Q4 2021 TE Connectivity Ltd Earnings Call
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Okay.
Ladies and gentlemen, thank you for standing by and welcome to the T E connectivity fourth quarter and final fiscal 2021 earnings call.
At this time all lines are in a listen only mode.
Later, we will conduct a question and answer session if.
If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question again press the star one as.
As a reminder, today's call is being recorded.
I would now like to turn the conference over to our host Vice President of Investor Relations Suzhou Shah. Please go ahead.
Good morning, and thank you for joining our conference call to discuss Te connectivity is fourth quarter and full year 2021 results with me today are Chief Executive Officer, Terrence Curtin and Chief Financial Officer Heath Mitts.
During this call we will be providing certain forward looking information and we ask you to review the forward looking cautionary statements included in today's press release.
In addition, we will use certain non-GAAP measures in our discussion. This morning, and we ask you to review the sections of our press release and 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.
Due to the large number of participants on the Q&A portion of today's call. We're asking everyone to limit themselves to one question. We are willing to take follow up questions, but ask that you rejoin the queue. If you have a second question let.
Now, let me turn the call over to tariffs for opening comments.
Thank you so John and I also appreciate everyone joining us.
Ladies and gentlemen, this is the operator, we are currently having technical difficulties. Your car will resume shortly until that time, you will be placed on music hold thank you for your patience.
Yeah.
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Ladies and gentlemen, thank you for standing by you will now resume our call Karen you may begin.
Thank you and I apologize for the technical difficulties.
I'm sorry at the beginning in my comments just to make sure we know when we first of all.
Hi.
I wanted to talk about our results for the fourth quarter as well as fiscal 2021 as well as the outlook for the fiscal 2022 first quarter. So.
So before he can I get into the slides, let me frame out the performance relative to the broader market environment that we're operating in.
I am pleased with our results in the fourth quarter as well as the strong performance that we delivered for the full year.
We continue to experience global GDP growth was strong end market demand across most end markets that we have strategically positioned <unk> to focus on.
And this broad growth that we're seeing is both in the consumer and capital spending areas and let me bring some color to that and how that relates to <unk>.
On the consumer side demand for autos and appliances remains strong and we continue to see increases in medical procedures that benefits medical device sales.
On the capital spending side, we see increased investments that relate to cloud and Datacenters factory automation semiconductor capacity as well as the need for more renewable energy sources.
And when you look at the results, we're going to talk about today youre going to see this broad shrank reflected in our orders in our backlog that will benefit us as we go into 2022 as well as our results in 2021.
While certainly this demand environment is a positive.
The balance of this is that the reality is we're still in a world that's dealing with Covid angle global supply chains that have not been able to keep up with the strong demand trends.
Within this backdrop, we are continuing to capitalize on growth opportunities across our served markets.
In the fourth quarter, we delivered 16% organic growth despite auto production declines caused by our auto customer supply chain.
This performance demonstrates the strength as well as the diversity of our portfolio.
We have strategically positioned T around certain secular trends and youre seeing the market outperformance in each of our segments as a result of this positioning.
In transportation, our leadership position is enabling us to deliver content growth from both electrification of the car as well as increased adoption of electric vehicles globally.
In industrial we're benefiting from accelerated global capital spending around factories and in communications, we are driving content and share gain in cloud applications.
In addition to the strong top line growth outperformance versus our markets. This year.
We have executed well to deliver margin expansion in each of our three segments.
The last proof point that I think is important is and then shows the strength of the portfolio is how our full year results compared to pre pandemic levels of 2019.
Both our sales and adjusted earnings per share in fiscal 'twenty, one we're up double digits versus 2019 and.
And we expanded adjusted operating margins by over 100 basis points by continuing the margin journey that were wrong.
More importantly, we also remain excited about the additional growth and margin opportunities that we still have ahead of us.
Now with that as a backdrop, let me get into the slides and I will discuss the highlights that we have listed on slide three.
Our teams have strong execution results in the fourth quarter, despite reductions in auto production and ongoing challenges in the broader global supply chain.
We generated sales of $3 $8 billion with 16% organic growth and adjusted earnings per share ahead of guidance at $1 69, which was up 46% year over year.
Adjusted operating margins were 18, 5% as a result of the increase was across all three segments.
And I'll share more details about segment results a little bit later.
When you look at the full year year over year sales were up 23% adjusted operating margins expanded approximately 400 basis points and adjusted earnings per share was up over 50% to $6 51.
Also as important of earnings is where we generated a free cash flow.
Our free cash flow was above $2 billion with approximately 100% conversion to adjusted net income for the year, demonstrating our strong cash generation model.
We also continue to remain balanced in our capital deployment with about three quarters of our free cash flow returned to owners. This past year and the remainder used for M&A, including the earning acquisition in the industrial segment that we mentioned last quarter.
When you look at our orders in the fourth quarter. They remained strong at $4 1 billion.
With strength in each segment and our book to Bill was a one point OA.
With these orders and where we positioned te.
We do expect a strong performance of our portfolio to continue into the first quarter with approximately $3 $7 billion in sales, which will be up mid single digits organically year over year. Despite a roughly 20% expected decline in year over year auto production.
We expect strong double digit growth in both our industrial and communications segments and I think this was another point that reinforces diversity of the markets that we serve.
Adjusted earnings per share is expected to be approximately $1 60 in the first quarter and this will be up 9% year over year.
Okay.
Now, let me talk to talk about.
The market some frame it to where we were just 90 days ago. When we last spoke.
In transportation consumer demand for autos remains robust, but clearly ongoing challenges with semiconductors and the broader supply chain continue to impact our auto OEM customers ability to produce.
Global Auto production came in lower than we expected just 90 days ago as our customers reduced production to enable the supply chain to catch up.
Auto production was approximately 2 million units lower than we anticipated in the fourth quarter and.
And we're expecting auto production to be in the 18 million unit range in our first quarter.
This first quarter production will be well below the nearly 23 million units made in the first quarter of 2021.
