Q3 2019 Earnings Call
Kind of organically driven by inventoried this talking.
Partially offset by shrank to medical applications.
Also our energy business was flat on an organic bases with growth in North America offsetting declines in Europe .
From an earnings perspective, industrial solutions, adjusted operating margins expand it 220 basis points over the prior year to 16.6%.
Driven by strong operational execution by our team.
I'm pleased that we can still generate strong performance in the score despite a challenging market environment and our plans remain on track to expand adjusted operating margins into the high teens over time for this segment.
So let me turn to communication solutions, and if it's flipped the plates hot.
Yeah flip the page seven please.
Communication sales were down 11% organically well below our expectations.
And it goes back to what I talked about earlier. This segment has the highest percentage of business going through the distribution channel. So there is a greater impact amendment Tory to stocking in the segments.
Adjusted operating margins were 14.9% they declined 70 basis points over the prior year.
Due to volume.
So with that I'll turn it over here to cover the financials recorder, three and I'll come back and covered guys.
Thank you <unk> good morning, everyone.
Please turn to slide eight will and where it would provide more details on the Q3 financials.
Adjusted operating income was 596 million with an adjusted operating margin 17.6%.
Ghabra operating income was 520 million included 67 million of restructuring and other charges and 9 million of acquisition charges.
Last quarter, we mentioned that we were broadening the scope of our cost initiatives to better align the cost structure of the organization with the market environment.
Given the market conditions, we're taking further advantage of the current low and demand to reduce our fixed cost and better wine our footprint with our customers supply chain.
Hence we are increasing our estimate of restructuring charges to $300 million to $75 million for the full year.
This represents an increase of 125 million versus our prior review.
The additional actions are primarily in our transportation and communications segments.
I'm confident that the initiatives we've taken so far this year.
Have enabled margin and E.P.S. resiliency, despite weaker Marcus and we are now further accelerated cost actions to ensure that we can preserve margin any P.S. performance. During this part of the cycle.
As we have shown in the past this will enable us to realize improve margin as demand returns.
Adjust the D.P.S. was $1.50, 6% you every year.
We were able to grow adjusted E.P.S. you every year, despite a reduction of revenue, which demonstrates our ability to execute on multiple lovers.
To drive earnings performance.
Gabie P.S. was $2.24.
For the quarter included in 91 cent tax benefit primarily related to Swiss tax reform.
This benefit was partially offset by restructuring <unk> acquisitions and other charges of 17 cents.
The adjusted effective tax rate in Q3 was 13.6% and for the full year, we expect the adjusted effective tax rate to be roughly 16 and a half.
Suess tax reform results in one time at one time tax benefit accused three but increases are effective tax rate going forward. So you should continue to expect the tax rate for t. to be in the high teens as we move beyond this year.
However, importantly, we expect our cash tax rate to stay well below are reported E.T.R.
[noise] and get you had turned to slide nine.
Sales or 3.4 billion were down 5% you over your honor reported basis and down 3% organically.
Currency exchange rates negatively impact of sales by 123 million versus the prior year.
Adjusted operating margins were 17.6% and our strong margin performance. Despite lower sales as a result of the benefits were seen from proactive cost actions, we initiated earlier this year.
As well as the progress we have made in profitability across all the segments, particularly the industrial segment.
In the quarter cash from continuing operations was 692 million in our free Castle was 515 million.
With 166 million of net capital expenditures.
We returned 307 million to shareholders their dividends and cheery purchases in the quarter and year to date 2900 free cash flow.
Is 928 million, which is an increase of 27% versus the prior year.
We expect that our free cash will will exceed the prior year, even with the increased level of restructuring investment related to our costs initiatives. So powerful story there.
Our balance sheet as healthy and we expect cash flow to remain strong which provides us the flexibility to utilize cash in support of organic growth investments to drive long term sustainable growth, while also allowing us to return capital shareholders and continue to pursue both on acquisitions.
I'm pleased with our team reacted quickly to pull the levers and our business model earlier in the year to help mitigate impacts of weaker sales on our margin any P.S. performance.
But as you should expect we will continue to balance or structural cost actions with our long long term growth investments to ensure sustainability of our business model going forward.
So what that alternative <unk> cover guidance before we get into questions Bank C. and you, let me get and the Guy and so I'll start with the fourth quarter, which isn't on slight 10.
