Q3 2020 TE Connectivity Ltd Earnings Call
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To answer session to ask a question during that time, you will need to press star one on your telephone keypad.
As a reminder, today's call is being recorded I would now like turn the conference over to your host Vice President of Investor Relations Shoes Sujal Shah. Please go ahead.
Good morning, and thank you for joining our conference call to discuss Te Connectivitys third quarter 2020 results.
With me today, our Chief Executive Officer Terrence Curtin.
She financial officer he Smith.
During this call, we'll be providing certain forward looking information and we ask you to review the forward looking cautionary statements included in today's press release.
In addition, we will use certain non-GAAP measures in our discussion. This morning, 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 unrelated tables, along with a slide presentation can be found on the Investor relations portion of our website at <unk> Dot com.
It is a large number of participants on the Q and 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 parents broken in college.
Thank you she held and also thank you everyone for joining us today to cover our third quarter results as well as our expectations as we look forward.
Before we get into the results for the quarter in the slides I do want to take a moment to provide our perspective what is the same and also what is different from the time. We spoke just on our last earnings call 90 days ago.
So let me first start off with what is the same.
First we do continue to be in a challenging market environment that is influenced by coated.
We continue to prioritize the safety of our employees, while also focusing on meeting the needs of our customers. While they are also navigating this environment.
I think the second key thing that is the same is that our balance sheet liquidity were strong coming into the covert downturn and it remains strong.
We have a strong cash generative business model with flexibility to use our cash we're investing for growth opportunities and improving our cost structure.
Continuing to return.
Capital door owner.
Another key point that is the same is that we continue to execute our cost reduction and footprint consolidation plans.
These plans will enable higher earnings leverage as we capitalize on content opportunities as the markets returned to growth.
And the last thing that we spoke about last call that is saying is that or manufacturing resilience was a differentiator last quarter and you're seeing it again this quarter.
It is enabling us to serve our customers through this volatile environment.
Our strong operations capability continues to set t. apart from other suppliers that we believe will enable share gain opportunities during this call.
So with that being a backdrop of whats the same.
Now let me highlight some of the key differences versus 90 days ago that both he said I'll cover during todays discussion.
Last time, when we spoke in April orders were declining and during that time or customers were shutting down manufacturing plants in Europe, and North American due to cope with.
With the biggest impact being at our market leading automotive business.
We have now seen China return to essentially pre covert levels.
We continue to see improving order trends in both North America and Europe. After the April low point.
Another key differences that in our third quarter, we were looking at strong sequential sales declined marginally P.S. compression when we spoke.
I'm happy to say that our quarter three results came in better than we expected and into fourth quarter. We're now expecting sequential sales growth outdoor auto customers are ramping production.
Along with not only sales increase we're going to continuous expansion of margins and earnings per share sequentially.
And we do believe that our third quarter was the low point for revenue and earnings.
You know to continue to build on auto.
Another key differences that you know auto production was declining to a low point of 12 million vehicles that were produced in our third fiscal quarter.
We're now expecting a 40% increase in auto production sequentially into September.
And we're pleased that dealer inventories remain at appropriate levels that support that production.
And the last key difference I would say versus last quarter.
Is why were being impacted by market volatility in our transportation segment, our industrial and communications segment performed well in light of market conditions last quarter.
And we expect sequential sales to be stable indoor fourth quarter for those two segments on a combined basis.
So I do hope that just starting off by sharing what's the same and what's different from 90 days ago will help frame our discussion today.
One final thing I'd like to cover before we get into the slides is also how our employees and teams have completely leaned in an aligned with Tees purpose and creating a safer more sustainable productive and connected world. During this crisis.
Our teams have been focused on working with our customers to increase production of key elements like for respirators, and ventilators, where our products are key building blocks in their architecture.
And another thing I'm very proud of and that's wasn't employee led effort is that we've utilized our threed printing and molding expertise to supply fish shields for healthcare workers around the world.
And I'm pleased to tell you that we now have produced and donated over 120000 pay shields for frontline healthcare workers in hospitals around the world.
I would tell you. These are just a few examples of what our teams have done but it also gives me confidence in our focus as well as the opportunity of what we're capable as we come out of this crisis.
Overall, we are pleased with our performance considering this challenging in many ways unprecedented environment.
We're also expecting that the recovery will be gradual more like an indoor and trade spend to sprint.
Well I will tell you we remain excited about our content and growth opportunities that we position t. around.
So with that lead in.
Let's jump in the slides.
And if you could jump to slide three.
Let me get into the numbers for quarter, three as well as how we're thinking about quarter for.
For the third quarter sales of $2.5 billion were better than our expectations.
They were down 20% sequentially and versus our expectation, where we thought they would be down 25%.
Excluding auto our sequential sales declined 4% showing the performance of our industrial and communications segment, which deliver results in line with our expectations in a challenging market.
Transportation sales were down 32% sequentially.
Better than we anticipated across each of our businesses in the segment.
And really the supply chain correction, we thought by our customers were less than we expected in the quarter.
In the industrial segment sales were down 10% sequentially with much of the weakness driven by commercial aerospace.
