Q1 2021 TE Connectivity Ltd Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the T E connectivity first quarter earnings call for fiscal year 2021. At this time all lines are in a listen only mode. Later, we will conduct a question and answer session to ask a question during the SaaS.
You will need to press star one on your telephone as a reminder, today's call is being recorded I would now like to turn the conference over to Warehoused, Vice President of Investor Relations <unk> Shah. Please go ahead.
Good morning, and thank you for joining our conference call to discuss T. E connectivity first quarter results with me today are Chief Executive Officer, Terrence Curtin and Chief Financial Officer Heath Mitts.
During this call we will be providing certain forward looking information and we ask you to review the forward looking cautionary statements included in today's press release.
In addition, we will use certain non-GAAP measures in our discussion this morning.
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 <unk> Dot com.
Due to the large number of participants on the Q&A portion of today's call. We're asking everyone to limit themselves to one question to make sure. We can give everyone an opportunity to ask questions. During the allotted time we.
We are willing to take follow up questions, but ask that you rejoin the queue. If you have a second question now let me turn the call over to tariffs for opening comments.
Sure Joe.
And thank you everyone for joining us today to cover our results for our first fiscal quarter and also our expectation for our second fiscal quarter of 2021.
Before I get into the slides I would like to share some perspective on our first quarter.
As you will see the result, we are benefiting from our diverse portfolio and are continuing to execute on our margin expansion plans.
While markets have been very dynamic over the past year, we are seeing improving conditions across the majority of them.
Against this backdrop, we are demonstrating not only the resiliency of our operations, but also the ability to drive organic content growth ahead of our markets, while expanding operating margins and demonstrating strong free cash flow generation that is inline with our business model.
We are positioned to continue to benefit from secular trends and growing markets, while driving the margin expansion plans that we've highlighted to you.
And Youll see the benefit of these efforts in our first quarter results as well as our guidance for the second quarter.
Yeah.
With that as a quick backdrop, let me now frame out some of the key messages of today's call.
First I am very pleased with our execution in the first quarter and I believe our teams delivered strong results.
We delivered sales growth of 11% and adjusted earnings per share growth of 21% year over year, demonstrating the strength and diversity of the portfolio and the benefits from our operational improvements.
Our sales were ahead of our expectations in each segment, but with the greatest outperformance in transportation, where we continue to generate strong content growth from electrification of the powertrain as well as increased data in the vehicle.
Our adjusted operating margins expanded 190 basis points year over year to 17, 7% with margin growth in both transportation and our communications segment.
And a slight decline in our industrial segment, where we maintain mid teens margin performance. Despite a sales decline.
Yeah.
We continue to demonstrate our strong cash generation model with our quarter, one free cash flow being at a first quarter record of approximately $530 million.
We continue to expect approximately 100% free cash flow conversion to adjusted net income for this fiscal year.
And as we look to our second quarter, we are expecting our strong performance to continue.
We expect sales on adjusted earnings per share similar to the first quarter at approximately $3 $5 billion of revenue and $1 47 in earnings per share.
And like in the first quarter, we again expect double digit sales and adjusted earnings per share growth year over year.
Now I'd like to take a moment to discuss our performance relative to where our markets were in the pre COVID-19 time frame of our fiscal 2019.
And we do hope this will provide a baseline for evaluating our performance and progress this year.
At the overall company level of revenue was approximately back to pre COVID-19 levels. Despite the majority of our markets being below 2019 levels and I'd like to give you some color by the three different segments.
In our communications segment.
We have seen strong improvement in our end markets and this has helped enable sales to recover above pre COVID-19 levels and.
For example in data and devices as well as in appliances. We are benefiting from continued data center build outs and home investments respectively.
In our industrial segment it is a very different environment.
We have markets that continue to remain weak as a result of the COVID-19 impacts.
Commercial air and medical markets and our sales are still well below pre COVID-19 levels.
However, what we are seeing is it does look like order patterns are indicating that we could be touching along the bottom in both of these businesses and we could see some improvements later in the year.
Yeah.
And in our transportation segment.
Our auto and commercial transportation businesses are now generating revenue above the levels. We saw prior to Covid, even though global auto and truck production is still forecasted to be below fiscal 2019 levels.
Content growth and share gains have driven the outperformance, reflecting our leadership position in these markets.
Te products and technology are designed into next generation of sustainable vehicles at every leading OEM worldwide.
The real proof of the traction as our content per vehicle progression.
In fiscal 2019, our content per vehicle and all of it was in the low sixty's and it's now trending into the low $70 range.
As consumer adoption increases for hybrid and electric vehicles, and we continue to bring more innovation to our customers. We expect our content per vehicle to expand into the eighty's overtime.
What's the price as consumer preferences continue to drive the features and the technology and.
And we will continue to benefit as vehicles become more safe green and connected driving more content for connector and sensing solutions.
While I am pleased with our results from the progress that we've made operationally I'm, even more excited about the sales growth and margin expansion opportunities that we still have ahead of us.
We continue to execute on our margin expansion plans in transportation and industrial that we started prior to COVID-19 and accelerated during the pandemic.
I'm also very proud of the margin progression in communications, which has offset the volume related pressure that we're seeing in industrial as a result of the market impacts due to COVID-19.
