Earnings Call Transcript
TE Connectivity plc (TEL)
Earnings Call Transcript - TEL Q2 2020
Operator, Operator
Ladies and gentlemen, thank you for standing by. And welcome to the TE Connectivity Second Quarter Earnings Call for Fiscal Year 2020. At this time, all lines are in a listen-only mode. Later, we will conduct a question-and-answer session. As a reminder, today's call is being recorded. I would now like to turn the conference over to your host today Vice President of Investor Relations, Sujal Shah. Please go ahead.
Sujal Shah, Vice President of Investor Relations
Good morning, and thank you for joining our conference call to discuss TE Connectivity's Second Quarter 2020 results. With me today are Chief Executive Officer, Terrence Curtin; and Chief Financial Officer, Heath Mitts. During this call, we'll be providing certain forward-looking information and we ask you to review the forward-looking cautionary statements included in today's press release. In addition, we will use certain non-GAAP measures in our discussion this morning, and we ask you to review the sections of our press release and the accompanying slide presentation that address the use of these items. The press release and related tables along with the slide presentation can be found on the Investor Relations portion of our website at te.com. Due to the large number of participants on the Q&A portion of today's call, we're asking everyone to limit themselves to one question to make sure we can give everyone an opportunity to ask questions, during the allotted time. We are willing to take follow-up questions, but ask that you rejoin the queue if you have a second question. Now, let me turn the call over to Terrence for opening comments.
Terrence Curtin, CEO
Thank you, Sujal, and thank you, everyone, for being here today to discuss our second quarter results and provide insights into what we're currently experiencing and how it may affect us moving forward. We are all facing a challenging situation due to the global COVID-19 pandemic. When we held our last earnings call just 90 days ago and shared our outlook, that was before COVID emerged in China, so we did not factor any anticipated effects into our guidance for the second quarter. I am very pleased that, despite these challenges, we achieved results that met our expectations and honored the commitments we made to our customers and shareholders during the quarter. Before I delve into the results, I want to express my gratitude to our employees. We operate globally with engineering and manufacturing facilities worldwide, and the safety of our employees has been our top priority. I appreciate our teams' dedication as we navigate the COVID-19 crisis and continue to effectively support our customers as they also try to manage through this situation. A few points stand out regarding our response to this crisis. First, we prioritized the safety of our employees while maintaining strong execution for our customers. Our non-manufacturing teams adapted well to remote work to ensure we continued to innovate and serve our customers. I believe we also showed operational resilience. In China, we were able to restart our plants relatively quickly, increasing utilization levels to minimize quarter impacts. All our factories in China are operational, and Heath will later provide updates on our manufacturing in Europe and North America. Lastly, we demonstrated agility, which gives us confidence in our ability to adapt to changing conditions. Our employees have done an extraordinary job supporting our communities, customers, and each other. What I have observed over the past few months reassures me about our position emerging from this crisis. We will discuss our expectations for the next few months, but I am proud of our team’s performance, resilience, and flexibility this quarter. Now, let's move on to the results, starting on slide 3, where I'll outline the key points of today's call. We achieved sales that matched our guidance, and our adjusted earnings per share exceeded the top end of our guidance range, supported by strong performance across all three segments. Our adjusted operating margins were over 16%, reflecting the diversity of our portfolio and the early implementation of cost reductions, positioning TE strongly amid ongoing uncertainties. Another significant point is our strong balance sheet with ample liquidity. A crucial aspect of our business model is our robust free cash flow engine, which is resilient during challenging periods like these. We expect to generate well over $1 billion in free cash flow this year, in addition to having $2.3 billion in available liquidity. However, looking ahead, visibility into future demand is limited. We expect to experience more significant COVID-19 related impacts in the second half, particularly in Transportation and commercial aerospace markets. Consequently, we estimate that our sales could decline approximately 25% sequentially in the third quarter compared to our second quarter levels. Lastly, beyond this crisis, we remain optimistic about TE’s strategic positioning. I am confident we will navigate through the crisis, and our plans for expanding margins and our earlier expectations remain unchanged. We aim to enhance our earning capacity through ongoing footprint consolidation and accelerated cost reductions in response to weakening demand. When markets stabilize and begin to grow, we are well-positioned to take advantage of recoveries in China, which constitutes about 20% of our business, as well as broader rebounds in the automotive and Transportation sectors. Additionally, our healthy cash flow allows us to invest in growth opportunities that will enable us to outperform relative to the underlying markets. We will continue to benefit from secular trends across our businesses and within TE's positioning. Please turn to slide 4, where I will review a few more highlights from the second quarter. Sales of $3.2 billion met our guidance and were down 6% reported and 5% organically year-over-year. Our orders grew sequentially, resulting in a book-to-bill ratio of 1.05. These orders indicate that our customers are securing supplies amidst an uncertain market. Indeed, our orders in the quarter exceeded our initial expectations. However, it is important to note that we observed a decline in orders late in the quarter, which extended into April. I will discuss that further when I move to the next slide. Regarding earnings, our adjusted operating margins were above 16%, and our adjusted earnings per share of $1.29 surpassed the top end of our guidance, driven by strong execution across all segments. Reiterating my earlier comments about our cash-generative business model, year-to-date free cash flow is