TE Connectivity Ltd

Q1 2022 Earnings Conference Call

1/26/2022

spk15: Ladies and gentlemen, thank you for standing by and welcome to the TE Connectivity first quarter 2022 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, simply press star, then the number 1 on your telephone keypad. As a reminder, today's call is being recorded. I would now like to turn the conference over to your host, Vice President of Investor Relations, Sujil Shah. Please go ahead.
spk02: Good morning, and thank you for joining our conference call to discuss TE Connectivity's first quarter 2022 results. With me today are Chief Executive Officer Terence Curtin and Chief Financial Officer Heath Mitz.
spk17: 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.
spk02: 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.
spk01: Now, let me turn the call over to Terrence for opening comments.
spk02: Yeah, thank you, Sujol, and also thank you, everyone, for joining us today. To cover our results for our first quarter, along with our outlook for the second quarter of our fiscal 2022, As I normally do, and before Heath and I take you through the slides, I want to provide some key takeaways that frame our performance relative to the broader environment that we continue to operate in. Our results represent a strong start to our fiscal year in a world that continues to have challenges. Our first quarter builds upon the strong momentum that we demonstrated throughout our fiscal 2021. And things are playing out as we expected, including the outlook for our markets. We also continue to be excited about the growth opportunities where we have positioned TE around, as well as the strong operational performance of our teams to expand margins and drive earnings and cash flow growth as we go forward. In our first quarter, we delivered strong results in each segment. On a year-over-year basis in quarter one, we delivered sales growth of 8% and adjusted earnings per share growth of 20%, along with operating margins of 18.6%, which are up 90 basis points over last year. On an APS perspective, our adjusted earnings per share of $1.76 was a record for our first quarter. The demand environment also continues to be strong, as evidenced by the orders that we'll talk about, And our orders remained above $4 billion in the quarter. And what you'll see is this reflects strength across many of our end markets and provides a positive indicator of ongoing future growth. What we like about our performance in the first quarter is that it continues to demonstrate the strength and diversity of our portfolio. Our industrial and communications segments grew over 20% and 40% respectively. more than offsetting expected impact from the mid-teen auto production declines that impacted our transportation segment. Also, you continue to see in our results the benefits of where we strategically positioned our engineering investments around certain secular trends. This is generating market outperformance in each of our segments as a result of this positioning. The content story growth is real. and we continue to benefit from our leading position in electric vehicles, factory automation, as well as cloud applications. 20% of our auto sales are now driven by hybrid and electric vehicles, and we continue to see ongoing content growth in auto around electronification across both electric and combustion engine platforms. We are also generating content outperformance from automation and Internet of Things and manufacturing, and higher speeds and greater efficiency in the data center. And also, you know, throughout today's presentation, I think it's going to show our teams continue to execute well in a challenging supply chain environment and is clearly reflected on our first quarter results as well as our second quarter guidance. We are also pleased that we continue to generate performance that is in line with our long-term business model goals. And our first quarter results, when you look with our second quarter guidance, imply a first half growth of 5% growth in sales. and 13% growth in adjusted EPS versus the first half of last year, along with continued margin expansion. This strong performance is within a backdrop of global GDP growth environment and higher-end demand across most end markets where we have strategically positioned TE. We are seeing broad strength in capital expenditures that relate to factory automation, expansion and manufacturing capacity, cloud, and data center investment, as well as investment in renewable energy sources. If you look on the consumer side of the economy, demand for autos remains healthy, with auto production improving sequentially in our first quarter, and we continue to see content growth to drive market outperformance in both our commercial transportation and auto businesses. We continue to see expansion in our content per vehicle driven by our leading position in electric vehicles, as well as ongoing expansion of electronification in both internal combustion and EV platforms. And we clearly expect that this trend is going to continue as we move forward. You know, certainly while this demand environment is positive, we are still in a world that deals with COVID as well as supply chain challenges. The supply chain challenges and inflationary pressures that we've been discussing since the onset of COVID are slightly worse than 90 days ago, but I do want to highlight that I'm pleased with how we are managing through this and making continued progress towards our business model goals despite these ongoing factors. With the healthy demand in the current state of the global supply chains, our ability to produce will be a key factor of our near-term revenue performance. We continue to benefit from our global manufacturing strategy to produce and region, and our teams continue to drive price actions and productivity initiatives across all three of our segments. So with that as a backdrop, let me now turn to the slides and discuss some additional highlights, and I'll start on slide three. Our quarter one sales of $3.8 billion were up 8% on both a reported and organic basis. and adjusted earnings per share was $1.76, which is up 20% year over year, and a record for our first quarter, as I mentioned earlier. Adjusted operating margins were 18.6%, up 90 basis points year over year, driven by the growth and strong operational performance in our industrial and communications segments. We do continue to see a strong demand environment, which is reflected in orders of $4.3 billion, And I'll get into more details on