泰科電子 (TEL) 2017 Q2 法說會逐字稿

Welcome to the Q2 2017 TE Connectivity Earnings Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded. And I would now like to turn the conference over to the Vice President of Investor Relations, Sujal Shah. Please go ahead, sir.

Good morning, and thank you for joining our conference call to discuss TE Connectivity's second quarter 2017 results. With me today are Chief Executive Officer, Terrence Curtin; and Chief Financial Officer, Heath Mitts. During the course of this call, we will be providing certain forward-looking information, and we ask you to review the forward-looking cautionary statements included in today's press release. In addition, we will use certain non-GAAP measures in our discussion this morning. We ask you to review the sections of our press release and the accompanying slide presentation that address the use of these items. The press release and related tables, along with the slide presentation, can be found on the Investor Relations portion of our website at te.com. (Operator Instructions)

Now let me call the -- turn the call over to Terrence for opening comments.

Thanks, Sujal, and thank you, everyone, for joining us today for the earnings call. While many of you know me well, it's very exciting to be holding my first earnings call as CEO and sharing our strong results for the second quarter as well as improved growth and earnings outlook for the year. In the second quarter, we delivered sales of $3.2 billion, representing 8% organic growth year-over-year, and we experienced growth across all regions. We delivered record quarter 2 profitability, with 170 basis points of adjusted operating margin expansion year-over-year and adjusted earnings per share of $1.19, which was up 32% over the prior year. Now this second quarter performance was ahead of our prior guidance due to the high organic growth, as well as strong execution by our teams.

All of our segments contributed to our sales growth, and margin expansion was driven by our industrial and communications segments. Based upon these strong results and our view of market conditions for the second half, we are raising the midpoint of our revenue and adjusted earnings per share guidance to $12.7 billion and $4.62, representing 6% organic revenue growth and 17% earnings per share growth, respectively.

I do want to take a moment to reiterate the key pillars of our strategy, that we have discussed with you in the past. First is our focus on harsh environment applications, which demand high levels of engineering and manufacturing excellence and provide competitive differentiation. Second is our TEOA operating system that drives customer service enhancements and productivity that reduces our fixed cost footprint. And third is our consistent execution of our balanced capital allocation strategy, which enabled us to make strategic acquisitions that have expanded our portfolio, while consistently increasing dividends and repurchasing our shares. Also in addition to these three, we are also focused on ensuring that we align and enable our teams around the world to be focused and executing towards these pillars. With our portfolio focused on the harsh environments, I'm pleased that our business is now firing on all cylinders with revenue and profitability growth across each of our segments. Our second quarter performance and increased guidance for fiscal 2017 demonstrate successful execution on our strategy, and we believe this foundation will continue to drive growth ahead of our markets, deliver improved financial performance and generate strong returns for our owners.

If you could, please turn to Slide 3 to review some additional highlights from the second quarter. As I indicated, we'd growth across all segments and regions, with particular strength in Asia where our organic growth was 16%. We delivered 10% organic growth in our transportation segment, with auto and Commercial Transportation driving significant performance above market growth rates due to content gains. In Industrial Solutions, markets are improving and we generated 3% organic growth, that was in line with our prior guidance for the segment. And in the communications segment, sales increased 9% organically with growth across each of our 3 business units.

At the company level, adjusted operating margins were 16.6%, with year-over-year expansion driven by the industrial and communications segments. As we look forward to guidance, we're raising our organic growth expectations from 4% to 6% for the year, with second half growth expected across all segments year-over-year. Adjusted earnings per share, we're raising from $4.40 to $4.62 at the midpoint, reflecting higher growth and a slightly lower tax rate.

Heath and I will go through the details on the guidance later in the call, but as you think about our revenue guidance increase, please keep in mind that we had a stronger-than-expected second quarter and this outperformance explains about half of the full year increase. We're also seeing a strong momentum in orders, which reinforces slightly higher growth expectations for the second half in our Commercial Transportation business and our communications segment, along with a slightly reduced headwind from FX versus our prior guidance view.

Before we get into the segment results and updates, I appreciate you turn to Slide 4, so I can cover our orders for the quarter, which will help provide context for the trends that we're seeing and our expectations. Demonstrating continued momentum, our total orders were $3.4 billion in the second quarter, and if you exclude SubCom, which is what is shown on the slide, orders were $3.2 billion, which were up 16% year-over-year and up 15% organically. We saw organic order growth across all of our segments in the second quarter, as well as growth among all regions. By region, and excluding SubCom, orders in the Americas grew 14%; in Europe, they grew 13%; and in Asia, they grew 18%. I do want to remind you that these growth rates are somewhat amplified due to a relatively weaker comparison versus last year's second quarter, when we were contending with both inventory corrections and certain regional weaknesses.

By segment, in transportation, orders increased 17%, with growth in all regions. Industrial orders grew 22% year-over-year due to the Creganna and Intercontec acquisitions, while orders organically were up 8%.

In the communications segment, excluding SubCom, we saw year-over-year organic orders growth of 17%, including 9% growth in Data and Devices, that's from our high-speed connectivity focus, as well as Appliances orders grew 27% organically, reflecting continued strength in share gain in Asia. When you look at our sequential orders growth in industrial and communications, both of these support our growth outlook in the second half.

