TE Connectivity Ltd

Ladies and gentlemen, thank you for standing by and welcome to the PE Connectivity first quarter earnings call for fiscal year 2021. At this time, all lines are in a listen-only mode. Later, we will conduct question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. As a reminder, today's call is being recorded. I would now like to turn the conference over to our host, Vice President of Investor Relations, Sujol Shah. Please go ahead.

Good morning, and thank you for joining our conference call to discuss TE Connectivity's first quarter results. With me today are Chief Executive Officer Terence Curtin and Chief Financial Officer Heath Metz. 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. Thanks, Sujal, and thank you, everyone, for joining us today to cover our results for our first fiscal quarter and also our expectations for our second fiscal quarter of 2021. Before I get into the slides, I would like to share some perspective on our first quarter. As you will see in the results, we are benefiting from our diverse portfolio and are continuing to execute on our margin expansion plans. While markets have been very dynamic over the past year, we are seeing improving conditions across the majority of them. Against this backdrop, we are demonstrating not only the resiliency of our operations, but also the ability to drive organic content growth ahead of our markets while expanding operating margins and demonstrating strong free cash flow generation that is in line with our business model. We are positioned to continue to benefit from secular trends in growing markets while driving the margin expansion plans that we've highlighted to you. And you'll see the benefit of these efforts in our first quarter results as well as our guidance for the second quarter. With that as a quick backdrop, let me now frame out some of the key messages of today's call. First, I am very pleased with our execution in the first quarter, and I believe our teams delivered strong results. We delivered sales growth of 11% and adjusted earnings per share growth of 21% year over year, demonstrating the strength and diversity of the portfolio and the benefits from our operational improvements. Our sales were ahead of our expectations in each segment, but with the greatest outperformance in transportation, where we continue to generate strong content growth from electrification of the powertrain, as well as increased data in the vehicle. Our adjusted operating margins expanded 190 basis points year over year to 17.7%, with margin growth in both transportation and our communications segment and a slight decline in our industrial segment where we maintain mid-teens margin performance despite a sales decline. We continue to demonstrate our strong cash generation model with our quarter one free cash flow being at a first quarter record of approximately $530 million. We continue to expect approximately 100% free cash flow conversion to adjusted net income for this fiscal year. And as we look to our second quarter, we are expecting our strong performance to continue. We expect sales and adjusted earnings per share similar to the first quarter at approximately $3.5 billion of revenue and $1.47 in earnings per share. And like in the first quarter, we again expect double-digit sales and adjusted earnings per share growth year over year. Now, I'd like to take a moment to discuss our performance relative to where our markets were in the pre-COVID timeframe of our fiscal 2019. And, you know, we do hope this will provide a baseline for evaluating our performance and progress this year. At the overall company level, our revenue is approximately back to pre-COVID levels, despite the majority of our markets being below 2019 levels. And I'd like to give you some color by the three different segments. In our communication segment, we have seen strong improvement in our end markets. And this has helped enable sales to recover above pre-COVID levels. And for example, in data and devices, as well as in appliances, we're benefiting from continued data center build-outs and home investments, respectively. In our industrial segment, it is a very different environment. We have markets that continue to remain weak as a result of COVID impacts. Commercial air and medical markets and our sales are still well below pre-COVID levels. However, what we are seeing is it does look like order patterns are indicating that we could be touching along the bottom in both of these businesses, and we could see some improvements later in the year. And in our transportation segment, our auto and commercial transportation businesses are now generating revenue above the levels we saw prior to COVID. even though global auto and truck production is still forecasted to be below fiscal 2019 levels. Content growth and share gains have driven the outperformance, reflecting our leadership position in these markets. TE products and technology are designed in the next generation of sustainable vehicles at every leading OEM worldwide. The real proof of the traction is our content per vehicle progression. In fiscal 2019, our content per vehicle in auto was in the low 60s, and it's now trending into the low 70 range. As consumer adoption increases for hybrid and electric vehicles, and we continue to bring more innovation to our customers, we expect our content per vehicle to expand into the 80s over time. What's nice is that consumer preference continues to drive the features and the technology and we will continue to benefit as vehicles become more safe, green, and connected, driving more content for connector and sensing solutions. While I am pleased with our results and the progress that we've made operationally, I'm even more excited about the sales growth and margin expansion opportunities that we still have ahead of us. We continue to execute on our margin expansion plans in transportation and industrial, that we started prior to COVID and accelerated during the pandemic. I'm also very proud of the margin progression in communications, which has offset the volume related pressure that we're seeing in industrial as a result of the market impacts due to COVID. So now if we could turn to the slides and I'd ask you to turn to slide three to provide some additional details for the first quarter and our expectations for the second quarter. Quarter one sales of $3.5 billion were better than our expectations, up 11% on a reported basis and 6% organically year over year. We had 12% organic growth in both transportation and in communications, with growth across all businesses in those two segments. Industrial segment sales were down 8% organically due to the COVID-related impacts I already talked about. During the quarter, we saw orders of $4 billion, and this was up 25% year-over-year, reflecting an improvement in the majority of the end markets we serve. And I'll come back to orders in a couple of slides. From an earnings per share perspective, our adjusted earnings per share was $1.47. This was up 21% year-over-year due to the strong operational performance where we showed adjusted operating income being up approximately 25% year-over-year. As we look forward, we expect our strong performance to continue into our second quarter, with sales and adjusted earnings per share being similar to first quarter levels, despite lower sequential auto production. For the second quarter, we expect sales to be approximately $3.5 billion, and this is up approximately 10% year-over-year on a recorded basis and mid-single digits organically. Similar to our first quarter, year-over-year growth will be driven by transportation and communications, partially offset by an organic decline in industrial. Adjusted earnings per share is expected to be approximately $1.47 in the second quarter, and this will be up 14% year-over-year with adjusted operating margin expansion included in the earnings performance. So if you could, let me turn to slide four and I'll get into our order trends that we're seeing. For the first quarter, our orders were approximately $4 billion with a book to build of 1.15. I would like to highlight that this level of orders reflects improvements in a number of our end markets, as well as some supply chain replenishment. As we see markets improving, it is not surprising that our orders reflect the impact of supply chains being replenished after shutdowns that occurred in the U.S. and Europe in the third quarter of last year. We are also seeing customers placing advanced orders in some cases due to product constraints and the broader electronic component categories like semiconductors and certain passive components. And the guidance that we give does factor in the impacts of these supply chain dynamics. In looking at orders by segment, on a year-over-year basis, transportation and communication orders both grew 36 percent with broad-based growth across all businesses. Industrial orders declined slightly year-over-year, but on a sequential basis, we did see orders growth in all businesses in each segment. So let me also add some color on what we're seeing in orders from a geographic perspective, and I'll provide this on an