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TE Connectivity Ltd. (NYSE:TEL)
Q4 2020 Earnings Call
Oct 28, 2020, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the TE Connectivity 4th Quarter Earnings Conference Call for fiscal year 2020. At this time, all lines are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to our host, Vice President of Investor Relations. Sujal Shah. Please go ahead.

Sujal Shah -- Vice President of Investor Relations

Good morning and thank you for joining our conference call to discuss TE Connectivity's 4th Quarter and Full Year 2020 results. With me today are Chief Executive Officer, Terrence Curtin and Chief Financial Officer Heath Mitts. During this call, we will be providing certain forward-looking information and we ask you to review the forward-looking cautionary statements included in today's press release. In addition, we will use certain non-GAAP measures in our discussion this morning and we ask you to review the sections of our press release and the accompanying slide presentation that address the use of these items. The press release and related tables along with the slide presentation can be found on the Investor Relations portion of our website at te.com. Due to the large number of participants on the Q&A portion of today's call, we're asking everyone to limit themselves to one question to make sure we can give everyone an opportunity to ask questions during the allotted time. We're willing to take follow-up questions but ask that you rejoin the queue if you have a second question. Now let me turn the call over to Terrence for opening comments.

Terrence Curtin -- Chief Executive Officer

Thanks Sujal and thank you everyone for joining us today to cover our results of the 4th quarter as well as our expectations for our first quarter of fiscal 2021. Before I get into the slides, I do want to frame out some key points about today's call. First off, I am very pleased with our execution in the 4th quarter where we delivered sequential sales growth of 28%, which was above our expectations and adjusted earnings per share of $16. Our top line benefited from a better than expected recovery in automotive production coupled with our leading position in this market. Adjusted operating margins expanded sequentially by over 500 basis points, while we also executed on our inventory reduction plans that we discussed with you last quarter and while we're still in a market where we're being impacted by COVID-related weakness and it has challenged our business model on margins in EPS, I also believe we successfully executed on a number of the key elements of our business model including strong free cash flow as well as content growth that help for the weakness we had in key markets. And I'll come back to this in a moment and get into a little bit more detail into that. The other thing is that we are pleased to see a faster recovery in certain markets as evidenced in our orders, but I do want to highlight that the visibility on the shape and the slope of the longer-term recovery still remains limited. And lastly, as we look into our first quarter, we are expecting sales to be roughly lead to the first quarter of fiscal 2019, but with adjusted operating margin and earnings per share expansion both year-over-year and on a sequential basis and for the first quarter which Heath and I'll talk about, we are expecting sales and adjusted earnings per share of approximately $3.2 billion and $1.25 respectively. While the challenges that we've experienced associated with COVID impacted the second half of our year, I am pleased that we demonstrated a key elements of our business model in fiscal 2020. We are benefiting from the active management of our portfolio over the years and the actions that we've taken to optimize our cost structure and before we get in the slides again, I just want to give a few examples of what stood out to us during the year. First off, despite the market headwinds, we benefited from the secular trends across the business that we position the company around and this is evident in automotive, where we delivered 6 endpoints of outgrowth versus the auto market in 2020 which reinforce our ability to generate content growth in both growing production or declining production environment and it's also important to remember that China is the largest auto production market in the world and we're from increased volumes in our leading position in this region as it recovered. Another highlight is our Communications segment that remained resilient through the downturn and delivered strong growth both year-over-year and sequentially in the second half driven by the build out of data center capability. We also saw margin expansion with the segment delivering adjusted operating margins at its mid-teens target level for the year. And lastly, the foundation of our business model is the cash generative nature of our businesses. We once again demonstrated this in fiscal '20 with $1.5 billion of free cash flow, and this represents a 104% conversion in net income. With this as a backdrop, I do want to take a moment to provide some perspective on our business and markets relative to our last earnings call 90 days ago. Last quarter, we said that the 3rd quarter would be the low point of the downturn. This is now confirmed with 40% improvement in sequential orders in the 4th quarter along with sequential revenue and EPS growth, both in the 4th quarter as well as what we expect into the first quarter. As we look into the first quarter, the business is returning to prior year levels with expansion of adjusted margin and earnings per share and while auto production has come back a little bit stronger than we expected, we are still well below 2019 production levels of 88 million units on an annual basis and we still believe the shape of the recovery will continue to be gradual and dependent on the global consumer. Over 19 million vehicles were produced in the 4th quarter and we expect sequential improvement in auto production in the first quarter to 21 million units. In our other 2 segments, the Industrial and Communication segments, we do expect them to be down sequentially with some [Indecipherable] like we have in commercial aerospace. So with that, let me get into the slides and if you could please turn to slide 3, I'll provide some additional details for the 4th quarter and the full year as well as our expectations for 2021 first quarter. Quarter 4 sales of $3.26 billion were better than our expectations and up 28% sequentially. Transportation sales were up approximately 50% sequentially driven by the recovery in our auto sales, which were up 68%. Industrial sales were up 11% sequentially with growth across all businesses and in our Communication segment, sales were up slightly sequentially and up 12% year-over-year. During the quarter, we saw orders of approximately $3.35 billion and a book to bill ratio of 103, which I'll add more color on when I talk to that slide in a moment. Adjusted earnings per share was $1.16 and adjusted operating margins were up 500 basis points sequentially to 14.5%. As we mentioned at the onset of COVID, we kept inventory levels relatively high to ensure we can meet commitments to our customers through a period of supply chain volatility. During the quarter, we drove a significant reduction in inventory in TE primarily in the transportation segment with some reduction in industrial as well. This helped our free cash flow