TE Connectivity - Q2 2017
April 26, 2017
Transcript
Operator (participant)
Ladies and gentlemen, thank you for standing by, and welcome to the Q2 2017 TE Connectivity Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. If you should require assistance during the call, please press star followed by the zero. As a reminder, today's conference is being recorded, and I would now like to turn the conference over to the Vice President of Investor Relations, Sujal Shah. Please go ahead, sir.
Sujal Shah (VP of Investor Relations)
Good morning, and thank you for joining our conference call to discuss TE Connectivity's Second Quarter 2017 results. With me today are Chief Executive Officer Terrence Curtin and Chief Financial Officer Heath Mitts. During the course of this call, we'll be providing certain forward-looking information, and we ask you to review the forward-looking cautionary statements included in today's press release. In addition, we will use certain non-GAAP measures in our discussion this morning. 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.
Finally, for participants on the Q&A portion of today's call, I would like to remind everyone to limit to one follow-up question to make sure we're able to cover all the questions during the allotted time. Now, let me turn the call over to Terrence for opening comments.
Terrence Curtin (CEO)
Thanks, Sujal, and thank you, everyone, for joining us today for the earnings call. While many of you know me well, it's very exciting to be holding my first earnings call as CEO and sharing our strong results for the second quarter, as well as an improved growth and earnings outlook for the year. In the second quarter, we delivered sales of $3.2 billion, representing 8% organic growth year-over-year, and we experienced growth across all regions. We delivered record quarter-two profitability with 170 basis points of adjusted operating margin expansion year-over-year and adjusted earnings per share of $1.19, which was up 32% over the prior year. This second quarter performance was ahead of our prior guidance due to the higher organic growth, as well as strong execution by our teams. All of our segments contributed to our sales growth, and margin expansion was driven by our Industrial and Communications segments.
Based upon these strong results and our view of market conditions for the second half, we are raising the midpoint of our revenue and adjusted earnings per share guidance to $12.7 billion and $4.62, representing 6% organic revenue growth and 17% earnings per share growth, respectively. I do want to take a moment to reiterate the key pillars of our strategy that we've had discussed with you in the past. First is our focus on harsh environment applications, which demand high levels of engineering and manufacturing excellence and provide competitive differentiation. Second is our TEOA operating system that drives customer service enhancements and productivity that reduces our fixed cost footprint. And third is our consistent execution of our balanced capital allocation strategy, which enabled us to make strategic acquisitions that have expanded our portfolio while consistently increasing dividends and repurchasing our shares.
Also, in addition to these three, we are also focused on ensuring that we align and enable our teams around the world to be focused and executing towards these pillars. With our portfolio focused on the harsh environment, I'm pleased that our business is now firing on all cylinders with revenue and profitability growth across each of our segments. Our second quarter performance and increased guidance for fiscal 2017 demonstrate successful execution on our strategy, and we believe this foundation will continue to drive growth ahead of our markets, deliver improved financial performance, and generate strong returns for our owners. If you could, please turn to slide three to review some additional highlights from the second quarter. As I indicated, we have growth across all segments and regions, with particular strength in Asia, where our organic growth was 16%.
We delivered 10% organic growth in our Transportation segment, with Auto and Commercial Transportation driving significant performance above market growth rates due to content gains. In Industrial Solutions, markets are improving, and we generated 3% organic growth that was in line with our prior guidance for the segment. In the Communications segment, sales increased 9% organically, with growth across each of our three business units. At the company level, adjusted operating margins were 16.6%, with year-over-year expansion driven by the Industrial and Communications segments. As we look forward to guidance, we're raising our organic growth expectations from 4%-6% for the year, with second-half growth expected across all segments year-over-year. Adjusted earnings per share, we're raising from $4.40 to $4.62 at the midpoint, reflecting higher growth and a slightly lower tax rate.
Heath and I will go through the details on the guidance later in the call, but as you think about our revenue guidance increase, please keep in mind that we had a stronger-than-expected second quarter, and this outperformance explains about half of the full-year increase. We're also seeing a strong momentum in orders, which reinforces slightly higher growth expectations for the second half in our commercial Transportation business and our Communications segment, along with a slightly reduced headwind from add-backs versus our prior guidance view. Before we get into the segment results and updates, I'd appreciate it if you could turn to slide four so I can cover our orders for the quarter, which will help provide context for the trends that we're seeing and our expectations. Demonstrating continued momentum, our total orders were $3.4 billion in the second quarter.
If you exclude SubCom, which is what is shown on this slide, orders were $3.2 billion, which were up 16% year-over-year and up 15% organically. We saw organic order growth across all of our segments in the second quarter, as well as growth among all our regions. By region and excluding SubCom, orders in the Americas grew 14%. In Europe, they grew 13%, and in Asia, they grew 18%. I do want to remind you that these growth rates are somewhat amplified due to a relatively weaker comparison versus last year's second quarter when we were contending with both inventory corrections and certain regional weaknesses. By segment and transportation, orders increased 17%, with growth in all regions. Industrial orders grew 22% year-over-year due to the Creganna and Intercontec acquisitions, while orders organically were up 8%.
In the Communications segment, excluding SubCom, we saw year-over-year organic orders growth of 17%, including 9% growth in Data and Devices. That's from our high-speed connectivity focus, as well as Appliance orders grew 27% organically, reflecting continued strength and share gain in Asia. When you look at our sequential orders growth in Industrial and Communications, both of these support our growth outlook in the second half. Please turn to slide five so I can discuss the segment results, and I'll start with our Transportation segment. Quarter two was a very strong quarter for Transportation, with sales growing 10% organically year-over-year and operating margins in the range of our expected levels. Segment sales exceeded expectations due to Auto demand in China, where we saw another quarter of production growth versus the prior year and growth from our leading position in the heavy truck market.
Our Auto sales were up 9% organically due to growth in Asia and in Europe, and Auto production growth, we estimate, was up approximately 4% in the quarter, and we continue to outperform the market due to content growth and share gains. For the full year, we expect global Auto production to be up 2%-3% based upon the stronger-than-expected first-half production. With the strong production that we experienced in the first half, we expect the estimate of the growth of the year from a production perspective really to be driven by the first-half production growth. Looking at the second half, it pretty much implies a flat 1% production growth in the second half, which is what we expected when we started the year, as we expected production growth to moderate and really has not changed from our prior guidance.
