Q3 2021 TE Connectivity Ltd Earnings Call
Yeah.
Ladies and gentlemen, thank you for standing by and the walk and GTE kind of Covid you Terry.
Earnings call.
For fiscal year 2021at this time all lines are in a listen only mode. Later, we will conduct a question and answer session and you ask the question. During the session you will need to press the star of line on your telephone as a reminder, today's call is being recorded I would now like to turn the conference over to.
To our host Vice President of Investor Relations, Mr. Schuler Shah Sir Please go ahead.
Good morning, and thank you for joining our conference call to discuss the connectivity is third quarter results with me today of our Chief Executive Officer, Terrence Curtin and Chief Financial Officer, Keith Smith.
During this call we will be providing.
The forward looking information and we ask you to review the forward looking cautionary statements included in today's press release in.
In addition, we will use certain non-GAAP measures in our discussion. This morning, and we ask you to review the sections of our press release and the accompanying slide presentation that address the use of these items the press release and related tables.
And the slide presentation can be found on the Investor relations portion of our website of TV 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 1 question to make sure. We can give everyone an opportunity to ask questions. During the a lot of time.
We're willing to take follow up questions, but ask that you rejoin.
Along with the out of second question.
Now turn the call over to tariffs for opening comments.
Thank you.
And I also appreciate everyone joining us today to cover our results for the third quarter as well as our expectations for fourth fiscal quarter.
But for Heath, and I get into the slides and the details of the quarter.
<unk> I want to frame our view of the environment that we're operating in as well as our performance.
We arent in the economy that is showing strong GDP growth globally, driven by the recovery from last year's Covid shutdowns with consumer spending that is robust as well as corporations around the world increasing.
And the Q the capitalize on this recovery.
In addition to the recovery. It's also important to note that we've strategically focused T E around select secular trends.
These trends are accelerating in the key markets that we serve.
You'll see this in our transportation segment with electric.
Vehicle adoption accelerating and our communications segment around cloud investment.
And in our industrial segment with capital spending accelerating globally around factory automation automation as well as digitization.
Okay.
While we have of recovery that is happening faster and has more.
The robust and we all thought.
The reality is that the world is dealing with supply chain trying to catch up to this faster recovery.
This is causing volatility for our customers as well as everyone. That's in our customers' supply chains.
Given this backdrop, we are performing well in this environment and are.
Our strong results for the quarter and our performance so far the sheer demonstrates the strength and diversity of our portfolio.
You'll see this with contribution from each of our 3 segments.
We are generating sales adjusted operating margins and adjusted earnings per share that are pre COVID-19 levels and we remain excited.
Cited about the additional growth and margin opportunities that will be beyond this year.
Yes.
With this backdrop, let me provide some key messages from today's call about our performance.
First I am pleased with our execution in the third quarter and in the quarterly records that we achieved.
These records include sales of over $3.8 billion adjusted earnings per share of $1.79, and adjusted operating margins of over 19%.
Yes.
Our results were ahead of our expectations driven by the continued recovery in most end markets have from serve our broad leadership positions.
And strong operational performance by our teams.
It's also important to note that while we are in a recovery or growth also continues to be driven by the secular trends across our markets that are driving our market outperformance this year.
And we will continue to drive the outperformance going forward.
Another key factor that you see is that we are continuing to demonstrate our strong free cash generation model and continue to expect free cash flow conversion to approximately 100% for this full fiscal year.
And as we look forward you know, you'll see and we'll talk about our orders in quarter 3 remain consistent.
With our second quarter.
And we expect our quarter for sales to be roughly flat to our quarter 3 sales.
And we expect these revenue levers of translate into strong performance with $1.65, and adjusted earnings per share in the fourth quarter.
As I mentioned our results are demonstrating the.
The strength and diversity of our portfolio with growth and margin contributions from each segment.
And communications, you'll see the growth opportunities in the cloud and the ongoing increase in capital expenditure trends by the cloud providers.
In our industrial segment, you see increased investments in capacity and higher levels of factory automation.
And then transportation you see content growth trends for electrification as well as further electronic vocation of both of autos and trucks.
And in each of our segments, we are delivering strong operational performance, which are evident in the margins.
And you know when we look back to our discussion.
We had in October.
We did indicate that our first quarter would be the peak of global quarterly auto production for fiscal year, but not the peak of our earnings.
This is playing out as we anticipated because of our diverse portfolio.
For this fiscal year, we are expecting over 20% growth in sales.
Approximately 400 basis points of adjusted operating margin expansion and over 50% growth in adjusted earnings per share.
I am very pleased with this level of progress towards our business model and our team's ability to execute especially with some of the markets continuing to recover and the broader challenges we faced in the supply.
Yeah.
So now let me turn and I want to take a moment the frame the current market environment and our business relative to where we were just 90 days ago. When we last spoke.
So starting with transportation consumer demand for autos remains robust.
But ongoing challenges with semiconductor supply continue.
The impact of our customer's ability to produce.
Global Auto production came in slightly lower than expected in the third quarter and we're expecting auto production to be approximately 19 million units in our fourth quarter.
The trends around our content growth remains strong in the transportation segment.
The chain our content per vehicle has accelerated from the low 60 range a few years ago into the $70 range. This year.
We continue to benefit from increased electronic vacation and higher production of electric vehicles, which will enable us to continue to outperform auto production going forward as content continues to grow.
Okay.
In our industrial segment, we continue to see an industrial backdrop that is improving which is benefiting our industrial equipment as well as our energy businesses.
Also in our quarter orders of medical had begun to recover and we've returned to growth as interventional procedures have started to increase.
Increase again.
And the 1 area, where we are not seeing acceleration is in our ADM business, but I will highlight the business does feel stable at current revenue levels.
From 90 days ago, Let me talk about communications.
The end market trends that we.
Last quarter are continuing.
Consumer demand continues to be robust and appliances.