So please turn to Slide 5. So I can discuss the segment results, and I'll start with our transportation segment. Quarter 2 was very strong quarter for transportation, with sales growing 10% organically year-over-year and operating margins in the range of our expected levels. Segment sales exceeded expectations due to auto demand in China, where we saw another quarter of production growth versus the prior year, and growth from our leading position in the heavy truck market.

Our auto sales were up 9% organically, due to growth in Asia and in Europe, and auto production growth, we estimate, was up approximately 4% in the quarter, and we continue to outperform the market due to content growth and share gains. For the full year, we expect global auto production to be up 2% to 3% based upon the stronger-than-expected first half production. With the strong production that we experienced in the first half, we expect the estimated growth for the year from a production perspective really to be driven by the first half production growth.

Looking at the second half, pretty much implies the flat to 1% production growth in the second half, which is what we expected when we started the year, and we expect the production growth to moderate and really has not changed from our prior guidance.

Turning to Commercial Transportation. Our business delivered another very strong quarter as this business continues to outperform the market. Organic revenue growth grew 21% driven by our strong global position, strength in the heavy truck market in China and content growth due to adoption of new emission standards and regulations.

In our Sensors business, we had 3% growth organically with growth driven by transportation and getting the benefit of improving industrial markets. Adjusted operating margin for the segment remains strong at 19% and was where we expected, and we continue to support a robust pipeline of design wins that will generate future growth above production. As we've indicated to you before, you should continue to think of steady state transportation operating margin as 20%, plus or minus a point.

If you could, please turn to Page 6 to discuss our Industrial Solutions segment. Sales in the segment grew 16% on a reported basis driven by Creganna and the Intercontec acquisitions and 3% on an organic basis, which was in line with our expectations. We are very pleased with the growth and performance of our acquisitions and they are contributing favorably to the segment, both on the top and bottom line.

In Industrial Equipment, we grew 4% organically, with increased demand from factory automation applications, and we're seeing the benefit of that in all regions. In our Aerospace and Defense unit, our Defense business grow organically, while our commercial aero was negatively impacted by timing of programs in the quarter. Our Oil & Gas business has now stabilized and is no longer expected to be a headwind to revenue or operating margins on a year-over-year basis.

Our Energy business grew 7% organically driven by strength, both in Europe as well as in Asia. Adjusted operating margins for this segment increased to 130 basis points to 12.7%, as we expected, and we believe operating margins will expand from this level in the second half with revenue growth. It helps show the progress, excluding the impact from the acquisition-related amortization, adjusted EBITDA margins expanded 160 basis points to 16.9%.

So please turn to Page 7, so I can cover Communications Solutions. The second quarter really demonstrates the progress that we've made in the segment. We had 9% organic growth, and continued momentum in all 3 businesses. Segment adjusted operating margins expanded significantly year-over-year and improved versus last quarter, and now, they are at 15.2%. Data and Devices reported another quarter of organic growth, as we continue to benefit from the high-speed ramps at cloud infrastructure customers. As we discussed last quarter, growth in this business is the result of our multiyear transformation to focus the product portfolio, key growth application, and we expect organic growth for the full year.

In addition, D&D more than doubled its adjusted operating margin from a year ago, driving significant improvement at the segment level, as the actions taken to transform the portfolio and optimize the operations have really taken hold. In our appliance business, we have very strong performance of 14% organic growth year-over-year as demand remains strong, particularly in Asia, and our SubCom business grew 11% in the second quarter. Adjusted operating margins of 15.2%, were up 680 basis points from the prior year with contributions from all businesses and actually was up 200 basis points sequentially.

So with that segment overview, I'll turn it over to Heath, who will cover the financials.

Thank you, Terrence, and good morning, everyone. Please turn to Slide 8, where I will provide more details on Q2 financials. Adjusted operating income was $535 million, with an adjusted operating margin of 16.6%, driven by strong organic growth of 8% and productivity benefits. GAAP operating income was $473 million and included $59 million of restructuring charges and $3 million of acquisition-related charges.

For the full year, we continue to expect restructuring charges of approximately $150 million, driven by footprint consolidations from acquisitions and structural improvements. We aim to get healthy balance between investing for future growth while capturing SG&A efficiencies. GAAP EPS was $1.13 for the quarter. Adjusted EPS was a new record for the second quarter at $1.19, up 32% year-over-year, this was above our prior guidance range driven by revenue growth and benefit from a lower tax rate.

The growth above prior year is result of our strategy and action, with harsh applications driving growth, TEOA driving efficiency and balance capital deployment enabling acquisitions and share buyback. We also benefited from a lower adjusted effective tax rate of 15.4%, driven by the expirations of statutes in certain jurisdictions and additional benefits from Accounting Standards Update 2016-09 related to stock compensation.

For the full year, I now expect an adjusted effective tax rate around 18%, similar to last year, however, as discussed last quarter, please keep in mind that the year-over-year dynamics we get an EPS benefit in the first half of 2017 and have an EPS headwind in the second half of '17, driven by -- a given that our Q3 2016 and Q4 2016 adjusted effective tax rates were 17% and 13%, respectively. While the first half benefit is $0.10, we've a negative impact of $0.10 in the second half, resulting in a 0 net impact for the year. Going forward, I would expect an adjusted effective tax rate between 19% and 20%.

Page 15 of our slide deck contains a bridge, provides details from the first half and second half.