the orders on the next slide. Looking at free cash flow, we generated approximately $370 million of free cash flow in the quarter, and we returned approximately $410 million to shareholders through buybacks and dividends during the quarter. And moving away from financials for a minute, I do want to highlight that we continue to be recognized for our ESG initiatives. and we were named to the Dow Jones Sustainability Index for the 10th consecutive year, along with our recent ranking in the top 20 of Investor Business Daily's 100 Best ESG Companies. I think importantly, we remain committed to our goal of decreasing Scope 1 and Scope 2 greenhouse gas emissions by over 40% on an absolute basis by 2030, which is above and beyond the 27% reduction that we've already made over the past decade. And while I've talked about our team's performance about their execution, let's face it, to make these sustainability investments is also how our employees engage in that as well. And I'm very pleased with the progress of how our employees are engaging as we drive sustainability initiatives across TE. So let me turn to guidance for the second quarter. And we expect that the strong performance of our portfolio to continue in our second quarter with approximately $3.8 billion in sales and And this will be up 2% on a reported basis and 3% organically versus the prior year, despite the year-over-year decline in auto production. We expect double-digit growth in both industrial and communication segments to drive our second quarter growth, once again reinforcing the diversity of our portfolio. We do expect adjusted EPS to be approximately $1.70 in the second quarter, and this will be up 8% year-over-year. So now let me get into the order trends and markets, and if you could please turn to slide four where you see our order progression by our segments. For the first quarter, our orders were $4.3 billion, and our book-to-bill was 1.13, and we saw year-over-year and sequential growth in our industrial and communication segments. In our largest segment, transportation, Order levels came in as we expected, and our book to build was 1.0, which aligns closely to auto production trends. Global auto production came in slightly better than we expected in the first quarter at approximately 19 million units, and we expect that auto production will remain at a similar level in the second quarter, reflecting roughly a 5% reduction year-over-year in auto production. We continue to anticipate that auto production will improve in the second half compared to the first half and will return to year-over-year growth as we move through 2022. In addition to production, the trends around content remain strong, and we continue to expect outperformance to be at the high end of our four to six range in 2022 as we continue to benefit from increased electronification and higher production of electric vehicles which we expect will be up over 30% globally this year. Now, when you think about transportation, there are certainly ongoing challenges with semiconductors and the broader supply chain that continue to be a governor for our auto customers' ability to produce. When you look beyond the near-term noise in the auto supply chain, we continue to see a favorable setup for longer-term auto production growth. with healthy consumer demand and dealer inventories that remain extremely low. So let me turn to the industrial segment orders. And what's nice is for the first time since the onset of COVID, sequential orders strengthened across all businesses in the segment. We see an improving backdrop with increased capital expenditures for factory automation, manufacturing capacity related to electric vehicle infrastructure and semiconductors, as well as investments in renewable energy, And this increased capital investment benefits our industrial equipment and energy businesses in the segment. On top of that strength, we've seen improved order trends in our Comair and medical businesses that we expect to begin to see favorable year-over-year revenue comparisons in those businesses later this fiscal year. If you look at our communications segment, Our order growth in the first quarter was driven entirely by our data and devices business and reflects an increased outlook for cloud capital expenditures, as well as our ongoing share momentum. We also see with our D&D customers, they're placing orders out for delivery beyond the current quarter due to the broader supply chain uncertainty. While we continue to see favorable head market trends in D&D, we are seeing a moderation of the appliance market as we expected, particularly in China, and we would expect softening in the appliance market from the first half to the second half of our fiscal year. With that overview of orders and markets by the segments, let me add some color to what we're seeing organically from a geographic perspective, and I'll start on a sequential basis. In Asia Pacific, and I'll exclude China here, those orders were up 18%, while in China, orders were up 4% sequentially. And outside of Asia, orders were essentially flat sequentially. On a year-over-year basis, organically again, Asia Pacific, excluding China, orders were up 18%. North America and China orders were up 17% and 2% respectively. And we saw a slight decline in Europe of approximately 4%. So with that backdrop around orders and markets, let me get in to briefly discover year-over-year segment results. And that's laid out on slides five through seven. And as I added a lot of color, I'll just hit the high points here. In transportation, our sales were down 2% organically year-over-year, with declines in auto partially offset by growth in commercial transportation and censorship. Our auto business declined 6% organically versus auto production declines that were in the mid-teens. Once again, you see the separation of our sales performance versus the market due to the content growth. TE's technology and products are enabling high-voltage architectures and applications with every leading customer, and 20% of our sales are now driven by hybrid and electric vehicle platforms. In commercial transportation, we saw 11% organic growth without performance versus the market due to content growth drivers that are very similar to our auto business. And in sensors, we saw 5% organic growth driven by industrial applications as well as new ramps and transportation applications. For a margin perspective in the segment, adjusted operating margins came in as we expected at 18.2%. Now, moving to industrial segment results, our