Capital expenditures of trends remained strong in cloud applications.
And while that's a look at where we were versus 90 days ago by our segments.
I do want us all the remember that we are in the world that's still dealing with Covid.
Mentioned lending of uncertainties around variance.
While all of our global factories or operation.
We continue to watch developments in each of the regions we operate.
And 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 now let me get into the slides from please turn to slide 3 so I can get into some additional details for the third quarter as well as our expectations for the fourth quarter.
Yeah.
In the third quarter sales of $3.8 billion were better than our expectations and were up over 50% year over year.
Demonstrating strong performance through the economic recovery with growth in all segments.
Also on a sequential basis sales were up 3% and of our earnings per share was up 14% with sequential margin expansion in each segment.
Compared to last quarter industrial segment sales were up 5.
Per cent driven by ongoing strength in industrial equipment and increases in energy and medical.
And in the communications segment sales were up 16% with double digit growth in both debt and devices and appliances on a sequential basis.
And in our transportation segment, our sales were in line with our expectations.
<unk>.
When you look at orders in the quarter. They remained strong at $4.5 billion consistent.
Consistent with the levels, we had in the second quarter and this reflects market improvement along with ongoing inventory replenishment by our customers.
If you think about the.
The balance sheet, we continue to maintain the capital strategy between making sure were free of returning capital shareholders as well as M&A.
Earlier this month, we entered into an agreement to acquire Ernie of European connector manufacturer that has a complementary product line in serving the industrial market.
This acquisition.
<unk> has a purchase price of approximately $300 million and is consistent with the bolt on strategy around the acquisitions that we talked to you about.
As we look forward, we expect our strong performance to continue into our fourth quarter.
We expect sales to be up in the high teens over.
The year to approximately $3.8 billion.
Adjusted earnings per share is expected to be approximately of $1.65, and this will be up 40% year over year.
And as you can see on the slide we've included our full year numbers.
Our performance relative to both fiscal 2020 and 2019.
Which I highlighted earlier.
Yes.
So, let's turn to slide 4 and I'll get into orders a little bit more.
For the third quarter, our orders remained strong at approximately $4.5 billion consistent with the second quarter levels that I mentioned earlier.
Order levels.
Continue reflect economic recovery and replenishment across a number of our end markets.
Year over year, we saw orders growth in all businesses and in all regions.
Transportation orders remained elevated due to the market recovery as well as the auto industry supply dynamics.
In our industrial segment.
It grew 8% sequentially with growth in industrial equipment energy and medical and flat orders in a day in EM, which indicates the stabilization that I mentioned earlier.
And communication sequential order growth was driven by strength in data and devices.
Orders. So let me also add some color on orders from what we're seeing from a geographic perspective on a sequential basis.
We continue to see growth.
The orders were up 6% sequentially.
In Europe, our orders were down 7% sequentially and in North America orders were essentially.
Essentially flat versus last quarter.
Yeah.
So with that as a backdrop around the orders, let me get into our segment results that you'll see on slides 5 through 7 and I'll cover this briefly.
Starting with transportation, our sales were up approximately 70% organically year over year with.
Growth in each of our businesses.
Our auto business grew 90% organically and we're benefiting from the market recovery and are demonstrating continued content outperformance due to our leading global position.
We continue to benefit from increased production of electric vehicles.
S T E technology and products are enabling.
<unk> high voltage architectures and applications with every leading OEM on the planet.
In commercial transportation, we saw 56% organic growth driven by the market recovery ongoing emission trends as well as content outperformance.
We are continuing to benefit from stricter emission.
With that around the world and increased operator of adoption of euro of 6 which reinforces our solid position in China.
The other key point is that we continue to gain momentum with wins on electric powertrain platforms in trucks, which while this doesn't give revenue orders today it will provide future.
Stan tenant growth for.
Our leading position in commercial transportation.
In sensors, we saw 20% organic growth driven primarily by auto applications and we also saw growth in the commercial transportation and industrial applications as well.
For the segment adjusted.
<unk> margins expanded sequentially to 19, 4% on essentially flat sales.
Okay.
So let me turn to the industrial segment.
And in this segment sales increased 13% organically year over year.
In our industrial equipment business sales were up 36.
For the awkward organically with growth in all regions and benefiting from the momentum in factory automation applications, where we continue to benefit from accelerating capital expenditures in areas like semiconductor and automotive manufacturing.
Our ADM business sales.
Sales declined 7% organic.
Percentage driven by the continued weakness in the commercial aerospace market.
In our energy business, we saw 9% organic growth driven by increases in renewables, especially global solar applications.
And lastly in our medical business as I mentioned earlier, the returned to growth in the quarter and was up 10%.
Ganic likely year over year.
With the recovery in interventional procedures around the world.
From a margin perspective, adjusted operating margins for the segment expanded year over year by nearly 300 basis points to 15, 8%. Despite the volume declines in our ADM business and this was driven by solid.
All of the operational performance by the teams.
Now, let me turn to the communications segment.
Our team continues to demonstrate strong operational execution, while capitalizing on the growth trends in the markets that we serve.
Sales grew 31% in the segment organically year over.
Organic with robust robust growth in both data and devices and appliances.
In data and devices, we grew 16% organically year over year due to the solid position, we built in high speed solutions for the cloud applications.
We continue to see capital expenditures, increasing by our customers.
For year content growth is enabling us to grow cloud related sales of double the market rate this year.
And appliances sales grew 57% organically versus the prior year with growth in all regions driven by market improvement, our leading global market position and ongoing share gains.
Yes.
And.
I do want to say that you know our communications team continues to deliver outstanding performance to complement the higher sales levels that there extra extra effect.
Executing too.
And you see this with our adjusted operating margin in the segment of 23, 5%, which is up 760 base.
Points versus the prior year.
Overall across our segments. Our teams are capitalizing on growth trends in their end markets demonstrating the diversity of our portfolio, while delivering strong operational execution.
