and turn in the communications segment, even so as we look at it.
The we will be exiting the year in and we anticipate exiting the year next year.
Closer to our existing run rate here for the second half of of 19, so kind of in that 17 ish number in terms of equity next year as you break it down by segment you would expect continued.
Tick up from our entry point into 20, it into the exit points for each of the three segments.
Our plan for industrial has always been how do we consistently get it in from from where it is where historically had been in the low teens operating margins to get it consistently in the mid to high teens, we're a little bit of ahead of schedule on that multiyear journey as you saw the the.
Year over year improvement in industrial this year.
Transportation, certainly has room to move up a particularly as some of the plants come offline that are part of the overall restructuring plan.
How much of that we see in 2020 versus as we go into 2021 still to be determined based on the timing of getting those offline and then in communications listen as the small so the three segments are yours is going to have the most volatility in margins. There just by the law of small numbers. However.
As you look at it over time that business should average out somewhere in the mid teens from an operating margin perspective.
There are obviously battling up against a fair amount of volume.
Depression right now.
Okay. Thank you Sean maybe next question please.
Your next question comes from the line of Wamsi Mohan with Bank of America.
Yes. Thank you good morning.
Heath can you talk a little bit about free cash flow in 2020 years ago, where a strong growth and free cash flow in 2019. Despite the revenue performance and I was wondering if you're going to help bridge 2019 with with 2020 any major puts and takes that you see.
Sure. Thanks for the question Wamsi listen we're pleased with the cash flow performance I mean, we talk a lot about the markets here and earnings and margins and so forth, but at the end of the day cash still king and we feel very good about our ability to in this environment. Our operating model allows us to reporting capital out pretty aggressively so.
So we tween working capital optimization.
We obviously are spending less in capex in this environment, but don't misinterpret that or anything in terms of funding growth activities that still remains strong.
We're also taking advantage of some of the investments we've made when we were spending more in the prior year.
To add capacity and certain in certain regions that this is allowing us to move some of the restructuring that we're doing now now there will be some restructuring dollars put into play as we go into 19 in terms of mainly severance expense and so forth related to those restructure.
And activities, but as we look forward I would anticipate a similar level of Capex in 2000, Twentys. We just experienced in 19 I would expect our working capital to stay resilient and I would expect.
Similar type of conversion if you will between cash and net income as we think about halfway 20. So.
It's a good story.
Alright. Thank you want to equip next question. Please.
Your next question comes from the line of William Stein with Suntrust.
Hey, guys. Thanks for taking my question. This is Joe on for will.
I think they Joe you see deployed Hey, how are you.
So you deploy about 300 million in acquisitions last year and you have to more on the comment that some volume per sensor.
Just wondering what kind of sales and EPS boost you'd imagine in an aggregate in fiscal 2000 from all these deals you've done.
Joe appreciate the question.
The current outlook that we just guided to.
Sims are fairly Diminimus amount of acquisition I think theres year over year, there's about $50 million of.
Topline impact as you can imagine with business is just coming online thats, only a penny or so of EPS.
The.
As we as we look forward, particularly into first sensor, which is the more sizable of the deals are given where the uncertainty of the timing of when that's going to actually close we have not included anything in our guidance relative to first sensor.
As that closes we will certainly update that but at an annualized basis for sensors about $175 million business and in reasonably profitable. So as we bring it into the full.
We'll we'll update our overall guidance accordingly.
Okay. Thank you Jeff we have next question. Please.
Your next question comes from Joe Giordano with Cowen.
Hey, guys good morning.
Hey, Joe Good morning.
Hey, Ed as you look at your your global production Auto estimates.
What what market of the three majors that you play in you think is that most risk in terms of just the market itself getting weaker from here and and if I could just ask.
If you can clarify your comments about.
Content on commercial vehicles being.
Declining roughly like do you your your commercial vehicle sales declining roughly with market why is that kind of shifting towards less of a content spread there. Thanks.
Sure Joe the let me, let me take them.
Separately, so first off on global auto production.
The only when you sit there it does feel and even when we think about next year I'm going to keep on going back to this 21 million units a quarter, we have been dealing with in 2019.