up 34% compared to last year. In the second quarter, free cash flow was about $310 million, with roughly $430 million returned to shareholders during the same period. Moving forward, we remain committed to our dividend, but we will continue to assess our share buyback strategy in light of current market conditions. Looking ahead, we are withdrawing our full-year guidance but providing a high-level outlook for the third quarter compared to the second quarter. We anticipate a sales decline of approximately 25% sequentially in the third quarter, with an estimated 45% fall-through to adjusted operating income as a result of this revenue decline. This projection reflects order trends, primarily driven by market weaknesses in the Transportation and commercial aerospace sectors, alongside some inventory adjustments in our supply chains, which I will elaborate on. While we cannot control the market environment or COVID's effect on our customers, we are dedicated to executing what we can influence, including driving down costs and consolidating our footprint, while also continuing to invest in TE's long-term growth and opportunities. Please transition to slide 5, and I will discuss order trends—not just for the quarter but also what we've witnessed since the end of the quarter. For the second quarter, orders were at $3.4 billion, which was stronger than anticipated as customers secured components amidst an uncertain supply chain, especially in China. Despite the COVID-related shutdowns in China in early February, I am pleased with how quickly we resumed operations in our 18 factories. Thanks to a high level of automation, our revenues were minimally affected in the quarter, and we maintained production to fulfill our customer commitments even amid labor shortages. This underscores our core manufacturing capability as a key differentiator for TE and our customers. As shown in the chart, we’ve outlined sequential orders for the first and second quarters. I won’t delve deeply into the numbers for the second quarter, but I do want to focus on what we have observed from late March to April to provide a clearer picture of future demands, particularly as the Americas and Europe grapple with COVID impacts. In Transportation, we noted a reduction in orders that began in both auto and commercial Transportation sectors in late March and extended into April. As you know, customers have been shutting down factories since late March in Europe and North America. You may have seen announcements regarding these plant closures and projections on when production might resume. In the Industrial sector, orders diminished in commercial aerospace, but we experienced ongoing strength in defense, medical, and energy sectors. Our energy segment services global power utilities. In Communications, demand increased for data and devices for cloud-based applications as data centers expand their capabilities to manage the rise in high-speed data traffic and storage, coinciding with China's recovery. In China, which represents around 20% of our sales, orders have essentially returned to pre-Lunar New Year levels as we move from March into April, indicating a recovery across many of our sectors there. Now, let’s turn to slide 6 to correlate these trends with our sales outlook for the third quarter. This new chart highlights major sequential factors from the second quarter to the third quarter, alongside our assumptions. While we’re not capturing every nuance across our various businesses for the quarter, we anticipate a sales decline of about 25% sequentially into the third quarter, categorized into four areas. The first area involves auto production, which we expect to plunge globally by about one-third sequentially, from 18 million vehicles produced in the second quarter to around 12 million in the third quarter, aligning with IHS projections. This drop in auto production will account for approximately half of our total revenue decline. The second area relates to anticipated reductions in the commercial aerospace market at about one-third due to decreased production by major airframe manufacturers. These first two areas are market-driven. The third area concerns the auto supply chain—our second quarter auto sales were significantly ahead of production largely due to our customers building component inventories during the quarter. As a result, we foresee about $200 million in inventory adjustments by our customers in the third quarter, which should be a temporary effect as those inventories deplete. The fourth area involves supply chain challenges not related to autos. TE and our customers have several factories temporarily closed due to COVID-19 mandated actions, and we expect these disruptions to affect various businesses, with a projected reduction of around $100 million in the quarter. It's important to emphasize that this is the immediate impact we’re observing due to the pandemic, but in the long run, we anticipate benefiting from the widespread secular trends across our businesses, built on the strong market positions we’ve established. Now, let’s briefly review segment results for the quarter, which you can find detailed on slides seven through nine for reference. I will summarize the key points. In the Transportation segment, our sales declined 5% year-over-year organically, with reductions across each of our business areas. Auto sales fell 2% organically as global production decreased by 20%. Our relatively stronger performance was contributed to by customer supply chain preparations ahead of factory closures and continued content growth benefits. While we’re experiencing a volatile demand scenario, we still expect increased production of hybrid and electric vehicles and the ongoing adoption of autonomous features, which should maintain our history of market outperformance. In sensors, I’d like to mention that we recently completed the acquisition of First Sensor, which will be included in our financial results starting in the third quarter. In our Industrial segment, sales fell 3% organically year-over-year as anticipated, affected by downturns in commercial aerospace and industrial equipment due to market weaknesses. However, our defense, medical, and energy sectors remain steady owing to positive trends, and we expect them to continue to perform well throughout the year. Regarding Communications, both sales and margins were as anticipated. Though data and device sales decreased in the second quarter, we are witnessing growth in high-speed and cloud applications, which we expect to persist into the third quarter. With that context, let me hand it over to Heath, who will provide further details on the financials, after which I will return to cover our projections for the third quarter.