organic basis. In China, our orders were up 33 percent in the first quarter, with growth driven by transportation and communications. We are benefiting from our strong position in auto, commercial transportation, and appliances, and continue to see strong improvement across those markets in China. We also saw 26% year-over-year growth in Europe, with growth in all segments. This represents a second consecutive quarter of orders growth in Europe, with some markets improving following the large drops from COVID back in the middle of last year. And in North America, orders were flat, with growth in transportation and communications being offset by declines in industrials. Now, what I'd like to do is touch upon our segment results briefly, and I'll cover those in slides five through seven of the slides we issue. Starting with transportation, our sales were up 12% organically year over year with growth in each one of our businesses. In auto, sales were up 11% organically versus global auto production growth in the low single digits. The outperformance is driven by continued strong content growth and some benefits from the supply chain replenishing. We are seeing gains from our leadership position in next-generation products and technology and the value that we bring to our customers. As I mentioned earlier, we are seeing strong content growth from the move to an electric powertrain and increased data connectivity, as well as the continued electronification of the vehicle. In our commercial transportation business, we saw 25% organic growth driven by electronification trends, which are helping content outperformance as well as ongoing share gains. We are also benefiting from higher emission standards and new increased operator adoption of Euro 5 and 6 in China and new emission standards in India. We saw growth in all regions, as well as all market verticals that we serve in our commercial transportation business and continue to benefit from our strong position in China. We are also seeing increased program wins in the electric powertrain and commercial transportation that will provide future content growth. In sensors, we saw 29% growth on a reported basis, which included the revenue contribution from the first sensor acquisition. On an organic basis, sales increased 3% driven by growth in auto applications. And we continue to expand our design wind pipeline in auto sensing and expect growth as these platforms continue to increase in volume. From an operating margin perspective, the segment expanded margins by 200 basis points to 19.4%, driven by strong operational performance. Now let me move over to the industrial segment where, as I mentioned, our sales declined 8% organically year over year, and our adjusted operating margins were down slightly to 13.5% despite the 8% organic sales decline. I am very proud we were able to maintain our mid-teens adjusted operating margins due to the cost actions that we initiated over the past couple of years. During the quarter, the segment continued to be impacted by the decline in the commercial aerospace market, with our AD&M business declining 22% organically. As I mentioned earlier, we do believe we're touching along the bottom in this business and could see improvement in Comair later in this year. Our industrial equipment business was up 8% organically, with growth in all regions and strength in factory automation applications. And we continue to see weakness in our medical business with ongoing delays in interventional elective procedures that have been caused by COVID. We anticipate this to be a short-term dynamic in medical that is consistent with what our customers are seeing and expect this market to return to growth as these procedures start to increase later in the year. And lastly, in our energy business, we saw a 4% organic decline driven by COVID impacts on utility spending, but we did see growth in renewable energy applications and the wind and solar application. Now let me turn to the communications segment, where our sales grew 12% organically year-over-year, with growth in both data and devices, as well as appliances. We do continue to benefit from the recovery in China and Asia more broadly, which represents over half of our sales in this segment. In data and devices, our sales grew 5% organically year-over-year due to the strong position we built in high-speed solutions for cloud applications. And in appliances, we grew 21% organically year-over-year with growth across all regions and benefits from home investments and an improved housing market. I would have to say our communication team continues to perform very well. delivering 17.6% adjusted operating margins, which is up 550 basis points versus the prior year. Now, with that segment over you, let me turn it over to Heath, who will get into more details on the financials and our expectations going forward. HEATH HILLIARD. Thank you, Terrence, and good morning, everyone. Please turn to slide 8, where I will provide more details on the Q1 financials. Adjusted operating income was $624 million, approximately 25% year-over-year, with an adjusted operating margin of 17.7%. GAAP operating income was $448 million and included $167 million of restructuring and other charges and $9 million of acquisition-related charges. We plan for the restructuring to be front-end loaded this year and continue to expect total restructuring charges in the ballpark of $200 million for fiscal 21 as we continue to optimize our manufacturing footprint and improve the fixed cost structure of the organization. Adjusted EPS was $1.47 and GAAP EPS was $1.13 for the quarter and included a tax-related benefit of $0.09. We also had restructuring, acquisition, and other charges of 43 cents. The reconciliation is provided. The adjusted effective tax rate in Q1 was approximately 20%. For the second quarter, we expect our tax rate to be in the high teens and continue to expect an effective tax rate around 19% for fiscal 21. Importantly, we expect our cash tax rate to stay well below our reported ETR for the full year. So if you'll turn to slide nine, sales of 3.5 billion were up 11% on a reported basis and up 6% on an organic basis year over year. Currency exchange rates positively impacted sales by 106 million versus the prior year. We are demonstrating our business model execution with adjusted EPS of $1.47 up 21% year over year. Adjusted operating margins were 17.7%, as I mentioned earlier, and that is an expansion of 190 basis points versus prior year. I am pleased with the progress we are making in driving improvements to our cost structure and our strong operational performance. And we continue to execute on our footprint consolidation and cost reduction plans in both transportation and industrial areas. And we are now benefiting from the heavy lifting that we have already completed in our communications segment. Transportation adjusted operating margin was 19.4%, which is nearing our business model target of 20%. Industrial adjusted operating margins remained in the mid-teens despite significant volume drops, which demonstrates the benefits of our cost actions we have been discussing with you over the past few years. I'm also very pleased with the 17.6% percent adjusted operating margin and communication, which reflects our strong operational execution that I mentioned earlier. In the quarter, cash from continuing operations was $640 million, and we had very strong cash flow for the quarter of approximately $530 million, which represents the first quarter record, as Terrence mentioned. We returned $286 million to shareholders through dividend and share repurchases, Our strong cash flow performance last year and into the first quarter of this year demonstrates the strength of our cash generation model, and we continue to expect free cash flow conversion to approximate 100% for the full year. We remain committed to our disciplined use of cash, and over time, we expect two-thirds of our free cash flow to be returned to shareholders and about a third to be used for acquisitions. And before we go into questions, I want to reiterate that we remain excited about how we positioned our portfolio with leadership positions in the markets we serve, along with organic growth and margin expansion opportunities ahead of us. To summarize, we have discussed the benefits of secular trends across our portfolio. You are seeing content growth enabling sales performance above our markets in auto and commercial transportation, benefits from market recovery and data and devices and appliances, and some markets that have been impacted by COVID in the industrial segment that are now showing signs of stabilization. We initiated cost of actions well ahead of the COVID downturn. You are seeing strong margin expansion as a result of our efforts. We expect to continue to generate strong cash flow, maintain a disciplined and balanced capital strategy, and drive to business model performance, our focus on value creation for our stakeholders going forward. So now let's open this up for questions. Sujal? Sujal Raghavanamalai, CFO Alphabet and Google Jaro, could you please give the instructions for the Q&A session?