Turning to Slide 9. Our strong Q2 results demonstrate we're executing our strategy and performing well against our business model. Adjusted gross margin in the quarter was 34.4%, up 180 basis points improvement from the prior year, driven by follow-through on increased volumes, productivity improvements from our TEOA programs and restructuring benefits.

Adjusted operating margins were 16.6% in the quarter, up 170 basis points year-over-year, driven by our industrial and communications segments. Adjusted EBITDA helps to explain the cash earnings on our business. Adjusted EBITDA margins in Q2 were 21.3%, up 160 basis points year-on-year. Cash from continued operations was $521 million, and free cash flow was $387 million in the quarter. Free cash flow grew year-over-year, primarily due to better operational performance. We returned $234 million to shareholders through dividends and share repurchases in the quarter.

Looking ahead, we continue to expect free cash flow to approximate net income and capital expenditures to be approximately 5% of sales. We remain committed to our disciplined long-term capital strategy with balance return of free cash flow to shareholders, while still having ample capital to invest for acquisitions.

Our balance sheet is strong, with reasonable debt levels and an ability to continue to support return on capital and acquisitions going forward. We have added a balance sheet and cash flow summary in the appendix for additional details.

Now I'll turn the call back to Terrence.

Thanks, Heath. And let me cover our guidance for both the third quarter and full year. So let's start with the third quarter, and you can look at Slide 10, please. We expect third quarter revenue of $3.2 billion to $3.3 billion and adjusted earnings per share of $1.14 to $1.18 per share. This represents reported sales growth of 4% and organic sales growth of 5%, with 7% adjusted EPS growth at the midpoint. I do want to highlight that our outlook includes the negative impact of a stronger dollar, which we expect will be a headwind of $70 million to sales and $0.04 to EPS on a year-over-year basis. And in addition, as Heath mentioned, there is an unfavorable tax impact of 3 years when you compare it to the prior year. Without these 2 headwinds, we would expect solid double-digit earnings per share growth year-over-year on 5% organic revenue growth, which is in line with our business model.

Looking by segment, we expect Transportation Solutions to grow low single digits on a reported basis and mid-single digits organically. This is above the expected auto production growth levels of 1% that we expect in the third quarter, with our out performance being driven by content growth. We also expect continued growth in our Commercial Transportation segment across all regions.

In Industrial Solutions, we continue to expect to grow low single digits on both reported and organic basis, with growth expected across all 3 of our business units. And in communications, we expect high single-digit growth on both reported and on an organic basis, with growth in each of our 3 businesses. We do expect SubCom to be particularly strong in the third quarter due to the timing of program execution.

Now let's move to Slide 11. So I can cover full year guidance. And just before I get in the guidance, as I said earlier, I'm very pleased that our business is firing on all cylinders, with revenue growth and operating margin expansion this year being driven by all 3 segments. And as we look at the second half, the margin expansion that we're going to experience in the second half will be driven by the communications and industrial segments. It's very similar to what we saw in quarter 2. So when you look at our guidance for the year, we are raising the midpoint of revenue and adjusted earnings per share guidance from our prior year by $300 million on the top line and $0.22. Roughly $100 million of the sales increase and $0.04 of the earnings per share improvement is from reduced currency exchange headwinds. Organic revenue expectations were increasing from 4% to 6% or roughly $200 million. Of this, approximately $130 million is from the outperformance we had in the second quarter and $70 million is driven by our prior outlook in both our Commercial Transportation business and the communications segment in the second half. I do want to note that our assumption for auto growth in the second half has not changed from our prior view. We expect our auto business to deliver mid-single-digit growth in the second half on a slight production increase.

When you look at our implied year-over-year trends in the first half to second half, I would ask you to keep in mind the impact of currency exchange rates and the tax dynamics that Heath talked about. And then we have more details on Slide 15 of the deck. For the full year, the increase, I'll just walk you through results and revenue in the range of $12.6 billion to $12.8 billion and adjusted earnings per share of $4.58 to $4.66. This represents 6% reported and organic growth and 17% adjusted EPS growth at the midpoint versus the 52 weeks of fiscal '16.

By segment, we expect Transportation Solutions to now be at high single digits organically, reflecting strong results in the first half and continued content growth and share gains. As I said, while we continue to expect auto production to moderate, we expect to generate mid-single-digit revenue growth in our auto business in the second half.

Commercial Transportation is expected to outperform its end market again this year, benefiting from content expansion and heavy truck market. And we expect our Sensors business to grow mid-single digits year-over-year. In our industrial segment, organic growth guidance is consistent with the guidance we've been giving since the start of the year, reflecting continued improvement in the industrial markets. And in communications, we expect to be of low single digits on a reported basis, an improvement versus our prior view, reflecting continued strength in Appliances and growth in Data and Devices, and we're raising our guidance for our SubCom units to high single-digit growth this year.

In summary, I feel very good about our ability to drive 6% organic growth, expand our operating margins and generate strong double-digit adjusted earnings per share growth this year. I think this demonstrates that our portfolio is delivering and continuing to benefit from the secular trend of content growth across our businesses. Before we go to Q&A, I do want to close by thanking our employees for the strong execution in the second quarter as well as their continued commitment to bring our technologies to our customers all around the world.

So with that, let's open it up for questions, Sujal?

Brett, you give the instructions for the Q&A session.

