TE Connectivity - Q2 2015
April 22, 2015
Transcript
Operator (participant)
As a reminder, today's call is being recorded. I'll turn the conference now to Mr. Sujal Shah, Vice President of Investor Relations. Please go ahead.
Sujal Shah (VP of Investor Relations)
Good morning, and thank you for joining our conference call to discuss TE Connectivity's Q2 results. With me today are Chairman and Chief Executive Officer, Tom Lynch, and Chief Financial Officer, Bob Hau. During the course of this call, we will be providing certain forward-looking information, and we ask you to review the forward-looking cautionary statements included in today's press release. In addition, we will use certain non-GAAP measures in our discussion this morning. We ask you to review the sections of our press release and the accompanying slide presentation that address the use of these items. The press release and related tables, along with the slide presentation, can be found on the investor relations portion of our website at te.com.
To effectively set a baseline for today's call, please keep in mind that we announced the sale of our Broadband Networks business last quarter and continue to expect the transaction to close by the end of the calendar year. BNS is reflected as discontinued operations and is not included in our Q2 results or guidance going forward. Note that all prepared remarks on today's call will reflect TE continuing operations, unless otherwise noted. We have provided additional slides, numbered 13 through 17, in our earnings presentation to help reconcile the difference between previously reported results and guidance against assumptions for continuing operations. You will find this information to be helpful as we go through the call today.
Finally, for participants on the Q&A portion of today's call, I'd like to remind everyone to limit themselves to one follow-up question to make sure we are able to cover all questions during the allotted time. Now, let me turn the call over to Tom for opening remarks.
Tom Lynch (CEO)
Thanks, and good morning, everyone. Here are the key takeaways from today's call. In Q2, we continued to deliver strong results with organic revenue growth of 6%, adjusted earnings per share of $0.02 above implied guidance for continued operations, and adjusted operating margins of 16.4%. For the full year, our prior adjusted EPS guidance of $4.20 assumed $0.53 from BNS and $3.67 from continuing operations. We are holding our guidance at the $3.67 level, as continued strong performance of our harsh businesses, coupled with SubCom improvement, is offsetting additional FX headwind. Our EPS guidance reflects 11% adjusted EPS growth year over year, and as Sujal mentioned, there's a detailed reconciliation of guidance found on page 16 of our earnings presentation.
But also, like a few other points, we're very well positioned and continue to benefit from the secular trend of electronic content growth, with 80% of our revenue derived from products serving harsh environment applications. This is a theme you've heard before, and you'll continue to hear throughout today's call, and it's a very important part of our strategy. Our recovering SubCom business continues to gain momentum, with over $1 billion of contracts now in force and over $700 million of revenue expected this year. Our sensor business continues to build momentum as well, with a growing design win pipeline across several market verticals, and overall, the integration of the acquisition is going well. And then just a comment on market conditions: I'd say they continue to be mixed, compared to 90 days ago when we last spoke.
Europe, up a little bit, of course, off a low base. China has slowed a little bit, and the end markets in the U.S. are mixed, although growth is continuing. I'd say overall, similar trends as last quarter. I'd now like to provide some additional color on the performance of our business. As I mentioned, Q2 is another good quarter for the company operationally, and we made four important moves to strengthen the company strategically during the quarter. We announced the sale of our Broadband Networks business for $3 billion in January and continue to expect the transaction to close by the end of this calendar year. As a result of this transaction, 90% of our revenue is now focused on the attractive and growing connectivity and sensor markets.
These markets have solid underlying growth trends due to the increasing demand for more electronics as the world becomes safer, greener, and more connected. And with our unmatched portfolio of connectivity and sensors, TE is well positioned in providing the key building blocks for the connected world. As I mentioned, 80% of our revenue is focused on providing solutions for harsh environment applications that demand the highest quality and reliability performance, which has long been our strong suit. This capability is not easily replicated, and we believe that TE's ability to provide solutions for harsh environments will remain a strong differentiator and growth driver as we move forward. In February, we announced the purchase of AdvancedCath, a company focused on applications serving the medical and healthcare markets.
The combination of AdvancedCath and our broad range of sensor and connectivity technologies puts us in a very good position to capitalize on opportunities in the high-growth, high-margin interventional applications in this market. This acquisition is accretive to our industrial segment growth rate and operating margins. And this is a good example of where having a broad range of connectivity and sensors, fine wire capability, molding and stamping manufacturing capability, enables us to provide a broader set of solutions for our customers. In March, along with the planned divestiture of BNS, we organized into three segments: Transportation, Industrial, and Communications. The transportation and industrial segments remain exactly the same in terms of business composition, and communications is now made up of Appliances, SubCom, and Data and Devices. Data and Devices reflects the combination of Consumer Devices and Datacom into a single business.
This combination improves our ability to win in these dynamic markets. These markets are converging, and combining the unique strengths of each business will strengthen our competitive position and profitability and proper potential for growth in these markets. In March, we also announced the appointment of Terrence Curtin to the newly created position of company President. Terrence has been an important leader in our transformation as CFO, and most recently, President of our Industrial Solutions segment. In his expanded role as President of TE, Terrence will focus on accelerating our performance across our harsh connectivity and sensor businesses by driving growth in TEOA across the business. Please turn to slide three for a summary of Q2 results and our guidance.
As I mentioned, we delivered strong results for Q2 with adjusted EPS of $0.91, $0.02 above the midpoint of guidance, and sales of $3.1 billion, growing 4% year-over-year and up 6% organically. Currency translation rates impacted Q2 by $246 million in revenue and $0.09 in EPS year-over-year. That's negatively impacted Q2. The continued strong performance of our harsh environment business is coupled with improvements in SubCom, more than offset the FX headwind compared to the prior year. Excluding the impact of currency exchange rates, adjusted EPS would have improved by 16%. During the quarter, we returned $261 million to shareholders. Total company orders were $3 billion, flat year-over-year, excluding SubCom orders were up 1%. Book-to-bill, excluding SubCom, was 1.03. As I mentioned earlier, I'm pleased with the momentum in our Sensors business.
We expect strong growth this year and are adding resources to support the significant increase in customer RFPs. We see an increasing number of opportunities to integrate sensors with our other products and provide our customers with innovative, highly reliable, and cost-effective solutions. We intend to aggressively build this business with inorganic and organic investment, and we believe our unmatched customer-facing and engineering resources are a significant asset for TE. Our TEOA program continues to enhance margin and drive higher profitability. Adjusted gross margins were up 70 basis points year-over-year, and adjusted operating margins expanded to 16.4%, up 50 basis points versus the prior year. Please turn to slide 4. As I mentioned earlier, we continue to hold our full-year guidance despite increasing FX headwinds.
Our full-year EPS outlook is unchanged from our prior guidance for continuing operations, with harsh environment business strength, contribution from strategic acquisitions, and a leading position in the recovering SubCom Market, offsetting additional FX headwinds versus our previous view. For the full year, we are projecting sales of $12.5 billion, up 4% from the prior year and 6% organically. We expect adjusted operating margins to exceed 16%, with adjusted EPS in the range of $3.60-$3.74, up 11% at the midpoint. With the cumulative move of the dollar versus world currencies during the last six months or so, 2015 FX headwinds are now approximately $1 billion in revenue and $0.38 in EPS versus last year for our full year.
