Q2 2021 TE Connectivity Ltd Earnings Call
Yeah.
Ladies and gentlemen, thank you for standing by and welcome to the key E connectivity second quarter earnings call for fiscal year 2021.
This time all lines are in a listen only mode. Later, we will conduct a question and answer session at that time, if you would like to ask a question. Please press Star then the number one on your telephone keypad. If you would like to remove your question. Please press the pound key.
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Please ask one question and then jump back into queue to ask a second and in.
Accordance with time I would now like to turn the conference over to your host Vice President of Investor Relations. She shall Shah. Please go ahead.
Good morning, and thank you for joining our conference call to discuss T connectivity second quarter results.
With me today are Chief Executive Officer, Terrence Curtin and Chief Financial Officer, Keith Smiths during.
During this call we will be providing certain forward looking information. We ask you to review the forward looking cautionary statements included in today's press release.
We will use certain non-GAAP measures in our discussion this morning.
We ask you to review the sections of our press release on the accompanying slide presentation that address the use of these items.
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.
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 were willing to take follow up questions, but ask that you rejoin the queue. If you have a second question.
Now, let me turn the call over to Terrence for opening comments.
Thank you. She was all on thank you everyone for joining us today to cover our results for the second quarter as well as our expectations for the third quarter of our fiscal 2021.
Before I get into slides, let me give you some perspective on our second quarter.
And I think as you'll see in our results. We are continuing to demonstrate the strength of our diverse portfolio and the benefit of content growth across our businesses.
We are delivering organic growth ahead of our markets as well the strong operational performance and free cash flow generation.
I would say this performance is on a world with an improving economic backdrop that is dealing with global supply chains that are trying to keep up with the broader macro recovery.
We are continuing to execute to our business model and you can see this on our second quarter results as well as the guidance that we provided for the third quarter and I'll talk about a little bit more to debt.
So let me also provide some key messages about today's call.
First off I am very pleased with our execution in the second quarter.
We delivered sales growth of 17% and generated record quarterly adjusted earnings per share of $1 57.
And this EPS represents growth of 22% year over year.
Our sales were ahead of our expectations and it was broad across each segment driven by the continued recovery in most end markets. We serve are broad leadership positions and the benefits of the secular trends that we strategically positioned <unk> to capitalize on them.
Also our adjusted operating margins expanded 80 basis points year over year to 17%.
And this was driven by margin expansion in both our transportation and communications segments.
I also believe that you're going to continue to see us demonstrate our strong cash generation and truly evident of that as our year to date free cash flow, which was approximately $1 billion.
Which is also a company record for the first half of our fiscal year.
And as we look into the our third quarter, we are expecting our strong performance to continue.
With sales on adjusted earnings per share at similar levels to what we just delivered in the second quarter.
With that as a little bit of a backdrop I do want to take a moment to frame up the curtain arc environment and our business relative to where we were just 90 days ago. When we last spoke.
In our transportation segment consumer demand and orders continues to remain strong.
And auto production is remaining stable on the range of 19 to 20 million units per quarter globally.
Even with the well documented semi shortages.
And we've also seen further strength in our commercial transportation end markets.
The trends around content growth remains strong as we continue to benefit from increased electrification of vehicles at higher production of electric vehicles, which will enable us to continue to outperform auto production going for.
In our industrial segment.
We see increased momentum in the recovery of industrial equipment markets due to factory automation and increasing manufacturing capital expenditure trends.
Also on our industrial segment, the commercial aerospace on medical businesses are still being impacted by Covid and this is similar to what we mentioned last quarter, but we do continue to see indicators of stability on our orders in both of these businesses.
In our communications segment the market trend, we mentioned last quarter are continuing.
Consumer demand is getting stronger and globally, we have seen an increase on appliance for Matt.
We continue to see strong ongoing capital expenditure trends in the cloud applications as well as acceleration of demand around the data center.
And when you think about the strength I just covered on our segments as a backdrop.
The faster than expected recovery in the markets that I mentioned has resulted in.
Some challenges as the industries, we serve replenish their supply chain and look to further secure supply.
While this dynamic has benefited our orders which remains strong it has caused a broader supply chain pressure.
And the pressure, we're experiencing is factored into our expectations for the third quarter guidance and Heath will provide more color on this on his session.
And the last thing I want to highlight is let's all remember that we are still on the world that stay on Covid.
We continue to see countries go on to Lockdown again, and this is impacting some of our customers on their supply chains.
And certainly while Vaccinee vaccines are getting rolled out in certain parts of the world.
The pace of the deployment on availability of the vaccines varies greatly by country. So Sean some uncertainty remains.
Our focus has been and will continue to be on keeping our employees safe while also helping our customers capitalize on the improving economic conditions.
So with that as a backdrop, let me get into the slides on I'd. Appreciate if you could turn to slide three to provide some additional details for our second quarter and our expectations for the third quarter.
Second quarter sales of $3 $7 billion were better than our expectations on each of our segments.
They were up 17% on a reported basis and 11% organically year over year.
We had 15% organic growth on our transportation segment with double digit growth across all businesses.
We also had very strong performance on our communications segment with organic growth of 29%, which was strong double digit growth on both of the businesses in that segment.
And in our industrial segment sales were down 4% organically due to the ongoing weakness in the commercial aerospace market.
From an orders perspective second quarter orders were $4 6 billion and this was up 36% year over year.