(Operator Instructions) And our first question today comes from the line of Shawn Harrison with Longbow Research.

This is the obvious question on auto, but you had some other players into the markets raise some red flags, be it excess inventory in North America, China production declining, and I know your fiscal year doesn't align with the other calendar year and many companies. But are you seeing any weakness in auto production out there right now, the kind of a flattish second half that would lead you worried into the next fiscal year?

Shawn, it's Terrence. So let me take that question. When you look at auto this year, we go back to the beginning of year. We expected North America to be flat to slightly down on production and it's sort of playing out as we expected. I think, when you look at Europe, we have actually seen in Europe, that has constructively got better throughout the year, incrementally. So not a major move, but I would say continue to strengthen and that has been a positive trend. And the same has hold true in Asia, outside of China. When we guided in the beginning of the year, we guided it to 1% growth overall, it was -- really the big wildcard was around the China incentive. And what would be the impact once that incentive tailed off? And we always assumed that auto production can be pretty much flat in the second half and it looks like it's playing out that way. And so while we had a strong first half in production and a lot of it was driven by China, as we're looking at our order rates, we view the years playing out as we sort of said all year, with the only real change being China production was a little stronger in the first half, which really has driven the increase from our original 1% production growth up to the 2% to 3%. The other thing, I said on the call, we always also viewed even in that low production growth environment, we were going to get into in the second half, we felt very good with our content wins, and we're going to drive mid-single-digit growth and that hasn't changed at all. So when you think to our guidance and the changes we make in the guidance, our auto has been pretty consistent with the picture that we said, and we expected China auto to slow, and we expected a tough North American market. It's been tough in North America, now almost for 2 years, when you sort of look at the production environments, it has been sort of flat to slightly down.

So I don't think there is incremental red flag. I think, it's playing out as we thought.

That's very helpful. And then second, just following up on the SubCom business, now being up high single digits for the year. Maybe, you could talk about what visibility you have in the fiscal '18? Does the business decline? Can you hold it flattish in the fiscal '18 based upon the backlog you have right now?

No, Shawn, thanks for that question as well. SubCom, we always talk to you about SubCom, and we have a pretty good 18-month window based upon the projects in the pipeline, and what was nice during the quarter, our backlog is still pretty steady at around $850 million, is what we have quote, and we're also working on a number of opportunities that we're quoting. So, I think, when you look at where we are right now, the strength of the backlog, I would sort of assume as your model next year, keep SubCom pretty much flat with where we guided for this year. And like we normally do, we get more projects and we'll update as we -- as confidence increases, but I think the confidence we have is the amount of activity that we're quoting and working on, and I think, modeling sort of a flat of this number we've given you for this year is probably the most prudent thing to do right now.

Our next question comes from the line of Amit Daryanani with RBC Capital Markets.

I guess, 2 questions from me as well, on the transportation side. Could you maybe talk about the operating margin dynamics you saw on a sequential base. I think it was down about 300 basis points? Could you just touch on what kind of happened over there? And how do you think of margins as you go through fiscal '17 broadly? And when do you see the central headwinds? I think is a big issue for you guys right now, abating?

Amit, this is Heath. I'll take that. I think, if you do go back and look at our comments from 90 days ago. We were pretty clear that -- the number of the -- the transportation segment margins were running very high and were not really sustainable. So I think, internally we looked at the 19%, it was right in line with where we thought it would come in and consistent with where we've -- what we've guided in terms of 20%-plus or minus. There is an investment activity going on in this segment, as we are ramping up, because our revenue pipeline is very strong in transportation globally. So we're going to continue to make those investments, and I think, modeling plus or minus 20% is probably a good number for that.

Sensors is improving, you see the organic growth in terms of -- there still continues to be a bit of a headwind relative to the overall segment margins, but is progressing on track with where we thought it would be in this year at this point, and the outlook going forward will continue to be plus, plus for headwind and will progress through the next couple of years.

Got it. And I guess, Heath, you talked about, I think, the $150 million researching plan for the year. How much of that is just M&A integration versus implementing structural improvements within TE Connectivity's portfolio? And how should we think about the payback period for those -- for the cost takeout that you guys are doing?

Thanks, Amit. It's a good question. There is some acquisition-related integration, some of those tied to more recent acquisitions that have been done, even including Sensors and in the medical space. There is some of that included in there. And then quite honestly, there is some broader footprint consolidation that we're doing as well, and we'll continue to move forward on as we optimize the footprint. But if there is a balance between us, and I think, in general, if you want to calculate most of our restructuring has similar between 18-month and 2-year payback in terms of the cash-on-cash returns. Some of the restructuring that you see in the $150 million, there is a chunk of that, that's noncash related write-off. So if I think about it from a cash-on-cash return, I think 2 years is probably the number.

And we do have a question from the line of Joe Giordano with Cowen and Company.

I have seen several news releases highlighting some of your products and it looks like you have a pretty big boost at the upcoming lights or trade show. Are you trying to accelerate your penetration in the whole connected home market?

Thanks, Joe. When you look at it, light there is coming out. When you think about what we do there, around the home, I talk a little bit about our Appliances business, which we have a lot in the home. And over the past 5 years, we have increased investments around lighting, that would be part of our industrial business. So it's areas where as lighting goes that way indeed, you get into sockets, it comes into a natural opportunity for us. I think it's just one of those applications that sort of shows where we bring our engineering to and also how it is smartly engineered and you have to switch over there. So it is a product area we've gotten into. I don't know that the revenue we have on the top of my head. But from that standpoint, I think it is pretty typical of the type of applications throughout our business we try to go after to really make sure how do we continue to drive growth as for the market. So certainly around that space, we have made investments into it.