Turning to Commercial Transportation, our business delivered another very strong quarter as this business continues to outperform the market. Organic revenue growth grew 21%, driven by our strong global position, strength in the heavy truck market in China, and content growth due to adoption of new emission standards and regulations. In our Sensors business, we had 3% growth organically, with growth driven by transportation and getting the benefit of improving Industrial markets. Adjusted operating margin for the segment remained strong at 19% and was where we expected, and we continue to support a robust pipeline of design wins that will generate future growth above production. As we've indicated to you before, you should continue to think of steady-state transportation operating margin as 20% ± a point. If you could, please turn to page six to discuss our Industrial Solutions segment.
Sales in the segment grew 16% on a reported basis, driven by Creganna and the Intercontec acquisitions, and 3% on an organic basis, which was in line with our expectations. We are very pleased with the growth and performance of our acquisitions and their contributing favorably to the segment, both on the top and bottom line. In Industrial Equipment, we grew 4% organically, with increased demand from factory Automation applications, and we're seeing the benefit of that in all regions. In our Aerospace and Defense unit, our Defense business grew organically, while our Commercial Air was negatively impacted by timing of programs in the quarter. Our Oil and Gas business has now stabilized and is no longer expected to be a headwind to revenue or operating margins on a year-over-year basis. Our Energy business grew 7% organically, driven by strength both in Europe as well as in Asia.
Adjusted operating margins for the segment increased 130 basis points to 12.7%, as we expected, and we believe operating margins will expand from this level in the second half with the revenue growth. To help show the progress, excluding the impact from the acquisition-related amortization, adjusted EBITDA margins expanded 160 basis points to 16.9%. So please turn to page seven so I can cover Communications Solutions. The second quarter really demonstrates the progress that we've made in this segment. We had 9% organic growth and continued momentum in all three businesses. Segment adjusted operating margins expanded significantly year-over-year and improved versus last quarter, and now they're at 15.2%. Data and Devices reported another quarter of organic growth as we continue to benefit from the high-speed ramp to cloud infrastructure customers.
As we discussed last quarter, growth in this business is the result of our multi-year transformation to focus the product portfolio on key growth applications, and we expect organic growth for the full year. In addition, D&D more than doubled its adjusted operating margin from a year ago, driving significant improvement at the segment level as the actions taken transform the portfolio and optimize the operations have really taken hold. In our Appliance business, we had very strong performance with 14% organic growth year-over-year as demand remained strong, particularly in Asia, and our SubCom business grew 11% in the second quarter. Adjusted operating margins of 15.2% were up 680 basis points from the prior year with contributions from all businesses and actually was up 200 basis points sequentially. So with that segment overview, I'll turn it over to Heath. We'll cover the financials.
Heath Mitts (CFO)
Thank you, Terrence, and good morning, everyone.
Please turn to slide 8, where I will provide more details on the Q2 financials. Adjusted operating income was $535 million, with an adjusted operating margin of 16.6%, driven by strong organic growth of 8% and productivity benefits. GAAP operating income was $473 million and included $59 million of restructuring charges and $3 million of acquisition-related charges. For the full year, we continue to expect restructuring charges of approximately $150 million, driven by footprint consolidations from acquisitions and structural improvements. We aim to strike a healthy balance between investing for future growth while capturing SG&A efficiencies. GAAP EPS was $1.13 for the quarter. Adjusted EPS was a new record for the second quarter at $1.19, up 32% year-on-year. This was above our prior guidance range, driven by revenue growth and the benefit from the lower tax rate.
The growth above prior years is a result of our strategy in action with harsh applications driving growth, TEOA driving efficiency, and balanced capital deployment enabling acquisitions and share buyback. We also benefited from a lower adjusted effective tax rate of 15.4%, driven by the expirations of statutes in certain jurisdictions and additional benefits from Accounting Standard Update 2016-09 related to stock compensation. For the full year, I now expect an adjusted effective tax rate around 18%, which is similar to last year. However, as discussed last quarter, please keep in mind that in the year-over-year dynamics, we get an EPS benefit in the first half of 2017 and have an EPS headwind in the second half of 2017, driven by, given that our Q3 2016 and Q4 2016 adjusted effective tax rates were 17% and 13% respectively.
While the first-half benefit is $0.10, we have a negative impact of $0.10 in the second half, resulting in a zero net impact for the year. Going forward, I would expect an adjusted effective tax rate between 19% and 20%. Page 15 of our slide deck contains a bridge that provides the details for the first half and second half. Turning to slide 9, our strong Q2 results demonstrate that we are executing our strategy and performing well against our business model. Adjusted gross margin in the quarter was 34.4%, up 180 basis points improvement from prior year, driven by fall-through on increased volumes, productivity improvements from our TEOA programs, and restructuring benefits. Adjusted operating margins were 16.6% in the quarter, up 170 basis points year-over-year, driven by our Industrial and Communications segments. Adjusted EBITDA helps explain the cash earnings on our business.
Adjusted EBITDA margins in Q2 were 21.3%, up 160 basis points year-on-year. Cash from continued operations was $521 million, and free cash flow was $387 million in the quarter. Free cash flow grew year-over-year primarily due to better operational performance. We returned $234 million to shareholders through dividends and share repurchases in the quarter. Looking ahead, we continue to expect free cash flow to approximate net income and capital expenditures to be approximately 5% of sales. We remain committed to our disciplined long-term capital strategy of a balanced return of free cash flow to shareholders while still having ample capital to invest for acquisitions. Our balance sheet is strong with reasonable debt levels and an ability to continue to support return of capital and acquisitions going forward. We have added a balance sheet and cash flow summary in the appendix for additional detail.
Now I'll turn the call back to Terrence.