No base of what we laid out and we're seeing an m. more markets and the order trends fourth quarter revenue is expected to be $3.2 billion to $3.3 billion.
With adjusted earnings per share of $1.27 to $1.33.
At the mid point this represents lower year over year reported an organic sales of 7%.
Even with the sales decline, we're only expecting year over year reduction of five cents and adjusted E.T.S.
On $250 million of lower revenue.
Which is evidence of the multiple leverage were pulling in our business model.
Including the accelerated cost actions he just talked about.
Looking at it by segment.
We expect transportation solutions to be down mid single digits organically.
And this is based upon a global auto production environment, which we expect to be down 6% in the quarter.
With our revenue being impacted by supply chain adjustments enlightened further weakening and production trends.
And industrial solutions, we expect to be down low single digits organically with declines in industrial equipment from the inventory to stocking being partially offset.
[noise] growth momentum and aerospace and defense a medical applications.
And then communications, we expect to be down approximately in the high teens as the inventory to stocking we mentioned works its way through and it will impact that segment more than the others.
<unk> turn to slide 11, I'll get into a full year guidance for 19.
For the full year, we expect sales and arrange a 13.35 to 13.4 or $5 billion.
As I mentioned earlier this as a reduction of $250 million from our prior review to to lower auto production.
Driven by China.
An inventory to stocking in the distribution channel.
[noise] our guidance represents the kinds of 2% on on organic basis, and 4% on a record of basis.
With currency translation Headwins $400 million on a full your basis.
[noise] adjusted earnings per share is expected to be in the range of $5.47 to $5.53.
And this is a 10 cent reduction from our prior review.
On a year over year basis, we are expecting adjusted D.P.S. to be up low single digits, excluding currency exchange Headwins of 16 cents.
Similar to court, if we let me get into some color on their segments for the full year guide.
We expect transportation solutions to be down low single digits organically.
And we now expect global auto production to be down approximately 7%.
Versus our prior you are being down 5% with the reduction primarily driven by China.
And certainly this is all on our fiscal period.
Year to date or revenue growth has exceeded auto production.
By the content growth range that we told you in the range of 4% to 6%. So our content position is very strong.
And industrial solutions, we continue to expect sales to be up low single digits organically with grow driven by aerospace defense as well as medical applications.
And lastly in communications, we do expect to be down high single digits organically.
Driven by the Asian market weakness that we've been talking about before this quarter as well as the inventory to stocking in the distribution channel that we're saying that's impacting us here late in a year.
So with that before we go into questions. Let me just recap some key take away that I hope we conveyed during the call.
PERS, we've seen a weakening in the market since the last call and this is driving reduction in our guidance.
[noise], it's driven by two main areas dropping auto production in China.
As well as what we're experiencing through our distribution partners.
As they are to stocking <unk> their inventories.
Secondly, we have positioned to eat a benefit from secular trends such as electric vehicles autonomous driving next generation airframes, as well as interventional medical applications and cloud infrastructure growth.
Which are enabling us to outperform weaker markets.
Thirdly. Despite this market backdrop, we are successfully executing on our strategy.
Driving the multiple levers that we have in our business model to protect our margin and earnings performance suicidal.
And you know lastly goes without saying you know I think we've proven that it's when we've seen markets that are weaker in the past.
We're going to take advantage of these a holes as an opportunity to aggressively go after cost reduction of footprint consolidation activities.
And we're following the same approach and expect to emerge with increase earnings power. When these markets return to growth.
So before I close I do want to also thank our employees across the world for their execution in quarter, three and what continues to be a mex market backdrop.
As well as their commitment to our customers and a future that a safer sustainable productive and connected.
So with us who the Hell, let's open up request alright. Thank you Lisa can you. These give the instructions for the Q. and a session.
At this time I'd like to remind you of your money in order to ask a question Prestart then the number one on your telephone keypad and now you're going to have time for all questions to participate extends into one question.
Like ask a follow up question. Please press star one to return to the King.
Your first question comes from crank hadn't Bach from Morgan Stanley Hairline is open.
Yes. Thank you.
The parents just given that the backup that we're in and just want to get your thoughts kind of as you manage internally you have a number of restructuring programs going on.
But also externally you're you're still looking at kind of pursue and an execute on m. and and and how you balance those things and and what kind of a typical cycle.
No I mean, a couple of things I think.
First of all it goes back to we're very fortunate that we have a very strong cash generation model that you see it with the free cash flow we've generated.