At this time, I would like to remind everyone, in order to ask a question, press star and the number one on your telephone keypad. In order to have time for all questions, each participant is limited to one question. If you would like to ask a follow-up question, press the star one on your telephone keypad to return to the queue. Your first question comes from the line of Craig Haydenbach. You may now ask your question.

yes thank you uh and terence thanks for the color on the current supply gene chain dynamic maybe you can just expand on that i know there's plenty of news around kind of bottlenecks out there and you mentioned semiconductors just kind of a gauge of how you would frame what you're seeing your business versus the demand out there and and where we are in this kind of replenishment phase okay thanks craig and um i would say first off i think like many things covered

The recovery is very uneven, and it's impacting different businesses differently. So, you know, the comments I made were very much around transportation. In markets that are soft, like industrial, I would tell you we still have, in places like medical and aerospace, inventory still being burned. So I do think the factors I'm talking about in the supply chain are very similar to how we painted the overall picture of the three segments. I think when you look at the supply chain and you go to transportation, though, I think we ought to keep in perspective where auto production went to and that automotive is adjusting time supply chain. So back in the third quarter, 12 million units were made. That we made 22 million units on the planet, I think, was quicker than we all would have thought the recovery was. And there will be some areas where there will be bottlenecks as everybody recovers. And, you know, you heard that and Certainly our customers have adjusted some of their production due to that, and that's reflected in our guidance. But what's nice is on top of that, even though we're talking about supply chain, is where consumer inventory levels are very healthy. So when I think about what we try to track for long term or how many cars are being bought on the planet, it's nice to see inventory levels on the lots when you look at North America and China. you know, probably being more towards middle to low end of normal ranges. Europe's probably right around the middle. And, you know, it's not surprising that the supply chain's being stressed a little bit due to the improving markets we're seeing. And, you know, some of our customers have adjusted their production, and that's in our guidance. Okay, thank you, Craig. Thank you. Can we have the next question, please?