Terrence Curtin (CEO)
Thanks, Heath. Let me cover our guidance for both the third quarter and full year. Let's start with the third quarter. If you could look at slide 10, please. We expect third-quarter revenue of $3.2-$3.3 billion and adjusted earnings per share of $1.14-$1.18 per share. This represents reported sales growth of 4% and organic sales growth of 5%, with 7% adjusted EPS growth at the midpoint. I do want to highlight that our outlook includes the negative impact of a stronger dollar, which we expect will be a headwind of $70 million to sales and $0.04 to EPS on a year-over-year basis. In addition, as Heath mentioned, there is an unfavorable tax impact of three cents when you compare to the prior year.
Without these two headwinds, we would expect solid double-digit earnings per share growth year-over-year on 5% organic revenue growth, which is in line with our business model. Looking by segment, we expect Transportation Solutions to grow low single digits on a reported basis and mid-single digits organically. This is above the expected Auto production growth levels of 1% that we expect in the third quarter, with our outperformance being driven by content growth. We also expect continued growth in our Commercial Transportation segment across all regions. In Industrial Solutions, we continue to expect to grow low single digits on both a reported and organic basis, with growth expected across all three of our business units. And in Communications, we expect high single-digit growth on both a reported and on an organic basis, with growth in each of our three businesses.
We do expect SubCom to be particularly strong in the third quarter due to the timing of program execution. Now let's move to slide 11 so I can cover full-year guidance. Just before I get into guidance, as I said early on, I'm very pleased that our business is firing on all cylinders, with revenue growth and operating margin expansion this year being driven by all three segments. As we look at the second half, the margin expansion that we're going to experience in the second half will be driven by the Communications and Industrial segments, very similar to what we saw in quarter two. When you look at our guidance for the year, we are raising the midpoint of revenue and adjusted earnings per share guidance from our prior year by $300 million on the top line and $0.22.
Roughly $100 million of the sales increase and $0.04 of the earnings per share improvement is from reduced currency exchange headwinds. Organic revenue expectations were increasing from 4%-6% for roughly $200 million. Of this, approximately $130 million is from the outperformance we had in the second quarter, and $70 million is driven by a higher outlook in both our Commercial Transportation business and the Communications segment in the second half. I do want to note that our assumption for Auto growth in the second half has not changed from our prior year. We expect our Auto business to deliver mid-single-digit growth in the second half on a slight production increase.
When you look at our implied year-over-year trends in the first half to second half, I would ask you to keep in mind the impact of currency exchange rates and the tax dynamics that Heath talked about and that we have more details on in slide 15 of the deck. For the full year, the increase I just walked you through results in revenue in the range of $12.6-$12.8 billion and adjusted earnings per share of $4.58-$4.66. This represents 6% reported in organic growth and 17% adjusted EPS growth at the midpoint versus the 52 weeks of fiscal 2016. By segment, we expect Transportation Solutions to now be up high single digits organically, reflecting strong results in the first half and continued content growth and share gains.
As I said, while we continue to expect Auto production to moderate, we expect to generate mid-single digit revenue growth in our Auto business in the second half. Commercial Transportation is expected to outperform its end market again this year, benefiting from content expansion in the heavy truck market, and we expect our Sensors business to grow mid-single digits year-over-year. In our Industrial segment, organic growth guidance is consistent with the guidance we've been giving since the start of the year, reflecting continued improvement in the Industrial markets. In Communications, we expect to be up low single digits on a reported basis, an improvement versus our prior year, reflecting continued strength in Appliances and growth in Data and Devices, and we're raising our guidance for our SubCom unit to high single digit growth this year.
In summary, I feel very good about our ability to drive 6% organic growth, expand our operating margins, and generate strong double-digit adjusted earnings per share growth this year. I think this demonstrates that our portfolio is delivering and continuing to benefit from the secular trend of content growth across our businesses. Before we go to Q&A, I do want to close by thanking our employees for the strong execution in the second quarter, as well as their continued commitment to bring our technologies to our customers all around the world. So with that, let's open it up to questions and results.
Sujal Shah (VP of Investor Relations)
Okay, Brent, you give the instructions for the Q&A session.
Operator (participant)
Sure. Ladies and gentlemen, if there are any questions from the phone lines at this time, please press star followed by the one on your touch-tone phone. You'll hear a tone indicating you've been placed in queue.
Once again, if there are any questions from the phone lines at this time, please press star followed by the one. Our first question today comes from the line of Shawn Harrison with Longbow Research. Please go ahead.
Shawn Harrison (VP and Senior Research Analyst)
Hi, morning everyone, and congrats on the good first half of the year. Thanks, Shawn. This is the obvious question on Auto, but you've had some other suppliers into the markets raise some red flags, be it excess inventory in North America, China production declining, and I know your fiscal year doesn't align with the other calendar year ends of many companies. But are you seeing any weakness in Auto production out there right now beyond kind of a flatter second half that would lead you worried into the next fiscal year?
Terrence Curtin (CEO)
Hey, Shawn, it's Terrence, so let me take that question.
When you look at Auto this year, and we go back to the beginning of the year, we expected North America to be flat to slightly down in production, and it's sort of playing out as we expected. I think when you look at Europe, we've actually seen a Europe that has constructively gotten better throughout the year incrementally. So not major move, but I would say continued to strengthen, and that's been a positive trend. And the same has held true in Asia outside of China. When we guided in the beginning of the year and we guided to 1% growth overall, it was really the big wild card was around the China incentive and what would be the impact once that incentive tailed off.
We always assumed that Auto production was going to be pretty much flat in the second half, and it looks like it's playing out that way. So while we had a strong first half in production and a lot of it was driven by China, as we're looking at our order rates, we view the year's playing out as we sort of settle all year, with the only real change being China production was a little stronger in the first half, which really has driven the increase from our original 1% production growth up to the 2%-3%.
The other thing I said on the call, we always also viewed even in that low production growth environment we were going to get into in the second half, we felt very good with our content wins that we were going to drive mid-single digit growth, and that hasn't changed at all. So when you think through our guidance and the changes we're making to guidance, our Auto has been pretty consistent with the picture that we've said, and we expected China Auto to slow, and we expected a tough North American market. It's been tough in North America now almost for two years when you sort of look at the production environment. It's been sort of flat to slightly down. So I don't think there's incremental red flags. I think it's playing out as we saw.
