TE Connectivity Q4 2021 Earnings Call Transcript

Quartr
Provided by Quartr
October 27, 2021

There are 8 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the TE Connectivity 4th Quarter and Final Fiscal 2021 Earnings Call. At this time, all lines are in a listen only mode. Later, we will conduct a question and answer session. Star 1. As a reminder, today's call is being recorded.

Operator

I would now like to turn the conference over to our host, Vice President of Investor Relations, Sujal Shah. Please go ahead.

Speaker 1

Good morning, and thank you for joining our conference call to discuss TE Connectivity's 4th quarter and full year 2021 results. With me today are Chief Executive Officer, Terrence Curtin and Chief Financial Officer, Heath Mitts. Quarter. 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. Fiscal 2020.

Speaker 1

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 atte.com. Due to the large number of participants on the Q and A portion of today's call, we are quarter. Now let me turn the call over to Terrence for opening comments.

Speaker 2

Thank you, Sushil, and I also appreciate everyone joining

Operator

Ladies and gentlemen, this is the operator.

Speaker 3

We are

Operator

currently having technical difficulties. Your call will resume shortly. Until that time, you'll be placed on music hold. Thank you for your patience. Ladies and gentlemen, thank you for standing by.

Operator

We will now resume our call. Terrence, you may begin.

Speaker 2

Thank you, and I apologize for that technical difficulty. I'll start at the beginning again in my comments, just to make sure we do what we broke off. But I want to talk about results for the Q4 as well as fiscal 2021 as well as the outlook for the fiscal 2020 2 Q1. So before Keith and I get into slides, let me frame out the performance relative to the broader market environment that we're operating in. I am pleased with our results in the 4th quarter as well as the strong performance that we delivered for the full year.

Speaker 2

We continue to experience global GDP growth with strong end market demand across most end markets that we've strategically positioned TE to focus on. And this broad growth that we're seeing is both in the consumer and capital spending areas. And let me bring some color to that and how that relates to TE. On the consumer side, demand for autos and appliances remain strong and we continue to see increases in medical procedures that benefit medical device sales. On the capital spending side, we see increased investments that relate to cloud and data centers, factory automation, semiconductor capacity as well as the need for more renewable energy sources.

Speaker 2

And when you look at the results we're going to talk about today, you're going to see this broad strength reflected in our orders and our backlog that will benefit us as we go into 2022 as well as our results in 2021. While certainly this demand environment is a positive, The balance of this is that the reality is we're still in a world that's dealing with COVID and global supply chains have not been able to keep up with these strong demand trends. Within this backdrop, we are continuing to capitalize on growth opportunities across our served markets. In the Q4, we delivered 16% organic growth despite auto production declines caused by our auto customer supply chain. This performance demonstrates the strength as well as the diversity of our portfolio.

Speaker 2

We have In transportation, our leadership position is enabling us to deliver content growth in both electrification of the car as well as increased adoption of electric vehicles globally. In industrial, we're benefiting from accelerated global capital spending around factories. And in communications, we're driving content and share gain in cloud applications. In addition to the strong top line growth outperformance versus our markets this year. We have executed well to deliver margin expansion in each of our three segments.

Speaker 2

The last proof point that I think is important is and shows the strength of the portfolio is how our full year results compare to pre pandemic levels of 2019. Both Our sales and adjusted earnings per share in fiscal 'twenty one were up double digits versus 2019, and we expanded adjusted operating margins by over 100 basis that we still have ahead of us. Now with that as a backdrop, let me get into the slides and I'll discuss the highlights that we have listed on Slide 3. Our teams had strong execution results in the 4th quarter despite reductions in auto production and ongoing challenges in the broader global supply chain. We generated sales of $3,800,000,000 was 16% organic growth and adjusted earnings per share ahead of guidance at $1.69 which was up 46% year over year.

Speaker 2

Adjusted operating margins were 18.5% as a result of the increases across all three segments. And I'll share more details about segment results a little bit later. When you look at the full year, year over year sales were up 23%, adjusted operating margins expanded approximately 400 basis points and adjusted earnings per share was up over 50% to $6.51 Also as important to earnings is where we generated in free cash flow. Our free cash flow was above $2,000,000 with approximately 100% conversion to adjusted net income for the year, demonstrating our strong cash generation model. We also continue to remain balanced in our capital deployment including the earning acquisition in the Industrial segment that we mentioned last quarter.

Speaker 2

When you look at our orders in the 4th quarter, They remained strong at $4,100,000,000 with strength in each segment and our book to bill was a 1.08. With these orders and where we position TE, we do expect the strong performance of our portfolio to continue into the 1st quarter with approximately $3,700,000 in sales, which will be up mid single digits organically year over year despite a roughly 20 expected decline in year over year auto production. We expect strong double digit growth in both our industrial and communication segments, and I think this was another point that reinforces diversity of the markets that we serve. Adjusted earnings per share is expected to be approximately 1.6 in the Q1, and this will be up 9% year over year. Now let me talk about Consumer demand for autos remains robust, but clearly ongoing challenges with semiconductors and the broader supply chain continue to impact our auto OEM customers' ability to produce.

Speaker 2

Global auto production came in lower than we expected just 90 days ago as our customers reduced production to enable the supply chain to catch up. Auto production was approximately 2,000,000 units lower than we anticipated in the 4th quarter, and we're expecting auto production to be in the 18,000,000 unit range in our Q1. This first quarter production will be well below the nearly Content growth for TE remains strong, and we expect content growth to be at the high end of the 4 to 6 point range in fiscal 'twenty 2 as we continue to benefit from increased electronification and higher production of electric vehicles. No branches 90 days ago in our Industrial segment, the key is that we continue to see an improving backdrop, which is benefiting our industrial equipment and energy businesses and our medical business is growing year over year as interventional procedures increase. The one area that we've not seen improve is the commercial aerospace business.

