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spk00: Ladies and gentlemen, thank you for standing by and welcome to the TE Connectivity fourth 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. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press the star one. 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, Sujil Shah. Please go ahead.
spk03: Good morning, and thank you for joining our conference call to discuss TE Connectivity's fourth quarter and full year 2021 results. With me today are Chief Executive Officer Terrence Curtin and Chief Financial Officer Heath Mitz. 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 are asking everyone to limit themselves to one question. We are willing to take follow-up questions, but ask that you rejoin the queue if you have a second question.
spk08: And let me turn the call over to Terrence for opening comments.
spk00: Ladies and gentlemen, thank you for standing by. We will now resume our call. Terrence, you may begin.
spk02: Thank you, and I apologize for that technical difficulty. And I'll start at the beginning again in my comments just to make sure we know where we broke off. But, you know, I want to talk about our results for the fourth quarter as well as fiscal 2021 as well as the outlook for the fiscal 2022 first quarter. So before Keith and I get into the 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 fourth quarter, as well as the strong performance that we delivered for the full year. 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, how that relates to TE. On the consumer side, demand for autos and appliances remains strong. 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. 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 to 2022, as well as our results in 2021. While certainly this demand environment is a positive, you know, 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 surf markets. In the fourth quarter, 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. We have strategically positioned T around certain secular trends, and you're seeing the market outperformance in each of our segments as a result of this positioning. In transportation, our leadership position is enabling us to deliver content growth from 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 market expansion in each of our three segments. The last proof point that I think is important and shows the strength of the portfolio is is how our whole year results compared to pre-pandemic levels of 2019. Both our sales and adjusted earnings per share in fiscal 21 were up double digits versus 2019, and we expanded adjusted operating margins by over 100 basis points by continuing the margin journey that we're on. More importantly, we also remain excited about the additional growth and margin opportunities 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 three. Our teams had strong execution results in the fourth quarter despite reductions in auto production and ongoing challenges in the broader global supply chain. We generated sales of $3.8 billion with 16% organic growth and adjusted earnings per share ahead of guidance at $1.69, which was up 46% year-over-year. 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 to approximately 400 basis points, and adjusted earnings per share was up over 50% to $6.51. Also as important of earnings is where we generated in pre-cash flow. Our pre-cash flow was above $2 billion 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 with about three-quarters of our pre-cash flow returned to owners this past year. and the remainder used for M&A, including the earning acquisition in the industrial segment that we mentioned last quarter. When you look at our orders in the fourth quarter, they remain strong at $4.1 billion, 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 a strong performance of our portfolio to continue into the first quarter with approximately $3.7 billion 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 is another point that reinforces diversity of the markets that we serve. Adjusted earnings per share is expected to be approximately $1.60 in the first quarter, and this will be up 9% year over year. Now let me talk about the markets and frame it to where we were just 90 days ago when we last spoke. In transportation, consumer demand for autos remains robust, but clearly ongoing challenges with semiconductors and the broader supply chain continue to produce. 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 million units lower than we anticipated in the fourth quarter, and we're expecting auto production to be in the 18 million unit range in our first quarter. This first quarter of production will be well below the nearly 23 million units made in the first quarter of 2021. The key for us is that the trends around content growth for TE remain strong, and we expect content growth to be at the high end of the four to six point range in fiscal 22, as we continue to benefit from increased electronification and higher production of electric vehicles. Versus 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. 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, so it's important to tell you what we're seeing in our supply chain. 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 million of revenue due to us not having availability of supply. This quarter, that's down to about $50 million. And with this improvement, this will enable us to increase production and inventory capacity supply issues. Now, before I move into orders that will start on slide four, 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 One Connected World strategy, which really encapsulates 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 one and scope two greenhouse gas emissions by over 40% on an absolute basis by 2030. And this new goal is above and beyond the 35% reduction we've already made in absolute greenhouse gas emission reductions over the past decade. We also continue to make progress in sourcing renewable electricity. 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 gotten good feedback from our employees on how we've been there for them during this difficult time. So clearly, I'm pleased with the continued progress that we're making towards what our purpose is as a company, which is to create a safer, sustainable product. So now let me please get into the orders on slide four, and we'll go through it by the segments in both of them, and also on a geographic basis. For the fourth quarter, our orders were over $4 billion, 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 been elevated with customers placing orders for delivery beyond the current quarter due to the broader supply chain situation. As a result, we're coming into fiscal 22 with a strong backlog position that 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 communication segment, we have a relatively large portion of our business that goes through our channel partners, and we're seeing our booking patterns begin to align more closely to our sell-in, which is a good sign. 