And then, could you give us some details on what you're seeing in Data and Devices, particularly in China?

On Data and Devices, our performance was extremely strong and even slightly ahead of what we thought. Because as you know, we very much repositioned portfolio around high speed. And I think, you really start to see the benefit, both on the growth side as well as the margins that we thought would get the business up to, and it certainly came truly in there. When we look in Asia, on Data and Devices, we had a very strong performance in Asia. We grew double digits organically in China, and we basically grew greater than that outside of China, which will include Japan and Southeast Asia. So really the traction when you look at that business has always been and continues to shift towards Asia. And the sales performance that you saw, as well as the operating performance has really been driven by those wins that we have, while we still get the infrastructure investments being made around China as well as how they service the rest of the world. So a lot of that growth will be driven out of Asia and go forward as well.

Next question comes from the line of Craig Hettenbach with Morgan Stanley.

Can you expand a bit just on the theme of increasing automotive content? So any particular applications that are driving the content increase in fiscal '17? And then even as you go out to '18, maybe some of the applications you guys are excited about?

Craig, thanks for the question. I mean, it is so broad-based, and when we think here, it's not just applications, it's everywhere in the world. So if you take -- we talk about growth being greater than production, I mean, this year every region is going to have pretty substantial growth greater than production, whether it's China, whether it's Japan, whether it's Korea, even in places like North America, where production's light, we're doing better than production. So it's very broad-based around the world and it comes back to those trends we talked to you about, not only on connect side, we had that for payment plans, but also where you see powertrain and emission programs that does call into where our team is going to help solve the problems in the harshest environments and with emission. And you continue to add the safety side. So it's not one application. We're very fortunate, we cover all applications and what we do being the global leader, where we're also benefiting from the secular trends all around automotive and you see that the strong performance we have that's greater than production. And when you look at the guidance, I talked about as we expect production to moderate, production being relatively flat in the second half. We're going to grow mid-single digit, which just proves the content growth assumption we talked to you about are 4% to 6%, and you then price off of it, it's all across the trends, it's not just one, and it's really very good execution that how we cover our customers globally and enable their technology to make sure they can bring it to market.

Got it. And then as my follow-up, I want to focus on one of the three things you highlighted in terms of focal points for the company on capital allocation. And there has been, I think, some discussions around maybe some increased discipline around OpEx and M&A? Just wanted to get your sense of how the approach is changing if it is? And what the implications are for that, as you approach M&A versus cash returns?

Craig, this is Heath. I'll take that. I was -- by no means will I suggest there has been a pivot on terms of our approach. We're going to continue to be disciplined with our deployment. The dividend strategy stays on track, the share repurchase strategy is consistent. And we're been active in the M&A market, but it's been a tough market right now as more evaluations are. And so we'll continue to be active and push that lever. But we're going to also be disciplined about what the returns are relative to those M&A investments and make sure there are deals for our shareholders.

May I have the next question, please.

And we do have a question from the line of Wamsi Mohan with Bank of America Merrill Lynch.

Terrence. Clearly, the market is worried about deceleration in auto production trends and you guys are clearly outperforming based on the content growth commentary that this implied both in your guidance and in your comments here. But can you remind us maybe what levers you might lean on if the deceleration continues to be stronger? Say in 2018, where trough transport margins might be and -- we're firing on all cylinders right now, but just from a risk mitigation standpoint, how should investors think about the levers that you might have at your disposal if things do end up getting a little tougher? And maybe calibrate in environment of flat to 1% you're growing 4%, 5%, if production were to be say, a couple of points more negative, how that might influence your auto growth and I have a follow-up?

And yes, I think, let's talk a little bit about trough, and I think, let -- if production is flat next year, we would expect that we're going to grow mid-single digit. And if it would be down a little bit from that, then we would be growing low single digit, but I think with what we have done with our content, when we realize, these are platforms that we won, they are in the backlog. This is not stuff to go get when you think about next year. So I think even in a slightly negative production environment, we're going to post growth. So I don't really view that as trough by any means. I really view, we would tighten up like we always do around where do we invest capital and make those trade-off decisions, but I don't view that as a free-for-all from our financial performance. We just have to manage that. I think it shows where the business has come from. And I think it's expansion around content, and everywhere in the world. So I think similar to this year, where the only thing here we told you, we thought production would be 1%, we can grow mid-single digits. During that second half, certainly got some benefit. But I think the way that we're positioned as well as where we see the trends, we do expect that global auto production long-term should bear GDP. So certainly, we always get an element or maybe there is somebody has a peak in a country or region and adjust, but I think the content trend that we have, and I'll go back to what I said again with Craig. The trend that is happening around connecting the car from an infotainment perspective and continued safety applications and probably the bigger one, that always has to be around the powertrain and what happens from emissions. What happens in those environments, whether it be electrification of the vehicle, going EV that's content benefit for us, or even if you're adding turbochargers to get better fuel economy on a smaller engine, that is where we drive and that drives our engineers to create the most value, the toughest engineering challenges. And I feel very strong that we're going to continue to drive that content growth. And I think this year truly demonstrates that. So I think when you think through if production is a little worse, I think you're still going to have even on a slight production decline, we're going to be growing due to our content position that we've established over the past 5 years.