While in the communication segment or sales were up 14% sequentially driven by strength related to cloud applications.
From an earnings perspective, adjusted operating margins were 9.4%.
And I am pleased even with a concentrated drop in our auto sales in our transportation segment, we were able to manage the earnings fall down on sales and achieved the adjusted alive We reported.
Adjusted earnings per share was 59 cents. This was ahead of our expectations due to the management of our operations on lower sales.
In the third quarter, our free cash flow was $280 million with approximately $240 million being returned to shareholders in the quarter.
Including approximately $160 million in dividends.
Year to date free cash flow was approximately $830 million and we continue to expect to exceed $1 billion or free cash flow for 2020.
As we look to the fourth quarter, we do expect fourth quarter sales to be up sequentially by approximately 10% from the third quarter with sales growth driven by the transportation segment as our customers increase auto production.
We expect our industrial and communications segments to be essentially flat sequentially in the fourth quarter on a combined basis.
We also continue to expect to improve our earnings power by continuing to execute the footprint consolidation plans. While we've also accelerate additional cost reductions considering the weaker demand environment that we're experiencing.
Longer term, we remain committed to our margin expansion plans and the expectations that we shared with you.
As we look beyond the current environment. We are excited about how we positioned our portfolio to benefit from secular trends and I'll highlight these as I go through the segment results.
So if you could I'd appreciate it could turn to slide four and let's get into the order trends. So we can share what's on the slide and what we've seen as we've gone through the quarter as well as what we've seen in July.
For the third quarter or orders were $2.4 billion and that was in line with what we expected.
We have seen continued monthly trends improved since the bottoming in April in April really with as our customer shutdown. It wasn't very slow order mountain, we talked about in our last call.
When we look at going into the fourth quarter, we are entering the fourth quarter with a stronger backlog position than we normally have and our July book to Bill ratio came in at 105.
And this supports our view of a 10% sequential growth in the fourth quarter, which will be driven by our transportation segment.
I also want to add some color on what we're seeing in orders from a geographic perspective.
We have seen improvement in China back to pre cobot levels.
And while orders contracted in both North America in Europe across all segments. During the quarter. We are encouraged that the monthly order trends have been improving in those regions since low point in April.
So I'd have asked thank you turn to slide five and let's get into our sales view for the fourth quarter and how we're thinking about.
We are expecting sales to increase by approximately 10% sequentially into our fourth quarter, primarily driven by a 40% sequential increase in auto production.
We expect the auto production to go from roughly 12 million vehicles produced globally in the quarter three to nearly 17 million vehicles produced in quarter four.
When you factor in our content per vehicle this will drive approximately $300 million of growth sequentially.
While this is a sharp increase I do want to highlight that auto production is still well below the 21 million vehicles per quarter that we were planning on our business around being produced well before code.
Beyond automotive, we do have some puts and takes both on the positive and negative side.
And we are expecting sequential growth in some of other businesses, but this is expected to be offset by residual impact of supply chain correction by our auto another customer.
When we think about this growth of 10% sequentially by segment.
We are expecting approximately 20% sequential growth in transportation.
While in industrial will have slight growth, which will be offset by a modest sequential decline in communications.
On this increased revenue sequentially, we expect roughly 35% incremental adjusted operating margins on the volume growth.
Note that the incremental margins do reflect the impact of us working down.
Inventory in the quarter.
As we continue drive free cash flow.
Now with that as a backdrop at the total company level, Let me briefly discuss year on year segment results in the quarter on slide seven through nine.
Along with some key drivers in each of the segments that we expect will fuel future content and growth.
So in the transportation segment.
Sales were down 37% organically year over year.
Declines in each of our business as you can see on the slide.
In auto sales were down 43% organically, which was in line with global auto production declines.
Even with the demand dynamic changes in the auto market due to Cove it.
Our content growth expectations are unchanged as evidenced by the fact that year to date, we are generating 600 basis points of content growth above production.
Which continues to enable our out performance versus a weaker production environment.
The other thing I want to highlight is that while the production of internal combustion vehicles will drop significantly. This year, we do expect production of hybrid and electric vehicles to be up approximately 12% in fiscal 2020 that gives us confidence around where we positioned ourselves around the electric powertrain and the investments we make.
And just to bring this the life a little but on the electric vehicle.
We continue to innovate with our customers as they move to more sustainable vehicles by providing leading edge technology and products to enable and improved performance of both hybrid and full electric platforms.
In fact, we generated approximately $6 billion and design wins for connectors and sensors and hybrid and electric vehicle platforms across every leading OEM.
More importantly, our customers plans remain intact for ebay and hybrid electric vehicles and there has even been some acceleration of roadmaps along these platforms as Oems respond to increase demand and a more stringent regulatory environment in certain parts of the world.
And what we also get excited about as while we talk to you a lot about what's going on in the electrical power train and cars.
It's also important that were taken this technology over to the commercial transportation space as well.
And a key example of how we're doing that there is the applications in our work with Nicola.
Equally as using hydroelectric technology and its next generation trucks and you know we partnered with them to enable these designs as we work with them on their architecture.
You know our products are in various sub systems within the electrified powertrain of their trucks as well as also the various infotainment and driver convenience systems that use high speed data connectivity solutions.