It reflects both the improvement in the markets that I mentioned, along with inventory replenishment in the supply chain by our customers.
Our earnings per share was a record at $1 57 in the quarter and this was up 22% year over year and was driven entirely by our operating performance, resulting in adjusted operating margins being up 80 basis points year over year.
I am pleased that we were able to manage the broader supply chain pressures, which all companies are dealing with.
And had margin expansion.
From a free cash flow perspective in the second quarter free cash flow was $477 million with approximately $340 million being returned to shareholders.
As we look forward, we expect our strong performance to continue into the third quarter with sales on adjusted earnings per share being similar to our second quarter levels.
For the third quarter, we expect sales to be approximately $3 7 billion and this is up significantly year over year on both a reported and on organic basis.
And we expect adjusted earnings per share to be $1 57, which is in line with the levels. We just saw in the quarter. We just closed.
So, let's turn to slide for now I'll cover the order trends that we're seeing.
Yeah.
As I already stated in the quarter, our orders were very strong at approximately $4 6 billion and.
And we had a book to bill of one to two.
Orders in transportation and communications were up 50% and 45% respectively.
And this increase reflects both market recovery and supply chain replenishment and both of those segments.
In these segments customers are not only placing orders to make current production needs, but also replenishing the supply chains that were depleted during fiscal 2020.
I would also highlight that with some of the shortages in semiconductors and certain passive components. We are seeing some areas where customers are placing orders to secure supply beyond our lead times.
On our industrial segment. It is a different picture than what we're seeing in transportation and communications.
But what is nice is that despite the year over year sales decline we had in this segment.
<unk> seen orders growth of 7% and that's driven by the continued recovery in the industrial equipment market.
Partially offset by the weakness in commercial aerospace that I mentioned.
Let me also on orders and add some color on what were seeing organically on a geographic basis and I'm going to do this on a sequential basis to show where order momentum is.
And China orders were up 3% from a strong base from fiscal quarter one.
And that growth was really driven by our industrial and communications segments.
Orders on a sequential basis in Europe were up 14% and North America sequential orders were up 22%.
And that was broad based growth across all of our segments in those two regions.
So let me get into our year over year segment results and they are on slides five through seven on I'm going to touch upon each segment briefly before I turn it over to Heath.
Okay.
Transportation sales were up 15% organically year over year with growth on each of the businesses.
In auto our sales were up 14% organically and.
And year to date, we are generating content outperformance over production and are expected for 2% to 6% range.
We continue to benefit from our leading global position and increased production of electric vehicles and as you've probably seen the number of EV launches are increasing by our customers around the world.
In commercial transportation similar to our first quarter, we saw 25% organic growth driven by ongoing admission trends content outperformance and ongoing share gains.
We are continuing to benefit from stricter emission standards and the increased operator adoption of euro five and six in China, which reinforces our strong position in that country.
We saw growth in all regions and our commercial transportation business, along with double digit growth in all market verticals that we serve in this business.
The other nice thing that we continue to see as we see increased wins on electric powertrain platforms in trucks.
Which give us confidence about the future content potential in this market.
Ear.
Yes.
In our sensors business, we saw 13% organic growth with growth on all markets and double digit growth in auto applications.
We do continue to expand our design win pipeline on auto sensing and expect growth as these platforms continue to increase in volume.
From a margin perspective.
<unk> operating margins for the segment.
Excuse me expanded 80 basis points to 18, 1% driven by higher volumes versus the prior year and despite the supply chain pressures.
So if we now turn to the industrial segment.
As I said earlier, our sales declined 4% organically year over year.
During the quarter the segment continued to be impacted by the decline in the commercial aerospace market with our aerospace defense and marine business declining 21% organically year over year.
As I covered already based upon the order patterns. We do believe this business is showing signs of stabilization at the current order levels.
Yeah.
When you think about our industrial equipment market.
It was very strong and up 16% organically with growth on all regions and increasing strength in factory automation applications, where we're benefiting from accelerating capital expenditures in areas like semiconductor equipment as well as long the auto manufacturing supply chain.
We continue to see weakness on our medical business on our industrial segment and it was down 13% organically year over year.
And this is being driven by ongoing delays on interventional elective procedures caused by Covid.
And the dynamics, we are experiencing in medical are consistent with what our customers are saying and we expect this market to return to growth as these procedures start to increase later in the year.
And lastly on the industrial segment, our energy business, we saw 4% organic growth and you know this was driven by increase in penetration of renewables, especially with benefiting from solar applications around the world.
From a margin perspective in industrial solutions, our margins declined year over year to 12, 5%.
And that was really driven by the significant drop in commercial aerospace volume.
So let me cover the <unk>.
On occasion segment.
And you know in this segment, we continue to benefit from both the market recovery and share gains while delivering very strong operational performance.
Sales in the segment grew 29% organically year over year with strong growth on both data and devices on implies.
In data and devices, our sales grew 24% organically year over year due to the strong position we have built in high speed solutions for cloud applications.
Favorable secular trends in cloud services are leading to increased capital expenditures by our customers and our content on share gains are on enabling us to grow on cloud related sales at double the market rate.
Yes, just to give you. An example at one of the major cloud providers. We are now providing six X. The content on the next generation server applications versus the prior generation.
In our appliances business. We are also seeing strong growth trends.
Sales grew 35% organically year over year, driven by our leading global market position share gains and ongoing market improvement across all regions.
Yes.
From a margin perspective, our communications segment and team.