sales increased 18% organically year over year. In the industrial equipment area, we were up 40% organically with strong growth in all regions, and we're benefiting from the increased capital investment and spending across the globe. In our energy business, we saw 17% organic growth that's driven by our increased penetration and renewable applications that we've talked about with you. And in our medical business, it grew 8% organically as we're starting to benefit from the recovery and interventional procedures. And in our aerospace and defense business, our sales declined 3%, which is organically driven by the market dynamics in that space, but certainly our orders show a more positive outlook as we move forward. From a margin perspective in an industrial segment, our adjusted operating margins expanded year over year by 130 basis points to 14.8%, driven by higher volume, as well as the strong operational performance by our teams. So let me turn to the communication segment. I just want to start that, you know, you look at the performance of both businesses as well as the margin performance. It just shows that our teams continue to execute while capitalizing on growth trends in the markets we serve. Sales grew 40% organically year over year for the segment with strong growth in each of our businesses, as you can see on the slide. In data and devices, we saw strong growth across all regions, driven by content growth and share gains in high-speed cloud applications, as our customer moved towards 400-gig and next-generation chip platforms, as well as growth in server and artificial intelligence applications. In appliances, we saw growth in all regions with continued share gains as we continue to differentiate with our customers around our global manufacturing network. And from a margin perspective, the performance was outstanding, with another record in adjusted operating margins of 27%, which was up 950 basis points year over year, which was strong performance in the prior year as well. If you just take a step back and you look across the segments, our teams continue to capitalize on the growth trends in their end markets, demonstrating the diversity of our portfolio, and delivering operational execution with both pricing actions within a challenging supply chain environment. So with that as an overview, let me give it to Heath, and he'll get more details on the financials and our expectations going forward. Thank you, Terrence, and good morning, everyone. Please turn to Site 8, where I will provide more details on the Q1 financials. Adjusted operating income was $712 million with an adjusted operating margin of 18.6%. GAAP operating income was $672 million and included $24 million of restructuring and other charges and $16 million of acquisition-related charges. We continue to expect restructuring charges of approximately $150 million for the full year as we continue to optimize our manufacturing footprint and improve the cost structure of the organizations. Adjusted EPS was $1.76, and GAAP EPS was $1.72 for the quarter, and included a tax planning-related benefit of $0.05. Additionally, we had restructuring, acquisition, and other charges of $0.09. The adjusted effective tax rate in Q1 was approximately 18%, and for the second quarter, we expect our tax rate to be very similar to Q1. We expect the adjusted effective tax rate for the full year to be around 19%. Importantly, we expect our cash tax rate to stay well below our adjusted ETR for the full year. Turning to slide 9, our results you see on the slide reflect the strong execution of our teams and the diversity of our portfolio. As Terrence mentioned, each segment contributed to the strong start to our fiscal year. Sales of $3.8 billion were up 8% on both a reported and organic basis year-over-year. Currency exchange rates negatively impacted sales by $45 million versus the prior year, more worse than expected. We expect currency exchange rates to be a sequential headwind from Q1 to Q2 and a year-over-year headwind of approximately $110 million in the second quarter. And if the dollar remains at current levels relative to other currencies, FX could be a headwind of approximately $300 million to $400 million for our full fiscal year. Adjusted EPS of $1.76 was up 20% year-over-year and represents a record for the first quarter, as mentioned earlier. Adjusted operating margins were 18.6% and expanded 90 basis points versus the prior year. And the incremental flow-through on the adjusted margins on revenue growth were approximately 30% in Q1, on a year-over-year basis. I am pleased with our performance given the inflationary pressures we are seeing and the challenges in the broader supply chain. And as Terrence mentioned, we are pulling pricing levers across the businesses to help offset those inflationary pressures. Turning to cash flow, in the quarter, cash from operating activities was $532 million. Free cash flow for the quarter was $373 million. The year-over-year trend in free cash flow reflects the strategic inventory builds to meet anticipated customer demand, as we mentioned last quarter. In Q1, we returned approximately $410 million to shareholders through share repurchases and dividends. As noted in our recent proxy filing, we proposed a 12% increase to our dividend that we expect to be approved by shareholders in March. We remain committed to our disciplined use of capital, and over time, we still expect two-thirds of our free cash flow to be returned to shareholders and one-third to be used for bolt-on acquisitions. So before we go to questions, I want to reiterate that we are executing well despite the challenges we discussed in the broader supply chain. Our results for the quarter demonstrate the strength and diversity of our portfolio with strong operational performance from each of our three segments. The demand environment continues to be strong as evidenced by our orders, which reflects strength across many of our markets and provides a positive indicator of future growth. You are continuing to see market outperformance in each of our three segments as a result of our strategic positioning around secular trends. We continue to benefit from our leading position in electric vehicles, factory automation, and cloud applications. We continue to generate performance that is in line with our business model goals, and we are excited about the growth and margin expansion opportunities as we go forward. So now let's open it up for questions. Rob, can you please give the instructions for our Q&A session?
