Q1 2022 TE Connectivity Ltd Earnings Call
Yeah.
Ladies and gentlemen, thank you for standing by and welcome to the T E connectivity first quarter 2022 earnings call.
At this time all lines are in a listen only mode.
Later, we will conduct a question and answer session if you'd like to ask a question simply press Star then the number one on your telephone keypad as a reminder, today's call is being recorded.
I would now like to turn the conference over to your host Vice President of Investor Relations as usual Shah. Please go ahead.
Good morning, and thank you for joining our conference call to discuss T E connectivity first quarter 2022 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. We ask you to review the forward looking cautionary statements included in today's press release and.
In addition, we will use certain non-GAAP measures in our discussion. This morning, we ask you to review the sections of our press release and the accompanying slide presentation that address the use of these items.
The press release and related tables, along with the slide presentation can be found on the Investor relations portion of our website at <unk> Dot com due.
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.
Let me turn the call over to tariffs for opening comments.
Yes. Thank you Shaun and also thank you everyone for joining us today to cover our results for our first quarter, along with our outlook for the second quarter of our fiscal 2022.
As I normally do them before Heath and I take you through the slides I want to provide some key takeaways that frame our performance relative to the broader environment that we continue to operate.
Our results represent a strong start to our fiscal year in a world that continues to have challenges.
Our fourth quarter builds upon the strong momentum that we demonstrated throughout our fiscal 2021.
So things are playing out as we expected, including the outlook for our markets.
We also continue to be excited about the growth opportunities, where we are positioned to year round.
As well as the strong operational performance of our teams to expand margins and drive earnings and cash flow growth as we go forward.
Yeah.
In our first quarter, we delivered strong results in each segment.
On a year over year basis in quarter, one we delivered sales growth of 8% and adjusted earnings per share growth of 20%.
Along with operating margins of 18, 6%, which are up 90 basis points over last year.
On an EPS perspective, our adjusted earnings per share of $1 76 was a record for our first quarter.
Okay.
The demand environment also continues to be strong as evidenced by the orders that we will talk about and our orders remained about $4 billion in the quarter.
And what Youll see is this reflects strength across many of our end markets and provides a positive indicator of ongoing future growth.
What we like about our performance in the first quarter is that it continues to demonstrate the strength and diversity of our portfolio.
Our industrial and communications segments grew over 20% and 40% respectively.
More than offsetting expected impacts from the mid teen auto production declines that impacted our transportation segment.
Yes.
Also you continue to see in our results the benefits of where we strategically positioned our engineering investments around certain secular trends.
This is generating market outperformance in each of our segments as a result of this positioning.
The content story growth is real and we continue to benefit from our leading position in electric vehicles factory automation as well as cloud applications.
20% of our auto sales are now driven by hybrid and electric vehicles, and we continue to see ongoing content growth in auto around electronic application across both electric and combustion engine platforms.
We are also generating content outperformance from automation and internet of things and manufacturing and higher speeds and greater efficiency in the data center.
And also throughout today's presentation I think it's going to show our teams continued to execute well in a challenging supply chain environment and is clearly reflected in our first quarter results as well as our second quarter guidance.
We are also pleased that we continue to generate performance that is in line with our long term business model goals.
And our first quarter results when you look with our second quarter guidance imply a first half growth of 5% growth in sales and 13% growth in adjusted EPS versus the first half of last year.
Along with continued margin expansion.
Okay.
This strong performance is within the backdrop of global GDP growth environment, and higher end demand across most end markets, where we have strategically positioned ta.
We are seeing broad strength in capital expenditures that relate to factory automation.
Spansion and manufacturing capacity.
Cloud and data center investment as well as investment in renewable energy sources.
If you look on the consumer side of the economy demand for autos remains healthy with auto production improving sequentially and our first quarter.
And we continue to see content growth to drive market outperformance in both our commercial transportation and auto businesses.
We continue to see expansion in our content per vehicle driven by our leading position in electric vehicles as well as ongoing expansion of electronic vacation in both internal combustion and EV platforms.
And we clearly expect that this trend is going to continue as we move forward.
Certainly while this demand environment is positive we're still in a world that deals with COVID-19 as well as supply chain challenges.
The supply chain challenges and inflationary pressures that we've been discussing since the onset of Covid are slightly worse, it 90 days ago.
I do want to highlight that I'm pleased with how we are managing through this and making continued progress towards our business model goals. Despite these ongoing factors.
With a healthy demand in the current state of the global supply chains, our ability to produce will be a key factor of our near term revenue performance.
We continue to benefit from our global manufacturing strategy to produce and region.
And our teams continue to drive price actions and productivity initiatives across all three of our segments.
So with that as a backdrop, let me now turn to the slides and discuss some additional highlights and I'll start on slide three.
Okay.
Our quarter, one sales of $3 8 billion were.
We're up 8% on both a reported and organic basis and adjusted earnings per share was $1 76, which is up 20% year over year and a record for our first quarter as I mentioned earlier.