The key for US is that the trends around content growth for Te remained strong and we expect content growth to be at the high end of the 4% to six point range in fiscal 'twenty two as we continue to benefit from increased electronic vacation and higher production of electric vehicles.
No versus 90 days ago in our industrial segment. The key is that we continue to see an improving backdrop, which is benefiting our industrial equipment and energy businesses and.
And our medical business is growing year over year as interventional procedures increase.
The one area that we've not seen improve as the commercial aerospace business, it's sort of staying stable and we've not seen an inflection point in that business, yet to higher or lower growth.
And communications versus 90 days ago, we continue to see favorable end market trends with global growth in cloud capital expenditures and strength in residential demand benefiting our appliances business.
Now, while that's a view of what we've seen versus 90 days ago from a market perspective.
I also believe in this environment. It is important to tell you what we're seeing in our supply chain.
While challenges remain in the broader supply chain, we have seen some improvement in our availability of certain raw materials in our own supply chain versus 90 days ago.
90 days ago, we thought we were impacted by about $100 million of revenue due.
Due to us not having availability supply.
This quarter, and we're only and thats down to about $50 million.
And with this improvement this will enable us to increase production and inventory levels. Accordingly to ensure we can meet demand as our customers resolve their supply issues.
Now before I move into orders that will start on slide four I do want to take a moment to mention a few key highlights from the progress we made this year on our ESG initiatives.
Earlier this year, we issued our 11th corporate responsibility report, which discusses our one connected world strategy, which really encapsulates our ESG strategy.
And we hope that you read this report, which highlights the efforts that we are driving internally related to our impact on the planet as well as the innovation of our engineers to bring to our customers to make sure we're enabling sustainable applications.
Some of the key highlights I want to mention is that on the environmental side, we set up a new goal to decrease scope one scope two greenhouse gas emissions by over 40% on an absolute basis by 2030.
And this new goal is above and beyond the 35% reduction we have already made an absolute greenhouse gas emission reductions over the past decade.
We also continue to make progress on sourcing renewable electricity.
And today I'm happy to say over 20% of Te's production currently uses carbon creates electricity.
And also this past year, we began to report scope three emissions back.
Back in July.
If you look at social enough initiatives, we set a goal to increase women in leadership position by over 26% by 2025.
And I'm happy to say, we continue to focus on employee safety and engagement throughout the pandemic. We've got good feedback from our employees have been therefore during this difficult time.
So clearly I'm pleased with the continued progress that we're making towards one of our purposes as a company, which is to create a safer sustainable productive and connected future.
So now let me please get into the orders on slide four.
And we'll go through it by the segments in both.
And also on a geographic basis.
For the fourth quarter, our orders were over $4 billion.
With year over year order growth in all regions.
Our order trends and backlog remains strong in each segment and the order patterns. We're seeing are as we expected.
As we've been mentioning through the year and as you've seen in our book to Bill ratios order levels have been elevated with customers, placing orders for delivery beyond the current quarter due to the broader supply chain situation.
As a result, we're coming into fiscal 'twenty, two with a strong backlog position that is higher than we typically see for our business.
Sure.
When we look at the order patterns at a segment level industrial and communication orders are trending as expected with continued momentum in areas like factory automation and cloud applications.
I also want to highlight and remind you that in the industrial and communications segment, we have a relatively large portion of our business that goes through our channel partners.
And we're seeing our booking patterns begin to align more closely to our sell in which is a good sign.
The other key thing to highlight around our channel partners is that in 2021, we did not see inventory levels increase with them, even though they had a much higher level business levels have really they had a much higher turn in their inventories this year.
Looking at transportation.
We are seeing order levels match the production to the dynamics that are in line with our guidance.
When you look beyond the near term noise of auto supply chain pressure.
It is important to remember that consumer demand for autos remained strong and dealer inventories remain extremely low. So we believe this is a very favorable setup for medium and longer term auto production growth.
Now let me add some color on what were seeing organically from a geographic perspective on a year over year basis.
We continue to see growth in Asia, where China orders were up 17%.
And growth across all three segments.
In Europe orders were up 21% in North America orders were up 26%.
On a sequential basis, we saw orders decline in each region that reflect the order patterns I just talked about in our segments.
But the one key difference is we did see growth in our transportation segment orders in China sequentially or auto orders were up 9%.
So with that.
With an order backdrop, let's get into the segment year over year results and they'll be on your slides five through seven.
So starting with transportation.
Segment sales were up 16% organically year over year with growth in each of our businesses.
Our auto business grew 12% organically despite the declines in auto production that I mentioned.
We continue to benefit from increased production of electric vehicles, as our technology and products are enabling high voltage architectures and applications with every leading customer on the planet.
Hybrid and electric vehicle production grew 50% year over year, increasing from roughly 6 million units produced in 2020 to roughly 9 million units produced globally in 2021.
We also continue to benefit from content growth in non electric vehicles, driven by ongoing safety certainly data connectivity comfort and autonomy features.
As a result of these content drivers our content per vehicles has accelerated over the past couple of years from the in the low sixty's per vehicle into the mid Seventy's. This year and we expect to continue to outperform auto production going forward as the content that we've set up and the wins we have continues to grow.
Turning to our commercial transportation business we.
We saw 38% organic growth with increases across all sub market.
We are.
<unk> benefit from stricter emission standards and the increased operator adoption of euro six which reinforces our strong position in China.
Also we were also pleased to announce that two leading heavy truck Oems have awarded us the high voltage connectivity wins on their new electric vehicle platforms that they're rolling out.
This will provide future content growth and reinforce our market leadership position in the commercial transportation market.
In our sensors business in the segment, we saw 15% organic growth driven by transportation applications with the new program ramps that we've talked to you about in the past few years.
And for this segment adjusted operating margins expanded nearly 500 basis points to 18% driven by higher volume and strong operational performance by our team.
Okay.
Now turning to the industrial segment for.
Our sales increased 6% organically year over year.