Shawn Harrison (VP and Senior Research Analyst)
That's very helpful. Second, just following up on the SubCom business, now being up high single digits for the year, maybe you could talk about what visibility you have in the fiscal 2018, and does the business decline? Can you hold it flattish in the fiscal 2018 based upon the backlog you have right now?
Terrence Curtin (CEO)
Yeah, Shawn, thanks for that question as well. SubCom, we always talk to you about SubCom, and we have a pretty good 18-month window based upon the projects and the pipelines. And what was nice during the quarter, our backlog is still pretty steady at around $850 million is what we have booked, and we're also working on a number of opportunities that we're quoting.
So I think when you look at where we are right now, the strength of the backlog, I would sort of assume as your model next year, keep SubCom pretty much flat with where we guided for this year. And like we normally do, we get more projects in, we'll update as confidence increases, but I think the confidence we have is the amount of activity that we're quoting and working on, and I think modeling sort of a flat off this number we're giving you for this year is probably the most prudent thing to do right now.
Shawn Harrison (VP and Senior Research Analyst)
Thanks so much.
Terrence Curtin (CEO)
Thank you, Shawn.
Sujal Shah (VP of Investor Relations)
Thank you, Shawn. We have the next question, please?
Operator (participant)
And our next question comes from the line of Amit Daryanani with RBC Capital Markets. Please go ahead.
Amit Daryanani (Managing Director and Equity Analyst)
Yep, thanks. Good morning, guys. I guess two questions for me as well on the Transportation side.
Could you maybe talk about the operating margin dynamics you saw on a sequential basis? I think it was down about 300 basis points. Could you just touch on what kind of happened over there, and how do you think of margins as you go through fiscal 2017 broadly, and when do you see the sensor headwinds, which I think is a big issue for you guys right now, abating?
Heath Mitts (CFO)
Amit, this is Heath. I'll take that. I think if you go back and look at our comments from 90 days ago, we were pretty clear that the Transportation segment margins were running very hot and were not really sustainable. So I think internally, when we looked at the 19%, it was right in line with where we thought it would come in. It's consistent with where we've guided in terms of 20% plus or minus.
There is some investment activity going on in the segment as we're ramping up because our revenue pipeline is very strong in Transportation globally. So we're going to continue to make those investments, and I think modeling ±20% is probably a good number for that. Sensors is improving. You see the organic growth in terms of it still continues to be a bit of a headwind relative to the overall segment margins, but is progressing on track with where we thought they would be this year at this point, and the outlook going forward will continue to be less and less of a headwind as we progress over the next couple of years.
Amit Daryanani (Managing Director and Equity Analyst)
Got it. And I guess, Heath, you talked about, I think, the $150 million restructuring plan for the year.
How much of that is just M&A integration versus implementing structural improvements within TE Connectivity's portfolio? And how should we think about the payback period for the cost takeout that you guys are doing?
Heath Mitts (CFO)
Thanks, Amit. That's a good question. There is some acquisition-related integration, some of those tied to more recent acquisitions that have been done, even including Sensors and in the medical space. There is some of that included in there. And then quite honestly, there's some broader footprint consolidation that we're doing as well, and we'll continue to move forward on as we optimize the footprint. But there's a balance there between those. And I think in general, if you want to calculate, most of our restructuring has somewhere between 18-month and 2-year payback in terms of the cash-on-cash returns.
Some of the restructuring that you see, the $150 million, there's a chunk of that that's non-cash related that are write-offs. So if I think about it from a cash-on-cash return, I think 2 years is probably a good number.
Amit Daryanani (Managing Director and Equity Analyst)
Perfect. Thank you, and congrats on the quarter, guys.
Sujal Shah (VP of Investor Relations)
Thank you, Amit.
Heath Mitts (CFO)
Thanks, Amit.
Sujal Shah (VP of Investor Relations)
We have the next question, please.
Operator (participant)
And we do have a question from the line of Joe Giordano with Cowen and Company. Please go ahead.
Joe Giordano (Managing Director)
Congrats on the quarter. I've seen several news releases highlighting some of your products, and it looks like you have a pretty big booth at the upcoming LightFair trade show. Are you trying to accelerate your penetration in the whole connected home market?
Terrence Curtin (CEO)
Yeah, thanks, Joe. When you look at it, LightFair is coming up.
When you think about what we do there around the home, I talked a little bit about our Appliance business, which we have a lot in the home. Over the past five years, we have increased investment around lighting. That would be part of our Industrial business. So it's areas whereas lighting goes LED and you get into sockets, it comes into a natural opportunity for us. I think it's just one of those applications that sort of shows where we bring our engineering to and also how it is highly engineered that you have to switch over there. So it is a product area we've gotten into.
I don't know the revenue we have off the top of my head, but from that standpoint, I think it's pretty typical of the type of applications throughout our business we try to go after to really make sure how do we continue to grow fast with the market. So certainly around that space, we have made investments into it.
Joe Giordano (Managing Director)
Thank you. And then could you give us some details on what you're seeing in Data and Devices, particularly in China?
Terrence Curtin (CEO)
Yeah, no. On Data and Devices, our performance was extremely strong and even slightly ahead of where we thought because, as you know, we very much repositioned the portfolio around high speed. And I think you really started to see the benefit both on the growth side as well as the margins that we thought we'd get the business up to, and it certainly came truly in there.
When we look in Asia and Data and Devices, we have a very strong performance in Asia. We grew double digits organically in China, and we basically grew greater than that outside of China, which would include Japan and Southeast Asia. So really the traction when you look at that business has always been and continues to shift towards Asia. And the sales performance that you saw, as well as the operating performance, really to be driven by those wins that we have while we still get the infrastructure investments being made around China as well as how they service the rest of the world. So a lot of that growth will be driven out of Asia as we go forward as well.
Joe Giordano (Managing Director)
Thanks for the question.
Sujal Shah (VP of Investor Relations)
All right. Thank you, Terrence. We have the next question, please.