Your next question comes from the line of Amit Duryanani. Your line's open. Amit, Daria, Nani, your line's now open.

Hi. Sorry. I will stick to one question. And I want to say congrats on some really good execution the last six months with the way demand has recovered. I guess the question I would have is, when I look at the December quarter print and the March quarter guide, especially with transportation up really strong and better than end-unit production, I think the fear folks will have is that, you know, a strong first half, fiscal first half for you folks could be overshipping versus end demand, and OEMs are just building a lot more inventory than they need. And, you know, the risk would eventually be that in the back half of the fiscal year back half ends up being a lot softer as OEMs start to normalize inventory. Can you just perhaps talk about what are you seeing from your OEM level that gives you confidence that this isn't overbuilding of inventory and there's a correction in the back half that we have to worry about?

I think the thing that you look at is certainly we have orders that are accelerating to the improving market. Supply chain does need to get to a normalized level where production is. I think when you look at auto production going from quarter one to quarter two, we do expect it to be down to about 20 million units in our second quarter versus 22 in the first quarter. So that should also allow the supply chain to help normalize since there will be a little bit less production. And when we look at it, what's really nice is our growth is due more to content and production than it is due to the supply chain replenishment. As we've always told you, in an individual quarter, you can get supply chain movements one way or the other. But when I think about content per vehicle, as I said on the call, and really think about the $10 or so that our contents increased over the past couple of years, really about half of that is driven due to traditional electronification of the car being more electronics in it. The other half is being driven by the benefit of the winds we have in HEMS, as well as, I'm sorry, electric mobility, as well as what we've valued in content on the car having more data in it. So when we look at that, that's real content growth. Certainly inner quarters, there may be a little bit of movement as supply chain goes, but the bigger driver of our growth is content, and it's what's really allowed our transportation segment to get back to pre-COVID levels on what we all know will be production this year based upon the external estimates. That'll be less than pre-COVID. Okay, thank you, Ahmed. Can we have the next question, please?

Your next question comes from the line of David Kelly. Your line's open.

Good morning, Terrence and Ethan. I appreciate you taking my question.

Maybe just following up on that point, and just to be clear, when you're talking about the buckets and the drivers, that content per vehicle ramp, what's Was that in regard to the shift you've seen, the low 60s to the low 70s?

And just as a follow-up, as we start thinking about the go-forward drivers to that, you know, low $80 target, just curious, you know, what percentage of that or the mixed shift driver you expect from the electrification and EV trend specifically? No. I think what you're going to see is balance. as we go up into the 80s similarly, because I think one of the things that's important is what's nice about what we've seen over the past year is the electric vehicle seems to stand the test of COVID. You know, we talked about it last year about, you know, you had electric vehicle growth last year. This year, we believe, you know, electric vehicles on the planet are going to be up about 50% versus last year. Continued strong adoption in Europe, certainly the adoption that Asia has already had. And, you know, it's going to break through 10% of global production. So content will continue to be benefited by our position in electric vehicles. But we also have to realize there's still content opportunity in traditional architecture, too. And those products also go into electric vehicles. So what's nice about what we talked about going to 60 to 70, it's going to be a similar picture as we go forward because, you know, where we play in the architecture is on every vehicle. It's not just electric. It's also our legacy position and how globally strong we are with that position. So as we look forward, all components whether it be electric vehicle powertrain movement whether it be features and electronification of any vehicle as well as as you get more data in it and you know all of those are drivers to our content and you know just in the past two years you can see the reality of it and you know that's what we get excited about and i think it's what we get excited about as we look to forward growth okay thank you david we have the next question please

Your next question comes from the line of Matt Shrine. Your line is open.

Yes, thanks, and good morning. Paris, I wanted to ask, outside of transportation, the commentary on industrial, particularly the areas that you're seeing strength, how much of that is relative to supply chain inventory adjustments versus true demand? And I know there's a decent amount of distribution exposure there. Are you seeing signs of good POS or sell-through and any inventory build there?

So a couple of things, Matt. Thanks for your question. And, you know, when you think about distribution, distribution touches both our CS and IS segments, industrial and communication segments, more than transportation. Our sales into the channel in the quarter were on par with our total company sales growth. So that's 6%. It's pretty much how our sales into our channel partners were. Sellout is, you know, their sellout has accelerated with some of these supply chain dynamics. They have a role to play. That's why they hold inventory. We have seen some of their orders increase, but I would say we're not overshipping into our distributors. Actually, their inventory levels on sort of a turn are actually lower than normal. So, you know, that's some of the balancing that will be occurring here as the world normalizes, hopefully. And, you know, net-net and industrial, what I would tell you, while we may have some areas like in our industrial equipment that showed strength, you know, I'll go back to our medical customers are still burning some inventory, and so is aerospace and defense. So net-net, I would not say there's supply chain replenishment and industrial that we're benefiting from. Okay, thank you, Matt. Can we have the next question, please?