So now if we could turn to the slides and I'd ask you to turn to slide three to provide some additional details for the first quarter and our expectations for the second quarter.
Quarter, one sales of $3 $5 billion were better than our expectations up 11% on a reported basis and 6% organically year over year.
We had 12% organic growth in both transportation and communications with growth across all businesses in those two segments.
Industrial segment sales were down 8% organically due to the COVID-19 related impacts I already talked about.
During the quarter, we saw orders of $4 billion and this was up 25% year over year, reflecting an improvement in the majority of their end markets, we serve and I'll come back to orders in a couple of slides.
From an earnings per share perspective, our adjusted earnings per share was $1 47. This was up 21% year over year due to the strong operational performance, where we showed adjusted operating income being up approximately 25% year over year.
As we look forward, we expect our strong performance to continue into our second quarter with sales and adjusted earnings per share being similar to first quarter levels, Despite lower sequential auto production.
For the second quarter, we expect sales to be approximately $3 5 billion.
And this is up approximately 10% year over year on a reported basis and mid single digits organically.
Similar to our first quarter year over year growth will be driven by transportation and communications, partially offset by an organic decline in industrial.
Adjusted earnings per share is expected to be approximately $1 47 in the second quarter and this can be up 14% year over year with adjusted operating margin expansion included in the earnings performance.
So if you could let me turn to slide four and I'll get into our order trends that we're seeing.
For the first quarter orders were approximately $4 billion with a book to Bill of 1.15.
I would like to highlight that this level of orders reflects improvements in a number of our end markets as well as some supply chain replenishment.
As we see markets improving it is not surprising that our orders reflect the impact of supply chain being replenished after shutdowns that occurred in the U S and Europe in the third quarter of last year.
We're also seeing customers, placing advanced orders in some cases due to product constraints and the broader electronic component categories like semiconductors and certain.
Passive components.
And the guidance that we gave does factor in the impacts of the supply chain dynamics.
And looking at orders by segment.
On a year over year basis transportation and communication orders, both grew 36% with broad based growth across all businesses.
Industrial orders declined slightly year over year.
But on a sequential basis, we did see orders growth in all businesses in each segment.
So let me also add some color on what we're seeing in orders from a geographic perspective, and I'll provide this on an organic basis.
And China orders were up 33% in the first quarter with growth driven by transportation and communications.
We are benefiting from our strong position in auto commercial transportation and appliances and continue to see strong improvement across those markets in China.
We also saw a 26% year over year growth in Europe with growth in all segments.
This represents the second consecutive quarter of orders growth in Europe with some markets improving following the large drops from COVID-19 back in the middle of last year.
And in North America orders were flat with growth in transportation and communications being offset by declines in industrial.
Now what I'd like to do is touch upon our segment results briefly and I'll cover those in slides five through seven of the slides we issued.
Starting with transportation.
Our sales were up 12% organically year over year with growth in each one of our businesses.
And auto sales were up 11% organically versus global auto production growth in the low single digits.
The outperformance is driven by continued strong content growth and some benefits from the supply chain replenishing.
We are seeing gains from our leadership position in next generation products and technology and the value that we bring to our customers.
As I mentioned earlier, we are seeing strong content growth from the move to an electric powertrain and increased data connectivity as well as the continued electronic location of the vehicle.
In our commercial transportation business, we saw 25% organic growth driven by electronic vacation trends, which are helping content outperformance as well as ongoing share gains.
We are also benefiting from higher emission standards of new <unk>.
Increased.
Operator adoption of Euro five and six in China, and new emission standards in India.
We saw growth in all regions as well as all market verticals that we serve in our commercial transportation business and continue to benefit from our strong position in China.
We are also seeing increased program wins, and the electric powertrain and commercial transportation that will provide future content growth.
In sensors, we sold 29% growth on a reported basis, which included the revenue contribution from the first sensor acquisition.
On an organic basis sales increased 3% driven by growth in auto applications and.
And we continue to expand our design win pipeline and auto sensing and expect growth at these platforms continue to increase from volume.
From an operating margin perspective, this segment expanded margins by 200 basis points to 19, 4% driven by strong operational performance.
Now, let me move over to the industrial segment.
As I mentioned, our sales declined 8% organically year over year and our adjusted operating operating margins were down slightly to 13, 5%. Despite the 8% organic sales decline.
I am very proud we were able to maintain our mid teens adjusted operating margins due to the cost actions that we initiated over the past couple of years.
During the quarter the segment continued to be impacted by the decline in the commercial aerospace market with our ADM business declining 22% organically.
As I mentioned earlier, we do believe we're touching along the bottom in this business and could see improvement in Comm Air later in this year.
Our industrial equipment business was up 8% organically with growth in all regions and strength in factory automation applications.
And we continue to see weakness in our medical business with ongoing delays in interventional elective procedures have been caused by Covid.
We anticipate this to be a short term dynamic in medical that is consistent with what our customers are seeing and expect this market to return to growth as these procedures start to increase later in the year.
And lastly in our energy business, we saw a 4% organic decline driven by Covid impact on utility spending.
But we did see growth in renewable energy applications in the wind and solar applications.