but did impact our margins negatively both at the company level and in the Transportation segment. In the 4th quarter, free cash flow was approximately $650 million and we returned $1.1 billion to shareholders during the year, including approximately $625 million from dividends and $500 million of share buybacks. When we look to the full year of 2020, sales were $12.2 billion and they were down 10% year-over-year on both a reported and organic basis due to the impacts of COVID on our markets. Adjusted operating margins were 14.2% with adjusted EPS of $4.26. While transportation and industrial were impacted by the market weakness, our Communication segment grew 15% organically from the first half to the second half demonstrating the diversity of our portfolio. I am also pleased that we didn't hit this downturn flat-footed. Prior to the onset of COVID, we began executing on cost reduction and footprint consolidation plans in the transportation and industrial segments to get to the target margins we've been discussing with you. As we look forward, we do expect quarter one sales of $3.2 billion, which is up 1% year-over-year on a reported basis and adjusted earnings per share of $1.25, up 3% year-over-year, which is an expansion in both adjusted operating margins and EPS in the first quarter. So if you could, we would appreciate if you turn to slide 4, and let me talk about orders across the businesses as well as geographically. For the 4th quarter, our orders were over $3.3 billion and our book-to-bill improved to 1.03 as I mentioned earlier. On a year-over-year basis, transportation orders grew 12% driven by auto, but we did also see growth in our commercial transportation and sensors orders as well. Industrial decline year-over-year were primarily driven by the ongoing weakness in commercial aerospace and in Communications, our growth was 13% driven by the appliances business unit as that market recovers globally post COVID. Our book-to-bill was above one in transportation and below one in our other segments supporting our sequential revenue growth in quarter one in our Transportation segment and the declines we expect sequentially in Industrial and Communications. So let me add some color on orders from a geographic perspective. For the second consecutive quarter, we saw an increase of orders in China, which were up nearly 25% year-over-year in the 4th quarter with growth in each of our segments but particular strength in transportation. We saw approximately 8% year-over-year growth in our orders in Europe and this was also primarily driven by transportation and in North America, our orders declined 8% year-over-year primarily driven by the industrial segment and weakness in the Comair market. So with that as a backdrop of orders, let me get into the segment results and they'll be on slides 5 through 7 and I'll hit the high points that will be on the slides as I go through the segments. So let me start with Transportation. Transportation sales were down 6% organically year-over-year with declines in each of our business as you can see on the slide. In auto, sales were down 4% organically driven by global auto production declines. Even with the dynamic changes in the auto market due to COVID in 2020, we generated 6 points of content growth for the full year and that just proves our continued outperformance versus the weaker market. I would ask you to keep in mind that content growth can vary quarter-by-quarter, but we continue to expect 4% to 6% content growth in auto over the long term. And when you look at 2020, the production of internal combustion vehicles dropped nearly 20% percent this year, but we did benefit from the increase in hybrid and electric vehicle production that was up 13% in our fiscal year. When you look at hybrid and electric vehicle production and that represents 10% of total global auto production and we expect that EV and HEV production to reach approximately 20 million units in the next 5 years. Our customers plans remain on track for full battery electric and hybrid electric vehicles and there has even been some acceleration of road maps as OEMs respond to increased demand and a more stringent regulatory environment in certain parts of the world. We are leading provider of technology and products to our customers as they move to more sustainable hybrid and electric platforms. In sensors, we show 10% growth year-on-year due to the revenue contribution from the first sensor acquisition and on organic basis, sales increased 9% sequentially as we expected with our year-over-year performance being impacted by the market volatility. We continue to grow our design in pipeline and auto applications and expect growth as these platforms increase in volume. Adjusted operating margins for the transportation segment declined year-over-year as a result of the planned inventory work-down in the quarter that I mentioned earlier. We expect significant sequential adjusted margin expansion in the transportation segment in the first quarter, which will be the driver of the company's margin expansion both sequentially and year-over-year in the first quarter. Let me turn to the Industrial segment. In this segment, sales declined 6% organically year-over-year and our adjusted operating margins were approximately 14% and impacted by the lower volumes as well as some of the inventory workdown. We remain on track with our long-term margin expansion plans in this segment and we remain focused on driving adjusted operating margins into the high teens. During the quarter, the segment continue to be impacted by the decline in the commercial aerospace market with our aerospace, defense, and marine business declining 13% organically. We do expect the Comair weakness to continue into early 2021 as the market is still in the process of bottoming. In our Industrial Equipment business, our revenue was down 2% organically and better than we expected with declines in Europe being partially offset by growth in Asia. We continue to see weakness in our medical business with ongoing delays in elective procedures caused by COVID. We believe this is a short-term dynamic in our medical business as consistent with what our customers are seeing and we expect this market to return to strong growth as elective procedure start to increase. Turning now to Communications, our sales grew 11% organically year-over-year with growth in both data and devices as well as appliances. We continue to benefit from the recovery in China and Asia more broadly, which represent over half of our sales in this segment. Data and devices grew 7% organically year-over-year due to our strong position that we've built in high speed solutions and cloud applications. Appliances grew 18% organically year-over-year with growth across all regions and benefit from an improved housing market as well as supply chain replenishment. Our Communications team performed very well and adjusted operating margins grew to over 21% in the 4th quarter. This strong performance is a result of the multi-year transformation of our portfolio and reduction in our cost structure and manufacturing footprint. Adjusted operating margin for the segment for the full year were 16%, which is in line with our target and we continue to expect mid-teens operating margins long-term in this segment. So with this overview of segment performance, I will turn it over to Heath who will get into more details on the financials, as well as our quarter one expectations.