Areas, where they had.
The amount of cars are not being worked down that helps you had some of the regulation that happened in Europe and it does feel when we look in the past couple of quarters pretty stable around 21 million units now what that means by region. As we look at 2020 at thus far to say Asia, including China down about mid single digits.
You have Europe down about 2% after being down high single digits, and 19 and it does actually show for the first time and while we would tell you the Americas, Andy us will be down slightly low single digits.
So when I look at those.
May I don't view one.
As aggressive certainly we have to continue to see.
Probably China is always the one that you sit there and as inventory has come down we so we'd like to see demand pickup.
But net net I think at that 21 million units were pretty balanced as we go through the year and the other thing I would just say is.
We are very globally balance that we plan all basic programs on the year and regionally so no one shifts a little bit versus another.
We're going to benefit from that.
So let me let me turn to the second part of your question I'll commercial transportation.
The commercial transportation market like I said in my comments, we do expect to be down high single digit has a market.
We are experiencing and you saw in our fourth quarter results. We are seeing supply chain corrections by our OEM customers that started in the fourth quarter logo in the early part of next year that is really not a distribution business for us thats more of a direct business for us like most of our transportation segment.
So as we look at next year at how we guide for next year, we're sort of assuming that our revenue for that market will equal the market because the content gains will need to absorb some of the supply chain effects. So content like you've seen over the past three years, we had very good content momentum, we're just going to need some of that content will absorb some of the.
Supply chain. So next year, we're sort of assuming will be more market.
And actually CD market due to some of the supply chain effects were going to feel early in 2020.
Okay. Thank you Joe quit next question please.
And your next question comes from the line of match Sharon with Stifel.
Yes, thanks, good morning.
Just.
One question good morning, just related to your auto business.
Do you have.
Seeing any impact from from the GM strike.
Both.
This quarter and as you look out to the December quarter, and just a follow up on the.
On the commercial transportation in the ATRIO, our market, where there has been the supply chain inventory build.
Are you expecting that you have to take a couple of quarters. Just as you are the distribution channel or does your outlook in terms of end market growth.
Differ at all.
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 channel, but I would say it's not in the distribution channels. So we did see that you saw our performance in the fourth quarter and commercial transportation.
It was down about 14% and we do expect we're going to get that that correction worked through here in the early part a 20.
On the first party crush have won 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 TV and I think it shows our global strength.
So while certainly that strike has impacted production a little bit it really doesn't play a much toward numbers.
Okay. Thank you Matt we have next question. Please.
Your next question comes from the line of Craig Hettenbach with Morgan Stanley .
Yes. Thank you question Proterra and just looking through just what's kind of difficult market conditions is this a period to kind of look more and currently focused in terms of.
Making sure you execute through to a difficult market.
Or.
At the same time other opportunities kind of M&A in terms and maybe some dislocations out there. So just want to get a sense of how you right in the business and how M&A comes into play here.
Craig I, it's a combination of both.
Clearly I think you've seen last year last year was turned out to be a year, where our net net our markets were negative overall, despite very strong growth in places like aerospace and medical.
And we deployed capital.
We added to the sensor platforms as he said, we also added something in electric vehicle platforms and their trends that we're committed to it and they are driving content opportunities. So no different than the earlier question. We have a couple more sensor one one smaller one Esa mine that is that just closed for sensors out.
We're going to continue to look at how do we strengthen this portfolio because we do like around the secular trends how that can drive growth at the markets recycling and whether its automotive whether its factor equipment.
We are going to have these cycles, we are going to have periods, where inventory correction and supply chain and I think we have to stay balanced can be good capital deployed through a cycle.
Not stop to one of the other and I think we've shown we can do both and I think we've been pretty disciplined when it comes to capital over over the years and I expect we're going to stay that way.
Okay. Thank you Craig we have the next question please.
Your next question comes from the line of Jim Suva with Citi.
Thank you very much I believe it was Terrence you mentioned on Q in a about three quarters of inventory adjustment, if I heard that correctly and if so was that on all the different end markets or is that more specific to say industrial or auto and can you maybe update.