Were it not for the impact of FX, we would be generating 13% revenue growth and 22% adjusted EPS growth year-over-year. Strong financial performance by any measure. Now I'll turn it over to Bob to cover segment results, and I'll wrap it up in a little while.
Bob Hau (CFO)
Thanks, Tom. Good morning, everyone. Please turn to slide five for transportation solutions. Our revenue grew 3% organically in the quarter, in line with our expectations. Our Automotive business grew 4% organically, while global vehicle production was up about 1%. We continue to outgrow auto production volume due to content growth trends and share gains. Our Commercial Transportation business declined slightly in Q2, as expected, driven by slowing growth in the heavy truck market and continued weakness in the off-road equipment market. In sensors, we continue to gain momentum with an expanding design win funnel across transportation and other market verticals. We continue to expect strong growth in sensors due to our unique combination of technology, resources, and broad, deep customer engagements.
Our total transportation adjusted operating income was $333 million in Q2, down 1% year-over-year as expected, with strong operational performance offset by FX. We continue to invest in sensors and support a growing pipeline of opportunities. In Automotive and Commercial Transportation, adjusted operating margin expanded 60 basis points year-over-year in Q2, driven by additional volume and operational execution. Looking forward, we expect another good quarter in Q3, with actual sales growth in the low single digits and organic growth in the mid single digits. Please turn to slide 6. Our Industrial Solutions segment performed well in Q2, growing 5% organically, representing the seventh consecutive quarter of year-over-year growth for this segment. Industrial equipment was up 6% organically, with strong growth in all regions.
In our Aerospace, Defense, Oil, and Gas business, 6% organic growth was driven by continued strength in commercial aerospace, which more than offset declines in Oil and Gas. Going forward, we'd expect continued strength in commercial aerospace to offset weakness in our Oil and Gas business. In our Energy business, we saw 4% organic growth, with growth in Asia and North America partially offset by declines in Europe. We also completed the acquisition of AdvancedCath, increasing our opportunity in the high-growth medical interventional market. AdvancedCath is now part of our Industrial Equipment business. Adjusted operating income was $112 million in Q2, up 5% year-over-year, with a 50 basis points expansion in adjusted operating margins due to organic growth and TOA initiatives. For Q3, we expect low single-digit organic growth with similar market trends as in Q2.
Please turn to Slide 7. Our newly created Communication Solutions segment grew 16% year-over-year on an organic basis, driven by our strong position in the recovering SubCom market and a continued strong performance in our market-leading appliances business. This more than offsets the planned declines in our Data and Devices business, where we continue our strategy of exiting low-margin products in this business. Adjusted operating income was $61 million, up 126% year-over-year, and operating margin doubled to 9% from 4.5% a year ago. We expect to continue to drive further operating margin improvement in this segment. And heading into Q3, we expect actual revenue to grow mid-teens and high teens on an organic basis, driven by a new SubCom program coming into force.
The new AEConnect program, which is scheduled to be ready for service in December of 2015, is the latest transatlantic subsea fiber optic cable system connecting North America to Europe. Please turn to Slide 8, where I'll provide more details on earnings. Adjusted operating income was $506 million, up 7% versus the prior year, despite the significant FX headwind. The growth versus the prior year is driven by our TE Operating Advantage efforts to improve safety, quality, cost, and delivery, as well as volume leverage. GAAP operating income was $448 million and included $36 million of restructuring and other charges, most of which were in the Data and Devices and Oil and Gas units, and $22 million of restructuring-related charges in the quarter as expected.
Adjusted EPS was $0.91 for the quarter, $0.02 above the implied midpoint of guidance, driven by strong productivity, mix, and cost management. GAAP EPS was $0.77 for the quarter, and GAAP EPS included acquisition-related charges of $0.04 and restructuring and other charges of $0.11. For the full year of 2015, I expect approximately $75 million of restructuring and other charges, reflecting in $0.18 at midpoint, up slightly versus our prior guidance. We expect roughly $0.22 of charges associated with our recent acquisitions, which will more than offset our reserve reversals from tax liabilities. Turning to Slide 9. Our adjusted gross income for the quarter was 34.3%. This is an expansion of 70 basis points versus the prior year, driven primarily by our growth in harsh environment businesses and SubCom and productivity gains from our TOA initiatives.
Adjusted operating margins expanded 50 basis points, driven by productivity and volume leverage. Total operating expenses were $551 million in the quarter, with increases from acquisitions and R&D to support growth in transportation. Cash from continuing operations was $350 million, and our free cash flow in Q2 was $217 million. Free cash flow was impacted by the timing of payments and SubCom project activity. Gross capital expenditures were essentially flat year-over-year, and net capital expenditures were up $9 million year-over-year. I expect capital spending rate to be approximately 5% of sales for 2015. You'll notice we've added a balance sheet and free cash flow summary in the appendix for additional details. And now I'll turn it back to Tom.
Tom Lynch (CEO)
Thanks, Bob. Please turn to Slide 10, and I'll cover our outlook, and then go through the outlook in more details on the following slides. We expect to deliver another solid quarter in Q3, with revenue of $3.13 billion-$3.23 billion, up 3% on an actual basis and 7% organically year-over-year at midpoint. We expect adjusted EPS of $0.85-$0.89, an increase of flat to $0.05 5% year-over-year. As Bob and I have been mentioning throughout this call, our Q3 outlook does include a significant headwind from currency exchange rates, which are negatively affecting our guidance by approximately $330 million in revenue and $0.13 per share in EPS versus the prior year.
Since we're on a constant currency basis, would be up about 18% in EPS year over year. Our Q3 performance will continue to be driven by the strong performance of our harsh environment businesses, the building momentum in SubCom, and contributions from our recent acquisitions in sensors and industrial. This is more than offsetting the FX headwind. Please turn to Slide 11. For the full year, we now expect revenue of $12.3 billion-$12.7 billion, up 4% versus the prior year and reflecting 6% organic growth. Our adjusted EPS guidance range is $3.60-$3.74, representing year-over-year growth of 11% at midpoint. Note that the total impact of currency exchange rates is now approximately $1 billion versus the prior year and $0.38 in EPS.
We have a number of catalysts for growth: strong secular trend of increasing electronic content, especially in harsh applications, our expansion into the high-growth sensor market, and the growing SubCom business. To provide a baseline for the performance of our business, adjusted EPS would be growing by 22% year-over-year, were not for the negative impact of the stronger dollar relative to other currencies. Now a few final comments before we open it up for Q&A. The company is performing well in a relatively still slow growth world, and we're extremely well positioned in a world of increasing connectivity, which demands more sensors and more connectors. Our harsh environment strategy is paying off. 80% of our revenue is derived from products designed in the harsh environment applications. This requires innovation and the highest quality and reliability. These applications are sticky.
