Ladies and gentlemen, thank you for standing by and welcome to the TE Connectivity Second Quarter Earnings Call for Fiscal Year 2021. At this time, all lines are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions].

I would now like to turn the conference over to your host, Vice President of Investor Relations, Sujal Shah. Please go ahead..

Good morning and thank you for joining our conference call to discuss TE Connectivity's second quarter 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.

The press release and related tables along with the slide presentation can be found on the Investor Relations portion of our website at te.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 to make sure we can give everyone an opportunity to ask questions during the allotted time. We are willing to take follow-up questions but ask that you rejoin the queue if you have a second question.

Now let me turn the call over to Terrence for opening comments..

Thank you Sujal and thank you everyone for joining us today to cover our results for the second quarter as well as our expectations for the third quarter of our fiscal 2021.

Before I get into the slides let me give you some perspective on our second quarter and I think as you will see in our results we are continuing to demonstrate the strength of our diverse portfolio and the benefit of content growth across our businesses.

We are delivering organic growth ahead of our markets as well as strong operational performance and free cash flow generation. I would say this performance is in a world with an improving economic backdrop that is dealing with global supply chains that are trying to keep up with the broader macro recovery.

We are continuing to execute to our business model, and you can see this in our second quarter results, as well as the guidance that we provide for the third quarter and I'll talk about it a little bit more today. So let me also provide some key messages about today's call. First off, I am very pleased with our execution in the second quarter.

We delivered sales growth of 17% and generated record quarterly adjusted earnings per share of a $1.57 and this EPS represents growth of 22% year-over-year.

Our sales were ahead of our expectations and it was broad across each segment driven by the continued recovery in most end markets we serve our broad leadership positions and the benefits of the secular trends that we've strategically positioned TE to capitalize on.

Also, our adjusted operating margins expanded 80 basis points year-over-year to 17% and this was driven by margin expansion in both our transportation and communications segments.

I also believe that you're going to continue to see us demonstrate our strong cash generation and truly evidence of that is our year-to-date free cash flow, which was approximately $1 billion, which is also a company record for the first half of the fiscal year.

And as we look into our third quarter, we are expecting our strong performance to continue with sales and adjusted earnings per share at similar levels to what we just delivered in the second quarter.

With that as a little bit of a backdrop I do want to take a moment to frame out the Kurtenbach [ph] environment and our business relative to where we were just 90 days ago when we last spoke.

In our transportation segment, consumer demand in autos continues to remain strong and auto production is remaining stable in the range of 19 million to 20 million units per quarter globally, even with the well-documented semi shortages. And we've also seen further strength in our commercial transportation end markets.

The trend around content growth remains strong as we continue to benefit from increased electronification of vehicles and higher production of electric vehicles, which will enable us to continue to outperform auto production going forward.

In our industrial segment, we see increased momentum in the recovery of industrial equipment markets due to factory automation and increasing manufacturing capital expenditure trends. Also in our industrial segment, the commercial aerospace and medical businesses are still being impacted by COVID and this is similar to what we mentioned last quarter.

But we do continue to see indicators of stability in our orders in both of these businesses. In our communication segment, the market trend we mentioned last quarter are continuing. Consumer demand is getting stronger, and globally we've seen an increase in appliance demand.

We continue to see strong ongoing capital expenditure trends in the cloud applications, as well as acceleration of demand around the data center.

And when you think about these trends I just covered in our segments as a backdrop, the faster than expected recovery in the markets that I mentioned has resulted in some challenges as the industries we serve replenish their supply chain and look to further secure supply.

While this dynamic has benefited our orders, which remain strong, it has called for broader supply chain pressure and the pressure we're experiencing is factored into our expectations for the third quarter guidance and Heath will provide more color on this in his session.

And the last thing I want to highlight is let's remember that we are still in a world that's still on COVID. We continue to see countries go into lockdown again and this is impacting some of our customers and their supply chains.

And certainly while vaccines are getting rolled out in certain parts of the world, the pace of the deployment and availability of the vaccines varies greatly by country so some uncertainty remains. Our focus has been and will continue to be on keeping our employees safe while also helping our customers capitalize on the improving economic conditions.

So with that as a backdrop, let me get into the slides and I'd appreciate maybe if you could turn to Slide 3 to provide some additional details for our second quarter and our expectations for the third quarter. Second quarter sales of $3.7 billion were better than our expectations in each of our segments.

They were up 17% on a reported basis and 11% organically year-over-year. We have 15% organic growth in our transportation segment with double-digit growth across all businesses. We also had very strong performance in our communications segment with organic growth of 29%, which was strong double-digit growth in both of the businesses in that segment.

And in our industrial segment, sales were down 4% organically due to the ongoing weakness in the commercial aerospace market. From an orders perspective, second quarter orders were $4.6 billion and this was up 36% year-over-year.