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 of business levels, that really they had a much higher turn in their inventories this year. Looking at transportation, we are seeing order 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. 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 they'll be on your slides five through seven. So starting with transportation, segment sales were up 16% organically year-over-year with growth in each of our businesses. 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 vehicle production grew 50% year-over-year, increasing from roughly 6 million units produced in 2020 to roughly 9 million units produced globally in 2021. We also continue to benefit from content growth in non-electric vehicles, driven by ongoing safety, certainly 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. Turning to our commercial transportation business, we saw 38% organic growth with increases across all sub-market verticals. We are continuing to benefit from stricter emission standards and the increased operator adoption of Euro 6, which reinforces our strong position in China. Also, we're also pleased to announce that two 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 sensors business in the segment, we saw 15% organic growth driven by transportation applications, with the new program ramps that we've talked to you about over the past few years. And for this segment, adjusted operating margins expanded nearly 500 basis points to 18%, driven by higher volume and strong operational performance by our team. Now, turning to the industrial segment, our sales increased 6% organically year over year. Industrial equipment was up 32% organically, with double-digit growth in all regions driven by momentum and factory automation applications, where we continue to see the benefit from accelerating capital expenditures in areas like semiconductor manufacturing as well as in the automotive space. Our AD&F business declined 18% organically year-over-year, driven by the continued market weakness I talked about earlier. And in our energy business, we saw 8% organic growth driven by 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, 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. SAM proved 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. It's clear that our communications team continues to deliver at an outstanding performance, with record adjusted operating margins of 24.7%, and this is up 300 basis points versus a strong quarter in the prior year. Overall, our segment teams are capitalizing on the growth trends in their end markets. It's demonstrating the diversity of our portfolio while delivering on strong operational expectations. You're seeing this reflect in our results both for our fourth quarter as well as our full year, and we expect this to continue into 2022. So with that as a segment and a market overview, let me turn it on to Keith who will get the more details on the financials as well as our expectations coming forward. Thank you, Terrence, and good morning, everyone. Please turn to slide eight where I will provide more details on the Q4 financials. Sales of $3.8 billion were up 17% on a reported basis and 16% on an organic basis year over year. Currency exchange rates positively impacted sales by $51 million versus the prior year. Adjusted operating income was $706 million with an adjusted operating margin of 18.5% with strong year-over-year fall-throughs. GAAP operating income was $660 million and included $38 million of restructuring and other charges and $8 million of acquisition-related charges. For the full year, restructuring charges were $208 million, in line with expectations, and I expect restructuring charges to decline in fiscal 22 to approximately $150 million. 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 of the proportion of our U.S. pension liabilities. Additionally, we had restructuring, acquisition, and other charges of $0.14. Free cash flow was approximately $535 million for the quarter. And during the quarter, we utilized approximately $300 million for acquisitions, including earning 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 around 19%, but continue to expect our cash tax rate to be in the mid-teens. So turning to slide nine. This slide puts some perspective on our performance this year and shows how we performed from fiscal 19 to 21. Over this time period, we had 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 perform to deliver strong results through this cycle. To provide some segment-level examples, our transportation sales are up approximately 15% versus fiscal 19, despite auto production declining over 11% during that same time frame. Similarly, our communications segment sales are up approximately 25% over this time period, significantly outperforming our in-markets. This also demonstrates some of the content benefits we are seeing across the portfolio. Turning to year-over-year comparisons, fiscal 21 sales of $14.9 billion were up 23% on a reported basis and 18% organically year-over-year. Currency exchange rates positively impacted sales by $444 million versus the prior year. We would expect currency exchange rates to be a year-over-year headwind, in our first quarter and could remain a headwind for fiscal 22 if the dollar remains at the current levels relative to other currencies. 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 across our business in fiscal 21 and expect further increases in fiscal 22. Turning to cash flow, we generate approximately 100% conversion to adjusted net income with record-free cash flow of approximately $2.1 billion for the year. 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 FY21, we continue to maintain our balanced capital strategy, returning capital to shareholders and remaining active in M&A. During the year, we returned over $1.5 billion to shareholders and utilized over $400 million for acquisitions. Going forward, we remain committed to our balanced capital deployment strategy and expect to return two-thirds of our free cash flow to shareholders while supporting our inorganic growth initiatives through Voltron acquisitions. Before we go to questions, I want to reiterate that we are performing well in this environment despite 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 three 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. Now let's open it up for questions.