Your next question comes from the line of Christopher Glynn. Your line's open.

Thank you. Good morning. Hey, Chris. Hey, guys.

Since the last couple of years, I know there may be some routing, but, you know, it looks like maybe you're trending a little bit above your long-term range. I think we saw that for a couple of years in the 17 to 19 period, too. Is that range, you know, hedged or anything, or are your commercial teams just executing better in wins, or is it fleet mix that consumers are buying?

Well, on CPV, you know, the range we've always had is 4% to 6%. And, you know, I believe that range is still appropriate long-term. You know, there are assumptions in there. You know, where does electric vehicle adoption go? Certainly feature sets and so forth. But we feel very good about that range. And, you know, certainly that range is not – we do not limit our commercial teams to that range. So, you know, it does come back to there's always consumer preference there. It is nice that the consumer preference has been picking up the features that we're benefiting from. And, you know, we feel very good about that 4% to 6% range above auto production going forward. So, you know, I don't think that range changes. And, you know, hopefully we stay towards the high end of it. Okay, thank you, Chris. Can we have the next question?

Your next question comes from the line of Scott Davis. Your line's open.

Great. Good morning, guys. Hey, Scott. Nice to hear your voices. Hope you're well. Anyways, I wanted to just ask you for a little bit of an update on First Sensor, you know, what kind of your early read on it, what you're getting out of it. You know, any details you can provide there would be great.

Sure. Thanks, Scott. This is Heath, and I appreciate the question. Sure. You know, first sensor, we own a little over 70% of it still. You know, there's a given the German public company takeover dynamics, there's still a bit of a tail in terms of us acquiring the remaining 25 to 30 percentage points of the business with owners. But within that, you know, first sensor is behaving as we would expect it to, where we have market overlap, which is pretty considerable, whether that's in auto, general industrial, medical applications. It's trending right, as we would expect, as we see in other parts of both our sensor and our connector business. So everything's on track there. Now, you know, It's given us about $50 million or so, $40 million, $50 million a quarter of revenue. And I would say that some of the work that we need to do relative to some of the operational synergies, footprint consolidation things, not just on their end, but things that will eventually move into their facilities from our existing sensors business is still ongoing. So we're not expecting a lot of bottom line support this particular year, but trajectory still looks good as we move forward. All right. Thank you, Scott. Can we have the next question, please?

Your next question comes from the line of Wamsi Mohan. Your line is now open.

Hey, this is Danielle Ashton on behalf of Wamsi. Can you just talk about kind of your position in the broader community electric vehicle market and kind of key differentiators for TE?

Yeah, so first off is, and thanks for word, I think the first differentiator we have is, you know, our global position and where do we bring the innovation. And it starts with those design centers that are everywhere. Current vehicles are designed in next generation vehicles, and that's pretty special. And, you know, that's where we've leveraged, you know, our traditional position there. The other thing is when you get into the architecture of a car, our knowledge is there are parts of traditional architecture that do go over into an electric vehicle. So certainly there's a lot of discussion around the powertrain, how does that evolve the batteries, but also realize that architecture does come together as you bring low voltage and high voltage together and certainly come into the infotainment and data element of it that could go into autonomy. So we play across all those elements. I think it's a very unique architecture. position that TE has, that also comes into the content opportunity. The other thing that is, and, you know, these are investments that we started to make 10 years ago, is, you know, when we look at electric vehicle, you know, like I said earlier, we think there's going to be about 9 million made this year. 5 million of those will be in Asia, you know, Europe, continues to accelerate. And one of the things we probably get more excited about is not only the vehicle technology, but where do you see support coming to make sure that electric vehicle penetration gets stronger? There's two big factors that come in, you know, not only just not only consumer adoption, but you come into the two big things outside the car that relate to infrastructure as well as battery technology. And you continue to see developments in that space that with where EVs are going, we think will create continued momentum on EV adoption as well as support of the infrastructure and certainly the battery technologies that are so important to it. And that's happening globally. So, you know, early on we were very much bullish on Asia, certainly Europe with some of their regulations, and certainly, you know, you continue to see at a lesser pace momentum here. But where TE comes in on that architecture, where how that architecture comes together, the electric, the data, the signal, that is our specialty. And, you know, it's really great how these trends we're going to benefit from, and you saw it in our content numbers. Okay. Thank you, Danielle.

Can we have the next question, please?

Your next question comes from the line of . Your line's open.

Hi. Good morning. Thanks for taking my question. I did want to go back to the content growth story again in autos and just focus a bit more on the sensor side of the business there. You kind of outlined $10 of content increase you've had over the moving to $70 range, the low 70s. Can I just clarify if that includes sensors at all or is it de-minimus at this point? And more kind of looking forward, how should we think about the opportunity in terms of sensors that you can address today on a vehicle and what the aspirations are of what that content per vehicle for the sensors portfolio can look like?

No, thank you, Sumit. And actually, those figures I said earlier did not include sensors. That was our traditional approach. interconnect solutions that we provide. And when you think about sensors and you think about sensors back in 19, you're talking about that's about $2 a content. We see that going up to about $5 a content there. So that would be additive to those figures I gave you. You know, we're getting benefits of the launch. You know, that's actually the auto launch has actually drove the organic growth. Our sensory business still has a big industrial piece to it that, you know, impacted those figures. But, you know, sensors is a part that would be additive to those figures I said earlier.