It reflects both the improvement in the markets that I mentioned, along with inventory replenishment in the supply chain by our customers.

Our earnings per share was a record at a $1.57 in the quarter, and this was up 22% year-over-year and was driven entirely by our operating performance, resulting in adjusted operating margins being up 80 basis points year-over-year.

I am pleased that we were able to manage the water supply chain pressures which all companies are dealing with and had margin expansion. From a free cash flow perspective, in the second quarter free cash flow was $477 million, with approximately $340 million being returned to shareholders.

As we look forward, we expect our strong performance to continue into the third quarter, with sales on adjusted earnings per share being similar to our second quarter levels.

For the third quarter we expect sales to be approximately $3.7 billion, and this is up significantly year-over-year on both a reported and an organic basis and we expect adjusted earnings per share to be a $1.57, which is in line with the levels we just saw in the quarter we just closed.

So let's turn to Slide 4 and I will cover the order trends that we're seeing. As I already stated in the quarter, our orders were very strong at approximately $4.6 billion and we had a book-to-bill of 1.22.

Orders in transportation and in communications were up 50% and 45% respectively, and this increase reflects both market recovery and supply chain replenishment in both of those segments.

In these segments, customers are not only placing orders to meet current production needs, but also replenishing the supply chains that were depleted during fiscal 2020.

I would also highlight that with some of the shortages in semiconductors and certain passive components, we are seeing some areas where customers are placing orders to secure supply beyond our lead times. In our industrial segment, it is a different picture than what we're seeing in transportation and communications.

But what is nice is that despite the year-over-year sales decline we had in the segment, we have seen orders growth of 7%, and that's driven by the continued recovery in the industrial equipment market, partially offset by the weakness in commercial aerospace that I mentioned.

Let me also on orders, add some color to what we're seeing organically on a geographic basis. And I'm going to do this on a sequential basis to show where order momentum is. In China our orders were up 3% from a strong base from fiscal quarter one. And that growth was really driven by our industrial and communications segments.

Orders on a sequential basis in Europe were up 14% and North America sequential orders were up 22%, and that was broad based growth across all our segments in those two regions. So let me get into our year-over-year segment results, and they're on Slides 5 through 7. I'm going to touch upon each segment briefly before I turn over to Heath.

Transportation sales were up 15% organically year-over-year with growth in each of the businesses. In auto our sales were up 14% organically and year-to-date we are generating content outperformance over production in our expected 4% to 6% range.

We continue to benefit from our leading global position and increased production of electric vehicles and as you've probably seen, a number of EV launches are increasing by our customers around the world.

In commercial transportation, similar to our first quarter, we saw 25% organic growth driven by ongoing emission trends, content outperformance, and ongoing share gains. We are continuing to benefit from stricter emission standards and the increased operator adoption of Euro 5 and 6 in China, which reinforces our strong position in that country.

We saw growth in all regions in our commercial transportation business, along with double-digit growth in all market verticals that we serve in this business.

The other nice thing that we continue to see is we see increased wins on electric power train platforms and trucks which give us confidence about the future content potential in this market in out years. In our sensors business we saw 13% organic growth with growth in all markets and double-digit growth in auto applications.

We do continue to expand our design win pipeline in auto sensing and expect growth as these platforms continue to increase in volume. From a margin perspective, adjusted operating margins for this segment, excuse me, expanded 80 basis points to 18.1%, driven by higher volumes versus the prior year and despite the supply chain pressures.

So if we now turn to the industrial segment, as I said earlier, our sales did decline 4% organically year-over-year. During the quarter, this segment continued to be impacted by the decline in the commercial aerospace market with our aerospace, defense, and marine business declining 21% organically year-over-year.

As I covered already, based upon the order patterns, we do believe this business is showing signs of stabilization at the current order levels.

When you think about our industrial equipment market, it was very strong and up 16% organically with growth in all regions and increasing strength in factory automation applications where we're benefiting from accelerating capital expenditures in areas like semiconductor equipment as well as along the auto manufacturing supply chain.

We continue to see weakness in our medical business in our industrial segment, and it was down 13% organically year-over-year. And this is being driven by ongoing delays and interventional elective procedures caused by COVID and the dynamics we're experiencing in medical are consistent with what our customers are seeing.

And we expect this market to return to growth as these procedures start to increase later in the year. And lastly, in the industrial segment, our energy business we saw 4% organic growth and this was driven by increase in penetration of renewables, especially benefiting from solar applications around the world.

From a margin perspective in industrial solutions, our margins declined year-over-year to 12.5% and that was really driven by the significant drop in commercial aerospace volumes.

So let me cover the communications segment and in this segment we continue to benefit from both the market recovery and share gains while delivering very strong operational performance. Sales in this segment grew 29% organically year-over-year, with strong growth in both data and devices and appliances.