Industrial equipment was up 32% organically with double digit growth in all regions driven by momentum in factory automation applications, where we continue to see the benefit from accelerated capital expenditures in areas like semiconductor manufacturing as well as in the automotive space.
Okay.
Our <unk> business declined 18% organically year over year, driven by the continued market weakness I talked about earlier.
And in our energy business, we saw 8% organic growth driven by increases in renewables.
Specially global solar applications.
And it was nice that our medical business grew 5% year over year and it's growing in line with the recovery that we're seeing in the interventional procedures.
At a margin level the segment expanded margin year over year by 200 basis points to 15, 9% driven by strong operational performance.
Now, let me turn to communications.
And clearly our teams continue to demonstrate strong operational execution, while capitalizing on the growth trends in the markets that we serve in this segment.
<unk> sales grew 36% organically year over year for the segment and in both businesses.
In data and devices performance continues to be driven by the position we built in high speed solutions for cloud applications.
We continue to see capital expenditures, increasing by our cloud customers and our content growth enabled us to grow cloud related sales at double the market rate this year.
And our appliance business, we saw double digit growth in all regions driven by both consumer demand as well as continued share gains.
It's clear that our communications team continues to deliver an outstanding performance with record adjusted operating margins of 24, 7%.
And this was up 300 basis points versus a strong quarter in the prior year.
Sure.
Overall, our segment teams are capitalizing on the growth trends in their end markets, that's demonstrating the diversity of our portfolio.
While delivering on strong operational execution in a challenging supply chain environment.
You are seeing this reflected in our results both for our fourth quarter as well as our full year and we expect this to continue into 2022.
So with that as a segment in our market overview, let me turn it over to Heath will get into more details on the financials as well as our expectations going forward.
Okay.
Thank you Terrence and good morning, everyone.
Please turn to slide eight where I will provide more details on the Q4 financials.
Sales of $3 8 billion were up 17% on a reported basis and 16% on an organic basis year over year.
Currency exchange rates positively impacted sales by $51 million versus the prior year.
Adjusted operating income was $706 million with an adjusted operating margin of 18, four I'm, sorry, 18, 5% with.
With strong year over year fall throughs.
GAAP operating income was $660 million and included $38 million of restructuring and other charges and <unk> 8 million of acquisition related charges.
For the full year restructuring charges were $208 million in line with expectations.
And I expect restructuring charges to decline in fiscal 'twenty, two to approximately $150 million.
Adjusted EPS was $1 69, and GAAP EPS was $2 40 for the quarter and included a tax related benefit of <unk> 92, primarily related to decreases in our valuation allowances associated with tax planning.
We also had a charge of <unk> <unk> related to the neutralization of the proportion of our U S pension liabilities.
Additionally, we had restructuring acquisition and other charges of 2014.
Free cash flow was approximately $535 million for the quarter.
And during the quarter, we utilized approximately 300 million for.
For acquisitions, including earning in our industrial segment, which Terrence mentioned earlier.
Okay.
The adjusted the adjusted effective tax rate in Q4 was 20% and approximately 19% for the full year.
For 2022, we expect an adjusted effective tax rate.
Around 19%, but continue to expect our cash tax rate to be in the mid teens.
So turning to slide nine.
This slide put some perspective on our performance this year and shows how we performed from fiscal 19 to 21.
Over this time period, we had to overcome a challenging operating environment.
And our performance is demonstrating the strength and diversity of our portfolio and the strong execution of our teams.
We are back above the 2019 pre COVID-19 levels on every financial metric with sales up 11% adjusted operating margins expanding over 100 basis points.
Adjusted earnings per share, increasing by 17% and free cash flow up 29%.
I am pleased with how our teams performed to deliver strong results through this cycle.
To provide some segment level examples our transportation sales were up approximately 15% versus fiscal 19, despite auto production declining over 11%.
During that same timeframe.
Similarly in our communications segment sales are up approximately 25% over this time period significantly outperforming our end markets. This also demonstrates some of the content benefits we are seeing across the portfolio.
Turning to year over year comparisons fiscal 'twenty, one sales of $14 9 billion were up 23% on a reported basis and 18% organically year over year.
Currency exchange rates positively impacted sales by $444 million versus the prior year, we would expect currency exchange rates to be a year over year headwind in our first quarter and could remain a headwind for fiscal 'twenty. Two if the dollar remains at current levels relative to other currencies.
Adjusted operating margins of 18, 1%.
And the expanded by nearly 400 basis points year over year with expansion in every segment.
Our adjusted earnings per share exceeded 53% year over year to $6 51.
I am pleased with our performance given the inflationary pressures we are experiencing.
As we have discussed in prior quarters, we havent implemented price increases across our business in fiscal 'twenty, one and we expect further increases in fiscal 'twenty two.
Turning to cash flow, we generated approximately 100% conversion to adjusted net income with record free cash flow of approximately $2 1 billion for the year.
As we go forward, we are confident that end demand will be robust for our products and given our strong balance sheet. We are in a position to do strategic inventory builds to meet anticipated customer demand given the broader supply chain uncertainty.
Okay.
In FY 'twenty one.
We continue to maintain our balanced capital strategy, returning capital to shareholders and remaining active in M&A. During the year, we returned over $1 5 billion to shareholders and utilized over 400 million for acquisitions.
Going forward, we remain committed to our balanced capital deployment strategy and expect to return two thirds of our free cash flow to shareholders, while supporting our inorganic growth initiatives through bolt on acquisitions.
Before we go to questions I want to reiterate that we are performing well in this environment. Despite challenges in the broader supply chain.
Our results for the quarter and for the year demonstrate the strength and diversity of our portfolio with contributions from each of our three segments.
Our first quarter guidance represents a continuation of our strong performance and we are excited about the growth and margin expansion opportunities as we move forward.
Now, let's open it up for questions Emma.
Can you please give the instructions for the Q&A session.
At this time I would like to remind everyone in order to ask a question press star one on your telephone keypad.
In order to have time for all the questions. Each participant is limited to one question.