Heath Mitts, CFO
Thanks Terrence and good morning everyone. Please turn to Slide 10 where I’ll provide more details on the Q2 financials. Adjusted operating income was $519 million with an adjusted operating margin of 16.2%. Adjusted EPS was $1.29 exceeding the high end of guidance. GAAP operating loss was $415 million due to a one-time non-cash charge in the quarter of $900 million. This reflects a partial impairment of the goodwill associated with our sensors business. Also included are $22 million of restructuring and other charges and $12 million of acquisition charges. We continue to expect restructuring charges in the range of $200 million to $250 million for this fiscal year. GAAP EPS was a loss of $1.35 for the quarter and included non-cash charge of $2.67 related to the goodwill impairment and restructuring acquisitions and other charges of $0.08. On the other side, we also had a tax-related benefit of $0.12 related to the pre-separation tax matters and the termination of the tax sharing agreement shared previously. The adjusted effective tax rate in Q2 was 16.1%. And for the third quarter we would expect a similar rate. And if you turn to Slide 11. Sales of $3.2 billion were down over $200 million year-over-year, including an impact of $60 million from currency exchange rates. But we were able to maintain adjusted operating margins over 16% in the quarter as I mentioned. As Terrence mentioned earlier, we already had a number of actions underway ahead of this downturn which helped us maintain healthy operating margins. For the past two years, we have been executing our margin expansion plans in the Industrial segment. And about a year ago, we kicked off our factory footprint consolidation efforts in Transportation. We continue to execute on these plans and are accelerating certain cost actions due to the recent drop in volumes. I now want to give you an update from an operational perspective. We are operating all of our factories in China and most of our factories throughout Asia. Most of our factories in Europe are operating with the recent reopening of our factories in Italy and Spain. In North America, all of our factories are open in the U.S. but we do have some plants shutdown in Mexico, including those serving automotive. Many of our customers are going through temporary shutdowns of their manufacturing operations in different regions and all of this volatility has caused – has resulted in supply chain dynamics that Terrence discussed previously. In the quarter, cash from operations from continuing operations was $481 million whereas free cash flow was $311 million and we returned $433 million to shareholders through dividends and share repurchases in the quarter. If you'll turn to slide 12 to review our cash flow and liquidity and this is a newer slide that we thought pertinent for this call today. We have a history of strong free cash flow generation and for the current year our free cash flow is up 34% year-to-date versus the prior year. For our fiscal year, we expect free cash flow to be well above $1 billion. Our long-term capital strategy is to return two-thirds of our free cash flow to shareholders through dividends and share buybacks. And we remain committed to paying our dividend and we'll continue to thoughtfully evaluate share repurchases in light of evolving market conditions. We are also reducing our plans for capital expenditures to approximately $575 million this year, which is a reduction of about $100 million from our prior view 90 days ago. However, and this is important, we remain committed to funding growth initiatives that will enable future growth opportunities as that's the lifeblood of our company. We continue to execute on footprint consolidation plans and pursue additional opportunities to drive cost reductions. Across our businesses we have units that are being impacted to different degrees and for those units that are most impacted we are implementing selective furlough of employees that are largely tied to where our corresponding customers have temporary factory closures. We will continue to evaluate our cost structure as the demand environment evolves. We are in a strong liquidity position with $2.3 billion available, as the attached chart details our debt maturity ladder is gradual. In early February of this year we raised €550 million debt at 0% coupon. The use of the proceeds was for the acquisition of First Sensor and pre-funding of our pending $350 million debt maturity in June. At quarter end, we had a cash balance of approximately $800 million. Given our strong cash position, we have not needed to be in the commercial paper market for some time. We have a $1.5 billion undrawn revolver committed by a strong bank group. Within the revolver covenant, we expect to be well below the 3.75 rolling four-quarter debt-to-EBITDA ratio going forward. As a reference point with our current debt-to-EBITDA ratio of 1.5 we are well below that threshold. With that, I'll turn it over to Terrence to provide some additional commentaries about the forward look.
Terrence Curtin, CEO
Thanks, Heath. And we have provided some details of our expectations going forward on slide 13. So let me summarize with a few comments around the words on that page. For quarter three, from a market and demand perspective, we're expecting weakness to be driven by Transportation and commercial aerospace as I've said. In addition, we are expecting supply chain adjustments in Auto as well as broader supply chain impacts in other areas. And we expect the supply chain impact both in auto and other areas to be temporary. As a result, our best estimate for the quarter is an approximately 25% sequential sales decline with an approximate 45% flow-through to adjusted operating income on that revenue decline. And this fall-through is greater than our typical fall-through, due to the shortness and severity of the volume drop sequentially. During the call, we talked a lot about Transportation on comm air. But I do think it's important that, we highlight the areas that are continuing to stay stable as well as we benefit from and they are defense, medical, energy as well as data and devices. And that's about a third of our revenue. The other thing is, we are in an excellent position to benefit as auto demand returns as well as China continues to recover. And while fourth quarter visibility is limited many believe that our quarter three the June quarter will be the low point in global auto production. We expect that production will improve as we move past quarter three and will benefit both from the production increases as well as inventory normalizing in the auto supply chain like I've talked about. While the demand environment is uncertain, I am pleased with our operations resiliency that we've shown and our ability to continue to serve our customers during this challenging time. We have an excellent free cash flow generation model with ample liquidity. And this allows us to continue to invest in content growth and other secular opportunities across our businesses to emerge stronger when our markets return back to growth. And with that Sujal, let's open it up for questions.
Sujal Shah, Vice President of Investor Relations
Okay, Marcelo, could you please give the instructions for the Q&A session.
Operator, Operator
Your first question comes from Shawn Harrison at Loop Capital. Please go ahead.
