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Edited Transcript of TEL earnings conference call or presentation 29-Jan-20 1:30pm GMT

Q1 2020 TE Connectivity Ltd Earnings Call

SCHAFFHAUSEN Feb 5, 2020 (Thomson StreetEvents) -- Edited Transcript of TE Connectivity Ltd earnings conference call or presentation Wednesday, January 29, 2020 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Heath A. Mitts

TE Connectivity Ltd. - Executive VP & CFO

* Sujal Shah

TE Connectivity Ltd. - VP of IR

* Terrence R. Curtin

TE Connectivity Ltd. - CEO & Director

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Conference Call Participants

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* Bharat Daryani

JP Morgan Chase & Co, Research Division - Analyst

* Christopher D. Glynn

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

* Craig Matthew Hettenbach

Morgan Stanley, Research Division - VP

* David Lee Kelley

Jefferies LLC, Research Division - Equity Analyst

* Deepa Bhargavi Narasimhapuram Raghavan

Wells Fargo Securities, LLC, Research Division - Associate Analyst

* Erin Alexandra Welcenbach

Robert W. Baird & Co. Incorporated, Research Division - Analyst

* Jim Suva

Citigroup Inc, Research Division - Director

* Joseph Craig Giordano

Cowen and Company, LLC, Research Division - MD of Industrials, Automation and Robotics

* Joseph Robert Spak

RBC Capital Markets, Research Division - Analyst

* Mark Trevor Delaney

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Matthew John Sheerin

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst

* Shawn Matthew Harrison

Longbow Research LLC - Senior Research Analyst

* Wamsi Mohan

BofA Merrill Lynch, Research Division - Director

* William Stein

SunTrust Robinson Humphrey, Inc., Research Division - MD

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by and welcome to the TE Connectivity First Quarter Earnings Call for Fiscal Year 2020. (Operator Instructions) As a reminder, today's call is being recorded. I would now like to turn the conference over to our host, Vice President of Investor Relations, Sujal Shah. Please go ahead.

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Sujal Shah, TE Connectivity Ltd. - VP of IR [2]

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Good morning, and thank you for joining our conference call to discuss TE Connectivity's first quarter 2020 results. With me today are Chief Executive Officer, Terrence Curtin; and Chief Financial Officer, Heath Mitts.

During 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, 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.

Also, within the Industrial segment, we have broken out sales for our medical business separately from industrial equipment. On Slide 17 and on our website, you will see 8 quarters of historical revenue for the medical business and industrial equipment for your reference. There is no change to our segment reporting or those numbers.

(Operator Instructions)

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

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Terrence R. Curtin, TE Connectivity Ltd. - CEO & Director [3]

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Thank you, Sujal, and thank you, everyone, for joining us today to cover our first quarter results as well as our increased outlook for fiscal 2020.

As I normally do, before we get into the slides, I do want to frame out some of the key points that Heath and I will bring out during today's call.

First is that things are playing out as we expected when we provided our original guidance to you 90 days ago. Our expectations of markets in fiscal 2020 is essentially unchanged. Our order patterns are indicating stability. And the distribution destocking that we talked about for a few quarters is trending as we expect.

In addition to the things playing out, I'm also very pleased with our execution in the first quarter. And this is against the continued challenging market backdrop. We delivered revenue above the guidance midpoint and adjusted earnings per share above the high end of guidance, driven by strong operational execution across our segments.

Based upon our strong first quarter, we are raising our full year guidance to reflect the outperformance in the first quarter, and we're maintaining a view of second half that is consistent with our guidance that we gave you 90 days ago.

And then finally, there are 2 things that we talked about with you and we're focused on within this market backdrop that we're operating in. First is we're going to continue to focus on content growth that will enable outperformance versus the underlying end markets that we positioned TE around, and we are continuing to benefit from these secular trends across our businesses. The second key thing is that we continue to improve our earnings power by executing on cost actions and footprint consolidation plans, which we will expect to generate higher margins and earnings from the first half to the second half of our fiscal year.

So with that as a quick summary, let's get into the slides, and let me ask you to turn to Slide 3, and I'll get into some of the highlights from the first quarter. Sales of $3.2 billion exceeded the midpoint of our guidance, representing 5% year-on-year declines on both reported and organic basis driven by market weakness. While the number of our markets are challenging, we continue to demonstrate content growth across our business, and this can be whether it's an electric vehicle or autonomous features and transportation, next-generation aircraft and noninvasive medical procedures in our Industrial segment, or cloud computing in communications.

By segment, Transportation was down 6% organically as we expected, driven by production declines in both the auto market as well as commercial transportation market.

Industrial Solutions saw growth 1% organically, which was ahead of our guidance, driven by continued strength in AD&M, medical and energy.

And our Communications segment declined 14% organically as we expected, driven by continued inventory destocking in the distribution channel, which we've been talking about for a few quarters.

As we've highlighted to you, supply chain adjustments take a few quarters to play out, and this is happening as we expected supported by our orders increasing sequentially and our book-to-bill ending the quarter at 1.02, and I'll cover that when I cover the order slide in a few minutes.