Operator (participant)
Next question comes from the line of Craig Hettenbach with Morgan Stanley. Please go ahead.
Craig Hettenbach (Executive Director)
Yes, thanks. Can you expand a bit just on the theme of increasing Automotive content? So any particular applications that are driving the content increase in fiscal 2017, and then even as you go out to 2018, maybe some of the applications you guys are excited about?
Terrence Curtin (CEO)
Craig, thanks for the question. I mean, it is so broad-based, and when you think through it, it's not just applications. It's everywhere in the world. If you take, we talk about our growth being greater than production. I mean, this year, every region is going to have pretty substantial growth greater than production, whether it's China, whether it's Japan, whether it's Korea, even in places like North America where production's light, we're doing better than production.
So it's very broad-based around the world, and it comes back to those trends we talked to you about, not only on the connected side where you have infotainment wins, but also where you see powertrain and emissions programs. That does call into where our teams can help solve the problems and the harshest environments along the emissions, and then you continue to add the safety side. So it's not one application. We're very fortunate we cover all applications, and what we do being the global leader, what we are so we're benefiting from the secular trends all around Automotive, and you're seeing it with the strong performance we have that's greater than production.
I mean, when you look at the guidance I talked about, as we expect production to moderate, production being relatively flat in the second half, we're going to grow mid-single-digit, which just proves the content growth assumption we talked to you about, about 4%-6%, and you net price off of it. It's all across the trends. It's not just one, and it's really very good execution of how we cover our customers globally and enable their technologies to make sure they can bring it to market.
Craig Hettenbach (Executive Director)
Got it. And then as my follow-up, I wanted to focus on one of the three things you highlighted in terms of focal points for the company on capital allocation. And there has been, I think, some discussions around maybe some increased discipline around OpEx and M&A. Just wanted to get your sense of how the approach is changing, if it is, and what the implications are for that as you approach M&A versus cash returns?
Heath Mitts (CFO)
Craig, this is Heath. I'll take that. By no means would I suggest there's been a pivot in terms of our approach. We're going to continue to be disciplined with our deployment. The dividend strategy stays on track. The share repurchase strategy is consistent. And we've been active in the M&A market, but it's been a tough market right now with where valuations are. And so we'll continue to be active and push that lever. But we're going to also be disciplined about where the returns are relative to those M&A investments and make sure they're deals for our shareholders.
Craig Hettenbach (Executive Director)
Got it. Thanks.
Sujal Shah (VP of Investor Relations)
Okay. Thank you, Craig. We have the next question, please.
Operator (participant)
And we do have a question from the line of Wamsi Mohan with Bank of America Merrill Lynch. Please go ahead.
Wamsi Mohan (Director and Senior Equity Research Analyst)
Yes, thank you. Hey, Terrence, clearly the market's worried about deceleration and Auto production trends, and you guys are clearly outperforming based on the content growth commentary that's implied both in your guidance and your comments here. But can you remind us maybe what levers you might lean on if the deceleration continues to be stronger, say in 2018, where trough transport margins might be? I know we're firing on all cylinders right now, but just from a risk mitigation standpoint, how should investors think about the levers that you might have at your disposal if things do end up getting a little tougher? And maybe calibrate in an environment of flat to 1%; you're growing 4%-5%.
If production were to be, say, a couple of points more negative, how that might influence your Auto growth? And I have a follow-up.
Terrence Curtin (CEO)
Yeah, no. So I think let's talk a little bit about trough, and I think if production was flat next year, we would expect that we're going to grow mid-single-digit. And if it would be down a little bit from that, we would be growing low-single-digit. But I think with what we've done with our content wins, we've realized these are platforms that we've won. They're in the backlog. This is not stuff to go get when you think about next year. So I think even in a slightly negative production environment, we're going to post growth. So I don't really view that as trough by any means.
I really view we would tighten up like we always do around where do we invest capital and make those trade-off decisions, but I don't view that as a free-for-all from our financial performance. We would just have to manage tighter. I think it shows where the business has come from, and I think it's the expansion around content and everywhere in the world. So I think similar to this year where early in the year we told you we thought production was going to be 1%, we could grow mid-single digit. We're doing that in the second half, certainly got some benefit. But I think the way that we're positioned, as well as where we see the trends, we do expect that global Auto production long-term should mirror GDP.
So certainly you always get into elements of maybe there's somebody has a peek in a country or a region and adjusts, but I think the content trend that we have, and I'll go back to what I said again with Craig, the trend that's happening around connecting the car from an infotainment perspective, the continued safety applications, and probably the bigger one always has to be around the powertrain and what happens from emissions and what happens in those environments, whether it be the electrification of the vehicle, going EV, that's content benefit for us. Or even if you're adding turbochargers to get better fuel economy on a smaller engine, that is where we thrive. And that thrives where our engineers can create the most value, the toughest engineering challenges.
And I feel very strong that we're going to continue to drive that content growth, and I think this year truly demonstrates that. So I think when you think through if production's a little worse, I think you're still going to have even in a slight production decline, we're going to be growing due to our content position that we've established over the past five years.
Wamsi Mohan (Director and Senior Equity Research Analyst)
No, that's very clear, Terrence. Thanks for that color. And as a follow-up, can I just ask, we've heard of pickup and restock activity in the channel. Any comment on inventory levels, sort of non-Auto inventory levels that you might have seen? And could you address the discrepancy between sort of what you're including SubCom order pattern is versus the guide? Thank you.
Terrence Curtin (CEO)
Yeah. So no, that's a great question.
So let me take the first half of your question without Automotive and without SubCom because we have seen a couple of things. We have seen our channel partners increase their ordering levels. I would tell you from inventory that is in the indirect channels, it actually has not moved. So it isn't like inventory is building. But what we have seen through our channel partners is that they've seen some shortages in certain other electronic components and certainly the semi side. You see them getting a little bit more aggressive in their ordering patterns. And we experienced that in our second quarter. In some cases, those orders are placed out. We've discounted that in the guidance that we've given you in the third and fourth quarter. But certainly, we did see an acceleration of orders through our channel partners in the second quarter, which is typically a good indicator.