And with that let me turn it over to Keith who will get into more details on the financials and our expectations.
Spectation going forward.
[noise], Thank you Terrence and good morning, everyone.
Please turn to slide 8 where I will provide more details on the Q3 financials.
Adjusted operating income was $734 million up significantly year over year with an adjusted operating margin.
Margin of 19, 1% GAAP.
GAAP operating income of 714 billion and included $11 million of restructuring and other charges of $9 million of acquisition related charges.
We still expect total restructuring charges to approximately approximate 200 million for fiscal 'twenty, 1 as we continue to optimize our menu.
The fashion for footprint and improve the cost structure of the organization.
Adjusted EPS was $1.79, and GAAP EPS was $1.70 for for the quarter, which included restructuring acquisition and other charges of approximately 5 <unk>.
The adjusted effective tax rate in Q3 came in.
And as we expected at approximately 18% with our fourth quarter tax rate expected to be around 20%.
We expect to continue.
We continue to expect our adjusted effective tax for tax rate for the full year to be around 19% importantly, we expect our cash tax rates.
Well below our reported ETR for the full year.
Have you turn to slide 9.
Our results and progress you see on the slide reflects the strength and diversity of our portfolio and business model execution as Terrence mentioned, we delivered record performance in Q3 on sales adjusted operating margins and adjusted EPS.
Steve we are not only showing progress versus the prior year, but we're also delivering higher sales margins and adjusted EPS versus fiscal 19, which represents of pre COVID-19 baseline.
Sales of $3.8 billion were up over 50% versus the prior year and up 3% sequentially with solid performance in the performance.
Each of our segments currency exchange rates positively impacted sales by $138 million versus the prior year.
Adjusted EPS of $1.79 was up significantly year over year and up 14% sequentially, reflecting our strong operational performance.
Adjusted operating margins were $19.1 also.
Performance up significantly versus the prior year year to date, our adjusted operating margins are running at around 18% and our fourth quarter is expected to be a continuation of the strong performance.
Turning to cash flow in the quarter cash from operating activities was $682 million, we had very strong free cash.
For the quarter of 539 million and.
And year to date free cash flow was approximately $1.5 billion.
In Q3, we returned approximately $445 million to shareholders through dividends and share repurchases.
Our cash flow performance demonstrates the strength of our cash generation model and we continue to expect free.
Also all of the conversion of approximate 100 per cent for the full year.
We remain committed to our disciplined use of capital and over time, we continue to expect 2 thirds of our free cash flow to be returned to shareholders and 1 third to be used for acquisitions of <unk>.
Terrence noted we entered into an agreement to acquire Ernie.
Cash later this month and we expect to close by the end of this quarter.
As revenues of approximately $200 million annually and will be reported as part of our industrial equipment business.
Before we go to questions I want to reiterate that we are performing well in this environment. Despite challenges in the broader supply chain.
Our results for the quarter and our.
Our performance so far the sheer demonstrate the strength and diversity of our portfolio with contributions from each of our 3 segments. We delivered record performance in Q3, our fourth quarter guidance represents the continuation of our strong performance, we're excited about growth and margin opportunities.
Beyond this fiscal year.
Year in line with our business model.
Let's now open.
Open up for questions as usual okay. Louis could you. Please give the instructions for the Q&A session.
At this time I would like to remind everyone in our day to ask the question. Thank you press. The Star then the number of line on the telephone keypad.
You had time for all.
All questions each leg of that is limited to 1 question if you'd like to ask the follow up question. Please press star 1 again Kevin.
Keith.
Our first question comes from the line of Mark Delaney with Goldman Sachs. Your line is open.
Yes, good morning, and thanks very much for taking.
As of Jan.
Terrence you mentioned several secular trends of the company is addressing and longer term that Te can grow revenue and margins I was hoping you could speak a bit more about what the company is seeing with respect to this industry backdrop and what that May mean for the company's fundamentals in the intermediate to longer term.
Yeah, Thanks, Mark and I think.
When you sit there.
You see the performance, we put up which we're very proud of but in many ways.
A lot of where the recovery is across our business is still pretty early and I think the first thing the framed your question is probably around.
<unk>, we meet demand a little bit.
The quick and I would still total you're 1 of the things as you know with this quarter with some of the supply chain elements of happened with MTGE. There is about $100 million of revenue, we estimate across our segments for that due to our supply chain, we couldn't get out the customers. So we are still trying to get.
To the level of demand Thats out there.
And certainly with the supply chain issues.
We estimate is found in quarter, 3 and we think it'll be a similar amount in quarter 4.
But and Thats really aware of materials impact us around metals and resins, and we think that will be with us a little bit, but when you think through the markets and you think about.
Where auto production is at right now.
Auto production this year with the $19 million, we expect in the fourth quarter is still significantly below.
2019 levels that 88.1 million units this year will still be down from 88% to 19 and certainly.
We're being throttled, a little bit by some of the semiconductor supply chain. So we think as you think through the cycle auto production can go up as we go look forward certainly content is kind of help us.
We also have in the industrial as I mentioned in my comments, it's really feels like it's just getting started our medical business is picking up.
For our energy business that was pretty resilient continues to be strong and youre seeing what was started a couple of quarters goes around industrial equipment. We continue to see that picking up as you have capex.
And then in communications cloud Capex was up 20%. This year, it's expected to be up 10% next year.
So we still see there are big drivers for us that will help us.
And on the margin side.
We still have margin improvement that we need to deliver in 2 of our 3 segments and they are our largest segment. So certainly we're working through the supply chain elements that I think everybody in the plants working through and we.
We still see margin improvement back up to where we've told you all of our business model going forward. So the cycle is the recovery and 1 of the things we feel very good about is the consumer is showing up.
Whether it be the buy cars, whether it be the buy appliances and companies now we're showing up so it will probably be lumpy, but.
Tell you it feels very good from the drivers that we position tahira.