And what's really important about this as we look forward is all these things come together and delivering a class eight zero emission truck with equal or better performance of a diesel truck incapable of a 750 mile range.
And I think it just proves that.
In these markets, we've had leadership and we're going to continue to have clear leadership as we help solve next generation electrical power trains.
So with that on transportation, let me turn over to the industrial segment.
In the industrial segment, our sales declined 13% organically year over year and adjusted operating margins were approximately 13% and certainly impacted by the lower volumes.
It's important that we feel good that we remain on track with our long term margin expansion plans to drive adjusted operating margins into the higher teens in this segment.
During the quarter commercial aerospace and industrial equipment perform as we expected.
However, we did see some declines in our medical business due to delays and elective procedures caused by coven 19.
We do believe this is a short term dynamic in our medical business that is consistent with what our customers are saying and we expect this market to returned to strong growth has elected procedure start to increase.
And just to remind you what we've built a nor medical space is a leading position around interventional procedures.
And we will come back to strong growth because this is a market that we believe long term has high single digit growth.
And we partner with a leading device makers globally by enabling minimally invasive treatment for heart valve retreat placement stroke clot removal brain aneurism treatment and other Chris critical procedures.
And to bring it to life on average 120 patients per minute are treated with medical devices that incorporate our innovation.
We generated over a billion dollars a design wins in this business, which will enable strong growth over the long term.
Let me turn to communications and give a recap of that segment in the quarter.
So in the segment, we grew 4% organically year over year and adjusted operating margins expanded to approximately 16% that was in line with the business model target of the mid teens that we've been talking you about.
Data and devices grew 13% organically year over year due to our strong position and high speed solutions and cloud applications.
In this business, we continue to benefit from the increasing demand for bandwidth and higher speeds in the data center.
Our products and technologies enable 800 gigabit per second performance and with that also the thermal properties that are required in next generation data center for the world's leading cloud providers.
Similar to medical in the past three years, we generate over a billion dollars of new design wins in our cloud business, giving us confidence around future growth.
So with that backdrop, but overall and with the segments. Let me turn it over to Keith will get into more details on the financials and our expectations going forward.
Thank you Terence and good morning, everyone. Please turn to slide nine where I will provide more details on the Q3 financials.
Adjusted operating income was 240 million with an adjusted operating margin of 9.4% adjusted EPS was 59 cents.
GAAP operating income was 134 million.
Included 98 million of restructuring and other charges and 8 million of acquisition Chargers.
We expect restructuring charges to be approximately 250 million for this fiscal year similar to last year.
GAAP EPS was a loss of 18 cents for the quarter and included a noncash tax related charge of 51 cents related to an increase our valuation allowance for certain non us deferred tax assets. We also had restructuring and acquisition and other charges of 25 cents.
The adjusted effective tax rate in Q3 was 15.9% for Q4, we expected tax rate of approximately 19.5%.
Importantly, we expect our tax rate to continue to stay well below our reported HCR for the full year.
Turning to slide 10.
Sales of 2.5 billion were down 25% year over year on both reported and organic basis currency exchange rates negatively impacted sales were 35 billion versus the prior year.
Adjusted operating margins were 9.4% and as Terrence mentioned I am pleased with our overall performance, especially given the over 40% sales drop in our auto business in the quarter.
We continue to execute on footprint consolidation plans and pursue additional opportunities to drive cost reduction we remain committed to our margin expansion goals.
We expect volume growth combined with our restructuring plans to drive adjusted operating margins in transportation to 20% industrial into the high teens and communications consistently in the mid teens.
In the quarter cash from continuing operations was 380 million.
Free cash flow was $280 million for the quarter and year to date free cash was 834 million.
For this fiscal year, we expect free cash flow to be above 1 billion.
In the quarter, we returned 241 million to shareholders through dividends and share repurchases and just as we noted last quarter. We will continue to thoughtfully evaluate the buyback program as we see market conditions evolve.
I now want to give you an update from an operational perspective.
We are currently operate all of our factories around the world as parents mentioned, our manufacturing resiliency has enabled us to support our customers demand through a volatile supply chain environment.
Our inventory position increased in the quarter, which helped us meet customer commitments weeks, but we do expect to reduce our inventory levels going forward normalizing to the demand environment.
Reinforcing our comments from last quarter, we're in a strong liquidity position with approximately $2 billion available to have a strong balance sheet. This allows us to maintain a balanced capital strategy returning capital to shareholders, while continuing to invest to support our growth opportunities.
Now please turn to slide 11 to summarize how we're thinking about the fourth quarter based when everything we've discussed so for today.
For Q4, we are expecting sales grew approximately 10% from Q3 with sequential improvement driven by auto as we mentioned earlier, we are expected approximately 35% fall through to adjusted operating income on that sequential volume growth.
In terms of market, we are expecting global auto production to increase from approximately 12 million vehicles in our fiscal Q3, two approximately $17 million in our fiscal Q4.
We believe the supported by the production ramps of our customers.
Along with the appropriate levels of dealer inventory in China, and North America.