Heath Mitts -- Chief Financial Officer

Thank you Terrence and good morning everyone. Please turn to slide 8 where I will provide more details on the Q4 financials. Adjusted operating income was $473 million with an adjusted operating margin of 14.5%. GAAP operating income was $347 million and included $113 million of restructuring and other charges and $13 million of acquisition-related charges. For the full-year, restructuring charges were $257 million and I expect restructuring charges of approximately $200 million in fiscal '21 as we continue to optimize our manufacturing footprint and improve the cost structure of the organization. Adjusted EPS was $1.16 and GAAP EPS was $0.69 for the quarter and included a non-cash tax related charge of $0.17 related to an increase of the valuation allowance for certain deferred tax assets. We also had restructuring, acquisition, and other charges of $0.31. The adjusted effective tax rate in Q4 and the full year was approximately 17% and for FY '21, we expect an adjusted effective tax rate around 19% but it's important to note here that our cash tax rate will still be well below that in the mid teens. Turning to slide 9, sales of 3.3 billion, were down 1% on a reported basis and down 4% on an organic basis year-over-year. Currency exchange rates positively impacted sales by 39 million versus the prior year and at current levels, currency will be a $55 million tailwind in Q1. Our adjusted operating margins were 14.5% and expanded 510 basis points sequentially as mentioned earlier, while we anticipate it to our operating margin performance due to the planned inventory reduction we highlighted last quarter. I am pleased that we reduced inventory by nearly 300 million in the quarter. Just as a point of reference, our inventory overall came down 12% from the June quarter to the September quarter. As you can imagine, that had a couple hundred basis points of pressure to our margins as we got the inventory right sized but I feel good about the impact it had on our cash flows. The inventory reduction primarily impacted the Transportation segment. We also had some impact in the Industrial segment. We continue to execute on our footprint consolidation plans and pursue additional opportunities to drive cost reduction. We remain committed to our business model margin expansion goals, and we expect volume growth combined with our restructuring plans over time to drive adjusted operating margins in transportation to 20%, industrial to the high-teens and Communications consistently in the mid-teens. For the quarter, cash from continuing operating activities was $719 million. Free cash flow was approximately $650 million for the quarter. For the full year, free cash flow was approximately $1.5 billion, which represents a 104% cash conversion. For fiscal '21, we expect free cash flow conversion to again be strong at approximately 100%. Looking back on our performance in fiscal '20, the extreme volatility we saw in our end markets, our cash flow and capital structure performed in line with our expectations. We maintained a strong liquidity position and generated strong free cash flow in each quarter of this year. We maintained a balanced capital strategy, returning capital to shareholders and remaining active in M&A with the acquisition of first sensor. During the year, we spent $505 million on share repurchases buying back 6.5 million shares. At the same time, we continue to invest for future growth through R&D and capital spending initiatives and we're able to gain gear with key customers through our robustness we showed in our manufacturing operations. Going forward, we remain committed to our balanced capital deployment strategy and expect to return two-thirds of free cash flow to shareholders while supporting our inorganic growth initiatives. Please turn to slide 10 to discuss our expectations going forward. For Q1, we are expecting sales of approximately 3.2 billion up 1% on a reported basis and down 2% organically on a year-over-year base sequentially, we are expecting organic growth in transportation to be offset by modest declines in both industrial and Communications. On a year-on-year basis for the first quarter, we expect Transportation to be essentially flat organically, communications to grow mid single digits and industrial to be down mid to high single digits. Adjusted EPS is expected to be approximately $1.25, up 3% year-over-year and for the first quarter, we are expecting significant growth in adjusted operating margins from the 4th quarter levels. As Terrence mentioned, we are still dealing with low visibility and is difficult to predict the shape and slope of the recovery in different end markets and geographies as the world continues to deal with COVID. We do want to share some of our key market assumptions as we plan the business. We expect global auto production to be approximately 21 million units in the first quarter up sequentially from Q4, but still below prior year levels. During the December quarter being the strongest production level of the year in China, we are expecting Q1 to be the high global auto production our fiscal year. We continue to expect strong content growth of 4% to 6% enabling us to continue outperforming the auto market. In Industrial, we continue to expect commercial aerospace market to stay weak declining over 20% for the second consecutive year, but we do expect our medical business to improve as we move through the year. In Communications, we expect continued increases in cloud provider spending, driven by the growth in online activities and our data and device business plays directly into this favorable trend. So I've already summarized some of our financial assumptions for the fiscal year on the slide. They are there for easy reference for you. Now let's open it up for questions.

Questions and Answers:

Operator

[Operator Instructions] First question is coming from Wamsi Mohan with Bank of America.

Wamsi Mohan -- Bank of America -- Analyst

Yes, thank you and congrats on a really strong quarter and guiding in this environment. Heath, I was wondering if you could clarify some of the moving pieces on transport margins. Your transport revenues were almost flat on a year-on-year basis, but you had big negative leverage. How much of that was the inventory issue that you were addressing earlier and can you clarify what the inventory levels are now and if there is going to be any residual impact to margins in fiscal 1Q. And just as a point of clarification on the comment on reaching the high point of production in the December quarter, I don't think you are suggesting that also implies peak EPS in fiscal 1Q, but I was just hoping you would clarify that as well. Thank you.

Heath Mitts -- Chief Financial Officer

Thanks, Wamsi, and we may try to tackle those here. Certainly that inventory reduction, more than two-thirds of it or so from the total was in transportation and that was really the driver of our transportation margins being close to the 13% level. So we would expect as we move forward Inventory is now in the right place in terms of what we need to see moving forward and I would expect the Q1 numbers to tick up significantly at the Transportation level and as Terrence noted earlier that that it will flow through nicely to the overall performance for margins in our first quarter. In terms of the comments around the Q1, we're trying to highlight that the 21 million vehicle auto production number in Q1, we anticipate that 21 million to be the high point in the year. That does not mean that that's going to be necessarily the high point of TE's revenue or EPS for the year, OK and we've got other businesses in the portfolio and some do have some seasonality element to it in addition to some of the medical recovery that we would anticipate more in the second half of our fiscal year and obviously, we're actively engaged in a lot of cost reductions. We've got pretty significant heavy lifting this year with some plants coming offline. The timing of those will be staggered throughout the year, but as you can imagine, as the year progresses certainly, we start to benefit more and more from exiting those costs. So hopefully that clarifies your questions. Thank you, Wamsi. We'll have the next question please.

Operator

Our next question comes from the line of Amit Daryanani of Evercore.

Amit Daryanani -- Evercore -- Analyst

Good morning guys. Thanks for taking my question. Again, I'm hoping [--] hi, I was hoping, Terrence maybe you could talk a little bit about content growth and how do you see that stacking up in fiscal '21, especially on the EV markets in a scenario where there are more tire of fuel efficiency and emission standard requirements, especially in the US, what could that do to the content growth number that you guys have in fiscal '21.

