TE Connectivity plc (TEL) Earnings Call Transcript & Summary

Thanks, everyone, for joining us. Apologies, we've had some technical issues here. But we're -- I think we're ready to get started here. I'm Luke Junk, and I cover vehicle technology and mobility for Baird. We're very pleased to have TE Connectivity with us this morning. $32 billion market cap, TE is a leading supplier of connectors and sensors serving the transportation, industrial and data and devices end markets. Fiscal 2020 sales were over $12 billion. Joining us from the company, we have CEO, Terrence Curtin; CFO, Heath Mitts; and Sujal and Jennifer from IR. There will be some time for questions today, which you can submit via web portal, but in the interest of time, I'll turn it over to Terrence for some intro comments.

Thanks, Luke. And let me just make some brief intro comments. And what I want to start with is give a little overview of TE, who we are, to add to what Luke talked to you about. And when you think about TE, we're an industrial technology company, basically is the leading player in providing connection technologies as well as a leading sensor player. And when we think about where we bring our technologies, we really focus on applications where we can trade value with our engineers, certainly how we scale our supply chain. So when you think about TE from that lens, about half of our revenue is in transportation. That's automotive and commercial truck. And in that area, when we bring that connection technology and sensors to life, it really -- we have a great global position, but it's also around the electric vehicle and autonomy trends that we benefit from the content that I'll talk about a little bit more in a moment. About 30% of our business goes into industrial applications. And like many companies, industrial applications are very broad when you describe them. In TE's case, think about factory automation and machines and factories. Think about medical applications, also commercial aerospace and defense as well as in power utilities. And that's an area where you continue to get data being proliferated. We benefit from that. And then our third segment is communication solutions. And there's about 20% of very much benefit from Asia but also the high-speed trends that Luke talked about. And I'll share a little bit more here in a moment on that. When we look -- we just ended our fiscal year. So we're a September 30 year-end. And when we look back at 2020, there's a few things I'd like to highlight. And our transportation and industrial segments were impacted by COVID as COVID worked its way around the world, and we continue to work through it. But I believe some of the benefits we had out of 2020 that were evident for our owners and I think shows the progress that we've made, first off is where we position the portfolio around secular trends. You saw this in our transportation segment, where we believe we can grow content above production by 400 to 600 basis points. And in 2020, we grew about 600 basis points above production, driven by our global position, certainly very strong position in all regions of the world, as well as the continued takeoff of electric vehicles certainly in Europe and Asia. I think the other thing that's important not only around secular trends, as you know, you saw our Communications Solutions segment had growth in the second half of the year when a lot of the world was struggling, it shows the progress we've made in that segment around positioning around high-speed, and it also showed the diversity of our portfolio. The diversity of our portfolio, even though we were impacted in transportation, came through with our Asia weighting as well as some of the units that contributed in a time where some of our larger units were being impacted. The other thing that I think is important about the portfolio is also how we improve the cost structure. And we still have opportunities to continue to improve our transportation and industrial segment margins. But one of the things we're proud of in 2020, our trough margin in 2020 for the year was 14%. That was our peak margin in prior downturn. And I think it shows how we changed the portfolio and the secular trends, but it also shows what we've done to make this a better-performing portfolio as we will get cycles at times. And the last thing in my overview, I'd like to talk about is how we gave our guidance here for the first quarter, which is our December period. And one of the things that I think also proves the portfolio and the strategic things that we've been driving is, in our first quarter, we expect our top line to be flat year-on-year, still absorbing some areas like comm air that are going to be impacted for a while. But our earnings and our margin are going to be up year-on-year. And I think it once again shows the benefit of what we've driven. We still see a world that's going to gradually recover. We like the rebound that we've gotten. It's a little bit quicker than we thought, but we do think full recovery will be a little bit more gradual. And the other thing I would tell you that I think both was proven again in 2020 but also we continue is the key cash flow generation of TE. Last year, we did $1.5 billion of free cash flow. It's something that we expect we're going to be converting around that 100% of net income even as we work the cost actions we're going to continue to work to get to the higher margins in TS and IS. But we're going to continue to have our balanced capital deployment strategy, which is how do we do bolt-ons in key areas to continue to drive growth and how we create value and then also how we return capital to our owners while always first investing in the business organically around our engineering and certainly around the programs we need to win as we help our customers scale to the programs they want to get to more. So happy with the rebound and recovery we've gotten. Certainly, there's more opportunity we have to drive for TE certainly on the margin side and on the return side as we move forward. But I think 2020 was a year -- while painful, was a year that actually proves the work we've been doing here to make this portfolio better and the earnings better. So with that, Luke, I want to stop so we can get into your questions, and I know we're a little bit behind so -- due to some of our Zoom issues so I hand back over to you.