<unk> delivered very strong execution in the quarter and delivered 21% adjusted operating margins and these were up 720 basis points versus the prior year.
I am pleased with the way our team has worked through the supply chain pressures to deliver these strong operating margin expansion in this environment.
And our communication teams or capitalize on growth trends on their end markets, while delivering strong operational execution and you see this reflected on our results.
So with that let me turn it over to Heath to get into more details on the financials and our expectations going forward.
Well, thank you Terrence and good morning, everyone.
Please turn to slide eight where I will provide more details on the Q2 financials.
Adjusted operating income was $637 million.
Up approximately 23% year over year with an adjusted operating margin of 17%.
GAAP operating income was $612 million and included.
<unk> 17 million of restructuring and other charges and $8 million of acquisition related charges.
We continue to optimize our manufacturing footprint and improve the cost structure of the organization and can change to expect total restructuring charges in the ballpark of 200 million for fiscal 'twenty one.
Adjusted EPS was $1 57.
And GAAP EPS was $1 51 for the quarter and included restructuring and acquisition and other charges of six cents.
The adjusted EBITDA adjusted effective tax rate in Q2 was approximately 17% for.
For the third quarter, we expect our tax rate to be up slightly sequentially and continue to expect an adjusted effective tax rate around 19% for fiscal 'twenty one importantly.
Importantly, we expect our cash tax rate to stay well below our reported ETR for the full year.
Now turning to slide nine sales of $3 7 billion were up 17% versus the prior year and 6% sequentially demonstrating the strength of our portfolio.
Currency exchange rates positively impacted sales by $150 million versus the prior year.
Adjusted EPS of $1 57 was up 22% year over year and 7% sequentially.
Reflecting our strong operational performance.
Adjusted operating margins were 17% and expanded 80 basis points versus the prior year.
While we would've expected higher fall through on this level of sales growth, we saw impacts of higher freight charges and other supply chain pressures in the quarter on these will continue into the third quarter and as you are aware these supply chain issues or having a broad broader impact on our customers and suppliers as well.
As Terrence mentioned the supply chain is catching up to the increased level of demand.
We are seeing in many of our end markets and given these dynamics I am pleased with the results we delivered in the quarter and of our momentum going in going forward.
As shown on our third quarter guidance.
In the quarter cash from operations operating activities was $580 million, we had very strong free cash flow for the quarter of $477 million in the year to date free cash flow was approximately $1 billion, which is a record for the first half of the fiscal year.
We returned approximately 340 million to shareholders through dividends and share repurchases in the quarter, our strong free cash flow performance demonstrates the strength of our cash generation model and we expect to.
And we continue to expect free cash flow conversion to approximate 100% for the full year.
We remain committed to our disciplined use of cash and over time, we expect two thirds of our free cash flow to be returned to shareholders and one third to be used for acquisitions.
Before we go to 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 to summarize the outlook for many of the markets. We serve is consistent with what we are seeing 90 days ago, along with some axa.
<unk> of growth in the commercial transportation industrial equipment and communications markets, we're continuing to see the benefits of secular trends across our portfolio and are capitalizing on these opportunities.
The economic recovery has been faster than expected and we are seeing a corresponding near term pressures in the broader supply chain as a result.
These impacts will be resolved and nothing has changed with respect to our growth and margin expansion expectations.
We are executing we're executing well on the things we can control and our outlook for Q3 continues to reflect the strength of our portfolio. We expect to continue to generate strong free cash flow maintain a disciplined and balanced capital strategy and drive to our business model performance, we remain focused on value creation for our stakeholders.
For us going forward.
Now, let's open it up for questions.
Okay. Thank you Heath Michelle could you please give the instructions for the Q&A session.
On Monday.
Second please thank you at this time I would like to remind everyone in order to ask a question. Please 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 please press star one to return to the queue.
Your first question will come from crash benchmark for.
From Morgan Stanley Your line is open.
Well. Thank you question for Karen there there were a number of references to replenishment on.
Call. So can you just talk about the strength you're seeing in the business.
When customers do you think we'll get caught up on inventory and and importantly, that's the type of sales sell through you are seeing.
Sure, Thanks, Craig and let me.
You see that in our orders and I think one of the things is we're all dealing with a recovery across those markets that are seeing that improved recovery at a faster rate than we all expected and inventory levels are low.
When we see the orders brats that we see we do see people trying not only to make get the products and for what they want to make but also to get the supply change up.
Ensure that they are on some of the stresses that we hear about another component. So when you look up at that I think we're all in the middle of that real time. These are stresses that you get when you have a recovery that's emotion I do think we need a couple of quarters for that to play out because it is pretty broad.
Based on Bell box were taken very low.
And even when you think about our channel partners. Our channel partners are holding turn levels that are lower than normal and they're trying to catch up. So it is very broad across those markets you see the strength in <unk>.
It will take a couple of quarters to get truly everything probably replenished.
Okay. Thank you Craig we have the next question please.
Your next question comes from <unk> Mohan from Bank of America. Your line is open.
Yes. Thank you Terrence you alluded to a few things within the communications segment performance can you remind us how much of that is cloud now and are you expecting this growth to sustain here and then how sustainable are these margins.
Okay. Thanks, Romsey in communications I think one of the things that we have to keep in front of us as it was our segment that was least impacted last year.
And so I think that even makes when you look at the results that segment have a picket are more impressive because they didn't have the dip.