In data and devices our sales grew 24% organically year-over-year due to the strong position we have built in high speed solutions for cloud applications.

Favorable secular trends in cloud services are leading to increased capital expenditures by our customers, and our content and share gains are enabling us to grow on cloud related sales at double the market rate.

Now, just to give you an example, at one of the major cloud providers, we are now providing 6X the content on the next generation server applications versus the prior generation. In our appliances business we are also seeing strong growth trends.

Sales grew 35% organically year-over-year, driven by our leading global market position, share gains, and ongoing market improvement across all regions.

From the margin perspective, our communications segment and team delivered very strong execution in the quarter and delivered 21% adjusted operating margins and these were up 720 basis points versus the prior year.

I am pleased with the way our team has worked through the supply chain pressures to deliver these strong operating margin expansion in this environment, and our communication teams are capitalizing on growth trends in their end markets while delivering strong operational execution and you see this reflected in our results.

So with that, let me turn it over to Heath to get into more details on the financials and our expectations going forward. .

Well thank you, Terrence and good morning everyone. Please turn to Slide 8, where I will provide more details on the Q2 financials. Adjusted operating income was 637 million up approximately 23% year-over-year with an adjusted operating margin of 17%.

GAAP operating income was 612 million and included 17 million of restructuring and other charges and 8 million of acquisition related charges. We continue to optimize our manufacturing footprint and improve the cost structure of the organization and can change to expect total restructuring charges in the ballpark of 200 million for fiscal 2021.

Adjusted EPS was a $1.57 and GAAP EPS was a $1.51 for the quarter and included restructuring, acquisition, and other charges of $0.06. The adjusted effective tax rate in Q2 was approximately 17%. For the third quarter we expect our tax rate to be up slightly sequentially and continue to expect an adjusted effective tax rate around 19% for fiscal 2021.

Importantly, we expect our cash tax rate to stay well below our reported ETR for the full year. Now turning to Slide 9, sales of 3.7 billion were up 17% versus the prior year and 6% sequentially demonstrating the strength of our portfolio. Currency exchange rates positively impacted sales by 150 million versus the prior year.

Adjusted EPS of $1.57 was up 22% year-over-year and 7% sequentially reflecting our strong operational performance. Adjusted operating margins were 17% and expanded 80 basis points versus the prior year.

While we would have expected higher fall through on this level of sales growth, we saw impacts of higher freight charges and other supply chain pressures in the quarter and these will continue into the third quarter. And as you are aware, these supply chain issues are having a broader impact on our customers and suppliers as well.

As Terrence mentioned, the supply chain is catching up to the increased level of demand we are seeing in many of our end markets and given these dynamics, I'm pleased with the results we delivered in the quarter and our momentum going forward as shown in our third quarter guidance. In the quarter cash from operating activities was 580 million.

We had very strong, free cash flow for the quarter of 477 million and a year-to-date free cash flow that was approximately $1 billion, which is a record for the first half of the fiscal year. We returned approximately 340 million to shareholders through dividends and share repurchases in the quarter are strong.

Free cash flow performance demonstrates the strength of our cash generation model and we expect to -- and we continue to expect free cash flow conversion to approximate a 100% for the full year.

We remain committed to our disciplined use of cash and over time we expect two thirds of our free cash flow to be returned to shareholders and one third to be used for acquisitions.

Before we go to questions, I want to reiterate that we remain excited about how we have positioned our portfolio with leadership positions in the markets we serve along with organic growth and margin expansion opportunities ahead of us.

To summarize, the outlook for many of the markets we serve is consistent with what we are seeing 90 days ago, along with some acceleration of growth in the commercial transportation, industrial equipment, and communications markets.

We are continuing to see the benefits of secular trends across our portfolio and are capitalizing on these opportunities. The economic recovery has been faster than expected, and we are seeing a corresponding near term pressures in the broader supply chain as a result.

These impacts will be resolved and nothing has changed with respect to our growth and margin expansion expectations. We are executing well on things we can control and our outlook for Q3 continues to reflect the strength of our portfolio.

We expect to continue to generate strong free cash flow, maintain a disciplined and balanced capital strategy, and drive through our business model performance. And we've remained focused on value creation for our stakeholders going forward. Now let's open it up for questions. .

Okay, thank you Heath.

Michelle, could you please give the instructions for the Q&A session?.

[Operator Instructions]. And your first question will come from Craig Hettenbach from Morgan Stanley. Your line is open..

Thank you. Question for Terrence, there were a number of references to replenishment on the call.

So can you just talk about the strength you are seeing in the business, when customers you think will get caught up on inventory and importantly the type of sell through you're seeing?.

Sure, thanks Craig and let me -- you see that in our orders and I think one of the things is we're all dealing with a recovery across those markets that are seeing that improved recovery at a faster rate than we all expected. And inventory levels are low.