Heath Mitts -- Chief Financial Officer

Yes, certainly I don't [--] I think 2020 clearly solidified where we sort of say [Phonetic] 4 to 6 at, there is an element of, where does the consumer go to buy as well as the government programs help it one of the things that that's been very nice, and I mentioned in the comments is you see EV production and car sales really increased last year double-digit in what's a really tough economy and it was more in Europe and it actually was where it's been in Asia, and we still view that Asia and Europe will be the leading areas where you get adoption. We likely have always said is, you do typically mean where [--] you need where EVs are still less penetrated, you do need some government help to basically make sure as that scales and the US is still an area that is less penetrated than the others and have less regulation. So anything that helps EV penetration and increased penetration helps our growth and a chunk of our content is driven by the EV growth this past year being in the double digits and we're bullish on EV and certainly we've been investing to make sure we help scale-out architecture globally. And what's nice is, it looks like the bigger adoption is going to be in Europe and Asia, which is our strongest market positions.

Terrence Curtin -- Chief Executive Officer

Okay. Thank you, Amit. We'll have the next question please.

Operator

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

Terrence Curtin -- Chief Executive Officer

Hello Mark, are you on. All right. It looks like we're having an issue. Can we go to the next question please. We will come back to Mark.

Operator

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

Craig Hettenbach -- Morgan Stanley -- Analyst

Yes, thanks. Question for Terrence. If I look at your December quarter, it looks a bit above typical seasonality. I know this is a very unusual year in terms of what's played out up to date, but just curious to get your context in terms of what you're seeing for December versus what you typically see and any puts and takes by the end markets there.

Terrence Curtin -- Chief Executive Officer

Yeah, let me spend a little time on that and the first thing I would say is that Heath talked about so that we're well aligned. Auto production typically in the December quarter is the strongest quarter of the year for global auto production and that's really driven by China being the largest car producing country on the planet and as they have taken that position the December quarter is typically the strongest in China and that's why we believe the first quarter can be probably the strongest for the year, but as we [--] as we look across the portfolio, you take areas like industrial transportation. They are areas that have been hit hard by COVID. We did see sequential improvement. We did benefit from China strength, but our global position is also driving great content in places like India, in Europe that we think can be a growth driver as we go into next year, even though China may have some market anniversarying, it becomes a little bit tougher in the industrial markets Craig. Comair we do expect, we are in the middle of a bottoming process there. We do think that will be a little bit negative as we go into the early part of '21, but we do get excited that the medical business is going to be rebounding back here as elective procedures pick up and in Communications, we talk a lot about our performance this past year and I think we're going to continue to benefit from as our global appliance position that you saw the benefit in revenue as we go into next year and that recovers and certainly rebounds, as well as where we've done things secularly in our D&D business which has been a lot of hard work now we reposition that. So I do think it's a little bit different than normal seasonality. Seasonality is tough to sort of think about in this environment when our customers are telling us visibility is short, but it's nice to see the recovery coming back little bit faster than we thought in auto and we're trying to stay close to our customers on how do we help them as we're all new in this environment where visibility is light.

Heath Mitts -- Chief Financial Officer

Thank you, Craig. We'll have the next question please.

Operator

Your next question comes from the line of Shawn Harrison with Loop Capital.

Shawn M. Harrison -- Loop Capital Markets -- Analyst

Hi. Everyone and Mike congrats [Indecipherable] to 2020. Wanted to just dig a little bit deeper in the margins on a twofold aspect. Number one, do you expect Transportation EBIT margins to be back to the year-ago levels, now just feel for the inventory that came out and second, how do we think the kind of incremental margins either transportation as well as industrial from here knowing that we've had a couple of years restructuring in hand.

Heath Mitts -- Chief Financial Officer

Thanks, John. This is. Heath, I think you know as we look into FY '21 and obviously we're only guiding this first quarter, we feel pretty confident in our ability to get back to prior levels in terms of margins for transportation. In terms of the incrementals and I think it's fair to say at the TE level that you know thinking about a 30% or 35% flow through is a fair way to think about it and that pretty much is consistent down through the segments. Now, we used to say kind of 25% to 30% if you recall in some of the activities that we've undertaken are allowing us to step up some of that commentary, a little bit. So I feel pretty good about that. Now keep in mind that some of the heavy lifting that we're doing on restructuring and these [--] some of these plants if they were [--] if these plants are easier to take offline, we would have done in a long time ago. So they are in many cases, from the time that we announced and take a charge it can take 12 out 15 months to completely get them offline and exit the costs from those. So we are active, we've seen plants come off right at FY '20 and then in FY '21 we'll see another surge of that. So we're really probably talking FY '22 and so forth before you start to see the more significant step up incrementally from here, but certainly at the TS level, we expect margins to improve dramatically in our fiscal first quarter.

Terrence Curtin -- Chief Executive Officer

Thank you, Shawn. We have the next question please. Look, we will have the next question please.

Operator

I'm sorry. Your next question comes from the line of David Kelly with Jefferies.

David Kelly -- Jefferies -- Analyst

Hi, good morning guys, I appreciate you taking my question. I just wanted to get a feel for some of the opportunities that are in front of mine for TE into a new year with hopefully some continued ramp toward normal. So could you talk about some of the biggest strategy opportunities out there that you see on the horizon, things like whether it's ramping electrification in autos, return to M&A or broad electronification as a content driver.