Thats about it sounds like that that would then put his towards mid next year about being in a more healthy equilibrium standards for inventory, but if you can kind of make or break.
Break it down by the end markets about inventory in the duration for the adjustment for equilibrium. Thanks.
You know Jim Thanks for the question.
As I said, we started to see this on our orders as we talked last last quarter. Two we started to see the orders.
And we haven't really how it's impacting our revenue an impact on us this quarter you see it at our communications and in the industrial equipment market of our industrial segment.
So when you think about those businesses and Thats really through the electronic distribution channel, we expect that that Adam started and we start to feel it in our fourth quarter. We just closed and in those three businesses themselves youre going to see that continue into our first quarter and we expect at the end by the end of our.
Second quarter. So that's really a temporary headwind that we have and there the market youre going to see at the most Jim.
The other market that I did mention which isn't transportation is industrial.
Commercial transportation, which is the heavy truck that's more of our direct supply chain that we're feeling you saw in the fourth quarter. We think it had a follow a similar pattern.
Elsewhere, we feel inventories pretty good and yet it was tracking pretty much to demand and underlying market cost contact. So it's really those couple markets and you can actually see it in the slides as markets that are showing.
Down double digit they are typically the ones that you're going to see seeing some of the impacts.
The corrections that we're going through.
Alright. Thank you Jeff we have next question. Please.
Your next question comes from the line.
Glynn with Oppenheimer.
Thank you good morning.
Correct.
Hey, you can turn suits Joe.
On the sensors comment I think I heard positive growth next year for.
Relative to auto wins.
Just wondering if you could.
And to range, how that expectation might unfold and maybe in terms platform mix and take rates, but also brought or how you see the inflection fears sensors business ramping over the next.
A couple of years say on the basis of flattish production.
Yes, so Chris Good question, then if you look at this year.
Our sensor business growth was below where we thought it was going to be mainly due to what we saw when the the heavy truck as well as some of the auto and end market demand market being a lot slower than we expected. So some of the growth that we talk to you about about program ramps has been slower dude really to underlying markets and our sensors.
Business does not have the benefit of the broad base of being one every OEM like our auto business. So you will get a little bit more lumpiness on there.
As we go into next year, we do sort of view the auto ramps and the industrial space with the drivers of growth for the sensors were still going to have we still have a big chunk of our centered business thats and heavy truck that it's going to be impacted by that market and then youre going to continue to see those those are the ones, we talked about well over $2 billion content.
New to ramp up so you're going to continue to see that content separation that we haven't shown in centered versus underlying production. Unfortunately this year a muted by production.
But we do expect that's going to continue in that some of the reasons. We're excited that we'll be able to grow next year, even though auto and industrial transportation markets aren't going to really be helping us.
Okay. Thank you Chris we had the next question please.
Your next question comes from the line of deeper Cancun with Wells Fargo Securities.
Hey, good morning.
So my question is on automotive.
The 10 is what's your sense on how long the auto weakness can last Dan.
What are some of the drivers you're monitoring that can you help provide visibility into any sort of in selection to growth when that were to happen. I mean, you touched on China being a lot wildcard we understand but.
That's one part of the question second is also can you talk about some of the steps that T. He is taking to keep or gain market share.
And the current environment. Thank you.
So a couple of things I think what we look at not only to what we hear from our customers. We do look what is happening from a sales perspective inventory perspective around the world.
And I would say the trends we talk to you about whether its electric vehicle I would say electric vehicle trends continue to accelerate.
Regionally they strengthen in Europe , maybe China with some of the pause it slowed down but I would say net net when we think of the world. The electrical trend the electrical power train trend is accelerating certainly with European the leader of it and even if you take 2019 going into 2020.
Even though electric vehicles are still small part both electric and hybrid are going be closely up to about 50% year over year, even though a small part.
So of the market so we get the benefit of that.
Clearly we also are trying to also understand.
Autonomies, probably pushed out a little bit I would say as all of us that are in the automotive space you have less production, we all have to focus.
And in that regard you see more focus going on the electric vehicle powertrain.