Adjusted operating margins were 18, 6% up 90 basis points year over year, driven by the growth and strong operational performance in our industrial and communications segments.
We do continue to see a strong demand environment, which is reflected in our orders of $4 $3 billion.
And I will get into more details on the orders on the next slide.
Looking at free cash flow, we generated approximately $370 million of free cash flow in the quarter and we returned approximately $410 million.
To shareholders through buybacks and dividends during the quarter.
And moving away from financials for a minute.
I do want to highlight that we continue to be recognized for our ESG initiatives and.
And we were named to the Dow Jones sustainability index for the 10th consecutive year.
Along with our recent ranking in the top 20 of Investor business day at least 100 best ESG companies.
I think importantly, we remain committed to our goal of decreasing scope, one and scope two greenhouse gas emissions by over 40% on an absolute basis by 2030.
Which is above and beyond the 27% reduction that we've already made over the past decade.
And while I've talked about our team's performance about their execution, let's face it to make the sustainability investments is also how our employees engaged in that as well and I am very pleased with the progress of how our employees are engaging as we drive sustainability initiatives across GE.
Okay.
So let me turn to guidance for the second quarter.
And we expect that the strong performance of our portfolio to continue in our second quarter with approximately $3 8 billion in sales and this will be up 2% on a reported basis and 3% organically versus the prior year. Despite the year over year decline in auto production.
We expect double digit growth in both industrial and communication segments to drive our second quarter growth once again, reinforcing the diversity of our portfolio.
We do expect adjusted EPS to be approximately $1 70 in the second quarter and this will be up 8% year over year.
<unk>.
So now let me get into the order trends in markets and if you could please turn to slide four where you see our order progression by our segments.
Yes.
For the first quarter, our orders were $4 $3 billion and our book to Bill was 113.
And we saw year over year and sequential growth in our industrial and communications segments.
In our largest segment transportation order levels came in as we expected and our book to Bill was 1.0, which aligns closely to auto production trends.
Global Auto production came in slightly better than we expected in the first quarter at approximately 19 million units and we expect that auto production will remain at a similar level in the second quarter, reflecting roughly a 5% reduction in year over year in auto production.
Yeah.
We continue to anticipate that auto production will improve in the second half compared to the first half and will return to year over year growth as we move through 2022.
In addition to production the trends around content remains strong.
And we continue to expect outperformance to be at the high end of our 4% to six range in 2022, as we continue to benefit from increased electronic vacation and higher production of electric vehicles, which we expect will be up over 30% globally. This year.
Now when you think about transportation there is certainly ongoing challenges with semiconductors and the broader supply chain that continues to be a governor governor for our auto customers ability to produce.
When you look beyond the near term noise in the auto supply chain, we continue to see a favorable setup for longer term auto production growth with healthy consumer demand and dealer inventories remain extremely low.
Yes.
So let me turn to the industrial segment orders.
And what's nice for the first time since the onset of Covid sequential orders strengthened across all businesses in this segment.
We see an improving backdrop with increased capital expenditures for factory automation manufacturing capacity related to electric vehicle infrastructure in semiconductors as well as investments in renewable energy and this increased capital investment benefits, our industrial equipment and energy businesses in the segment.
On top of that strength, we've seen improved order trends and our comm air and medical businesses that we expect to begin to see favorable year over year revenue comparisons and those business later this fiscal year.
Excuse me.
If you look at our communications segment, our order growth in the first quarter was driven entirely by our data and devices business and reflects the increased outlook for cloud capital expenditures as well as our ongoing share momentum.
We also see with our DSD customers, they're placing orders out for delivery beyond the current quarter due to the broader supply chain uncertainty.
While we continue to see favorable end market trends in DMD, we are seeing a moderation of the appliance market as we expected, particularly in China, and we would expect softening in the appliance market from the first half the second half of our fiscal year.
Yes.
With that overview of orders in markets by the segments, Let me add some color what we're seeing organically from a geographic perspective, and I'll start on a sequential basis.
In Asia Pacific and I'll exclude China here.
Those orders were up 18%, while in China orders were up 4% sequentially.
And outside of Asia orders were essentially flat sequentially.
On a year over year basis.
Organically again Asia Pacific, Excluding China orders were up 18%.
North America, and China orders were up 17% and 2%, respectively, and we saw a slight decline in Europe of approximately 4%.
So with that backdrop around orders of markets, let me get into briefly discuss our year over year segment results and that's laid out on slides five through seven and as I added a lot of color I'll just hit the high points here.
In transportation, our sales were down 2% organically year over year with declines in auto partially offset by growth in commercial transportation and sensors.
Our auto business declined 6% organically versus auto production declines that were in the mid teens.
Once again, you see the separation of our sales performance versus the market due to the content growth.
Te's technology and products are enabling high voltage architectures and applications with every leading customer and 20% of our sales are now driven by hybrid and electric vehicle platforms.