Terrence Curtin -- Chief Executive Officer

Yeah, thanks David and let me take that. First of all, it is nice to see the world still in recovery mode certainly with the uncertainty that's around us due to COVID, but probably the first thing that we're excited about it is not only how the portfolio is sort of playing out like we expected in a cycle because we will be impacted by auto cycles due to our great position there, but I would also tell you that dealing with what we've dealt with in 2020 that we do have a clean portfolio versus what we've had in another cycles I think came true and honestly, it allows us to play offense around where we make our investment organically as well as if we do want to bring bolt on them and from that viewpoint, I think that's the number one thing that's nice going through the cycle versus others. I think we gave you some examples about the content, the number one content driver for TE is around automotive. It is around electrification. It's also the element also around data in the car and that's why we get excited with the 600 basis points we showed last year of our performance and we are confident with the wins we have that type of level in our 4% to 6% that we've told you about above production as global production continues to heal and let's face it. We're still well off the 90 plus million units of cars produced a few years ago. The other thing that I would tell you is during this downturn, it's giving us an opportunity in many ways to really make sure we get closer to our customers mainly to make sure they have the partners with them that are going to be there long term, and I do believe our manufacturing strategy that we've been investing in which includes the cost actions that Heath talked about has really been an element of how do we get, and continue to move our global manufacturing to be local for local and it's been a journey. We had a lot of work to do on that provides cost but also provide service elements and it does come back to why we feel good that we didn't enter this flat-footed. We understand that we have margin opportunity in transportation and industrial. We've been talking about that and how do we couple that with the content opportunities not only in automotive but in medical and also what we've done in cloud or things that we get really excited about and we have the engineering wins that support that. So as we're all dealing with an uncertain environment that we have to navigate through and adjust to, but we also have to accept the reality of the opportunities as well as where some markets like Comair we have to adjust to the reality of that market won't be what it was and they are the things that I think will drive both growth levers from here, but also margin levers and our capital structure and free cash flow generation allows us to make sure we can be focused on improving the business and growing the business.

Heath Mitts -- Chief Financial Officer

All right, thank you, David. We'll have the next question please.

Operator

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

Deepa Raghavan -- Wells Fargo Securities--- Analyst

Hi, good morning all. Yeah. Congrats on the solid execution as well. I have a margin question to Q1 year-on-year. How do you think about industrial margins in Q1, I'm assuming we won't see the inventory impacts repeat in Q1. So would that grow margins year-on-year in Q1, also your leverage in autos should be pretty nice in Q1, just given that auto production in peak volumes 21 million but what kind of margin levers do you have post Q1 and should we expect that margins in TS can grow rest of the year also. I mean clearly you've under earned because of COVID situation in 2021.

Heath Mitts -- Chief Financial Officer

Well thanks Deepa. There's a lot packed into that question. So let me get out at the industrial margins. I think the prudent viewpoint on that is that they'll kind of move, though be consistent in Q1 with what you saw in our fiscal 4th quarter that we just completed, albeit on lower revenue, which is [--] which was expected and there is some seasonality as we move generally through the year within Industrial. So I think we're holding our own there in terms of the journey within the industrial margin structure, but from a Q4 to Q1, I think you should expect those to be roughly flat on lower revenue. Obviously, your question around auto and then more broadly TS the impact that it has, you are correct. I mean we do have some good leverage there in terms of our Q1 performance, I think we've talked about a few different times here in the call in terms of seeing significant sequential improvement in that and then as we move throughout the year, the auto was obviously we gained the benefit of the content and we've seen those that activity continue to be strong, but it kind of gets down to little bit to what you think auto production is going to do in the subsequent quarters. That's one element of it and then obviously as we layer in some of the restructuring activities, we have several plants that will be coming offline, but you'll see those more impacted late in FY '21 and more pointedly in FY '22. So there are some pieces there, but we feel very good about the actions we've taken to date and what that allows us to do on the incrementals moving forward and again we've kind of stepped up our dialog there from I'll say pre-COVID activities in terms of what we think the incrementals could look like. Thank you. Deepa. We have the next question please.

Operator

Your next question is from the line of Samik Chatterjee with JP Morgan.

Samik Chatterjee -- J.P. Morgan & Co. -- Analyst

Hi, thanks for taking my question. I just wanted to hit the EV content story in a different way and see if we can get some more color here, particularly when you reiterated today the 4% to 6% content growth in automotive, as well as the 20% margin outlook longer term. Why shouldn't I be thinking of as the EV content story kind of plays out there being upside pressure on both of those long-term targets, be it related to content performance or be it 20% margin if kind of what we're seeing in terms of the roadmap acceleration on EVs does play out.

Terrence Curtin -- Chief Executive Officer

I think the key that you have is we do have to remember, we are in our quarter today and certainly when we think about the 4 to 6% EVs probably 2 to 300 basis point to that. So when you look at when we think about it, it's across our whole portfolio, so we continue to see very strong growth in EV and high power products, but you also have to realize what percentages of global auto production. So I think you will have years and if EV goes quicker and then adoption, you would have us closer to the higher end of our 4 to 6 range. But certainly, adoption will be important. The other thing I would just say to the margin element like anything EV products are things we have to scale, and from that viewpoint, how they scale and how we get volume leverage is going to be very important, whether there would be margin upside potential to our target margins.

Samik Chatterjee -- J.P. Morgan & Co. -- Analyst

It's great, helpful. Thank you.

Terrence Curtin -- Chief Executive Officer

Thank you. Samik. We'll have the next question please.

Analyst

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

Mark Delaney -- Goldman Sachs & Co -- Analyst

Yeah, good morning. Thanks for taking that question and apologies for the connection issue having before. I was hoping to speak more on the electric vehicle opportunity and I think the content is about double in an EV compared to a traditional car. Now that you're seeing a number of EV start-ups come to market, are you seeing a similar type of content opportunity with some of those customers and then maybe also just talk about any differences on margins and end market share, this is an evolving landscape. There could potentially be the opportunity to do more of a solution sale with newer entrants into the industry, but also perhaps they're also looking to bring in non-traditional suppliers. So any kind of comments around not only the content opportunity but also margins and market share. Thank you.