Speaker 2

It's sort of staying stable and we've not seen an inflection point in that business yet to higher or lower growth. In communications versus 90 days ago, we continue to see favorable end market trends with global growth in cloud capital expenditures and strength in residential demand benefiting our appliances business. Now while that's a view of what we've seen versus 90 days ago from a market perspective, I also believe in this environment, it's quarter. While challenges remain in the broader supply chain, we have seen some improvement in our availability of certain raw materials in our own supply chain versus 90 days ago. 90 days ago, we thought we were impacted by about $100,000,000 of revenue, due to us not having availability supply.

Speaker 2

This quarter, Ed, we're only in that sound about $50,000,000 And with this improvement, this will enable us to increase production and inventory levels accordingly to ensure we can meet demand as our customers resolve their supply issues. Now before I move into orders, I will start on Slide 4, I do want to take a moment to mention a few key highlights on the progress we made this year on our ESG initiatives. Earlier this year, we issued our 11th corporate responsibility report, which discusses our 1 Connected World strategy, which really relates our ESG strategy. And we hope that you read this report, which highlights the efforts that we're driving internally related to our impact on the planet as well as the innovation our engineers bring to our customers to make sure we're enabling sustainable applications. Some of the key highlights I want to mention is that on the environmental side, we set up a new goal to decrease Scope 1 and Scope 2 greenhouse gas emissions by over 40% on an absolute basis by 2,030.

Speaker 2

And this new goal is above and beyond the 35 And today, I'm happy to say over 20% of TE's production currently uses carbon free electricity. And also this past year, we began to report Scope 3 emissions back in July. If you look at social initiatives, we've set a goal to increase women in leadership position by over 26% by 2025. And I'm happy to say we continue to focus on employee safety and engagement throughout the pandemic. We've got good feedback from our employees have been there for during this difficult time.

Speaker 2

So clearly, I'm pleased with the continued progress that we're making towards 1 and on purpose of this company, which is to create a safer, sustainable, productive and connected future. So now let me please get into the orders on Slide 4 and we'll go through about the segments in both of them and also on a geographic basis. For the Q4, our orders were over $4,000,000,000 with year over year order growth in all regions. Our order trends and backlog remain strong in each segment, and the order patterns we're seeing are as we expected. As we've been mentioning through the year and as you've seen in our book to bill ratios, order levels have year end with customers placing orders for delivery beyond current quarter due to the broader supply chain situation.

Speaker 2

Quarter. As a result, we're coming into fiscal 'twenty two with a strong backlog position and is higher than we typically see for our business. When we look at the order patterns at a segment level, industrial and communication orders are trending as expected with continued momentum in areas like factory automation and cloud applications. I also want to highlight and remind you that in the Industrial and Communications segment, we have a relatively large portion of our business that goes from our channel partners. And we're seeing our booking patterns begin to align more closely to our sell in, which is a good sign.

Speaker 2

The other key thing to highlight around our channel partners is that in 2021, we did not see inventory levels increase with them even though they had a much higher level business levels that really they had a much higher turn in their inventories this year. Looking at transportation, we are seeing quarter levels match the production dynamics that are aligned with our guidance. When you look beyond the near term noise of auto supply chain pressure, It is important to remember that consumer demand for autos remains strong and dealer inventories remain extremely low. So we believe this is a very favorable setup for medium and longer term auto production growth. Now Let me add some color on what we're seeing organically from a geographic perspective on a year over year basis.

Speaker 2

We continue to see growth in Asia where China orders were up 17% and growth across all three segments. In Europe, orders were up 21%, and North America orders were up 26%. On a sequential basis, we saw orders decline in each region that reflect the order patterns I just talked about in our segments. But the one key difference is we did see growth in our transportation segment orders in China sequentially, where our auto orders were up 9%. So with that, with an order backdrop, let's get into the segment year over year results, and year over year with growth in each of our businesses.

Speaker 2

Our auto business grew 12% organically despite the declines in auto production that I mentioned. We continue to benefit from increased production of electric vehicles as our technology and products are enabling high voltage architectures and applications with every leading customer on the planet. Hybrid and electric production grew 50% year over year, increasing from roughly 6,000,000 units produced in 2020 to roughly 9 units produced globally in 2021. We also continue to benefit from content growth in non electric vehicles, driven by ongoing safety, certainty data connectivity, comfort and autonomy features. As a result of these content drivers, our content per vehicle has accelerated over the past couple of years from in the low 60s per vehicle into the mid-70s this year, And we expect to continue to outperform auto production going forward as the content that we've set up and the wins we have continues to grow.

Speaker 2

Turning to our commercial transportation business. We saw 38% organic growth with increases across all submarket verticals. We are continuing to benefit from stricter emission standards and the increased operator adoption of Euro 6, that 2 leading heavy truck OEMs have awarded us the high voltage connectivity wins on their new electric vehicle platforms that they're rolling out. This will provide future content growth and reinforce our market leadership position in the commercial transportation market. In our centers business in the segment, we saw 15% organic growth driven by transportation applications with the new program ramps that we've talked year.

Speaker 2

And for this segment, adjusted operating margins expanded nearly 500 basis points to 18%, year, driven by higher volume and strong operational performance by our team. Now turning to the Industrial segment, with double digit growth in all regions driven by momentum in factory automation applications where we continue to see the benefit from accelerating capital expenditures in increases in renewables, especially global solar applications. And it was nice that our medical business grew 5% year over year, and it's growing in line with the recovery that we're seeing in the interventional procedures. At a margin level, the segment expanded margin year over year by 200 basis points to 15.9%, driven by strong operational performance. Now let me turn to communications.

Speaker 2

And clearly, our teams continue to demonstrate strong operational execution while capitalizing on the growth trends in the markets that we serve in this segment. Sales grew 36% organically year over year for the segment and in both businesses. In data and devices, performance continues to be driven by the position we built in high speed solutions for cloud applications. We continue to see capital expenditures increasing by our cloud customers and our content growth enabled us to grow cloud related sales at double the market rate this year. In our appliance business, we saw double digit growth in all regions, driven by both consumer demand as well as continued share gains.