Versus autonomous you're still going to move up autonomous by feature but probably full level five further out.
And whats great we benefit from both of those and certainly electric vehicle is a bigger content item for us.
Tommy like we talked about so we look at the same production trends you look at it does feel like inventory continues to normalize around the world and certainly we're adjusting and I think as he played out on some of the cost plant. The one thing we're going to take advantage of Hey, This auto market is weaker than we thought.
And what we laid out to you is how we're going to plan our cost structure to.
So it's not just about setting expectations has also things were going to work to get our cost structure right to put the flexibility we need.
And the auto market any other markets we serve.
Okay. Thank you Dave we haven't next question please.
Your next question comes from the line of Simic Chan with JP Morgan.
Hi, good morning, Thanks for taking the question.
I just wanted to ask London.
Corporate level of the broader level you mentioned a couple of times today, the resilience and be coatings performance in fiscal 19. Despite the revenue declines that you saw and then that's going to evident in the fourth quarter results as well, but when I kind of going forward for the fiscal glennie gall guidance.
It goes the other direction, where you have more to start going up wasnt decline in revenue what do you have a high or decline in the earnings performance.
And when I exclude kind of FX FX impact are still kind of probably a bit more higher earnings decline than the revenue. So im just wondering can you help bridge work, though what changes between fiscal 19 and 20 on that front is it more reflective of kind of pick becoming more difficult to drive cost out.
He was costing comment.
What revenue comes down I'd point, you comes down.
No and I appreciate the questions a C E.
Listen we've dropped.
From two years ago, So where we just guided right about $1 billion and still held operating margins in the high teens and so.
There's nothing.
To apologize for their Alvin However, your point is taken the.
We're operating at this level and we have this amount of restructuring activity going on including.
Footprint changes, meaning manufacturing sites coming off line, there is going to be periods of time when you do have some.
Some margin compression.
Certainly as you have duplicative activity going on as sites are coming offline. While other sites are coming up and we'll see some of that during fytwenty for some of the things we've taken charges for already in fight 19, as well as the anticipated changes that we see forthcoming charges that we see forthcoming.
In the early part of 20. So there is that kind of activity going on in addition to the fact that we are going to see as you mentioned earlier, the currency and the tax rates pick up.
Certainly that has about that impacts about us 30 cents year over year on earnings will continue to update that but.
In general I feel like the team is focused weve got some opportunity too.
To to exit the year, UNEV, why 20, and I'm pretty tough in by anticipate environment in a position that when we come out of this part of the cycle.
Across all of our businesses, we feel very good to flex up on the uptick relative to the cost structure and what.
Relative to where the mix of business is going to be.
Okay. Thank you so make.
We have next question please.
And again, if you would like to ask a question. Please press Star then the number one on your telephone keypad.
You have a follow up question from the line I want to funny Mohan with Bank of America.
Yes. Thank you thanks for taking the follow up.
Your content I think given around 4% the low end of the range for 2019, how much do you think those this was was timing related versus mix related and are doing 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 I mean, I think the range that we've talked to you about four to six we remain confident at that four to six certainly when you take a year like this year, where you have sort of a decline in production you can get some supply chain effect no different than we highlighted to you sometimes our content has the market was strong.
Is above the high end of our range. So I don't see anything from a mix versus the 4% to 6%.
Changing I actually we feel good with the 4% to 6% like I say on a quarter you may be off a little bit due to supply chain effects I feel pretty good about the four to six as we're going into next year as well as long term.
So, it's creating a buffer versus a negative market I think thats pretty clear with the backdrop for the environment, we've been dealing with and I think our content trend has been pretty consistent with past three to four years.
That gives us confidence of with the wind for sand and also how we partner with our customers.
Okay. Thank you, obviously I won't thanks Wamsi. Thank you I want to thank everybody for joining our call. This morning, and if you have further questions. Please contact investor relations at Ti. Thank you and have a nice day.
And thank you ladies and gentlemen, your conference will be available for replay beginning at 10 38.
Eastern standard time today October Thirtyth 2019 on the Investor Relations portion.
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