When we see the orders that we see, we do see people trying not only to make -- get the products in for what they want to make, but also to get the supply chains up that ensure that there aren't some of the stresses that we hear about in other components. So when you look at that, I think we're all in the middle of that real time.

These are stresses that you get when you have a recovery that's in motion. I do think we need a couple of quarters for that to play out because it is pretty broad based and stocks were taken very low.

And even when you think about our channel partners, our channel partners are holding turn levels that are lower than normal, and they're trying to catch up. So it is very broad across those markets that you see the strength in and it will take a couple of quarters to get truly everything probably replenished. .

Okay, thank you, Craig. Could we have the next question please..

Yes. Your next question comes from Wamsi Mohan from Bank of America. Your line is open. .

Yes, thank you. Terrence, you alluded to a few things within the communications segment performance.

Can you remind us how much of that is cloud now and are you expecting this growth to sustain here and how sustainable are these margins?.

Yeah, thanks Wamsi. In communications I think one of the things that we have to keep in front of us is it was our segment that was least impacted last year.

And so I think that even makes, when you look at the results, that segment has a Puget or more impressive because they didn't have the dip that our transportation segment had when the western world shut down auto production. And so the growth that you see first off is in D&D.

It is primarily driven by cloud applications and I think it's both the acceleration of cloud CAPEX in addition to where we position ourselves from a market share perspective and we continue to do a nice job in that team, continuing to build more momentum from a share perspective and that's really driving that growth.

The other thing that you have in that segment is our client's business has a great global position, and we're also benefiting from as certainly appliances have accelerated globally around the world. You're seeing the benefit of that business and you're also seeing how globally two businesses are.

So certainly I talked about it in orders, but these businesses are very globally balanced and you're seeing the growth. So feel good about the positioning we've done on the top line. I would also say with the volumes that we're at, we would expect that this segment would be higher margin than what we've told you historically.

So we always said this was probably middle teen at these types of levels. You'd probably be in the middle higher teens over time. And it just shows that the work that we've done to improve the portfolio here, the trends we have put it around as well as the operational execution team has done. So thanks Wamsi for the question. .

Thank you Wamsi. Could we have the next question, please..

Your next question comes from Amit Daryanani from Evercore. Your line is open..

Yes, good morning, everyone. Thanks for taking my question.

Terrence, I was wondering if you would maybe solve the deviation between the strength we're seeing on both the book-to-bill and the order number that you put out more so in the June quarter guide, right, I mean, if I think about the book-to-bill of 1.22, I would applaud June quarter guide would be north of 4 billion in revenues.

So I would just love to understand what is the delta between the book-to-bill versus your guide? And related to that the orders trends you're talking about, is there any deviation between channel versus OEM there?.

So let me just take it, I'm going to take your last piece first, if that's okay. When you look at it, the trends where you're seeing the acceleration and also with some of the supply chain stresses, you do see orders in the channel were probably a couple of hundred million higher than what we build.

And our channel sales grew similar to what the total company grew. So you do see the channel partners trying, their inventories are low, they're trying to catch up. But I wouldn't say it's different than what we're seeing direct. It is about how do we make sure the supply chain levels to support this faster recovery get into place.

When you look at our book-to-bill of 1.22, as you all know, this is not a business that's typically a backlog business and what we're seeing because things were so depleted, you have customers that are sitting out there not only getting orders for production, but also trying to replenish and there's pain points in the world.

So, there's certain product sets that we have some constraints on. There's pain points on some of our input materials and Heath talked about some of the pressures on inflation side. So I think what you have is the orders are a lot higher than our guidance and our guidance is really the things that we see we're going to schedule out and deliver.

And, it will normalize over time that there'll be more check, but right now you have a supply chain replenishment going on after COVID in 2020. It took a lot of supply chains to a full-stop. .

Okay, thank you Amit.

Can we have the next question, please?.

Yes. Your next question comes from Joseph Spak from RBC Capital Markets. Your line is open..

Thank you very much. If we look at the actual incrementals in the quarter and compare that to sort of that low 30s, that delta is about $50 million.

So is that order of magnitude what you sort of experienced from logistical headwinds? And then I know you mentioned that could continue, so maybe you could talk about some of the puts and takes on the margin as we head into your fiscal third quarter?.

Sure. Joseph, this is Heath, I'll take the question. You're right on with your assumption. We would have expected these volume levels to be north of 30% flow through as we've talked about.

And so the delta on a year-over-year basis to where we came in, probably puts you into that type of number in terms of, in terms of the flow through and then the impact that it had on margins.

As we work our way through the year, there's certain things that will continue that we will continue to expect to feel the pressure on, whether that's free charges, freight inflation, or inflation on input materials otherwise.

What the team is hammering through those, and we have different levers that we can pull to pass some of those things along as well as where we deal with the timing issues on some of that.