Shawn Harrison, Analyst
Hi, good morning everybody, good to hear from you.
Terrence Curtin, CEO
Good morning, Shawn.
Shawn Harrison, Analyst
Terrence, I wanted to just go to that last comment of auto production into the second half of the calendar year. And just maybe an idea of how much it could bounce back just upon the normalization of production schedules into the September quarter? I know IHS has a pretty robust figure out there. Maybe that's not realistic, but bounce-off is $12 million. And then secondarily, do you get the same type of margin uplift as production recovers versus the downtick you're seeing in the margin profile this quarter?
Terrence Curtin, CEO
Thank you for the question, Shawn. To provide some context on automotive production, prior to COVID-19, we believed global auto production would stabilize at around 21 million units per quarter. Last quarter, that figure dropped to 18 million, primarily due to disruptions in China and other regions. As we anticipate a further decline from 18 million to 12 million, we are seeing an uptick in production in China, but factory closures in Europe and North America are likely to result in a collective decrease of about 50% in the western world. Looking ahead, we expect our customers to ramp up production. Therefore, while we consider the 12 million-unit impact, it’s reasonable to predict an improvement in the fourth quarter as auto factories resume operations and the supply chain stabilizes. We believe that the third quarter will be the lowest point. Regarding your question about recovery, as production levels increase, we anticipate a significant rebound, similar to the decline we experienced. We are confident in our cost management strategies, which will provide us with the necessary tools to address this situation effectively. We also believe that our strong position in the automotive market will lead us to emerge even more robust from this crisis, as our customers will rely on us as their partners, and TE will be present to support them globally.
Sujal Shah, Vice President of Investor Relations
Okay. Thank you, Shawn. We have the next question please.
Operator, Operator
Your next question comes from the line of Amit Daryanani from Evercore. Your line is open.
Amit Daryanani, Analyst
Good morning guys. Thanks for taking my question.
Terrence Curtin, CEO
Hi, good morning.
Amit Daryanani, Analyst
Good morning. I guess, Terrence, I'm curious in a post-COVID world, do you see market share dynamics accelerate in favor of larger companies. And do you think trends like integrated solutions for connectors and sensors are becoming more attractive to folks? I guess, I'm just trying to understand, when you've gone through recessions in the past, have you seen TE benefit from share gains as you go through a recovery?
Terrence Curtin, CEO
It's a great question and thanks for it. I think what you see as companies go through, we have benefited through these crises to gain share. And I think back to 2008 and 2009 a little bit, while the company is very different, we did gain share because of the financial stability we have that Heath talked about. And also our global customers really looking to how do we get deeper and who's going to support them. And I actually believe that what you saw in our operational performance in the second quarter we did benefit. Where other people couldn't deliver we could. And as people were trying to secure supply chains, they were looking for who could keep their supply chains going in an uncertain time. So I do believe it's a differentiation point. I do think as we've always told you share doesn't move in big chunks in our industry. But they're going to be looking for the partners as they look forward. And I think between how our engineering teams were able to shift over to online innovation, we didn't see a tail-off in projects and also how we've been adapting our supply chain and also not only ours also helping our supply chain partners that are below us understand the safety protocols we expect because they are an extension of us. I'm pretty proud of what we accomplished. And I do think it creates opportunity for more stickiness as we come back. And I do think, it's share opportunity and that's one of the things we view positively about this crisis.
Sujal Shah, Vice President of Investor Relations
Okay. Thank you, Amit. Could we have the next question please?
Operator, Operator
Your next question comes from the line of Deepa Raghavan from Wells Fargo. Your line is open.
Deepa Raghavan, Analyst
Good morning, everyone. Given the current situation, there isn’t much we can control. I want to ask a forward-looking question similar to the previous ones. Terrence, you mentioned this briefly, but could you identify specific signs of recovery we should monitor in Europe and North America, particularly in the automotive sector? We understand it won't follow the same playbook or trajectory as China. Additionally, as you assess your overall portfolio, which verticals should we watch to identify segments that are likely to recover early versus those that may lag? Thank you.
Terrence Curtin, CEO
Thank you, Deepa. I will focus more on the second part of your question, as I believe it's significant. We've discussed the script framing in the automotive and commercial aerospace sectors quite a bit. When examining our portfolio, about a third is experiencing minimal or no impact at all. Our data and device cloud business continues to see an increase in orders, our medical business remains steady, and our energy sector is also stable. Additionally, defense has maintained a solid level of stability. Currently, a third of our portfolio is quite stable in terms of orders. We may face some temporary shutdowns in certain countries due to government requests, but overall indicators remain stable, and I'm pleased with our teams' performance in those areas. A portion of our industrial equipment and appliance sectors is showing some weakness, although both are benefiting from China's recovery due to their significant presence in that market. However, they are still affected in the western markets, which I believe will remain soft. The factors affecting these sectors differ. For the industrial sector, its recovery will depend on future capital expenditure trends. Transportation is another area that will be impacted by automotive builds, and while we have spent considerable time discussing this, it's worth noting our unique advantage compared to many companies: we have a stronger presence in Asia, Europe, and North America. As you analyze builds, please remember that Asian and European markets are crucial, with North America having a lesser impact. Sometimes, being based in the U.S., we may focus on domestic builds more than on global trends, but as Asia and Europe recover, they will be pivotal for us. Finally, there's the commercial aerospace sector, which generates approximately $550 million in annual revenue for us. I mentioned that we expect it to decline significantly from Q2 to Q3, and I believe this market will not rebound in the near term. There are multiple indicators, including statements from Boeing and Airbus, that suggest this sector will be down for some time. I hope this answers your questions regarding the various indicators, and I appreciate your inquiry.