Like to ask a follow up question. Please press star one to return to the queue.
Your first question comes from the line of Chris Snyder with UBS your.
Your line is open.
Alright, thank you.
Repaired remarks, you guys said that you expect auto outgrowth to come in at the high end of the 4% to 6% guided range for fiscal 'twenty two.
Just want to confirm that I heard that right and B that includes any impact from supply chain and then what should we make the company driving low double digit outgrowth on a two year stack.
As you guys outperformed by mid teens this year.
This compared to the mid single digit guided range.
Thanks, Chris and you have a couple of questions questions. Thanks for it in the first thing is you're right just to confirm what you heard when we're looking at the programs that we've won and looking at into 2022, we do see sort of being at the high end of the content outperformance range, we've given you at that 6% and.
We do think that will include any noise around supply chain is included in that count 10 outperformance.
Because like we always say.
Be careful looking at CTV on a quarter basis or content growth on a quarter, there's supply chain dynamics and I think what's important to us.
As.
Two years ago, we were in the slow <unk> or content per vehicle.
We talked to you about the trends around.
Electrification of the car powertrain getting turning electric as well as autonomy in the car and what's nice is we sort of view. This year. We're in the mid Seventy's of content and we continue to feel very confident around getting up into that mid eighties.
And we are benefiting from the electric vehicle ramp that's happening around the world.
It has grown 50% this year like I said.
Right now people are saying even than what IHS views on our basis to be a flat production environment electric vehicles are going to grow another 50% next year.
And I feel we're going to capitalize on it with the program wins, we have.
This year about 20% of our automotive revenue is driven by electric vehicles, even though it's not 20% of the total cars made on the plan.
So it just reinforces again the content that we've been driving where we positioned CEO round.
And certainly there are supply chain that will make production a little lumpy.
But when we look at 2022 and beyond we think Theres, a pretty good setup, where demand is where inventory levels are for production as well that at some point. We will also be a catalyst on top of the content that we keep CEO Paul.
So hopefully I touched upon all of your questions Chris.
Alright. Thank you Chris. Thank you can we have the next question. Please.
Your next question comes from the line of Mark Delaney with Goldman Sachs. Your line is open.
Good morning, and thanks very much for taking the question a question on orders the book to Bill was positive, but orders were down 9% sequentially. I was hoping you could speak to the linearity of the orders relative to typical trends and then talk about how T. At interpreting what the ordered at a $6 million. Thank you.
Sure. Thanks for the question.
Yes, I think we have to go back the past couple of quarters. We've told you. There was a lot of orders coming in as people were working with their supply chains.
But what we started to see is that in this quarter. The scheduling App continues which is a good sign I think people are accepting the lead times they have throughout the components in their supply chain.
Last time I read I think semiconductors are about half a year lead time, so we see customers looking at scheduling out so while our backlog is stronger clearly and Thats also scheduled out longer and we're seeing customers adapting to that the other thing is the and dynamics are very strong.
So when you think about car demand.
You also see our auto customers also keeping them scheduled out so net net we actually think this trend is a positive sign.
And we always said, we thought our orders when we get closer to billings than our billings getting closer to the orders we've had for the past couple of quarters and actually that they are starting to get scheduled out more is a good sign I would say the only area that we see any end market softness right now is around auto production, but that supply chain driven and what.
We saw how those orders moved out aligning to how our customers want.
Produce.
The order trends sort of mirrored exactly what's going on so I think it's getting a little bit more predictable, even though it scheduled out a lot longer.
Okay. Thank you Mark next question please.
Your next question comes from the line of Ami <unk> with Evercore.
Okay.
Okay. Thanks, a lot and good morning, everyone.
Yes.
Hi, Sarah.
The question for you.
If you reflect on your fiscal 'twenty one results in aggregate I was hoping you just talk about how do you think the supply chain.
Component availability inflation, all desktop impacted fiscal 'twenty, one revenue and EPS and then as I think about fiscal 'twenty to give you all of us.
Lesser headwind of stays about the same and what would the ramification be P&L in 'twenty differently.
Drivers.
Sure I mean, I'm going to let heath take that because theres a lot of different parts of it sure.
Thank you for the question.
Certainly as we progressed over the past 90 days since last time, we spoke.
We have starting to see from an availability standpoint things to improve things have gotten a little bit better with some of our inputs, particularly with the the resins side of things now we are still seeing inflationary pressures, particularly on metals resins, and probably most pronounced on freight cost.
And we do expect those inflationary pressures to continue into 'twenty two.
Now on the flip side of that.
As you are acutely aware of normally we would see price pressures of somewhere 1% to 2% of erosion each year.
In FY 'twenty, one that was largely neutral we did not see those price pressures were more back at par and we expect should we expect in 'twenty two as we move forward.
To see some some price increases as.
As we battled through some of these inflationary pressures so a lot of moving parts. There again I think from an availability standpoint things are improving.
And we're working through using price as one of the levers that we have to combat inflationary pressures.
Alright. Thank you Amit next question please.
Your next question comes from the line of Scott Davis with Melius.
Your line is open good morning.
Good morning, guys. Thanks, Scott good morning.
Congrats on.
2021 it was.
Great year for you guys and good luck for 'twenty two.
Thanks Scott.
In that context incremental margins you put up 42% I think it wasn't in Q4 pretty big numbers, but.
If I kind of back into the guidance in <unk>, it kind of implies a bit of a slowdown.
Is there any color around that at all or just being a little bit extra conservative and can we expect the type of incrementals that you've been putting up to be.
In the ballpark of sustainable.
Scott I appreciate the question this is heath.
The yes, youre right about the Q4 flow through in our flow through for FY 'twenty. One in total was in that range of the 30% to 35% range, which is which is our expectation.
As we move into 'twenty two.
To highlight we Ernie the acquisition layers in in 'twenty, two and weather did not have any impact in our 'twenty. One numbers case based on the timing of the closure of that transaction in Q1 alone. If you were to.