That <unk>.
Transportation segment had one on the western World shut down auto production.
And so the growth that you see first off is Deanne D. It is primarily driven by cloud applications and I think it's both.
The acceleration of cloud Capex.
In addition to where we position ourselves from a market share perspective, and we continue to do a nice job on that team continuing to build more momentum from a share perspective, and that's really driving that growth.
The other thing that you have in that segment as you know our appliance business.
<unk> has a great global position and we're also benefiting from as certainly appliances have accelerated globally around the world Youre seeing the benefit of that business and Youre also seeing how global lease two businesses are so certainly I talked about it in orders, but these.
These businesses are very globally balance and you know you're seeing the growth. So feel good about the positioning we've done on the topline I would also say with the volumes that we're at we would expect that this segment would be higher margin than what we've told you. Historically. So we've always said this was probably middle teen at these types of levels you'd probably be in the middle.
Higher teens overtime.
And it just shows that the work that we've done to improve the portfolio here the trends we've put it around as well as the operational execution of the team has done. So thanks, Tom. Thanks for the question. Thank you want to equip. The next question. Please. Your next question comes from and net Gary on me from Evercore. Your line is open.
Good morning, everyone. Thanks for taking my question.
I was wondering if COVID-19, maybe we can find the deviation between the strength we've seen on both the book to Bill on the auto number that you put out worse for the June quarter Guide right. I mean, if I think about the book to Bill of one point due to I would applaud Jude what a guy would be north of $4 billion in revenue. So just love to understand what the delta between the book to Bill What's in your guide.
It relates to that the audit strength, you're talking about is there any deviation between channel versus OEM there.
So let me just take it I'm going to take your last piece first if that's okay.
When you look at it.
The trends, where youre seeing the acceleration and also with some of the supply chain stresses you do see you know.
Orders in the channel were probably a couple hundred million dollars higher than what we build and our channel sales grew similar to what the total company growth.
So you do see our channel partners trying their inventories are low theyre trying to catch up but.
But I wouldn't say, it's different than what we're seeing in direct it is about how do we make sure the supply chain levels to support this fast recovery get into place.
When you look at our book to Bill at one point to two.
As you all know this is not a business thats typically a backlog business and what we're seeing because things were so depleted.
You have customers that are sitting out there not only hit.
Any orders for production, but also trying to replenish.
Theres pain points in the world. So yeah. There are certain product sets that we have some constraints on their pain points on some of our input materials and he talked about some of the pressures on inflation side. So I think what you have as you know the orders or are a lot higher than our guidance on our guidance is really the things that we see we're going to schedule out.
On deliver and it will normalize over time that there'll be more in check, but right. Now you have a supply chain replenishment going on after Covid and 2020 took a lot of supply chains to a full stop.
Okay. Thank you Amit can we have next question. Please. Your next question comes from Joseph Spak from RBC capital markets. Your line is open.
Thank you very much.
If we look at the actual incrementals in the quarter and compare that to sort of that low thirties.
The Delta is about $50 million. So is that order of magnitude what sort of experience from logistical headwinds and then I know you mentioned that could continue so maybe you could talk about some of the puts and takes on the margin as we head into your fiscal third quarter.
Sure. Joseph This is Heath I'll take the question.
Yeah.
Youre right on with your assumption, we would've expected at these volume levels to be north of 30% flow through as we've talked about.
And so the delta on.
On a year over year basis to where we came in.
Probably puts you into that type of that type of number.
In terms of in terms of the flow through and then the impact that it had on margins as we work our way through the year.
There are certain things that will continue that we will continue to expect to feel the pressure on whether thats free charges.
Create inflation or inflation on input materials otherwise.
The team is hammering through those and we have different levers that we can pull to pass some of those things along as well as where we deal with the timing issues on some of that but I would expect our margins to modestly improve as we work our way forward here.
For the third and fourth quarter based on some of the actions that are underway in our ability to combat some of the inflationary pressures out there.
Okay. Thank you Joe for you in the next question. Please.
Your next question comes from Chris Snyder from UBS. Your line is open.
Thank you my question is on EV wins, and the pipeline of demand coming to market.
Given the increased focus on high voltage are you seeing better share relative to I C E.
For these new awards should we expect initial unit production will carry a C. P. B above 120 until scale is reached.
Yeah no. Thanks, So a couple of things, let's remember that our share is very high.
Our leading position on what we do already so I wouldn't say share is higher I would say, it's in line with our leading share across automotive and transportation.
What is nice.
Yeah.
You talked about it is where do you see the momentum around EV.
Joseph We went back a few years it was $5 million on electric vehicles, if you take.
Pure electric and hybrid this year, we think it's going be closer to 10 million vehicles.
And you see Europe.
Continuing with the emission programs there certainly Asia has always been strong in there and these are both regions that we have very strong presence. So when we think about content whats nice is EBITDA continue to see the adoption.
You see the new models coming out the models are much more attractive in the consumer the consumer acceptance of those are strong and it pulls in line with our overall content growth in the CP V. We do expect to be that to act on those high voltage because what happens with the powertrain. So.
It is one of the things that you know with an improving recovery the secular trends of where we positioned te whether it's electric vehicle in the car and as I talked about.
My script was we also are seeing innovation along the heavy truck fleet that is becoming more platform driven they are going to have more model launches probably out in the 'twenty five 'twenty six and that's going to be a content driver and we have wins on those so those secular trends.