From an earnings perspective, adjusted operating margins were approximately 16% as we expected. Adjusted earnings per share was $1.21, which exceeded the high end of our guidance, driven by higher sales and execution of our cost initiatives. On a 5% sales decline, adjusted earnings per share declined at a similar rate, demonstrating strong operating performance and the benefit of pulling levers to reduce costs in an uncertain market environment to preserve earnings resiliency.

From a cash flow perspective, our free cash flow was very strong during the quarter at approximately $245 million. And approximately -- we returned approximately $300 million back to our owners through dividends and share repurchases. I want to be clear that our capital strategy continues to include capital deployment to build out our portfolio inorganically and capitalize on secular trends to drive future growth.

Now let me turn over and talk about our full year guidance briefly, and I'll come back towards the end of the call and get into more details about it. For the full year, this does reflect the upside in our first quarter and a view of the second half that is consistent with our prior view. We now expect sales of $13.05 billion. The sales guidance assumes organic decline for the year of 1% to 3%. On a year-on-year basis, our sales guidance reflects a decline of approximately $400 million. Half of this is due to currency exchange rates and the other half is driven by the market weakness and distribution, inventory destocking, which we discussed with you last quarter. We are raising the low end of our adjusted EPS guidance to get to a midpoint of $5.10. This midpoint continues to include $0.30 of year-over-year headwinds from currency and tax impacts, which is the same as our guide from last quarter.

While we can influence in market environment, I am pleased that we continue to execute on leverage, which we can control to drive our cost reduction and footprint consolidation plans, while continuing to invest in the long-term growth and our content opportunities.

As we discussed last quarter, we expect to generate improvements in both margin and earnings per share as we move from the first half to the second half of this fiscal year.

So with that as a backdrop of our first quarter results, let me get into order trends, and I'd ask you to turn to Slide 4.

For the first quarter, our book-to-bill was 1.02, and this exceeded 1 for the first time since the second quarter of 2019 and reflects an improving supply chain as well as stability in certain end markets. Organic orders were down 2% year-over-year, but we did see orders grow sequentially, signaling stabilization in some of the key markets.

When I talk about orders, I'm going to talk about them on a sequential basis, as this helped lays out the foundation for our quarter 2 guidance and how we're thinking about the shape of our year.

In Transportation, orders declined slightly sequentially as we expected, driven by North America, and this was offset by growth in China.

In Europe, in Transportation, orders were essentially flat on a sequential basis. And as we think about the market, we continue to expect global auto production to be stable at a run rate of approximately 21 million units per quarter through fiscal 2020.

Turning to Industrial. Our orders grew sequentially across all regions, and the growth was driven by AD&M as well as medical.

In the Communications segment, we saw strong sequential order growth in both appliances and data devices, reinforcing our expectation of growth in the second half. And as we talked about the distribution channel, from an overall basis, and certainly, the channel impacts our CS segment the most as well as our industrial equipment business in Industrial. Our orders did decline 10% year-over-year, as we expected, but more importantly, we saw orders growth grow double digits sequentially and have reinforced our view of the inventory normalization that we expect by the end of quarter 2 and will drive sequential growth as we get into the second half of the year.

So with that being a summary of orders, let's get into the segment performance, and I'll start with Transportation that begins on Slide 5.

Transportation sales were down 6% organically year-over-year as we expected. Our auto sales were down 3% organically, driven by global auto production declines. Once again, we continue to outperform auto production due to content growth, driven by the increase in electric vehicles as well as autonomous features in vehicles.

In our commercial transportation business, sales were down 16% organically, driven by weakness in North America and Europe, and this was partially offset by growth in China as a result of China VI emission's adoption as well as content gains by us.

In sensors, our sales were down 11% organically, and this was driven by the weakness in the commercial transportation and industrial end markets.

In auto, our sensors revenue was flat year-over-year despite production declines and it reflects the ramps of the new design wins that we've been talking about for a number of years.

From a margin perspective, adjusted operating margins were 17.4% as expected, down year-over-year on lower volumes.

So let's turn to Industrial Solutions segment, and that starts on Slide 6. For the segment, sales grew 1% organically year-over-year, and this was above our expectations. Three of our businesses in the segment saw very strong growth, which was partially offset by ongoing weakness in the industrial equipment market.

Our Aerospace, Defense and Marine business delivered another very strong quarter of 9% organic growth, driven by content growth and new programs in both commercial aerospace as well as defense.

As Sujal mentioned earlier, we are now breaking out our medical business from our industrial equipment business to give you greater visibility to another area of growth within TE. Now just as a reminder, in medical, we serve both the interventional and surgical imaging markets, and the key area of focus from an application perspective are areas around minimally invasive medical products. What's great here is we are a partner of choice to premier OEMs, and our technology enables customers to build the medical devices that save lives as well as reduce costs. What's really nice about what we've built here is that our engineering capability as well as track record of quality, medical expertise and broad technical offering really differentiate TE in this market.

From a performance perspective in the quarter, the medical business grew 7%, and it was driven by growth entirely by interventional applications, and this trend is one that's going to continue to drive growth for quite some time for us.

And our energy business had very nice quarter. It was up 12% organically. And this growth was being driven by investments in renewable energies as well as infrastructure upgrades in certain parts of the world.