In commercial transportation, we saw 11% organic growth with outperformance versus the market due to content growth drivers that are very similar to our auto business.
And then sensors, we saw 5% organic growth driven by industrial applications as well as new ramps and transportation applications.
From a margin perspective in the segment adjusted operating margins came in as we expected at 18, 2%.
Yeah.
Now moving to industrial segment results are.
Our sales increased 18% organically year over year.
And the industrial equipment area, we were up 40% organically with strong growth in all regions and we're benefiting from the increased capital investment and spending across the globe.
In our energy business, we saw 17% organic growth is driven by our increased penetration of renewable applications that we've talked about with you.
And in our medical business grew 8% organically as we're starting to benefit from the recovery in interventional procedures.
And in our aerospace and defense business, our sales declined 3%, which is organically driven by the market dynamics in that space, but certainly our orders show a more positive outlook as we move forward.
From a margin perspective in the industrial segment, our adjusted operating margins expanded year over year by 130 basis points to 14, 8% driven by higher volume as well as the strong operational performance by our teams.
So let me turn to the communications segment I just want to start that you look at the performance of both businesses as well as the margin performance. It just shows that our teams continue to execute while capitalizing on growth trends in the markets we serve.
Sales grew 40% organically year over year for this segment with strong growth in each of our businesses as you can see on the slide.
In data and devices, we saw strong growth across all regions driven by content growth and share gains in high speed at cloud applications as our customers move towards 400 gig and next generation chip platforms as well as growth in server and artificial intelligence applications.
In appliances, we saw growth in all regions with continued share gains as we continue to differentiate with our customers around our global manufacturing network.
And from a margin perspective.
Performance was outstanding with another record and adjusted operating margins of 27%, which was up 950 basis points year over year, which was strong performance in the prior year as well.
Could you just take a step back and you look across our segments. Our teams continue to capitalize on the growth trends in their end markets demonstrating the diversity of our portfolio and delivering operational execution with both pricing actions within a challenging supply chain environment.
So with that as an overview, let me give it to Heath and I will get into more details on the financials and our expectations going forward.
Thank you Terrence and good morning, everyone.
Please turn to slide eight where I will provide more details on the Q1 financials.
Adjusted operating income was $712 million with an adjusted operating margin of 18, 6%.
GAAP operating income was 672 million and included $24 million of restructuring and other charges and $16 million of acquisition related charges.
We continue to expect restructuring charges of approximately of $150 million for the full year as we continue to optimize our manufacturing footprint and improve the cost structure of the organization.
Adjusted EPS was $1 76, and GAAP EPS was $1 72 for the quarter included eight and included a tax planning related benefit of five <unk>.
Additionally, we had restructuring acquisition and other charges of nine cents.
The adjusted effective tax rate in Q1 was approximately 18% and for the second quarter, we expect our tax rate to be very similar to Q1.
And we expect the adjusted effective tax rate for the full year to be around 19%.
Importantly, we expect our cash tax rate to stay well below our adjusted ETR for the full year.
Turning to slide nine.
Our results you see on the slide reflect the strong execution of our teams and the diversity of our portfolio.
As Terrence mentioned each segment contributed to the strong start to our fiscal year.
Sales of $3 8 billion were up 8% on both the reported and organic basis year over year currency exchange rates negatively impacted sales by $45 million versus the prior year.
Worse than expected.
We expect currency exchange rates to be a sequential headwind from Q1 to Q2 and the year over year headwind of approximately $110 million in the second quarter.
And if the dollar remains at current levels relative to other currencies.
<unk> could be a headwind of approximately three to 400 million for our full fiscal year.
Adjusted EPS of $1 76 was up 20% year over year and represents a record for the first quarter as mentioned earlier.
Adjusted operating margins were 18, 6% and expanded 90 basis points versus the prior year.
And the incremental flow through on the adjusted margins on revenue growth of approximately 30% in Q1 on a year over year basis.
I am pleased with our performance given the inflationary pressures, we're seeing in the challenges in the broader supply chain and as Terrence mentioned, we're pulling pricing leverage across the businesses to help offset those inflationary pressures.
Turning to cash flow in the quarter cash from operating activities was $532 million free cash flow for the quarter was $373 million.
The year over year cash year over year trend in free cash flow reflect reflects the strategic inventory builds to meet anticipated customer demand as we mentioned last quarter.
In Q1, we returned approximately $410 million to shareholders through share repurchases and dividends as noted in our recent proxy filing we proposed a 12% increase to our dividend that we expect to be approved by shareholders in March.
We remain committed to our disciplined use of capital and over time, we still expect two thirds of our free cash flow to be returned to shareholders and one third to be used for bolt on acquisitions.
So before we go to questions I want to reiterate that we are executing well. Despite the challenges we discussed in the broader supply chain our results for the quarter demonstrate the strength and diversity of our portfolio with strong operational performance from each of our three segments. The.