On a backdrop of an improving economy, just creates more growth opportunity for us.
Okay. Thank you Chris cleanup next question please.
Next question comes from Sandvik Chatterji from Jpmorgan. Your line is open.
Great. Thank you for taking my question.
Wanted to ask on automotive is when you had strong results in automotive despite the uncertainty we're seeing there with the same going on for Scott is just wanted to ask for and what are you hearing from you on automotive Oems in terms of how they want to manage the supply chain.
Still sticking to adjusted.
Or are they ordering ahead and went to start expect for some of these shortages in terms of impact on production decided on what Reed.
Well I think when every OEM.
One is happy with where the consumer is showing up and if we were here six months from now while we were ramping one of the things we were talked about as high as the consumer showing up and I think thats for this great for the industry and ROE and we're trying to work through the supply chain pressures.
At a bigger extent than even we are dealing with so.
What was nicely on a certainly semiconductors are the big news out there and it's very well documented.
That impacted production a little bit.
Less than 1 million units in quarter, two I think it can be a similar number in quarter three.
Global auto production staying on that 19% to 20 million unit range than whats nice is probably this year auto production will be back to 2019 levels.
And that's a little bit quicker than we would've said six months ago. So the Oems are very much working hard to get the cars out to the consumers.
We're all working very much together knowing that right now.
It's ramping back up to a very high level and we're all trying to make sure how do we keep the Oems going in.
Discussions today are very much for around how do we work together to make sure our OEM customers.
Get to capitalize on this opportunity.
There is a lot of volatility right now due to the supply chain and I think we're going to have to continue to work through that.
Through the rest of our fiscal year.
Alright, Thank you just to make way for the.
Next question. Please yes. Your next question comes from Mark Delaney from Goldman Sachs. Your line is open.
Yes, good morning, and thanks very much for taking the question Heath you reiterated the view that free cash flow conversion for this year could be approximately 100% of net income can you talk about whether or not there's anything unusual benefit in free cash flow conversion. This year and Eric is going to be some puts and takes in any given year going forward, but is that a.
The right type of approximate level to be expecting on free cash flow conversion going forward. Thank you.
Mark Thanks for the question.
I think one of the things that as I look at the free cash flow on the components on leverage we get pulled there.
They're as we've worked our way through the last few years one of the things you have seen is is capex as a percentage of sales moderated a bit more closer to that 5% number versus higher and we're running a couple three years ago.
That capacity that we have put in place is certainly we are benefiting from that now and particularly as we move forward I think that number of 5% maybe a tad under that this year is helpful. In terms of how that converts cash flow.
On the thing that we obviously benefit from is the way, we manage our tax structure and our ability to pay.
Hey.
Our cash tax rate being much lower than than well below our ETR and so theres a few of those types of things, but working capital. This year has been a good story for us and our ability to.
Maintain receivable days and payable days.
Yeah.
Improving year on year. Despite this volatile environment has been has been good so nothing unusual in our FY 'twenty, one numbers or outlook from a cash flow perspective.
I continue to we continue to monitor it and we're not starving the businesses for for investments the organic revenue growth gets first priority as you can imagine so we feel good about how we have we've positioned that in going forward now theres a year coming forward that we have.
For a more significant step up in terms of an investment or restructuring or something I will highlight that but I think we are we're in a good position right now.
Alright. Thank you Mark we are on the next question. Please.
Next question comes from Joe Giordano from Cowen Your line is open.
Hey, good morning, guys.
Hey, Joe.
So I was hoping as debt.
Adam.
Little bit of that here, just if I look back in auto last quarter last year.
Thank you Tom.
Basis points of benefit from Jeanne replenishment then.
So if I look at the results from this quarter and I assume that you grew kind of like in your 600 basis points above production.
Is that is that how I should think about this that supply chain and this quarter. It was like 900 basis points and it should still be like a pretty favorable number for the next few quarters.
I think it's very difficult to just look at content on one quarter, Joe and Youre right with last last year in this quarter.
We did have supply chain benefit because we saw people sort of getting into Covid. We were all in on trying to secure supply.
You need to look at it over longer term.
And I think that's the more appropriate way to look at it as we said on last quarter. When we sort of look at mix of vehicles. This year, we sort of view.
It should be in the mid seventies without supply chain effects of share.
And that's something that is if you look at what's driven that versus the lower to mid sixties, a few years ago.
Half of that is due to our positioning around electric vehicle and certainly data has autonomy infrastructure gets put on the car and then the other half is just electronic vacation as our core product set continues.
To be sure sent us targets more features on it. So I still think this year without supply chain, where you are in that same figure. We told you last quarter I think when you get into where supply chains are trying to move it is difficult to get it into one number in the quarter.
Okay. Thank you Joe we have the next question. Please next question comes from Scott Davis from Malleus Research. Your line is open.
Hey, good morning, guys, Hey, Scott.
How do you handle how are the contracts handled when you have kind of these excess orders a day.
Double ordering or folks that are.
What more can you get additional price and helped to offset some of the cost issues and such.
Sure so on pricing Scott.
When you think about a distribution, which is about 20% of our business. We did price increases and we do them every six months. We did some in January we have other ones rolling out July for for some of the inflation pressures.
What we do have with some of our larger customers metal riders that have adjusters for.
For metal so as he talked about we do expect modest margin expansion as we go into the third quarter. Some of it is as those things kick in.
As we continue to try to manage through it. So it is very different by the markets we plan.