Sujal Shah, Vice President of Investor Relations
Okay. Thank you, Deepa. Could we have the next question, please?
Operator, Operator
Your next question comes from the line of Christopher Glynn from Oppenheimer. Your line is open.
Christopher Glynn, Analyst
Thank you. Good morning. Was curious to hear you talked about Terrence, the U.S. factories and facilities up and running Mexico, still pockets of shutdowns. Are there any key differences between government mandates and how those roll through in the respective production regions? And also any major impacts of just how people workers are responding independent of government mandates.
Terrence Curtin, CEO
Thank you for the question. Heath covered in the prepared comments the different situations we've encountered. We've observed that government responses vary significantly across the globe. In most regions, our products are considered essential, allowing us to continue operations and ensure our products reach all the necessary applications. However, some countries have implemented stricter shutdown measures. As Heath mentioned, Europe faced particularly severe situations in Italy and Spain, leading us to temporarily halt operations there, although those factories are now reopening. In Mexico, the definition of essential services has been narrower, focusing mainly on medical and food processing sectors, with other industries gradually being added back. Therefore, we are operating at reduced capacity in Mexico. The global government responses have varied widely. Regarding our workforce, it is vital that we prioritize employee safety. With our global presence, we learned many valuable practices during COVID in China that helped us resume operations there quickly, and we've been applying those insights globally. Our supply chain and crisis teams have done an excellent job ensuring that we have the necessary protective equipment, temperature screening, and adjustments to factory layouts to minimize crowding. We are also retraining employees to ensure they feel comfortable returning to their work environments. Furthermore, we continue to invest in automation, which allows us to be less dependent on labor in certain regions compared to five or ten years ago. Overall, the situation is quite complex, and we are navigating it strategically. For the areas that are restarting operations, we have comprehensive procedures in place to ensure our employees return safely and are prioritized appropriately.
Sujal Shah, Vice President of Investor Relations
Okay. Thank you, Chris. We have the next question, please.
Operator, Operator
Your next question comes from the line of Wamsi Mohan from Bank of America. Your line is open.
Wamsi Mohan, Analyst
Hi. Yes. Thank you. Good morning. Hey, Terrence, can you compare how TE is different this downturn versus the last downturn? It feels like your breakevens are quite different. Trough margins appear a lot higher than they did last time around. And if I could, what would decremental margins have looked like in your fiscal 3Q, without the supply chain adjustments? Thank you.
Terrence Curtin, CEO
I understand I need to address this question since Heath wasn't around in 2008 and 2009. Many companies have referenced those years while setting their forecasts. There are some similarities between TE today and back then, but there are also many significant differences. Our portfolio has been adjusted, and we've made strategic moves that have strengthened our position. If I summarize what's similar, the most important element is our cash generation model. It remains resilient even during challenging times. We utilize working capital when markets are growing, and during downturns, we'll still generate free cash flow while adjusting our capital expenditures and prioritizing growth investments. This approach has historically enabled us to strengthen our position during crises. Now, regarding the differences, our portfolio is much more concentrated and robust now compared to 2008 and 2009. The businesses we engage in are aligned with positive secular trends, and we've divested from areas that don’t follow those trends. Back in 2008 and 2009, we had stagnant telecom operations and a heavy presence in consumer electronics, whereas today we have built an unparalleled platform. Another notable difference is our automotive segment. While we've always had a significant automotive business, it's evolved significantly. In 2008 and 2009, China didn’t account for 25% of global car production like it does now. Our leading position in this sector is unique. Additionally, while our automotive margins were average leading into the last crisis, our Transportation segment margins are considerably stronger this time. We've taken various cost actions since the last crisis, resulting in a company that is currently in a much healthier financial situation. Our margins are now 300 basis points higher than in 2008 and 2009, just as we face this downturn, and our balance sheet is much more solid. So, while fluctuations in auto production will impact us, the overall health of TE and our improved cost structure puts us in a favorable position for navigating crises and emerging even stronger afterward.
Sujal Shah, Vice President of Investor Relations
Okay. Thank you, Wamsi. We have the next question, please.
Operator, Operator
Your next question comes from Mark Delaney from Goldman Sachs. Your line is open.
Mark Delaney, Analyst
Yes. Good morning, and thanks very much for taking the question.
Terrence Curtin, CEO
Good morning. Mark.
Mark Delaney, Analyst
I was hoping to better understand how TE is thinking about its content per car opportunity. I realize you already described some near-term inventory adjustments in the auto market for the completed quarter and for the current quarter. But if you put that aside, is there any change to how you're thinking about your content per car opportunity either because of pricing dynamics or delays in new car launches? Thank you.