Speaker 2

It's clear that our communications team continues to deliver an outstanding performance with record adjusted operating margins of 24.7 percent And this is up 300 basis points versus strong quarter in the prior year. Overall, our segment teams are capitalizing on the growth trends in their end earnings. It's demonstrating the diversity of our portfolio while delivering on strong operational execution in a challenging supply chain environment. You're seeing this reflected in our results both for our Q4 as well as our full year, and we expect this to continue into 2022. So with that segment and a market overview, let me turn it on to Keith who will get into more details on the financials as well as our expectations year.

Speaker 2

Thank you, Terrence, and good morning, everyone. Please turn to Slide 8, where I will provide details on the Q4 financials. Sales of $3,800,000,000 were up 17% on a reported basis and 16% on an organic basis year over year. Currency exchange rates positively impacted sales by $51,000,000 versus the prior year. Adjusted operating income was $706,000,000 with an adjusted operating margin of 18.4 I'm sorry, 18.5 percent with strong year over year fall throughs.

Speaker 2

GAAP operating income was $660,000,000 and included $38,000,000 of restructuring and other charges and $8,000,000 of acquisition related charges. For the full year, restructuring charges were $208,000,000 in line with expectations, And I expect restructuring charges to decline in fiscal 'twenty 2 to approximately 150,000,000 adjusted EPS was $1.69 and GAAP EPS was $2.40 for the quarter and included a tax related benefit of $0.92 primarily related to decreases in our valuation allowances associated with tax planning. We also had a charge of $0.07 related to the annuitization portion of our U. S. Pension liabilities.

Speaker 2

Additionally, we had restructuring acquisition and other charges of $0.14 Free cash flow was approximately $535,000,000 for the quarter. And during the quarter, we utilized approximately 300,000,000 for acquisitions, including Ernie in our Industrial segment, which Terrence mentioned earlier. The adjusted effective tax rate in Q4 was 20% and approximately 19% for the full year. For 2022, we expect an adjusted effective tax rate of 2019, but continue to expect our cash tax rate to be in the mid teens. So turning to Slide 9.

Speaker 2

This slide puts some to overcome a challenging operating environment and our performance is demonstrating the strength and diversity of our portfolio and the strong execution of our teams. We are back above the 2019 pre COVID levels on every financial metric with sales up 11%, adjusted operating margins expanding over 100 basis points, adjusted earnings per share increasing by 17% and free cash flow up 29%. I am pleased with how our teams performed to deliver strong results through this cycle. To provide some segment level examples, our transportation sales are up approximately 15% versus fiscal 'nineteen despite auto production declining over 11% during that same time frame. Similarly, in our Communications segment, sales are up approximately 25% over this time period, significantly outperforming our end markets.

Speaker 2

This also demonstrates some of the content benefits we are seeing across the year. Turning to year over year comparisons. Fiscal 'twenty one sales of $14,900,000,000 were up 23 on a reported basis and 18% organically year over year. Currency exchange rates positively impacted sales by $444,000,000 versus the prior year. We would expect currency exchange rates to be a year over year headwind and our Q1 and could remain a headwind for fiscal 'twenty two if the dollar remains at the current levels relative to other currencies.

Speaker 2

Adjusted operating margins of 18.1% and expanded by nearly 400 basis points year over year with expansion in every segment. Our adjusted earnings per share expanded 53% year over year to $6.51 I'm pleased with our performance given the inflationary pressures we are experiencing. As we have discussed in prior quarters, we have implemented price increases As we go forward, we are confident that end demand will be robust for our products. And given our strong balance sheet, we are in a position to do strategic inventory builds to meet anticipated customer demand given the broader supply chain uncertainty. In FY 'twenty one, we continue to maintain our balanced capital strategy, returning capital to shareholders and remaining active in M and A.

Speaker 2

During the year, we returned over $1,500,000,000 to shareholders and utilized over $400,000,000 for acquisitions. Going forward, we remain committed to our balanced capital deployment strategy and expect to return 2 thirds of our free cash flow to shareholders, while supporting our inorganic growth initiatives through bolt on acquisitions. Before we go to questions, I want to reiterate that we are performing well in this environment challenges in the broader supply chain. Our results for the quarter and for the year demonstrate the strength and diversity of our portfolio with contributions from each of our 3 segments. Our first quarter guidance represents a continuation of our strong performance and we are excited about the growth and margin expansion opportunities as we move forward.

Speaker 2

Now let's open it up for questions. Emma, can you please give the instructions for

Speaker 1

the Q and A session?

Operator

Turn to the queue. Your first question comes from the line of Chris Snyder with UBS. Your line is open.

Speaker 3

Thank you. In the In

Speaker 4

the prepared remarks, you guys said that you expect auto outgrowth to come in at the high end of the 4% to 6% guided range For fiscal 'twenty two. So just want to confirm that, A, I heard that right and B, that includes any impact from supply chain? And then what should we make of the company driving low double digit outgrowth on a 2 year stack? My math says you guys outperformed by mid teens this year, just compared to the mid single digit guided range?

Speaker 2

Thanks, Chris. And you have a couple of questions. So thanks for it. The first thing is you're right, just to confirm what you heard. When we're looking at the programs that we've won and looking at into 2022, we do see something at the high end of the content outperformance range we've given you at that 6%.

Speaker 2

And we do think that will include any noise around supply chain is included in that content outperformance. Because like we always say, be careful looking at CPV on a quarter basis or content growth on quarter. There's supply chain dynamics and I think what's important to us is 2 years ago we were in the slow 60s of content per vehicle. We talked to you about the trends around electrification of the car, powertrain getting turning electric as As well as autonomy in the car, what's nice is we sort of view this year we're in the mid-70s of content and we continue to feel very confident around getting up into that mid-80s range. And we are benefiting from the electric vehicle ramp that's happening around the world.