This collection of businesses generate margin above our current 16% adjusted operating margin run rate. We have now grown harsh environment revenue to 80% from about 50% of our portfolio five years ago, and our inorganic and organic growth investment will continue to focus on harsh applications. Our sensor business is building momentum, and we are adding resources to support the significant increase in customer RFPs. We see an increasing number of opportunities to integrate sensors with our other products and provide our customers with innovative, highly reliable, cost-effective solutions. We really feel our unmatched customer-facing and engineering resources are a significant asset for the company. We intend to aggressively build this business with inorganic and organic investment. The BNS divestiture is going well, and we'll return the majority of the proceeds to shareholders.
Bob mentioned we've restructured our Data and Devices business to improve our focus and competitive position and reduce costs. I expect this business to be a contributor to EPS growth in fiscal 2016. Our SubCom business is continuing to build momentum. The market appears to be in the early stages of an upcycle, and we continue to win a majority of the key awards. We now have pretty good visibility through fiscal 2016, and expect SubCom to improve our performance at least this year and next. Our strong cash flow and balance sheet enables us to consistently return 2/3 of our free cash flow to shareholders in the form of dividends and share repurchase, and to pursue strategic acquisitions to strengthen our leadership position.
TE has a strong portfolio of businesses, probably the strongest we've ever had, with the strong secular growth drivers that should enable us to grow 6%+ organically in a 3%+ GDP world, continue to grow our adjusted operating margins, building on the 16% level we will deliver this year, and continue to generate free cash flow at the 10% of revenue level. In summary, we have a lot of levers to grow profitability and cash flow, and I've never felt better about the company. Now let's open it up for questions.
Operator (participant)
Ladies and gentlemen, if you would like to ask a question on the call, please press star then one. You will hear a tone indicating you've been placed in the queue. If your question gets answered and you wish to remove yourself from the queue, please press the pound key. Again, star one if you have a question. And first go to William Stein with SunTrust. Please go ahead.
William Stein (Managing Director of Equity Research)
Good morning. Thank you for taking my question. So I think the prior EPS guidance midpoint was $4.40. The new guidance is $3.67. I think it's clear the biggest driver of that reset is the BNS divestiture. But can you walk us through the components that are driving this change in the discontinued or rather, in the continuing operations EPS guide?
Bob Hau (CFO)
Yeah, Will, good morning. Thanks. This is Bob. So the prior guidance that we gave 90 days ago, $4.20, included the Broadband Networks business. That as you recall, on the morning of our earnings release, we closed the agreement to sell the business. The business is not yet... The transaction is not yet closed. But with that announcement, that business now moves into discontinued operations. At the end of March, I believe March 23 or so, we issued an 8-K to recast prior periods earnings, actually going back nine quarters. We went a little bit further than required to make sure to give the full color to the investor base.
And what you saw in that 8-K release was last year, 2014, on a full year basis, Broadband Networks contributed about $0.48 to our earnings. So adjusting last year's results, previously reported, would've been $3.79, backing out the $0.48 of Broadband Networks. The recast 2014 actual is now $3.31. You compare that to the $4.20, the prior guidance, BNS had $0.53 of earnings embedded or a part of that $4.20. So you take the $4.20, you back out the $0.53, you get to $3.67. So the change in the number is completely BNS.
Essentially, $3.67 is the new $4.20, and a like sort of number on a continuing operations basis. That growth, $0.48 to $0.53, really is comprised of a couple of things. Number one, as you may recall, we, we did a number of restructuring actions last year to take cost out of the business. A good portion of that was directed at the Broadband Networks organization, and so we expected to see operating income, operating margin improve nicely in that business, 2014 to 2015. Additionally, we did have some modest organic growth on a year-over-year basis.
So net-net, the BNS contribution was growing about 10% on an EPS basis, roughly in line with what the total company was, and it's really driven by low double digits, excuse me, low single digits, modest organic growth, as well as the benefits of restructuring and general productivity.
William Stein (Managing Director of Equity Research)
... Okay, that helps. So we're now through this earnings reset. Of course, we're expecting earnings to grow again, to you know, on an all-in basis, if you will, contemplating the buyback that we'd expect following the close of the BNS sale. I guess despite the fact that you didn't guide to it, I would have expected to see the buyback accelerate at least a little in the quarter. And I wonder if perhaps you're planning more acquisitions to replace the divested BNS or to replace part of it anyway. You've talked about looking both organically and inorganically in the sensor area, and I'm wondering how prominent this is in your plans from now till the end of the year and on an ongoing basis?
Bob Hau (CFO)
Yeah, so let me—I'll, I'll cover the buyback, and then, Tom can talk to you a little bit about the M&A plans. In, in terms of the buyback, again, 90 days ago, when we announced the, the transaction, we indicated that, we expect or will be getting, $3 billion in proceeds, from the transaction. The majority of that will be used, to buy back shares, but that we would not be doing that in advance of closing the transaction. So we have not accelerated share buyback in the, in the current quarter, nor do we expect to, until that transaction closes, which, currently, has, has been and remains, expected to close by the end of the calendar year. Once we receive that cash, we will buy, begin the buyback.
As we indicated, in the past and continue to expect, that share buyback will help largely offset the $0.53 of dilution, once that buyback is completed, and net-net, the transaction will be neutral approximately one year after closing. That's the benefit of the share buyback being fully implemented, as well as working through some shared costs. If you think about the TE business model, we have things like our in IT, procurement, HR, finance type organizations working through a shared services model. So a centrally organized organization around some of those functions, and those costs are shared across our business. With the BNS divestiture, we obviously see some descaling of those shared services.
Once the deal closes, we do have a transition services agreement with CommScope, which will absorb some of the shared service. And once those TSAs start to unwind, we'll work to offset the costs, eliminate the impact, one year after closing. In rough order of magnitude, that shared services type cost is about $0.07 of the $0.53. So you get the benefit of the reduced share count on the $3 billion with the share buyback and the benefit of working through those shared services costs post TSA, TSAs unwinding, and you can get to a net neutral position on the $0.52.
Tom Lynch (CEO)
And Will, on the acquisition comment or question, I should say, well, we're always, you know, our strategy, as you can see, is around harsh environment, connectivity and sensors.
As we did in the last quarter, we had the AdvancedCath and another small technology acquisition. So we have a robust pipeline. It has to fit in with our strategy, and similar to the sensor logic, it has to be able to leverage our scale. So take advantage of all the, the thousands of people we have in front of the customer, the thousands of engineers we have, the supply chain footprint around the world close to our customers. So, our goal is to continue to identify the best fits and if we can get them at a price that works, to make acquisitions.
William Stein (Managing Director of Equity Research)
If I can fit in one more, please. On the sensor side, you talked quite a bit about having success in that market. You report that business in transportation, but as I recall, measurement and the other, I think you did another sensor acquisition, they're not exclusively transportation, as I recall. Maybe you could talk about where you're seeing success in terms of combining sensors and connectors from an end market perspective. Where do you see the bigger opportunities? Thank you.