So I don't think as we managed through both of these as well as we returned capital the owners I don't think it's one versus the other.
I think what's really nice about what we've done with our portfolio you see how the content trends, where we position ourselves well you see it even how automotive contents buffering you know a recession, an automotive production that yeah, yeah, we got a little bit of a head take last quarter and China that that made it a little bit worse here.
But I do think when we look at <unk> sensors, and medical which are platform do we want to build on.
As well as areas like hustling that we talked about that scenario, where electric and how do we get into high power in commercial transportation, we're going to continue to look for him an a. opportunities that continue to build on where we have a very strong position. So I I don't think it's one versus the other and I also believe when we get into our cost structure.
I'm pretty pleased that you know we got after it early in the year.
You know, we we been sorted auto production has gotten worse. So we've had to expand some things to make sure. We we take the cost out during the law and even with what he talked about you know what we're talking about and some of the expanded is also you know making sure. We're looking at maybe some opportunities and communications that you know at at higher volumes, we probably couldn't take advantage of.
The only other thing I would add is you know I'm also very pleased that when you think about the adjustments were making the market. There's also things we teed up last year the year before that we talked about about the industrial segment.
And you know you're really seeing how we continue to improve the performance of that segment, how it's contributing and you know they're they're still things that are from some of the investments we made aren't having a payback yet so I think it provides.
No future leverage as we fixed effects cost structure of T.V. and get a better aligned and also a little bit more agile. So I I think you're going to continue to see us balancing both of them and you know I think this quarter is a great example of it.
Alright. Thank you crash crime, we have next question. Please.
Next question comes from games like our from American line or something.
Good morning, everyone.
Hey, David Good morning.
I wanted to dig through a little bit about some of these headwins, they're seeing and the channel it seems to be impacting you a little bit later than some other people.
When I understand if we can <unk>, how your business going through the channels different than other people.
And how long for your products as we go through those corrections and that channel how long does it last for you to to kind of work through that.
Thanks, Okay. So you know David I, I don't know, but.
Other products such you're talking about you know when you think through us.
You know.
Of our $13.4 billion of revenue.
There's a little bit over $2 billion that goes through our channel partners and it's really around the medium to small customers. You know, we we can't directly and we do leverage our channel partners for that.
When you look at it and you sort of take that $2 billion.
Our transportation business as a very direct business. So the channel impact is pretty small when it deals with our transportation segments.
As your deal to that markets I have more pragmatic customer bases, you know you get that in our industrial equipment.
Area, that's being impacted by you're also seeing it in our communication segment.
And you know what we were seeing was actually our business through our channel partners have been saying pretty stable at around the orders were running around $500 million per quarter about the last six quarters and you know this past quarter in the June quarter at step down and we expect at a set down even further and there's been some announcements out there.
Typically that's getting aligned more with you know slowing us on the market.
As well as I think we're also being impacted that some of the channel partners due to lead times and other product categories in certain semi categories and passes probably got a little bit ahead of themselves and making sure they had enough supply.
That all being said you know these types of supply chain adjustments you know while ahead when now.
Typically take four to six months to sort of work through you know clearly we're in the middle of it and I I think you know they are temporary effects.
So they or something you know, we're gonna have to work through here over the next couple of quarters.
And you know that'll be a town when at some point, depending on where markets are.
And we're in the middle of it.
So you know wallet mamie layer versus other categories. You know it is we started to see a new orders in quarter three.
It'll be with us for a little bit and then it'll be a tailwind at some point when it when it cracks and getting normalized.
Thank you. Thank you David Thanks, David maybe the next question. Please.
Hi next question comes from the line of Sean Harrison from long Bow Research your line or something.
<unk> morning Terence.
Hey, Shaun good morning, <unk>, the the auto sector in terms of the step down here, particularly led by China, but there any leading indicators that that you're looking to track the inventory be it.
Other factors within China or globally that will tell you we've reached the bottom.
I'm not looking for you to guide the December quarter, but just to speak about it in some sense of whether we could reach the bottom end of December quarter in calendar 20 could represent a more positive environment.
Sure.
So you know as everybody heard us talk last quarter, we we sort of knew when we were getting the stabilization and auto production and I I think I haven't said on this call or in some some conversations at conferences, we sort of thought we were running around 22 million units of cars being produced per quarter, and we thought we were stabilizing.
And to the comments I made on the call what we actually saw you know and sort of.