Speaker 2

That's grown 50 This year, like I said, right now people are saying even what IHS views on our basis to be a flat production environment, electric vehicles are going to grow another 50% next year and I feel we're going to capitalize on it with the program wins we have. And this year about 20% of our automotive revenue is driven by electric vehicles even though it's not 20% of the total cars made on the So it just reinforces again the content that we've been driving where we position TE around and certainly there's supply chain that will make production a little lumpy, but when we look at 2022 and beyond, we think there's a pretty good setup where demand inventory levels are for production as well that at some point will also be a catalyst on top of the content that we TE on.

Operator

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

Speaker 5

Yes. Good morning and thanks very much for taking Question on orders, the book to bill was positive, but orders were down 9% sequentially. I was hoping you could speak to the linearity of the orders relative to typical trends and then talk about how TE is interpreting what the order data is signaling? Thank you.

Speaker 2

Sure. Thanks for the question. I think we have to go back. The past couple of quarters, we've told you there was a lot of orders coming in as people working with their supply chains. But what we started to see is that in this quarter, the scheduling have continues, which is a good sign.

Speaker 2

I think people are accepting the lead times they have throughout the components in their supply chain. Last time I read, I think semiconductors are about half a year lead time. So we see customers Looking at scheduling out, so while our backlog is stronger, clearly in dollars, it's also scheduled out longer and we're seeing customers adapting to that. The other thing is the head dynamics are very strong. So when you think about car demand, you also see our auto customers also keeping them scheduled out.

Speaker 2

So net net, we actually think this trend is a positive sign. And we always said we thought our orders would get closer to billings our billings getting closer to the orders we've had for the past couple of quarters. And actually that they're starting to get scheduled out more is a good sign. I would say the only area that we see any end market softness right now is around auto production, But that's supply chain driven and what we saw how those orders moved out aligning to how our customers want Produce the order transfer to mirror exactly what's going on. So I think it's getting a little bit more predictable even though it's

Operator

Your next question comes from the line of Amit Daryanani with Evercore.

Speaker 4

Thanks a lot and good morning everyone.

Speaker 2

Hi. Terrence, I guess the question is for you.

Speaker 4

As you reflect on your fiscal 2021 results in aggregate, Hopefully, you just talked about how do you think the supply chain pressures component availability inflation, all this stuff Impacted fiscal 2021 revenue and EPS. And then as I think about fiscal 2022, do you think all of this becomes less of The headwind stays about the same and what would the ramifications be to your P and L in 'twenty two from these drivers?

Speaker 2

Sure. Amit, I'm going to let Heath There's a lot of different parts of it. Sure. Amit, thank you for the question. Certainly, As we progress over the past 90 days since last time we spoke, we have started to see from an availability standpoint things to improve, things have gotten a little bit better with some of our inputs, particularly with the resins side of things.

Speaker 2

Now we are still seeing inflationary pressures, particularly on metals, resins and probably most pronounced on freight costs. And we do expect those inflationary pressures to continue into 'twenty two. Now on the flip side of that, as you're acutely aware, normally we would see price pressures of somewhere 1% to 2% of erosion each year. In FY 2021, that was largely neutral. We did not see those price pressures.

Speaker 2

We were more back at par and we actually expect in 'twenty two as we move forward to see some price increases as we battle through some of these inflationary pressures. So a lot of moving parts there. Again, I think from an availability standpoint, things are improving and we're working through using price as one of the levers that we have to combat the inflationary pressures.

Speaker 1

All right. Thank you, Amit. Can we have the next question, please?

Operator

Your next question comes from the line of Scott Davis with Melius. Your line is open.

Speaker 6

Good morning, guys. Hey, Scott. Good morning. Congrats on 2021. It was a great year for you guys and good luck for 'twenty two.

Speaker 7

Thanks, Rob.

Speaker 6

In that context, incremental margins you put up 42%, I think it was in Q4, pretty big numbers. But If I kind of back into the guidance in 1Q, it kind of implies a bit of a slowdown. So is there any color around that at all or just Being a little bit extra conservative and can we expect the type of incrementals that you've been putting up to be

Speaker 2

in the ballpark is sustainable? Scott, I appreciate the question. This is Heath. The yes, you're right about the Q4 flow through and our flow through for FY 2021 in total was in that range of the 30% to 35% range, which is our expectation. As we move into 2022, just to highlight, we Ernie, The acquisition layers in, in 2022 and did not have any impact on our 2021 numbers is based on the timing of the closure of that transaction.

Speaker 2

In Q1 alone, if you were to adjust out for earning, which will come in at a couple of 100,000,000 of revenue, but Well, we'll not add much from an EPS perspective in our 1st year, while we work through the integration And all the value levers that we're going to pull for Ernie, that alone brings our flow through in the Q1 down to the level that you're referring to. If you were to back that out, you'd be up in that 30% range again. But again, we feel very good about the value Create opportunities that Ernie brings to us and we'll pound through the year to set that pressure that it puts on our flow through in margins.

Speaker 1

Okay. Thank you, Scott. Thank you. We have the next question, please.

Operator

Your next question comes from the line of Wamsi Mohan with Bank of America.

Speaker 5

Yes. Thank you. Good morning. Terrence, I know you're not guiding fiscal 'twenty two explicitly, but how are you thinking about the growth in the end markets? And I just want to ask a clarification around the ASP comment that was made earlier on the call.

Speaker 5

So some of this outperformance, the magnitude of this right mid teens for the year or mid-20s for the quarter is well above that 4% to 6 percent range. Some of that is supply chain dynamics, some of it is ASP, some of it is mix. Anything you can do to help parse those different things would be

Speaker 2

Yes. So let me get into the markets here, Lonzy. And when we sit there, I do want to go back to what I said in the script that we do have a constructive demand environment across when you get out to the end And the only place that we haven't seen a constructive market is certainly around the aerospace side. And that will come at some point.