The demand environment continues to be strong as evidenced by our orders, which reflects strength across many of our markets and provides a positive indicator of future growth.
You're continuing to see market outperformance in each of our three segments as a result of our strategic positioning around secular trends and we continue to benefit from our leading position in electric vehicles factory automation and cloud applications.
We continue to generate performance that is in line with our business model goals and we are excited about the growth and margin expansion opportunities as we go forward.
So now let's open it up for questions. Rob can you. Please give the instructions for Q&A session.
Certainly at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
In order to have time for all questions. Each participant is limited to one question if.
If you would like to ask a question follow up question. Please press star one again to return to the queue and your first question comes from the line of David Kelley from Jefferies. Your line is open.
Hi, Good morning, Thanks for taking my question, maybe starting with the the order trends I appreciate all the color.
Industrials communications, clearly accelerated and transportation soften can you just talk about.
How are you thinking about the order implications for revenues go forward and maybe how we should think about some of the supply chain dynamics impacts on those orders as well.
Yes, Thanks, David and good morning.
I think first off Youre exactly right orders accelerated and I've said in my comments, we expected orders and automotive to step down and even last quarter. When we talked you know we had extreme content outperformance in the fourth quarter that we knew that the supply chain was going to be a little bit ahead and some inventory.
Is out there so the orders coming in as we expected, we really like and transportation.
And to your point, where we saw the Reacceleration was very much the broad acceleration in industrial and.
And the <unk> acceleration that I mentioned.
So when you take that that we see the reacceleration in time to trends like we all see around capital spending and industrial as well as calm air and medical accelerating for the first time really during COVID-19 sort of gets into the broad industrial cycle spending that we see.
And in communications I think what what it portends too we sort of have a tale of two cities. There. We have DMD that stays very strong cloud capex actually has moved up a little bit, but I would also say our teams.
Our winning bigger share programs around some of the applications I talked about I think you can expect that D&A is going to be strong and we do expect our clients' businesses to step down in the second half of the year versus the first half of the year and that I think we telegraphed.
Just is that that gets to a more normal cycle.
So feel like the order reduction in automotive is very natural the book to Bill being closer to one is more natural and I would also say as we look at some of the more predictability of what we're seeing out of our customers. It does set up to it feels like around this 19 million units can be.
Baseline to grow off of so it was nice to see automotive production go from 16 million units in our fourth quarter up to 19 in our first quarter and it feels like it as the supply chain gets a little better it has potential to move up as we move through the year and return to production growth. So net net I ask.
<unk> think.
I think it plays out very well for how we think about how the year can continue to improve and the demand environment stays strong very broadly and also it's very global as I said in my comments by region.
Okay. Thank you David we have the next question. Please.
Our next question comes from the line of Amit <unk> from Evercore. Your line is open.
Thanks, a lot and good morning, everyone.
Yes. My question really is on the EPS performance and there's a fair bit of moving parts here, but I was wondering if you could perhaps put.
Some context around the EPS performance were seeing specifically if you could talk about what really drove the beat in December quarterly with respect it would be helpful. And then as you think about March quarter, you're talking about EPS being slot, but maybe just talk about what are the puts and takes there as well.
Thanks, Amit this is heath I'll take that.
Listen we were pleased with our results and if you recall, what our guide was for the quarter going into the December quarter, we ended up beating on the top line by a bit more than a $100 million and that was largely driven by the higher auto production numbers that Terrence just referred to relative to our guide.
So we were pleased with that and we were pleased to see the flow through on those incremental on that incremental revenue.
In terms of the Q2.
Listen largely the top line is is going to be flat sequentially. As we anticipated we expect auto production to stay roughly flat at roughly the 19 million units.
There is some things.
Terms of the strengthening dollar that work against us in terms of a sequential headwind with foreign exchange and then if you look at the segments, we think industrial will improve modestly but would you see.
Tomorrow at communications coming down a tad sequentially, mainly due to appliances as Terrence referenced.
In his prepared remarks so.
From an EPS perspective, we don't expect.
Our communications business to stay at 27% we've.
We've talked in the past, but thats a bit overheated, particularly given the amount of her clients. That's in there, but as we move forward, we expect that to normalize. So and then there are some non operational impacts foreign exchange and tax rate or our headwind sequentially. So I think when we look at it looks like a very similar quarter minus three of those.
<unk> things with some puts and takes on the top line.
Okay. Thank you and we have the next question. Please.
Your next question comes from the line of Joe Giordano from Cowen Your line is open.
Hey, good morning, everyone.
Hey, good morning.
Currency, you mentioned that the supply chain internally for you guys.
Worse than it was 90 days ago.
Now can you maybe try to scale.
Okay.
At your own revenue was in terms of getting stuff out the door and how that how that compares to the last couple of quarters and what's embedded in the guide for <unk>.
Yes, Joe this is heath.