Terrence Curtin, CEO
Thanks, Mark, and I'll take that. And what's interesting is we don't. As I said earlier, the emission requirements in places like Europe are not changing. We also believe even with this change in production the number of global hybrid and electric vehicles will still be up year-over-year even in a lower production environment and all the production growth that's been taken out are combustion engines. So the 4% to 6% that we've always talked to you about where we look through where our growth is coming from our engineering projects, what are the trends. Certainly, electric vehicles are continuing to accelerate. We've talked to you before autonomy. It's probably a little bit further out. But net-net, the 4% to 6% content opportunity continues to be real and it hasn't changed the way we think about it.
Sujal Shah, Vice President of Investor Relations
Okay. Thank you, Mark. We have the next question, please.
Operator, Operator
Your next question comes from the line of Joseph Giordano from Cowen.
Francisco Amador, Analyst
Good morning, Terrence. Good morning, Heath. This is Francisco on for Joe. Can you guys expand on the $900 million impairment charge that you guys took this quarter please?
Heath Mitts, CFO
Sure. This is Heath. This is related to our sensors platform most of which was acquired in 2014 with the acquisition of Measurement Specialties. So, there's been subsequent acquisitions that have come into that platform over the years of smaller size. And – but there's been a downturn in those markets here for a while. And particularly in the Industrial space, which is about half of our sensors business. We've seen a downtick here going back several quarters as well as following the trends that we've seen in other Industrial businesses as well as in the commercial transportation space, which is about a quarter of the sensors business. So that factored in with a down – an outlook that is consistently down with everything else, we've talked about today did push us to take a harder look at where we sat relative to the accounting treatment of that and we've made an election in the quarter to take that charge based on the accounting rules that govern that. It's a non-cash charge and it kind of right-sizes the carrying value from accounting perspective.
Sujal Shah, Vice President of Investor Relations
Okay. Thank you. We have the next question, please.
Operator, Operator
Your next question comes from the line of Craig Hettenbach from Morgan Stanley. Your line is open.
Craig Hettenbach, Analyst
Yes. Thanks. Heath, I just wanted to follow-up on understanding there's a lot of pressure on auto production but just going back to the content theme, particularly from a sensor pipeline perspective. Just curious prior to these disruptions how you were feeling about kind of design win activity for sensors and any update on just the work you're doing in combination of sensors and connectors?
Terrence Curtin, CEO
Yeah. Sure Craig. Thanks for the question. And when we think about it the revenue pipeline we have around sensors and automotive continues to stay robust. Certainly, it's going to be impacted by lower production builds on the planet. So – and that ties into a little bit what Heath talked about in the prior question. But that momentum as you continue to see how sensors need to play in a car actually around whether it goes to electric and current sensing what happens on autonomy as well as the momentum of our TERP, our revenue pipeline that momentum still stays strong similar to the engineering projects as I said. So nothing has changed there. Certainly, it's being impacted by the end market downturns in auto and Industrial Transportation like Heath said, but when we think about the opportunity about that content that opportunity has not changed per vehicle. It's really the number of vehicles made that has been impacted.
Sujal Shah, Vice President of Investor Relations
Okay. Thank you, Craig. We have the next question, please.
Operator, Operator
Your next question comes from the line of Samik Chatterjee from JP Morgan. Your line is open.
Unidentified Analyst, Analyst
Hi. Good morning. Thanks for taking my question. This is actually Bharat on for Samik. So continuing on the automotive market I just had one question. So what are you seeing in terms of order trends or erosion, specifically in the China automotive market? I mean, the latest IHS data, we saw yesterday is showing some stability although at a low level in the automotive production outlook for China. So, are you starting to see the same stabilization in order trends as well? Thank you.
Terrence Curtin, CEO
Yeah. Well, a couple of things that when it comes to China. China we have seen production increase and production will increase off of the low quarter two levels that you have in China. And we do expect production as our customers have ramped up. So that is then, I would call it a healing process. The other thing that I think was a nice data point to have is that in March there was about 1.3 million cars sold in China. Certainly, the consumer element needs to come back. But that alone if it stayed at that March rate would be about 16 million to 17 million unit SAAR based upon the March sales. So all those factors need to continue to improve, but we do see increased production and the production decline from quarter two to quarter three is really in Europe and North America that we've highlighted.
Sujal Shah, Vice President of Investor Relations
Thank you, Bharat. Can we have the next question please?
Operator, Operator
Your next question comes from the line of David Leiker from Baird. Your line is open.
David Leiker, Analyst
Good morning everyone.
Heath Mitts, CFO
Hey David. Good morning.
David Leiker, Analyst
I noticed on the Transportation Solutions slide that your sales decreased by 2% organically with a 20% decline in build rates. Typically, that disparity could be attributed to content gains or shifts in mix, but it seems that supply chain issues might be contributing significantly. If possible, could you quantify how much of the difference between build rates and your revenues is due to supply chain factors and whether this might change later in the year?
Terrence Curtin, CEO
David. It's Terrence. When we’ve talked about quarter two to quarter three being down sequentially, there was an element of auto production going from 18 million to 12 million. We also estimate back to those data points that you've said, there was about $200 million where our customers were putting orders on us, we delivered with what we were able to continue to get our factories up. That $200 million is what will turn here in the third quarter. And that's one of the numbers we highlighted in quarter 2 to quarter 3. And the simple way to think about it, our auto revenue in the quarter was pretty much as we expected. We thought there was going to be 21 million cars made in the plant. There was 18 million. It's 3 million vehicles times $65 gets you to about the $200 million that we're estimating that was hey revenue that you could sort of say probably should have been in quarter 3. We were able to ship it in quarter 2, as people were really trying to deal real time with COVID-19. And that will work through and normalize as we go through quarter 3.