But there will be price increases aligned with how we have the mechanisms with our customers.
Okay. Thank you Scott we are on the next question. Please.
Next question comes from Christopher Glynn from.
Oppenheimer Your line is open.
Hey, Thanks, good morning, everybody.
Higher level question on industrial automation cycle, how you see that shaping up.
The comparisons in the macro or helping you but during COVID-19.
A lot of people learn to do.
More with personnel disruptions and robotics has been pretty emerging category I'm wondering if you're seeing the makings of an automation super cycle in terms of investment over the next handful of years.
What I would tell you is.
If you went back certainly last year that space got hit and the year before that it wasn't.
A positive cycle, there were elements around auto production going down.
That were impacting us so what we see in mobile we see a pretty consistently globally.
Youre going to have many many semi conductor manufacturing equipment.
That's accelerating youre seeing the investments around the auto supply chain, you'll see a lot of those around the electric vehicle battery side of it certainly warehousing.
There is no no surprise either so what we have seen pretty consistently globally is an acceleration that last quarter. We told you we saw some emerging.
To hope, we really saw an acceleration this quarter in us.
And I do think just with the backdrop, where and I do think youre going to have a positive cycle here around automation investment.
As people see an economic recovery that continues.
And let's face it the two markets, where we haven't seen it our income here.
And medical which are.
Most impacted by Covid.
Where we play a medical so I do think you could have a stronger like here of an industrial capital equipment cycle.
That stronger coming out of Covid.
Alright, Thank you, Chris and we have the next question. Please.
And your next question comes from David Kelley from Jefferies. Your line is open.
Alright, Thanks, and good morning parent teeth into Joe Hey, David.
Hi, a quick follow up question on the prior distribution channel exposure.
Just hoping you could maybe give us a.
On the percent of the order trends there and if you don't mind could you remind us of your distribution mix within communications and industrial.
On a styles as well.
Sure when you when you take our distribution mix. It is about 20% of the total company, but what you do have that mix is higher than our industrial segment as well as our CNS segment on those cases, Europe, 40% plus in automotive theres not a lot of distribution that just thats a direct just in time.
You don't have that so you do have higher weightings in communications and industrial.
Our revenue growth was in line with the total company revenue growth sort of mid teens, but we did see our book to Bill on that area was higher than total company. It was more like a 150 book to bill and their inventory levels are low and.
Not surprising with the world accelerated people are trying to secure inventory. They're also trying to rebuild their inventory levels to more appropriate term. So the book to Bill was very strong there.
And I just think it's another positive sign.
Of an improving economy and certainly as.
As we look forward.
Alright, Thank you David could weigh on the next question. Please.
Next question comes from Jim Suva from Citigroup. Your line is open.
Thank you and Terrence in your prepared comments you made a comment about the.
Orders being stronger than your lead times.
You know when their chip shortages and the lead times are stretching out you'd normally see down a lot. So can you just help us kind of bridge why would customers be ordering a lot more beyond your lead times is it just inventory replenishment or do you think that there.
Fearful of more supply chain issues, because if your lead times are normal it seems like they could just put in normal orders versus stretching lead times. Thank you.
Yes, Jim a couple of things so lets realize that in automotive. It's adjusted type system. There really isn't lead times, so that part of our business. It is just in time and the rest of our business. Our lead times are four to six weeks.
On typical we do have some pain points and I would probably say we are on some areas were a little bit further out on that but not anywhere close to some of the semis.
I think you do have replenishment going on people did take volume down-low and the economy is doing better.
In addition.
People see semi and some other passives, having shortages it isn't surprising that people are saying, hey, I want to make sure I get my orders on to make sure I don't get surprised and other.
Components and tier two tier two product so.
I think that's why you see what's happening with distribution I think it's also on some of those markets out of very hot that youll see that happening.
And honestly, our lead times arent moving out significantly except in very finite products that we have some pain points.
Alright, Thank you Jim thank.
Thank you for wave the next question please.
Your next question comes from <unk> <unk> from Baird. Your line is open.
Hey, good morning Terrence.
I was hoping you could discuss some of the key opportunities in your energy business as it relates to the proliferation of electric vehicles, Christina Lee an area that we're getting questions on if you could just speak to the role of the TSA.
To play in terms of grid hardening, which of course is in focus on the Texas storms. This winter renewables you mentioned somewhere in your comments and similar.
So on our energy business on our industrial segment is important where we play on that is really how long the grid.
It is very much around the electrical infrastructure and it is very global.
Key factors that really drive growth. There is hardening as you said, but also where we pivoted our portfolio and our team has done a nice job has been.
How do we get our share when you deal with when the applications, where you have the high very high voltage connection that need to come back and hook into the grid as well as the solar applications, which are not in panel connections, but really taken the energy that comes off the solar grid into the core.
Grid and what's nice is the growth that we've seen in our energy business that has been pretty consistent with past share is really due to our repositioning around renewables. Historically this would have been.
A very slow growth business, where you have seen that you saw a 4% this quarter and that exposure of those renewables was really driving the growth there and certainly how EV drive into energy usage would also benefit that so we are benefiting from all the carbon neutral initiatives on the planet and certainly how do we make.
Sure, we get our fair share with our pretty broad product set to make sure those connections into the grid occur.
Is what we get excited about.
Okay. Thanks, Luke we have next question. Please next question comes from Nick harder Rock from Longbow Research. Your line is open.