spk15: Certainly. At this time, I would like to remind everyone, in order to ask a question, press star, then 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, please press star 1 again to return to the queue. And your first question comes from the line of David Kelly from Jefferies. Your line is open.
spk04: Hi, good morning, Terrence, and thanks for taking my question. Maybe starting with the order trends that appreciate all the color, industrials, communications, clearly accelerated, transportation softened. Can you just talk about How are you thinking about the order implications for revenues go forward and maybe how we should think about some of the supply chain dynamics impacts on those orders as well?
spk02: Yeah, thanks, David, and good morning. I think, first off, you're exactly right. You know, orders accelerated, and I said in my comments, We expected orders in automotive to step down, and even last quarter when we talked to you, we had extreme content outperformance in the fourth quarter that we knew that the supply chain was going to be a little bit ahead and some inventory was out there. So the orders coming in that we expected we really like in transportation, and to your point where we saw the re-acceleration was very much the broad acceleration in industrial and the D&D acceleration that I mentioned earlier. You know, so when you take that, that we see the re-acceleration and tying to trends like we all see around capital spending and industrial as well as Comair and medical accelerating for the first time, you know, really during COVID, you know, sort of gets into the broad industrial cycle spending that we see. And in communications, I think what it pertains to, you know, we sort of have a tale of two cities there. We have D&D that stays very strong. Cloud CapEx actually has moved up a little bit, but I would also say our teams are winning bigger share programs around some of the applications I talked about. I think you can expect that D&D is going to be strong, and we do expect our appliance businesses to step down in the second half of the year versus the first half of the year that I think we telegraphed just as that gets to a more normal cycle. So I feel like the order reduction in automotive is very natural. The book to build being closer to one is more natural. And I would also say as we look at some of the more predictability of what we're seeing out of our customers, it does set up to, you know, it feels like around this 19 million units can be a baseline to grow off of. So it was nice to see automotive production go from 16 million units in our fourth quarter to up to 19 in our first quarter, and it feels like, you know, as the supply chain gets a little better, it has potential to move up as we move through the year and return to production growth. So, you know, net-net, I actually think it plays out very well for how we think about how the year can continue to improve and the demand environment stays strong very broadly, and also it's very global, as I said in my comments by region.
spk01: Okay, thank you, David. We have the next question, please.
spk15: Our next question comes from the line of Amit Daryani from Evercore. Your line is open.
spk12: Thanks a lot, and good morning, everyone. The question really is on the EPS performance, and there's a fair bit of moving parts here, but I was wondering if you could perhaps put some context around the EPS performance we're seeing specifically if you could talk about what really drove the beat in December quarter from your perspective would be helpful. And then as I think about March quarter, you're talking about EPS being slapped, but maybe just talk about what other puts in place there as well.
spk02: Thanks, Ahmed. This is Heath. I'll take that. Listen, we were pleased with our results, and if you recall what our guide was for the quarter going into the December quarter, we ended up beating on the top line by a bit more than $100 million, and that was largely driven by the higher auto production numbers that Terrence just referred to relative to our guide. So we were pleased with that, and we were pleased to see the flow through on that incremental revenue. In terms of the Q2, you know, listen, largely the top line is going to be flat sequentially as we anticipated. We expect auto production to stay roughly flat at roughly 19 million units. You know, there is some things in terms of the strengthening dollar that work against us in terms of a sequential headwind with foreign exchange. And then if you look at the segments, we think industrial will improve modestly, but we do see communications coming down sequentially, mainly due to appliances, as Terrence referenced in his prepared remarks. So from an EPS perspective, we don't expect our communications business to stay at 27%. We've talked in the past that that's a bit overheated, particularly given the amount of appliance that's in there. But as we move forward, we expect that to normalize some. And then there's some non-operational impacts, foreign exchange and tax rate are headwinds sequentially. So I think, you know, when we look at it, it looks like a very similar quarter, minus some of those operational things with some puts and takes on the top line. We have the next question, please.
spk15: Our next question comes from the line of Joe Giordano from Cowan. Your line is open. Hey, good morning, everyone.
spk13: Good morning. Hey, Terrence, you mentioned that the supply chain internally for you guys was worse than it was 90 days ago. Can you maybe try to scale what the impact to your own revenue was in terms of getting stuff out the door and how that compares to the last couple quarters and what's embedded in the guide for 2Q? Sure.
spk02: Yeah, Jared, this is Heath. Listen, we talked last quarter that that number was around $50 million of sales we would have liked to have shipped if we had the material. That did worsen in the quarter. It's just north of $100 million that, again, we would have liked to have shipped had we had the raw material availability to do it. So it did get modestly worse in the quarter and certainly something as we reflect and look forward into our second quarter. We anticipate a similar kind of level. Thank you, Joe. We have the next question, please.
spk15: Your next question comes from the line of Chris Snyder from UBS. Your line is open.