Speaker 1

I'm I'm not sure that

Speaker 2

will be in 2022 for us, but that will come at some point. Just to break it down by the segments a little bit, In transportation, and like you said, Wamsi, we didn't guide, but I'll give you how we sort of see the external data points around markets. In automotive right now, people in IHS are saying it's going to be around 77,000,000 cars made next year globally. That's pretty flat. That has supply chain constraints in it and semi side continuing.

Speaker 2

Could there be upside to that? Does supply chain get worked out Potentially, but I would also say the content that we talked about is at the high end of the 4% to 6%, inclusive of any supply chain noise we feel in the commercial transportation space, this year was a great year by our team. We grew 2x the market. It demonstrates our leading position and also the content that we're getting around emissions that are all over heavy trucks as well as activity on heavy trucks. And next year, we're going to have a slowdown in China in the market.

Speaker 2

I think that's very well known. But on a flattish environment to slightly down environment in commercial broader commercial vehicles, we think content will create growth there. And I talked about the new EV wins that we have on the heavy truck that won't benefit 'twenty two, we further out. In the industrial space, the recovery feels like it's just getting started. And we're starting to see improvements in medical.

Speaker 2

Our industrial and factory automation side is very strong. Energy has stayed strong throughout The environment 'nineteen forward, we see that continuing especially with the benefits from renewable sources that we're in the mid teens of our revenue. We think that can move up in our energy business around solar and certainly wind. And in the Communications segment, what I will tell you as we look forward is you have cloud CapEx that can increase another 10% next year. And when you think about we've grown 2x the market here over the past 3 years, our cloud revenue has doubled since 2019.

Speaker 2

We're going to have growth on top of that with that cloud CapEx picture. And then when appliances, the consumer is strong, certainly we have to The consumer slowing down a little bit, there could be a little bit of a headwind, but right now we're sort of assuming that's a flattish market globally. So we believe it's a pretty constructive setup. Certainly supply chain billing is a big piece of it. We hope our supply chain continues to like we saw over the past 90 days and we'll take advantage of that as we build a little bit inventory early in the year to make sure we capitalize on the setup.

Speaker 2

On the pieces around the second part of your question, when you look at this year, other than the market, the bigger piece of our growth is really around content. So anyway you want to parcel it, I think Heath framed the price side. Normally we have 1% to 2% negative price last year. We're basically flat. That shows the pricing that we've been pushing through that we started in January in the distribution area.

Speaker 2

And we're in the middle of automotive contractual negotiations as we speak. So I think there's more to come there. But clearly, the bigger piece last year has to do marketing content and that's what we get excited about as we go forward. And I gave you that a couple of examples there between auto and also in the cloud.

Speaker 1

Okay. Thank you, Wamsi. Can we have the next question please?

Operator

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

Speaker 4

Hi, good morning. Thanks for taking my question. Maybe to follow-up on the 20% EV sales mix And automotive, Terrence, I

Speaker 3

think you made that comment

Speaker 4

in the prepared remarks. Just wanted to confirm that, A, that is EVs and doesn't include hybrids. And then just curious, your EV sales have begun to scale. Is the content per vehicle tracking at that 2 times relative to internal combustion that you have expected? And just curious if you're thinking about any potential upside from there going forward?

Speaker 2

Thanks, David. So first off, from a clarification, thank you for asking it. When we talk EV, we do include hybrid. We include both elements of them. So when you take that and even the numbers I quote about The 9,000,000 units made globally that are electric, that includes hybrids and plug in hybrids.

Speaker 2

So that's totally the area we get the bigger content as you bring in the electric powertrain in both areas. So if you take our automotive revenue this year with what you would have on electric vehicle both on the high voltage content and low voltage together, that's a little bit above 20%. And the content is sort of running the 2x, it's right on top of it. And like we've always said, when you think about TE, there is some things that could cannibalize on our product. The low voltage things come over.

Speaker 2

When you start putting that electric powertrain, you have charger inlets, you actually have to get the power into the battery. We play along those connectivity, how it comes into the sell side and also some of the things we do from a switching of power as you bring the power back and forth And that creates the content above the low voltage position. So it is important there. The other thing I would just Don't want to lose sight on and I said in my script was, as you get into the heavy truck, I know we've given examples, but I did mention in the prepared remarks, We won 2 programs with 2 of the top 5 truck manufacturers of the world And these are turning from prototypes into real platforms. And when you look at that, in our commercial transportation business that I talked about a little bit earlier, The content on those high voltage architectures can be over $1,000 per vehicle.

Speaker 2

And that's just on the high voltage architecture. That doesn't even include some of the other elements that we would have on data. And I'm really excited about those wins because they also truly show our leadership position there in commercial transportation. When it comes to connectivity, position there in commercial transportation. When it comes to connectivity, we have a leading share by quite some distance and our global customers are looking about how when they to more electrified powertrains across their fleets and their offerings.

Speaker 2

They come to us and let's face it, you're dealing with voltages that are at 1,000 versus what you would have in a car, you're dealing with vibration and certain durability, which we talked about harsh environments. That's what we love and our engineers like to tackle those challenges and that we want 2 of the top 5 on their initial platforms. I see that continuing just to go across the other players and reinforcing our commercial transportation business.

Speaker 1

Okay. Thank you, David. Can we have the next question, please?

Operator

Your next question comes from the line of Joe Giordano with Cowen. Your line is open. Hey guys, good morning.

Speaker 6

Keith, I just wanted to kind of Clarify a couple of things here. With the orders running arguably

Speaker 4

a little bit hot and out far And Terrence, the commentary about there's still $50,000,000 of stuff that you would have liked to have shipped out, but couldn't versus it was $100,000,000 last quarter. I'm just curious on the inventory build because it was pretty substantial in the quarter and I get why you'd want to have some protection there, but just want to square like the ability to build that kind of inventory with the inability to get things out the door and high orders. So can you kind of just kind of square that for me?