Bob Hau (CFO)
Sure. And right now, they're all, you know, there, there are a couple of design wins and a lot of customer activity to prove out the concept. But I think the most important thing is the businesses that we bought are growing slightly ahead of our assumption in the acquisition plan. So the core organic growth of those businesses has been very good, and the technology breadth and depth is even better than we thought, which is now what is the catalyst for being able to walk into customers. And, you know, medical would be a good example on a thin gauge wire that we provided to a customer now, putting a very small sensor on the end of it to dramatically improve the capability, and we can do it all, so we can optimize the functionality. That's a good example.
And in early discussions in the industrial industry, the appliance industry, and of course, automotive and in the industrial transportation industry. So, the good challenge we have right now is there's a lot of opportunity and prioritizing them, but it's the kind of challenge we wanna have, and that's why I mentioned, and Bob mentioned, that we're gonna continue to add organic resources into these businesses. So, so far, the hypothesis for bringing sensors together with connectors is playing out. We know it's still the early part of the game, but we're very optimistic, and we're excited about the capabilities we have.
William Stein (Managing Director of Equity Research)
... Thank you.
Tom Lynch (CEO)
All right. Thank you, Will. Can we have the next question, please?
Operator (participant)
That's from Amit Daryanani with RBC. Please go ahead.
Amit Daryanani (Managing Director and Equity Research Analyst)
Yep, thanks a lot. Good morning, guys. You know, I guess to start off with, could you just talk about the transportation segment a little bit? I think the organic growth, 3%, is a little below what you've seen in the last few quarters. I'm curious, you know, what are you seeing in China and ATR that you talked about, that's leading to the softness? And do you think it's a one-quarter phenomenon, or are those headwinds going to sustain for the next few quarters as well?
Tom Lynch (CEO)
Yeah, Amit, I guess a couple comments there. One, it was in pretty much in line with what we expected based on what the industry was projecting as vehicle production. So last year, vehicle production was just under 5. This year, been predicting anywhere from 2 to 3, depending on when the estimates are coming out. So no surprise there. In our case, our auto business grew 4% on 1% vehicle production. Three or four years ago, on 1% vehicle production, we would have grown 2% to 2.5%. So we have had a tremendous run of design-ins over the last, actually, 3 to 5 years coming out of the downturn and including the downturn.
So no surprise there, and, you know, generally, I'd say the auto business is still pretty healthy. China continued to be strong for us. We have a tremendous position in China and continue to grow solid double digits there. We expect that to slow down a little bit, but not dramatically. So overall, still, you know, feel in line with what we expected in automotive, and the production rates, like I said, kind of in line, a little bit below historical average, but they were above the historical average last year. And if you look over time, they tend to balance out over two or three years. But we're generating a lot more revenue for a dollar or a 1% growth in production than we have in the past.
Amit Daryanani (Managing Director and Equity Research Analyst)
Got it. And if I just go back to this, the BNS divestiture impact, if I just get this right, $0.53 impact from discontinued ops, $0.07 of that is shared services that goes away once the deal closes, or do you have to do some restructuring to negate that, and then $0.45 will be offset through buybacks. Is that kind of the right way to characterize those two buckets?
Tom Lynch (CEO)
Yeah, that's essentially correct, Amit. The $0.07, some of that will be absorbed by the transition services agreement that will kick in once the deal closes, so you'll see some quick absorption of that. And then over time, as we unwind those transition services or transition services agreements, we'll work the cost down, so that once those are unwound, it's a net neutral.
Amit Daryanani (Managing Director and Equity Research Analyst)
Yeah, and can you just talk about how does the buyback mechanism works once the deal closes? I mean, would you have to do an ASR or something fairly quick to ensure that the neutrality holds up from the divestiture, or would you look to elongate that over a 12-month process?
Tom Lynch (CEO)
Yeah... What we've indicated is it'll be one year after closing, and so that will encompass some time to actually execute the share buyback over a period of time.
Amit Daryanani (Managing Director and Equity Research Analyst)
Perfect. Thanks a lot for your time.
Tom Lynch (CEO)
Thank you. Thank you, Amit. Can we have the next question, please?
Operator (participant)
We'll go to Amitabh Passi with UBS. Please go ahead.
Amitabh Passi (Equity Research Analyst)
Hi, guys. Good morning. I had a question and a follow-up. Tom, maybe I'll focus on the Industrial Solutions segment. I think you're expecting full year growth of low single digits. Just wanted to get a sense, you know, when can we expect to see a slightly better sort of top-line growth for this segment? And profitability seems to be doing better than expected. Can you sustain it at the levels you just reported? So both sort of the demand environment as well as profitability, and then I had a follow-up.
Tom Lynch (CEO)
Sure. Thanks, Amitabh. I would say, like a lot of these businesses, particularly industrial, you kind of have to disaggregate it to make it meaningful. So, commercial air, growing very nicely. The market is solid with new aircraft builds, and we've significantly—you know—over the last 5-6 years, increased our content. So that, that's a nice high single-digit growth story. Industrial equipment has been growing for the last 6 or 7 quarters now, which is nice, and kind of mid, occasionally drifting a little bit above mid-single digits, which is a healthy growth rate for that business. Oil and Gas is declining now.
It's about a little under 10% of that segment, so it's not massive, but you know, a couple quarters ago, it was a nice growth for us, and of course, with energy, with oil prices where they are, that's slowed the growth down in that business. And then the other big piece within there is our energy business, which has gone back to, and it's a kind of a low single-digit growth business, very steady, close to company average margin, good cash flow generator, but getting really hit hard by the strong dollar, because about 45% of our business is in Europe.
So, you know, when you disaggregate it, we would expect normalized, you know, let's say Oil and Gas is flat where it is now, let's say it doesn't get worse, but we would expect that business is gonna grow in the 5%-6% range for us because there is a lot of content growth in aircraft. Military is starting to grow slightly again, and that had been a negative for a while. And there is content growth on the factory floor with things like Industrial 4.0 really starting to pick up momentum. In terms of the margin, the margins are moving up, that this is a business that has undergone a lot of shifting of the supply chain to get us more efficient over the last two or three years under Terrence's leadership, and...
That was an important thing that we needed to get done as we, you know, we went into vertical markets several years ago, and we feel good about that. We feel this is a, you know, this should be a high teens% margin business. About 65% of the business is there now, and there's still more room in the third of the business that isn't and in other parts of the business. So there's a lot of natural levers, not miraculous levers, I would say, just in a five to six% growth market, a lot of operating leverage should come with that business. And we're starting to see it as we whenever we get past that 3% growth rate into the 5%, we really start to see the operating leverage kick in.
Amitabh Passi (Equity Research Analyst)
Thanks, Tom. That was helpful. Then maybe just for a quick follow-up, either for you or Bob. At $700 million for your subsea business, can you maybe just update us on how we should be thinking about profitability for the segment, and also what profitability was for subsea in the March quarter?