Now, let me turn to the communications segment.
Where our sales grew 12% organically year over year with growth in both data and devices as well as appliances.
We do continue to benefit from the recovery in China, and Asia, more broadly which represents over half of our sales in this segment.
In data and devices, our sales grew 5% organically year over year due to the strong position, we built in high speed solutions for cloud applications.
And in appliances, we grew 21% organically year over year with growth across all regions and benefits from home investments and an improved housing market.
I would have to say our communication team continues to perform very well.
Delivering 17, 6% adjusted operating margins, which is up 550 basis points versus the prior year.
Now with that segment overview, let me turn it over to Heath will get into more details on the financials and our expectations going forward.
Thank you Terrence and good morning, everyone.
Please turn to slide eight where I will provide more details on the Q1 financials.
Adjusted operating income was $624 million up approximately 25% year over year with an adjusted operating margin of 17, 7%.
GAAP operating income was 448 million and included 167 million of restructuring and other charges.
And $9 million of acquisition related charges.
We plan for the restriction would be front end loaded this year and continue to expect total restructuring charges in the ballpark of 200 million for fiscal 'twenty, one as we continue to optimize our manufacturing footprint and improve the fixed cost structure of the organization.
Adjusted EPS was $1 47, and GAAP EPS was $1 13 for the quarter and included a tax related benefit of <unk>.
We also had restructuring acquisition and other charges of 43 <unk> the.
<unk> provided.
Yeah.
The adjusted effective tax rate in Q1 was approximately 20% for the second quarter, we expect our tax rate to be in the high teens and continue to expect an effective tax rate of around 19% from fiscal 'twenty one.
Importantly, we expect our cash tax rate to stay well below our reported ETR for the full year.
So if you'll turn to slide nine.
Sales of $3 5 billion, we're 11%, we're up 11% on a reported basis and up 6% on an organic basis year over year.
Currency exchange rates positively impacted sales by $106 million versus the prior year.
We have demonstrated in our business model execution with adjusted EPS of $1 47 up 21% year over year.
Adjusted operating margins were 17, 7% as I mentioned earlier and that is an expansion of 190 basis points.
Versus prior year I am pleased with the progress we are making in driving improvements to our cost structure and our strong operational performance.
We continue to execute on our footprint consolidation and cost reduction plans in both transportation and industrial and we are now benefiting from the heavy lifting that we've already completed and our communications segment tranche.
Transportation adjusted operating margin was 19, 4%, which is nearing our business model target of 20%.
Industrial adjusted operating margins remained in the mid teens, despite significant volume drops which demonstrates the benefits of our cost actions. We have been discussing with you over the past few years.
I'm also very pleased with the 17, 6% adjusted operating margin in communication, which.
Flex our strong operational execution that I mentioned earlier.
In the quarter cash from continuing operations was $640 million and we had very strong cash flow for the quarter were approximately $530 million, which represents a first quarter record.
As Terrence mentioned, and we returned $286 million to shareholders through dividend and share repurchases.
Our strong cash flow performance last year and into the first quarter of this year demonstrates the strength of our cash generation model and we continue to expect free cash flow conversion to approximate a 100% for the full year.
We remain committed to our disciplined use of cash and over time, we expect two thirds of our free cash flow to be returned to shareholders.
About a third to be used for acquisitions.
And before we go into questions I want to reiterate that we remain excited about how we have positioned our portfolio.
With leadership positions in the markets, we serve along with organic growth and margin expansion opportunities ahead of us.
Summarize what we've discussed the benefits of secular trends across our portfolio.
We're seeing content growth, enabling sales performance above our markets in auto and commercial transportation benefits from some market recovery in data and devices and appliances and some markets that have been impacted by Covid in the industrial segment that are now showing signs of stabilization.
We initiated cost sections, well ahead of the Covid downturn, we're seeing strong margin expansion as a result of our efforts.
We expect to continue to generate strong cash flow.
Well maintain a disciplined and balanced capital strategy and drive to business model performance.
Our focus on value creation for our stakeholders going forward.
So now let's open this up for questions Suzhou Zero could you. Please give the instructions for the Q&A session.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your thought would sound key pad.
To have time for all questions. Each participants is limited to one question. If you would like to ask a follow up question Press Star one on your telephone keypad to referring ticket queue. Your first question comes from the line of Craig <unk> you May now ask your question.
Yes, Thank you and Terrence thanks for the color on the current supply chain, China chain dynamics, maybe you can just expand on that I know, there's plenty of news around kind of bottlenecks out. There you mentioned semiconductors, just kind of a gauge of how you would frame what youre seeing in your business versus the demand out there and where we are.
And this kind of replenishment pace.
Thanks, Craig.
I would say first off I think like many things COVID-19.
The recovery is very uneven and it's impacting different businesses differently. So.
The comments I made were very much around transportation.
In markets that are soft like industrial I would tell you we still have in places like medical and aerospace inventories still being burned.
So I do think the factors I'm talking about in the supply chain are very similar to how we painted the overall picture of the three segments.
I think when you look at the supply chain and you go to transportation, though I think we ought to keep in perspective, where auto production went to in that automotive is adjusting time supply chain.