Now that's very clear, Terrence. And as a follow-up, can I just ask, we've heard of pickup in restock activity in the channel, any comment on inventory levels sort of nonauto inventory levels that you might have seen? Could you address the discrepancy between sort of what your including SubCom order pattern is versus the guide?

So it's a great question. So let me take the first half of your question, without automotives and without SubCom, because we have seen a couple of things, we have seen our channel partners increase their ordering levels. I would tell you from inventory, that is the indirect channels, it actually has not moved, so it isn't like inventory is building, but what we have seen through our channel partners is as they've seen some shortages in certain other electronic components and certain in semi side, you see them getting a little bit more aggressive in their ordering patterns. And we experienced that in our second quarter. In some cases, those orders were placed out. We've discounted that as the guidance that we've given you in the third and fourth quarter. But certainly, we did see an acceleration of orders through our channel partners in the second quarter, which is typically a good indicator. It isn't like your inventory is getting ahead of themselves, but I think, it does sort of show just positive momentum, where they are starting to get pulls, and I think, in some parts of the electronic supply chain, there are some shortages that they're also trying to be cautious on. So we're monitoring that, and we'll continue to update you on that.

We do have a question from the line of William Stein with SunTrust.

Terrence, I'm wondering if you can characterize the content gains that you're seeing coming through both in the sales results and in the wins that might not even be reflected in orders yet? Whether those are more on the connector side, the Sensors side or whether you're seeing accelerating demand for integrated products there?

Actually, on the content side, when you actually look at it, I presume, were your questions around auto?

Yes.

Actually, where we see the content case is traditionally outside of it. So when you actually, look at it, it's really around the integrated solutions where we're providing new technologies, is really where we're seeing the content wins as well as sensors. So I think those combination where you look at it really where we've invested in part what we call our adjacent technologies. There would be things like in EV, where we provide contact, contactor is not an interconnect, it's actually, something that is very important to an electric vehicle. We have a very strong position on it globally. So those types -- those are the types of areas we're seeing it, and when we look at the terminal connector side, it's growing very nicely, but from a contact perspective, it's much more outside of interconnect.

I appreciate that. Maybe 1 follow-up if I can. Can you remind us of your exposure, specifically to the carrier market? I think that's outside of SubCom. I think there is something in Data and Devices, and if you could comment on trends in that market, I would appreciate it.

Bill, could you maybe come up with a few more bars on what you define as carrier? And do you mean like the AT&Ts and the British Telecoms?

Service providers, yes, as opposed to sort of web scale data center company.

We do not serve anywhere directly to a carrier anymore. That was part of our BNS business we sold. Certainly, we would sell to the people high-speed applications into the carrier network. To those people that make the gear, but we do not sell to the carriers.

And our next question comes from the line of Steven Fox with Cross Research.

Just a couple of questions, please. First of all, I was wondering, Terrence, you gave a lot of good color around orders. I was curious if you think about everything you talked about, what it says about sort of the business cycle that we're currently in? Are you more encouraged that we're seeing an uptick in economic activity as some may argue? Or is it sort of similar trends overall given what you're seeing at distribution versus the easier comparisons, orders, et cetera. Just wondering about your thoughts there? And then I have a follow-up.

Steve, thanks for asking that question. It's a good question. What we would say it is, one of the things that is nice, I would say, markets overall have a little bit of an upward tilt, and it's actually pretty consistent between regions. So I would say, when we started the year, we gave out our guidance for the year, we saw a 3% growth. I do think industrial markets are getting a little bit better. The auto market is sort of as we called it, communications is better, but then also regionally when you sit there, we had very strong Asia performance, we talked about for this quarter, but also it's been very broad-based, it's just not the auto discussion we've had. Europe continually incrementally get better, and in the Americas, where I would say it's been sort of sideways for a while. We have seen a little bit of tilt up, really driven around the industrial markets. So I would say it's incrementally better. I would say it's less choppy than it's been, would be phrases I would use. But I will also certainly say there is still some political ping-pong around the world, that we still think while constructive, we're still ready to move quickly. I don't know if anything changes that could impact any of the market. So overall, I'd say it is stronger. I think the orders reflected. I think the broad-base of the growth reflected, and a little bit more confidence in the greater economy, but what I get excited about is that's in every region of the world right now, where we're seeing some of the upward tilt, which we haven't seen in certain markets recently.

And then just as a follow-up, on the auto content story. I mean, the company has historically been known for being a powerhouse around powertrain applications, et cetera. How much of the content is now being -- is driven by those core historical strengths versus maybe new areas like infotainment may be driving a little bit more of it? Or is it still mainly going to be a powertrain story going forward?