You know after earnings use all China car sales were down mid mid teens, and certainly that that has impacted China auto production.
And you know I would tell you right now global Automotives running around 21 million units versus the 22 million units. So that's impact caused by about 2 million units coming out.
That all being said we are looking at him and Tories in China inventory days on hand in China. In addition to the sales there I'm 50 days on hand, that's a little heavy I wouldn't say, it's horribly heavy but they're the types of things both on the car sales as well as the M. and toys, we're looking at.
And you know right now I wouldn't tell you were sort of assuming over running around that 21 million.
Unit rate.
China typically has a scrap up in the first quarter in production.
Yeah, I guess, that's the real uncertainty I would say, where we have to continue to watch where to car sales and inventory levels are before we would tell you where we should be but right now our mental model was sort of thinking they're saying how do we plan the business ramp 21 million units globally.
Per quarter in Automotives, how we're thinking about it and also how we're adjusting our cost structure and some of the things he talked about.
Okay. Thank you Sean we have the next question. Please.
Our next question comes from the line of lumps email him from Bank of America Merrill Lynch.
Yes. Thank you parents you open the called talking about.
Revenue growth in in some of the some of the headwinds here in in 2019.
As we think about adjusting to these lower organic growth levels in fiscal 19 can you maybe give us some sense of how we should think about.
You know heading into fiscal 21st quarter, how we should think about seasonality off of these lower fiscal four q. levels and and how do you view the odds of continued headwinds going into fiscal 20.
Thank you for the question laundry, there's part of this you know I'm gonna.
Not answer because we're we're not guiding to 20, yet [laughter] and certainly as we get more intelligence, we well I I think there are some things that I would highlight though to your question.
I think you know there will be things like auto production that that's kind of has been fluid I think we have to continue to keep fluid.
But I would also say when you think about that you know all those point I sort of talk around the 21 million unit says you know, we're still position ourselves around that 4% to 6% content element. So you've seen it this year, even at while the market's been worth I think you're going to continue to see that so as we picked production points and you you do your analysis.
I do think you're going to see those benefits around transportation, certainly you're going to see it and you're aerospace you're seeing it and medical.
So I think that's that's first of all I would say as you work your mouse is important.
But I I'll go second things, probably going back to what David said.
Channeled the stocking is a temporary item and I I think there's going to be a lot of data points not only by us, but there's some out there. This will normalize. So what is ahead when that we haven't quarter for that will go into early next year, you know certainly that will turn like it typically does.
And the other thing I would just say as we go into next year and it's less revenue as you know there's lots of leverage that were polling and you know where they hit in the year from a cost perspective will be at different points, depending upon we initiate him, but I do think as we try to manage through this week. We have many costs leverage that we're working that I take no different as we just played in for three and a quarter for we're going to continue to be working from an earnings perspective.
Now that that being said you know there is a <unk> point in your question around how do we see seasonality, let's face. It this year seasonality was not normal.
You know quarter three quarter for typically our strongest supporters of the you're a quarter for you know it's going to be all weekend. So.
I don't think you can take the normal seasonal patterns that we have and say you know take quarter one's going to be down mid to high single digits and a quarter for I I think you have to adjust for some of these facts I should look at that and certainly will guide more as we talked in 90 days, but I would just not say go blind seasonality because these markets are typical either.
So.
A longer answer them, probably wanted but hopefully that gives you. Some insights as you think about things and we'll give you more input and 90 days.
Okay. Thank you Wamsi equip the next question please.
Our next question comes from the line of Scott Davis Familia three search your line is open.
Hey come on guys.
Hey, Scott.
I.
I know this might be hard to to to answer and I know you're not given 2020 guidance, but can you help us give a little granularity on the restructuring you know and as far as kind of payback is.
And sometimes you do restructuring in Europe , and it takes a few years to see an impact, but you do it in the U.S. and its immediate and.
You just help us understand it either directly or or an actual kind of two one for 2020 would be helpful.
Or at least some color around where the restructuring is.
Super.
You know I, just got I think you're you're you're right on in terms of that some of the non U.S. restructuring does have a longer cash on cash return.
In addition to the the just the length of time to when you're taking factories off line to to from the point of initiation until you. When you realize in savings I think it's fair to say of that 375, there's a blend but on average it's about a three to four year payback, so that would kinda stupid towards a number of annualized savings as part of that in steer you towards a jurisdictionally work a lot of this activity is taking place.