It isn't like their inventory is getting ahead of themselves, but I think it does sort of show just positive momentum where they're starting to get pulls. And I think in some parts of the electronic supply chain, there's some shortages that they're also trying to be cautious on. So we're monitoring that, and we'll continue to update you on that.
Wamsi Mohan (Director and Senior Equity Research Analyst)
Thanks, Terrence.
Terrence Curtin (CEO)
Thanks, Wamsi. Good question.
Sujal Shah (VP of Investor Relations)
Thanks, Wamsi. We have the next question, please.
Operator (participant)
We do have a question from the line of William Stein with SunTrust. Please go ahead.
William Stein (Managing Director and Senior Equity Research Analyst)
Great. Thanks for taking my question.
Terrence, I'm wondering if you can characterize the content gains that you're seeing coming through both in the sales results and in the wins that might not even be reflected in orders yet, whether those are more on the connector side, the sensor side, or whether you're seeing accelerating demand for integrated products there?
Terrence Curtin (CEO)
Actually, on the content side, when you actually look at it, and I presume, Will, your question's around Auto? Yes. Actually, where we see the content gain is traditionally outside of interconnect. So when you actually look at it, it's really around the integrated solutions where we're providing new technologies is really where we're seeing the content wins as well as Sensors. So I think those combinations where you look at it is really where we've invested in part of what we call our adjacent technologies.
They would be things like in EV where we provide contacts. Contactor is not an interconnect. It's actually something that is very important to an electric vehicle. We have a very strong position in it globally. So those are the types of areas we're seeing it. And when we look at the terminal connector side, it's growing very nicely, but from a content perspective, it's much more outside of interconnect.
William Stein (Managing Director and Senior Equity Research Analyst)
Appreciate that. Maybe one follow-up if I can. Can you remind us of your exposure specifically to the carrier market? I think that's outside of SubCom. I think there's something in Data and Devices. And if you could comment on trends in that market, I'd appreciate it.
Terrence Curtin (CEO)
Hey, Will, could you maybe come up a few more bars of what you define as carrier? I mean, do you mean like the AT&Ts and the British Telecoms?
William Stein (Managing Director and Senior Equity Research Analyst)
Service providers, yeah, as opposed to sort of web-scale data center company.
Terrence Curtin (CEO)
We do not serve anywhere directly to a carrier anymore. That was part of our BNS business we sold. Certainly, we would sell to the people, our high-speed applications into the carrier network, to those people that make the gear, but we do not sell to the carriers.
William Stein (Managing Director and Senior Equity Research Analyst)
Great. Thanks for that clarification. Congrats on the good quarter.
Terrence Curtin (CEO)
Thanks, Will. Thanks for the question.
Sujal Shah (VP of Investor Relations)
Thanks, Will. Can we have the next question, please?
Operator (participant)
And our next question comes from the line of Steven Fox with Cross Research. Please go ahead.
Steven Fox (Managing Director)
Thanks. Good morning. Just a couple of questions, please. First of all, I was wondering, Terrence, you gave a lot of good color around orders.
I was curious if you think about everything you talked about, what it says about sort of the business cycle that we're currently in. Are you more encouraged that we're seeing an uptick in economic activity, as some may argue, or is it sort of similar trends overall given what you're seeing at distribution versus the easier comparisons with orders, etc.? Just wondering about your thoughts there, and then I had a follow-up.
Terrence Curtin (CEO)
Steve, thanks for asking that question. It's a good question. What we would say is one of the things that's nice, I would say markets overall have a little bit of an upward tilt, and it's actually pretty consistent between regions. So I would say when we started the year, we gave out our guidance for the year with around 3% growth. I do think Industrial markets are getting a little better.
The Auto market is sort of, as we called it, Communications is better. But then also regionally, when you sit there, we've had very strong Asia performance. We talked about it for this quarter, but also it's been very broad-based. It's just not the Auto discussion we've had. Europe continually is to incrementally get better. And in the Americas where I would say it's been sort of sideways for a while, we have seen a little bit of tilt up really driven around the Industrial markets. So I would say it's incrementally better. I would say it's less choppy than it's been, would be phrases I would use. But I would also certainly say that there's still some political things going on around the world that I still think, while constructive, we're still ready to move quickly if anything changes that could impact any of the markets.
So overall, I would say it is stronger. I think the orders reflect it. I think the broad-based of the growth reflects it and a little bit more confidence in the greater economy. But what I get excited about is that's in every region of the world right now where we're seeing some of the upward tilt, which we haven't seen in certain markets recently.
Steven Fox (Managing Director)
Thanks for that. And then just as a follow-up, on the Auto content story, I mean, the company has historically been known for being a powerhouse around powertrain applications, etc. How much of the content is driven by those core historical strengths versus maybe new areas like infotainment, maybe driving a little bit more of it, or is it still mainly going to be a powertrain story going forward? Thanks.
Terrence Curtin (CEO)
No, it's actually in all three, Steve.
So if you take it, and I know we show a slide when we see investors. If you sort of think about our $60 today of content, approximately half of our content today in an Auto is around we call it green, but to your point, you used the right phrase, powertrain. About half of our content is in powertrain. About 40% of our content is around safety applications. I would put anti-lock brakes, traction control, and airbags into those. And then about the remainder is really around the connected. That would be your convenience, your lighting, the things that happen within the cabin around infotainment, the less mission-critical type items, I guess I would say, that happen in the cabin. So that's really our mix. And what's nice is all of them have opportunities.
When we talk to you all about five years from now, we think we can get that content up to $80 above it. We really feel it's across all three of those categories. So it isn't just in powertrain. Certainly, powertrain, I think, has the biggest toggle of greater growth, especially as you get to EV adoption. That content is really driven in the powertrain and the infrastructure of the car side. So I think that's one that has more upside than probably the others, but we're well positioned in all of them regardless. So I appreciate your compliment about us being on power and the powertrain. I like that. But I do think we've rounded ourselves out, and it gets into some of the questions today. It's across all of them.
That's really it's a credit to our focus and getting ahead and leveraging the technology we can bring to these customers that we serve anywhere they are, both from an engineering setting and where they manufacture. It's a real strength that we have.