Okay. Thank you Mark we of the next question. Please.
Our next question comes from the line of David Kelley of Jefferies. Your line is open.
Hi, good morning, Terrence and Heath, Thanks for taking my question.
1 of the focus maybe on the fourth quarter earnings guidance implies.
They start mastic went till the lower margins relative to the third quarter.
It feels like we're seeing rising input costs, some ongoing supply chain disruptions, but also improved pricing and then clearly volume recovery. So.
With that in mind could you talk about some of the dynamics at play here in context of how youre thinking about the fourth quarter margin trajectory.
Sure David the CS I will take the question.
What does that mean.
First of all I think what we effectively.
Tom.
<unk> commented in my prepared.
Statement was well run at around 18% year to date in terms of margins and we see that more or less continuing as we work our way into the fourth quarter.
If.
If you pick a particular quarter youre going to have timing issues given the diversity of now.
Which we are how we're set of globally youre going to have timing issues in any 1 particular quarter. So I think you've got to be careful about just picking out of quarter and trying to compare it for backwards.
Within our world there is price cost differences between.
The different businesses in some cases, we're able to pass along that price we're quickly, particularly.
Particularly if it runs through our channel partners, where we have distribution in some of our businesses from our heavier dependent upon that and in places, where we don't have that distribution partner in that mechanism to gasoline price of that quickly it takes a little bit longer and so the realization of that is very mixed within our portfolio.
The.
Now the very considers we're still.
As we've talked about in the past we are still on this restructuring journey with some of our footprint optimization and as part of that Youre going to have timing issues of when you start to realize some of the savings versus the cost of getting some of those things done.
And you spend a little bit ahead of if we take things offline.
The other thing of the kinds of different moving parts in a portfolio like ours from.
From an EPS perspective sequentially, you will have from of third quarter fourth quarter, we will out of tax headwind our tax rate is going to step up a couple of hundred basis points and that's fairly normal in terms of timing for the fourth quarter. So some of the EPS.
Sequentially, just as types of the attach rate.
Okay. Thank you David we have the next question. Please.
Our next question comes from the line up.
Of Evercore your line is open.
Yeah. Good morning, Thanks for taking my question.
Kevin I'm wondering if you the maybe expand a bit more of the supply.
Apply to the dynamics, you've talked about it and there's been a fair bit of discussion around this by everyone in beauty of theaters. So I'd love to get your all perspective on what is really all of it mean hotel and maybe you can explain what all of the supply chain pregnant, you're referring to and then what impact of what happened with your operations in Pn are broadly. Thank you.
Yes. Thanks.
Thanks for the question let me.
Supply chain I guess, we're all using more than we would like to use them on calls so let me make sure.
What it means for Te.
First of all of.
It all starts with end demand in our customers. So let me spend a little bit of what we're feeling from customers.
Certainly customers.
We are trying to make sure they recover.
And in some cases, when you think about what we go into and even take a car current 30000 parts.
If 1 or 2 or 3 parts they can procure the sure.
We will make in the car and so what you have right now because of the recovery being faster you have everybody scrambling.
And also you have a lot of the data signals that are coming down from our customers are changing a lot as they're trying to make sure. They meet customer demand. So the first thing I would say from a supply chain is per.
Severe volatility coming from our customers as they are trying to make sure they get up and running and unfortunately in some cases you've seen customers.
Having to stop production because of things like semiconductor so that creates volatility.
Net when you look into our world. It is important that when you think about Te.
We are manufacturer we start from very base materials, what we innovate we make.
So from that viewpoint, the biggest things that we use of things.
<unk> plastics, certainly resins from commodity all the way up the very highly engineered things that help with flame retardant sea of temperature.
And as well as metals that are used for conductivity. So when you sit there in those 2 key areas.
We did have some areas where resin supply.
<unk> was impacted and certainly metal supply has been impacted.
And what that has created for US is not only the supply impacted we've had to do some things that arent as natural for tea.
As we might have to supply due to our global supply chain in certain parts of the world and we may be shipping things around the world. So.
Things that only the availability. It's also created some of those pressures as you said it in your question that we're managing because guess what we're trying to really make sure we ramp we help our customers.
And the reality of it is this is going to be with us we've been dealing with it and the recovery.
I'd say, it's getting.
Better, but I would say, we're going to continue to be dealing with it through our fiscal year and the early next year as we're trying to pick up to a world that's recovering.
And this type of recovery, what do you see it in our orders are in the supply chain.
Means theyre sort of fast recovery, that's happening out there as people are trying to catch up to.
So now so hopefully that give some flavor and I think our teams of actually the managing it through the volume of the price and the productivity as you're seeing the results.
Okay. Thank you Amit 3 of the next question. Please.
Our next question comes from the line of Joseph Spak of RBC. Your line is open.
Yes.
2 of them.
Thanks, Good morning, Charles you talked about.
Some of the the.
The BV wins out of it doesn't really impact of the numbers today, but it helps for future growth I was wondering if you could help dimensionalize that for us at all.
Maybe quantify the the bookings in this quarter or the lifetime backlog and how fast some of those factors.
Like how should we think about that.
So the number 1 is from a momentum perspective, the momentum that we've talked about has not changed.
<unk>.
Theres really 2 factors, we benefit from our global position.
We also benefit from the.
The technology that we bring as you move the high voltage architecture, whether that's being.
<unk> thing it being 2 sensors that are resolved and current sensors when you get them for the electric motors.
When you look at it to conceptualize the little bit I'll go back to what I talked a little bit about.
Last call of the call before which is what it means of our content.
A few years back we were in the low <unk>.
Dollar per foreign content, where in the <unk> now and.
And when you think about that $10 increase in content.
Approximately half of that is due to high voltage so thats about $5 of content at the total te level across all production that has translated into revenue.
That's the key driver as we say our content can grow up above the eighteens.