Sujal Shah, Vice President of Investor Relations
Thank you, David. Can we have the next question, please?
Operator, Operator
Your next question comes from the line of David Kelly from Jefferies. Your line is open.
David Kelly, Analyst
Hi, good morning. Just a quick question. Thanks for taking my question. Just a quick one on distribution channel exposure, I think you referenced in the slide deck ongoing Industrial corrections. Just wondering if you could give us some color into what you're seeing in data and devices and appliances as well. And maybe more broadly how do you see channel health shaping up into the back half of the fiscal year here?
Terrence Curtin, CEO
Thanks for the question. And certainly we've been talking a lot about end markets and we do typically talk about channel. Over the past 6, 9 months, we've been in an element of where our channel partners have been correcting. And what I would say we've seen is that correction of their inventory position seems to have normalized. As we've ended March probably across our markets with the exception of being our Industrial business and total TE channel is up to about 20%. So what we've seen from POS trends which is what our distributor is selling out outside of Transportation and comm air type of markets, have been pretty steady. So we're watching those indicators to see if there's inventory builds. It feels okay right now, but there is the Industrial market that feels like it has a little bit too much inventory in it. And certainly with the demand impact and we're going to have to keep an eye on it. But right now it feels stable outside of Transportation and comm air.
Sujal Shah, Vice President of Investor Relations
Thank you, David. Can we have the next question, please?
Operator, Operator
Your next question comes from the line of Jim Suva from Citigroup. Your line is open.
Jim Suva, Analyst
Thank you very much. In discussing the commercial aerospace sector and, to some degree, the transportation industry related to autos and trucking, there seems to be a conversation among OEMs regarding price concessions to suppliers and potential changes that may be needed. Can you share your expectations for these price concessions, or anything else happening within the supply chain? Thank you.
Terrence Curtin, CEO
Sure Jim. Thanks for the question. Our pricing environment has been relatively stable. In the automotive sector and similar areas, we offer productivity benefits to our customers during their annual negotiations, which revolve around the investments we make and the volumes they achieve. I expect these discussions to reflect what we have seen in previous crises, with price erosion remaining at historical rates based on the value we provide. I do not anticipate any acceleration in price erosion, as maintaining a certain level of supply certainty is also essential. Our position, supported by innovation and strong manufacturing partnerships with our customers, creates a balance that allows us to sustain current pricing levels.
Sujal Shah, Vice President of Investor Relations
All right. Thank you, Jim.
Jim Suva, Analyst
Thank you so much.
Terrence Curtin, CEO
Thanks, Jim.
Operator, Operator
Your next question comes from the line of Matt Sheerin from Stifel. Your line is open.
Matt Sheerin, Analyst
Yes, thanks, and good morning. So a question just regarding some cost cutting actions. Heath, you talked about, it sounded like just ongoing cost-cutting actions that you've been doing and then some furloughs, but nothing incremental in terms of taking any fixed costs out. So what are your thoughts there? And at what point do you take that next step to do some further consolidation particularly if we're in a longer recession and the auto market doesn't recover as quickly as maybe you think.
Heath Mitts, CFO
Matt, thank you for the question and the follow-up. I’d like to clarify a few points. Over the past couple of years, we've been quite open about our efforts in the industrial sector. About a year ago, we initiated a consolidation of our auto-related factory footprints, so we were prepared for the challenges ahead. The recent sharp sequential decline of 25% poses significant challenges for margins in the short term. Nevertheless, our priority remains on achieving permanent cost reductions. We will consider furloughs, especially where our customers have implemented them, to avoid keeping excess personnel in our factories. Our approach to cost reductions is focused on making lasting changes, so that when we return to growth, it will be more robust. This situation allows us to accelerate some existing initiatives, as we can ramp up inventory builds and other necessary adjustments. Additionally, we are actively exploring additional restructuring measures. I apologize if my previous comments weren’t detailed enough on that front. We are already implementing changes on the factory side, and we do not need to start from scratch. The business will be adjusted to be more sustainable, and we will consider our long-term margins as we return to a more normal operating environment. It’s also worth noting that outside of the auto sector, we have stable segments currently operating at full capacity. As Terence mentioned, our defense, data and devices, medical, and energy sectors are all performing well and meeting customer demand. Each segment presents a different situation. Regarding auto, we will ensure that our operations are appropriately sized not only for the upcoming quarters but also for fiscal years 2021 and 2022, which is crucial to keep in mind.
Sujal Shah, Vice President of Investor Relations
Okay. Thank you, Matt. Could we have the next question, please.
Operator, Operator
Your next question comes from the line of William Stein from SunTrust. Your line is open.
William Stein, Analyst
Thank you for taking the question. Heath, a moment ago you talked about performance of sensors in the industrial end market. And with it actually I think there was some progress on the First Sensor acquisition in the quarter. Can you update us on the status of the integration of that company and its product portfolio and in your future plans in that category? Thank you.