spk03: Emma, can you please give the instructions for the Q&A session?
spk00: At this time, I would like to remind everyone, in order to ask a question, press star 1 on your telephone keypad. In order to have time for all the questions, each participant is limited to one question. If you'd like to ask a follow-up question, please press star 1 to return to the queue. Your first question comes from the line of Chris Snyder with UBS. Your line is open.
spk06: Thank you. In 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 22. So just want to confirm that, you know, A, I heard that right. And, B, that includes any impact from supply chain? And then what should we make, you know, of the company, you know, driving low double-digit outgrowth on a two-year stack? You know, my math says you guys outperformed by mid-teens this year, you know, just compared to the mid-single-digit guided range.
spk02: Thanks, Chris. And you have a couple questions. So thanks for it. And the first thing is you're right, just to confirm what you heard. you know, when we're looking at the programs that we've won and looking at into 2022, we do see, you know, something at the high end of the content outperformance range we've given you at that 6%. And we do think that will include any noise around supply chain, you know, is included in that content outperformance. Because like we always say, you know, be careful looking at CPV on a quarter basis or content growth on a quarter. There's supply chain dynamics. And I think what's important to us is two 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 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. You know, that's grown 50% this year, like I said. Right now, people are saying even in 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, you know, 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 planet. So it just reinforces, again, the content that we've been driving where we position TE around. And, you know, 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 is, where inventory levels are for production as well. That at some point will also be a catalyst on top of the content that we TE up on. So hopefully I touched upon all your questions there, Chris.
spk03: All right. Thank you, Chris. Thank you. Can we have the next question, please?
spk00: Your next question comes from the line of Mark Delaney with Goldman Sachs. Your line is open.
spk15: Yes. Good morning, and thanks very much for taking the question. 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.
spk02: Sure. Thanks for the question. I think we have to go back. The past couple of quarters, we told you there was a lot of orders coming in as people were working with their supply chains. But what we started to see is that in this quarter, the scheduling out continues, which is a good sign. I think people are accepting the lead times they have throughout the components in their supply chain. You know, last time I read, I think semiconductors are about a 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 end dynamics are very strong. So when you think about car demand, you also see our auto customers also of keeping them scheduled out. 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 than 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. end market softness right now is around auto production, and that's supply chain driven. And what we saw, how those orders moved out, aligning to how our customers want to produce, you know, the order trend sort of mirrored exactly what's going on. So I think it's getting a little bit more predictable, even though it's scheduled out a lot longer. Okay. Thank you, Mark. We have the next question, please.
spk00: Your next question comes from the line of Amit Daryanati with Evercore.
spk05: Amit Daryanati Thanks a lot, and good morning, everyone. Terence, I guess the question for you, as you reflect on your fiscal 21 results and aggregate, I was hoping you'd just talk about, you know, how do you think the supply chain pressures, component availability, inflation, all this stuff, you know, impacted fiscal 21 revenue in EPS. And then as I think about fiscal 22, do you think all of this becomes less of a headwind or stays about the same? And what would the ramification be to your P&L in 2022 from these drivers?
spk02: Sure, Amit, I'm going to let Heath take that because there's a lot of different parts of it. Sure. Amit, thank you for the question. Certainly, as we've progressed 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. 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 22. 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 FY21, that was largely neutral. We did not see those price pressures. We were more back at par. And we actually expect in 22, 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. All right. Thank you, Ahmed. We have the next question, please.