Okay. Thank you guys.
Thank God. Thank God, we have the next question. Please.
Our next question comes from the line of <unk> from Goldman Sachs Your line or something.
The morning, Thanks for taking the question I was hoping we could go to I mean, you could draw a little bit more into China regions, specifically in with you know the the decline in orders that you saw there and reverse all compared to what you'd been seen.
Last quarter is that all just macro and weakness or do you think any of this is due to the the trade environment and potentially a more difficult region for us companies to do business now thanks.
So a couple of things certainly the global trade environment I think just creates an overlay around economic conditions period I I don't think it's only one one or two countries impacts everything. So I do think that has some impact on the slower economic conditions, because places like Europe ships into China, and so forth and that impacts us in many places.
You know and more back to the question that you had.
You know when we were sitting here last last quarter, and we saw an ice increase in our China business.
Totally yeah, our orders.
You know when you know almost 10% going from our first quarter second quarter and you know it was primarily driven by transportation.
And you know it didn't revert back I would say in our industrial businesses.
It's has faced any adult a constant rate I once had to accelerating but it sideways fill in those are industrial businesses.
Its fangs spending.
And you always more flat year on year, but auto has been the big bigger piece for US is that production has declined I don't think when it comes to automotive and our position we have an automotive I don't think it is impacted by.
Or or.
Or U.S. attachment.
The other thing I would say that places that I would say have gotten you know a little bit weaker is around the communication equipment. That's an area and also in appliances and C.S., we've been talking about that all year, they've been environments, where they have been slow.
So you know any industrial space and it's been more stable and sideways.
But really the slowing we saw versus last quarter is really in our transportation and communication segments, not as much or industrial space.
Okay. Thank you Mark we had the next question please.
Hi next question comes from the line of G.O.G.I. channel from Carolyn your line or something.
Yeah, it's more.
Hey, Joe.
I know, it's I know, it's hard to do for you guys, but is there any way to kind of at least triangulate how much you think on the communications jam up on the on the supply side is due to like very specific temporary issues with like while way in restrictions on on certain entities.
I would tell you when we think about the supply side of that I don't think channel has anything to do with that.
You know our channel.
Business, you know large customer we service directly.
So when you sit there and the portfolio setting or communications segment is a portfolio set that goes into a lot of different applications, not just high speed and and that's why it doesn't have a big part that goes to the channels are in both our clients business on our.
D.N.D. business their basic building blocks that can be used in a lot of different areas. So.
When to try to tie what's going on with the channel to Telecom China.
I I think that would be.
A leap too far.
They're also seeing it in industrial into our industrial markets as well.
I'm, sorry, I'm sorry, Joe.
Yes. It obviously, it's like an indirect route I'm just curious if there was any way to kind of like close that loop there.
No I mean, I I think the other thing that you have I don't think you can close that loop. There Ah. Okay. You know there has been some slowing us by certain other telecom equipment makers and certainly cloud spending which was very strong growth last year. So we're all going to have a lower rate. There's lots of those other factors I would also say impact that but I wouldn't pie completely back to walk away.
Nice okay. Thank you Joe. Thanks. So we have the next question. Please my next question comes from the line of Christopher Glenn from Oppenheimer Your line or something.
Yeah. Thanks, good morning.
You know the the the headline China numbers are one story, but maybe electric vehicles well different story tickets up 50% year to date, just wondering if that aligns with you know you're thinking.
Do you do you expect that penetration to accelerate what what are you learning along that curve from your.
Kinda specifications cycles with the customers there.
[laughter] certainly while China auto production is down electrical vehicle penetration you know.
You're exactly right.
If you look at it if you take full full electric plus any hybrid you know it's continues to accelerate even though.
In a car production is down so that is not changing certainly.
<unk>, it's growing while <unk> overall production is down and our design wins around those electric vehicle continue to be very strong and then you know let's face. It is something when we think about electric vehicles.
Electric vehicles are going to be driven in the world by boat.
China and Asia.
As well as the.
C.O. two requirements that you have in Europe as well so when we think about electric vehicles someplace, you need to be positioned and we are positioned very strongly.
Is in Europe . It is in China as well as you know in Japan, and what's really good at what position as well with our customers and you know the one thing that we always watch in slow markets is where is our project momentum do we see project momentum slowing we are not seeing any change in the number of projects, we have with our customers in any of our businesses and certainly any automotive Spain. There continues to be the March between electric vehicles and autonomous featured by all our customers that certain those market. So.