Bob Hau (CFO)
Yeah, Amitabh, it's Bob. Our current outlook for 2014 is about $720 million in revenue, and we'll do low double-digit operating margin at that level. As we've indicated in the past, as we approach $1 billion in volume or in revenue on an annual basis, we have to expect that to, to increase to company average margins. But right now, part of it is we're still doing ramp up, so we're restarting factories and hiring folks and getting our assets fully utilized. But this year, at 720, we'll do low double-digit operating margins.
Amitabh Passi (Equity Research Analyst)
In the March quarter?
Bob Hau (CFO)
About similar.
Amitabh Passi (Equity Research Analyst)
Okay. All right. Thank you both.
Tom Lynch (CEO)
Thank you. Thanks, Amit. Can we have the next question, please?
Operator (participant)
We'll go to Matt Sheerin with Stifel. Please go ahead.
Matt Sheerin (Managing Director and Senior Equity Research Analyst)
Thanks. Just a couple of quick follow-up questions. Regarding the transportation business in the commercial area, you talked about weakness in heavy trucking and related to Oil and Gas. Do you see that bottoming in the next couple of quarters or so? And in terms of how it impacts your margins, my understanding that margins in that business were perhaps better than your automotive margins, so does that impact things at all? And could—if that does get worse, could you shift resources into your the passenger vehicle side, or are they separate operations?
Tom Lynch (CEO)
Thanks, Matt. Yeah, a couple things there. I would say what we saw in the heavy truck market is a slowdown in the growth rate in the heavy truck market and continued weakness in the off-road market. So as you know, mining and agriculture, those markets have been soft. And as the growth rates slow down, what you typically see is the supply chain slows down a little faster. So we saw that at the tail end of last quarter, in this quarter. We're not seeing anything that says it's gonna get any worse. I think it's... There, there are good drivers in there, such as emission standards.
In China, for example, while truck production is down, the content for trucks in China, now that they are really adopting and enforcing Euro 4 standards, is up more than the truck volume is down. So I would say, you know, we'd see this business to stay for the next quarter or two, about the level it's at now. The margins are above company average. Definitely, it's a nice margin business. There's not enough change in the business to really be thinking about redeploying. You know, it's kind of staying at the level it's been. We do share within the business, so we share factories. You know, as Bob talked about, our shared cost infrastructure for support services, we certainly share that.
So we do optimize within the transportation segment as a whole, a lot of our assets. So if, for example, it slowed in, you know, trucks slowed in one part of the world, but cars picked up, we can take advantage of that with basically in the same facilities for the most part. So there is that kind of flexibility. If-
Matt Sheerin (Managing Director and Senior Equity Research Analyst)
Okay, that's helpful. And just regarding the subsea business, you guided to $700 million+ for the year. And you're looking at, I think, I think you called it, growth year-over-year in communications overall. So should there be a step up this quarter in subsea revenue in sort of the mid-teens sequentially?
Tom Lynch (CEO)
On a sequential basis for SubCom, I would expect some modest improvement. The new AEConnect program kind of immediately ramps up. We are actually doing some juggling within our factories to manage that program. So we'll complete that program this calendar year, and we will probably offset some other programs. So it's a net net, not full increase, but it is growth from our prior guidance up to that 720 level, about a $70 million increase from prior guidance. So you do see some incremental into Q3 and into Q4 from that, from that new program.
Matt Sheerin (Managing Director and Senior Equity Research Analyst)
Okay. All right. Thanks a lot.
Tom Lynch (CEO)
Thank you. Okay, thanks, Matt. Can we have the next question, please?
Operator (participant)
That's from Mike Wood with Macquarie. Please go ahead.
Mike Wood (Equity Research Analyst)
Hi, good morning. Thanks for providing a lot of these bridges. My first question is just on the operational performance line on slide 4, the $55 million lower sales and the $0.07 increased EPS. I know you'd mentioned SubCom's up more than $50 million versus your expectations. Can you just provide what was dragging, what was offsetting that? And on the lower sales, how you're able to get to $0.07, is that commodity deflation or operational improvement?
Tom Lynch (CEO)
You're talking the full year, Mike, I think, correct?
Mike Wood (Equity Research Analyst)
Yeah. Yep.
Shawn Harrison (Senior Equity Research Analyst)
Some of that is subsea, some of that is accelerated restructuring, and for example, related to Data and Devices. As we told you last quarter, we're doing some, we're doing some significant combination there that's driving costs out, and continuing to drive, the productivity side. We get a little bit of lift, you know, from metals being lower in the year as our hedges roll off, but it-- versus last year, but we're gonna see most of that next year. But it's a combination of things and just tightening up.
Bob Hau (CFO)
Mike, the revenue decline of about, I think on that page was $55 million operationally.
We, we get the lift from SubCom, but we do have, as we've talked about, continuing to work through refocusing our data and device business, as well as some of that weakness in ICT, offsetting that.
Mike Wood (Equity Research Analyst)
Okay, great. And then, just a question in terms of, you know, recent Western European vehicle registrations have been pretty strong. It seems like, you know, the industry and yourselves are still looking for auto production that seems to remain pretty tepid. I'm just curious what, you know, you're expecting there from the cadence. I mean, eventually, is there an offset to that strong Western European vehicle registrations in other European regions that you're seeing? Or is this just a timing issue when eventually the production will ramp back up?
Tom Lynch (CEO)
Yeah, well, I mean, it's I'd say if you take Europe in total, it's, it's gradually improving. And, you know, to kind of put it in perspective, it's still... If it stays on its current track, which would be, you know, a little under 2% total production growth, it'll get back to slightly above 2012 levels. So I think, yes, there's more new registrations, but you're also in certain countries, you also have the impact of Russia uncertainty on Eastern Europe and the Russian market itself. Not huge, but that's a that's down 50%.
But net-net, I think the industry estimates now are Europe production growth, so that's, and the way we think about it, it's all the production of the European OEMs is gonna be up high 1 and 1.5-1.6% range, which is a little better than it's been. But, you know, still, we believe there's pent-up demand there. It's better than it's been, but it's not robust yet.
Mike Wood (Equity Research Analyst)
Great. Thank you.
Bob Hau (CFO)
You're welcome.
Tom Lynch (CEO)
Thank you, Mike. We have the next question, please.
Operator (participant)
That's Shawn Harrison with Longbow Research. Please go ahead.
Shawn Harrison (Senior Equity Research Analyst)
Morning. Two questions. First, open to bridge the increase in revenue guide sequentially with EPS going down sequentially. On that typical type of volume increase, I would have expected that to mitigate the sequential FX headwind, so headwinds. So if you could maybe help me out on why EPS is going down sequentially on higher revenues, it doesn't look like, essentially, like you're getting any volume leverage.