As we discussed throughout the call our portfolio as well balanced to benefit from several several secular trends across our business, including constant growth. While this will be a gradual recovery as Terrence noted earlier, we do expect revenue growth and margin and EPS expansion has demand.
Returns.
So while the demand environment continues to be dynamic, we're pleased with their operations resiliency as well as our ability to keep employees save while continuing to serve our customers. During this challenging time.
We have a solid balance sheet ample liquidity and solid free cash flow.
Which enables us to maintain a balanced capital strategy.
And we will continue to invest.
Growth opportunities across our business.
Also very confident that this will enable us to emerge stronger and more profitable markets to return to growth.
So with that Sushil, let's open it up for questions shore. Jacqueline can you. Please give instructions for queuing next session.
Certainly at this time I would like to remind everyone in order to ask your question. Please press Star then the number one on your telephone keypad.
In order to have time for all questions. Each participant is limited to one question.
I would like to ask a call. It follow up question. Please press star one to return to the Q.
Your first question comes from the line of Wamsi Mohan from Bank of America.
Your line is open.
Yes. Thank you good morning, Terrence really impressive performance on the trough operating margins this cycle.
From a question I was wondering if you could provide some additional color on the order cadence you're seeing and any early thoughts on how this recovery cadence compares to perhaps other auto downturns, you'll see it. Thank you.
No. Thanks, Wamsi, so, let let me spend a little bit more time on orders.
Expand on what I said, so first off one of the things that I think has been unique about this downturn has been production will shut off even when there were still demand and that's very different than any other downturn.
And our orders in the quarter and you can see on the order slot I went through the $2.4 billion and even our book to Bill was very late in the quarter because of the sharp decline in orders we fall in April.
In the Western World, and we saw Asia, and China orders in China. They bounced back in other markets like Japan, and Korea, there's still recovering but didn't go down as deep.
As certainly Europe, and North America. The so when you think about the shape that we've seen and what we're working with our customers on especially in transportation you saw as they were thinking about ramping improvement in May improvement in June and as we shared during the call. You had we had one of five book to Bill.
Well in July and I think one of the keys. When you think about a book to Bill there's a numerator and there is a dominant denominator and the denominator is also strong so it gives us the confidence around where we're telling we think sales are going to be even though we continue to be hana in a very volatile environment.
I think when you.
Think about and let's keep it in transportation first.
How is production ramping.
We do see production getting back to 17 million units, which is pretty consistent with where production was in the second quarter, but it's still below the 21 million units. So it's nice to see our customers ramp.
If you take place it like North America, and China dealer inventories look in line because production was shut down so abruptly and demand continued, albeit at a lower level.
So there that things were going to continue to be watching as we move forward and what has been.
Nice outside the transportation, while there's puts and takes like we covered both Keith and I, while their strength in some markets. It's also offsetting some markets on a weekly comair and I think it that demonstrates how we've improved the portfolio over our time since the last prices, so where we are.
Encouraged by where the orders have been tracking to but certainly it is a continually environment. That's impacted by coded that I think we do believe we'll continue to being a rat gradual recovery as I said I don't think it'll be bouncing back to 21 million vehicles.
Immediately, but we have to see how the world heels on how the economy hits.
Okay. Thank you obviously with the next question please.
Your next question comes from Amit Daryanani from Evercore. Your line is open.
Perfect. Good morning, guys. Thanks, taking my question I.
I guess I had one question on the incremental margins and it's Super early in the West coast on probably doing my math wrong, but.
It looks like you did about 43% decremental margins in the June quarter, and the guide I think is implying about 35% incremental margins I guess ill turn so hey, maybe would be helpful to understand.
Why aren't we seem to see magnitude of margin recovery in the September quarter as we saw the downtick only here just some context and this would be really helpful. Thanks.
Thanks, Amit this is heat.
Good morning. Your math is is correct on the Decrementals in terms of the the magnitude of the sales drop in our fiscal third quarter.
It was about $650 million and clearly the.
Yes.
Guidance, if you will hear in terms of our directional sequential move up 10%.
His place something closer to 250 million or so on the way.
Backup sequentially. So part of it it's just that magnitude of the revenue drop versus.
The smaller initial rebound.
The other thing is to keep in mind I mentioned Jim.
My prepared comments that we will leave reducing inventory in the quarter and that does have some.
Some effect as we speak about the flow through math.
On on how that handles works to our absorption so.
Thank you for the question.
Thank you on it we have next question. Please next question comes from Craig box from Morgan Stanley.
Line is open.
Yes. Thank you question for Terrence just can you talk about the dollar content that you're seeing in designs for each of these versus combustion.
And then just more broadly I know there has been a lot of supply chain disruptions, but what are you seeing from a new design outside of diseases. In automotive are you seeing any stalled programs, where things kind of tracking as you'd expect.
From a new design.
Thank you.
Thanks, Craig you for the question so a couple of things.
One of the things that it's a real positive that we talked about in the prepared comments was where our content holding it and let's face it the content holding and very strong and we have the separation and that is due to the progress MTV and we're getting the benefit of while electric vehicles are up 12%.
Youre seeing that in the content and you see that year to date.