spk08: Thank you. My question is on pricing in the quarter and forward expectations for price cost, and then particularly for the transport segment, where I know auto pricing can come through maybe a bit slower than the other segments. And then also, are there any other puts and takes on transport margins through the rest of the year we should be thinking about as ice volumes rebound and, you know, maybe any restructuring benefits? Thank you.
spk02: Sure, Chris. Thanks for the question. And, you know, when you look at it, you know, pricing and TE was positive across the company in the first quarter. And we do expect it will be positive this year overall. for the year, and certainly, as your point, in places like transportation, that is very much contractual negotiations, and those discussions do lag a little bit. So that will benefit our margin as we get through later in the year, as well as the volume to help offset some of the headwinds that we've talked about being a little bit worse. I think the one key I just want to remind everybody when we talk about prices, our normal business model, because we do play in the technology space when we win programs, is when we ramp them, we're going to get productivity back to our customers, and that really varies by our segments. But we typically run in the 1% to 2% price erosion model, and right now we're running in the low single-digit plus price. And I think that demonstrates, you see it in the margin, it also demonstrates that how our teams are executing, and it's across all our segments. So in some markets, we can get more than others. But I do expect we're going to be positive for the year. And we continue, as we see these inflationary effects, continue to implement more price actions. And, you know, I would say price isn't completely offsetting all of the inflation and supply chain challenges, but it's also the other elements of our business model are also driving the results. So I do think it's a combination. And to the second part of your question on automotive, I think the one thing that we're going to continue to see is as volume moves up, you're going to continue to see that benefit. Certainly, we continue to have some of the restructuring elements that Heath talked about, and then you're also going to have some of those price elements coming in, with the headwind really being the inflationary things that I think everybody's dealing with, and I don't think we're any different. So hopefully that frames those couple questions for you. Thanks, Chris. Thank you, Chris. Can we have the next question, please?
spk15: Your next question comes from a line of Wamsi Mohan from Bank of America. Your line is open.
spk11: Yes, thank you. Terrence, as you look at the order trajectory and autos normalizing with book-to-bill closer to one, how are you thinking of that progression in June and September quarters? And more broadly, can you maybe just give some qualitative color on the rest of fiscal 22 and highlight any important headwinds and tailwinds that we should be thinking about?
spk02: Wamsi, thanks for the question. I have to start with we aren't given guidance for the year, certainly the environment that we've been in. But I think some of the color I gave on the slides and the orders is we do expect with the order trends we've seen, we've seen some markets accelerate that haven't accelerated in a long time, like Comair and Medical. We also see auto turning the corner in production, and certainly we have to see that come to fruition later in the year, but it feels better than where we were six months ago. And we continue to see places like D&D and industrial equipment, the orders remain strong. And in some cases, the confidence of people placing orders out, I also give a positive indicator here. that they're planning out more, knowing that we all think that supply chain challenges around semis and other components are going to be with us. So I do think, you know, you can expect as we move through the year that it wouldn't be reasonable to expect a step up due to transportation, due to industrial in the second half of the year, with communications, you know, coming down a little bit due to the appliance comments that Heath and I made. I think when you think about beyond the businesses, I think the one headwind that he talked about was, you know, the dollar strength thing is a headwind for us year over year. It actually accelerated, so sequentially we're feeling it. But on a year over year basis, you know, to our growth, that's going to be about a $300 million to $400 million headwind on currency exchange on a full year basis that I do think as you model, you want to keep in front of yourself.
spk01: Okay. Thank you, Wamsi. We have the next question, please.
spk15: Your next question comes from the line of William Steen from Truist Securities. Your line is open.
spk17: Thanks, guys, for taking my question. I'm hoping you can help us better understand the dynamics, maybe one level deeper in the automotive end market. I think a legitimate fear that investors might have is that in the last year, as there have been shortages, we've seen the OEMs sort of shift their mix to the most, let's say the highest profit margin models, which are the higher end models and the higher end trims within the models. I'm wondering if you have visibility into what that trend might be this year as supply availability comes on. Is it going to be enough to cause mix to shift back towards more And then similarly, the mix between EVs and internal combustion engines, do you expect that to continue sort of this similar mix during this year as well, similar to what we saw last year?