Heath Mitts, CFO
Sure, Will, thank you for the question. Sensors continue to play a crucial role in our growth strategy, and we remain optimistic about our long-term prospects despite the accounting changes we made this quarter. Earlier, Terrence noted the strong performance of the auto component within our sensors revenue pipeline. While some of these elements have been delayed due to volume issues, our design wins in auto sensors remain strong. We are also well-positioned in the commercial transportation sensors sector, although we have been experiencing pressure on both the sensor and traditional connector sides of the business since last summer. Nevertheless, we maintain a solid market share in that area. Together, auto and commercial transportation account for about half of our sensor business. The industrial segment, which serves various end markets, is facing similar challenges, particularly as our industrial business has seen a significant organic decline. As we move forward, we will highlight how First Sensor complements our product offerings. We are currently close to owning three-quarters of the shares, and as Terrence mentioned, we'll start incorporating some of their financials into our results this quarter. We also have processes in place under German law to acquire the remaining shares, and we are pleased with our progress despite the lengthy process. The product range and manufacturing capabilities of First Sensor remain vital to us, and we will continue to discuss the role of sensors in our growth strategy.
Sujal Shah, Vice President of Investor Relations
Okay. Thank you, Will. We have the next question, please.
Operator, Operator
Your next question comes from the line of Joseph Spak from RBC Capital. Your line is open.
Joseph Spak, Analyst
Thanks, everyone. I just quickly wanted to go back to your estimate of the auto supply chain impact, because if you back out that $200 million, you were sort of really more in line with – with global production in your second quarter. And I know you have a longer-term outgrowth opportunity but was there something specific to either mix or share that impacted this quarter?
Terrence Curtin, CEO
No. On any one quarter, you're never going to have a perfect 4% to 6% because of all the supply chain elements that happen. So there wasn't anything specific. And the supply chain impact let's face it – it is an estimate on our behalf with all the moving parts we have. But the content that we see happening the 4% to 6% there's no change in that. And you should look at that over a year period or so not one quarter.
Sujal Shah, Vice President of Investor Relations
Okay. Thank you, Joe. We have the next question, please.
Operator, Operator
Your next question comes from the line of Nick Todorov from Longbow. Your line is open.
Nick Todorov, Analyst
Thanks. Good morning, gentlemen. I understand a big portion of your out inventory adjustments will occur in the June quarter. But I guess, can you talk about your expectations regarding destocking potentially lasting into the second half of the year? I mean in other words, do you expect the correction to be a deep and quick one contained only in the June quarter, or you see some spillover?
Terrence Curtin, CEO
Well, what we've said is some of the destocking in some cases because of the – being the automotive supply chain. The automotive supply chain is sort of – at least how I think about it is sort of a six-week just-in-time supply chain. It's not an Industrial supply chain or a channel supply chain that is very, very spaghetti like. So when we sit there and the way that we're guiding is we sort of assume as our customers ramp back up they will burn off this extra stock. Certainly that's our assumption. Could it last a little longer? Potentially but it'll depend how they ramp. And certainly they don't like a lot of excesses in the supply chain. So we view it would be probably over a three-month period was reasonable.
Sujal Shah, Vice President of Investor Relations
Okay. Thank you, Nick. We have the next question, please.
Operator, Operator
Your last question comes from the line of Shawn Harrison from Loop Capital. Your line is open.
Shawn Harrison, Analyst
Hi. Thanks for allowing me back in. Heath, just a follow-up on both kind of the restructuring and kind of the normalized goals. To be clear, there is no change in kind of the normalized margin profile you're searching – you're targeting for any of the three business lines? And then second, I think you've done $650 million – or that you're targeting in 2018, 2019 and 2020 about $650 million of restructuring. Where are you in terms of the payback of those restructuring actions? Are you a third of the way through it right now or even less?
Heath Mitts, CFO
I appreciate the question, Shawn. The normalized margins for our business remain stable, with TS in the high teens approaching 20, IS consistently in the mid- to high teens, and CS in the low to mid-teens, growing towards that range. These figures have not changed. However, we will need to see some volume return in certain areas to support these margins. Our long-term strategies aimed at reducing permanent costs will help to narrow the gap. Regarding the restructuring, most of our actions have been systematic, focusing on specific facility relocations within Industrial and transportation, a process that continues as we anticipate charges for this fiscal year. The payback period for these changes is about three years, which is longer than what is typically expected in the U.S. It’s important to note that some plants that were shut down are in regions where the costs to close them out are extended. The overall blended payback stands at about three years. Depending on the facility in question, we are at various stages of this process, as different locations have different timelines and challenges, particularly in light of the ongoing COVID-19 situation. While some aspects have slowed, there are operational factors, like inventory builds, that we can manage to help reduce costs more quickly. Overall, I would say we are about halfway through this process. Sometimes, charges reflected in the P&L can take over a year before the associated savings materialize due to accounting practices related to cost elimination, so there is a delay involved. Thank you for your question.
Sujal Shah, Vice President of Investor Relations
Thank you, Shawn. Okay. It looks like there's no further questions. If you do have questions please contact investor Relations at TE. I want to thank everyone for joining us this morning. Thank you.
Operator, Operator
Ladies and gentlemen, your conference will be made available for replay beginning at 10:30 A.M. Eastern Standard Time today April 28th, 2020 on the Investor Relations portion of the TE Connectivity's website. That concludes your conference for today.