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

The next question comes from the line of Mark Delaney. Your line is open.

I guess, good morning. Thanks very much for taking the question. Good morning. The company already talked a lot about some of the near-term dynamics in the first half of the year and some of the nice strength and recovery you're seeing. So I'm going to better understand your thinking Not just the second half outlook, but you're thinking about investing in the business longer term in terms of where you're deploying capital in terms of these acquisitions like First Sensor, some of the R&D you're doing to really capture that content growth you're seeing in EVs. What's most interesting to the company? What are you most excited about going forward?

Yeah, so thanks for that question, and I do appreciate it, Mark. I think when you think about when we look forward, I think there's one that I'll talk about short term, and then there's one that I think are important longer term. You know, I do actually think this period over the past year and the dynamics and the challenges we've all gone through We're getting to show our portfolio the diversity of it and why we like our portfolio. And a lot of people had questions of how this portfolio would act because it wasn't the same portfolio. And we do like our portfolio, and you see that here. I think the other thing as we look forward is the content elements we've talked to you about. And you think about transportation. The content opportunities we're talking about are still in early stages. And, you know, electric vehicle is early stage. Autonomy is early stage. And that, in many ways, you know, we're content kickers. We've been talking about it, and you're starting to see it in the numbers. And they're going to be around for a while. But I would say it's not just limited to auto and transportation. You've seen how our communication segment has changed, certainly around our cloud investments and how we've gained share in cloud that has made that segment a performer. And, you know, when you think about industrial, medical will come back, Comair will come back, and our positions are very strong. So there are things that certainly are hurting us now, but I think will be things that drive content longer in the future. And those are the things where data and power are going, whether it's around sustainability or things being more connected, where things get more productive like factory automation. We still have content opportunity to drive growth. That's going to be above market. The other thing I would just say, while I'm pleased with the execution, our margin improvement story is not over. Our transportation and our industrial segments, we've been doing some heavy lifting to get to where we believe these businesses are entitled. It's nice to see our transportation segment on lower volume than peak being back close to the margin we think it should be at. But our industrial segment has room to go. And, you know, lastly, I think it goes to the point that you sort of alluded to in your question is, you know, we like our cash-generated business model. It provides choices, whether it's return capital or you do the bolt-ons, like Scott's question, the heat around first sensor. And what's nice is, you know, we do have organic secular trends that we can do bolt-ons into. And, you know, we're going to maintain discipline as we go through it. So as we look forward... It's nice to see some improvement. We're always going to have a market that's probably cycling one way or the other with the diversity, but I do think with the portfolio showing up, we're pretty proud of, and we think there's more room to run on the growth on the margin side, which turns into earnings power and cash generation for value creation.

All right. Thank you, Mark. We have the next question, please.

Your next question comes from the line of Joe Giordano. Your line's open. Hey, guys. Good morning.

Hey, Joe. Hey, it's great to see the total content scaling from, yeah, you mentioned the 60s and 70s. I wanted to talk maybe longer term. I know you guys always mention the EV is generally like 2x a regular car. As we start hitting those inflection points where EV production scales exponentially, What does that, like, spread look like? How much of that spread is, like, actually more physical volumes on the cards? And how much is because, you know, the price of these products is significantly higher because the volumes are significantly lower? And, like, how does that change over time? Did the price go down substantially, but the volume scale, so gross dollars, it's very, very positive, but the spread between ICE and EV kind of compresses? How do we think about that when we get to, like, you know, significant deployment of EVs?

Well, a couple of things, you know, and, you know, our content assumption always assumes, I do think we have to keep in reality a nice vehicle. You know, if you take this year where people think mid-80 million vehicles will be made in 2020 long, there is 70-some million of ice vehicles made versus 9 million of electric vehicles made. So there is a scale advantage, certainly. Our customers expect that, and we do expect there will be price compression in our content as EVs scale. We also have to make sure we bring our technology and our scale to make sure these vehicles are affordable. So that's always been included. You will still have increased content. So I don't think you see it getting to an ICE engine content, but there will be some as you move up the volume curve on platforms and as the industry scales, and we've always said that to you. So that's how we've always said it, and we don't see that changing, and it's something that's very important for the industry to make sure electric vehicles are on par with traditional engines so that consumers can choose what they want. Okay, thank you, Joe. We have the next question, please.

The next question comes from the line of Chris Snyder. Your line's open.

Thank you for the time. Just another one on the content per vehicle, and particularly comments that CPV is in the low 70s today versus the low 60s, I believe you said, in 2019. So some quick back of the envelope math there implies high single-digit annual growth. So, I guess, is there any reason why this growth rate would slow, you know, maybe over the next two years? I understand longer term there can be, you know, more price and competition as that builds. But, you know, I guess over the next two years, is there any reason I think that would slow? Obviously, the number is building off a higher base, but EV unit production, you know, is inflecting. And it seems like there could also be some sensor tailwinds as well.