spk00: Your next question comes from the line of Scott Davis with Mellius. Your line is open. Good morning.
spk18: Good morning, guys. Hey, Scott. Good morning. Congrats on 2021. It was a great year for you guys, and good luck for 22. Thanks, Scott. In that context, the 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, you know, 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 in the ballpark as sustainable?
spk02: Scott, I appreciate the question. You're right about the Q4 flow-through, and our flow-through for FY21 in total was in that range of the 30% to 35% range, which is our expectation. As we move into 22, just to highlight, we – Ernie, the acquisition layers in in 22 and did not have any impact on our 21 numbers based on the timing of the closure of that transaction. In Q1 alone, if you were to adjust out for Ernie, which will come in at a couple hundred million of revenue, but will not add much from an EPS perspective in our first 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 first quarter down to the level that you're referring to. If you were to back that out, he'd be up in that 30% range again. But, again, we feel very good about the value-creating opportunities that Ernie brings to us, and we'll pound through the year to offset that pressure that it puts on our flow through and margins. Okay.
spk03: Thank you, Scott. Thank you. We have the next question, please.
spk00: Your next question comes from the line of Wamsi Mohan with Bank of America.
spk12: Thank you. Good morning. Terrence, I know you're not guiding fiscal 22 explicitly, but how are you thinking about the growth in the end markets? And I just want to ask a clarification around the ASB comment that was made earlier on the call. So some of this outperformance, the magnitude of this, right, mid-teens for the year or, you know, mid-20s for the quarter is well above that 4% to 6% 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 super helpful. Thank you.
spk02: Yeah, so let me get into the markets here, Ramzi. And, you know, when we sit there, I do want to go back to what I said in the script that, We do have a constructed demand environment across when you get out to the end applications that we're in. And the only place that we haven't seen a constructed market is certainly around the aerospace side. And that'll come at some point. I'm not sure that'll be in 2022 for us, but that'll come at some point. Just to break it down by the segments a little bit, in transportation, and like you said, 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 million cars made next year globally. That's pretty flat. That has supply chain constraints in it and the semi-side continuing. Could there be upside to that? The supply chain could work out potentially, but I would also say the content that we talked about at the high end of the four to six, inclusive in any supply chain noise, we feel pretty good about. In the commercial transportation space, You know, 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 the data connectivity on heavy trucks. And next year we're going to have a slowdown in China in the market. I think that's very well known. But on a flattish environment to slightly down environment in commercial, broader commercial vehicles, we think content could create growth there. And I talked about the new EV wins that we have on the heavy truck that won't benefit 22 weeks further out. In the industrial space, you know, the recovery feels like it's just getting started. And, you know, we're starting to see improvements in medical. 19 forward, we see that continuing, especially with the benefits from renewable sources. You know, 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 then the communication segment, what I would tell you as we look forward is you have cloud cap actually going to increase another 10% next year. And when you think about, you know, we've grown 2x the market here over the past three years. Our cloud revenue has doubled since 2019, and we're going to have vertical on top of that with that cloud CapEx picture. And then, you know, in appliances, the consumer is strong. Certainly we have to watch that. You know, if the consumer slows 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, you know, we believe it's a pretty constructive setup, certainly some to improve like we saw over the past 90 days, and we'll take advantage of that as we build a little bit of inventory early in the year to make sure we capitalize on the setup. 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 any way you want to parcel it, I think he 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. 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, you know, that's what we get excited about as we go forward. And I gave you a couple examples there between auto and also in the cloud. Okay.
spk03: Thank you, Wanzi. Can we have your next question, please?
spk00: Your next question comes from the line of David Kelly with Jefferies. Your line is open.
spk19: All right. Good morning. Thanks for taking my question. Maybe to follow up on the 20% EV sales mix and automotive, Terrence, I think you made that comment, the prepared remarks. Just wanted to confirm that A, that is EVs and doesn't include hybrids. And then just curious, you know, your EV sales have begun to scale. Is the content per vehicle tracking at that two times relative to internal combustion that you have expected? And, you know, just curious if you're thinking about any potential upside from there going forward.