So realize theres only 9 million of electric vehicles made this year, what's great is that that adoption continues to accelerate it and stopped during COVID-19 and certainly as that accelerates that's going to continue to drive content outperformance.
The performance for us.
And it's actually just continues to accelerate all around the world and it's nice to see the traction in places even like the United States, which has always been of slower adopters out there of the technology actually pick up as well as the models that are coming out from all of our global customers are showing how this trend is picking up.
Okay. Thank you Joe we have the next question please.
The next question comes from the line of Scott Davis Melius Research Your line is open.
Good morning, guys.
Scott.
Nice to see the surviving this.
Mess, that's out there and thriving but.
I.
I was kind of just wanted to follow up on that last question a little bit.
In the context of the Chevy bolt recall and perhaps the architecture of that is being utilized there on the high voltage side as there is.
Are there learnings from that recall and that perhaps increases your content growth going forward and having more.
More.
Backup.
And safety systems around around particularly.
Particularly around high voltage is there anything to be gleaned, there or are nothing new.
Scott Great question and good to hear from you I think the thing that you look at I would say when you think about does.
That learning out of that recall.
Provide extra content I wouldn't say it does but I think it shows how fast the technologies moving.
As well as when you look at the architecture evolution.
The pace of which is coming up.
When you think about combustion engines and how long they took the develop.
Everybody getting their models that you will have situations, where there will be events that there will be learnings of what how do you need to harden the electrical architecture I don't think that will create.
Incremental content opportunity, but what I would tell you for Te is when those issues occur where.
We're the type of company that they look to.
Because we're working on up to 1000 volts, we play not only from the Charger inlet, we play into the where the motors go to the high voltage. There you will also play on what's happening on the cell to cell or module the module connections as well as the sensing that occur so certainly.
GM will really work hard to make sure.
For those types of events of what occurred in the future, but actually also creates a bigger opportunity for stickiness for us and certainly on.
The new truck platforms of GM, we have very strong content.
That's in line with that 2 X content, we've talked to you about.
Okay. Thank you Scott for you have the next question. Please.
Next question comes from the line of squeeze the Snyder of UBS. Your line is open.
Thank you all of my question is around T E High voltage differentiation you know the company is the <unk>.
Invested significantly in both in developing but also scaling these solutions globally.
Recent years.
And is this leading to high voltage share gains relative to low voltage. It also seems like the Oems would lean more heavily on top suppliers.
Just given how important these initial EV rollouts are and then particularly you know.
Within the high voltage as it's a new but also extremely.
Critical component for them.
Yeah. So so Chris when we look at it I think let me take a step back for just for a second.
With what we do around our interconnect and sensor portfolio.
Anywhere you have data you have power you have.
Streamlining and guess what getting in the smaller packages and higher power and higher data.
That's what our engineers to.
And so when you deal with high voltage of architecture in the car.
Certainly our customers that's why we like the position we have and you know what's the global position as I said, we design all around the world with all the Oems.
So when you think about it it is of 1 point I want to highlight is the low voltage architecture carries over for us because you're not putting in your low voltage applications onto the battery and the motors. So that's part of low voltage carries over and where we really get into.
And I mentioned at the Scotts question.
It starts at the charging inlet it goes into how does.
The connections in the sensing occur around the high voltage connections that you need around the motors it gets into the battery solutions.
Gets into the contactor zone.
And I would the switch the power over as you go from AC to DC to AC back as well as the position in the current sensors. So it's completely across and I think the other thing that's unique for for us versus some others that might be of tier 1 tier 2 our customers really like that we're agnostic we.
We are there to solve their challenges that theyre trying to get to how are they trying to solve fast charging what type of sales are they using in their battery pack and that agnostic element is what they really like about our global position as they come into and we focus on the connection systems, we don't get complicated.
We provide harnesses and other things that's what the tier ones do but it's really about the connection technology that we invest in as they think about the platforms and how they have to evolve these platforms.
And Thats, where you get the content increase that we mentioned and we shared examples but it gives us a real content opportunity to double of our content in the electric vehicles.
Echols and like I said earlier, the content growth you're seeing in CE about half of it over the past couple of years is due to high voltage wins.
Okay. Thank you Chris the way of the next question. Please.
Our next question comes from the line of <unk> Mohan of Bank of America. Your line is open.
Thank you.
Currency had a pretty solid for us.
For a quarter of your guiding so pretty strong exit for this fiscal year.
Can you maybe share some early thoughts into next fiscal year. It feels like there should be some nice production growth and the other end markets seem to be in recovery mode as well. So so any bookends around dimension in fiscal 'twenty 2 of them.
Yeah, Thanks, Hamzah and I guess, you don't have to give you the caveat the yeah.
We only guide for the fourth quarter and we'll talk to you in 90 days about what we see going into 2022.
But I just do want to reflect on what we say our business model as of May be flipped before I talk to market.
Thank you.
It is about the content, we've talked about even to your questions. It is about.
Underlying production.
Go in the different various markets that we serve.
And it is about also continued to capitalize on some of the execution things that Heath talked about on the restructuring.
We're still not at the entitled margin.
And 2 of our 3 segments and it is how do we use that capital to return of 2 so I do think it's important.
That's the way we think about Te.
And it's.
The important that we keep in front of us.
And some of this I talked about in transportation.
We do still see.
The runway around production.
The semiconductors had been a little bit of a governor of this year.
That probably it will get fixed I think people say in 2022 at some point, but also that the consumer demand and inventories being depleted on car lots.
Really or something that you could see auto production.
Going up certainly our content will continue.
And industrial.
Manufacturing Capex is accelerating I mentioned, we're seeing it in semiconductor we are benefiting from that we're seeing it in the automation, we're benefiting from that.
And what we're seeing in medical as well as energy looks like very nice legs to it.
The 1 spot that we don't sort of see any signs of acceleration is around aerospace and defense and Thats just something there is good consumer trends we.