We don't see any change in that certainly the global productions impacted that's more impacting combustion engines.
Okay <unk>, we have the next question please.
Hi next question comes from the line G.M.C. lot from City Group investment your line is open.
Thank you very much.
Clear 'em up automotive side, which is good but the communication inside you know as one of the few questions and what we think about that.
If my memory is correct, you're really not not a smart phone.
Supplier or component to smoke. So I assume this is more like on.
<unk> routers, which is those type of bigger box you're devices in with five G. people down I guess, a little surprised to see this type of slow down so can you help us.
<unk> order build up like last quarter in excess.
Okay.
Or was it just the no trade wars, where people over stock and now they're talking or was it.
Okay demands slow down in the communications segment. Thank you.
Hey, Jim to to fold and you were breaking up a little bit on on your cell. So.
First of all I would say when you think about our communication segment.
You know, there's a chunk of it which is that an devices and then there's another chunk about appliance. So certainly we can we need to look at to your question data bases, you're right. You know, we we do not plan smart phones. So you know our products go into base station equipment goes into traditional switches like you mentioned and when you look at at what we've seen is we have seen some of the cloud spending not growing as fast as ranges from last year. So when you're talking about something that grew you know 20, 30% of spending and then it grows 10.
You will have adjustments in supply chain I do think that is working through.
[noise] on five G. five g. when you think about it certainly were designed and and you know China's granting licenses and you know we're positioned very well there but that is still early stages of how much does that contribute to T.E.'s revenue. So they're typical <unk>, we're going to get.
<unk> from suppose around clouded poggi, we're in good shape.
The other thing I would just say around or D.N.D. and it goes back to the channel on that I made.
You know typically are products in D.N.D. or very much next to semiconductors and passes I do think some of our partners and also other to your ones in the supply chain, probably got a little bit ahead of themselves as you said.
And they're correcting to get to more normalize to end the man.
There's there's not a content or share element.
It's more you know we're going to have to get hurt here, a little bit with the I'm, a tory to stocking, but that will normalize and I feel very good about where we're positioning cloud in five Gee.
But certainly we don't plan of cell phones.
Okay. Thank you Jim we have the next question please.
Our next question comes from the line of David Kelly from Jeffrey's your line or something.
Thanks, I I just have a quick follow up on your earlier comments on China vehicle inventory levels.
If we were to see some hypothetical vehicle demand injection in China can you talk about your ability to ran back up to support production growth given your presumably running leaner with ongoing costs actions I think clearly no one's ready to call for a rebound yet, but we're just trying to get a feel for if there might be an operational lag and impact on short term margins when production does ultimately rebound.
No.
Clearly were as we do the actions that he'd talk to you about we are also being very focused on how and those core areas that we keep production.
Flexibility and Yeah, you know what we had was in some cases, we were playing catch up as the volume was going very strong we'd talked about last year. We feel we have enough capacity you know if we do get a jump back in there that might be a little bit of a lag, but we feel very good with how not only what we do but also are extended supply chain can do.
So that is not something we worry about and certainly if it came back stronger than we thought.
You know we would also have to look at how we time some of the restructuring actions that he talked about.
Okay. Thank you David Queer the next question please.
Our next question comes from the line of deep that rank event from Wells Fargo Securities airline is open.
Good morning, all.
The morning people here I think it's a question for you how do we think about contribution margins given that weakness in in markets will be offset by some of the costs I can do seem to be.
In our taking new actions you know every few quarters now.
What you'd expect the average contribution margin to net out on the corporate average line broadly and how does it compare across segments like about below corporate <unk> I think that will help us be said some of my expectations. Thank you.
[noise] well thanks for the question D., but.
Let's just let's take a take a you know a bigger view of this first right I mean, we've seen demand tick down pretty considerably throughout the year on auto production and tear and said it's kind of settled in around.
You know 21 million vehicles, a quarter, which is you know in a runrate, that's that's pretty significantly less and moving around in prior years.
Data veils us the opportunity to get after some things on the cost structure.
For transportation.
Maybe in jurisdictions that we can better aligned with new locations lower costs locations, and so forth closer to where our customer supply chain. It exists. So that's a real opportunity for us.
On that front.
And then communications is the other area that we have we going to do some restructuring in as you'll recall transportation to the first half or fiscal year was running quite strong we've seen based on them. All the comments made earlier this call as that's tick down it's pulled forward some things that we would've done maybe in future years anyway, and so is we're starting to look at those types of actions.