When you and I think the story around content is still the same for us, it's going to be 4% to 6% overtime.
We are proven that through the cycle, which I think is one of things that I think we're going to prove to you.
Through down cycle here that that content story is real and the other thing that I would share with you is how we thought about what that content opportunity is versus a combustion engine has not changed so when you think about full electric.
Due to not only the normal features you have as you get the electrified powertrain and the other products we bring.
And the architecture, we bring we still view that's two lacks our traditional combustion engine. That's around 60, some bucks hybrid electric is about one and a half times. So when you look there that's intact.
That went to the second part of your question about what do we see from customers.
Our customers continue full full steam ahead on the electric programs, but they are making choices and we do see around some areas around autonomy that is being pushed out.
So as they are making their choices as should out there selling less cars producing less cars and they have the pressures of covance, they're making choices and where you see the choice of being May prioritized are very much on the electric powertrain and we have seen some slowdowns in some features and programs around autonomy.
As you always know electric vehicles are bigger content play for us that we shared with you meant autonomy certainly autonomy will continue to be a content opportunities can be longer out and that's what we're saying.
And we did have some program slippage just due to.
How are customers have to work with.
And at the delay some ramps, but thats just temporary.
It's not impacting our content at all so.
Hopefully that helps.
Okay. Thank you Craig cleared the next question please.
Your next question comes from Joe Giordano from Cowen Your line is open.
Good morning.
Joe.
Just curious to that.
The content discussion here.
As you are you talking about a 40% increase in market production in next quarter. How do you guys expect to compare to that and just some of your competitors.
When they are talking about the market over the next three in six months have been pretty pretty conservative versus third party estimates in.
Summer shutdowns and.
Some restocking in China over the last.
Month few months that haven't been like directly related to production. So just curious how you are you seeing through that.
Sure Joe So let me maybe share a little bit about the production environment, then we'll get into because we do believe there is some supply chain work off by our customers. So we do we did say that we think theres going be 17 million vehicles made in the fourth quarter and in China is running about four.
For corn ethane units. So its comeback is no production solid there we still expect that in North America, and Western Europe, Europe, a very deep trough and I think the other key element realizes being a global leader we're strong in every market, which also includes Japan and Korea.
Not just North America, Europe, and China, and while the effect has not been his deep in Japan and Korea Auto production is still a pre cobot levels in Japan, and Korea. So we see that being a gradual recovery back up so that's some production environment that we see and thats really from talking to our customers and the insight.
We have.
But we think about sequential revenue, we do expect an increase they all aligned with our content to the production, but as I mentioned, there is about $100 million that we think needs to work off by our customers.
They ramp down hard and the ramp and upward and from a supply chain that is a lot to happening perfectly so.
As we think about our guide and as I said from our expectations. There's about 100 million that is primarily in automotive that we think needs to be worked off at this moment thing back end normalization. So hopefully that answers your question.
Okay. Thank you Joe create next question please.
Next question comes from Shawn Harrison from Loop capital Your line is open.
Hi, Good morning, everybody Terrence you touched on kind of easy acceleration, but maybe you could speak on kind of what you're seeing coming out of this may be an acceleration of.
Programs and other end markets are businesses are things that just you've seen during Kobe that had you excited and also just.
Side of that kind of incremental margins on the upside as you get through this restructuring are they going to be better than kind of what we've seen or at least anticipating better than what we've seen over the past couple of years as well.
Thanks, Sean and I think when you say what do I get excited about flows Cove at the first thing will be that we'll post covance.
So certainly it's been a challenging environment that we're all living in.
Yeah. The for the first one that I would say and it it's a little bit different than where we positioned TV and also the cost actions I highlight your question is one of the things that we're very excited about in this time is opportunity for just core share gain.
During this time, our customers are making choices they have to make choices as you know they're dealing with the same reality we are.
And during the last downturn, we picked up share in some key markets and I also believe this market as an opportunity for that and I think some of the things we talked about from not only how we innovate how we're proving them through manufacturing, we're going to be therefore, no matter what market environment, where end and also the stability of TV.
From our capital structure that.
Was pre Covance. So that's one thing we do get excited about.
The other thing I would tell you that we're excited about and it goes into some of your cost elements and incremental margins as we're excited we didnt hit this downturn being flat footed.
We talk to you about the work we've had to do and transportation as we were planning around an 84 million global vehicle environment.
That we had cost actions that we're starting that'll come in as we go forward and let's face it will have to do further adjustments to whatever global auto production comes out too.
And also an industry, where we were marching up certainly we have to make some adjustments and some of the areas around commercial aerospace due to the so that market, but I do feel that we didn't hit a flat footed and our teams are embracing the reality of where markets have been impacted.
We're making those adjustments that we have to make to really make sure we serve our customers and also our owner as well.
The other thing I would say that we do get excited about and you see it in the results, which is very different where we position TV.
We have a leading automotive business that we aren't going to apologize for.
The content opportunities, both rowdy TV as well as the returns we get in that business were very strong and they have not changed the return profile.
The other thing I would tell you is you see the benefits of how this portfolios changed.