In the industrial equipment business, our sales were down 15% organically, driven by both weak market conditions and factory automation applications as well as this unit is being impacted by distribution inventory destocking.

From an earnings perspective, adjusted operating margins were down as we expected due to the cost from footprint optimization activities. And as we talked to you before, we continue to remain on track with our multiyear margin expansion plan for the segment.

So with that, I'd like to turn to Slide 7, and let me get into Communications Solutions. Data & Devices sales were down 15% organically, and our appliance business sales were also down double-digit organically. And these were in line with our expectations. We saw demand-driven weakness across all regions, along with ongoing inventory destocking in the distribution channel. As a reminder, this segment has the highest percentage of our business going through distribution, so they will always have a greater impact from channel dynamics than the other 2 segments. As I mentioned earlier, what's really nice is we did see sequential growth in orders for both of these businesses, which gives us confidence of growth as we move into the second half of our fiscal year.

Margins in the segment were 12.1%, and they were impacted by the volume-driven sales decline. And we expect to return to mid-teen target margins in the second half as distribution channel normalizes to be more in line with market conditions.

With that, I'm going to turn it over to Heath, who will go through the financials in some more detail, and I'll come back and cover guidance in a little bit.

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Heath A. Mitts, TE Connectivity Ltd. - Executive VP & CFO [4]

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Thank you, Terrence, and good morning, everyone. Please turn to Slide 8, where I will provide more details on the Q1 financials.

Adjusted operating income was $502 million with an adjusted operating margin of 15.8%. GAAP operating income was $471 million and included $24 million of restructuring and other charges and $7 million of acquisition charges. We continue to expect fiscal 2020 restructuring charges to be similar to fiscal '19.

Adjusted EPS was $1.21, down 6% year-over-year. And as Terrence mentioned, on a 5% sales decline, adjusted EPS declined at a similar rate, demonstrating our ability to execute on multiple levers to drive earnings performance. GAAP EPS was $0.07 for the quarter, but then included a tax-related charge of $1.05, which was related to the impact of the Swiss tax reform that we had talked to you about last summer. This was a noncash charge. We also had restructuring, acquisition and other charges of $0.09.

The adjusted effective tax rate in Q1 was 18.6%. And for the full year, we continue to expect an adjusted effective tax rate of around 18% to 18.5% and that's unchanged from our prior review from 90 days ago.

Importantly, we expect our cash tax rate to stay well below our reported ETR for the full year.

Now if you turn to Slide 9. Sales of $3.2 billion were down 5% year-over-year on both the reported and organic basis. Currency exchange rates negatively impacted sales by $43 million versus the prior year. Adjusted operating margins were 15.8% as expected. As Terrence mentioned, we expect margin expansion from the first half to the second half of the year as we see benefits of sales growth and the cost actions we've initiated over the past year.

I continue to be pleased with the progress we are making in driving improvements to our cost structure. The team is executing well, but we still have work to do on our footprint optimization plan. And as discussed in the past, this is a multiyear journey, but I feel like we're on the track.

In the quarter, cash from continuing operations was $411 million and up 25% year-on-year. Free cash flow was $243 million, and we returned $297 million to shareholders through dividends and share repurchases in the quarter.

Our balance sheet remains strong, and we expect cash flow to remain strong, which provides us the flexibility to utilize cash to support organic growth investments to drive long-term sustainable growth, while also allowing us to return capitals to shareholders and continue to pursue bolt-on acquisitions.

We are seeing the benefits of the levers in our business model to help mitigate the impacts on weaker sales on our margin and EPS performance. And as you should expect, we will continue to balance our structural cost actions with our long-term growth investments to ensure sustainability in our business model.

So with that, I'll turn back to Terrence to cover guidance.

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Terrence R. Curtin, TE Connectivity Ltd. - CEO & Director [5]

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Thanks, Heath. And, yes, let me get into our guidance, and I'll get into the second quarter, which is on Slide 10.

As I mentioned earlier, our markets are playing out as we expected and we laid out for you 90 days ago. Driven by the order patterns that we see in quarter 1 that I covered earlier, we do expect second quarter revenue of $3.1 billion to $3.3 billion and adjusted earnings per share of $1.22 to $1.28 per share.

At the midpoint, this represents declines in reported sales of 6% overall and organic sales of 5% year-over-year and reflects the weakness in the end markets and the ongoing effects of destocking in the distribution channel. We do expect to grow sequentially from the first quarter to the second in both sales and adjusted earnings per share, and that is a view that gives us confidence about stabilization.

By segment, we do expect Transportation Solutions to be down low single digits organically, and it's mainly going to be driven by the weakness in the commercial transportation market and with mid-single-digit declines in global auto production.

Industrial Solutions is expected to be down low single digits organically with continued market weakness in industrial equipment, being partially offset by growth in Medical, Defense and Energy. And in Communications, we expect to be down low teens organically driven by continued inventory destocking in the distribution channel.

So please turn to Slide 11, and let me get into the full year guidance. As I covered earlier, we expect full year sales of $13.05 billion at midpoint, and this will represent year-over-year declines in reported sales of 3% and on an organic basis, 2%. We are continuing to expect year-over-year headwinds of approximately $0.30 from currency exchange and tax rates, and note that most of the year-over-year tax headwind will occur in the second half.