You'll start to see closer a margin flow through you know our normal margin flow through between 25, and 30% I will tell you that when you see.
The types of of numbers, specifically within communications drop.
At that rate.
It's going to take a little while to get back to those types of contribution margins I just mention because you're still having a cover fixed costs and so forth.
Having said that I don't want to get too hung up on percentages here because being C.S.B. in our small a segment we could be talking about a few million dollars can swing a percentage more dramatically than really told what the real material impact is to T.V.. So I think we've got to be careful with that now industrial is we've tops pretty openly about industrial being on a multi your journey to come out of this to to to work its way towards the high teens.
I would tell you that we're probably a little ahead of land than what we went into the year with went into the year, assuming that our industrial margins would be roughly flat, while we execute on some blueprint moves that have been announced in we're actively working through but the team has done a really good job of getting some of those savings out a little bit faster than the planned. In addition to just kind of normal belt tightening and so I feel good about that in terms of that I'd say industrial is still got still has a couple of years left of things of activity. That's doing based on the the time you to some <unk> footprint goes and so we're continuing on that on that journey in terms of that so I mean, if you kind of backup from all that we're really using this opportunity in this part of the cycle to get out fixed cost that's what we've lowered the overall restructuring and come out of this one market demand does improve we'll have a linear structure and obviously you'd get hurt.
Do this one time when we're in periods of higher growth. So.
I hopefully that answers your question, but.
Happy to take any problem.
Okay. Thank you, Dave and we have the next question. Please Hi next question comes from the line of Stephen Fox from Cross Research. Your line is open.
Thanks, Good morning, I'd like to follow up on it.
Hi, I guess the confusion I have in terms of all the charges you've taken say over the even your last year or two last five years is trying to discern tactical from strategic he made a good case for why industrial is strategic but in the case of some of these latest charges. How do we know that you're not sort of cutting into the the bone a little bit too much as opposed to fat and how do we see an end to sort of the the charges if to me and Steve sort of at these levels. Thanks.
I think it's a Stephen first of all I think it's fair question and we have you know as as the the businesses evolved we have continued the journey on the on the footprint side of things as you mentioned I think industrials pretty clear in terms of what we laid out here in the last 18 to 24 months and and where we are on that journey and you've seen those in the end the numbers.
Certainly there's some.
Tactical things that we will be doing within the C.S. business, but again, it's the smaller segment and I don't want to get too hung up on a margin rage. There in terms of what the target is we performed very well and that segment, but you know a couple of million dollars can swing u. from mid teens to low teens or the other direction to high teens. So I want to be careful in terms of that what we're doing on the transportation side <unk> more mirrors, what we're looking at from industrial.
Which is taking advantage of this these are these are locations that you know on a clean piece of paper, we would probably not having those jurisdictions anyway. So this is more of a of a couple of your journey in terms of that process to get the the operating footprint, where it needs to be I'm not worried about cutting into the bone and I say that because you know the long term business models of all the trends that we enjoy whether it's on the auto side with hybrid and electric or the overall factory automation side with an industrial and everything they're all the rage stuff is going on a medical or aerospace and defense. There's nothing that we're going into in terms of cutting that we don't have a redundant capabilities are opportunities to move into existing locations. We're not having to go do a bunch of greenfield to do this.
And we're not taking a lot of cost out of high growth higher growth areas to recycle like places in in Asia, and so forth, where we do expect for instance, hybrid and electric to be more prominent piece. There. So as I look at it I'm not worried about cutting then to that I view. This is more of an opportunity to get some things done that it would be harder to do if we're at a higher growth environment because in those cases, you're just trying to keep up with customer demand.
Great that's great.
Very much.
Right.
<unk> next question. Please our next question comes from the line of William signs from Sun Trust. Your line is open.
Great. Thanks for taking my question, if we think about the below seasonal trend that we're seeing guided for in Q3 overall I wonder if.
We could hear your take on the trends if he were to allocate them to the direct business versus the channel how much of the weakness in the channel and how much of the direct business might have been much closer to two seasonal if we were to look at it carved up that way. Thank you.
Well, let me talk to rationally. So a couple of things like you know I highlighted our book to Bill overall is accompanied 1.98 in our channel It was 0.85.
So I do think you know.
Channel has been a steeper impact and we've talked about it.