spk02: Thanks, David. So first off, from a clarification, thank you for asking it. When we talk EV, we do include hybrids. We include both elements of them. So when you take that, and even the numbers I quote about the 9 million units made globally that are electric, that includes hybrids and plug-in hybrids. 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 an 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 isn't things that get cannibalized on our product. The low voltage things come over when you start putting in that electric power train. You have charger inlets. You actually have to get the power into the battery. We play along those connectivities, certainly how it comes into the cell 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 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 want two programs with two of the top five truck manufacturers in 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. 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, we have a leading share by quite some distance. And our global customers are looking about how when they get to more electrified power trains across their fleets and their offerings. 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, you know, we've talked about harsh environments. That's what we love, and our engineers like to tackle those challenges and that we want two of the top five on their initial platforms. I see that continuing just to go across the other players and reinforcing our great commercial transportation business. Okay. Thank you, David.
spk03: Can we have the next question, please?
spk00: Your next question comes from the line of Joe Giordano with Cohen. Your line is open. Hey, Joe.
spk13: Can you hear me?
spk20: Hey. Okay. I just wanted to kind of Clarify a couple things here. You know, with the orders running arguably a little bit hot and out far, and Terrence's commentary about there's still $50 million of stuff that you would have liked to have shipped out but couldn't versus, you know, it was $100 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 also the inability to get things out the door and high orders. So can you kind of just kind of square that for me?
spk02: Sure, Joe. I mean, first of all, as diverse as our portfolio is, 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. It's not as simple as just saying, well, 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, and metals we're working our way through. 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. 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. But what we do know is that there's really, really strong demand out there for automobiles. 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. Now, when that ramp happens, it's still TBD. But I'm not going to signal that this number of inventory builds is going to be massive, but we are going to take advantage of that. a little bit of a slowdown in the auto production world and get ahead of it so we're ready.
spk03: Okay, thank you, Joe. Can we have the next question, please?
spk00: Your next question comes from the line of Christopher Glenn with Oppenheimer. Your line is open.
spk10: Hey, thanks for taking the question. Good morning. Hey, Christopher. I'm curious about margin outlook generally and CS. Do you expect some margin progress at each segment in fiscal 22? And for communications in particular, comments may be flat as appliance markets, but, you know, the second half comps are kind of off the charts. How should we think about the leverage for the, you know, detrimental margins for the CS segments?
spk02: 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, within that, I think you'll see the strength more out of the industrial and out of the transportation businesses. The communications 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 at these 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. I'm not suggesting that's all going to happen here in the first quarter, 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 levels are looking like. So, you know, in terms of the defermentals on that, I think you could roll through roughly the same kind of math. But, you know, we target about 30% flow through on the organic side, and that's really where our focus continues to be as part of our business model for FY22.
spk03: All right. Thank you, Chris. We have the next question, please.
spk00: Your next question comes from the line of Sameek Chatterjee with J.P. Morgan. Your line is now open.
spk01: Thanks for taking my question. A couple of clarifications on auto trends. Communications seem like it moderated quarter to 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 orders being up. Is that EV or is that still like an inventory build? Just if you can clarify those two order trends. Thank you.
spk02: Yeah, I wouldn't say it's CS other than, you know, just things getting a little bit more normalized and scheduled out. There's nothing unique in there to me. In regard to the auto... I think one of the things just to highlight, you know, 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. And we're not getting a strong China build quarter because of the supply chain issues that it's going through. So I wouldn't say you should read into there's more EV or less EV in there. I think it's pretty much in line with what we've said on a global basis because Asia still is, 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. Okay. Thank you, Sumit.
spk03: Can we have the next question, please?
spk00: Your next question comes from the line of Joseph Spack with RBC Capital Markets. Your line is open.
spk17: Thanks. Good morning. First, just a 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 could just talk a little bit about how or receptivity to recovering pricing for commodities maybe by end market, how that's going for you.