Back in the third quarter 12 million units from made that we made 22 million units on the planet I think was quicker than we all would have thought the recovery was and there will be some areas, where there will be bottlenecks as everybody recovers.
You heard that and certainly our customers have adjusted some of their production due to that and Thats reflected in our guidance, but what's nice is on top of that even though we're talking about supply chain is where consumer inventory levels are very healthy.
So when I think about what we tried to track for long term or how many cars are being bought on the planet.
It's nice to see inventory levels on the lots when you look at North America and China.
Probably being more towards the middle to low end of normal ranges, you're probably right around the middle.
It's not surprising that the supply chain being stressed a little bit due to the improving markets. We are seeing.
And some of our customers have adjusted their production and that's in our guidance.
Okay. Thank you Craig.
Thank you operator, the next question please.
Your next question comes from the line and meets or your nanny.
Lines open.
Hi.
<unk> Your line is now open.
Hi.
Hi.
I will stick to one question.
I want to say congrats on some really good execution last six months with all the way demand has recovered.
The question I would have to as you know when I look at the December quarter print in the March quarter guide, especially transportation up really strong and better than in unit production.
I think the fewer folks will have is that.
Strong first half fiscal first half for you folks could be over shipping versus end demand and OEM to just building a lot more inventory than they need.
The risk would eventually be that in the back half of the fiscal year back half.
Being a lot softer as Oems start to normalize inventory could you just perhaps talk about what are you seeing from your OEM level that gives you confidence that this isn't or building up inventory and there is a correction in the back half that we have to worry about.
I think the thing that you'll look at is certainly we have orders that are accelerating growth improving market supply chain does need to get to a normalized level, where production is I think when you look at auto production going from quarter, one to quarter. Two we do expect it to be down.
So about 20 million units in our second quarter versus 22 in the first quarter.
So that should also allow the supply chain.
Normalized since there will be a little bit less production.
And.
When we look at it is what's really nice is it's our.
Our growth is due more to content and production than it is due to the supply chain replenishment as.
As we've always told you in an individual quarter, you can get supply chain movement, one way or the other.
When I think about content per vehicle as I said on the call and really think about the $10 or so that are content increase over the past couple of years really about half of that is driven due to traditional electronic vacation of the car being more electronics and the other half of it.
Being driven by the benefit of the wins, we have in hands as well as what I'm, sorry electric mobility as well as what we've got <unk> content on the car, having more data and.
So when we look at that that's real content growth certainly inter quarter, there may be a little bit of movement is supply chain goes, but the bigger driver of our growth is content.
And that's what's really allowed our transportation segment to get back to pre COVID-19 levels on what we all know will be production. This year based upon external estimates.
Will be less than pre COVID-19.
Okay. Thank you Amit could we have next question. Please.
Next question comes from the line of David Kelly Your line is open.
Hi, Good morning, Terrence and Heath and I. Appreciate you taking my question, maybe how are you doing.
Maybe just following up on that point.
And just to be clear when you're talking about the buckets and the drivers of that content per vehicle ramp was was that in regard to the shift you've seen the low <unk> to the low seventy's and just as a follow up as we start thinking about the go for drivers to that low $80 target just curious.
What percentage of that or the mixed shift driver you expect from the electrification of EV trends specifically.
No.
What youre going to see us balance as we go up into the 80 similar late because I think one of the things. That's important is what's nice about what we've seen over the past year is the electric vehicles seems have seen.
And the test of Covid.
We talked about it last year about you had electric vehicle growth last year.
This year, we believe electric vehicles on the planet are going to be up about 50% versus last year.
Continued strong adoption in Europe, certainly the adoption that Asia is already had.
And it's kind of breakthrough 10% of global production.
Content will continue to be benefited.
By our position in electric vehicle.
But we also have to realize there's still content opportunity and traditional architecture too and those products also go into electric vehicles. So what's nice about what we talked about going to 60 to 70 day, it's going to be a similar picture as we go forward.
<unk> channel.
Where we play and the architectures on every vehicle.
It's not just electric it's also our legacy position and how globally strong we are with that position. So as we look forward.
All components, whether it be electric vehicle powertrain movement, whether it be features on elektron application of any vehicle as well as as you get more data and all of those are drivers to our content.
And.
Just in the past few years, you can see the reality of it and.
That's what we get excited about and I think it's what we get excited about as we look to for growth.
Okay. Thank you David next question please.
Your next question comes from the line and Matt Sheerin.
Your line is open.
Yes. Thanks.
Good morning.
Just I wanted to ask outside of transportation the commentary on industrial, particularly the areas that youre seeing strength, how much of that is relative to <unk>.
Hi chain inventory adjustments.
It is true demand and I know there is a.
Decent amount of distribution exposure. There are you seeing signs of good Pos or sell through and any inventory build there.
So a couple of things Matt Thanks for your question and.
When you think about distribution distribution touches both art.
CES and <unk> segments, industrial and communication segments more than transportation.
Our sales.
Into the channel in the quarter were on par with our total company sales growth, so that 6% pretty much how our sales to our channel Partners War.
El Al as you know their sellout has accelerated with some of the supply chain dynamics, they have a role to play.