Yes, thanks for saying good morning, everyone.
We've seen some reports that some auto Oems are doing much better than others in the current environment because they have shifted away from just in time over the years.
As we deal with broader supply chain issues that I know that's more on the semi side, but how do you see customer inventory policy on the auto side changing do you see any structural shift away from just in time.
What I would tell you is with what we are dealing with currently.
We're trying to meet demand.
Have not seen significant shifts.
Do the Oems reflect.
After this will be interesting I think that will be a discussion we have with our customers, but right now our customers really focus on making sure that you get product out the door and you know in some cases just realized we don't have.
Some of the production lead time that a semiconductor company would have for when they think about their fab. So what we do is different.
But certainly there is stress and strain in the system and some of the tier ones that are also in that equation play.
Play a pretty big role not just the Oems they took inventory levels down very low.
And that's what we're all trying to catch up on.
Okay. Thank you net we have next question. Please.
And your next question comes from William Stein from tourists Securities. Your line is open.
Okay.
Sure. So I think it was you who use the word inflation to describe something that's happening to at least part of your costs.
Maybe it was maybe Keith but.
Whomever it takes it's fine.
Maybe tell us about whether that's.
Something that youre seeing in input costs material costs for example, or labor or if it's just supply chain related cost and I think you also noted that you would expect us to be clawed back overtime is that through.
Essentially.
We let's say deflation in those costs or is it something you think youre going to be able to pass on to customers. Thank you.
William This is Heath I'll take the question.
Certainly.
We're feeling.
The biggest inflation right now is on the freight side.
Freight inflation has been significant as we battle through there and Theres a variety of reasons.
For that including higher air freight and so forth in terms of that and that's not unique to to Te certainly I think thats been well publicized across the overall supply chain.
We are as we move towards the <unk>.
Second half of our year.
We are seeing a little bit higher input cost, particularly with resins and some of thats pretty directly attributable to the weather issues that were in Texas here earlier.
This past quarter.
And then copper prices as we continue to monitor those we've seen those creep up now on some cases, we have hedges in place in terms of how we hedge our <unk>.
Metals cost. So you don't see that kind of layer in a little bit slower in and out on the P&L as we hedge about 50% of our exposure out about 18 months for metals. So.
We get through their labor cost is not a major issue on.
On the inflation side, but labor availability in certain places that are still being more.
Acted by Covid.
To drive some inefficiencies and there is no doubt whether thats in Mexico or in Central Europe, and otherwise we still are battling through.
Covid, where we have significant operations and thats, where ever more around availability than than inflation in terms of the clawback I think terrence outlined it.
Couple of questions ago in some cases, we have contractual ability to do that.
In terms of passing through riders.
As we've seen inflation, Kevin more aggressively in some cases, it's a broader pricing discussion with a customer and then within channel.
Certainly.
We utilize our ability to take prices up type of inflation for that piece of the business and then depending upon the business Theres surcharges in different types of mechanisms that are put in place, but I'd say the timing issue is is a portion of it there's no way I'm going to sit here and say, we're going to claw back a 100% of what we are pounding through right now.
But we also on productivity engines in place to help offset some of these things so.
More to come.
Okay. Thank you we'll wait for the next question. Please next question comes from Matt Sheerin from Stifel. Your line is open.
Thanks, Doug good morning, everyone.
Question around the industrial solutions area.
Particularly how we should be thinking about operating margin going forward. I mean, you were down year over year for reasons, you talked about particularly weakness in.
In the aerospace area it sounds like Thats bottoming, it sounds like Youre continuing to see growth.
In the broader industrial market. So what should we be thinking about margin expansion from here I know you've been targeting high teens.
And is it a function of volumes here or there is still some restructuring benefits that we should be expecting.
Matt to see they will take the question and thank you.
First of all nothing has changed in terms of our outlook.
We've been on a multi year journey to get the.
Footprint right and the industrial segment and that involves a reduction of <unk>.
Consolidation of a lot of.
<unk> tops nothing Thats changed there in terms of our.
Our multi year plan to get to mid to high teens operating margin certainly within the quarter.
We were impacted by a very by the mix of businesses, where the growth or.
Lack of growth is coming from commercial aerospace is a very profitable piece of the segment and is thats down.
Year over year debt.
He has a pinch point in terms of margins. However, there's other things that factor into this as well in terms of how we think about.
The restructuring thats going on in some cases, where we do have cost ahead of some of the savings as we're moving factories into new locations.
In addition, the segment was not immune from some of the supply chain challenges. So a variety of things or I am confident as we move into the second half of our year that we will see improvement there.
Okay. Thank you Matt can we have the next question. Please.
Your next question is from Steven Fox from Fox Advisors. Your line is open hi.
Hi, Thanks, good morning, I might have misinterpreted.
Sounded like you mentioned market share gains more than normal I was just curious if there's any common thread across why you're gaining share or if there's anything you would point to within the different segments.
Driving share gains.
No what I would say Steve.
I think one of the things.
That's important as we did want to highlight those areas, where we do feel there is share gain not just margin improvement.
There are areas that I think we've differentiated during COVID-19, where they created some opportunities.
And I think youll see that in both units and the CES segment certainly in regard to our industrial transportation business and how we've continued to gain share. There. So there are some of the bigger highlights, but we did want to make sure in those areas not only margin recovery. We also had took advantage.
Market share in some key markets that are also contributing to our results.