Tom Lynch (CEO)
Yeah, Shawn, it's not unusual in this set of businesses in Q3, particularly our transportation business, for margin to drift down a little bit in Q3, and then it, you know, we're expecting it to kick up. We're also seeing very low production in Q3, with a pickup because of a lot of new model launches in Q4, which means towards the end of Q3 and in Q4, we'll be shipping higher content vehicles. So we got a little bit of that. There is a more significant FX hit, and that FX hit is on our European businesses. And those are, if you look at our energy, industrial equipment, and particularly our very strong European auto businesses, those are nice margin businesses. So you get a little bit of mix effect. Then you have the ICT business slowing down a bit.
So it's more of a mix factor than anything else. You know, margins will stay in the ballpark, I'd say within 50 basis points of Q2, but we're solidly in the 16% range for 16%+ for the year. So $0.08-$0.09 EPS impact in Q2, $0.13 in Q3. So it's a variety of things depressing the you know, the earnings growth.
Shawn Harrison (Senior Equity Research Analyst)
Gotcha, thanks. I guess to that, is there any tax rate dynamics? Because I know it ticked down a bit sequentially. Do taxes rise?
Tom Lynch (CEO)
Yeah, the tax rate for the quarter was down nicely from Q1. Overall, we still expect the full year to be about 23%. The first half of the year, if you put the two quarters together, was 22.5%. So net-net, all in line with about 23%. It largely the difference is timing of ability to release some reserves or statute of limitations expiring that we have planned. Just a matter of when those actually expire and when we're able to record those impacts.
Shawn Harrison (Senior Equity Research Analyst)
Okay, and this is my follow-up. I understand, I guess, the concept of waiting till you have the $3 billion in hand for accelerating the buyback. But at the same time, if, you know, everything goes as planned, your stock price should be higher exiting the year than it is now, and you have access to cheap capital if you want to borrow it. I think what it was, the EUR debt issuance was at 1%. So I guess more of the question is on the rationale on, you know, why not accelerating the buyback if you could borrow some short-term money and do it now before the stock price rises, if everything goes as planned?
Tom Lynch (CEO)
Yeah, I would say, you know, we've been pretty consistent. We're not changing our answer on this, because we don't think that's a good idea, obviously, or else we'd be doing it. But fundamentally, until the deal is closed, I mean, it's on track. All government approvals are not received yet. We're getting through them. I'm optimistic, but it's not that far off. So rather than go through and change the capital structure from which worked for us extremely well, for the last seven years, I, you know, I just don't wanna do it. So, it's really the answer.
Shawn Harrison (Senior Equity Research Analyst)
Okay, that's fair. Thanks, Tom.
Tom Lynch (CEO)
Thank you.Okay, next, the next question, please.
Operator (participant)
Thank you. We'll go to Craig Hettenbach with Morgan Stanley. Please go ahead.
Craig Hettenbach (VP and Equity Research Analyst)
Yes, thanks. On the Datacom side of the business, can you provide an update on the 25 gig product cycle in terms of, you know, what your visibility is there? And then also, as you start to see revenue, kind of the implications for the margins in that business.
Tom Lynch (CEO)
So thanks, Craig. I feel good about our win rate and frustrated about the actual rate of adoption. So I think that's sort of been our sad story in a way for the last year. We have a nice product. Customers seem to like it. They're selecting it. They're designing it in, but I think the tremendous amount of change that's going on in that industry is just delaying the impact of new technology. You know, we remain committed to the product line, and it's not quite the drag it had been, because for so long, you know, it was heavy R&D. We're starting to see the light at the end of that tunnel. Hopefully, we expect next year with shipping some of this product.
But part of the, you know, the nature of what's going on in that industry, the convergence of customers, the white box effect, software-defined network, all those things that are just continuing to squeeze the industry is why we combined the two businesses, and we need to run it differently than we have in the past. I like our product line. It's a much more focused product line, and there's still more focusing to do, but our core connectivity product line is very good. You know, we've been investing in high speed, and, you know, we think that's eventually gonna pay off for us, but it's certainly taken longer for the market to adopt this, the higher speed solutions, in any significant way than we thought.
Craig Hettenbach (VP and Equity Research Analyst)
Okay, thanks for the call there. As a follow-up, on the automotive side, particularly within sensors, you know, understanding it's a time process in terms of longer cycle business to design in, but you did have an organic development underway. Now you have some incremental technology from the Meas side. Can you just talk about the engagements you're seeing on the automotive side, and what that means, kind of mid to longer term in terms of the growth opportunity?
Tom Lynch (CEO)
Yes. We're, we're very pleased with the engagement. Of course, we're, you know, we're not generating any sales in our financials yet from measurement products that are capitalizing on our market presence, but there's a lot of customer engagement, and it'll be a, it'll be a couple of years before we can turn the engagements into, into revenue, but it's happening. The, the number of engagements are happening faster than we expected. We just. It's a really, really good product line that Measurement Specialties had, and of course, we're the established customer supplier for connectivity and, and our own sensor base. So we have the credibility and the wherewithal to support the customers.
The auto customers, you know, have very, very strict requirements, and that was a key part of our hypothesis, that our ability to capitalize on that and bring in products that otherwise might not get there was good. So we're. It's activity right now. So the activity level is high. We're excited about it. A couple, a couple of small victories, that'll turn into revenue, but on or ahead of track, I would say, but it's a couple of years out before revenue synergy starts to kick in. But importantly, the organic revenue of the acquisitions is tracking slightly ahead of plan, so that, that's also nice.
Craig Hettenbach (VP and Equity Research Analyst)
Got it. Thank you.
Tom Lynch (CEO)
Thank you, Craig. Can we have the next question, please?
Operator (participant)
We'll go to Sherry Scribner with Deutsche Bank. Please go ahead.
Sherri Scribner (Director and Senior Research Analyst)
Hi, thanks. Just looking at your transportation solutions margins, they're starting to get near the sort of 21% level, and they've been at the 21% level last year. How much more upside do you have to the transportation solutions margin, and how much more do you think you can do with restructure- not necessarily restructurings, but with better cost alignment? Thanks.
Tom Lynch (CEO)
Sure. The transportation margins are very healthy at above 20. Our primary focus is to drive a higher revenue, and that's what's starting to happen, as I mentioned earlier, with if you look at our auto sale rate versus production rate, the sensor business is growing, you know, in the 8%-10% rate. So that's our big opportunity. I'd say within the portfolio, sensors, as we mentioned when we acquired the business, significant opportunity to move the margin up with our scale. It won't happen overnight, but we expect the margins to march up steadily towards the core automotive connectivity margin. So you might see, it might look like our total margin is moving a little bit, but within that, holding the margins we have and growing the sensor margin.
At 3%, 3.5% production, I would expect to deliver, you know, 30-50 basis points of margin improvement, everything else being equal. We've been pretty consistently moving the margins up. But again, our focus is to drive the revenue growth, to continue to drive you know, above mid single-digit revenue growth into the high single-digit revenue growth in this business, that should have some natural margin flow with it.
Sherri Scribner (Director and Senior Research Analyst)
Then, just following up on the growth rates, I think in the past, you've talked about a 6%-8% growth rate for this business. Is that number higher with the sensor acquisition that you've done in the sensor business, or is it still sort of 6%-8%? Thanks.