Let me get into some more color on our segments that are included in our guidance. In Transportation, we expect for the year to be down low single digits organically. We expect our organic auto sales to be flat to down slightly for the full year. And as I mentioned earlier, we continue to expect a global auto production run rate of approximately 21 million vehicles per quarter, resulting in mid-single-digit global production declines for fiscal 2020, which is consistent with our prior year view. We expect content growth to enable us to continue to outperform declining auto production. We also expect our commercial transportation business to outperform high single-digit market declines in that market due to content growth and share gains this year.

In our Industrial segment, we expect to grow low single digits organically, with growth in Defense, Medical and Energy, partially offset by declines in industrial equipment.

And finally, in Communications, we do expect to be down mid-single-digits organically, with both data and devices, appliances being impacted by the continued broad market weakness and inventory destocking in the distribution channel. Once we work through the inventory adjustments in the first half, we do expect to move back to positive year-on-year organic growth for the second half of the year in our Communications segment.

So before I get into questions, let me just recap the key points that we made today, and I'm sure we'll talk more about in Q&A.

First, we have built a strong portfolio with leadership positions in the markets we serve. This portfolio that we built is performing significantly better than the last time we went through a market downturn. This is evident in our quarter 1 results, where we delivered sales and adjusted earnings per share ahead of guidance, and our operating execution enabled us to raise our guidance for fiscal 2020.

The second key point are things are playing out as we expected when we provided our guidance 90 days ago. Our expectations of markets in fiscal 2020 is essentially unchanged. Our order patterns are indicating stability, and distribution destocking is trending as we expected, giving us confidence in the sales and earnings growth sequentially in the second half.

The third key point is around content. And content growth is enabling outperformance even in declining markets and is helping to buffer the market conditions we're seeing. We're going to continue to benefit from secular trends, whether it's electric vehicles, autonomy, next-generation aircraft, minimally-invasive medical applications, factory automation or cloud computing. And these trends are going to be with us for a long time.

And finally, we are executing on what we can control through our restructuring plans across all of our segments, and we're focused on this to ensure we get greater leverage in earnings power when markets return to growth.

So with that, I do want to thank our employees around the world for their continued strong execution as well as our continued commitment toward our customers and a future that is safer, sustainable, productive and connected.

So Sujal, with that, let's get to Q&A.

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Sujal Shah, TE Connectivity Ltd. - VP of IR [6]

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Thank you. Amy, could you give the instructions for the Q&A session?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Wamsi Mohan with Bank of America.

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Wamsi Mohan, BofA Merrill Lynch, Research Division - Director [2]

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Yes. Terrence, nice performance in a pretty tough end market here. So can you maybe talk a little bit -- in a little bit more detail what your assumptions are for the year for the various end markets and with some color on geographic performance as well?

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Terrence R. Curtin, TE Connectivity Ltd. - CEO & Director [3]

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Sure. Thanks, Wamsi. And yes, during the call, I used the word stable a lot. I also said challenging, so your question is very fair.

There's markets that have been strong and are going to continue to be strong. Yes. They're Medical, certainly Defense, Energy, and you heard that a lot, and they're in our Industrial segment. But when I used the word stable, it really says some of the supply chain things are working off like we saw in distribution, but there's still are markets that are challenging.

Auto production, we expect to be down mid-single digits. I talked about that around the 21 million units a quarter, and we're repositioning ourselves on content, will help get us down to closer to flat on the year versus a negative production environment. The industrial transportation space, certainly, that space is one where North America heavy truck rolled over, and we're being impacted by that. But we do expect that market to be down high single digits for the year because of also how we're positioned in China. You got Euro VI emissions. You also have strong content gain we have in that market, and that's going to buffer to get us nice separation there.

The other area that I would say that I think is going to continue to be challenging is the factory automation and industrial equipment market. That's a market that's clearly being impacted by capital spending on the planet. Our business both has the underlying market. It's going to continue to be challenged. And -- but we also have some inventory destocking.

So how I would frame and similar to how we framed it 90 days ago was we don't see a world where our markets are going to get a lot better this year. We see some of these supply chain effects working through March, basically the end of our second quarter, and we're going to get our normal seasonality. So I would say, the markets we're playing with, I'm glad we have the content opportunity. We have to buffer some of it. And we'll start seeing some growth in some of the markets later in the year once the channel effects get off.

From a geographic perspective -- so hopefully, that helps. From a geographic perspective, Wamsi, it was an interesting environment, and I'm probably going to talk much more around sequentially. We saw -- China was a little bit better coming out of our first quarter sequentially. Europe was a little bit worse, and North America was relatively sideways. So it's other things that are very much around how do we see things from a stability perspective. Our book-to-bill was above 1 in all regions. We were 1.02 overall, which, as I said on the call, it was the first time we were above 1. It gives us a view that things were working through and getting a little bit more back to parity. So it means we built some backlog, which is good as we get into the second half of the year.

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Sujal Shah, TE Connectivity Ltd. - VP of IR [4]

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Okay. Thank you, Wamsi.

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Operator [5]

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Your next question comes from the line of Christopher Glynn with Oppenheimer.