Okay. Thank you Steven we have the next question. Please.
The next question comes from Rod Lache from Wolfe Research Your line is open.
Hey, this is <unk> Patel on for Rod.
You talked about.
You mentioned the content opportunity that youre seeing in battery electric vehicles versus ice.
To X opportunity and I think in the past you've talked about $60 of content on an ice vehicle increasing to 120 on beds, but with certain programs. It seems like you're you're actually the actual content on those vehicles is much higher so I'm trying to get a sense of.
Amongst the programs that youre, either that Youre, winning how do you think about the content on those vehicles.
How should we be thinking about that and what's the opportunity there going forward.
On the vehicles are winning one of the things that you have a long ass.
Architecture continues to get scale and along there is a broader breadth of content per vehicle on electric vehicles for us on your sort of have on a traditional ice and that we get excited about that and there are some electric vehicles.
Traditional <unk> and there are some that are much higher where our customers have asked us to do more so there is a broader breadth and you have on a traditional ice where on a traditional ice it really comes down to the feature set.
But what's nice is the number of Evs that you see are accelerating and FTE. What we get really excited about is as this continues to need to scale to make sure. These vehicles are affordable for all consumers not just on the higher end, that's where we continue to provide scale and we've always said debt.
As we think through price as it scales.
Some of these very high CTV elements, we've talked about will come down a little bit because they have to for the affordability of the cards on thats assumed in all of our content assumptions. So feel very good about the adoption that it is a global as it is I think it really stood the test for Covid, but also is when you look.
How does the architecture on the car needs to continue to scale.
That's what we get excited about because automotive is still a scale business and I think we've proved that with our leading position and what we've done on the ice and what's nice is our ice products carryover because theyre, mainly in the electrical architecture that carries over into the EV. So there isn't real cannibalization because the powertrain.
<unk>.
It is not as big from.
Electrical side from analysis, just goes way up when you get to a BB or hybrid.
Okay. Thank you can we have next question. Please.
Next question comes from David Williams from Loop capital Your line is open.
Hey, good morning, and thanks for let me ask a question I wanted to ask maybe on the mix shift from the automotive Oems obviously they.
Pivoted to the higher end and maybe even more luxury vehicles, because we see that shift mix, maybe move back towards that mid range for lower range vehicles as the semi shortage eases, how do you think that impacts maybe revenue and EBITDA margin.
In fact there.
But when you look at that certainly the Oems were getting to make the vehicles they want to make and they make money on and I think thats what going on.
Things that are nice about this improving economy.
But I would also say many of the Oems are also.
Change their platform dramatically about what vehicles and platforms. They make so certainly when you have increased increase options that are put on cars, we will get a little bit of benefit in content on our traditional product.
And thats sort of ebbs and flows over time.
And I would also make sure we take a global perspective of it.
I know thats very much in the U S. There's a view on pickup trucks and that has more content, but when you think about Te you need to really think globally.
Some of those trends arent as real elsewhere in the world as they may be in the North American market.
Okay. Thank you David next question please.
Your next question comes from <unk> Mohan Bank of Montreal, and Bank of America, Sorry. Your line is open.
Yes, thanks for taking my follow up Terri.
So I was wondering if you could comment I know, it's still early days, but if you could comment on any puts and takes associated with the infrastructure plan, particularly given.
The amount of investment in EV infrastructure, or how that might be a tailwind for <unk> versus any potential tax headwinds from the proposed tax hike. Thank you.
Yes.
Well on both sides of those equations, obviously theres a lot of things out there so.
Sizing that today is very difficult knowing that there is a lot of things being thrown around.
So, let's just keep that as an overlay, but I think if you think about any infrastructure how could that benefit I think is important.
And certainly I answered a question earlier about energy infrastructure certainly there is investments that have to happen there that would benefit our energy business. If you get infrastructure put in for battery electric capacity in North America versus relying on other parts of the world certainly our factory automation team would do it and then any other <unk>.
Infrastructure I think that the other benefits should be is and we've been very clear on it we always view acceleration of electric vehicles in Asia, and Europe are going to happen quicker than the United States because there has not been as much government support.
Around getting those vehicles adopt it so that could also benefit.
Our auto.
Business.
So there is just some of the bigger elements and then youre getting use traditional infrastructure, where you would have a very strong position in commercial transportation.
Depending upon what happens with Roche on if that creates a machinery cycle.
Would participate very well on increases around certainly the heavy equipment side due to our industrial transportation, but there is some of the positives that could occur.
We got to see how the bills in the plan shakeout.
Let heath handle tax.
Handoff them for that piece of it thanks Terrence.
As you probably recall on the tax side again, there's a lot of things that are still to be determined but as you recall when the the last tax reform lowered the corporate rate. It didn't have a big impact on us given our structure and.
Where we're domiciled in where our profit pools Y. So early look at any of the proposal kind of indicated we probably wouldn't have that much of an impact on us.
The other direction, either so more to commerce things get solidified there, but I think it's important to look at not just the impact there, but where we can where we pay cash taxes and so.
Not a huge concern at this point, but stay tuned.
Okay. We have no further questions I want to thank everyone for joining us on the call. This morning, and if you have further questions. Please contact investor relations at Te. Thank you and have a great day.
Okay.
Ladies and gentlemen, your conference will be made available for replay beginning at 11 30, a M. Eastern time today April 21, 2021 on the Investor Relations for portion of key connectivity website.
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