Listen we talked last quarter that that number was around $50 million of sales and we would like to have shipped if we had the material that did worsen in the quarter and it's just north of 100 million that again, we would have liked to have shipped.
We had the raw material availability do it so it did get it did get modestly worse in the quarter and certainly something as we reflect and look forward into our second quarter, we don't anticipate that similar kind of level.
Okay. Thank you Joe we have the next question please.
Your next question comes from the line of Chris Schneider from UBS. Your line is open.
Thank you my question is on pricing in the quarter and forward expectations for price cost and then particularly for the transport segment, where I know auto pricing can come through maybe a bit slower than the other segments.
And then also are there any other puts and takes on transport margins through the rest of the year, we should be thinking about as ice volumes rebounds.
Maybe any restructuring benefits. Thank you.
Sure Chris Thanks for the question and then.
When you look at it.
Pricing and pricing in <unk> was positive across the company in the first quarter and we do expect it will be positive this year for the year and certainly as your point in places like transportation.
That is very much contractual negotiations and those discussions do lag a little bit so that will benefit.
Our margin as we get through later in the year as well as the volume.
It will help offset some of the headwinds that we've talked about being a little bit worse.
I think the one key I just want to remind everybody when we talk about prices are.
Our normal business model, because we do play in the technology space. When we win programs is how when we ramp them, we're going to get productivity back to our customers and that really varies by our segments.
But we typically run in the 1% to 2% price erosion model and right now were running in the low single digit plus price and I think that demonstrates you see it in the margin. It also demonstrates.
How our teams are executing and it's across all our segments. So in some markets, we can get more than others, but I do expect we're going to be positive for the year and we continue as we see these inflationary effects continue to implement more price actions.
And.
I would say price isn't completely offsetting all of the inflation and supply chain challenges, but it's also the other elements of our business model are also driving the results. So I do think it's a combination.
And to the second part of your question on automotive I think the one thing that we're going to continue to see is as volume moves up.
Youre going to continue to see that benefit certainly we continue to have some of the restructuring elements that Heath talked about and then you're also going to have some of those price elements coming in with the headwind really being some of the inflationary things that I think everybody is dealing with and I don't think were any different.
So hopefully that frames. So there's a couple of questions for you. Thanks, Chris. Thank you Chris can we have the next question. Please.
Your next question comes from the line of <unk> Mohan from Bank of America. Your line is open.
Hi, yes. Thank you Terence as you look at the order trajectory in autos normalizing with book to Bill closer to one <unk>.
How are you thinking about that progression in June and September quarters, and more broadly can you maybe just give some.
Qualitative color on the on the rest of fiscal 'twenty, two and highlight any important headwinds and tailwind that we shouldnt be thinking about it.
<unk>. Thanks for the question and you know I have to start with.
Aren't giving guidance for the year certainly in the environment that we've been in but I think some of the color I gave on the slides and the orders as you know we do expect with the order trends. We've seen we've seen some markets accelerate that haven't accelerated in a long time like comm Air and medical we also see auto.
Turning the corner in production.
And certainly we have to see that come to fruition later in the year, but it feels better than where we were six months ago.
And we continue to see places like DMD and industrial equipment. The orders remained strong and in some cases the confidence of people placing orders out.
You also gave a positive indicator.
They are planning out more knowing that we all think that the supply chain challenges around semis and other components are going to be with us. So I do think you can expect as we move through the year that it wouldn't be reasonable to expect a step up due to transportation due to industrial in the second half of the year with.
Communications coming down a little bit due to the appliance comments that Heath and I made.
I think when you think about beyond the businesses I think the one headwind that Heath talked about was.
The dollar shrank thing is a headwind for us year over year, it actually accelerated sequentially were feeling it but on a year over year basis to our growth that's going to be about a $3 million to $400 million headwind on currency exchange on a full year basis that I do think as you model you want to keep in front of yourself.
Okay. Thank you Anthony we have the next question. Please.
Your next question comes from the line of William <unk> from <unk> Securities. Your line is open.
Thanks.
Thanks, guys for taking my question.
Hoping you can help us.
Better understand the dynamics.
Maybe one level deeper in the automotive end market.
Legitimate fear that investors might have is that in the last year as there have been shortages, we've seen the Oems.
Sort of shift their mix to the most.
Let's say that the highest profit margin models, which are the.
The higher end models and the hiring trends within the models.
Wondering if you have visibility into what that trend might be this year as supply availability comes on is it going to be enough to cause mix to shift back to.
Words more.
Economical models and then similarly, the mix between Evs and internal combustion engines do you expect that to continue.
Similar.
Mix.
During this year as well similar to what we saw last year.
Yes. So you have about three questions in your one question. So it was pretty creative as well so I appreciate that.
So let's talk about content overall, I think and then then I'll try to click into some of your sub questions.
I think the first thing we have to keep in perspective is whereas auto production versus whereas our revenue.
Back to pre Covid.
Auto production is still off 10% globally, and our revenue is up well above 10%.