You see us talking about cloud you Ccs being a target margins and the other opportunities that I highlighted in the script I feel very good about so where this portfolio position Jim were being impacted by cobot hosted our leading business, but we don't feel we should apologise for because it's a global business with a leading position.
And our customers are going to need us more now and we see opportunity in this time as we come out of it and we're going to be therefore.
So I do appreciate you asking that question Sean.
Maybe get away from the current a little bit but I do appreciate the question.
Alright. Thank you Sean we have the next question. Please your next question comes from Steven Fox from Fox Advisors. Your line is open.
Thanks, Good morning.
I was wondering if you just maybe following up on that last question talk a little bit more about your footprint from two aspects one is.
Your advantages versus say the other large sensor.
Like Molex Amphenol for both say et cetera.
Since you highlighted that and then secondly parents and Keith just getting a sense for the endpoint.
Yes.
Industrial business or rather the manufacturing footprint, how do we think about that given your prior comments do we.
Relative to when auto production comes back to prior levels and your content gains how much more would there be to go. Thank you.
Sure. So let me take the first part and then I'll ask hate to take the second part Stephen Thanks for the question one of the things when you think about the footprint.
And one of the things, it's a fragmented space and you mentioned a couple of customers.
It is very important, especially as people are trying to think about where supply chain need to be.
Postcode certainly post other things going on the world.
And how we've continued over the past decade to make sure. We are global while also making sure we're supporting regional supply chains. You. All know we've done a lot of work and it's actually served us extremely well and this time.
So as our customers are really working through where to their supply chains you'd be post coded and certainly to their strategies. We continue to see our global deployment, which is balance to our revenue.
And also how we continue to make shifts to be something that is a differentiator.
So in some cases, we compete against companies that are very regional might be in only a single country and where we're able to flex is very important and I think we prove that during the tariffs time.
And certainly we're continuing to prove it during co bid and I think you saw let him both last quarter in this quarter's results.
As we go forward, we still view, that's the right strategy.
That we're going to continue to make sure we engineer where innovations happening in the world and were innovation occurs and we're manufacturing occurs is not always completely aligned based upon our customer strategy. So it is very important our business model that the innovation and our engineering note or where innovation happens in the world.
We have not seen where the innovation happens in world change.
Certainly there has been more discussion around how does the supply chain more and then we're going to continue to evolve to make sure we service our customers as they see where they want to innovate and make and that will continually evolve supply chain. Some change in today and I really like how we're positioned and how we service our customers, especially in this dynamic time.
So thats the first half heat you want to take the second half around industrials and Steve I appreciate the question.
The industrial footprint, we talked about really going back to two a couple of three years ago in terms of that journey that were on and the number of facilities.
Where they are and everything that is unchanged. We are executing along that plan I will say that.
We're still a couple of years away and partly is because of some of the co bid driven.
Slowdown, particularly in the commercial aerospace, where we're not expecting a recovery anytime soon.
And that does allow us opportunity too.
To continue to streamline that footprint. So we're still a couple of years away, but you will see incremental improvements along the way like I believe you already have.
So I think the next couple of years are going to continue to be very busy both on the transportation side and on the industrial side.
With some of the activity Thats underway.
Thank you.
Okay. Thanks, Dave Thanks, Steve We've next question please.
Next question comes from Mark Delaney from Goldman Sachs. Your line is open.
Yes. Good morning, Thanks, very much for taking the question, let's say mark better under.
Good morning, I was hoping to better understand the thought process about reducing the company's inventory. This this current quarter.
And maybe you can frame it relative to the bookings that are improving and also with the footprint consolidation I think the company would need to carry some extra inventories and able to footprint consolidation. So you can balance some of those sacks with the decision to exit to reducing inventory and provides more clarity on that.
I would be helpful. Thanks.
Sure Mark ill take that questions. The seats, we made a conscious decision in certain parts of the business when things really started getting.
I will say choppier dynamic here back in the spring that.
Our customers are which are which front and center inventory discussions they were still working through exactly what their production plans look like somewhere thinking shorter term shutdown, which then evolved to longer term shutdown.
So.
We're moving production in different places there was obviously.
The opportunity for us to make sure we were there with them and we made a conscious decision to to hold bit more inventory in different parts of the world in different end markets to make sure. We were there now as we see now as we see no a little bit more stability in the order pattern and a little bit more consistency week to week.
It does avail, an opportunity for us to I'll say more normalized now you're absolutely right.
There are some buffer builds associated with factory moves, but some of that was underway here not just starting to hear those past quarters. Some of that's been underway for awhile. So thats already built into our assumption set.
And we'll continue to manage it along the lines of what we see out there with with demand patterns.
But I see an opportunity in the quarter to tune to reduce it.
And we'll execute on that but if we need to make decisions otherwise as the quarter progresses, we will bits. It's all tied to how we think about the customers order pattern and the confidence that we can have coming from their orders from there.
Yes.
Okay. Thank you Mark we have next question. Please.
Your next question comes from David Kelley from Jefferies. Your line is open.
Hi, good morning.
Hi, just hoping you could remind us of your typical sequential flow through in a growth macro and maybe given your cost actions over the last three years. How are you thinking about potential leveraged host inventory work down and we were curious, particularly if we see a gradual market recovery through 21. However.