We arent seeing it yet in that supply chain.
And then in communications I would just say cloud and we expect to be strong.
When it comes to appliances and of the.
The consumer showing up strong.
Probably will normalize at some point I don't know if that will be in 'twenty, 2 or later, but certainly we are benefiting from a very strong appliance cycle here around the consumer so.
Really like how the end markets could be teeing up for 'twenty, 2 and we will share more within 90 days.
Okay. Thank you Andre we of the next question. Please.
Next question coming from the line of Joe Giordano of Cowen Your line is open.
Hey, guys good morning.
Hey, Jim.
Just curious on <unk>.
In auto on the on the customer inventories side of component parts.
Lot of.
Different commentary coming out so far in earnings season from what different companies are seeing just curious what you do internally to kind of make sure you're understanding whether it would like what percentage of orders that you're getting are for like actual production of cars right now and how much is for them.
You are the only customers building some stocks so like what's the internal.
Procedure for kind of Flushing that out.
Well a couple of things that we do do so yeah.
It's not unreasonable to assume that people will be trying to hold a little bit for buffer stock right now, but as I said.
We're not even able to meet current full demand.
And.
So that was about.
Internal of $1 million.
We do actually make sure as we check with our customers actually in some cases, we visit their warehouses to make sure we don't see.
According occurring.
And we also talk to our OEM customers because lets realize in some cases, we ship into the tier ones.
And there's lots of discussions.
Between the OEM the tier ones to make sure flow continues to happen. So I'm sure in some parts there may be some people trying to build up a little bit of extra buffer stock, especially in the supply chain environment I would tell you we're still trying to get to make sure we keep demand flowing to keep production going with the OEM lines.
Okay. Thank you Joe for the next question. Please.
Our next question comes from the line of Christopher Glynn with Oppenheimer. Your line is open.
Hi, Yes. Thanks also wanted to double down a little bit on the relationship between orders and consumption and.
As it pertains for.
Of the new I'm wondering if there's any mismatch relative to the actual production now with the transportation segment, specifically that we might qualify our view of production Advancement next year, and then as far as orders go would.
Would we anticipate a quarter or 2 where maybe.
You have the reciprocal of what we're seeing now and kind of mismatch of the other way with the continued outsized book to bills in the the <unk>.
Trailing periods.
Sorry, you asked about 3 questions there so.
Now let me start the total company level first.
Yeah.
The red for $5 billion of orders last quarter, and this quarter and if you take this quarter rebuild 3.8.
I think when you look at that gap that GAAP is certainly larger than normal.
There is about $100 million of that cap added real demand that due to our supply chain, we could not fulfill.
We've had when you look at that remaining GAAP I sort of think about it in a couple of buckets and certainly we look at it of lock with Saudi of fire of different end markets.
There was probably about half of that element, which relates to our distribution partners.
That is where people may not be able to get goods from us.
They are looking to our channel partners to procure.
And from that viewpoint, we have seen an increase very strong increase over the past 2 quarters in our channel partner orders.
But what I would tell you our channel partner inventory is at the same levels as last year.
So they are turned.
It was a very big they're placing orders certainly we're not able to meet them.
To the levels that they were ordering the <unk>.
Other portion would be from our direct OEM customers and it will be that theyre trying to make sure.
Ge's parts are not that 1.2 or 3 parts that they can't make something so we have seen people go.
Out of an extra quarter in some of their ordering patterns due to the current environment and I think.
As the supply chain continues to get better what you would see in places like transportation of transportation book to Bill is typically around 1.
It's not typically 111.2.
And I think as the supply chain catches up you will see things get more normal and get closer to where they should be as they normalize and the whole supply chain gets better. So I would expect that some time orders will get closer to billings.
Clearly as the supply chain continues to improve and things from better.
Okay. Thank you Chris the next question please.
Next question comes from the line of Sunny Saturday of Jpmorgan. Your line is open.
Hi, Good morning, Thanks for taking my question I guess Terrence just wanted to follow up on your comment about order trends by geography and seem like Europe is kind of the outlier.
They are there, but you still are you seeing some weakness in the border. So just if you can talk about what you're seeing in terms of the.
Difference there in Europe and in the recovery there and why are probably kind of the auto trends being kind of a bit of an outlier relative to the other regions.
No honestly when you.
With that.
I know, it's down by about 7% sequentially I would say when you look at that that's more around some of the normal summer shutdowns and transportation.
Then I would say it is.
A big deceleration I would say, we continue to see orders even as we're into July.
You look at elevated.
Elevated levels because of the conditions were in the house.
Current changing.
And I wouldn't say, it's 1 of them barometer.
The negative or positive, it's just a little bit slower than certainly we would normally see that has some of our customers do summer shutdowns in Europe in the automotive space and they are still.
Statements.
Yes.
Okay. Thank you just to make the plan for the next question. Please.
Next question from William Stein of UBS. Your line is open.
Great. Thanks for taking my question.
True.
You mentioned earlier of this fact of manufacturing where.
Car has 30000 parts or whatever it is and you need all of them to make the car not just the.
Not just the subset even if youre missing a couple of you of a problem.
Certainly true in almost all products in autos, though I'm sure you've acknowledged that there are cases, where these companies can decide well there is a feature.
For 2 that we can isolate.
And perhaps the content and get a car shipped.
We're picking this trend up pretty clearly from multiple sources that we're seeing the content of going on in order to get around the shortages.
Wondering if he is seeing this.
Yes.
If so to what degree and in particular does it.
Does it take away from your growth in sort of for the next couple of quarters in any way where perhaps.
More content rich car.
Wood of provide.
<unk> provided a better opportunity, but what the company shipping of something.
The smaller content opportunity or vice versa.
Well great question number 1 let's face if the auto manufacturers are being created because there is consumer demand.
And let's face it they want to get the vehicles out and if there is a feature where they can't get of component. They certainly are.
Taking.