But I would expect our margins to modestly improve as we work our way forward here into the third and fourth quarter, based on some of the actions that are underway and our ability to combat some of the inflationary pressures out there..

Okay. Thank you, Joe.

Could we have the next question, please?.

Yes. Your next question comes from Chris Snyder from UBS. Your line is open..

Thank you. My question is on EV wins and the pipeline of demand coming to market.

Just given the increased focus on high voltage, are you seeing better share relative to ICE and for these new awards, should we expect initial unit production will carry a CPV above 120 until scale is reached?.

Yeah, no thanks. So a couple of things let's remember that our share is very heavy on a leading position in what we do already. So I wouldn't say share is higher, I would say it's in line with our leading share across automotive and transportation.

What is ICE and you talked about it is where do you see the momentum around EV and, just if we went back a few years, it was 5 million electric vehicles if you take pure electric and hybrid. This year we think it's going to be closer to 10 million vehicles.

And you see Europe continuing with the emission programs there, certainly Asia has always been strong in there, and these are both regions that we have very strong presence.

So when we think about content, what's nice is EV continue to see the adoption, you see the new models coming out, the models are much more attractive than the consumer acceptance of those strong. And it pulls in line with our overall content growth and the CPV. We do expect to be that 2X on those high voltage, because what happens with our train.

So it is one of the things that with an improving recovery, the secular trends of where we positioned TE whether it's the electric vehicle in the car.

And as I talked about in my script was we also are seeing innovation along the heavy truck fleet that is becoming more platform driven, they are going to have more model launches probably out in the 2025, 2026, and that's going to be a content driver and we have wins on those.

So those secular trends, in the backdrop of an improving economy just creates more growth opportunity for us. .

Okay. Thank you, Chris.

Can we have the next question, please?.

The next question comes from Samik Chatterjee from J.P. Morgan. Your line is open..

Great, thank you for taking my questions. I wanted to ask an automotive as well.

You had strong results in automotive, despite the uncertainty we're seeing there with the same kind of shortages, just wanted to Terrence what are you hearing from your automotive -- in terms of how they want to manage the supply chain, are they still sticking to the model or are they ordering ahead and when to start expect some of these shortages in terms of impact on production to start to moderate?.

Well, I think when every OEM, number one is happy with where the consumer is showing up. And if we were here six months from now, while we were ramping, one of the things we talked about is the consumer showing up.

And I think that's just great for the industry and our OEMs are trying to work through the supply chain pressures, at a bigger extent than even we're dealing with. So, what was nice and certainly semiconductors are the big news out there and it is very well documented. Now that impacted production a little bit less than a million units in quarter two.

I think it's going to be a similar number in quarter three, but global auto production, staying in that 19 million to 20 million unit range. And what's nice is probably this year auto production will be back to 2019 levels, and that's a little bit quicker than we would have said six months ago.

So the OEMs are very much working hard to get the cars out to the consumers. We're all working very much together knowing that right now, as it's ramping back up to a very high level, and we're all trying to make sure how do we keep the OEMs going.

And so the discussions today are very much around how do we work together to make sure our OEM customers get to capitalize on this opportunity. And yeah, there is a lot of volatility right now due to the supply chain. And I think we're going to have to continue to work through that, through the rest of our fiscal year. .

Alright. Thank you Samik.

Can we have the next question please?.

Yes. Your next question comes from Mark Delaney from Goldman Sachs. Your line is open..

Yes. Good morning. And thanks very much for taking the question. Heath, you reiterated the view that free cash flow conversion for this year could be approximately 100% of net income.

Can you talk about whether or not there's anything unusual benefiting free cash flow conversion this year and recognize there's going to be some puts and takes in any given year going forward, but is that the right type of approximate level to be expecting on free cash flow conversion going forward? Thank you..

Well Mark, thanks for the question.

I think we've -- one of the things that as I look at the free cash flow and the components and leverage we get to pull there, there as we've worked our way through the last few years, one of the things you have seen is CAPEX as a percentage of sales, moderated a bit more closer to that 5% number versus higher we were running a couple of three years ago.

That capacity that we have put in place is certainly we are benefiting from that now. And particularly as we move forward, I think that number of 5%, maybe tad under that this year is helpful in terms of how that converts cash flow.

The other thing that we obviously benefit from is the way we manage our tax structure and our ability to pay our cash tax rate being much lower than well below our ETR.

And so there's a few of those types of things, but working capital this year has been a good story for us and our ability to maintain receivable days and payable days, improving year-upon-year despite this volatile environment has been good. So nothing unusual in our FY21 numbers or outlook from a cash flow perspective.

I continued to -- we continue to monitor it and we're not starving the businesses for investments. The organic revenue growth gets first priority as you can imagine.

So we feel good about how we have positioned that and going forward now, if there's a year coming forward that we have a more significant step up in terms of an investment or restructuring or something, we will highlight that. But, I think we are in a good position right now. .