Just out for Ernie, which will come in at a couple hundred million dollars of revenue, but will not add much from an EPS perspective in our first year.
We work through the integration and all the value levers that we're going to pull for Ernie.
That alone.
Our flow through in the first quarter down to the level that you're referring to if you were to back that out you'd be up in that 30% range again, but again, we feel very good about the value creating opportunities that are in it brings to us in and we'll pound through the year.
To offset that pressure that it puts on our on our flow through and margins.
Okay. Thank you Scott.
You can we have next.
Next question please.
Your next question comes from the line of <unk> Mohan with Bank of America.
Hi, Thank you good morning Terry.
I know youre not guiding fiscal 'twenty to explicitly but how are you thinking about the growth in the in the end markets and.
Just wanted to ask a clarification around the ASB comment that was made earlier on the call. So some of this outperformance the magnitude of this right mid teens for the year or mid <unk> for the quarter is well above the 4% to 6% range. Some of that is supply chain dynamics. Some of it is ads b. Some of it is mix any anything you can do to help.
Parcels those.
Different things would be super helpful. Thank you.
Yes, so let me get into the market so romsey.
When we sit there I do want to go back to what I said in the script.
Do have a constructive demand environment.
Across when you get out to the edge and the applications that we're in and the only place that we haven't seen.
Constructive market is certainly around the aerospace side and that will come at some point I'm not sure that will be in 2022 for us, but that will come at some point.
Just to break it down by the segments a little bit.
In transportation and like you said Malmsey, we didn't guide, but I'll give you how we.
We sort of see the external data points around markets.
In automotive right now people in IHS is saying, it's going to be around 77 million cars made next year globally and thats pretty flat.
That has supply chain constraints and in the semi side continuing.
Could there be upside to that the supply chain gets workout potentially but I would also say the content that we talked about it being at the high end of the four to six.
Inclusive in any supply chain noise, we feel pretty good about.
In the commercial transportation space. This.
This year was a great year by our team we grew two extra market.
<unk> demonstrates our leading position also the content that we're getting around emissions that are all over heavy trucks as well as the data connectivity on heavy trucks go next.
Next year, we're going to have a slowdown in China in the market and I think that's very well known.
But on a flattish environment.
So slightly down environment in commercial broader commercial vehicles, we think content will cause great growth, there and I talked about the new EV wins that we have on the heavy truck SaaS wont benefit 'twenty to be further out.
In the industrial space the recovery feels like it's just getting started.
And we're starting to see improvements in medical our industrial and factory automation sides very strong energy has stayed strong throughout the entire 19 Ford we see that continuing especially with the benefits from renewable sources that were in the mid teens of our revenue, we think that can move up and our energy business.
Around solar and certainly wind.
And then the communication segment, what I would tell you as we look forward as you have cloud Capex is going to increase another 10% next year.
And when you think about we've grown <unk> the market here over the past three years, our cloud revenue has doubled since 2019, and we're going to have growth on top of that with that cloud Capex picture and then on appliances to consumer strong certainly we have to watch that the consumer's slows down a little bit there could be.
A little bit of a headwind, but right now we're sort of assuming that's a flattish market globally.
So we believe it's pretty constructive setup, certainly supply chain blinks, a big big piece of it we hope our supply chain continues to improve like we saw over the past 90 days.
And.
We will take advantage of that as we build a little bit of inventory early in the year to make sure we capitalize on the setup.
On the pieces around the second part of your question when you look at this year.
Other than the market the bigger piece of our growth is really around content.
So any way you want to parcel that I think he framed the price side normally we have 1% to 2% negative price last year were basically flat that shows the pricing that we've been pushing through that we started in January.
In the distribution area and we're in the middle of automotive contractual negotiations as we speak so I think theres more to come there.
But clearly the bigger piece last year has to do marketing content and that's what we get excited about as we go forward and I gave you that a couple of examples there between auto and also on the cloud side.
Okay. Thank you <unk>, we have the next question please.
Your next question comes from the line of David Kelley with Jefferies. Your line is open.
Hi, Good morning, Thanks for taking my question, maybe to follow up on the 20%.
<unk> sales mix in automotive Terrence I think you made a comment that prepare remarks, just wanted to confirm that.
It is <unk> and doesn't include hybrid and then just curious your EV sales have begun to scale is the content per vehicle tracking at that two times relative to internal combustion that you hadn't expected.
Just curious if you are thinking about any potential upside from there going forward.
Thanks, David So first of all from a clarification. Thank you for asking it.
When we talk EV. We do include hybrids. We could we include both elements of them.
So when you take that and even the numbers I quote about the 9 million units made globally that are electric that includes hybrid and plug in hybrids. So thats totally the area, we get a bigger content as you bring in the electric powertrain in both areas.
So if you take our automotive revenue this year with what you would add on electric vehicle both on the high voltage content and low voltage together, that's a little bit above 20% and the content sort of running the two wax and it's right on top of it and like we've always said when you think about hey, there is some things that get cannibalized.
On our products the low voltage things come over when you start putting in an electric powertrain you have charger inlet to actually they have to get the power into the battery we play along those connectivity certainly how it comes into the sell side and also some of the things we do from a switching of power as we bring the power back and forth and that creates.
The content above the low voltage position so it is.
Important there.
Other thing I would just don't want to lose sight on and I said in my script was as you get into the heavy truck.
We've given examples but I did mentioned in the prepared remarks.
We won two programs with two of the top five truck manufacturers of the World and these are turning from prototypes into real platforms and when you look at that and our commercial transportation business that I talked about a little bit earlier.
The content on those high voltage architecture can be over $1000 per vehicle.
And that's just on the high voltage architecture that doesn't even include some of the other elements that we would have on data and I'm really excited about those wins because they also truly show our leadership position there in commercial transportation when it comes to connectivity, we have a leading share by quite some distance and our global customers are looking at.
When they get to more electrified powertrains across their fleets and their offerings they come to us and let's face it you're dealing with voltages that are at 1000.
