TE Connectivity plc (TEL) Earnings Call Transcript & Summary

Well, thanks to everyone for joining us this morning. My name is Luke Junk, and I cover vehicle technology and mobility for Baird. We're very pleased to have TE Connectivity with us today. $48 billion market cap, TE is a leading supplier of connectors and sensors serving the transportation, industrial and communications end markets. TTM sales for the company, over $14 billion. Joining us this morning, we're pleased to have Terrence Curtin, CEO of the company, with us. We do have about 25 minutes for this session. So I'll do my best to weave in any questions that you might have. [Operator Instructions] With that, I'll turn it over to Terrence as we jump into Q&A here. Terrence, just wondering if there's anything you'd like to add to my introductory comments that might help level set everyone this morning, especially anyone that would be -- might be newer to your story.

Well, first, thanks, Luke, for having us today. And I also want to appreciate everybody that's listening in to learn more about TE and not only what we've accomplished but also where we're going. And I think the only thing that I would add to what you're saying because I want to get into the Q&A is where we play with what you have with connectors, what you have with the sensors we do, it's -- they're very critical elements of the architecture of all of the key elements that are going on around us. I know we're going to talk about electric vehicle. I'm sure we're going to talk about cloud spending as well as some other key trends that drive our growth. But I really think what we did during COVID, show -- continue to show the margin opportunity we have. Also the growth opportunities really came out around where that content is really real, around electric as well as cloud and really things that are just getting started in many cases that are going to drive content growth for the long term. And we're really happy where we position the portfolio. Certainly, we had to do a lot of portfolio work in our past, but it was nice. It came out pretty clear this past year with all our segments contributing as well as being well above 2019 levels even when we have some core markets like comm air that are still not recovering. So with that, I think we can get into it with the Q&A and where we want to go.

Yes. Thanks for that, Terrence. So yes, let me start with the big picture. I'm sure everyone here is wondering your perspective on the current environment. So why don't we start there? First, I want to start, current state of the industry on the auto side of the business, especially what you're seeing right now real time in terms of trip-related impacts in light vehicle production and what your customers are telling you, you sitting here in the fourth quarter, what you should be expecting near to medium term in terms of production schedules, generally speaking.

Sure. So I think the first thing, even before we get into the elements you asked about is how is demand for cars. And demand on for cars are very strong in the world. And it's one of the things -- it's not only demand for cars but also electric vehicles is very strong. So the technology that we pointed TE towards continues to see growth in it globally. Now when you think about the supply chain, this past year, auto production got off in 2021. And I'm going to talk on a fiscal period, Luke, not a calendar period since we're fiscal September. It started very strong this year, but as we got into March, that's when you start to see the semiconductor impact on auto production. And on our fiscal period last year, there was about 10 million units that are estimated to be made due to semis. I think we're still seeing semiconductor and other supply chain issues holding our OEM customers back. So that's going to be something that's with us well into 2022. And certainly, people are seeing -- we're saying -- the experts say that they think auto production is going to be flat due to those environments and those issues in the supply chain. But that being said, the demand is strong. Certainly, as the supply chain improves, we think there could be upside to that production number. But clearly, we don't make semiconductors. So I would just also ask as you go through your sessions, make sure you're asking people to make semiconductors, how they see their capacity evolving because they know it best.

Yes, absolutely. And related question, kind of building on this discussion, I want to talk about the current state of your supply chain overall. What are you focused on right now? What can TE control? I think you had told us on the quarter a couple of weeks ago that if you look at the sales that you weren't able to sell to, if you will, because of your supply chain, that, that impacted actually -- declined sequentially third fiscal quarter to your fourth fiscal quarter, if we can unpack that a little bit. Just curious to see what you're seeing in your supply chain right now.

Yes. I think what's important, first of all, semiconductors in our supply chain is mainly only used in our centric business. So when you think about semiconductors, its impact on us is much more on how it impacts our customers because that is the brain of most electronics. What we do at TE is around the connecting and the sensing that really helps bring everything to that brain to make sure the compute can happen. With that being said, earlier in the year, probably about midway during the year, we really started to have supply chain issues around plastics supply in the world, certainly around medical supply in the world. And in the last quarter of our fiscal year, we actually saw in both those areas our material flow actually get a little bit better, which is our supply chain -- from getting material so that we could process it into our end product did improve. And we thought in the fourth quarter, there was probably $50 million of revenue we couldn't fulfill due to our supply chain issues. But that was down from where we saw at the end of June. We're still not able to get completely unconstrained material, but I would say it's healthier than it was. So that's, I think, a good factor. When you think about our focus, though, areas where we still continue to have -- when you think about the broader supply chain, freight and logistics are a challenge for all of us. And especially when we're trying to keep a customer up, we may be trying to -- we can get something supplied as a subcomponent or raw material in one part of the world. We might have to ship it to another part of the world. That -- those bottlenecks are still there. And certainly, we think they're going to be there into this year. So the freight and logistics are still a very challenging side. We're fortunate that we do try to do most of what we do in region. But in some cases, we are trying to cross over to make sure we meet demand. So that's a core focus. The last focus, I would say, is very important for us as we're going in and we talked about in the call is these inflationary factors we're seeing in the supply chain. We've had them in resins. We've had them in metals. We're continuing to see them in freight. It's from the pricing element to really make sure as we go into 2022 for us. We started to do some pricing in 2021. That's going to continue, especially with the inflation that we've all experienced.

Yes. Well, one more question on this topic, and then we'll steer the discussion into some more bigger picture elements, longer term speaking. Polling question, we're asking everyone at the conference a related question around labor availability and related solutions. And just wondering, Terrence, what's your perspective on the current labor market as it relates to TE's business?