But you do sit there and you know there has been slowness no auto production slowness has nothing to do with the channel.
So I think when we talk about how we frame reduction and guidance.
You know two thirds was driven by transportation and a slower China.
And certainly seasonally you know I I do think that's have normal that China would have weakened in the quarter were him.
But the other one third is truly the channel that 250 decline. So I, it's different by markets, but I would say you know channel correction happens due to them adjusting to and markets that are happening.
And you know clearly they're seeing some slowness saw you know the it is deeper in the channel certainly and that's an impact we're gonna have here like I said not only a quarter for to probably go into early next year.
<unk>, Yeah, certainly we've seen that much slowness and our direct customers as well.
But not to the extent of shape.
Thank you.
Thank you well clear of the next question. Please.
Again, if you'd like to ask a question press Star then the number one on your telephone keypad. Our next question comes from the line of Matt Sharon from Stiefel your line or something.
Yes. Thank you.
No. The question on the industrial solutions segments, specifically, the strong growth that you're seeing in the in the military aerospace a marine factor, which has been up a double digits.
<unk> what are the drivers their parents and and what's the outlook I know we've heard from other suppliers at the defense and aerospace market continues to be strong I know, though there's also some distribution exposure there too it doesn't sound like there's there's inventory issues. There and then just on the margins. He if you did talk about the drivers <unk>, a really strong margin expansion.
<unk>, but given and and so I guess one question is is the mix of business. The stronger meal Arrow is that a contributor to margins or is it mostly the cost cutting actions that you talked about.
So let me take the first half and I'll, let him take second now.
So you know one of the things that we talk to you all about for for a long time is how we position or <unk> or sounds very well from around commercial aerospace and certainly the content opportunity. We have there and we've laid out for you moved from what happens and <unk> and also regional jet.
And you know while airframe production has been pretty setting up a little bit I think you're really seeing the benefit in the commercial areas may side from those <unk> momentum that we've had very broadly across industry and it's really credit to our team about tree looks like.
In addition, you know this year, we're getting the kicker about defense spending and I think similarly, while defense and and I think it's pretty obvious when you look at the defense companies you know that they are in a good cycle.
But it's also an area that we do have a nice position our position between commercial aerospace and defense is pretty balanced.
And we're getting the benefit on both sides and you know the defense is also driven by government spending some and we're benefitting from that.
But that is also a content play as well when you think about communication you think about power distribution are all the next generation hardware, that's going on defense, we benefit from that as well and that's a content play. So those two are very important.
To your point Matt.
You know part of that business. Those go through the channel that is not seeing the stocking you know that as a market. That's you know still saying very good there and you know is one of the things that's buffering in the industrial segment. The slowness that we have to do the talking our industrial equipment business and the channel outlet heat talk about them aren't inside of it.
Yeah, Matt appreciate the question so.
On the margins side, you know when I think about industrial and when when we're internally going through our processes, there's not a tremendous amount of mix that plays into it. There's certainly some pieces that have you know a little bit better flow through in terms of particular p. product lines, and so forth within each individual business shouldn't but.
I think it's pretty well balanced in terms of you know, we make a little bit more money in certain areas, a little bit less than others, but it's not a wide.
Swing there in terms of as you can imagine obviously you know I think part of your question was you know the aerospace and defense were obviously when you're growing type of organic numbers that were seen out of aerospace defense business. You would expect nice flow through and we are certainly see that in the businesses is converting the revenue into profits nicely as you would expect them as they blow past some of their fixed cost base.
But there's other areas as well that are showing some resiliency on the margins, particularly our energy businesses have they have initiated and and nearly concluded on some facility restructuring. So there's a lot of different moving parts. There is a balance between where the growth is as well as some of the footprint consolidations.
We had talked some earlier in the year about this being a year, where they're not going to be as much I'd say, we're a little ahead of of our of ourselves as I mentioned earlier the call and we'll still see some periods in court from from time to time, a quarter or two where you'll see a jumped down a little bit as you have do give costs, meaning you're moving out of one facility into another and you might have done it up costs for you know a period of a quarter or so during any particular facility rationalization. So that will happen from time to time, but we're very pleased with the progress that the team's doing and and what their what their current outlook is as they before.
Okay. Thank you, Matt and I'd like to thank everybody for joining us. This morning for a call. If you have any additional questions. Please contact investor relations that T.E.
Thank you and have a nice day.
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