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Christopher D. Glynn, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [6]

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Just wondering if you're seeing any interesting changes in the cadence around design cycles in electric vehicles, China and EU come to mind, versus the baseline expectations for the development of that market.

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Terrence R. Curtin, TE Connectivity Ltd. - CEO & Director [7]

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No. Thanks, Chris. And when you look at it, what's intriguing is we've always talked to you about electric vehicles, and electric vehicle production is probably going to go from about a little bit over 6 million units, sorry, to over 9 million units. And this year is going to be really one that's driven by Europe. China, we sort of view -- and when I do electric vehicles, many of you know, I include plug-in hybrids and hybrids in that number. It's not a pure NAV number, just it's from the broader thing. And really, what we're seeing is we're seeing a year where China will be in sideways. They had some of the stimulus come off from a production, but Europe is going to be the real growth driver. And you're seeing it with the CO2 regulations. We aren't seeing any changes in designs. We are still of the opinion, if you take the 2 mega trends that we have in automotive around electric vehicle as well as autonomy features, our customers are prioritizing electric vehicles ahead of autonomy. We're going to benefit from both of those trends, which I think is a unique proposition that we have. But the electric vehicle trend is helping drive the content buffer I talked about, and we're not seeing any change in design cycles at all. If anything, they're trying to get their designs done at quicker rates than traditional combustion engines.

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Sujal Shah, TE Connectivity Ltd. - VP of IR [8]

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Okay. Thank you, Chris.

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Operator [9]

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Your next question comes from Craig Hettenbach with Morgan Stanley.

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Craig Matthew Hettenbach, Morgan Stanley, Research Division - VP [10]

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Terrence, can you provide an update just on the automotive sensor design pipeline? And any particular sensor types from -- that you're seeing traction within automotive?

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Terrence R. Curtin, TE Connectivity Ltd. - CEO & Director [11]

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Yes, no. So a couple of things, Craig. Thanks for the question. First off, when you look at our sensors' results, you see really -- 75% of our sensors business from a revenue is still sort of pointed at heavy vehicle as well as the industrial markets. And some of our growth we saw this quarter looks very much similar to what we saw in our industrial equipment and commercial transportation in our core connector products. But our auto sensor revenue was flat. So certainly getting outperformance versus the mid-single-digit declines we're talking about. And the ramps are continuing to happen as we thought. We're being impacted by a slower environment, but the traction we've talked to you about and the pipeline we've talked to you about continues to remain intact. And right now, it's really all about production is impacting why we're not seeing more growth other than flat in that market.

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Sujal Shah, TE Connectivity Ltd. - VP of IR [12]

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Okay. Thank you, Craig.

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Operator [13]

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Your next question comes from the line of David Leiker with Baird.

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Erin Alexandra Welcenbach, Robert W. Baird & Co. Incorporated, Research Division - Analyst [14]

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This is Erin Welcenbach on for David. So a follow-up question on the sort of the EV and autonomy discussion. There's been some talk in the industry about architectural changes. What are you seeing with respect to EV and autonomy trends? And how do these architectural changes impact content growth for TE?

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Terrence R. Curtin, TE Connectivity Ltd. - CEO & Director [15]

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Thanks, Erin. And I will build on the question I talked about earlier. So number one is, we feel very good about our content growth opportunities. And our content growth opportunities, you have to realize, all starts where does power need to go in the car, where does signaling need to be in the car as well as when you deal with autonomy and data. And data is the one that is really the latecomer, but when you deal with power and you go to electric vehicle architecture, you're dealing with different power than a 12-volt or a 48-volt system that we've lived with or changing to. So it's what gives us confidence around this 4% to 6%.

And as I said, for us, a bigger driver will be electrification. We also will benefit from autonomy as the data network and the car continues to evolve. And architecture in a car always evolves. Our OEM customers are the ones that control the architecture. It is part of how they differentiate, and it's something they own. And they typically don't let a Tier 1 control that. But when you look at it, as those 3 building blocks build and what we see, we continue to be encouraged of how that architecture gets evolved and where we're positioned globally.

If you think about my discussion earlier about electric vehicles, the trends in the number of units made in the world are going to be more in Asia and in Europe, and we are a leading position in those markets, and we're working with the largest OEMs on those. So nothing has changed around how we think about architecture, where do we play, and we're -- what's really nice about TE, we benefit from both. An electric vehicle is more in the front of the brain for our OEM customers, where autonomy has slipped back a little bit. And feel very good about the 4% to 6% we've talked to you about.

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Sujal Shah, TE Connectivity Ltd. - VP of IR [16]

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Okay. Thank you, Erin.

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Operator [17]

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Your next question comes from the line of Jim Suva with Citi Investment.

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Jim Suva, Citigroup Inc, Research Division - Director [18]

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Can you talk a little bit about the trends that happened in your sensor business, maybe on a year-over-year perspective? It looks like they may have taken a little bit of a step-down compared to September year-over-year. And then maybe the content on automobiles that you're seeing now, I believe you typically viewed long-term content growth of kind of 4% to 6% range. Kind of where we're sitting at kind of for this quarter and the outlook?