spk02: Yeah, so you have about three questions and you're one question, so that's pretty creative, Will, so I appreciate that. So let's talk about content overall, I think, and then I'll try to click into some of your sub-questions. I think the first thing we have to keep in perspective is where is auto production versus where is our revenue back to pre-COVID? Auto production is still off 10% globally, and our revenue is up well above 10%. So when it comes to content, we feel very good about our content, and I think you've seen that content outperformance. Now, over this period, you mentioned some, but there's also been the supply chain dynamic. And, you know, every quarter, I know everybody wants us to be right on top of our range, and sometimes we're above and beyond. But we feel good about the six points of overperformance this year, including supply chain normalization that we were very transparent with you last year. We probably got some extra revenue last year as supply chains were trying to get back to normalization, people secure inventory. And I think even you look at our first quarter, where production went from 16 million to 19 million units, our revenue was flat. And it really was some of that supply chain excess got sucked up. And we think you're going to see that as we get back to normalization. So that would be a little bit of a headwind. But when you think about what OEMs are building, they are prioritizing. First, I would say it's not mix and trim. It's electric vehicles. There's demand for the electric vehicles. They're trying to keep up on that growth. And in certain parts of the world, there's regulatory conditions that they get penalized if they don't get these electric vehicles out. So I think one of the things, first off, is I've talked about the growth of electric vehicles. It's clear our content is growth. It's 2x an electric vehicle. That has not changed. And we're benefiting from that. And as electric vehicles continue to accelerate, we'll continue to get the benefit of that. we have also seen and as i talked about last quarter you know we do benefit from features as well as increased electronics on a combustion engine too so our content continues to increase on combustion engines not just electric vehicle now let's face it one of the bigger drivers is the electronics that help a combustion engine drop be more efficient That isn't a trim package. That is, guess what, for those that continue to make combustion engines and people have demand for them, how do you make those more fuel-efficient? Drive electronics, and that's some of the electronification. We're also seeing increased communication and infotainment. That is things that benefit us around the data side, and certainly if automotive OEMs can add features that customers pay for, we always get the trim plus or minus, but that's not new. They're doing what they can. So I would tell you when we think about content, how we've stepped up, I think it's clear where our content position is. I also just want to say our globalness is unique, and I know I say this every call, but And when you look at it, we benefit from electric vehicle everywhere, not in one region, not in one customer. And I think that's a pretty special position that's differentiated. And we feel very good about the six points of outperformance we're going to get this year. But in a certain quarter, you can get elements of supply chain. So I would just ask everybody, when you see overperformance or underperformance, please don't overreact to it because supply chain has been very dynamic as auto production is trying to get to a more normal level. and let's face it, hopefully get up past the supply chain crisis and get much higher than where we are here. Okay, thank you, Will.
spk01: Can we have the next question, please?
spk15: Your next question comes from the line of Mark Delaney from Goldman Sachs. Your line is open.
spk01: Yes, thanks very much for taking the question. I was hoping to also ask on the transportation segment and specifically around the bookings. You commented lower production was a factor in the bookings reduction as well as a degree of inventory. Could you comment if you think you can hold this level of absolute bookings in transportation and maybe even build off of it from here, or is there the potential for bookings to need to step down sequentially to give us that inventory that may still be out there? Thank you.
spk02: No, it's a great question. I actually think you're going to see a booking level that's moving much more with production. So I think you're going to continue to see booking levels stay closer to probably around that one book to bill than where we were at certain points of the recovery. And I think that's a sign of stabilization. And I think you also see it in the levels of how OEMs need to bring production down. It has become a little bit more stable, even though the supply chain still is not flowing as freely as we would all like. But I do think you're going to continue to see pretty solid order performance, and we've even seen it as we've started our second quarter, order staying pretty strong and solid across all three regions of the world. Okay, thank you, Mark. Can we have the next question, please?
spk15: Your next question comes from the line of Jim Suba from Citigroup. Your line is open.
spk07: thank you uh can we talk about average selling prices i know in your prepared comments in the q a you mentioned that you're up most single digits compared to normally down a couple percent is that specifically towards transportation or across your entire portfolio because i'm curious about is there a difference in transportation say versus industrial and other and markets and those afps you know are they changed contracts and now they're long-term and you have visibility with it, or is it more just some added adders for like supply chain inefficiencies or higher copper costs? If we could talk some more about ASDs. Thank you.
spk02: Sure, Jim. And good morning. First off, when you think about the pricing and, you know, you captured it right, we are low single digits on the pricing side. And, you know, in CS and IS, about half of that goes to distribution. So we've been, you know, raising prices since last January, and that'll continue. Certainly, that impacts the smaller customers. When you get into the larger customers, whether it's CS, IS, or TS, they are more contractual agreements. So in places like auto, they will be later. But I would tell you pricing is across all three segments. It is connected to the headwinds and inflation we feel in the different products across the segments. And in different segments, in some cases, it's full recovery. In other cases, it's partial. And it is elements of do we have some adders, but also in those that are contractual, it's probably more pure price. So it reflects the diversity of the markets we serve. I'm pleased with the progress we have today. And, you know, in some cases where they're contractual, they'll come in a little bit later in the year than where we have in places like the channel that are pretty much within three months and more transactional. Okay, thank you, Jim. Can we have the next question, please?
spk15: Your next question comes from the line of Scott Davis from Mellius Research. Your line is open.
spk16: Good morning, guys. Good morning, Scott.
spk15: Good morning.