Tom Lynch (CEO)
Still in that range, but I think it starts to move towards the higher end of the range. Now, Sensors right now is still a little more than 10% of the business, so it doesn't have that much leverage, but that's gonna change. I mean, that's our goal, is to change it. So it definitely sort of solidifies the middle of that range in our mind and starts to tip it towards the higher end.
Sherri Scribner (Director and Senior Research Analyst)
Thank you.
Tom Lynch (CEO)
Okay. Thank you, Sherry. Can we have the next question, please?
Operator (participant)
We'll go to Steven Fox with Cross Research. Please go ahead.
Steven Fox (Managing Director and Equity Research Analyst)
Thanks. Good morning. Just a few clarifications on Measurement Specialties first. Are you providing sort of the EPS accretion you're getting from it in the most recent quarter and how it looks for the rest of the year? And then secondly, I think what I heard, Tom, is that you're saying that you're seeing a pickup in wins on and around sensors, and but it's more longer term, mainly related to auto still. Is that the right characterization? And then I had a quick follow-up. Thanks.
Tom Lynch (CEO)
Yeah. What my point really on the second part of the question, and I'll turn it to Bob for the first part, is that the design-in process takes a while. So you know, you get asked to design-in or you convince the customer to let you bid on a quote, and we're having a lot of that activity. Then you, if you win, you've got to get designed in. And for these applications, even in things like appliances and on the industrial floor, it's a couple of years typically before between design and revenue. It's shorter in the consumer space, of course, but we're really very targeted in that, targeted in that space with our sensor business. Most of our sensor business, even the way it spreads today, just the makeup by end market today, is in harsh environments.
So that's what I mean. There's this kind of the three elements. There's the organic growth, that's kind of the normal Mej and AST growth that they would have had whether we acquired them or not. We probably helped that a little bit. That's growing at a little better rate than we thought when we bought than the assumption. Then there's the take the sensors and leverage our channel strength for standard products. We expect to start to see that next year. And then new design-ins that we enable because we're sitting with a customer that Measure AST would not have had access to. That's a couple of years out.
Steven Fox (Managing Director and Equity Research Analyst)
Okay.
Tom Lynch (CEO)
That's, that's the way I think about it.
Operator (participant)
Great.
Tom Lynch (CEO)
Then, Steve, in terms of the impact of Measurement on a full year basis, we expect about $0.10 in terms of EPS in the current quarter. Call it $0.02-$0.03 was what we saw in the second fiscal quarter. You know, one important point to note between your questions and Sherry's previously around the operating margin. Overall, our automotive and ICT margins actually grew year-over-year, but we talked about that in our opening comments. With the acquisition of Measurement, that's slightly less. So the sensors business is up nicely on a year-over-year, kind of on a pro forma basis, so seeing operating performance. But that actually takes the overall transportation margins down just slightly.
Some of that is acquisition accounting, some of that is, the beginning of sensors, adding into our business. But overall, we're seeing nice margin of benefits, in auto and ICT.
Steven Fox (Managing Director and Equity Research Analyst)
That's really helpful. And then just really quickly on the book-to-bill, the 1.03x SubCom. That seems like a pretty positive number, despite all the mixed trends you pointed to. Can you just isolate what the drivers are? And then I guess that's part of why the Q4 should be so strong.
Tom Lynch (CEO)
It's in the harsh businesses. So those businesses continue to perform well, both you know from a, I think the markets are holding up and, you know, we're performing well, and our design ends continue to get a little bit bigger each year. So it's really across those businesses, and it's. We had a pretty good order, a very good order month, for example, in automotive in Q2, and that's starting to line up for the new model that we'll start shipping into in Q4, to your point.
Steven Fox (Managing Director and Equity Research Analyst)
Great. Thank you very much. Congratulations.
Tom Lynch (CEO)
Thank you, Steve. Can we have the next question, please?
Operator (participant)
We'll go to Amitabh Passi with UBS. Please go ahead.
Amitabh Passi (Equity Research Analyst)
Hey, guys. Sorry, just a quick follow-up on my end. Bob, I, I apologize if you touched on this, but can you help us understand how we go from the $0.87 to the implied $1 for fiscal 4Q, the 3Q to 4Q jump on essentially flattish sales?
Tom Lynch (CEO)
Yeah, there's a couple of things driving that. Number one, we are seeing some growth in our aerospace business, so we're getting some additional leverage in that. Obviously, FX continues to be a headwind, so there is some organic growth. Productivity, the benefits of restructuring, in particular, in the opening comments, I talked about the restructuring charges that we've taken, actually, in Q3, but also. Excuse me, in Q2, but also in the first half of the year. We've taken about $64 million worth of charges. We expect the full year to be now about $75 million of charges. The majority of those charges are associated with Data and Devices and Oil and Gas. Particularly in the Data and Devices business, that's OpEx.
So you get very quick payback, and we'll start seeing the benefits of that in the Q4, and that helps bring some nice leverage on the organic growth with lower OpEx spending.
Ruplu Bhattacharya (VP and Equity Research Analyst)
Okay-
Tom Lynch (CEO)
The other thing, Amitabh, just if you look at our auto business, because of the changeover, when we start shipping into the new models, our production is actually gonna be higher in Q4 than it was last year. So we're gonna get it, you know, as the benefit as lower cost per unit. So we're getting a little bit of that, and there's a lot of new models being launched that will be-- they'll actually come on the market calendar Q4, but we'll be shipping for them to be built in our late Q3, but mostly through our fiscal Q4, as you know, which ends in September. And we have more content on that, and that helps our margin as well.
Amitabh Passi (Equity Research Analyst)
Which is contrary to normal seasonality, right? 'Cause typically, I thought-
Tom Lynch (CEO)
It is.
Amitabh Passi (Equity Research Analyst)
Okay, got it.
Tom Lynch (CEO)
You know, it's not that super seasonal anymore because China's become such a bigger part of the auto story.
Amitabh Passi (Equity Research Analyst)
Yep.
Tom Lynch (CEO)
The seasonality used to be more pronounced, but. And they're, you know, introducing more cars quicker. So, that thing's starting to get tamped down. But in this quarter, you've got, you've got new Priuses, you know, all the German OEMs are launching a bunch of new cars. And, so there is a little bit of unusual impact there, 'cause we wouldn't typically see that Q3, Q4 to Q4.
Amitabh Passi (Equity Research Analyst)
Got it. Thank you.
Tom Lynch (CEO)
Thanks, Amit. Can we have the next question, please?
Operator (participant)
We'll go to Mark Delaney with Goldman Sachs. Please go ahead.
Mark Delaney (Equity Research Analyst)
Yeah, thanks very much. Two questions. First one for me is actually following up on the implied outlook for the fiscal Q4 into September. If I'm doing my math right, to get to the $1 of EPS in 4Q on that flattish revenue, I mean, I mean, it seems to me like the EBIT margin needs to be something in the mid-17% range, and that, you know, OpEx has to be stepping down, you know, pretty, pretty materially in the September quarter. I guess the question is around, you know, is the math right? And then, you know, as the OpEx is coming down that much in the fiscal Q4, what does that imply for the OpEx trends into fiscal 2016?