When we look at it, it goes back to what I said before. We think it's 4% to 6% above global production. Depending on what you assume on production growth from here, you take the content and add it to it. I'm not sure it would slow. It will come into how consumer preferences are, but it's what we get excited about on content. I don't see it slowing. I see it actually being a real engine for us, and we've been investing around it. And, you know, certainly we'd like to see that the revenue that's coming through on it, we're partnering with our customers, and we know we're solving their hardest challenges. All right. Thank you, Chris. Can we have the next question, please?

Your next question comes from the line of Joseph Spack. Your line's now open.

Thank you. Terrence, you know, you mentioned a couple times how you're excited about the margin progression opportunities. You know, if we go all the way back to 2017, you laid out this 30 to 80 basis point a year, which would have brought you close to 19%. I know a lot of outside factors have occurred since then, but you've also taken some other action. So I'm just curious, do you have a view of the margin potential of this business looking out a few years? Is 19, 20% range still the goal?

Jim, this is Heath, and I'll take that question. You know, the progression over time certainly is still part of our operating model and how we think about to go forward. Certainly, you know, we've had to deal with some things that were unexpected relative to market conditions, no different than any other company out there. But we still feel like we're in a pretty good place. Now, acquisitions are always going to feather in to a point where, you know, you have to overcome some of that dilutive impact initially, and then you build upon that moving forward. But I still feel very good about it. I think you've got to kind of break it down into the segments as well. The segments are We've kind of targeted and talked about automotive being roughly a 20% operating income business, which is both, you know, bails a good return from our overall investment, as well as provides opportunity to enable reinvestment of the business for future growth. And that's a good return model. Industrial, which is in the low teens as we sit here today, but coming off of a pretty significant downturn, particularly in the commercial aerospace side as well as in the medical side, is still holding its head. But we would expect that over time, again, to be up into the high teens. So there's a fair amount of leverage there. And then in communications, you know, we're in a pretty good place. We've done a lot of heavy lifting there going back several years. And you're seeing the results there now when we get the types of volume reduction, or I'm sorry, the types of volume increases that we've seen both in appliances and data and devices. You can see what the flow through is in our factory environment with an optimized footprint that we enjoy today within communications. So, you know, there is still leverage in both transportation and in industrial areas. And in addition to that, you know, we are still tackling some of the costs in the operating expense line that you would expect us to, and that's been coming down radically, particularly as percentage of sales, and that will continue to be the case. So I feel good about our ability to continue to expand margins for some time now. All right. Thank you, Joe. Can we have the next question, please?

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

Good morning. Heath, maybe another question for you. Wondering if you could put this quarter's margin performance in context of the 20% midterm margin target for transportation solutions specifically. Just wondering how this quarter's profitability impacts that trajectory going forward. Maybe thinking in LEB terms specifically what it says about the production needed to hit that 20% margin target relative to maybe what you would have thought pre-COVID.

Well, it's a good question, right? I mean, you know, certainly 19.4% is a solid number at that segment level. But you have to remember that, you know, we are still trending well below where we were just a couple of years ago in terms of total global auto production. So we did a little north of 20. So, you know, global auto production in the quarter was a little north of 22 million units. If you think about where we were in 2018 and 2019, we're still trending pretty – still below those quarterly numbers. So, yes, what it shows you is what we can do on lower auto production relative to some of those prior hurdles. because we have tackled the fixed costs, but at the same time, we are going after. We've been pretty public with you about some of the restructuring that we're doing, and particularly in some of what have been announced, and we're working through some European footprint moves within our transportation segment. And those are underway in some cases. They're being pressured because we need some volume out of those facilities, but we'll see more benefit from those restructuring plans as we get through 2021 and into 2022. The other thing I would say is when you see the types of recovery, and Terrence mentioned going from 12 million units in the June quarter to 22 million units in the December quarter, that is a very steep ramp. in terms of, you know, our ability to ramp up. And as part of that, you would expect there is some inefficiencies that are embedded in that. And so, you know, although we're pleased with the margins, there's still room to go with that. All right. Thank you, Luke. We have the next question, please.

Your next question comes from the line of Jim Suva. Your line's open.

Thank you. My one question is on average selling prices, kind of looking ahead in the transportation segment. In the past, I believe, under conventional cars and autos, the price declines are kind of like 1% to 2%. Is that going to be similar as you look at more, say, battery-connected HV cars in the future, similar percents, or actually better percent declines or worse declines? The reason why I ask is, as you know, there's a lot of shortages in the automotive semiconductor industry, and they're seeing better pricing declines. I know that you have more annual or longer-term contracts, but I was kind of wondering longer-term declines. for that segment is the math formula of the one to two percent average price decline still intact or because these are newer technologies they should actually decline faster or because they're new technologies they could actually hold up better so again a couple of things thanks for the question and i'll tie back to the question i got earlier first off

When we look at pricing right now, we sort of view it as stable. Certainly, we don't make semiconductors, so some of the shortages that are happening in that space, we do. When you look longer term, and that assumes supply chain normalizes, we do expect our electric vehicle product portfolio to have a higher price curve. just due to the volume. And, you know, that's something we've always said that's included in our 4% to 6%. And so, you know, depending upon how those volumes go, and, you know, that's typically the arrangements that we have with our customers that are typically volume, and we sit down and have those discussions with our customers. I would also tell you that, you know, when we think about content, we do expect content to be about 2X with EVs. And, you know, also the margin targets we give you also include that price in it that, you know, Heath talked about a few minutes ago. So, net-net, it will be a little bit higher as it scales in those product sets. But overall, as part of our margin model and content model, we've always reviewed with you. All right. Thank you, Jim. Can we have the next question, please?