You're thinking about sequential flow through here.
Well I mean, our sequential flow through if you. If you go back over time, right and I'll say more normalized environment, which we're certainly.
View those days a bit more favorably, but we would can kind of say we are flow through would would be consistently around 25% year over year on that kind of math sequential flow through though can be a bit more dynamic because your cost structure. Every 90 days doesn't move as much as it might year over year now we have taken a lot.
Out of cost out we have a lot more cost centers going to continue to come out that has the benefit for us or simply reducing our fixed cost base as we consolidate plants and so forth and so.
Coming out of this I would hope that our flow through.
Would obviously improve.
Versus maybe normalized times, if you go back over the last couple of years.
At the same time, we're continuing to make some investments to two to grow with our customers as they recover but right now I feel like the moves that we're making we'll have a significant impact on our fixed cost structure, particularly in our industrial and in our transportation businesses and we've taken charges.
Over the over the last two years of about $500 million to enable that now some of that's because many of these plants were outside the U.S. and to tend to have more expensive.
Restructuring cost to do so but the long term strategy is is worth the cost to us. So it will improve versus that 25% I can't tell you exactly when because some of thats going to be dependent upon what will be depending upon where revenue comes back to.
Okay. Thank you David we have the next question. Please.
Your next question comes from deep already had Rick haven't from Wells Fargo. Your line is open.
Hi, good morning.
Can you talk through how European automotive vertical is responding to the green stimulus and other incentives provided by.
Entries there.
So how would the generally weight the sales recovery trend in Europe automotive. Thank you.
Hey, deep its terence.
One of the things should on your question is.
The the you had put in Europe.
Yes, carbon carbon regulations that happened impacting our customers that we talked a lot about pre covance.
And certainly how those regulations have come in.
I think when you really look at what we've seen.
Certainly co that has made it.
Confusing while those regulations are in I think the real bright spot that we see and the growth this year and electric vehicles that 12%. We talk about is almost entirely driven out of Europe.
And if we went back to three years ago, we would have sat down with you in said, China and Asia will be the driver hybrid and electric vehicles.
Then Europe and North America, certainly there isn't regulatory.
Support for North America would always be.
The slowest adoption rate and with the regulations that we have European TV in HCV sales are up about 90% year on year.
So it actually gives us confidence that some of those regulations are gaining traction as in the car sales and also in the production levels and as you all know Europe is.
One of our higher content regions on also higher share region. So it serves very well and we've been investing very much in electric vehicles, all over the world, but certainly in Europe and Asia, it's been very important.
So those trends are helping us on we think that certainly they're going to continue to help us as we go forward.
Thanks for the question.
Okay. Thank you Dave we have the next question. Please your next question comes from Jim Suva from Citigroup investments. Your line is open.
Thank you Terence I believe if I heard correctly on your prepared comments you mentioned.
Guidance for transportation speed up around 20%, if I heard that right.
Right so.
Yeah, and if so.
Then auto production you know I think people are expecting kind of say from 12 billion to 70 million, which is like.
40% are much bigger increase what's what's the reason a rationale to bridge that gap has that inventory digestion or timing and if so does that kind of getting equilibrium. After this quarter.
Sure No good question, Jim and really there's two factors.
When we talk about our transportation segment no different than our quarter, we just handed out.
Auto production was down 40.
The segment was down 30, so there are other things outside auto Thats industrial transportation certainly sensors. So there isn't element now that they want noise quarter light, but the other big part is the part that you articulated.
We do and as I said in my prepared comments, we still think theres about $100 million the supply chain to work all as our customers have been trying to get their component supply chains lined up and Thats a headwind as we go sequentially and a lot of that's an automotive. So do you look at it it is 40%.
In production increase on the 12 to 17.
You also get the $100 million of supply chain more call and then just realize there we have two other units in that segment.
That aren't fully auto so that's really how you should think about.
Okay. Thanks Gents. Thanks ship, we have next question. Please.
Your next question comes from Matt Sheerin from Stifel. Your line is open.
Yes. Thank you Karen I'm, hoping you can give us your read on the commercial transportation business.
We've been in a cyclical downturn for the last few quarters here.
So what's your outlook there has that market bottom to as the commercial as the passenger vehicle market has or is there still some downside there and then related to that the content opportunity I think in that market probably is.
As beneficial.
As it is in the passenger vehicle market.
Thanks, Matt.
You asked about one of our more complex markets and when you look there. It has been in a downturn and we talk about it and when we think about 2020 year were Ed.
Globally, you have construction has been weak.
Truck and bus part has been weak and certainly agriculture 10 weeks. So if you really take the bigger markets there they've all been weak.
And there is different reefal inflection points when you look at that geographically.
Emissions play a very big part into into this market not only what goes on with Covidien. It's one of the things that I think when you go to as we see there in certain regions. It does look like it's bottoming and other areas due to a mission benefits we've gotten it may get a week or so so it's a tale of.
Multiple cities.
The more important thing.
Is where we've improved our content opportunity here.
And one of the things that I think we've done an exceptional job.
On.
Not only in where we were traditionally strong.