Versus what you would have in a car youre dealing with migration certain durability, which we've talked about harsh environments. That's what we love our engineers like to tackle those challenges and that we want to with the top five when their initial platforms I see that continuing just to go across the other players and reinforcing our grade commercial transportation.
Business.
Okay. Thank you David the next question please.
Your next question comes from the line of Joe Giordano with Cowen Your line is open.
Hey, guys good morning.
Hey, Jeff can you hear me okay.
Okay.
Keith I just wanted to kind of.
Clarify couple of things here.
With the orders running arguably a little bit hot and outsource.
In terms of the commentary about there's still $50 million of stuff that you would have liked to have shipped out.
But couldnt verse was 100 last quarter I'm, just curious on the inventory build because it was pretty substantial in the quarter and I get why you'd want to have some protection there, but just wanted to square like the ability to build that kind of inventory with also the inability to get things out the door and high waters. So can you kind of just kind of square that for me.
Sure Joe.
First of all.
As diverse as our portfolio is in as many different products.
Imagine the complexity of our manufacturing environment and our supply chain right. So it's not just one part it's not as simple as just saying well, what we can and can't produce right.
Our availability of materials has largely been resins and metals as I mentioned earlier.
Resins, particularly are improving and metals were working our way through so as we look forward and we continue to anticipate resolution of some of those input challenges that we have it does give us the ability to start having a little bit more foresight into what we wanted to do strategic build the heads.
Right I mean, if you think about.
Where we're sitting here, we're not going to sit here and predict when some of the semi con challenges for our auto customers. Specifically get result, you should ask them or the semicon companies right, but what we do know is that there is really really strong demand out there for us.
Automobiles and that's not just a U S comment that's really globally.
And the shortage of those vehicle on dealer lots.
Give us a lot of <unk>.
Ability to play offense here in terms of being bullish about when that demand comes back we want to make sure that we are ready for our customers and not going to be holding up any kind of ramp that they may have now when that ramp happens is still TBD.
And I'm not going to signal that this number inventory build is going to be massive but we are going to take advantage of.
A little bit of a slowdown in the auto production world and.
Get ahead of it so we're ready.
Okay. Thank you Joe can we have the next question. Please.
Your next question comes from the line of Christopher Glynn with Oppenheimer. Your line is open.
Hey, Thanks for taking my question good morning.
Chris.
Curious about.
Margin outlook generally.
Yes.
So margin progress at each segment.
Fiscal 'twenty two.
For communications in particular comment maybe flattish appliance markets, but.
The second half comps are kind of opex.
The charts, how should we think about the leverage to the.
Decremental margins.
Yes segment.
Well I think it's a good question, Chris and it's one that we've talked to you about.
The.
The 30% flow through is still what we're gearing up for for the year.
In terms of that now.
Now seat within that I think youll see that the the strength more out of the industrial end out of the transportation businesses.
The communications side as we've talked about has been running poorly hot but it has now for several quarters in a row and it really shows at these volume levels, what it looks like particularly out of appliances.
Terrence mentioned, we're anticipating a flatter plants market as we work our way through the year I'm not suggesting that's all going to happen here in the first quarter, but were probably taken on an approach there where we see a little bit of contraction in the margins.
I'll be more to come as we are able to see what volume of looking like.
So in terms of the Decrementals on that I think you could roll through roughly the same kind of math, but.
We targeted about 30%.
Flow through on the organic side, and Thats really where our focus continues to be as part of our business model for FY 'twenty two.
Alright. Thank you Chris next question please.
Your next question comes from the line of Cemig Chatterji with J P. Morgan. Your line is now open.
Yes. Thanks.
Thanks for taking my question.
Any classifications on order trends.
Communications seem like it moderated quarter over quarter, what the order trends a bit more than the other two segments. So is there something going on there I know you spoke about strong.
Demand from the cloud customers and then similarly, I think you mentioned in your prepared remarks, China automotive orders being up.
Is that EV or is that still like an inventory build as if you can clarify those two auto trends. Thank you.
Yes, I wouldn't say it see us other than.
Just things getting a little bit more normalized scheduled out there is nothing unique in their cemig in regard to the auto.
I think one of the things just to highlight.
It's nice to see the China Auto go up certainly they are being impacted as well by some of the supply elements that are happening on the world and this would traditionally the strong China build quarter and we're not getting a strong trying to build quarter because of the supply chain issues have gone through so.
Wouldn't say you should read into that more EV or less CV in there I think it's pretty much in line with what we said on a global basis, because Asia is still is the predominant largest region of electric vehicles.
Compared to the other two regions so.
We were pleased to see that trend in China, continuing to stay up and grow certainly the supply chain continues to need to help us there.
They closed down.
It is an important market for us.
Okay. Thank you can we have next question. Please.
Your next question comes from the line of Joseph Spak with RBC capital markets. Your line is open.
Thanks, Good morning.
First just a quick clarification I don't know if I heard this but how much are you assuming global production for auto is up down or or maybe flat quarter over quarter and then if you could just talk a little bit about.
How are we sensitivity or two recovering pricing for commodities, maybe by end market, how that's going for you.
Yes, so first off on auto production auto production was about 2 million units light in our quarter, we just had versus where we guided.
In the first quarter, we're assuming 18 18 million unit range.
For auto production in our first quarter, which is compared to $23 million last year's first quarter. So that's a 20% down I mentioned on the line and certainly we're not guide for the year, but I believe IHS has that will in our fiscal period around 77 million units for the year, which will be flat year over year.
In regard to pricing pricing is very different by our end markets. When you say receptivity I Wouldnt say anybody likes pricing. So I wouldn't say people are saying.
I'm happy about it but I would say, we're pulling different levers as he said.
Some we can pull quicker and places where like we go through our channel partners smaller customers in places like auto it's more contractual agreements and Thats. We're in the middle of those and that will continue to be a recovery.
Throughout this year. So it is very different.
The stats at Heath laid out sort of framed it nicely and what the benefit we've gotten as well as how we're thinking about it into 2022.