When it comes to content, we feel very good about our content and I think you've seen that content outperformance.
Over this period.
You mentioned, some but there's also been the supply chain dynamic and you know every quarter I know everybody wants us to be right on top of our range and sometimes we're above and beyond.
But we feel good about the six points of over performance this year, including supply chain normalization that we were very transparent with the last year, we've probably got some extra revenue last year as supply chain.
Trying to get back to normalization people secure inventory and I think even you look at our first quarter, where production went from 16 million to 19 million units. Our revenue was flat and it really was some of that supply chain excess Scott's got sucked up and we thank you.
<unk> see that as we get back to normalization, so there'll be a little bit of a headwind.
But when you think about what Oems are building.
They are prioritizing first I would say, it's not mix and trim its electric vehicles.
As demand for the electric vehicles, they are trying to keep up on that growth and in certain parts of the world.
Regulatory conditions that they get penalized if they don't get these electric vehicles out. So I think one of the things first off as I've talked about the growth of electric vehicles.
It's clear our content.
Growth, it's <unk> and electric vehicle that has not changed and we're benefiting from that and as electric vehicles continue to accelerate we will continue to get the benefit of that.
We have also seen and as I talked about last quarter, we do benefit from features as well as increased electronics on a combustion engine to so our content continues to increase on combustion engines not just electric vehicle.
Now let's face it.
One of the bigger drivers is the electronics that help a combustion engine.
Being more efficient that isn't a trim package that is guess what for those that continue to make combustion engines and people have demand form how do you make those more fuel efficient drive electronics and thats some of the electronic vacation.
We're also seeing increased communication and infotainment.
That is things that benefit us around the data side and certainly if automotive Oems.
Oems can add features that customers pay for it we always get those trim plus or minus but that's not new.
They're doing what they can so I would tell you when we think about content. How we stepped up I think it's clear where our content position is.
I also just want to say our global nurses are unique and I know I say this every call, but when you look at it we benefit from electric vehicle everywhere not in one region not in one customer and I think thats, a pretty special position, that's differentiated and we feel very good about the six points of outperformance were going to get this year, but in a certain quarter.
<unk> you can get elements of supply chain. So I would just ask everybody when you see over performance or underperformance.
Please don't overreact to it because supply chain has been very dynamic as auto production is trying to get to a more normal level and let's face it hopefully get up past the supply chain crisis can get much higher than where we are here.
Okay. Thank you will acquire the next question please.
Your next question comes from the line of Mark Delaney from Goldman Sachs. Your line is open.
Yes, thanks very much for taking the question I was hoping to also ask on the transportation segment and specifically around the bookings.
You commented lower production was a factor in the bookings reduction as well as a degree of inventory.
Could you comment if you think you can hold this level of absolute bookings in transportation and maybe even build off of it from here or is there the potential for bookings to need to step down sequentially.
Given some of that inventory that may still be out there. Thank you.
No. It's a great question I actually think you're going to see a booking level. That's moving much more with production. So I think youre going to continue to see booking levels stay.
<unk> to probably around that one book to bill than where we were at certain points of the recovery.
And I think that's a sign of stabilization and I think you'll also see it in the levels of how Oems need to bring production down it has become a little bit more stable, even though the supply chain still is not flowing as freely as we would all like but I do think youre going to continue to see pretty solid order performance and we've even seen it as we started our SEC.
<unk> quarter.
Order staying pretty strong and solid across all three regions of the world.
Okay. Thank you Mark can we have the next question. Please.
Your next question comes from the line of Jim Suva from Citigroup. Your line is open.
Thank you can we talk about average selling prices.
Our prepared comments and the Q&A you mentioned.
Low single digits compared to normally down a couple percent was that specifically towards transportation or across your entire portfolio I'm curious about.
And that's in <unk>.
Transportation say versus industrial and other end markets.
AFC are they changed contracts have now.
The long term when you have visibility or is it more just some.
Anders will like.
Quite some inefficiencies or higher copper costs.
Talk some more about I guess thank.
Thank you.
Sure Jim.
Good morning.
First off when you think about the pricing and you captured it right. We are up low single digits on the pricing side and.
And CSN is about half of that goes through distribution. So we've been.
Raising prices since last January and that'll that'll continue certainly that impacts of smaller customers. When you get into the larger customers, whether it's <unk> or <unk>. They are more contractual agreements. So in places like auto they will be later, but I would tell you pricing is across all three segments. It is it is connected to the.
Headwinds in inflation, we feel into different products across the segments and in different segments in some cases it full recovery in other cases, it's partial.
And it is elements of do we have some matters, but also and those that are contractual it's probably more pure price. So it reflects the diversity of the markets we serve.
Pleased with the progress we have to date and in some cases, we're their contractual they'll come in a little bit later in the year.
And then where we have in places like the channel that are pretty much within three months and more transactional.
Okay. Thank you Jim next question please.