Alright. Thank you, Mark. Can we have the next question, please..

Your next question comes from Joe Giordano from Cowen. Your line is open..

Hey good morning..

Hey Joe..

[Technical Difficulty]. Just if I look back in auto last year in the 2Q, I think you had some 40 basis points of benefit from supply chain replenishment then.

So if I look at the results from this quarter, and I assume that you grew kind of like in your 600 basis points above production, like, is that how I should think about this, that supply chain this quarter was like 900 basis points, and it should still be like a pretty favorable number for the next few quarters?.

I think it's very difficult to just look at content in one quarter, Joe and you're right. With last year in this quarter, we did have supply chain benefit, because we saw people sort of getting into COVID, we were rolling out trying to secure supply. You need to look at it over a longer term. And, I think that's the more appropriate way to look at it.

As we said on last quarter, and when we sort of look at mix of vehicles this year, we sort of view we should be in the mid 70s, without supply chain effects this year.

And that's something that is, if you look at what's driven that versus the lower to mid-60s a few years ago, half of that is due to our positioning around electric vehicle, and certainly data has autonomy. Infrastructure gets put in the car.

And then the other half is just electronification as our core products that continues to be sourcing as the car gets more features on it. So I still think this year without supply chain we are in that same figure we told you last quarter.

I think when you get into where supply chains are trying to move in, it is difficult to get it into one number in a quarter..

Okay, thank you Joe.

Can we have the next question please?.

Next question comes from Scott Davis from Melius Research. Your line is open. .

Hey, good morning, guys..

Hey Scott..

How do you handle, how are the contracts handled when you have kind of these excess orders, no double ordering or folks that are want more, I mean, can you get additional price and help offset some of the cost issues and such?.

Sure, so on pricing Scott, so when you think about in distribution it was about 20% of our business. We did price increases and we do them every six months. We did some in January, we have other ones rolling out in July for some of the inflation pressures. What we do have with some of our larger customers, metal writers that have adjusters for metal.

So as he talked about, we do expect modest margin expansion as we go into the third quarter. Some of it is as those things kick in, as we continue to try to manage through it. So it is very different by the markets we plan. But there will be price increases aligned with how we have the mechanisms sorted with our customers. .

Okay, thank you, Scott.

Can we have the next question, please?.

Your next question comes from Christopher Glynn from Oppenheimer. Your line is open. .

Thanks. Good morning, everybody. Higher level question on industrial automation cycle, how you see that shaping up. The comparisons and the macro are helping you but during COVID, a lot of people learn to do more with personnel disruptions and robotics has been pretty emerging category.

I'm wondering if you're seeing the makings of an automation super cycle in terms of investment over the next handful of years?.

What I would tell you is if you went back, certainly last year, that space got hit. And the year before that it wasn't a positive cycle. There were elements around auto production going down that were impacting as well.

What we see and what we see it pretty consistently globally, you're going to have many semiconductor manufacturing equipment that's accelerating. You're seeing the investments around the auto supply chain, you see a lot of those around the electric vehicle and the battery side of it. Certainly warehousing is no surprise either.

So what we have seen pretty consistently, globally, is an acceleration that last quarter, we told you, we saw some emerging, fine to hope we really saw an acceleration this quarter. And I do think just with the backdrop we're in, I do think you're going to have a positive cycle here around automation investment.

As people see an economic recovery that continues, and let's face it, the two markets where we haven't seen it, are in Comair and medical which were both impacted by COVID. Where we play in medical, so I do think you could have a stronger like here of an industrial capital equipment cycle that's stronger coming out of COVID. .

Alright, thank you, Chris.

Can we have the next question, please?.

And your next question comes from David Kelly from Jeffries. Your line is open..

Hi, thanks. And good morning, Terrence, Heath, and Sujal.

A quick follow up question on the prior distribution channel exposure, just hoping you could maybe give us a deeper sense of the order trends there and if you don't mind, can you remind us of your distribution mix within communications and our struggles as well?.

Sure, when you take our distribution mix, it is about 20% of the total company. But what you do have that mix is higher in our industrial segment, as well as our CS segment. Now, in those cases you're up 40% plus. In automotive, there's not a lot of distribution, that's a direct just in time, you don't have that.

So you do have higher weightings in communications and industrial. And, our revenue growth was in line with the total company revenue growth, sort of mid-teens. But we did see our book-to-bill in that area was higher meant total company, it was more like a 150 book-to-bill. And their inventory levels are low.

And it's not surprising with as the world accelerated people are trying to secure inventory. They're also trying to rebuild their inventory levels to more appropriate turn. So the book-to-bill was very strong there. And I just think it's another positive sign of an improving economy and certainly as we look forward. .

Alright, thank you, David.

Can we have the next question, please?.

Your next question comes from Jim Suva from Citigroup. Your line is open..