Your next question comes from the line of Williams Pine. Your line's open.

Great. Thanks for taking my question. We're hearing a louder chorus of voices talking about ECU consolidation as an aspect of the evolution of automotive networking architectures, things like domain architectures and zonal architectures. Do you see this happening as well, or is it more talk from people uh from some technology providers than than sort of real action by the tier ones and oes and also i'm curious how you expect this will influence connector units pricing and your print position with customers thank you so well um you know this is not a new trend so i i think there's a big thing here and you know the trend of how do you bring feature integration into an ecu and you know certainly the car has a lot of ecu's but how does instead of adding a box to a car when you want to add to the architecture you're adding a feature into an ecu which does help make sure the architecture doesn't get out of control so you know this is not a new trend it's always been a trend certainly some people will go out and say you know will there be only one mega ECU or two. I think that's not a new idea, but I think that's going to be much further out. Net-net, what happens is the amount of interconnects that are in those ECUs become more complicated, which help us, and then certainly the interfaces around where do you need to sense what's going on in the car also creates more connections. And no different than the content picture I hope I painted earlier around where is content coming from Now, that $10, half of it is due to electric content, electric powertrain content, some data. But the other half is due to the low voltage architecture that continues to get more connections in it as the car has more features to it. And you still need to have a connection to wherever the feature is back to a box. So certainly ECU, no different than what semiconductors do all the time, which is it integrates more onto a chip. You're going to see that in the car. That creates more complex connecting solutions as that box has to connect into other applications in the car, and that's actually good for us. We think it adds more connections, and it actually creates complexity, which our customers need us more from an innovation perspective. So I hope that frames it a little bit better. and helps you with that question. All right, thanks, Will. Can we have the next question, please?

Your next question comes from the line of David Williams. Your line's open.

Hey, good morning, and thanks for letting me ask the question. I just wanted to kind of see if you could read into some of the trends you're seeing within the data center, the strength there, and maybe what your view is for the year in terms of that trend.

Well, the data center, you know, it's one of those markets who would tell you, you know, was not COVID impacted, you know, from the cycle. And that's just continued. So when we look at cloud and data center spending, we're looking at another double-digit increase this year and you know i think the start that we're getting in the unit um in our data and devices units there certainly um when you look at where semiconductors are growing that's also you know a supporter of it and you know we see the cloud spending just continuing and you know it's what's really nice that's over as our team you know he talked about the margin progression one of the things that we also work margin is where we were going to point our engineers at And, you know, what we're also very pleased with is our share gain and position that we've earned across all the cloud providers. And, you know, not only on the margin side, the team should be congratulated. It's also what they've done and how do we bring the innovation to those cloud providers.

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

Your next question comes from the line of Nick Fodorov. Your line is open. Okay.

Yeah, good morning. Thanks, everyone. Hey, Nick. Hi. Terrence, I think I heard you talk about increased design wins with electrification and the commercial transportation. I wonder if you can give us a little bit more color on that and maybe compare at what stage do you think the EV and commercial transportation is relative to where EV and light vehicle is today? Are we maybe where light vehicle EV was a year or two years ago?

Thanks for the question, Nick. And, you know, when you look at it, you know, we've all had the discussions around auto a lot. And, you know, we've talked here before about, you know, electric vehicles and trucks and, you know, a lot of things happening around the last mile fleet. What I've said is, you know, over this past year, we've seen a very significant increase in more platform work by the major companies. commercial truck OEMs, and when you look at that increased activity, it seems to be more serious activity than dabbling projects. And what is really nice is when you think about our position in commercial transportation, it's in many ways very similar to our automotive position. It's global. It's agnostic to the architecture. You know, that's why we like being a Tier 2. And when we sit there and we look at what our teams are working on, we're seeing an acceleration. So certainly when we look at commercial transportation, the breadth of vehicles that are in there, whether it's mining, whether it's, you know, Class A trucks and so forth, it's pretty broad. But we do get excited about the content opportunity there as well. And it does feel exciting. Where we are today from a program activity is probably where we were three to four years ago. And automotive, just giving you a gut feel on that. We have this momentum starting to accelerate. And it's really nice that we're going to leverage our position like we did in automotive. And that can be a content lever in ICT. Okay. Thank you, Nick. It looks like there's no further questions. So if you have any questions, please contact Investor Relations at TE. Thank you for joining us and have a nice day.

Ladies and gentlemen, your conference will be made available for replay beginning at 11.30 a.m. Eastern Time today, January 27, 2021, on the Investor Relations portion of TE Connectivity's website. That will conclude your conference for today.