Speaker 2

Sure, Joe. I mean, first of all, as diverse as our portfolio is and as many different products, you can imagine the complexity of our manufacturing environment and our supply chain, right. So it's not just one part and it's not as simple as just saying what we can and can't Produce, right. So our availability of materials has largely been resins and metals as I mentioned earlier. Resins particularly are improving in metals we're working our way through.

Speaker 2

So as we look forward and we continue to anticipate resolution of some of those input challenges that we have. It does give us the ability to start having a little bit more foresight into what we want to do strategic build aheads for, right. I mean, if you think about where we're sitting here, We're not going to sit here and predict when some of the semicon challenges for our auto customers specifically get resolved. You should ask them or the semicon companies, right. But what we do know is that there's really, really strong demand out there for automobiles.

Speaker 2

And that's not just a U. S. Comment, that's really globally. And the shortage of those vehicle and dealer lots give us a lot of ability to play offense here in terms of being bullish about when that demand comes back. We want to make Sure that we are ready for our customers and not going to be holding up any kind of ramp that they may have.

Speaker 2

Now when that ramp happens, it's still TBD. But I'm not going to signal that this number inventory build is going to be massive, but we are going to advantage of a little bit of a slowdown in the auto production world and get ahead of it as we're ready.

Speaker 3

Okay.

Speaker 1

Thank you, Joe. Can we have the next question, please?

Operator

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

Speaker 3

Hey, thanks for taking the question. Good morning.

Speaker 1

Hey, Chris.

Speaker 3

Curious about margin outlook generally in CS. Do you expect some margin progress at each segment in fiscal 'twenty two? And For communications in particular comments may be flattish appliance markets, but the second half comps are kind of up The charts, how should we think about the leverage for the decremental margins for the CS segment?

Speaker 2

Well, I think it's a good question, Chris, and it's one that we've talked to you about. The 30% flow through is still what we're gearing up for, for the year, in terms of that. Now see within that, I think you'll see that the strength more out of the industrial and out of the transportation businesses. The communication side, as we've talked about, has been running fairly hot, but it has now for several quarters in a row and it really shows that volume levels, what it looks like, particularly out of appliances. Terrence mentioned that we're anticipating a flatter appliance market as we work our way through the year.

Speaker 2

I'm not suggesting it's all going to happen here in the Q1, but we're probably taking an approach there where We see a little bit of contraction in the margins, albeit more to come as we're able to see what volume numbers are looking like. So in terms of the decrementals on that, I think you could roll through roughly the same kind of math. But we target around 30% flow through on the organic side. And that's really where our focus continues to be as part of our business model for FY 'twenty two. Your

Operator

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

Speaker 7

Just a couple of quick clarifications on order trends. Communications seem like it moderated quarter over quarter the order trends a bit more than the other two segments. So is there something going on there? I know you spoke about strong demand from the cloud customers? And then similarly, I think you mentioned in your prepared remarks, China Automotive Auto is being up.

Speaker 7

Is that EV or is that still like an inventory build just if you can clarify those 2 order trends?

Speaker 3

Thank you.

Speaker 2

Yes, I wouldn't say it's CS other than just things getting a little bit more normalized and scheduled out. There's nothing unique in there, Sameet. In regard to the auto, I think one of the things just to highlight, it's nice to see the China auto go up. Certainly, they're being impacted as well by some of the supply elements that are happening on the world. And this is traditionally the strong China build quarter.

Speaker 2

And we're not getting strong China billboard because of the supply chain issues that it's going through. So, I would say you Read into that more EV or less EV in there. I think it's pretty much in line with what we said on a global basis because Asia still is the predominant largest region of electric vehicles compared to the other two regions. So we were pleased to see that trend in China continuing to stay up and grow. Certainly, the supply chain continues to need to help us there because it is an important market for us.

Speaker 1

Okay. Thank you, Sameet. Can we have the next question please?

Operator

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

Speaker 3

Thanks. Good morning. First just a quick clarification. I don't know if I heard this, but How much are you assuming global production for auto is up, down or maybe flat quarter over quarter? And then if you

Speaker 4

could just talk a little bit about

Speaker 3

how or receptivity to recovering pricing for commodities maybe by end market, how that's going for you?

Speaker 2

Yes. So first off, on auto production, auto production was about 2,000,000 units light in our quarter we just had versus where we guided. In the Q1, we're assuming 18,000,000 unit range for auto production in our Q1, Which is compared to $23,000,000 last year's Q1. So that's at 20% down I mentioned on the line. And certainly we're not guiding for the year, but I believe our HSS have on our fiscal period around 77,000,000 units for the year, Which will be flat year over year.

Speaker 2

In regard to pricing, pricing is very different by our end markets. When you say receptivity, I wouldn't say anybody likes pricing. So I wouldn't say people are saying, I'm happy about it. But I would say we're pulling to different levers as he said. Some we can pull quicker in places where like we go through our channel partners, smaller customers in places like auto, it's more contractual agreements and So we're in the middle of those and continue to be a recovery point throughout this year.

Speaker 2

So it is very different. And I think the stats that Heath laid out sort of frames it nicely of what the benefit we've gotten as well as how we're thinking about it into 2022.

Speaker 1

Okay. Thank you, Jeff. Can we have the next question please?

Operator

Your next question comes from the line of William Stein with True Securities. Your line is open.

Speaker 3

I have a question about the communications end market that's been doing very well the last few quarters, all segments really, but in particular the comps end market. To what degree is The upside we're seeing there related specifically to cloud service providers upgrading to 200 in one case and I think 400 gigabit per second intra data center comms, which we think has been going on for a while versus sort of more broad based CapEx exposure. And does your growth here reflect more of broader end market growth or broader narrow end market growth or share gains from either new or approved products? Thank you.