It features out of.
Near term I would tell you on our revenue.
While we do see that around certain Oems that is not having a meaningful effect, where we play in the core architecture and the electrical network as well as in the backbone in an EV you may lose a couple of Interconnects.
Some of that there's not that much from a big picture content and even if you look at our content process share overproduction, it's not evident in any way.
So I would also say in this type of environment, while you have some of that the content.
We're also being able to have options to which we also benefit from but that isn't meaningful.
But that's.
And a big number either so it would probably impact others more than us, but with our breadth that we have across where we play in the architecture, while theyre doing it it's not having a meaningful impact on <unk>.
Okay. Thank you will address the question please.
Our next question from Matt Sheerin of Stifel. Your.
Fulton.
Yes.
Kevin I wanted to ask.
Scott about the strength, you're seeing in the communications I'd say agreement, specifically, the cloud business and the margins there.
It looked like record margin and so the question is how sustainable is that and then within the cloud.
On the demand side, how diversified are you I know obviously, there's just a handful of really big hyperscale players, but in terms of the diversification and the lumpiness of that business. If you could provide more color.
Sure, Matt and thanks, So a couple of things let me let me, let me talk about the cloud.
And then I'll talk about segment margin on the cloud element, what's really been nice is in those of you that followed us we very much are DMD business years ago.
Basically made the strategic decision again of consumer so we could focus on just high speed.
And I remember when we had.
Element of the $100 million with our cloud customers of 12 over $300 million today.
And our market share at 1 point in time was with 1 of the cloud providers or market share is pretty even across all of the cloud providers not only of the U S cloud providers, but also globally.
So the breadth of the breadth and the strength.
Letting of it as well as the share gain it's both the growth of the Capex in their investment, but also how our teams executed on share gain as well and bring an important technology to it and it has been a strong cloud environment.
I think I've mentioned already close to 20% Capex growth in cloud.
Whats nice is next year.
And I can see double digit again.
And as you not only get the underlying growth. It goes back to the secular trend around content is content to next generation as new chips come out on those servers. We also benefit from our next generation products from what the content is so feel very good with where we're positioned.
We still.
When you look at the segment margin.
The performance by the team has been very strong it's benefited not only by what we've done in cloud I would also say our appliance business in that global leading position.
That growth there and that business is also very much contributed to the margin in that segment.
So we still think that's of high teens business through cycle.
So with having both segments being very strong.
It's benefiting the margin there.
And it's something that has probably appliance normalizes, we could have some pressure, but net net debt that segment is above.
<unk> their origins of something we're proud of.
Okay. Thank you Matt query of the next question. Please.
Next question from Steven Fox Your line is open.
Hi, Good morning, everyone Terrence and Heath I was just curious if you could talk about.
When you start considering some of the supply chain pressures and inflation pressures.
So the sort of a new normal and how you might change managing your supply chain, how you might change hedging.
Of your customers might change and within that context can you just sort of give us a baseline for what youre doing on hedging.
Place right now thanks.
Sure Steven This is Steve I'll take the.
Our biggest input.
Target pressures that we have when we talk about.
Things that are impacting our P&L would be around resins and being around certain of the specialty metals rate that we use in our.
The products.
In many cases for the metals, we do have a hedging program that generally hedged out.
Put between months of our anticipated usage or purchase and then subsequent usage. So when we see inflation or deflation relative to the metals that tends to kind of layer in more quietly into our results both directions. So.
Debt that is unchanged.
And we will continue to do the the bigger issue that we are seeing when we are looking at some of these when we throw them into the broader supply chain bucket is we do have local sourcing which is really good of enables a lot of nimbleness and agility for our businesses, whether that's in Asia Europe or in the Americas to.
To be able to procure of product locally.
Versus shipping things around the world that also has the challenges of when we do have supply chain disruption in a particular location of a particular region, whether thats driven by natural causes like floods or otherwise.
And all of the.
Situation down in Texas earlier, this year, where a lot of the chemical companies came off line and put a lot of pressure through the resins and so forth and the Americas those types of things when they happen or floods in Germany as of when those when those things happen, we still have to be responsive to our customers and so sometimes that means we.
The moving some of our supply around the world of net give very expensive. So the freight costs for so long winded way of saying some of the freight cost layer into some of the supply chain pressures as well from us.
Because of some of our our structure.
For us we're going to continue to take advantage of of those local.
The big change.
And we just need to make sure that we have that flexibility going forward in terms of of our ability to manage and when do we foresee it being part of the new norm I don't know I mean the.
The semi con doesn't impact us directly but it impacts our customers, so youre, probably better equipped to come up with the.
Answer as to when the Semicon shortages dissipate.
In terms of some of the other things relative directly to us I would say, we're working through those and feel.
We feel pretty good about how we're ready to jump into FY 'twenty 2.
Okay. Thank you Steve we of the next question. Please.
Next question coming from the law.
Line of Jim Suva Citigroup Your line is open.
Thank you and my 1 question is actually a follow on to your response Keith that you just gave.
Not talking about the semiconductor shortages, but the resins input costs and all of that you talked about hedging consensus I'm wondering is shipping.
The costs have been around for a while now an extended amount of time all through Covid and these additional raw material costs. I'm wondering is it from time to start like re pricing some of your contracts with customers or put in indexing for raw materials.
All of your answers so far talk more about hedging.
And dealing with your supply and stuff I'm. Just wondering does the component go back to talk to the customer or are we just not there yet.
No Jim it's Terrence.
Twofold.
We've been there quite frankly so.
To sort of go where we are on it Craig.
Our channel partners, we did a price increase.
Kris and this of 20% of our business in January we just implemented another price increase and we're going to continue the loss in this environment.
And our direct customers.
We are having those discussions right now we do have metal riders and many of our.
Agreements that are.
Sort of like caller should the bust out of an area of the metal we have ability to recapture.