spk16: I don't want to beat a dead horse, and this has been asked in a couple different ways, but the integrity of orders, most people focus kind of on auto. What about the non-auto end markets? Are there notable inventory builds that you see? Have you had to put some customers on kind of allocation, thinking kind of medical where guys are scrambling around trying to get components and stuff in particular? But I'm sure there's other end markets too where there's – perhaps customers that aren't used to not being able to get what they want when they want, if you know what I mean. So maybe a little bit of color around that would be helpful. Thanks.
spk02: Yeah, hey, Scott. So I'm going to focus around IS and CS to your question. The one element that we've seen when you look at these orders is, I think, first off being, you know, we don't see inventory building up. um and let's take you know in those two segments a big part of our business goes through distribution our distributors are probably where they typically run 180 days at any time they're only at 150 days and certainly they would like to get to 180 days and we can't we have not been able to get them up to 180 days so their inventory levels are still below from a turn and a velocity below pre-covered and certainly they're trying to fill a role that they normally play. When you look at the larger customers, what we see is a scheduling out, I think a recognition that the supply chain is going to remain tight. And for those places where we typically would have had businesses where more orders would come in the current quarter and go out, we see our customers scheduling out and out quarters. And, you know, we see that in data and devices. I think that's an element of, as well as industrial equipment, those that we've seen extreme strength. You see our customers planning way out beyond the current quarter, beyond two quarters. And I think in some cases they're looking at certain other components like semiconductors that in some cases you have lead times that are 50 weeks. That used to be 26 weeks, and they're making sure and doing better planning to plan out around the long tent and the pole. So you see that in the orders and industrial equipment. You see that in data and devices. And then in those markets that are just recovering, like medical, like Comair, I would tell you they're just starting to move forward after there's been inventory work off in both of those markets. Those markets got hit hard. certainly there was excess inventory in the supply chain for those that follow calm air you know boeing and airbus builds have been known but what we like to see is that our orders are finally showing some of the elements to make sure we can pick up so i still think there's a couple markets that i think we could see further acceleration of orders as we move through the year and they don't feel elevated at all yet but they they show initial signs of strengthening So I hope, Scott, that gives you some color across the different industries we play, especially in IS and CS, since I did talk a lot about TS already in the transportation space.
spk01: All right. Thank you, Scott. We have the next question, please.
spk15: Your next question comes from the line of Samik Chatterjee from J.P. Morgan. Your line is open.
spk00: Hello. This is Manmohan facing on for Samik Chatterjee. Thanks for taking my question. So I just wanted to ask, Mike, you said that orders were down in Europe. Can you please help us understand what exactly is driving this trend in Europe particularly?
spk02: Thank you. Yeah, in the Europe orders, the Europe orders, that decline that we talked about was very concentrated around automotive products. So, you know, when you look at automotive, that drove the decline. In the industrial space, as well as in our communications markets, which are smaller there, we had very strong growth. But European automotive is an important position for us. It's certainly our leading business in Europe. And those orders were softened a quarter, and that drove the decline.
spk01: Okay, thank you. We have the next question, please.
spk15: Our next question comes from the line of Joseph Spapp from RBC Capital. Your line is open.
spk03: Thank you. Good morning. I wanted to ask about your strategic inventory build. Is that something you'd expect to work? off over these coming quarters or do you still need to do more there or you know just given the um general sort of supply chain uncertainty do you expect your inventory levels to remain at higher levels uh than prior at least until we have a little bit of easing in these questions
spk02: Yeah. And Joe, this is Heath. Most of our strategic inventory bill has come in the transportation space around automotive and commercial transportation, where, as you recall, we built up quite an order base last fiscal year. And even as things normalize back to a book to bill, there's still A very healthy backlog to work down. And so some of that is how our customers are scheduling activity and our ability to get ahead of that so that when we see their ramps, that we're going to be there and not going to cause them any park shortages. In terms of timing, some of that is going to be tied to auto production recovery. I could see that starting to moderate in terms of the inventory levels as we work our way through and get into the second half of our fiscal year, and that's something to stay tuned. But it really builds on the confidence of what we have, what our customers are telling us, and how they're scheduling things out. And it depends on which part of the world that we're in. Given some of our production challenges in terms of raw material availability, it's just made sense to build up where we can and be ready for those customers. The other thing to keep in mind is, you know, we've been talking about ongoing restructuring. There are a couple of plants that come offline later in our fiscal year, and there are buffer builds associated with those. And, again, those are largely in our transportation business. So that's all kind of part of the timing of this activity. Okay. Thank you, Joe. We have the next question, please.
spk15: Your next question comes from the line of Luke Junk from Baird. Your line is open.
spk14: Good morning. Thanks for taking the question. Morning. This could be a question maybe for Terrence or Heath. I wanted to ask about your gross margin performance in the first quarter. Of course, there's been a lot of discussion today about supply chain and inflation relative to sales and pricing for the company. But I was hoping you could put a finer point on the company's gross margin performance in the quarter. Thank you.