Speaker 2

Thanks, Will. A couple of things. The market and the growth, we're benefiting overall from hot speed Certainly the bigger growth lever is with the cloud providers and our position across those cloud providers as I think I've mentioned in other calls has really been pretty even as we've gained share and we aren't weighted to one of the cloud providers globally versus another. But we are benefiting from their capital spending trends and that capital spending trend is they're very much focused not only on speed, They're also focusing on how they continue to implement AI to make sure that how do they get more specific compute and scaling computing power And also helps them get to their costs of total ownership, including their impact on energy usage down.

Speaker 3

And what we continue to

Speaker 2

see as they're As they're making their investments, which are in line with what you said, we're seeing them wanting to spend another 10% around the cloud and data center going into next year and the content that we're getting is very strong with the share gains as well. That is why you saw this out of a in that specific product niche, we grew about 65% this year where their CapEx was up 30%. And these are things being deployed real time as they're trying to keep up their class offerings And we've become a very good partner in tactical as well as service partner form. And we've actually strengthened during the COVID

Speaker 3

Okay.

Speaker 1

Thank you, Will. Can we have the next question please?

Operator

Your next question comes from the line of Matthew Sheerin with Stifel. Your line is now open.

Speaker 3

Yes, thanks. Good morning. I wanted to ask a follow-up on the inventory issues. First, Looking at your customer base, are you seeing any pockets of inventory build that we're seeing that from some of your peers from their auto customers? And also if you look at your channel partners, particularly through the industrial markets, which have been strong, any signs of build there?

Speaker 3

And from your own perspective, Heath, you Talked about building inventory as you get into fiscal 2022. Can you tell us how that impacts your free cash flow and the conversion rate, which is typically around 100%?

Speaker 2

Yes. So Pat, let me take the part around what we see out of inventory in the world and then we'll get to We'll talk about our inventory. First off, in the channel partners, I would tell you our channel partner orders have accelerated over the 3 quarters, but they have leveled out now. So similar to the other order comments I've made, we have seen leveling. We've been able to service more to them as our supply has improved.

Speaker 2

But we have not seen their inventory increase on our product set. So their turn levels Have accelerated here and they're touching product more to get it out because how quick they're turning it. So inventory levels in 'twenty one have remained relatively flat while they've had significant growth as they're trying to help and their supply chain solutions to those. When it comes to our customers, we do see customers holding more inventory. Customers have scheduled out further, but we also have customers that some areas are still very low in certain inventory pockets.

Speaker 2

Certainly, the supply chain is trying to get to a normalized, I would say, on both sides of the equation. You see it. And it's also what's happening in auto land. You need about 30,000 parts to make a car. If one of them isn't there in one plant, the car is not being made.

Speaker 2

So when we look at it, we're always going to have supply chain noise, whether it's building or coming down a little bit, but we do view that as noise. And it's back to the comments we said about content. We feel good about the 6% content growth over production next year, including any supply chain noise. And Matt, on the question about our inventory build, I think it's down to relative to our cash conversion rate, That didn't get down to the timing. The way we're looking at it now is probably more of a first half issuer, some inventory builds and then As we can bleed that off, we're basically taking advantage of some slower auto production here in the early part of the year.

Speaker 2

So as part of that, I think that just gets into the timing. It could put a little bit of pressure on that 100%, but we have other levers as well that we're looking and we'll continue to assess that. I think we'll be able to give you a better update on that answer here a quarter or 2 from now.

Speaker 1

Okay. Thank you, Matt. Can we have the next question, please?

Operator

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

Speaker 3

Hi, good morning. Just on the 110 basis points improvement since 2019 on the operating margins, I was wondering if you could breakdown, sort of how you got there between volumes, restructuring and maybe some of the offsets and any implications for the risks of achieving 30% incremental margins this year? Thanks.

Speaker 2

Sure, Steve. Yes, listen, I mean, you've been covered for a long time. You're well aware of the restructuring endeavors that we've undertaken, And we've been very focused in particular areas around industrial this past year and some things that we did on a footprint basis in Europe that we're continuing to execute on within transportation and then we're benefiting greatly from the communications side with that a lot of that lifting done several years ago on the footprint side. So as we work forward, there's no doubt that as we think about that ability to grow over 100 basis points from 2019 to 2020, restructuring played a meaningful part of that. But I would also tell you that some of the things that we were able to do around holding off in 2021, the price erosion through some of the actions that we undertook as well as the ability to offset some of the inflationary

Speaker 3

pressures with productivity were a meaningful part and then volume goes a long way.

Speaker 2

As you know, the And then volume goes a long way. As you know, this is a scale business and having volume means a lot. So I don't know if we've ever actually Broke down externally what percentage of that increase is in certain buckets, but you can imagine there was contributions across the board on that side of Thanks. In terms of as I mentioned earlier, listen, as we sit here and although we're not guiding for the full year, we feel good about our ability to hold to our business model of margin expansion through even if it's modest this year through the flow through of that 30%.

Speaker 1

Okay. Thank you, Steve. Can we have the next question please?

Operator

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

Speaker 3

Thank you so much for the details. It's great to see that your restructuring costs are going lower. Just kind of curious that would to me imply that your operating margin track continues to remain where you will hit this 30% margins Growth is even better or with this recent acquisition of Ernie, should we think about there may have to be a little bit step up in restructuring or I'm just trying to get at kind of your goals for restructuring. It sounds like a lot of the heavy work is behind us, But then again, it could be timing and there was a pandemic and all these type of other things. So if you could talk to us about restructuring, that would be great.

Speaker 2

Sure, Jim. I know you and I have had a lot of discussions about this over the last few years. I appreciate the Honestly, as I sit there and look at where the buckets are, the bigger item, the bigger projects that we have underway in terms of rightsizing the footprint. Some of the things that we talked historically about getting rightsizing industrial and getting to the right places of manufacturing for automotive, particularly in Europe. A lot of those things are underway.