Terrence Curtin -- Chief Executive Officer

Yes. Sure, Mark and it's a question we get a lot and I'll try to frame it here. In many ways, it comes into not only where we innovate, but then it comes into their strategy about how do they want to make the car. In some cases we've shared examples where we have $500 to $600 on an EV product to where they're looking to others to do the assembly and more of the manufacturing from. We have one that is $200 where we're playing much more like our traditional component players. So I think as that evolves, I think that's why you see the wide variation, but even on the component side, the component side is where we get, and we typically stick to [Phonetic] 2X the opportunity. We also, when you come into margin you have to say, where do we bring value and where do we bring our engineering. We are not a contract manufacturer. We do not view ourselves as a tier 1. So that's not been part of our strategy. So it's why we typically tell you 2X, but I would tell you the opportunity is not just with new start-ups, it's also the strategies of every one of the OEMs, as they come out and figure out how they want to assemble the vehicles versus traditional and in some cases, we do more and in other places we play our component role and either way, it creates opportunity for us that drives the content and what's really great is because we know the architecture so well and there is existing architecture that goes into electric vehicle that we get content not just the high power prices. That's why we get such content opportunity over the combustion engine as well as the electrical powertrain.

Heath Mitts -- Chief Financial Officer

Okay. Thank you, Mark. We'll have next question please.

Operator

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

Matt Sheerin -- Stifel -- Analyst

Yes, thanks and good morning. Terrence another question on the auto market, you talked about Q1 being a peak, largely because of China seasonality. Do you have any thoughts on what the production number it looks like for your FY '21 and how you see North America and Europe playing out in terms of their catch up on production and also sell-through there.

Terrence Curtin -- Chief Executive Officer

As we look at, Matt, and I know I said it, visibility is limited and what I'd like to keep it to is probably the latter part of your question on sell-through and we talked about on another calls. The element is it's good to see production recovering, but the real proof in the pudding is are people buying cars and what has been nice if you go in Asia, and [Indecipherable] we had concerns of what was pent-up demand versus ongoing sell-through and China as you've seen from the figures have stayed pretty consistent with the sell-through and inventory levels in China are at very normalized levels. In North America, certainly production is ramping. We also see that demand is nice and inventory levels are at a comfortable spot. The one area where I would say inventory is still elevated is Europe. Some of that, we've also told you is relates to with the regulatory changes there between EV and combustion engines. I do think the consumer has been a little bit more cautious on vehicle purchases. So that's the one area that we continue to look at, to say, hey, we'd like to see inventory worked down. We like the structures and some of the incentive programs governments have put into place to really do cash for clunker type programs and incentives, but we still need to inventories come down in Europe. Okay. Thank you, Matt. We'll have the next question please.

Operator

Your next question comes from the line of Chris Schneider with UBS.

Chris Schneider -- UBS -- Analyst

Thank you. So the company's capital intensity has picked up over the last couple of years, which I assume is largely driven by the scaling of EV capacity but should capex intensity come down as we kind of look out the next couple of years just as is build out winds down. And then what does this level of investment mean for competitive positioning within the EV market as it seems like smaller competitors will have trouble matching this level of investment and could that [--] then could that trend in further add to the mode around the business.

Terrence Curtin -- Chief Executive Officer

Thanks, Chris. We did heightened up or tick up our capex investments. If you go back a couple of years ago, we were running [--] we were worth at $900 million. I think you're seeing that number has certainly come down over the past couple of years and I would say our viewpoint as we look at FY '21 is consistent. You should probably think about somewhere around that 5% of revenue in terms of our capex intensity certainly no more than that and one of the things we do benefit from is, as we were increasing our capacity and that's both to support the traditional combustion engine customers, but it was heavier weighted toward some of the EV fit up in our factories. Certainly we're able to now utilize that. That was done under the assumption of significantly higher auto production than what we saw in FY '20 and anticipate in FY '21, but we are able to utilize some of that capacity as we bring some of these plants offline. We've talked to you about restructuring dollars to take some of these plants, primarily in Europe offline. You don't hear us talking about incremental capex on the receiving end of where that activity is going to go, because that's already in place. And the second part of your question around does this differentiate us versus others. I certainly think it does. I can't give you [--] speak on behalf of other companies on what their capital structures are in terms of some of the smaller players, but I can tell you that there is particularly on the front end fair amount of of capital investment, both on the capex side as well as on the engineering front to support these customers particularly as Terrence noted as it's an evolving area in terms of what actually is going to be produced where and who is going to do what. And I think we're very, well positioned and as you know to make money in this business, it's all about scale and it's about having the ability to handle the customers' needs and be able to ramp production at full scale and and that's what we're good at.

Heath Mitts -- Chief Financial Officer

Yeah heath is exactly right. I mean it is important, while there are start-ups, you still have to get the price points and where the consumers there and scale is a big advantage. It is something that when you think about scale, there's 2 elements of scale in our business model that to your point is very important. It is the element of how you deploy the engineering resources against where those designs are happening and then there is a back-end scale, the part of it is how do you make sure that manufacturing what you design you bring scale in the automotive business where the customer wants the supply chain to be. The automotive business is still adjusting time business and it's very important that the scale that you bring is where they sell in the vehicles and in some cases what starts as maybe they think they penetrate one part of the world, they want to, may take off in another part of the world, the platform and how do you bring scale for continuity because it is still an industry that wants to make sure it's quality and that element, and they also want to make sure they can get the product to cost point their core that somebody can afford. So it is the scale element as EV scales. I think it's the biggest opportunity we have and also one we've signed up for how do we make sure and we bring scale to it. Okay.

Terrence Curtin -- Chief Executive Officer

Thank you, Chris. We'll have the next question please.

Operator

Your next question is from the line of William Stein with Truist Securities.

William Stein -- Truist Securities -- Analyst

Great, thanks for taking my question. I'm wondering if you can remind us what the annual pricing negotiations in automotive look like. When they occur, how pricing typically trends through these negotiations and maybe how the current negotiation let's say compared to what you think they do in a typical year as I recall, during these times and dislocations that could be sort of unusual discussions around that topic. Thank you.

Terrence Curtin -- Chief Executive Officer

Pricing across the portfolio is slight deflation and in auto, auto is typically one that its annual discussions that are based upon volume as well as opportunities and those discussions typically happen late in the calendar year, early in the following calendar year. So they will be upon us. Certainly, when you think about 2020, there's a lot of volume commitments that we've made as well as you know, how we're ramping a lot of things so that they are very strategic discussions we have with our customers also come into know how we are doing and make sure where we invest engineering and with where the world is, I don't see them being more price deflationary than normal. I think there will be real active discussions that we have as we get in those discussions with our customers.