That's why they hold inventory we have seen some of their orders increase but I would say, we're not over shipping indoor distributors actually their inventory levels on sort of a turn are actually.
Lower than normal so that's some of the balancing that will be occurring here as the world normalizes hopefully.
And.
Net and industrial what I would tell you while we may have some areas like in our industrial equipment that showed strength I'll go back to our medical customers are still burning some inventory and so as aerospace and defense. So net net I would not say there is supply chain replenishment of industrial that were benefiting from it.
Okay. Thank you Matt can we have the next question. Please.
Your next question comes from the line of Christopher Glynn.
Your line is open.
Thank you good morning, Chris.
Hey, guys.
Kevin.
CTV last couple of years.
I know there may be some rounding but.
It looks like maybe you're trending a little bit above your long term range I think we saw that for a couple of years in the 17 to 19 period too.
Is that range.
You know hedged or anything or commercial teams just executing better in wins or is it fleet mix that consumers are buying.
While on CP V. The range, we've always said is 4% to 6% and.
I believe that range is still appropriate long term there are assumptions in there where does electric vehicle adoption go certainly feature sets and so forth, but we feel very good about that range.
And certainly that range is not we do not limit our commercial teams to that range. So it does come back to there's always consumer preference here. It is nice that the consumer preference has been picking up the features that we're benefiting from.
And we feel very good about that 4% to 6% range above auto production going forward.
So I don't think that range changes.
And hopefully we stay towards the high end of it.
Okay. Thank you Chris could we have the next question.
Your next question comes from the line of Scott Davis Your line is open.
Great.
Morning, guys, Hey, Scott.
Nice to hear your voices hope you're well.
Yeah.
Anyway. So I wanted to just ask you for a little bit of an update on first sensor.
What kind of your early read on what Youre getting out of it.
Okay.
Any details you can provide there okay great.
Sure. Thanks, Scott This is heath.
<unk> the question.
Sure first sensor, we own a little over 70% of it still.
There's a given the.
German public company takeover dynamics, Theres still a bit of a tail in terms of us acquiring the remaining.
25% to 30 percentage points of the of the business with owners.
But within that first sensor is is behaving as we would expect it to where we have.
Market overlap, which is pretty considerable whether that's in auto general industrial medical applications.
It's trending right as we would expect as we see in other parts from with our sensor and our connector business. So everything's on track there now you know.
It's given us about $50 million or so a quarter of $40 million to $50 million a quarter of revenue and I would say that.
Some of the work that we need to do relative to some of the operational synergies footprint consolidation things not just on their end, but things that will eventually move.
Moving to their facilities from our existing sensors business is still ongoing.
So we're not expecting a lot of Bottomline support. This particular, this particular year, but trajectory still looks good as we move forward.
Alright. Thank you Scott next question please.
Your next question comes from the line of <unk> Mohan.
Your line is now open.
Hey, this is Daniel asking on behalf of Onesie can you just talk about kind of your position in the broader <unk>.
Electric vehicle market and kind of key differentiators for Keith.
So first off thanks for it I think the first differentiator, we have as you know our global position and where do we bring the innovation and it starts with those design centers that are everywhere.
Current vehicles are designed and next generation vehicles, and that's pretty special.
And that's where we've leveraged.
Our traditional position there the.
The other thing is when you get into the architecture of a card or knowledge is there are parts of traditional architecture that do go over into an electric vehicle.
So certainly theres a lot of discussion around the powertrain, how does that evolve the batteries, but also realize.
That architecture does come together as you bring low voltage and high voltage together and certainly come into the infotainment and data element of it that could go into autonomy. So we play across all of those elements I think it's a very unique position that he has that also comes into the content opportunity.
The other thing that is and these are investments that we started to make 10 years ago as you know.
When we look at electric vehicle.
Like I said earlier, we think theres going to be about 9 million made this year.
5 million of those will be in Asia.
Europe continues to accelerate and one of the things, we probably get more excited about is not only the vehicle technology, but where do you see support coming to make sure that electric vehicle penetration can get stronger there's two big factors that come in.
Not only just not only consumer adoption when you come into the two big things outside the core of that relate to infrastructure as well as battery technology.
And you continue to see developments in that space that with where Evs are going we think will create continued momentum on EV adoption as well as support of the infrastructure and certainly the battery technologies that are so important to it and thats happening globally.
So early on we were very much bullish from Asia, certainly Europe with some of their regulations and certainly.
You continue to see at a lesser pace momentum here, but where <unk> comes in on that architecture, where how that architecture comes together the electric the data the signal that is our specialty and whats really great. How these trends, we're going to benefit from and you sold in our content numbers.
Okay. Thank you Daniel we have the next question. Please.
Question comes from the line of SME Chatterji.
Lines open.
Hi, good morning, Thanks for taking my question.
I did want to go back to the content growth story again.
And.
I'll focus a bit from one of the sensor sales.
Oh, you got it you kind of outlined.
$10 of content increase you've had over the phone.
Moving to $17 range in 2017 can I just clarify if that includes sensors at all or is it would be minimal.
And more kind of looking forward, how should we think about the opportunity in terms of sensors that you kind of Chris studio in a vehicle and what the aspirations of what that content per vehicle.