spk02: Sure, Luke. Thanks for the question. Listen, our gross margins for the quarter on a gap basis, probably what you're seeing, show the low 32s. But the reality of it is, inside of that, there's some non-cash charges that were associated with the restructuring activity of a plant closure. So that rolled through that line. So we're actually running closer to our 33% just under that on an adjusted basis, which is consistent with with what I think you would expect, and as we move a little bit higher through the year, we would be a tad higher. We're absorbing the earning acquisition, though, and that has a bit of a headwind on gross margins, and the team is actively integrating that and working through getting those numbers up. So there's a little bit of noise relative to what you're going to see in a gap versus how we view it, but that really is a one-time charge that was taken. Hey, thank you, Luke. We have the next question, please.
spk15: Your next question comes from the line of Nick Totara from Longbow. Your line is open.
spk10: Yeah, hi, guys. Good morning.
spk15: Good morning.
spk10: Question, I wanted to double-click and maybe clarify. The 6% content outgrowth you're expecting for fiscal year 22 in auto, does that include the impact of FX? Because you clearly are seeing a bigger impact than you anticipated a quarter ago.
spk02: No, that would not include FX. So that comment's organic. You know, that would include anything we expect to happen in the supply chain this year, but that's really an organic comment. FX, we sort of give you that separately. Okay, thank you, Nick.
spk01: We'll get to the next question, please.
spk15: Our next question comes from Matt Sheeran from Stiefel. Your line is open.
spk05: Yes, thanks. And good morning. Terrence, I wanted to ask another question regarding the strength of devices and specifically the cloud computing. Could you just talk about the customer base there? I know there's a big concentration of big hyperscale players, but how diversified is that market? And as you're gaining share, is it new players or just winning with existing customers?
spk02: So when we talk about that customer base in the cloud, it is the hyperscalers of the planet. So when you look at it, that is still a concentrated customer base overall, but it is still – it's broad across all of them, and our market share is strong across all of them. So it isn't like we're only tied to one of them, but it is very broad. And really what's nice, and I said on the call, is as they're pushing the speeds up to 400 gig, clearly as they're trying to keep up with the artificial intelligence, which creates more compute and storage clearly, there are things that they're looking to us to bring our technology to, and those wins are across the base of them. So, pleased with the performance there. And, you know, I think it really goes back to how we repositioned our D&D business around the ultimate high speed versus what we were five, ten years ago. And it just shows the ongoing share momentum and the technology we bring to that space. And clearly, when you look at the margin, you know, our team's performing very well, you know, in that segment.
spk01: Okay. Thank you, Matt. We have the next question, please.
spk15: Your next question comes from the line of Shreyas Patel from Wolf Research. Your line is open.
spk06: Hey, thanks so much for taking my question. So maybe just following up on the early one regarding the data and devices. So, you know, just how should we be thinking about the structural growth rate that we could be seeing in that segment? I mean, you know, obviously this quarter you're up almost 50%. But we've been seeing very strong growth, really, every quarter for the last several quarters now. So I'm just trying to understand how we can think about that. And then for communications overall, I think you've talked about high team margins previously. And so how should we think about that settling out against the 27% that you did this quarter?
spk02: So let me take the first half, and I'll ask Heath to take the second half. You know, when I think about it, and as I said to Scott's question a little bit earlier, you know, some of the orders we're seeing in D&D right now are also scheduled out to make sure our supply is in place for those customers. I think you're going to continue to see our D&D business run at the high revenue levels it's at. you know, throughout this year. And, you know, really how Cloud CapEx builds off of that will be very important as we look into 23 and beyond. But I do think when you continue to see the needs as well as the efficiency that needs to be driven out of these data centers, I feel very good about the momentum there as well as the pipeline wins that we have. So let me let Heath talk about the margin side. Yeah, and listen, we're very happy with the margins that the CS segment has produced here, going back not just to the quarter we just reported, but really going back over the past year, year and a half. And the team has just done an exceptional job. The reality of it is there is a little bit of a mixed element to this as well, in that we do have higher margins, modestly higher margins in our appliance business relative to our data and device business. And, you know, Terrence talked about the strength in data devices, but we do see a little bit of correction that we've expected in appliances coming here in the second half of our fiscal year. And so there is a bit of a mixed impact in terms of how that comes down. Now, your question around, you know, what we've said from a business model perspective in terms of high teens, you know, which if you go back many years ago, was there just an aspiration to get to the high teens for the segment? is so much stronger. You know, listen, more to come. We get it, but I say still the high teens in a normalized environment still makes sense, and the team's, you know, just doing a terrific job, and we'll see where we end up longer term. Okay, thank you, Chris. It looks like we have no further questions, so I want to thank everyone for joining us this morning. If you do have any questions, please contact Investor Relations at TE. Thank you, and have a great morning.
spk15: Ladies and gentlemen, your conference will be made available for replay beginning at 11.30 a.m. Eastern Time today, January 26, on the Investor Relations portion of TE Connectivity's website. That will conclude your conference.
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