spk02: Yeah. So first off, on auto production, units light in our quarter we just had versus where we guided. In the first quarter, we're assuming 18 million unit range for auto production in our first quarter, which is compared to 23 million last year's first quarter. So that's at 20% down I mentioned on the line. And certainly we're not guiding for the year, but I believe IHS has that on our fiscal period, around 77 million units for the year, which will be flat year over year. 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, you know, I'm happy about it. But I would say we're pulling the different levers, as he said. You know, 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 we're in the middle of those, and that will continue to be a recovery point throughout this year. So it is very different, and I think the stats that he laid out sort of frames it nicely of what benefit we've gotten as well as how we're thinking about it into 2022.
spk03: Okay, thank you, Joe. We have the next question, please.
spk00: Your next question comes from the line of William Stein with True Securities. Your line is open.
spk11: Great. Thank you for taking my question. I have a question about the communications and market that's been doing very well the last couple a few quarters, full segment really, but in particular the comms and 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 comms? CAPEX exposure and does your growth here reflect more of Is broader and market growth or share gains from either new or approved products? Thank you.
spk02: Thanks, Will. A couple of things. The market and the growth, we're benefiting overall from high-speed applications. So when you look at D&D overall, it is anywhere we're having high speed getting put in, and that can be anywhere in the network. 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 age here, 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. It also helps them get to their costs of total ownership, including their impact on energy usage And, you know, what we continue to see as they're making their investments, which are in line with what you said, you know, we're seeing them wanting to spend another 10% around their 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 know, you saw this out of them. In that specific product niche, we grew about 65% this year, where their capex went up 30%. And, you know, these are things being deployed real time as they're trying to keep up their cloud offerings. And, you know, we've become a very good partner in technical as well as service partner form. And we've actually strengthened during the COVID time.
spk03: Okay. Thank you, Will. Can we have the next question, please?
spk00: Your next question comes from the line of Matthew Sheeran with Stifle. Your line is now open.
spk16: 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? 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? And from your own perspective, Heath, you talked about building inventory as you get into fiscal 22. Can you tell us how that impacts your free cash flow and the conversion rate, which is typically around 100%? Yes.
spk02: So, Matt, let me take the part around what we see as inventory in the world, and then we'll get to, you know, Heath will talk about our inventory. First of all, in the channel partners, I would tell you, Our channel partner orders have accelerated over the past three 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. But we have not seen their inventory increase on our product side. So their turn levels have accelerated here, and they're touching product more to get it out because of how quick they're turning it. So inventory levels in 21 have remained relatively flat while they've had significant growth as they're trying to help the customers and their supply chain solutions to those. When it comes to our customers, we do see customers holding more inventory. You know, some customers have scheduled out further. But we also have customers that, you know, some areas are still very low in certain inventory pockets. So, you know, 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, you know, 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. So when we look at it, you know, we're always going to have supply chain noise, you know, whether it's building or coming down a little bit, but we do view that as noise. And, you know, 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 on the question about our inventory build, I think it gets down to relative to our cash conversion rate. I think it gets down to the timing. You know, the way we're looking at it now is probably more of a first-half issue where some inventory builds, and then as we can bleed that off, we're basically taking advantage of some slow-water production here in the early part of the year. So as part of that, I think that just gets into the timing of It could put a little bit of pressure on that 100%, but we have other levers as well that we're looking at, and we'll continue to assess that, and I think we'll be able to give you a better update on that answer here a quarter or two from now. Okay, thank you, Matt.
spk03: Can we have the next question, please?
spk00: Your next question comes from the line of Stephen Fox with Fox Advisors. Your line is now open.
spk08: Hi, good morning. Just on the 110 basis points improvement since 19 on the operating margins, I was wondering if you could break down, you know, sort of how you got there, you know, between volumes, restructuring, and, you know, maybe some of the offsets and any implications for, you know, the risks of achieving 30% incremental margins this year. Thanks.
spk02: Sure, Steve. Yeah, listen, I mean, you've been in coverage 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 a lot of that heavy 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 19 to 20, 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 inflation. or a meaningful part. 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 things. 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%. Okay, thank you, Steve.
spk03: Can we have the next question, please?
spk00: Your next question comes from the line of Jim Suva with Citigroup. Your line is open.