Speaker 2

Those charges have been taken and we're working through those. What we're seeing more of now, Jim, is the

Speaker 1

impact of some of

Speaker 2

the more recent acquisitions. And when acquisitions come into our portfolio, inevitably they come in at multiple sites. In some cases, we do need to go and collapse those into our existing footprint. Or in some cases, they avail opportunities to take legacy TE locations and move into the acquired sites. So some of the things that we're now seeing, whether that's with Ernie or with some of the sensors activities that we acquired here in the last few years is driving some of those restructuring efforts and plays into the overall return and valuation considerations for the acquisitions that we do in terms of the return and value creation opportunities.

Speaker 2

So we're starting to make that move. We're not quite there in terms of cleaning up some of the legacy locations, but we're getting closer.

Speaker 1

Okay. Thank you, Jim. Can we have the next question, please?

Operator

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

Speaker 3

Good morning. Thanks for taking the question. A lot of near term focus here. I wanted to ask more of a strategic question and that is, Terrence, how do you play offense or position TE to grow above market in areas that have late in the recovery, specifically thinking about areas like medical, which is Encouragely, just starting to come back right now or something like Comair, can you come out better positioned on the back end given the size and scale of your organization versus, say, small competitors in those markets?

Speaker 2

I think during this time, certainly, I think our customers have And see stress around the supply chain from smaller competitors. So I do think any of us that are larger will benefit during this time. So that is something I think is a benefit for the larger companies in our space. When you talk about those two areas in the medical and we haven't talked about for the past couple of years due to the impact that we did have on procedures, But when you look at how procedures are increasing, the innovation that we've been doing with our customers has not slowed down during this time, but certainly the levels of procedures went way down due to the COVID dynamics. So I do think you'll see us talking more about medical again from a growth perspective, More like we've had historically than you've experienced the past couple of years.

Speaker 2

And Comair, it's a little bit different. I think medical had a temporary clause due to procedures. Comair is one that has been hit hard. It's been hit hard. Certainly, you're starting to Some discussion around single aisle aircraft, you get into dual aisle aircraft.

Speaker 2

Dual aisle aircraft is probably further away. And in those cases, I'm not sure you're going to have much new innovation happening even though we do have plans on what's happening in space, certainly lower satellite as well as we're also working with some of the newer EV OTL providers depending upon what ramp that does. So I think net net certainly a much more bullish tone around medical. I Because that how it really got hit is the overall market and our customers also got disorientated, that they had to reposition really is one that's going to be a little bit longer to have. Actually, we have a very good position there, certainly a leading position, But I'm not sure we're going to need a little bit of time for that to work out on what the growth trajectory is longer term based upon what our customers do.

Speaker 1

Okay. Thank you, Luke. Can we have the next question, please?

Operator

Your next question comes from the line of Nick Todorov with Longbow Research.

Speaker 4

Thanks and good morning everyone. When you look at your auto sales growth, whether it's fiscal year 2021 or It looks like your sales will outgrow production by more than 20%. So can you help us understand the components within that? I think you touched How much is content versus pricing? How much is FX?

Speaker 4

And how much is driven by some inventory build that

Speaker 3

you talked about as customers?

Speaker 2

Thanks. Hey, Nick. We did not grow 20% above production. So we did. We did have content outperformance.

Speaker 2

The market was up about double digit this year. And if you take the real element, we were in double digits content outperformance, a very strong 50% increase in EV, certainly continued growth And even traditional cars, ICE engines, we saw content growth. Price was only a little bit. So So net net, I would just ask you to maybe do a look at your math. It wasn't 20% by any means.

Speaker 2

And once again, that constant momentum, we're at the mid-70s. We've shared with you our path to get up to mid ADPs around the trends around powertrain, trends around data connectivity, certainly traditional safety features. We feel very good about where we're positioned and also how well we're positioned globally with every area. That's one of the special things about TE. We're essentially on every quarter we planned.

Speaker 2

Okay.

Speaker 1

Thank you, Nick. Can we have the next question please?

Operator

Your next question comes from the line of Rod Lachey with Wolfe research.

Speaker 4

Hey, this is Trayus on for Rod. I just wanted to come back to the question around orders and Specifically within the automotive segment. And I guess what I'm trying to think through is, as I look at 2021, how much of a benefit there was from kind of unusual order activity from OEM customers, just so that we can think about that going forward. I know you're talking about 6 points of outgrowth excluding that, but I just wanted to see if you could size that. And then on the EV side, I know you talked about $120 Content per vehicle for bevs on average.

Speaker 4

But given the growth that you're seeing, do you see and some of the wins that you've had, which I think I've exceeded $120 of content. Do you see an opportunity for that to maybe increase faster over time and maybe even be higher than that 120? Thanks.

Speaker 2

Well, I think a couple of things there. When you look at production next year, the 6% that we said is content above production, We said includes any supply chain noise. So you said excluded and my comments that include that we have every year. In regard to content, The comments that I made earlier about the 2X, we are running 2X, that would be both on all electric vehicles, including hybrids. And I think that penetration is continually going to play out.

Speaker 2

I think the one thing that's important, certainly we share things around vehicle content that are very specific models. But you also have to remember, there's also the models that are more mainline traditional average median income type cars that are in that content as well. So net net, I like where we're gaining our share, Continue the traction we have on content and electric vehicles go faster and we can win more programs, we can maybe be above that. But right now, we expect next year we'll be at that 6% high end of the range.

Speaker 1

All right. Thank you, Charisse.

Speaker 2

I want to thank everybody for joining us this morning.

Speaker 1

And if you have more questions, please

Operator

results will be made available for replay beginning at 11:30 a. M. Eastern Time today, October 27, on the Investor Relations portion of TE Connectivity's website. That will conclude your conference for today.

Powered by Quartr
Earnings Conference Call
TE Connectivity Q4 2021
00:00 / 00:00