And then when you deal with resins and freight which are newer we are having those discussions with our customers, it's very different by industry.
And that's what has been going on and that day will layer in at different times.
But I feel we are having those discussions real time.
Okay. Thank you Jim we of the next question. Please.
The next question comes from from the line of loop Jiang of Baird. Your line is open.
Thank you probably a question for Keith just wondering I was hoping you could walk us through the sequential margin walk and the industrial margin.
It's given the step up that we saw versus first half levels and also looking forward here, maybe just in the fourth quarter. If you could give us any help on what the you know with that margin outlook might look like in industrial specifically share.
Well I think the first of all thanks for the question.
Yeah.
We've been pretty public.
With the journey the or on within the industrial segment margins right and we started this in the low teens and with the multiyear trajectory of.
Through a lot of rooftop consolidations of getting this business into the high teens.
We're kind of where are in that journey, we've made a lot of.
Arjun here in the quarter certainly a couple of the things that industrial benefits from 1 of the restructuring.
<unk> activity that is has been underway continues.
That comes in chunks of times is as operations get taken offline and so you might have some cost in 1 quarter before something comes offline and net.
Improved tends to create quarter to quarter, lumpiness, but we smooth it out over a year or longer you can kind of see that result.
The other thing is in terms of just hit on this the industrial segment does benefit from the opportunity on the price side because more of the industrial business goes.
Through distribution and so fairly large chunks of our industrial segment did have the opportunity to not only do price increases back at the beginning of the calendar year, but in July implemented additional price increases and that does have.
More of a near term benefit for.
For the segment versus some of the other segments, where it's more of a direct of OEM relationship and it takes a little bit longer to work that way through so those are a couple of the pieces as we look forward in the fourth into the fourth quarter.
It was the timing on things, you're always going to have that where the business is big and complex as we are in our industrial segment being of 4 billion.
The segment has a lot of moving pieces, but I feel very good about the trajectory as we move from the first half the second half or.
For or.
Third quarter of fourth quarter.
But I think even more importantly, as we work our way into 2022 and beyond there is still margin upside for the segment in.
And the team is hyper focused on that.
So more to come thanks for the question. Thank you wait for the next question. Please.
The next question from Nick Todorov of Longbow Research. Your line is open.
Yeah. Thanks, Good morning, I think the near term dynamics on the supply chain are well public.
But my question of it's Terrence do you see any impact on the longer term dynamics like design by your customers specifically in automotive you see any changes in the way they operate or think about 9 in the current environment and if you do what impact that the half from these changes in your business. Thanks.
The 2 folds.
From a design perspective.
When I think about the velocity and even coming through Covid.
The velocity of it did not change during COVID-19.
So if anything especially in transportation specifically around Tvs you see the launches that are happening you see the innovation that's happening real time.
Sure.
What typically happens with customers I think with all of US we are seeing the pace continues to accelerate because of the consumer expects of them, So and thats debt I think not only isn't the transportation it's everywhere, but it's also how it goes through their supply chain and also some of the benefits we get in our industrial business over People's investments, including our.
Around how their factories has to be more flexible and digitized.
When it comes to the question about supply chain design.
Clearly customers will reflect going through this period of what needs to be different and the more you are they'll probably pick some spots.
Of what do they have to do differently I would say, we're not seeing anything near term, we don't see people thinking about vertically integrating interconnects.
Versus maybe some other areas, especially in the transition to the EV.
What's good is we're very close to our customers and hopefully we can take advantage of it for.
1 of duty for T vs risk as they werent true because once again being with every OEM, we have a pretty good per view, especially in automotive as we go for.
Okay. Thank you Nick query of the next question. Please.
And our last question coming from the line of flashy.
Wolfe Research your line is open.
Hey, this is the shortest patel on for Rod.
Just 2 quick ones 1.
Could you help quantify the the supply chain impact that you saw in the quarter I believe last quarter. You mentioned, there was the $50 million headwind.
And then second.
Just looking at the year over year.
For operating in Paris, and I know, it's a bit challenging given the base effect, but it looked like your incremental margin.
Ex currency with maybe closer to 40% and I think in the past you've talked about 30% to 35% incremental margins, maybe just how we should think about that going forward.
Sure. This is heath I'll take the question.
In the quarter and Terrence mentioned this earlier.
We quantify the supply chain impact to us.
Defined more or less as our availability to the.
Some of you in some cases inability to get the input materials that we need the debt impact to us was about 100 million.
I think.
And I would say that probably 2 thirds of that would've been the transportation. So our inability to ship it was about $100 million that I would quantify on the topline.
For the supply chain impact.
And obviously the teams are scrambling day by day to recover that and keep customers happy.
In terms of the flow through listen the year over year flow through I would we're proud of it we're proud of it and when we look at it and not just in the third quarter.
Just to pay the flow through in the fourth quarter, but also on the year to date and full year basis, and we are proud of it I think I would caution you last our compares last year.
Were so far off relative to the severe downtick and that had a disproportionate of impact to our margins as well last year. So when we look at that on the downtick versus the recovery of a year later.
Get seasonality in a quarter in a given quarter, you're going to see some outsized numbers.
I don't.
I would not want to guide you to reset your expectation that 40% is the new norm for our flow through we are still confident in that 30% to 35% number which was up which we took up earlier this year, but due to some of the restructuring activities that we have been underway.
And I think it normalizes into that range.
But youre going to have quarter noise from time to time, particularly in the year over year basis that we had in the third quarter.
Okay. Thanks for the question trace and I want to thank everybody for joining us. This morning, if you have more questions. Please contact investor relations at GE.
And have a good morning.
Thank you ladies and gentlemen, your conference will be made available for replay beginning at 11.30, a M. Eastern time today July of 'twenty 'twenty to anyone on the Investor Relations portion of T. E. Connectivity is the website that concludes your conference for today you may now disconnect.
Okay.
Tom.
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Yeah.
Okay.
Yes.
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