No, it's all -- it's actually in all three, Steve. So if you take it, and I know we show a slide, when we see investors. If you sort of think about our $60 today of content, approximately half of our content today in an auto is around, we call it green, but to your point, you used the right phrase, powertrain, about half of our content is in powertrain, about 40% of our content is around safety applications, I would put antilock brake, traction control and airbags into those. And then about your remainder is really around the connected, that would be your convenience, your lighting, the things that happen within the cabin around infotainment. The less mission-critical items, I guess, I would say, that happens in the cabin. So that's really our mix and what's nice is all of them have opportunities, and we talk to you all about 5 years from now. We think we get that content updating dollars, above that, we really feel it's across all 3 of those categories. So it isn't just in powertrain. Certainly, powertrain I think has the biggest toggle, of greater growth, especially as you get the EV adoption, that content is really driven in the powertrain and the infrastructure of the core side. So I think that's one that has more upside than probably be others, but we're well positioned in all of them regardless. So I appreciate your compliment about us being a power in the powertrain, I like that. But if you think we've rounded ourselves out, and it gets into some of the questions today across auto and that really is a credit to our focus and getting ahead and leveraging the technology we can bring to these customers that we serve anywhere they are, both from an engineering setting and where they manufacture, it's a real strength that we have.

We do have a question from the line of Jim Suva with Citi.

I have two questions, and I'll ask them both at the same time. Probably one, a CEO type question, and one CFO question. The first one would be, you had mentioned your auto forecast for this year remained unchanged, you are kind of strength right now and then deceleration going forward. That's good to hear. The main concern or question we have is are we facing a situation like last year, may be a different region or whatever, inventory being built up or your forecast of flattish actually being too aggressive as many of the others have kind of talked about a big deceleration coming in? So how come we're not facing inventory lot buildup and things like that? And why you think your forecast was different than others? Then for the CFO, I think, you had mentioned restructuring of about $150 million. Your operating margins are now performing well in every segment. Should we expect $150 million going forward? Because it is noteworthy that for the past several years, it was coming down, and now it's kind of come up a little bit. Because you're making so much more profitability, is $150 million the good rate? Is this kind of a peak year we should expect restructuring to decline? Or how should we think about those charges?

Jim, let me start with your first question. Then I'll Let Heath cover your second one. So, thanks for asking the question. First of all, on the auto production, and I know other people have talked about different outlooks for the year. I think, one thing that's very important is you all compare these outlooks as we're in a fiscal period that's different. And in our outlook, when we talk the next 2 quarters is really June and September, and our outlook is really from talking to our customers. So we feel actually very good about where our outlook is, where their production builds are, as well as where we plan the supply chain. So I don't think we're aggressive. I don't think we're conservative. I think we're in line with what our customers are telling us right now. And is sort of flattish the rest of the year. I know -- I think some others have come out with calendar year guidance. I don't think on a calendar year basis, so I think there is an element there, that I would ask to just be reasonable as you compare everybody's opinion about auto production. We do see a moderating like we've said from day 1, mainly driven around China. And we do not have much expectation from North America this year. We expect it to be flat to slightly down, and it looks like it's playing out of that as the source. So I guess, I'll hand on to Heath on the restructuring question. Go ahead.

Well, Jim, I think that restructuring question is certainly a valid comment. I don't know the 150 would be a number I hang my head on. In terms of that, certainly there was an opportunity in fiscal '17 to do some things to optimize our footprint and to make sure that we are aligning where we do business closer to our customers. And opportunities will avail themselves as we go forward. There is no doubt, there is a handful of things that we continue to contemplate as we go into 2018. But each opportunity has to have its own merits to stand on its own from a cash-on-cash return perspective. And so we'll provide more color for that as we go forward, but I think, there will be some element of restructuring as we go into 2018, as we continue to fine-tune the operating model. But I don't know if it's 150 or something less than that at this point.

And we do have a question from the line of Matt Sheerin with Stifel.

Just a question regarding the strong operating margin in the Communications Solutions. I think, that's the highest margin since you have kind of change the reporting segments. And I know a lot of that was driven by the portfolio mix, deselecting products, but trying to figure out how much of that strength was due to Subsea Communications versus the mix and versus the change of the portfolio? And how sustainable is that going forward?

Matt, it's Heath. It's a fair question. But the year-over-year improvement of nearly 700 basis points in this segment, was pretty well balanced across the three business units in this segment, Data and Devices, Appliances and SubCom, they all contributed roughly equal in terms of that margin improvement year-over-year.

Okay. In terms of targets, particularly, given that, it looks like Subsea will be or SubCom will be sort of flattish over the next few quarters into the next fiscal year. I imagine that you're still looking at growth within Appliances and Data and Devices. Is there still an incremental margin that you expect to generate where you can see even better margins there?

Well, certainly, productivity plans will be in place. The heavy lifting around the footprint consolidation in this segment related to the walkaway revenue that transpired over the last several years, that's behind us, and then we are largely to or I'll say more an optimized footprint within the segment, just a few tweaks left to go in that. So I don't -- I would not want to foreshadow that you are going to continue to see 700 basis points year-over-year improvement for quarter-on-quarter going forward. But certainly, we feel good about where the number is today. Knowing that SubCom is probably going to be flattish year-over-year and we expect more of the incremental operating income improvement to come to Appliances. And D&D, but they are both running pretty high.

Got it. That's helpful. And just back to transportation and specifically, the commercial segment, where you're seeing a very strong organic growth in an underlying market that is basically even flat to down and weak, we are starting to see signs of some stabilization from competitors, but Terrence, what are you seeing in those markets in terms of underlying growth, both in heavy trucks and off-road vehicles?