Okay. Yes. Thanks for that overview, Terrence, really a great way to start. I was hoping we could start with transportation. So you're coming off a year where you outperformed light vehicle production by 6%. That's at the high end of the 4% to 6% range that you mentioned in your remarks. As we start a new cycle, I'm just wondering, are there any dynamics, plus or minus, that you'd expect to impact that growth, whether it's inventory in the channel, country mix, vehicle mix? Maybe if you could just talk about that a little.

Well, I think the first thing, and I said it a little bit in my opening comments and I want to reiterate first before I get into your question, is realize our global automotive position is global. So one of the things that's great is we care that cars get made on the planet. It isn't one region versus another. And while we may have higher market share in places like Asia and Europe and North America, when we think about the electric vehicle trends, they're going to be driven more out of Asia and Europe, with some of the regulatory support and focus on those markets. And also, those markets are larger even than the U.S. So #1 is what's nice about our position, it is extremely global. And our customers like that. That allow us to innovate there. When you think about content, we sort of think about content in 2 to 3 buckets. Number one, on car platforms, regardless of the powertrain, you're still going to have content increase 200 to 300 basis point above production. And that's something that relates to electronification. And we use that word a lot. I'm not even sure it's a word. But it has to do with the features that get added to a car, no matter what, whether it's lane assist, all the electronics that we have, certainly the safety, the comfort and also emissions, even if it's a combustion engine. So that's core content. Then on top of that, we get the kicker related to where we play in the vehicle when it relates to electric vehicle as well as with autonomy. And electric vehicle is much bigger. So we've sort of said when we talk about that 4% to 6%, we think that electric vehicles go from the 6 million units or so up to the 20 million units over the next 5 years driven by Asia and Europe. How electric vehicles get adopted by consumers, that will be the biggest single driver of where we are in that range as we move forward. So when you say mix, mix is really around the type of car made than I would say regional dynamic. But it's one of the things that we've talked about. If you take a classic combustion engine car, we might have $60 of content. When you move off to an electric vehicle, that can be 2x plus, depending upon how the OEM is using us. And let's face it, when it comes to electric vehicles, everybody is trying to figure out how to scale. Electric vehicles at 6 million units is still a small percentage of the 70-plus million cars made last year and certainly recovering off that base. But the element is, and that's where TE -- we really like the opportunity we have and how we help the industry scale because they want to design all over the world, certainly where they want to make on their supply chain. And being a global supplier that has that basin as people are trying to innovate real-time when that's scaling to get to the cost points that the cars can be further adopted, and cost is not an issue. So mainly, it's going to come down when it comes to content of EV adoption or autonomy adoption and EV adoption we see happening quicker than autonomy. During this downturn, we have seen people increase in EV. Autonomy has been a little bit slower. But certainly, for TE, EV is a bigger content driver.

Yes, absolutely. You also have a large auto backlog in your sensor business. Could you maybe talk about the line of sight to that business ramping? And related to that, sort of how you see the competitive landscape in that business in particular? What makes sensing attractive for TE ultimately?

A couple of things. First of all, sensing is more fragmented, very much more fragmented than the interconnect space. And that's one of the things that we liked when we got into it. But when we did get into sensors, we were winning programs organically in certain technologies and what we acquired with measurement specialties was a broad basket of technologies that we needed to win programs around the technology and then scale them. And that's what we're in the middle of. And certainly, that the automotive market had this downturn certainly impeded a little bit of our revenue traction there. When we look at it, we do still view that essentially will add about $5 of content to our existing positions. It is through a broad base, some are pressure, some are humidity, some are temperature, some are current sensing that we've won around the world, and we're in the middle of industrializing. I think one key point that I would just make sure we're clear on, our automotive business stays very global. It's across pretty much every OEM. As we build the sensor business, it isn't as broad as we're going more from ground 0 than our established auto interconnect business. And so you'll have a little bit of more lumpiness at times. And we're at the middle of industrialization of those programs with our customers, and we're happy to say that the production is starting to recover. And that hopefully can be more of a tailwind than certainly it's been the past 2 years.