Okay. Thank you Joe we have the next question please.
Your next question comes from the line of William Stein with True Securities. Your line is open.
Thank you for taking my question.
Hi, Thanks, I have a question about the communications end market, that's been doing very well the last.
In the quarter.
Really but in particular, the comms end market to what degree is the upside we're seeing they're related.
Specifically the cloud service providers upgrading to 201 case, and I think 400 gigabit per second intra datacenter columns.
Which we think has been going on for a while versus sort of more broad based.
Capex exposure and does your growth here reflect more.
Broader end market growth or.
Broad or narrow end market growth or share gains from either new or improved products. Thank you.
Thanks will.
Couple of things.
The market and the growth we're benefiting overall from high speed applications. So when you look at D&A overall, it is anywhere where youre, having high speed getting put in and that can be anywhere in the network certainly the bigger growth levers with the cloud providers and our position across those cloud providers as I think I've mentioned in other calls has really been.
Pretty even as we gained share.
And we aren't weighted to one of the cloud providers globally versus another but we are benefiting from their capital spending trends in that capital spending trend as they are very much focused not only on speed. There are also focusing on how they continue and implement AI to make sure that happening at more specific compute and scaling computing power and also help.
<unk> them get to their cost of total ownership, including their impact on energy usage down and what we've continued to see as they're making their investments which are in line with what you said.
We're seeing them wanting to spend another 10% around the cloud and data center going into next year and the content that we're getting is very strong with the share gains as well that is why you saw us in that specific product niche. We grew about 65% this year, where their capex went up 30%.
And these are things being deployed real time as they are trying to keep up their cloud offerings and we've become a very good partner tactical as well as service part performer and we've actually strengthened during the Covid time.
Okay. Thank you will can weigh up the next question. Please.
Your next question comes from the line of Matthew Sheerin with Stifel. Your line is now open.
Yes. Thanks, Good morning, I wanted to ask a follow up on the inventory issues first.
Looking at your customer base are you seeing any pockets of inventory build we're seeing that from some of your peers from your auto customers and also if you look at your channel partners, particularly the industrial markets, which had been strong.
Signs of build there and from your own perspective, you talked about building inventory as you get into fiscal <unk> could you tell us how that impacts your free.
Cash flow and the conversion rate, which is typically around 100%.
Yes.
Let me take part around what we see out in inventory in the World and then we'll get to Keith will talk about our inventory first of all from the channel partners I would tell you.
Our channel partner orders have accelerated over the past three quarters, but they have leveled out now.
So similar to the other order comments I've made.
We have seen leveling, we've been able to service more.
To them as our supply has improved but we have not seen their inventory increase on our product set so theyre turn levels have accelerated here.
And Theyre touch on product more to get it out because of how quick they are turning it so inventory levels in 'twenty. One have remained relatively flat, while they've had significant growth as they're trying to help.
The customers and their supply chain solutions to those.
When it comes to our customers, we do see customers holding more inventory.
Customers have scheduled out further but we also have customers that some areas are still very low and certain inventory pockets. So certainly the supply chain is trying to get to a normalized I would say on both sides of the equation.
You see it and it's also what's happening in auto.
You need about 30000 parts to make a car if one of them isn't there in one plant cars not being made so when we look at it we're always going to have supply chain noise, whether it's building are coming down a little bit, but we do view that as noise.
It's back to the comments, we said about content, we feel good about the 6% content growth over production next year, including any supply chain delays.
And on the question about our inventory build I think it gets down to it relative to our cash conversion rate.
I think it gets down to the timing.
The way we're looking at it now is it's probably more of a first half issue, where some inventory builds and then as we can bleed that off we're taking basically taking advantage of some slower auto production here in the early part of the year, so as part of that.
It just gets into the timing it could put a little bit of pressure on that 100%, but where we have other levers as well that we're looking at in.
We'll continue to assess that and I think we'll be able to give you a better update on that answer here a quarter or two from now.
Okay. Thank you Matt we have the next question please.
Your next question comes from the line of Steven Fox with Fox Advisors. Your line is now open.
Hi, Good morning, just on the 110 basis points improvements since 19 on the operating margins I was wondering if you could.
Breakdown.
Sort of how you got there between.
Between volumes restructuring.
You know, maybe some of the offsets and any implications for the risks achieving 30% Inc.
Incremental margins this year. Thanks.
Sure Steve Yes, I mean, you are where you have been covering for longtime view well aware of the restructuring endeavors that we've undertaken and we've been very focused in particular areas around industrial this past year and some things that we did on a footprint basis in Europe.
We would execute on with the transportation and then we're benefiting greatly from the communications side with that a lot of that heavy lifting done several years ago on the footprint side. So as we as we work forward Theres no doubt that as we think about that that ability to grow over 100 basis points from 19 two.
<unk> to 'twenty restructuring played a meaningful part of that but I would also tell you that some of the things that we were able to do around.
Holding off in 2021.
The price erosion through some of the actions that we undertook as well as the ability to offset some of the inflationary pressures with productivity where meaningful part and then volume goes a long way as you know the scale business and having volume.
It means a lot. So I don't know that we've ever actually broke down externally what percentage of that increases in certain buckets, but you can imagine there was contributions across the board on that side of things in terms of as I mentioned earlier listen as we sit here and although we're not guiding for the full year, we feel good about our ability.
To hold to our business model of margin expansion through through even if it's modest this year through.
The flow through of that 30%.
Okay. Thank you Steve can we have next question. Please.
Your next question comes from the line of Jim Suva with Citigroup. Your line is open.
Thank you so much for the details.
It's great to see that your restructuring costs are going lower.
You just kind of curious that would to me imply that your operating margin continues to remain low we will hit this 30% margins, even better or with this recent acquisition of Ernie should we think about there may have to be a little bit step up in restructuring or I'm, just trying to get at kind of your.
For restructuring sounds like a lot of the heavy work is behind us, but then again it could be timing and there was a pandemic and all of these type of other things. So if you could talk to us about restructuring that would be great.