Is it, you know, are you getting the full restructuring benefits, and, and can you hold those levels? Or, you know, are there gonna be changes as we think about fiscal 2016 OpEx?
Bob Hau (CFO)
Yeah, Mark, your numbers are certainly in the ballpark. And, you know, we've indicated we expect to close the full year out well north of 16%, and that implies a nice uptick into the Q4. Some of that is certainly the OpEx spending. It's the Data and Devices restructuring, as well as the restructuring that we're doing in the Oil and Gas business to a much smaller level than what we're seeing in Data and Devices. Plus, it's the refocusing of that Data and Devices business. By exiting some unprofitable product lines, you see we're actually reducing revenue, but not only raising operating margin, but raising operating income dollars. And so that gives you a nice lift.
So it's not all OpEx, it's some gross margin lift also, but definitely a nice lift into the Q4.
Mark Delaney (Equity Research Analyst)
Okay.
Tom Lynch (CEO)
And you do have year over year, the transportation business up more than usual because of what I said, and the SubCom, relative to last year, especially. So you have two. Those, those are the three big levers. But, you know, Bob talked about cost and then the margin effect of, transportation and SubCom.
Mark Delaney (Equity Research Analyst)
Okay. And then for a follow-up question on the industrial segment. I understand you're seeing some weakness in the Oil and Gas end market specifically. Some of the bigger industrial companies have seen weakness outside of Oil and Gas and just traditional industrial and appliance type end markets and have missed 1Q numbers. Have you guys seen anything, either in your recent order patterns or just the conversations with your customers, that would indicate any broader weakness in industrial outside of Oil and Gas?
Tom Lynch (CEO)
I wouldn't say broad weakness. I think, you know, just all the shocks to the system between oil prices, dollar strengthening, and the Russia, lingering Russia situation has people, you know, kind of concerned. But, if you look at the core pieces of our industrial business, we're not seeing it in aerospace and defense. We are seeing it in Oil and Gas, to your point. We're not seeing it in industrial equipment. You know, we're keeping an eye on China. I mean, what happened in our quarter is China softened and Europe was strong in industrial equipment in the Q2 from both the sales and order rate. So you know, it's kind of mixed, for sure. In the appliance business, it's mixed. U.S., solid, China, slowing a bit.
So I think there's not a lot of momentum in the growth rate, is the way I would say it. It's. I thought 90 days ago, there'd be more momentum in the world from a growth point of view, and it's kind of going just sideways. So it is. You know, there's pockets, there's industries like auto that overall are continuing to have a very positive outlook and do well, particularly auto in a couple parts of the world. So, but it's a real mixed bag. It's not a circumstance that makes one comfortable, I would say.
Mark Delaney (Equity Research Analyst)
Thank you very much.
Tom Lynch (CEO)
Thank you, Mark. Can we have the next question, please?
Operator (participant)
That's from Wamsi Mohan with Bank of America Merrill Lynch. Please go ahead.
Ruplu Bhattacharya (VP and Equity Research Analyst)
Hi. Thanks. This is Ruplu filling in for Wamsi today. Thanks for taking the question. Tom, you've talked about, in the Data and Devices segment, exiting some low-margin products. Just wanted to clarify how much of that is left, and what kind of margin improvement can that translate to?
Tom Lynch (CEO)
Sure. You know, we're getting through it. It's on the other side, I'd say. So most of the heavy exit, a little bit left to do. The way we think about that business with the combination of a more focused product line and the cost actions we're taking is, one, it should contribute to EPS growth next year. And as you start going out of next year, would expect it to start closing in on double-digit margins.
Ruplu Bhattacharya (VP and Equity Research Analyst)
Okay. All right. Thank you.
Tom Lynch (CEO)
Okay, thanks, Ruplu. Can we have the next question, please?
Operator (participant)
We'll go to Jim Suva with Citi. Please go ahead.
Jim Suva (Director of Investment Research)
Thanks very much, and the bridge to financials was greatly appreciated. I have a question regarding slide five. So if you take a look at slide five on the transportation side, I see that you show auto up 4%, and then you have a little note on 1% unit growth. So if I do math correctly, that shows about 3% content growth net of ASP erosion. So I'm just kinda scratching my head here. Isn't content growth supposed to be about net 4%-6%, driven by about 6%-8% content growth, less ASP erosion of 2% long term? So was pricing more aggressive or content a little bit less, or was this more of a rounding error, or is my memory and math wrong?
So I thought kind of the general rule of thumb was global autos long term, 1%-3%, which was 1% this, this quarter, which is fine. And so then you've got, you know, 6%-8% content, less ASP erosion of 2%. So kind of a long-term growth rate of adding 4%-6%. So if you could just kinda help me out a little bit about what's going on there. Maybe it's, it's just rounding error.
Tom Lynch (CEO)
The model, the model we always refer to is production is what it is. This quarter was 1%. Content is 4%-6%, and price is 2%. So we don't net price in that scenario against content. 4%-6%, so it's not 6% to 8%. If we netted price, it would be 2% to 4%.
Jim Suva (Director of Investment Research)
Gotcha. Okay, great. And then regarding content growth for cars, is it being relatively stable growth, acceleration, or with oil prices going down, has there been a deceleration? Or can you talk a little bit about content growth of what you're seeing?
Tom Lynch (CEO)
It's pretty stable. I mean, it really hasn't changed that much. And it, I mean, what we see is in every part of the world, content growth is going up. So, you know, some parts of the world, you know, the European cars have the highest content, but everybody continues to move up. And, and the biggest, you know, the three big drivers, right? Safe, green, and connected. So you have just more safety, everything from more airbags to better braking systems, stability control, things like that. You have the connectivity, which is really increasing. And then you have emissions or green, which is driving a lot more electronics around the engine and the powertrain in general, which requires more connectivity and more sensing to optimize the performance of the engine so that you can hit the emissions target. So it...
But I'd say it's pretty steady because I think if you go back years ago, we would have thought hybrid electric would be a higher percentage of the market than it is today, and that, as you know, has significantly more content. That really hasn't moved, I think, as much as anybody thought, and one of the reasons is gas prices are down. And, you know, if you look at the latest numbers in the U.S., SUV and pickup trucks are way up, so the high gas consumption vehicles are way up, and actually, the hybrids are not. So it's kind of a mixed bag, but generally, we have not seen any significant shift in the trend.
Jim Suva (Director of Investment Research)
Great. Okay, thanks so much, guys.
Tom Lynch (CEO)
All right. Thank you, Jim.
I think we have no further questions, so if you do have further questions, please contact Investor Relations at TE. Thank you for joining us this morning, and have a great day.
Thanks, everyone.
Operator (participant)
Ladies and gentlemen, that does conclude your conference. Thank you for your participation. You may now disconnect.