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Terrence R. Curtin, TE Connectivity Ltd. - CEO & Director [19]

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Sure, Jim. Thanks, Jim. First off, on the sensors question, I'll probably repeat what I said a little bit earlier. In the quarter for sensors, we did have -- our growth was reflective of about the 75% we have in industrial equipment and commercial vehicle. What we saw on those markets are very similar to what we saw in our connector businesses, which really drove the revenue being down double digit. In auto, we were flat and that shows the content and the ramps that we're getting.

And then secondly, Jim, the separation around the content growth we saw in the quarter and as we're guiding for the year is pretty much right on top of the 4% to 6%. And it's as EVs continue to get adopted and the other trends I could add to the vehicles, you're going to see we expect that automotive will be basically flat to slightly down in a minus single-digit production environment. And that's where our guide is.

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Sujal Shah, TE Connectivity Ltd. - VP of IR [20]

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Okay. Thank you, Jim.

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Operator [21]

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Your next question comes from the line of Shawn Harrison with Longbow Research.

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Shawn Matthew Harrison, Longbow Research LLC - Senior Research Analyst [22]

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My congrats on the solid execution this quarter. I believe you already gave an idea of kind of the range of where you expect Communications margins to kind of exit the year on a run rate. I was hoping we could get an update on where you would expect Transportation and Industrial margins to exit the fiscal year.

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Heath A. Mitts, TE Connectivity Ltd. - Executive VP & CFO [23]

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Shawn, this is Heath, and I appreciate the question. As you mentioned, the CS margins, we feel good about our ability to move into the mid-teens in terms of where we see those margins, and that's reflective of a lot of the hard work the team is doing to mitigate pretty significant top line pressures in that business.

Within Industrial, we'll see moderate, nominal, however, you want to say it, margin expansion year-over-year. That's a multiyear journey, as we've talked about, within the Industrial business on the footprint consolidation side. There are -- in this particular quarter we just finished, sometimes we do run into situations where we have to spend some money in advance of facilities coming offline to get those transitioned correctly and do not disrupt our customers. So in a given quarter, you can see some movement within those types of activities, but we still expect Industrial to see a nominal margin expansion for the year. And I think if you look at it over a multiyear horizon as well as our trajectory into the next couple of years, you'll continue to see that we're on plan.

Within Transportation, we're dealing with a couple of different pieces on the top line pressures that Terrence mentioned earlier, particularly on the commercial transportation side, which is a very profitable business for us. That being down certainly has a pinch point for us. And then -- but that's offset with some of the activities within automotive and some of the footprint moves there. Now these moves, as we talked about in prior quarters, take a while, particularly the ones outside the U.S., to get offline. And so you'll see more of those savings later in this year and more into FY '21 and '22. But I would expect Transportation to be able to hold roughly where it is, maybe a little bit of expansion as we exit the year.

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Sujal Shah, TE Connectivity Ltd. - VP of IR [24]

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Okay. Thank you, Shawn.

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Operator [25]

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Your next question comes from the line of Deepa Raghavan with Wells Fargo Securities.

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Deepa Bhargavi Narasimhapuram Raghavan, Wells Fargo Securities, LLC, Research Division - Associate Analyst [26]

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Question is on automotive momentum, especially in China. Can you help talk about some of -- maybe give us some examples or just generally, just talk through the momentum there? Is there any fundamental recovery beyond just easy comps in that part of the region? And also, how should we think about the plant closures in China, just putting a wrench on your outlook, if at all, just given this coronavirus scare?

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Terrence R. Curtin, TE Connectivity Ltd. - CEO & Director [27]

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Now a couple of things. So let me take the second part of your question first. Certainly, on the coronavirus, it's a very fluid situation. China is important. And we're very much focused on dealing with it real time and making sure our employees are safe. That being said, first thing I want to highlight is that we don't have operations or factories in the Wuhan province. Our operations are not in that area. And we are in the middle of the Lunar New Year celebration, and that we are running lower shifts right now, as we speak, and we're going to continue to run those lower shifts. But the government has extended the Lunar New Year a few days. And then some of the industrial parks we serve, they are actually shutting in an extra week. And we're going to be -- do everything in compliance with the government. So net-net, it is an uncertainty that we have, but we have those uncertainties in many parts of our business every day.

On China momentum, we did see production improve in the first quarter. And like I said in some of my comments already, China was a little bit better. I would say, that was around automotive production. Europe was a little worse, net-net, getting to a neutral point for the year. I think the one thing that we're trying to keep our eyes on is not only what is production, but what are end sales in China. And end sales, while they are not declining as we were, still are not accelerating. So we still have a view that China will play out as we talked before. But we did see increased momentum before the Lunar New Year celebration, which sort of got us down to -- hey, supply chain was getting better. But we got to continue to watch it, and our guidance is sort of unchanged with where we were 90 days ago.

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Sujal Shah, TE Connectivity Ltd. - VP of IR [28]

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Okay. Thank you, Deepa.

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Operator [29]

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Your next question comes from the line of Mark Delaney with Goldman Sachs.

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Mark Trevor Delaney, Goldman Sachs Group Inc., Research Division - Equity Analyst [30]

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I was hoping the company could quantify where inventory in the channel is relative to historical levels on either dollars or a days basis. And when you talk about the restock in distribution -- sorry, let me rephrase that. When we talk about better trends into the distribution channel in the second half of the year, are you assuming to restock? Or just that your shipments catch up to what distributors are doing on a sell-through basis?