Those portfolio might look like.
No. Thank you submit and actually those figures I said earlier did not include sensors that are traditional.
Interconnect solutions that we provide and when you think about sensors and you think about sensors back in 19, you're talking about that's about $2 of content, we see that going up to about $5 of content.
There so that would be additive to those figures I gave you.
We're getting benefits of the launch that's actually the auto launches actually drove the organic growth our sensors business still has a big industrial piece too.
Two it that impacted those figures but.
Sensors is a part that would be additive to those figures I said earlier.
Okay. Thank you. So we have the next question please.
Next question comes from the line is it Mark Delaney your line's open.
Hey, good morning, Thanks, very much for taking the question.
I can talk to that.
Good morning, Tom here.
I talked a lot about some of the near term dynamics in the first half of the year.
And so the nice strength in recovery Youre seeing something to better understand your thinking.
In not just the second half outlook, but as you're thinking about investing in the business longer term in terms of where you're deploying capital in terms of you know some of these acquisitions like Blake for sensors. Some of the R&D youre doing to really capture that content growth youre seeing in evs.
What's most interesting to the company and what are you most excited about going forward.
Yes.
Thanks for that question.
And I do appreciate it mark.
When you think about when we look forward.
I think theres, one that I'll talk about short term and then theres ones that I think are important longer term.
I do actually think this period over the past year and the dynamics and the challenges we've all gone through.
We're getting to show our portfolio the diversity of it and why we like our portfolio and a lot of people had questions of how this portfolio would act because it wasn't the same portfolio.
And we do like our portfolio.
You see that here.
I think the other thing is when we look forward as you know.
The content elements, we've talked to you about.
And you think about transportation.
Content opportunities, we're talking about are still in early stages and <unk>.
Electric vehicles as early stage Autonomies early stage in that in many ways.
Content Kickers, we've been talking about and Youre starting to see it in the numbers and theyre going to be around for a while but I would say, it's not just limited to auto and transportation.
You've seen how our communication segment has changed certainly around our cloud investments and how we gained share in cloud that has made that segment a performer.
When you think about industrial medical will come back comm ore will come back in a position to very strong so they're things that certainly they're hurting us now, but I think will be things that drive content longer in the future and those are the things where data and power going.
Whether it's around sustainability, there is things being more connected where things get more productive like factory automation.
We still have content opportunity to drive growth that is going to be above market.
The other thing I would just say Wow.
I am pleased with the execution of our margin improvement story is not over.
Our transportation and our industrial segments, we've been doing some heavy lifting to get to where we believe these businesses are entitled It's nice to see our transportation segment on lower volume than peak being back close to the margin. We think it should be at but our industrial segment has room to go.
And lastly, I think it goes to the point you sort of alluded to in your question is no.
We like our cash generative business model and provides choices whether return capital or to do the bolt ons like Scotts question the heat around for sensor and what's nice is we do have organic secular trends that we can do bolt ons bolt ons into.
And we're going to maintain discipline as we go through it so as we look forward. It's nice to see some improvement we're always going to have a market, that's probably cycling one way or the other with the diversity, but I do think with the portfolio showing up at we're pretty proud of and we think theres more room to run on the growth on the margin side, which turns into earnings power and cash generation for value.
Creation.
Alright. Thank you Mark we have the next question. Please.
Your next question comes from the line of Joe Giordano. Your line is open.
Yes, good morning.
Hey, Joe.
Hey.
It's great to see the total content scaling from you mentioned the 60 to 70 million I'm just I wanted to talk maybe like longer term I know you.
You guys always mentioned like the EV is generally like to ask a regular car as we start hitting those inflection points.
Production scales like exponentially when does that spread look like how much of that spread is is like actually more physical volumes on the cars and how much is because the price of these products is significantly higher because the volumes are significantly lower and like how does that change over time does the price go down substantially but the volume scale some growth.
It's very very positive, but the spread between Eitan E. Compresses, how do we think about that when we get to like significant deployment of BV.
Couple of things you know an arc.
Our content assumption always assumed I do think we have to keep in reality a nice vehicle. If you take this year, where people think mid 80 million vehicles will be made in 2021.
There is 70 some million of ice vehicles made versus $9 million of electric vehicles made so there is a scale advantage certainly our customers expect that and we do expect there will be price compression in our content as EV scale.
We also have to make sure we bring our technology and our scale to make sure. These these vehicles are affordable and so that's always been included you will still have increased content. So I don't think youll see it getting to an ice engine content, but there will be some as you move up the volume curve on platforms and as the industry.
Scales and we've always said that to you so.
That's that's how we've always said it and we don't see that changing and it's something that's very important for the industry to make sure electric vehicles are on par with traditional engine. So that consumers can choose what they want.
Okay. Thank you Joe the next question please.
Your next question comes from the line of Chris Snyder Your line is open.
Thank you for the time just another one on the content per vehicle and then particularly comments that CTV is in the low seventies today versus the low sixties I believe you said in 2019.
Some quick back of the envelope math, there implies high single digit annual growth.
So I guess is there any reason why this growth rate would slow maybe over the next two years I understand longer term there can be more pricing.
Competition as that builds.