William Stein -- Truist Securities -- Analyst

The reason I ask is, I recall the credit crisis. There was also an expectation that you'd see normal price reductions, even though the customers were not meeting volume commitments. So that's sort of where I was headed with that. Do you think we'll see normal deflation this year as we have in other years even though the volumes might not have been met in the prior year.

Terrence Curtin -- Chief Executive Officer

I think we'll have some deflation, because of the automotive market. I'm not sure it will be normal and we have to get through those discussions with our customers.

William Stein -- Truist Securities -- Analyst

Thank you.

Heath Mitts -- Chief Financial Officer

All right, well thanks Will. We have the next question please.

Operator

Your next question is from the line of Joseph Giordano with Cowen.

Joseph Giordano -- Cowen -- Analyst

Hey, good morning everyone. One thing I just wanted to clarify first Terrence you mentioned inventory levels in Europe. Can you just clarify, are you seeing customer demand by market demand satisfied out of customer inventory right now. And then my main question a little bit more high level. Can you see something like EM coming out with the big new EV platform and plan to spend a lot of money. Can you just talk to me about how wise that relationship with the customer like that kind of evolves through their kind of planning phase and how earlier you involved with something like that and how would that be similar or different to like a, some of the start-ups that Mark mentioned earlier.

Terrence Curtin -- Chief Executive Officer

So you have a couple of questions there. So let me take the first one. What's been nice i car registrations have improved in Europe. So when you sit there, when I talked about inventory and truly I think about it that dealer a lot. It was heavy coming in and certainly COVID impacted and we've talked about that. So what I would say is we will really make sure that inventory looks at a more normalized level and so its true and sell out get more in line. So that was really my comment around Europe when you think about a program, a program it isn't just one car or one plant, it really starts at the platform level and those discussions happen as we're in the design element of the electrical architecture with the data architecture and in some cases what occurs is they're taking product off the traditional platform that they say it is good enough that could be interconnect on a life because it change really between combustion engine and electrical vehicle and how they actually start work in their platforms and those can take years depending upon where they get to the platform element and once you're on the platform that can spray how they evolve at the platform and certainly I think when you talk about EV when you have a start-up, they are basically starting with a model. Larger companies really have platforms and you are seeing some of our larger customers come out with platforms, you see much more advertisement around the world on it and some cases it is due to the regulations that we have to make, but it's also about where they see the market going and I think it's pretty consistent with what we laid out. So is it different than how we innovate today. No, but what I would tell you is the urgency in the pace on those platforms have certainly kicked in much faster than the design cycles that you want to add on a traditional evolutionary combustion engine. You do see how their focus is very much on EV, you see how autonomy has taken a little bit of a step back during the downturn that our customers are really focused on the electric powertrain and there were also seeing the opportunities of where they are in the world. So you see people very much want to be penetrating China as well as the high-end areas which some of the vehicles that we talk a lot about are very high-end vehicles.

Heath Mitts -- Chief Financial Officer

Okay. Thank you, Joe. We'll have the next question please.

Operator

Your next question comes from the line of Steven Fox with Fox Advisors.

Steven Fox -- Fox Advisors -- Analyst

Thanks for taking my question. Good morning, Terry. Hi, you talked a lot about the EV side. I was wondering if you could just sort of focus on the legacy CO2 side of the business since it is still so big, where would you be getting the content growth from there. I assume there is still some content growth and then just specifically with CO2, how do you manage as your customers seem to be dramatically increasing there just on the other side of the business.

Terrence Curtin -- Chief Executive Officer

Thanks. Well, it's really 2 factors. You know, you still have electrification that happens on a combustion engine. When you look at TE and you think about TE, other than on the engine, other than where you get into the ECU element, powertrain is not as big of a content element for us, as other things like you have on an EV platform. So where we get content is continued comfort features. Certainly, the data architecture that's being built into a car as you move up the levels. It's going to happen in both a CO2 engine as well as an electric vehicle. So that element that comes into the data architecture continues to evolve. Certainly the sensing you have around safety and the features that we all rely on. So while the development of combustion engines aren't as strong as they used to be, because people are going to EV, the other features we're getting in the car that do provide like we've talked about, when we've had done some of our analysts phase 200 or 300 basis points of content above production in a core engine is still occurring and those programs are as a data architecture puts in comfort features get added as well as just the whole ECU network evolves, we typically see more contacts being added in a car than less and the only other thing I would say on the combustion engine is we also see our customers leaning on us more on that legacy electrical architecture, because they want their engineers working on figuring out the electrical platforms.

Steven Fox -- Fox Advisors -- Analyst

Great, that's helpful Thank you.

Heath Mitts -- Chief Financial Officer

Thanks, Steven. We'll have the next question please.

Operator

Your next question comes from the line of Jim Suva with Citigroup Investments.

Jim Suva -- Citigroup Investments -- Analyst

Thank you. Hey, Jeff, if we you could take the opportunity maybe to clarify before there is any confusion about the peaking in the December quarter. My memory is that auto production typically generally always peaks in December, but people are going to be concerned that it's going to be your peak earnings per share and I think as Heath mentioned that that's not necessarily the case, but it sounds like there may be some hedging around that. I know you're not giving the full-year guidance, but can you just kind of help us think about that, because I can sense a lot of people are actually picking the peak of your earnings per share and and the story on that. So if you could maybe walk us through down a little bit.

Terrence Curtin -- Chief Executive Officer

Jim. Thanks and you said it right, 21 million units in the December quarter I think for the past 5 years has been the peak production globally. So when we look at the $21 million we expect in the first quarter, we do expect that to be the high point, but that doesn't mean it's the high point for EPS, Jim, that's just auto production estimate and it's the high point as we look into '21. So like I said during the call, we still think a gradual recovery in our markets is the right way to look at this. Certainly we would like that the recovery in auto production is quicker than we expected and I think like most people expected, but we do also have to realize that the first quarter is typically the high point of auto production in the year due to the effect of China and how China is the largest core producing country on the planet.