Sure Jim.
You and I have had a lot of discussions about this over the last few years I. Appreciate the question honestly as I sit there and look at where the buckets are.
The bigger items the bigger.
Projects that we have underway in terms of right sizing the footprint.
Some of the things that we've talked historically about getting right sized in industrial and getting to the right places of manufacturing for automotive, particularly in Europe and a lot of those things are underway those charges have been taken and we're working through those.
Where we're seeing more of now Jim is the impact of some of the more recent acquisitions and when acquisitions come into our portfolio inevitably they come in with multiple sites and in some cases, we do need to go in and collapse those into our existing footprint or in some cases, they available opportunities to take legacy.
Hey locations and move into the acquired sites. So some of the things that we're now seeing whether that's what ernie or with some of the sensors activities that we acquired here in the last few years.
Is driving some of those restructuring efforts and plays into the overall return and valuation considerations for the acquisitions that we do.
In terms of the return and value creation opportunities. So we're starting to make that move we're not quite there in terms of cleaning up some of the legacy locations, but we're getting closer.
Okay. Thank you Jim next question please.
Your next question comes from the line of Luke junk from Baird. Your line is open.
Good morning, Thanks for taking the question lot of near term focus here wanted to ask more of a strategic question and that is.
Curious how do you play offense are positioned <unk> to grow above market in areas that hit late in the recovery, specifically thinking about areas like medical which is encourage really just starting to come back right now or something like calm air.
I'm a better position on the back end given the size and scale of the organization versus say smaller competitors in those markets.
I think during this time certainly.
Our customers have looked for and seen stress around the supply chain from smaller competitors. So I do think any of us are larger will benefit during this time.
So that is something I think is a benefit for the larger companies in our space.
When you talk about those two areas medical and we haven't talked about for the past couple of years due to the impact that we did have one procedures, but when you look at how procedures are increasing the innovation that we've been doing with our customers has not slowed down during this time, but certainly the levels of procedures went way down due to the Covid dynamics, So I <unk>.
Do think youll see us talking more about medical again from a growth perspective more like we've had historically than you've experienced the past couple of years.
And <unk>, it's a little bit different.
I think medical had a temporary pause due to procedures common areas. One that's it's been hit hard.
It's been hit hard certainly youre starting to see some discussion around single aisle aircraft you get into dual aisle aircrafts dual aisle aircraft is probably further way and in those cases im not sure youre going to have as much new innovation happening, even though we do have wins on what's happening in space certainly.
Lower.
Satellite as well as we're also working with some of the newer EV <unk>.
Providers, depending upon what ramp that so.
I think net net certainly a much more bullish tone around medical I think and com air because that how it really got hit as the overall market and our customers also got disoriented.
They had to reposition really as one that's going to be a little bit longer out I feel we have a very good position there certainly a leading position, but I'm not sure we're going to need at a time for that to work out and what the growth trajectory is longer term based upon what our customers do.
Okay. Thank you Luke next question please.
Your next question comes from the line of Nick Todorov with Longbow <unk> Longbow Research.
Yeah, Thanks, Hey, good morning, everyone.
When you look at your auto sales growth.
Fiscal year, 'twenty, one or calendar year 'twenty, one it looks like your sales, we will grow production by more than 20%.
So can you help us understand the components within that I think you touched on this how much of its content.
Pricing, how much is FX and how much is driven by some inventory build that you talked about the customer. Thanks.
Hey, Nick we did not grow 20% above production so.
We did we did have content outperformance the market was up about double digit this year.
And if you take the real element, we were in double digits of content outperformance, a very strong 50% increase in EV, certainly continued growth and even.
Traditional cars ice engines, we saw content growth.
Price was only a little bit so net net I would just ask maybe to look at your math it wasn't 20% by any means.
And once again that content momentum, where we're at in the mid seventies.
Shared with you our path to get up to mid 80 based upon the trends around powertrain trends around data connectivity certainly traditional safety features but we feel very good about where we're positioned and also how well we're positioned globally with every OEM and Thats one of the special things about T were essentially on every car on the planet.
Okay. Thank you Nick next question please.
Okay.
Binder he would like to ask a question press Star then the number one on your telephone keypad your.
Your next question comes from the line of Rod Lache with Wolfe Research.
Hey, this is Ryan on for Rod I, just wanted to come.
Come back to the question around orders and specifically within the automotive segment and I guess, what I'm trying to think through and if.
If I look at 2021, how much of a benefit there was from.
Kind of unusual order activity from from OEM customers.
We can think about that going forward I know youre talking about six points of outgrowth, excluding that I just wanted to.
Why is that and then on the <unk> side, I know you've talked about $120 of content per vehicle for beds on average.
Given the growth that youre seeing.
And some of the wins that you've had which I think have exceeded $120 of content do you see an opportunity for that to maybe.
Increased faster over time, and maybe even be higher than that 120.
Well I think a couple of things there when you look at.
Production next year to.
The 6% that we said is content above production. We said includes any supply chain noise. So you said excluded my.
My comments said that include include any of that noise that can have on supply chain that we have every year.
In regard to content.
The comments that I made earlier about the <unk>, we are running <unk> would be both on all electric vehicles, including hybrids and I think that penetration is continually going to play out I think the one thing thats important certainly we share things around.
Vehicle content that are very specific models, but you also have to remember there is also the models that are more mainline traditional.
Average median income type cars that are in that content as well so net net I like where we're gaining our share continue the traction we add more content and electric vehicles go faster and we win more programs. We can maybe be above that but right. Now we expect next year will be at that 6% high end of the range.
Alright, Thank you Chris I want to thank everybody for joining us. This morning, and if you have more questions. Please contact investor relations at Te. Thank you and have a nice morning. Thank you everybody.
Ladies and gentlemen, the conference will be made available for replay beginning at 11 30, a M. Eastern time today October 27 on the Investor Relations portion of Te connectivity website that will conclude your conference for today.
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