Thank you. And Terrence, in your prepared comments, you made a comment about the orders being stronger than your lead times. When there's chip shortages and the lead times are stretching out, you normally see that a lot.

So can you just help us kind of bridge why would customers be ordering a lot more beyond your lead times, is it just inventory replenishment or do you think that they're fearful of more supply chain issues because if your lead times are normal, it seems like they could just put in normal orders versus stretched lead times? Thank you. .

Yeah Jim, couple of things. So let's realize in automotive it's adjustment type system, there really isn't lead times. So in that part of our business, it is just in time. And the rest of our business our lead times are four to six weeks.

When typical, we do have some pain points and I would probably say in some areas, we're a little bit further out than that, but not anywhere close to some of the semis. I think you do have replenishment going on, people did take volumes down to down low and the economy is doing better.

In addition, people see semis and some other passives having shortages. It isn't surprising that people are saying, hey, I want to make sure I get my orders on to make sure I don't get surprised and other components and tier two products. So, I think that's why you see what's happening with distribution.

I think it's also in some of those markets that are very hot, that you see that happening and honestly, our lead times aren’t moving out significantly, except in very finite product sets where we have some pain points. .

Alright, thank you Jim.

Can we have the next question, please?.

Your next question comes from Luke Junk from Baird. Your line is open..

Good morning.

Terence I was hoping you could discuss some of the key opportunities in your energy business as it relates to the proliferation of electric vehicles, increasingly an area that we're getting questions on, if you could just speak to the role that key has to play in terms of grid hardening, which of course is in focus on the Texas storms this winter, renewables mentioned in your comments and similar?.

Yeah, so on our energy business in our industrial segment, it is important where we play in that is really along the grid. It is very much around the electrical infrastructure and it is very global.

And, the key factors that really drive growth there is hardening as you said, but also where we pivoted our portfolio and our team has done a nice job has been, how do we get our share when you deal with wind applications where you have very high voltage connections that need to come back and hook into the grid, as well as the solar applications, which are not in panel connections, but really taking the energy that comes off the solar grid into the core grid.

And what's nice is, the growth that we've seen in our energy business that has been pretty consistent over the past year is really due to our repositioning around renewables.

Historically, this would have been a very slow growth business where you have seen it, you saw the 4% this quarter, and that exposure of those renewables is really driving the growth there. And certainly how EV is driving into energy usage would also benefit that. So we are benefiting from all the carbon neutral initiatives on the planet.

And certainly, how do we make sure we get our fair share with our pretty broad product set to make sure those connections in those grid occur is what we get excited about. .

Okay, thanks Luke.

Can we have the next question, please?.

Next question comes from Nik Todorov from Longbow Research. Your line is open..

Yeah, thanks. Good morning, everyone. Terrence, we've seen some reports that some auto OEMs are doing much better than others in the current environment, because they have shifted away from just in time over the years.

As we deal with broader supply chain issues and I know that's more on the semi side but how do you see customer inventory policy on the auto side changing, do you see any structural shift away from just in time?.

What I would tell you is, with what we're dealing with currently, we're trying to meet demand. We have not seen significant shifts. Do the OEMs reflect after this, it'll be interesting. I think that'll be a discussion we have with our customers, but right now our customer is really focused on making sure they get product out the door.

And, in some cases, just realize we don't have some of the production lead time that a semiconductor company would have when they think about their fab. So, what we do is different. But certainly there's stress and strain in the system.

And some of the tier 1s that are also in that equation, play a pretty big role not just the OEMs and they took inventory levels down very low. And that's what we're all trying to catch up on. .

Okay, thank you Nik.

Can we have the next question, please?.

And your next question comes from William Stein from Truist Securities. Your line is open..

Terrence, I think it was you who used the word inflation to describe something that's happening to at least part of your costs.

Maybe it was Heath, but whomever takes it is fine, I'd like you to maybe tell us about whether that's something that you're seeing in input costs, material costs for example or labor or if it's just supply chain related costs.

And I think you also noted that you'd expect this to be clawed back over time, is that through essentially a deflation in those costs or is it something you think you're going to be able to pass on to customers? Thank you. .

William, this is Heath. I will take the question. Certainly, we're feeling the biggest inflation right now is on the freight side. The freight inflation has been significant as we battled through there and there's a variety of reasons for that, including higher air freight and so forth in terms of that. And that's not unique to TE.

Certainly, I think that's been well publicized across the overall supply chain. We are as we move towards the second half of our year, we are seeing a little bit higher input costs, particularly with resins and some of that's pretty directly attributable to the weather issues that were in Texas here earlier, this past quarter.

And then copper prices as we've continued to monitor those, we've seen those creep up. Now in some cases, we have hedges in place in terms of how we hedge our metals cost. So you don't see -- you see that kind of layering a little bit slower in and out of the P&L, as we hedge about 50% of our exposure out about 18 months for metals.