Matt, it's a good question. I guess, so maybe frame a little bit the overall performance, because I think our performance is not just 1 quarter, it's really been in the past couple of years, as the overall market was very negative, especially North America. Our overall performance is really driven by our strong position in China, not only North America. And we really weathered the storm well, and the growth that we saw this quarter was really driven by emission standards in China as well as content gains with Chinese companies. So when we look at from a market perspective and we look forward, we do actually see construction starting to pick up after a very tough period, and I think you saw that some of the results have come out. Ag still continues to be a challenge, a challenge globally. So that's still a market we're waiting to pick up. And on that truck and bus side, we really benefited from our strong position globally. So when we look at it, it does feel like we're starting to get more forward lean in those overall markets, whereas I would say in the past 2 years, that's really been between our position and our content gains driving the growth, and in the (inaudible) as the market starts to click in, getting stronger growth in that market. So -- and as I said during the comments, part of our guidance uptick in the second half was really driven by Commercial Transportation, as well as our communications segment. So we are seeing upward momentum there as we go through the year.

We do have a question from the line of Mark Delaney from Goldman Sachs.

First question is a follow-up on that question about Commercial Transportation. Can you help us understand a little bit more in the regional exposure that you have within Commercial Transportation? I mean, how much is North America versus international markets? And then, I know the company mentioned some regulations that were helping the Commercial Transportation business. Can you just elaborate a bit on what sort of benefits you've been seeing from some of those regulations in commercial transport?

Sure. So the take on Commercial Transportation business is roughly, I'm trying to get that up about 40% of our business is in the Americas, 60% outside the Americas, split evenly between Asia and Europe, and really Asia, when you think about the regulations is probably the bigger area, specifically China, we'd been getting the benefit from the emission regulations that are happening there and a very strong position that we have, and increase content wins provide more to the customer than just what we historically did. So it's really good for the catalogs and the trend, but also pretty major content wins that we've gotten into other technologies we bring into the customers.

That's helpful. And then the final question is trying to understand a bit more the order patterns that the company is seeing in the automotive business. I think guidance for transportation in the June quarter is about $1.7 billion of revenue, and then if you use the full year guidance, the kind of the midpoint implies about $1.6 billion. So if you're seeing growth in commercial transport and sensors, it seems like the implied auto sales for both June and September are down, low to mid-single digits both quarters. Normally June is up sequentially. So are you guys seeing some sequential declines in on a quarter-to-quarter basis in the light vehicle business, in line with what your expectations are? I just want to kind of confirm that or is that just some conservatism of how you had such strong first half? And you're just not sure how the year goes from here?

When you look at the second half, we're going to be pretty much mid-single digits year-over-year, Mark. Clearly, we do expect production to step down. Our first quarter was very strong, as we said, some of that was due to the China stocking. So we will have sequential changes with production. But we're going to be up year-over-year, and we typically also always step down quarter 3 to quarter 4 primarily due to Europe, just from how the holiday and the production season works. So not sure I have completely followed on how you're looking at it. But second half year-on-year, we're going to grow mid-single digit on that flattish production, and the shape is a little different this year due to the strong first quarter. But when you get to the rest of the year, Q3 going down to Q4, we would expect to step down in pretty normal seasonality because of our strong European distribution.

We do have a question from the line of Sherri Scribner with Deutsche Bank.

Within industrial, can you talk about what drove the declines in Aerospace and Defense? And also wondering if you could comment from a margin perspective what was driving some of the upside, it's just mainly the moderation in the drive from Oil & Gas? Or if you're seeing contributions from other pieces of business?

Thanks for the question. In Aerospace and Defense, we still are confident with our outlook for the year. In the quarter, we saw in the commercial Aerospace side, just slower pickups from one of the large aircraft manufacturers in the quarter that we expect to have in quarter 2. We expect it will happen in quarter 3, but that was offset by Defense picking up, and I think that's a really positive. When you look at year-over-year, Oil & Gas really did not have an impact year-over-year, I mean. So the tailwind or the headwind from Oil & Gas is behind us. The Oil & Gas business was pretty constant in the quarter. So it didn't help our margin, really the margin improvement was around cost actions that we talked to you about, that we were taking in industrial to continue to improve the margin to get it up into the higher teens. And I think we're starting to see the benefit of that, and we expect to continue to see the benefit in the second half. And clearly, that's part of our guidance. Our guidance is that communications and industrial will be the margin drivers in the second half. And we're pleased with the performance that the industrial team did on the margin improvement side in the second quarter.

And then as a quick follow-up, it looks like SG&A ticked up a little bit this quarter. Just wondering if you could comment on that going forward?

Sure. It ticked up, and it's generally pretty seasonal. When we think about going back and looking prior year, generally from first quarter to second quarter, you'll see that normal tick up, and I think we will get as a percentage of sales pretty consistent is what we see in the past. There are some very specific drivers of that in terms of (inaudible) -- what were the timeliness of investments that we do each year, but pretty consistent and on track with our internal expectations.

Thank you very much. I want to thank everybody for joining us this morning. If you have further questions, please contact Investor Relations at TE. Thank you, and have a great day.

Thank you, everyone.

And ladies and gentlemen, this conference will be available for replay after 10:30 today through May 3. You may access the AT&T teleconference replay system at any time by dialing 1 (800) 475-6701, entering the access code 421540. International participants may dial (320) 365-3844. That does conclude your conference for today. Thank you for your participation and for using the AT&T Executive Teleconference Service. You may now disconnect.