Steven Fox (Managing Director)
Great. Thank you very much.
Terrence Curtin (CEO)
Thanks, Steve.
Sujal Shah (VP of Investor Relations)
Thanks, Steve. We'll get the next question, please.
Operator (participant)
We do have a question from the line of Jim Suva with Citi. Please go ahead.
Jim Suva (Managing Director)
Thank you very much. I have two questions, and I'll ask them both at the same time. Probably one CEO-type question and one CFO question. The first one would be, you had mentioned your Auto forecast for this year remained unchanged, kind of strength right now, and then a deceleration going forward. That's good to hear.
The main concern or question we have is, are we facing a situation like last year, maybe a different region or whatever, of inventory being built up or your forecast of flattish actually being too aggressive as many of the others have kind of talked about a big deceleration coming in? So how come we're not facing inventory lot build-up and things like that and why you think your forecasts are different than others? Then for the CFO, I think you'd mentioned restructuring of about $150 million. Your operating margins are now performing well in every segment. Should we expect $150 million going forward? Because it is noteworthy that the past several years it was coming down, and now it's kind of come up a little bit because you're making so much more profitability. Is $150 million the good rate?
Is this kind of the peak year and we should expect restructuring to decline, or how should we think about those charges? Thank you very much.
Terrence Curtin (CEO)
Hey, Jim. Let me start with your first question, and I'll let him cover your second one. So thanks for asking the question. First off, on Auto production, and I know other people have talked about different outlooks for the year. I think one thing that's very important as you all compare these outlooks is we're in a fiscal period that is September. Our outlook when we talk the next two quarters is really June and September. And our outlook is really from talking to our customers. So we feel actually very good about where our outlook is, where their production builds are, as well as where we plan to supply chain. So I don't think we're aggressive. I don't think we're conservative.
I think we're aligned with what our customers are telling us right now and is sort of a flattish the rest of the year. I think some others have come out with calendar year guidance. I don't think on a calendar year basis. And so I think there's an element there that I would ask to make just really reasonable as you compare everybody's opinion about Auto production. We do see a moderating, like we said, from day one, mainly driven around China. And we did not have much expectation from North America this year. We expected to be flat to slightly down. And it looks like it's playing out of that as the source pretty peak. So I guess I'll head off to Heath on the restructuring question. Go ahead.
Heath Mitts (CFO)
Well, Jim, I think the restructuring question is certainly a valid comment.
I don't know that 115 would be a number I'd hang my hat on in terms of that. Certainly, there was an opportunity in fiscal 2017 to do some things to optimize our footprint and to make sure that we are aligning where we do business closer to our customers. And opportunities will avail themselves as we go forward. There's no doubt there's a handful of things that we continue to contemplate as we go into 2018. But each opportunity has to have its own merits and stand on its own from a cash-on-cash return perspective. And so we'll provide more color for that as we go forward. But I think there'll be some element of restructuring as we go into 2018 as we continue to fine-tune the operating model. But I don't know if it's $150 million or something less than that at this point.
Jim Suva (Managing Director)
Great. Thank you so much for the details. Greatly appreciated.
Terrence Curtin (CEO)
Thank you.
Sujal Shah (VP of Investor Relations)
Thanks, Jim. Can we have the next question, please?
Operator (participant)
And we do have a question from the line of Matt Sheerin with Stifel. Please go ahead.
Matt Sheerin (Managing Director and Senior Equity Research Analyst)
Yes, thanks. And good morning, guys. So question regarding the strong operating margin in the Communications Solutions. I think that's the highest margin since you've kind of changed the reporting segments. And I know a lot of that was driven by the portfolio mix, deselecting products, but trying to figure out how much of that strength was due to Subsea Communications versus the mix and versus the change of the portfolio. And how sustainable is that going forward?
Heath Mitts (CFO)
See, it's a fair question, but your improvement of nearly 700 basis points in the segment was pretty well balanced across the three business units in the segment, Data and Devices, Appliances, and SubCom.
They all contributed roughly equal in terms of that margin improvement year over year.
Matt Sheerin (Managing Director and Senior Equity Research Analyst)
Okay. In terms of targets, particularly given that it looks like subsea will be or SubCom will be sort of flattish over the next few quarters into the next fiscal year, I imagine that you're still looking at growth within Appliances and Data and Devices. Is there still an incremental margin that you expect to generate where you can see even better margins there?
Heath Mitts (CFO)
Well, certainly, productivity plans will be in place. But the heavy lifting around the footprint consolidation in the segment related to the walk-away revenue that transpired over the last several years, that's behind us. I mean, we are largely to, I'll say, more of an optimized footprint within the segment, just a few tweaks left to go in that.
So I would not want to foreshadow that you're going to continue to see 700 basis points year-over-year improvement for the quarter-on-quarter going forward. But certainly, we feel good about where the number is today. Knowing that SubCom is probably going to be flattish year-over-year, you would expect more of the incremental operating income improvement to come from Appliances and from D&D. But they're both running pretty hot right now.
Matt Sheerin (Managing Director and Senior Equity Research Analyst)
Got it. That's helpful. And just back to Transportation and specifically the Commercial segment where you've seen a very strong organic growth in an underlying market that has basically been flat to down and weak. We're starting to see signs of some stabilization from competitors. But Terrence, what are you seeing in those markets in terms of underlying growth, both in heavy trucks and off-road vehicles?
Terrence Curtin (CEO)
Matt, it's a good question.
I guess to maybe frame a little bit our performance, because I think our performance is not just one quarter. It's really been the past couple of years as the overall market was very negative, especially North America. Our overperformance has really been driven by our strong position in China, not only North America. We really weathered the storm well. The growth that we saw this quarter was really driven by emission standards in China as well as content gains with Chinese companies. When we look at it from a market perspective and we look forward, we do actually see construction starting to pick up after a very tough period. I think you saw that in some of the results that have come out. Ag still continues to be a challenge, a challenge globally. That's still a market we're waiting to pick up.