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Terrence R. Curtin, TE Connectivity Ltd. - CEO & Director [31]

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No. Thanks. So first off, we assume there's not restock. We assume it's at parity with demand. So that's a key point and a very good question. When we sit there and what we've looked at, our major channel partners are getting book-to-bills above 1 again. We've talked to them about where did inventory burn through in their December quarter to get back more in parity. And as we told you last quarter, we thought the first half impact was around $100 million. We're about halfway through that what sort of the destocking was going to be across the network. So what's nice is we're seeing it work out as we thought in the first quarter. It needs to work through in the second quarter. The trend is right on track, and we're actually starting to see a pickup in bookings sequentially, as I said, by 10%. So feels like things are moving as expected. And the second half is all about getting to parity with demand, not restocking.

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Sujal Shah, TE Connectivity Ltd. - VP of IR [32]

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Okay. Thank you, Mark.

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Operator [33]

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Your next question comes from the line of Joe Giordano with Cowen.

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Joseph Craig Giordano, Cowen and Company, LLC, Research Division - MD of Industrials, Automation and Robotics [34]

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Just curious, given your, like, broad breadth in auto and who you work with and who you compete against, if you had any -- what does the BorgWarner-Delphi transaction do or not do to the competitive environment in that space?

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Terrence R. Curtin, TE Connectivity Ltd. - CEO & Director [35]

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For us, it doesn't really -- does nothing for us. When you look at those 2 mergers, you're really dealing with more people dealing with the mechanical side of things and our customers. Certainly, in some areas they're our customers, but they would not be major customers. So for us, that's a net-net, nothing.

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Sujal Shah, TE Connectivity Ltd. - VP of IR [36]

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Okay. Thank you, Joe.

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Operator [37]

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Your next question comes from the line of David Kelley with Jefferies.

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David Lee Kelley, Jefferies LLC, Research Division - Equity Analyst [38]

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You referenced continued strength in Defense. Just wondering if you've seen any incremental softness in Aerospace? And any impact from the Boeing grounding that we should be thinking about their modeling?

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Terrence R. Curtin, TE Connectivity Ltd. - CEO & Director [39]

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Yes. So a couple of things, and thanks for the question. Certainly, we do have commercial aerospace business. When we talk about Aerospace and Defense and Marine, that business in our Industrial segment, about half of it's commercial aerospace, and it covers all the commercial airframe manufacturers, including Boeing. So the Boeing situation has impacted us on that airframe specifically. It's probably about 0.5 point headwind to overall TE growth that we're absorbing with the diversity of our portfolio. But certainly, that market has gotten weaker due to the production schedule Boeing has laid out.

The key, I think, for us is that's a nice content driver. That is sort of transitory in my mind, and it'll impact us this year. But when Boeing works through its issues and those planes start to get delivered, we'll get a reacceleration on the other side. So near-term headwind that we've absorbed into our guidance, but it will become a tailwind once they work through the issue with the FAA.

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Sujal Shah, TE Connectivity Ltd. - VP of IR [40]

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Okay. Thank you, David.

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Operator [41]

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Your next question comes from the line of Samik Chatterjee with JPMorgan.

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Bharat Daryani, JP Morgan Chase & Co, Research Division - Analyst [42]

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This is Bharat on for Samik. So my question is in the Communications segment, the expectations heading into 2020 remain for a pickup in hyperscale spending and higher service provider CapEx towards 5G as well. So can you walk us through your expectations for spending from these 2 verticals? How is that tracking? And can there be an upside in outlook for 2020 in this segment overall if the spending ramps through the year?

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Terrence R. Curtin, TE Connectivity Ltd. - CEO & Director [43]

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Well, for 2020 -- thank you for the question. Yes, we certainly have seen how that segment has been impacted by the distribution channel. I would say, cloud spending, we have seen an improvement in our orders on the cloud side. And certainly, that's across many of the cloud providers. And one of the things our team has done a nice job is continue to penetrate and broaden our cloud customer breadth. So that is an important growth driver for that segment, and we continue to improve our positioning there.

5G is a little bit of a different story. 5G is one where in places like Korea, you have very dense networks that have been laid out and you get more than the use cases that they're developing.

In the U.S., 5G is not moving as quick, mainly due to the merger between T-Mobile that's out there, has sort of delayed how this 5G get invested in. So I would say, we've seen a pause in 5G investment here in the United States. That -- we hope that once that merger is done, the operators will invest and then we'll benefit from those deployments. We do play in 5G, though, on the infrastructure side. We don't play on the handset side. But it is something that's a good content opportunity as that spending accelerates.

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Sujal Shah, TE Connectivity Ltd. - VP of IR [44]

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Okay. Thank you, Bharat.

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Operator [45]

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Your next question comes from the line of William Stein with SunTrust.

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William Stein, SunTrust Robinson Humphrey, Inc., Research Division - MD [46]

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An earlier question addressed automotive networks. And one of the things that seemed more prominent this year at CES was the emerging changes in network architecture in cars, specifically ECU consolidation and automotive networks transitioning to more sort of hierarchical one with domain controllers. Can you comment on how this might affect revenue and margins and maybe mix of cabling versus connectors?