Well, when we think about TE's business, I do have to say, we think about labor globally. And it is very much -- there are pockets in the world in local areas where there are pockets that it's tight. But I would not say it's consistently tight everywhere in the world. So if you look at us, it is very local where we have some challenges. I think our teams have done a nice job in managing through that, but I think it will remain locally tight in certain areas of the world. And I also think it's an element that in TE, what's important, we not only look to labor but how do we continue to automate what we do. And it helps us not only from the labor side, it also helps us from the quality side. And it's not a new journey for us. It's a journey we've been on for quite a long time, not only to make sure we manage the labor element but just also when you think of some of the product sizes we get to any more with the miniaturization that's required, in some cases, humans cannot do that. And it's part of our automation strategy.

Well, I want to pivot the conversation now to your Transportation Solutions business, EVs, obviously, front and center as part of the conversation. And it's well known that TE has about 2x the content on an EV versus a combustion vehicle. What I'm wondering is how do you leverage your strong legacy market share position as we move into an EV world today as OEMs look to especially truly dedicated EV platforms. How is TE involved in those discussions in particular?

We're typically always involved in those discussions, which is really great when we look at TE overall. And I think the first thing that I always try to remind people is with TE, we essentially are with every customer in the planet. So what you said about our global position that we have, there's not many companies that can say they're on every car in the planet, and we can. And it does start with that low voltage architecture. When we think about an electric vehicle, I know there's a lot of discussion around the content and where does it bring sustainability. But when you think about what we do, the low voltage architecture and those features carry over into the electric vehicle for the most part. So we don't get decontented going from a nice engine to an EV. Actually, that low voltage architecture, which we're embedded in, comes over and then we get the new opportunity around the electric vehicle, the powertrain. And what really happens with that, we already have an understanding of the electrical architecture. Certainly, you're going up in voltages. But where the content comes into is the charger inlet is a connector. That's an opportunity for us. Certainly, as you get how that goes down and fills the battery pack, that creates high-voltage connectivity. You also have battery pack to the electric motors. That's high-voltage connectivity. That's all there. In addition, we have contactors that help switching of power. We have resolvers that actually are sensors that are on the motors that make sure the motors operate effectively. You also have current sensing that occurs throughout it, both on the -- when you get to the cell pack. So when you think about what we have, a very scaled business in our low voltage, it comes over. We have an understanding of the electrical architecture. You put in an electric powertrain. It's a natural discussion where TE shows up, and you're dealing with connectivity, connectors and sensors, which is -- that is all what we do. So it is a pretty natural discussion as it comes over. Certainly, you're dealing with different voltages, different materials. And our customers see us not only from an innovation and that we are agnostic across all platforms. They also have come to rely on us over the years. And it's something that what creates that opportunity that you talked about. And as I talked about in last earnings call, if you think about our automotive revenue just this past year, 20% of our revenue is related to content, both low- and high-voltage, that's on an electric vehicle. [ Others, ] a little bit over 10% of the cars made in the world are electric. So it really shows the content momentum we have. And as EVs get further adopted, just as further opportunity for that content to continue to increase as we go forward, drive growth and also leveraging our core legacy low-voltage position.

So I want to talk about commercial vehicles as well, Terrence. Could you highlight some areas where you see TE as descendants in that part of the market? There are some big news this quarter on that front, too. And more broadly, if we kind of zoom out and look at commercial vehicle electrification, how do you think that the trend towards zero-emission commercial vehicles has evolved over the past year? And what are some of the key factors and considerations that you're hearing from your customers in that regard?

So a couple of things that I think are important. First of all, I would just like to share, about 10% of our revenue is in the heavy truck ag equipment, and it is our highest leading position of share within TE. And I know we talk a lot about automotive, but we did about $1.5 billion in what we call our industrial and commercial transportation business. And we've always benefited from emission changes. I think this past year, you saw the content growth was very strong due to continued China move to Euro 6, the regulation changes that we benefited from in India. And our business once again is extremely global. Our market share is pretty even around the world. And over the past 3 to 4 years, we have gotten content benefit really on last mile vehicles, especially in emerging markets like China that you have -- you see the last mile vehicle be electrified. But one of the things that is happening and what we got excited about, what we talked about here just on the last earnings call is 2 of the major Class 8 truck manufacturers really have come out with their platform awards to really get to their electric vehicle truck platforms. We're fortunate enough that we won those programs, certainly leveraging our global position there. But certainly, you deal with higher voltage than you have in a car, you deal with higher vibration. Certainly, you have to tie into how do you have reliability and quality that is much higher than you would have in an auto environment. And we checked all that off with the innovation. And that would be for those 2 platforms about $1,000-plus of connectivity. And once again, that's about 2x what we would normally have, on a Class 8 truck. And what we're excited about is we've been dealing with a lot of truck manufacturers, where they've been prototyping a lot of things. Now these were pure platform launches that are going to be coming out, probably benefit our revenue out '25, '26, '27. It won't be as quick and -- as we have in auto. But it just sort of says we see this trend lagging into the commercial transportation space, something our global position is going to serve us well and will drive content in that business. That will be even greater than what we get in an electric vehicle car, which are, like you said, 2x. We average right now about $150 on the electric vehicles all in. Certainly $1,000 is a lot more than $150. And certainly, we have to see what owner adoption is on that and how governments around the world also support that adoption.

So rolling it all up, especially on the auto side of this business, is 4% to 6% outgrowth, which you've been talking to for a number of years now, still the right number for this business? I think a pretty common question that we get. You've endorsed outgrowth at the high end of that range looking forward here into fiscal '22 despite some tough comps and potential supply chain [indiscernible]. So yes, just any thoughts in that 4% to 6% range on a go-forward basis.