Our next question comes from the line of Scott Davis from Melius Research. Your line is open.
Good morning, guys.
Good morning, good morning.
There is I don't want to beat a dead horse and this has been asked in a couple of different ways, but the integrity of orders.
Most people focus kind of on auto what about the non auto end markets or are there notable inventory builds that debt.
That you see if you had to put some customers on kind of allocation.
I think you can kind of medical where guys are scrambling around trying to get components and stuff in particular, but I'm sure. There's other end markets to where there is perhaps customers that aren't used to not being able to get what they want when they want.
If you know what I mean, so maybe a little bit of color around that would be helpful. Thanks.
Yes, Hey, Scott, so I'm going to focus around <unk> to your question, but.
But one element that we have seen when you look at these orders is I think first off being we don't see inventory building up.
And let's take <unk> in those two segments are big part of our business goes through distribution or.
Our distributors are probably where they typically run 180 days at any time. They only had 150 days and certainly they would like to get to 180 days and we can we have not been able to get them up to 180 days. So their inventory levels are still below from a turn and a velocity below pre co.
And certainly they are trying to fill a role that they normally play.
When you look at the larger customers, what we see is a scheduling out I think a recognition.
The supply chain is going to remain tight and for those places where we typically would have had businesses were more orders would come in the current quarter and go out we see our customer scheduling out in out quarters.
And we see that in data and devices I think thats, an element of as well as industrial equipment those that we've seen extreme strength.
See our customers planning way out beyond the current quarter beyond two quarters.
And I think in some cases, they're looking at certain other components like semiconductors that in some cases you have lead times that are 50 weeks that used to be 26 weeks and theyre, making sure and doing better planning to plan out around the long term and the poll.
So you see that in the orders in industrial equipment, you see that in data and devices.
And then in those markets that are just recovering like medical like common error I would tell you.
They're just starting to move forward. After there has been inventory work off in both of those markets. Those markets got hit hard certainly there was excess inventory in the supply chain for those that follow calm air.
Boeing and Airbus builds have been known but what we like to see is that our orders are finally, showing some of the elements to make sure. We can pick up so I still think theres a couple of markets that I think we could see further acceleration of orders as we move through the year.
They don't feel elevated at all yet, but they show initial signs of strengthening.
So I hope Scott that gives you some color across the different industries, we play, especially in <unk> since I did talk a lot about tee us already in the transportation space.
Alright. Thank you Scott we have the next question. Please.
Your next question comes from the line of semi <unk> from J P. Morgan Your line is open.
Hello.
This isn't the most amazing.
This is one more competing on place I'll make journalism.
Thanks for taking my question.
Great. Thank you.
I just wanted to make you all said that orders were down in Europe .
Help us understand what exactly is driving this trend in Europe .
Thank you.
Sure.
Yes in the Europe orders.
In Europe orders that decline that we talked about was very concentrated around automotive.
So when you look at automotive.
That drove the decline in the industrial space as well as in our communications markets, which are smaller there we had very strong growth, but European automotive is an important position for us it certainly our leading business in Europe and those orders were soft in the quarter and that drove the decline.
Okay. Thank you can we have the next question. Please.
Next question comes from the line of Joseph Spak from RBC Capital. Your line is open.
Thank you and good morning, I wanted to ask about your strategic I wanted to ask about your strategic inventory build.
Is that something you would expect to work off over these coming quarters or do you still need to do more there or just given the general for supply chain uncertainty do you expect your inventory levels to remain at higher levels.
And then prior at least until we have a little bit of easing.
<unk>.
Yes, Joe this is heath.
Most of our strategic inventory build has come in the transportation space around automotive and commercial transportation, where as you recall, we built up quite an order base last fiscal year and even as things normalize back to a book to Bill there is still.
A very healthy backlog to work down and so some of that is how our customers are scheduling activity and our ability to get ahead of that so that when they see when we see their ramps that we're going to be there and not going to have caused many parts shortages.
In terms of timing some of that is going to be tied to auto production recovery I could see that starting to moderate in terms of the inventory levels as we work our way through.
And get into the second half of our fiscal year and that's something to see.
They tune, but it really builds on the confidence of what we have what our customers are telling us and how theyre scheduling things out.
And it depends on where which part of the world that we're in given some of our production challenges in terms of raw material availability. It's just made sense to build up where we can and be ready for those customers. The other thing to keep in mind as we've been talking about ongoing restructuring there are a couple plants that come offline later in our fiscal year.
And there are buffer builds associated with those and again those are largely in our transportation business. So that's all kind of part of the timing of.
All of this activity.
Okay. Thank you Joe we have the next question please.
Our next question comes from the line of Luke junk from Baird. Your line is open.
Good morning, Thanks for taking the question.
Right.
This could be a question maybe for territory Keith wanted to ask about your gross margin performance in the first quarter of course spent a lot of discussion today about supply chain and inflation relative to sales and pricing for the company, but I was hoping you could put a finer point on the Companys gross margin performance in the quarter. Thank you.