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Terrence R. Curtin, TE Connectivity Ltd. - CEO & Director [47]

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No. Certainly. So first off, yes, it's important that when you say cabling and connectors, we are not a harness maker. And so as harnesses get rationalized, certainly, there are people that are on the wire side that are going to get more impacted than us. Because as you even get into more consolidated ECUs, zonal architectures, the interconnects get absolutely more complicated, which play to the strength of which we have. So these architectures have continued to evolve. Whether you go to zonal or you go to centralized compute in a car, these are things that how do you continue to get the connection points, the sensing points around are things that are part of our 4% to 6%.

This will continue to evolve. Our OEM customers will be the ones that make those architectural decisions of what you see at CES. And what's really nice is how we engage with our OEM customers on our design. We know as those architectural changes are occurring. So when we think about the 4% to 6%, that does assume how the architecture will evolve. And what's really nice is -- I remember when we used to talk about architecture and people just want to talk about SAAR. It's really nice that the content trend, whether it'd be electric vehicle or autonomy and compute architecture in the car, are things that people are really talking to us about. And that's what we do. And that's what's driving some of the growth trends for TE.

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Sujal Shah, TE Connectivity Ltd. - VP of IR [48]

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Okay. Thank you, Will.

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Operator [49]

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Your next question comes from the line of Matt Sheerin with Stifel.

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Matthew John Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [50]

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Regarding your positive commentary, Terrence, on the medical market and the nice growth there, how much of that is adoption of newer technologies and an upgrade cycle, if you will, versus share gains? And I know or assume most of these products came from the Creganna acquisition from 2016. So any commentary on how that acquisition has been going for you?

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Terrence R. Curtin, TE Connectivity Ltd. - CEO & Director [51]

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I think when you look at the growth, it's a combination of things that we acquired, but also how we continue to bring the capabilities that TE and Creganna had. If you look at that business, that business is approaching $800 million, and Creganna was a little bit over $300 million when we bought it. And we continue to put the capabilities of TE and Creganna together, and we've also have the design center set up where the innovation occurs around interventional devices. What is nice is it is a mix, Matt, to your question. And also, what's nice is it's not just the therapies that we're used to today that we all benefit from, but it's also about the therapies of the future of other areas in the heart where they want to take interventional procedures where they still can't take them today. And that's the innovation that we continue to work on with the largest customers in the world that are focused on this.

So it is a combination of new programs, existing programs. And what's nice is with what we've built, we really have the door open with our customers and bringing our engineers in to work on the next-generation therapies that the largest companies -- medical device companies in the world are working on. So it's really nice. It's going to drive the high single-digit growth that we talked about today, and it's been driving.

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Sujal Shah, TE Connectivity Ltd. - VP of IR [52]

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Okay. Thank you, Matt.

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Operator [53]

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Gentlemen, your final question comes from the line of Joseph Spak with RBC Capital Markets.

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Joseph Robert Spak, RBC Capital Markets, Research Division - Analyst [54]

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Terrence, just a bigger picture. Yesterday, we heard a company talk about how as automakers move to new and electric platforms. The connector catalog, so to speak, is opening up for them because they require these new types of interconnect products. And I think you've hinted that the moat could widen as you move towards electrification in these new platforms. So I just really want to better understand how you think that business evolves as platforms shift, and maybe an example or 2 of what you're doing to retain and enhance your competitive positioning with the customers.

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Terrence R. Curtin, TE Connectivity Ltd. - CEO & Director [55]

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Well, I think one thing that's important when you deal with electric vehicles and the penetration we have is -- one of the things around electric vehicles, we have to be honest, you're still at -- even if we get to the 9 million units we have this year, it's still a small part of an $84 million market. And one of the things both from the relationships that we have, you also have to get to global scale to continue to bring the cost points of the electric vehicles down. And we view we were part of that equation. So how do you get to standardization? And while certainly, different people are driving different technologies, over time, we still have to get to a vehicle that people can afford without subsidies long term. And when I think about what we have done historically through our global customer reach as well as the breadth of technology we bring, I think we're one of the ones that are best positioned to capitalize on that and also making sure we scale it. And that's one of the things that our OEM customers and certainly other people still have some challenges of how do they scale electric vehicle. And we basically view we get to help them do that. So that's the breadth we have. You see it in some of the global OEMs that are going in more platform versus individual model. And they are some of the customers that we have very good relationships with and design wins with that we're going to help them solve that problem. And then we can also take it like we do with the rest of our connector portfolio into other areas to make sure that we bring productivity to the electric vehicle as well while getting our margin.

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Sujal Shah, TE Connectivity Ltd. - VP of IR [56]

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Okay. Thank you, Joe.

Looks like there's no further questions, so thank you for participating in the call this morning. If you have any other questions, please contact Investor Relations at TE. Thank you.

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Terrence R. Curtin, TE Connectivity Ltd. - CEO & Director [57]

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Thank you, everybody.

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Operator [58]

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Ladies and gentlemen, your conference will be made available for replay beginning at 10:30 a.m. Eastern today, January 29, 2020, on the Investor Relations portion of TE Connectivity's website. That will conclude your conference for today. You may now disconnect.