And on the truck and bus side, we've really benefited from our strong position globally. So when we look at it, it does feel like we're starting to get more forward lean in those overall markets, whereas I would say the past two years has really been between our position and our content gains driving the growth. And it'll be nice as the market starts to click in, getting stronger growth in that market. And as I said during the comment, part of our guidance uptake in the second half is really driven by Commercial Transportation as well as our Communications segment. So we are seeing upward momentum there as we go through the year.
Matt Sheerin (Managing Director and Senior Equity Research Analyst)
Okay. Thanks a lot.
Sujal Shah (VP of Investor Relations)
Thank you, Matt. Go ahead to the next question, please.
Operator (participant)
And we do have a question from the line of Mark Delaney with Goldman Sachs. Please go ahead.
Mark Delaney (Managing Director and Senior Equity Analyst)
Yes. Good morning. Thanks very much for taking the questions. First question is a follow-up on Matt's question about Commercial Transportation. Can you help us understand a little bit more on the regional exposure that you have within Commercial Transportation? Maybe how much is North America versus international markets? And then I know the company mentioned some regulations that were helping the Commercial Transportation business. Can you just elaborate a bit on what sort of benefits you've been seeing from some of those regulations in Commercial Transport?
Terrence Curtin (CEO)
Yeah, sure. So if you take our Commercial Transportation business roughly, and I'm trying to get that up, about 40% of our businesses in the Americas, 60% outside the Americas, split evenly between Asia and Europe. And really, Asia, when you think about the regulations, is probably the bigger area, specifically China.
We've been getting the benefit from the emissions regulations that are happening there and a very strong position that we have and increased content wins, providing more to the customer than just what we historically did. So it's a really good both capitalizing on the trend, but also pretty major content wins that we've gotten into other technologies we're bringing to the customer.
Mark Delaney (Managing Director and Senior Equity Analyst)
Yeah. That's helpful. And then my follow-up question is trying to understand a bit more of the order patterns that the company is seeing in the Automotive business. I think guidance for Transportation in the June quarter is about $1.7 billion of revenue. And then if you use the full-year guidance, kind of at the midpoint, it implies about $1.6 billion.
So if you're seeing growth in Commercial Transport and Sensors, it seems like the implied Auto sales for both June and September are down low- to mid-single digits both quarters. And normally, June's up sequentially. So are you guys seeing some sequential declines on a quarter-to-quarter basis in the light vehicle business in line with what your expectations are? I just wanted to kind of confirm that, or is that just some conservatism about you had such a strong first half, and you're just not sure how the year goes from here?
Terrence Curtin (CEO)
When you look at the second half, we're going to be pretty much mid-single digits year-over-year, Mark. Clearly, we do expect production to step down. Our first quarter was very strong. As we said, some of that was due to the China stocking. So we will have sequential changes and momentum with production.
But we're going to be up year-over-year. And we typically also always step down quarter three to quarter four, primarily due to Europe, just from how the holiday and the production seasons work. So not sure I'm completely following how you're looking at it. But second half year-over-year, we're going to grow mid-single digit on that flattish production. And the shape is a little different this year due to the strong first quarter. But when you get to the rest of the year, Q3 going down to Q4, we would expect a step down in pretty normal seasonality because of our strong European position.
Mark Delaney (Managing Director and Senior Equity Analyst)
Thank you very much.
Terrence Curtin (CEO)
Thanks, Mark.
Sujal Shah (VP of Investor Relations)
Thank you, Mark. Go ahead to the next question, please.
Operator (participant)
We do have a question from the line of Sherri Scribner with Deutsche Bank. Please go ahead.
Adrienne Colby (Analyst)
Hi. It's Adrienne Colby for Sherri. Thanks for taking the question.
Within Industrial, can you talk about what drove the declines in Aerospace and Defense? And also wondering if you could comment from a margin perspective, what was driving some of the upside? Is it mainly the moderation and the drag from Oil and Gas, or if you're seeing contributions from other pieces of business?
Terrence Curtin (CEO)
Yeah. Thanks for the question. In Aerospace and Defense, we still are confident with our outlook for the year and the quarter. We saw on the Commercial Aerospace side just slower pickups from one of the large airframe manufacturers in the quarter. That we expect to have in quarter two. We expect it'll happen in quarter three. But that was offset by defense picking up. I think that's a real positive. When you look at year-over-year, Oil and Gas really did not have an impact year-over-year.
I mean, so the tailwind, where the headwind from Oil and Gas is behind us, the Oil and Gas business was pretty constant in the quarter, so it didn't help our margin. Really, the margin improvement was around the cost actions that we talked to you about that we were taking in Industrial to continue to improve the margin to get it up into the higher teens. And I think you're starting to see the benefit of that. And we expect to continue to see the benefit in the second half. And clearly, that's part of our guidance. Our guidance is that Communications and Industrial will be the margin drivers in the second half. And we're pleased with the performance that the Industrial team did on the margin improvement side in the second quarter.
Adrienne Colby (Analyst)
Great. As a quick follow-up, it looked like SG&A ticked up a little bit this quarter. Just wondering if you could comment on that going forward?
Heath Mitts (CFO)
Sure. It ticked up. It's generally pretty seasonal. If you think about going back and looking prior, generally from first quarter to the second quarter, you'll see that normal tick up. And I think if you looked at SG&A as a percent of sales, it's pretty consistent with what we've seen in the past. There's some very specific drivers of that in terms of just how some things are with the timing of some of the investments that we do each year. But pretty consistent and on track with what our internal expectations were.
Adrienne Colby (Analyst)
Thank you.
Sujal Shah (VP of Investor Relations)
Okay. Thank you very much. I want to thank everybody for joining us this morning. And if you have further questions, please contact [email protected]. Thank you and have a great day.
Terrence Curtin (CEO)
Thank you, everyone.
Operator (participant)
Ladies and gentlemen, this conference will be available for replay after 10:30 today through May 3rd. You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701, entering the access code 421540. International participants may dial 320-365-3844. Those numbers, again, are 1-800-475-6701 and 320-365-3844. Again, entering the access code 421540. That does conclude your conference for today. Thank you for your participation and for using the AT&T Executive Teleconference Service. You may now.