Steven Fox -- Fox Advisors -- Analyst

Okay, thank you.

Heath Mitts -- Chief Financial Officer

Thanks, Jim. The next question please.

Analyst

Your next question comes from the line of Joseph Spak with RBC Capital Markets.

Joseph Spak -- RBC Capital Markets -- Analyst

Thanks, good morning. This is actually Garret [Phonetic] Compound for Joe, thanks for fitting me in. I guess just continue on electrification maybe shifting gears to commercial transportation, I mean I think historically, you've talked about commercial transportation CPV growth being a little bit below the 4 to 6 you kind of experience and target in auto, but maybe just update us on kind of where we are on that journey in terms of maybe the commercial transportation outgrowth getting closer to the 4 to 6 in auto, what the prospects are for next year given we're seeing more kind of electric commercial transportation programs come to market and then kind of what your conversations with customers have been recently around broader electrification within commercial transportation.

Terrence Curtin -- Chief Executive Officer

When you look at commercial transportation, it is a very broad market. So you're dealing with agriculture, you're dealing with construction vehicle certainly you're dealing with truck and bus and when you look at electrification, you do see it much more on the short-haul delivery. Certainly you see people on some longer haul experimentation, but at the overall market when you deal with electrification, the impact won't be as broad as you have it in the auto space. That being said, we do see a lot of content as both electrification as well as data autonomy because the features you have in the truck and bus space does have more data uses because you get into fleet management, how they think about their business models and what's been nice over the years is what our ICT business, which historically would have been probably moving much more with underlying production we have due to EV as well as data have created content separation. And I think you've seen that this year. We also expect as you get some of the things that are happening globally, China we do expect to be a little bit of a headwind, but we do expect other parts of the world to be able to make up for that partly plus our content is really going to be due to the content opportunity in ICT. I do still [--] we still do believe it's below the 4% to 6% in the car, but it is something that's going to be a big content driver for that business.

Heath Mitts -- Chief Financial Officer

Okay, thank you. We'll have the next question please.

Operator

Your next question comes from the line of Luke Junk with Baird.

Luke Junk -- Baird -- Analyst

Thank so taking the question. So you could comment on medical-related puts and takes as we go through another rising COVID cases, what factors needs line to get this business back on a growth trajectory and as you've outlined.

Terrence Curtin -- Chief Executive Officer

When you look at it, we realize where we point at our business has been very much around interventional procedures. And if you look at our customers, they have been impacted around it and they also are working off inventory. So when we look there, we still see the procedures that we're very much around being down. We have seen recovery. We would probably say the recovery plus as they work off inventory you're probably looking more at the latter half of our '21 based upon what we know today, but that could be impact based upon COVID or any other market developments. But I think we're probably in the middle of it, as we speak.

Heath Mitts -- Chief Financial Officer

Okay, thank you Heath. We'll have the next question please.

Operator

Your last question comes from the line of Nikolay Todorov with Longbow Research.

Nikolay Todorov -- Longbow Research -- Analyst

Thanks for taking the question. You guys talked about the December quarter out of production and peaking at 21 million. I know visibility is limited, but I'm guessing how you are thinking about the low point of production into the next fiscal year. Could we get down to 17 and 18 million vehicles a quarter. I'm just trying to understand how you're taking about probabilities and then can you give us just a breakdown of production and growth year-over-year into the December quarter by geography. Thanks.

Terrence Curtin -- Chief Executive Officer

Well, we aren't guiding for the year and I guess on the first point I'd ask you to look at 3rd-party resources. On your first part of your question, when we look at the first quarter, though where we are guiding there is element that even in the first quarter at the 21 million units that will still be down year-on-year versus around 22 million units last year. We see every geography still being down year-on-year, but certainly at a lower rates than we've been experiencing. So as you look through the geographies, even though China continues to go up to its first quarter we do expect China production to be down year-over-year and we also expect the other regions of the world. I do think it's important to realize and we like this recovery, but we still some of the reasons we highlight where we're at is, we're still below where we were at in 2019 and what we're very focused on is how do we make sure we adjust to the world not only in auto but elsewhere. So, where we are at post COVID, that we're still trying to figure out. So, still it's nice to see the sequential recovery up to the 21 million units versus where we were 2 quarters ago at 12 and we'll continue to keep you updated as we go through the year and we still expect a gradual recovery.

Heath Mitts -- Chief Financial Officer

Okay, thank you. It looks like there are no further questions, so I want to thank everybody for joining us on this morning. If you have additional questions please contact Investor Relations at TE. Thank you and have a nice morning.

Operator

[Operator Closing Remarks]

Duration: 69 minutes

Call participants:

Sujal Shah -- Vice President of Investor Relations

Terrence Curtin -- Chief Executive Officer

Heath Mitts -- Chief Financial Officer

Wamsi Mohan -- Bank of America -- Analyst

Amit Daryanani -- Evercore -- Analyst

Craig Hettenbach -- Morgan Stanley -- Analyst

Shawn M. Harrison -- Loop Capital Markets -- Analyst

David Kelly -- Jefferies -- Analyst

Deepa Raghavan -- Wells Fargo Securities--- Analyst

Samik Chatterjee -- J.P. Morgan & Co. -- Analyst

Analyst

Mark Delaney -- Goldman Sachs & Co -- Analyst

Matt Sheerin -- Stifel -- Analyst

Chris Schneider -- UBS -- Analyst

William Stein -- Truist Securities -- Analyst

Joseph Giordano -- Cowen -- Analyst

Steven Fox -- Fox Advisors -- Analyst

Jim Suva -- Citigroup Investments -- Analyst

Joseph Spak -- RBC Capital Markets -- Analyst

Luke Junk -- Baird -- Analyst

Nikolay Todorov -- Longbow Research -- Analyst

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