But I guess over the next few years is there any reason to think that would slow obviously the number is building off a higher base, but EV unit production.
Is inflicting and it seems like there could also be some sensor tailwind as well.
So when we look at it you know it goes back to what I said before we think it's 4% to 6% above global production and that depending on what you assume on production growth from here.
You would take the content and attitude and so I'm not sure. It would slow I mean, it will come into how consumer preferences are but it's what we get excited about on content. So I don't I don't see it slowing I see it actually being a real engine for us and we've been investing around that and certainly we'd like to see that the <unk>.
Revenue that's coming through on it.
We're partnering with our customers and we know we're solving their hardest challenges.
Alright. Thank you Chris can we have the next question. Please.
Question comes from the line of Joseph Spak. Your line is now open.
Thank you.
Terrence you mentioned a couple of times, how you are excited about the margin progression opportunities.
If you go all the way back to 2017, you you laid out this 30 to 80 basis points, a year, which would have brought you close to 19% and I know a lot of factors have occurred since then but you've also taken some other actions. So I'm just curious so do you have a view of the margin potential of this business looking out a few years is 19% range still still to go.
Yeah, Jim This is heath I'll take that question.
Yes.
The progression over time, certainly as is still part of our operating model and how we think about.
The go forward certainly we have had to deal with some things that were unexpected relative to market conditions no different than any other company out there but.
We still feel like we're in a pretty good place now acquisitions are always going to feather in to a point, where you know you have to overcome some of that dilutive impact initially and then you build upon that moving forward, but I still feel very good about it but I think you've got to kind of break it down into the segments as well the segments.
We've kind of targeted and talked about automotive being roughly a 20% operating income business, which is at both Vail is a good return.
From an overall investment as well as provides opportunity to enable reinvestment in the business for future growth and that's a good return model industrial which is in the low teens as we sit here today, but coming off a pretty significant.
<unk> churn, particularly in the commercial aerospace side as well as in the medical side.
<unk> is still is still holding its head, but we would expect that over time again to be up into the high teens. So theres a fair amount of leverage there and then in communications. We're in a pretty good place we've done a lot of heavy lifting they're going back several years.
And Youre seeing the results there now when we get the types of volume reduction alright, I'm, sorry for the types of volume increases that we've seen both in appliances and data and devices you can see what the flow through is in our factory environment.
An optimized footprint that we enjoy today within communications so.
There is still leverage in both transportation and industrial.
And in addition to that we are.
Still tackling some of the costs and the operating expense line that you would expect us to an investment coming down ratably, particularly as a percentage of sales and that will continue to be the case. So feel good about our ability to continue to expand margins for some time now.
Alright. Thank you Joe can we have the next question. Please.
Your next question comes from the line.
Your line is open.
Maybe another question for you wondering if you could put this quarter's margin performance in context of the 20% midterm margin target for transportation solutions, specifically, just wondering how this quarters profitability impacts that trajectory going forward may be.
<unk> and MVP terms, specifically, what it says about the production needed to hit that 20% margin target relative to maybe what you would've thought pre COVID-19.
Well, it's a good question right I mean, we COVID-19, 4% as is a solid number at that segment level, but you have to remember that we are still trending well below where we were just a couple of years ago in terms of total global auto production. So we did a little north of 20%.
Global auto production in the quarter was a little north of 22 million units. If you think about where we were in 2018 and 19, we are still trending pretty still below those quarter quarterly numbers. So yes. What it shows you is what we can do on lower auto production relative to some of those prior Uh huh.
Hurdles.
Because we have tackled the fixed costs, but at the same time, we are going after.
We've been pretty public with with you about some of the.
<unk> that we're doing and particularly in some of the what had been announced and were working through some European footprint moves within our transportation segment and those are underway in some cases.
They are being pressured because of we need this from volume out of those facilities, but we will see more benefit from those restructuring plans as we get through.
2021 and into 'twenty two the other thing I would say is when you see the types of recovery and Terrence mentioned going from 12 million units in the in the June quarter to 22 million units in the December quarter that has a very steep ramp in terms of.
Our.
<unk> two to ramp up as part of that you would expect there is some inefficiencies that are embedded in that and so.
Although we're pleased with the margins there are still room to go with.
With them.
Alright. Thank you look we have the next question. Please.
Your next question comes from the line of Jim Suva. Your line is open.
Yes.
Thank you my one question is on average selling prices kind of looking ahead in the transportation segment.
In the past I believe under.
Sure.
<unk> cars and autos price declines are kind of like 1% to 2%.
Is that going to be similar as we look at more say battery connected.
Cars that feature similar percentage or actually better percent declines or worse declines. The reason why I ask is as you know theres a lot of shortages in the automotive semi conductor industry and they're seeing better pricing.
Clients I know that you have more annual or longer term contracts, but I was kind of wondering longer term.
That segment is a math formula the 1% to 2% average price of claims still intact or because these are newer technologies you actually.
Declined faster or because of new technologies like they actually hold up better.
So again, a couple of things. Thanks for the question and I'll tie back to the question I got earlier first off when we look at pricing right now we sort of view it as stable certainly.
We don't make semiconductors. So some of the shortages that are happening in that space.