spk09: Thank you so much for the details. It's good to see that It's great to see that your restructuring costs are going lower. I'm just kind of curious. That would, to me, imply that your operating margin track continues to remain where you'll hit this 30% margin growth or 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. 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.
spk02: Sure, Jim. I know you and I have had a lot of discussions about this over the last few years. I appreciate the question. You know, 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 right-sizing the footprint. Some of the things that we talked historically about getting right-sized and industrial and getting to the right places of manufacturing for automotive, particularly in Europe, a lot of those things are underway. Those charges have been taken, and we're working through those. What we're seeing more of now, Jim, is the impact of some of the more recent acquisitions. And when acquisitions come into our portfolio, inevitably they come in at multiple sites, and 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. 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. 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. Okay, thank you, Jim.
spk03: Can we have the next question, please?
spk00: Your next question comes from the line of Luke Junk from Baird. Your line is open.
spk14: 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 lagged in the recovery, specifically thinking about areas like medical, which is, you know, encouragingly just starting to come back right now, or something like Comair. Can TE come a better position on the back end, given the size and scale of your organization versus, say, small competitors in those markets?
spk02: I think during this time, certainly... I think our customers have looked for and seen 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. in our space. When you talk about those two areas, you know, 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 dynamic. 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. And common error is a little bit different. You know, I think medical had a temporary pause due to procedures. You know, common error is one that, you know, has been hit hard. It's been hit hard. You know, certainly you're starting to see some aircraft, you get into dual-aisle aircraft, dual-aisle aircraft is probably further away. And in those cases, I'm not sure you're going to have as much new innovation happening, even though we do have lens on what's happening in space, certainly lower satellite As well as, you know, we're also working with some of the newer EV OTL providers, you know, depending upon what ramp that does. So I think net-net, certainly a much more bullish tone around medical, I think, in Comair because 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 out. I feel 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 of what the growth trajectory is longer term based upon what our customers do.
spk03: Okay, thank you, Luke. We have the next question, please.
spk00: Your next question comes from the line of Nick Todorov with Longbow Research.
spk07: Yeah, thanks, and good morning, everyone. When you look at your out-of-sales growth, whether it's Cisco Year 21 or Academy Year 21, 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 on this. How much is content versus pricing? How much is FX, and how much is driven by some inventory build that you talked about with customers? Thanks.
spk02: Hey, Nick, we did not grow 20% above production. So, you know, we didn't. We did have content outperformance. The market was up about double digits this year. And if you take the real element, we were double digits of content outperformance, a very strong 50% increase in EVs. certainly continued growth in even traditional cars, ICE engines. We saw content growth. Price was only a little bit. So net-net, I would just ask you to maybe do a look at your math. It wasn't 20% by any means. And once again, that content momentum, we're around the mid-70s. We've shared with you our path to get up to mid-80s based on the trends around powertrain, trends around data connectivity, certainly traditional safety features. which are very good about where we're positioned, and also how well we're positioned globally with every OEA. That's one of the special things about TE. We're essentially on every corner of the planet. Okay, thank you, Nick.
spk03: We have the next question, please.
spk00: As a reminder, if you would like to ask a question, press star, then the number one on your telephone keypad. Your next question comes from the line of Rod Latchey with Wolf Research.
spk04: Hey, this is Shreyasant 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 if 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 six 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've talked about $120 of content per vehicle for beds on average, but given the growth that you're seeing, and some of the wins that you've had, which I think have 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.
spk02: Well, I think a couple of things there. When you look at, you know, production next year, you know, the 6% that we said is content above production, we said includes any supply chain noise. So you said excluded. My comment says include any of that noise that we have on supply chain 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. 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 vehicles. 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 if electric vehicles go faster and we can win more programs, we can maybe be above that. But right now we expect actually we'll be at that 6% high end of the range. All right. Thank you, Chris. I want to thank everybody for joining us this morning.
spk08: And if you have more questions, please contact Investor Relations at TE. Thank you and have a nice morning. Thank you, everybody.
spk00: Ladies and gentlemen, your conference will be made available for replay beginning at 11.30 a.m. Eastern Time today, October 27th, on the Investor Relations portion of TE Connectivity's website. That will conclude.
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