Sure Luke Thanks for the question.
Listen our gross margins for the quarter on a GAAP basis is probably what you are seeing shows a low 30 twos, but the reality of it is of those inside of that there's some.
Some noncash charges that were associated with our restructuring activity of a plant closure so that rolled through that line. So we're actually running closer to our 33%.
Just under that on an adjusted basis, which is consistent with with what I think you would expect and as we move a little bit higher it's through the year.
We would be a tad higher we're absorbing the earning acquisition, though and that has a bit of a headwind on gross margins and the team is actively integrating that and working through getting those numbers up. So there's a couple of there's a little bit of noise relative to what youre going to see on a GAAP versus how we view it.
But that really is.
A one time charge that was taken.
Thank you. The next question please.
Your next question comes from the line of Nick Todorov from Longbow. Your line is open.
Yes, hi, guys good morning.
Good morning.
A question I wanted to double click and maybe clarify.
The 6% content outgrowth, you're expecting for fiscal year, 'twenty, two and out or does that include the impact of FX. Because you clearly are seeing a bigger impact than you anticipated a quarter ago.
No that would not include FX. So that comments organic that would include anything we expect to happen in the supply chain. This year, but that's really an organic comment.
Next we sort of give you that separately.
Minimal.
Okay. Thank you Nick next question please.
Our next question comes from Matt Sheerin from Stifel. Your line is open.
Yes, thanks, and good morning.
So I wanted to ask another question regarding the strength youre seeing in.
Devices, and specifically you think for cloud computing.
Could you just talk about the customer base, there I know theres, a big concentration of big Hyperscale players, but how diversify as that market and as Youre gaining share is it new players are just winning with existing customers.
So when we when we talk about that customer base in the cloud. It is the Hyperscale is of the planet.
So when you look at it that is still a concentrated customer base overall.
But it is still it's broad across all of them and our market share is strong across all of them. So it isn't like we're only tied to one of them.
But it is very broad and really what's nice and I said on the call is as.
As they're pushing the speeds up to 400 gig clearly as theyre trying to keep up with the artificial intelligence, which creates more compute and storage clearly.
Are there things that theyre looking to us to bring our technology to and those wins are across the base of them. So pleased with the performance there and I think it really goes back to how we reposition our D&A business around the ultimate high speed versus what we were 510 years ago and it just shows the ongoing share momentum in the technology we.
Bring to that space and clearly when you look at the margin our teams are performing very well.
In that segment.
Okay. Thank you Matt can we have the next question. Please.
Your next question comes from the line of <unk> Patel from Wolfe Research. Your line is open.
Hey, Thanks, so much for taking my question. So maybe just following up on that on the early one.
The data.
Data and devices.
Just how should we be thinking about.
The structural growth rate that we could be seen in that segment. I mean, obviously this quarter you were up almost 50%.
But we've been seeing.
Very strong growth really every quarter.
For last several quarters now so I'm just trying to understand how we can think about that and then for communications overall I think you've talked about.
Margins previously and so how should we think about that settling out.
Against the 27%.
You did this quarter.
So let me take the first half and I'll ask <unk> to take the second half when I think about it and then as I said.
To Scott's question, a little bit earlier some of the orders we are seeing in D&A right. Now are also scheduled out to make sure our supplies in place for those customers I think youre going to continue to see our D&A business run at the high revenue levels attack.
Throughout this year and really how cloud cloud capex builds off of that will be very important as we look into 'twenty three and beyond but I do think when you continue to see the needs as well as the efficiency that needs to be driven out of these data centers feel very good about the momentum there as well as the pipeline wins that we have.
So let me, let heath talk about the margin side.
Yes, listen, we're very happy with the margins that.
The CES segment has produced here going back not just in the quarter, we just reported but really going back over the past year year and a half and the team has just done an exceptional job.
But is there is a little bit of a mix element to this as well and that we do have higher margins modestly higher margins than our appliance business relative to our data and device business and <unk> talked about the strength in data and devices, but we do see a little bit of correction that we've expected.
And appliances coming here in the second half of our fiscal year and so there is a bit of a mix impact in terms of how that comes down now your question around what we've said from a business model perspective in terms of high teens.
Which if you go back many years ago was really was it a just an aspiration to get to the high teens for this segment and now we are performing so much stronger.
Listen more to come we get it but I would say still the high teens in a normalized environment.
Still makes sense and the team's just doing a terrific job and we'll see where we ended up longer term.
Okay. Thank you <unk> it looks like we have no further questions. So I want to thank everyone for joining us. This morning. If you do have any questions. Please contact investor relations at Te. Thank.
Thank you and have a great morning.
Ladies and gentlemen, your conference will be made available for replay beginning at 11 30 am Eastern time today January 26 on the Investor Relations portion of Te connectivity website that will conclude your conference for today.
Okay.
Okay.
Okay.
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