We do when you look longer term and that assume supply chain normalizes.
We do expect our electric vehicle product portfolio to have.
Higher price curve.
Due to the volume and that's something we've always said that's included in our 4% to 6%.
And so depending upon how those volumes go and that's typically the arrangements that we have with our customers that are typically volume and we sit down.
And have those discussions with our customer I would also tell you that when we think about content. We do expect content to be about two works with evs.
And also the margin targets. We gave you also include that price on it that he's talked about a few minutes ago. So net net it will be a little bit higher as it scales and those product sets.
But overall as part of our margin model and content model, we've always reviewed with you.
Alright. Thank you Jim can we have the next question. Please.
Next question comes from the line of William Stein Your line is open.
Great. Thanks for taking my question.
Moving on Lauder chorus of voices talking about <unk> consolidation as an aspect of the <unk>.
Evolution of automotive networking architecture things like domain architectures zonal architectures.
Do you see this happening as well or is it more talk from.
From some technology providers, and then sort of real action by the tier ones and Oems and also I'm curious how you expect this will influence connector units pricing in your print position with customers. Thank you.
So well.
This is not a new trend. So I think there is a big thing here in the <unk>.
<unk>, how do you bring feature integration into an <unk> and certainly the car has a lotta ecu's, but how does instead of adding a box to a car when you want to add to the architecture youre, adding a feature.
Into an E C U.
Which does help make sure the architecture it doesn't get out of control. So this is not a new trend has always been a trend certainly some people will go out and say will there be only one.
Mega ECA or two.
That's not a new idea, but I think that's going to be much further out.
Net net what happens is the amount of interconnects that are in those <unk> become more complicated which help us and then certainly the interfaces around where do you need to sense, what's going on in the car also creates more connections and no different than the content picture I hope by paint it earlier around.
Whereas content coming from.
That $10 half of it is due to.
Electric content electric powertrain content from data, but the other half is due to the low voltage architecture that continues to get more connections in it as the car has more features to it and you still need to have a.
Our connection to wherever the feature is back to a box.
So certainly acu no different than what semiconductors do all the time, which is you at it integrates more onto a chip youre going to see that in the car that creates more complex connecting solutions as that box has to connect into other applications in the car and that's actually good for US we think it adds more connections and it actually.
Creates complexity, which our customers need us more from an innovation perspective, so I hope that frames out a little bit.
Tom.
And it helps you with that question.
Alright, Thanks will can we have the next question. Please.
Our next question comes from day line as David Williams Your line's open.
Hey, good morning, and thanks for let me ask a question.
Just wanted to kind of see if you could read into some of the trends you're seeing within the data center the strength there and maybe what your view is for the year in terms of that.
While the data center.
It's one of those markets I would tell you.
It was not COVID-19 impacted from the cycle and that's just continued so when we look at cloud and data center spending we're looking at another double digit increase this year and.
I think the start that we're getting in the unit.
And our data and devices units there certainly.
When you look at where semiconductors are growing Thats also.
<unk> of it.
And we see the cloud spending just continuing.
And what's really nice assets over as our team he talked about the margin progression. One of the things is we also work margin is where we work on a point our engineers.
And what we're also very pleased with is our share gain and position that we learn across all the.
The cloud providers and not only on the margin side. The team should be congratulated also what they've done and how do we bring the innovation to those cloud providers.
Okay. Thank you David equate the next question please.
Your next question comes from the line of Nick father, Ralph Your line is open.
Yeah.
Yes, good morning, thanks, everyone.
Sure.
Sure. So I think I heard you talk about increased design wins with electrification in the commercial transportation I Wonder if you can give us a little bit more color on that and maybe compare.
What stage do you think the EV and commercial transportation is relative to where.
<unk> it might vehicles today are we may be where.
Light vehicle EBIT was a year or two years ago.
No. Thanks for the question, Nick and when you look at it we've all had the discussions around the auto a lot.
And we have we've talked to you before about electric vehicles and trucks and a lot of things happening around the last mile fleet.
What I've said is over this past year, we've seen a very significant increase in more plat from platform worked by the major.
Commercial truck Oems and when you look at that increased activity. It seems to be more serious activity then the dabbling products projects.
And what is really nice is when you think about our position in commercial transportation.
It's in many ways very similar to our automotive position, it's global it's agnostic to the architecture.
That's why we like being a tier two and when we sit there and we look at what our teams are working on and we're seeing an acceleration so.
Certainly when we look at commercial transportation.
The breadth of vehicles that are in there whether it's mining whether it's you know.
Class a trucks and so forth, it's pretty broad, but we do get excited about the content opportunity there as well.
It does feel where we are today from a program activity is probably where we were three to four years ago in automotive just given you a gut feel on that of where this momentum starting to accelerate.
And it's a trailing nice that we're going to leverage our position like we did in automotive and that can be.
Our content library and ICT.
Okay. Thank you Nick it looks like there's no further questions. So if you have any questions. Please contact investor relations at Te. Thank you for joining us and have a nice day.
Ladies and gentlemen, your conference will be made available for replay beginning at 11 30, a M. Eastern time today January 27, 2021 on the Investor Relations portion of day connectivity website that will conclude your conference for today.
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