In the Us and North America, and Europe, but also in China, I mean, China. This year will be our largest region in our industrial transportation market.
And that's very different than when we did Deutsche acquisition.
Historically, you would have had probably.
China would have been maybe 10% share and now it's our largest reagent really due to how we really penetrate that market taken advantage of the infrastructure spending there and also the emissions evolution.
And that is truly not only a market story, but a content story.
And then even the example, I gave during the script today, where you see.
Some of the progress of where does a sustainable powertrain go a class eight truck.
And I see on total we can range on average three to $400 a content.
Per vehicle, you get really like a three X and electrify.
While large vehicle and they are the things that are engineers are working on.
Our customers and as that become more reality will drive content growth. So it's not only what we see in the auto but also some of those features that trying to be taken over into.
The truck and Boston commercial transportation markets are also benefiting us until we have the leading position in that market similar to automotive business. So it's really about how do we continue to help our our customers as they want to take to the next generations is architectures.
Okay. Thank you Matt.
We have the next question please.
Your next question comes from Cemig GT from Jpmorgan. Your line is open.
Oh, Hi, good morning, Thanks for taking my question I just had one long question on automotive I talked.
Extensively aboard the leverage you have to electrification as a team just curious kind of how to think aboard the portfolio portfolio limitation to autonomous vehicles, as though kind of team overall, even though we're seeing some push outs healed and you mentioned kind of the landscape is good for share gains overall in this kind of right.
We had written but how you're thinking about M&A in this landscape. Thanks.
Well a couple of things.
First off we are exposed both one of the things I think is.
Unique to us.
We benefit from both of those trends in many companies benefit from one of the other.
Autonomy, though has been one when you think about architecture in the car has always been a lower content opportunity versus zeevi.
And we've shared those content charge with you about how much do we get on a content of our $65, which could breaks down between safety applications infotainment and data stack as well as production I mean on powertrain stack.
And clearly the powertrain Sac is always the biggest content for us and that's why we do benefit as the architecture moves more electric.
Autonomy is going to be something that drives content, it's part of our four to six.
But clearly not largest piece of it.
Powertrain has always been the largest piece and we play in all the application in the car just not specific ones.
As you look at M&A I think as we've gone over time, we're going to look where we can add value both through the acquisition as well as helps solve our customers' prop.
And we continue to look at M&A you see for sensor. We finally closed after we announced that last year, that's going to help us from the sensor suite and we'll continue to look at M&A across all our businesses as we move forward to say how does it strengthened us and continue to improve our portfolio and get return for our ownership.
Okay. Thank you so plenty of next question. Please.
Your next question from comes from Joseph Spak from RBC capital markets. Your line is open.
Hi, Thanks very much.
Turns maybe you could just be a little bit more.
Picked explicit about your assumption for North America production on the year over year basis, and this coming quarter because.
Indications are that you know July is you've been flat.
Year over year.
So I just want understand some of your conservatism there and then maybe also you could just clarify I thought I heard you say four and a half nine years in China, which seems well below trend I don't know if that was a slight miss heard or there, but you clarify that thanks.
A couple things you know your four four and a half million for China is right.
And per quarter.
So thats a per quarter number not an annual number so that is where we view China production was in quarter, three and we expect it to be similar in quarter. Four so that that is right for China and when you get to North America honestly, we think north American production is going to be around three and a half million units.
Which is pretty.
Consistent with where it was in quarter one in quarter two of this year.
I do want to I made the comment earlier.
TV we serve.
Every piece of the World in North America is our slowest, whereas our lowest piece of our revenue.
So.
Just remember there is other countries out there that we have very large position and then like Japan like Korea.
In addition to North America, So North America, we expect production to be about 3.5 million units in the fourth quarter.
Okay. Thank you Joe we have the next question please.
Thank you you last question comes from Nick toward.
Donor of summer Longbow. Your line is open.
Hi, guys. Thanks, good morning.
I think.
Getting us dose.
Production numbers I think you on your competitors.
Differ from the third party estimate so I was wondering if you can give us any sense of what is your initial thoughts on on calendar year 21 production I know, we're way too far and visibility is very low, but how do you thinking about that recovery. I think you mentioned you expecting a gradual one do you see a scenario where when.
There you are 21 production goes back to similar levels to 2019, or where you think thats going to take a little bit longer to get there.
I think the one thing you have to think about it and it's the hard thing that we all have to deal with is.
How does cove. It continue to impact that is the thing thats the same and how does that go forward. So we can't comment on 2021.
I think the key is you know you look right now and we are encouraged that production getting back to 17 million units, we have to see that the consumer demand pull through on those cars produce we like where inventory levels are right now, but as this is all ramping I think the first that we have to get there too is.
How does our customers ramp up to 17 million after being at 12, and where the consumer demand goes into next year and I think the baseline you would start lets his work quarter for production side. As you go into next year and you can do scenarios I think point estimates are very dangerous in an environment. Like this you got to be thinking scenarios.
Okay. Thank you Nick it looks like Theres no further questions. So if you do have further questions. Please contact investor relations at CE and we thank you for joining US. This morning have a great day.
This concludes today's conference call you may now disconnect.
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