So, as we get through their labor costs is not a major issue on the inflation side, but labor availability in certain places that are still being more impacted by COVID continues to drive some inefficiencies, and there's no doubt whether that's in Mexico or in Central Europe and otherwise.

We still are battling through where -- COVID where we have significant operations, and that's evermore around availability than inflation.

In terms of the callback, I think Terrence outlined it a couple questions ago, in some cases, we have contractual ability to do that in terms of passing through writers, as we've seen inflation come in more aggressively.

In some cases, it's a broader pricing discussion with a customer and then within channel, certainly, we will utilize the ability to take prices up, tie with inflation for that piece of the business. And then, depending upon the business, there's surcharges and different types of mechanisms that are put in place.

But I'd say the timing issue is a portion of it. There's no way I'm going to sit here and say, we're going to claw back 100% of what we're pounding through right now. But we also have productivity engines in place to help offset some of these things. So more to come. .

Okay, thank you Will.

Can we have the next question, please?.

Next question comes from Matt Sheerin from Stifel. Your line is open..

Yeah thanks. Good morning, everyone. My question is around the industrial solutions area, particularly how we should be thinking about operating margin going forward. You were down year-over-year, for reasons you talked about particularly weakness in the aerospace area.

Sounds like that's bottoming, it sounds like you're continuing to see growth in the broader industrial market. So what should we be thinking about a margin expansion from here, I know you've been targeting high teens, is it a function of volumes here or there's still some restructuring benefits that we should be expecting? Thanks..

Matt, this is Heath. I will take the question, and thank you. Well, first of all nothing has changed in terms of our outlook as we've been on a multi-year journey to get the footprint right in the industrial segment.

And that involves reduction of consolidation of a lot of rooftops, nothing has changed there in terms of our multi-year plan to get to mid to high teens operating margins.

Certainly within the quarter we were impacted by a very -- by the mix of businesses where the growth or lack of growth is coming from commercial aerospace is a very profitable piece of the segment. And as that's down, year-over-year, that it has a pinch point in terms of margins.

However, there's other things that factor into this as well, in terms of how we think about the restructuring that's going on, in some cases when we do have costs ahead of some of the savings as we're moving factories into new locations. In addition, the segment was not immune from some of the supply chain challenges. So a variety of things.

I am confident as we move into the second half of our year that we will see improvement there. .

Okay, thank you, Matt.

Can we have the next question, please?.

Your next question is from Steven Fox from Fox Advisors. Your line is open..

Hi, thanks. Good morning. I might have misinterpreted this, but it sounded like you mentioned, market share gains more than normal. I was just curious if there's any common thread across while you're gaining share or if there's anything you would point to within the different segments that are driving share gains? Thanks. .

No, what I would say Steve, I don't -- I think one of the things that's important is we did want to highlight those areas where we do feel their share gain, not just marking improvement. And there are areas that I think we've differentiated during COVID, where they created some opportunities. And I think you see that in both units in the CS segment.

Certainly, in regard to our industrial transportation business and how we have continued to gain share there. So there's some of the bigger highlights, but we did want to make sure in those areas, not only market recovery, we also had -- took advantage of market share in some key markets that are also contributing to our results. .

Okay, thank you, Steve.

Can we have the next question please?.

Your next question comes from Rod Lache from Wolfe Research. Your line is open..

Hey, this is Shreyas Patil on for Rod. You talked about -- you mentioned the content opportunity that you're seeing in battery electric vehicles versus ICE it's about a 2X opportunity. And I think in the past, you've talked about $60 of content on an ICE vehicle, increasing 120 on [indiscernible].

But with certain programs, it seems like you're actually -- the actual content on those vehicles is much higher.

So I'm trying to get a sense of amongst the programs that you're either -- that you're winning, how do you think about the content on those vehicles, how should we be thinking about that and what's the opportunity there going forward?.

When the vehicles are winning, one of the things that you have long as the architecture, continues to get scaled and aligned. There is a broader breadth of content per vehicle on electric vehicles for us, and you sort of have on a traditional ICE, and that we get excited about that.

And, there are some new electric vehicles, it's the traditional 2X and there's some that are much higher, where our customers have asked us to do more. So there is a broader breadth, and you have on a traditional ICE or in a traditional ICE it really comes down to feature set. But what's nice is the number of EVs that you see are accelerating.

And at TE what we get really excited about is, as this continues the need to scale to make sure these vehicles are affordable for all consumers, not just on the higher end, that's where we continue to provide scale.

And we've always said that, as we think through price as it scales, some of these very high CPV elements we have talked about will come down a little bit because they have to for the affordability of the cars. And that's assumed in all our content assumption.

So feel very good about the adoption that it is as global as it is, I think it really stood the test to COVID. But also is when you look at how the architecture of the car needs to continue to scale. That's what we get excited about because automotive is still a scale business.

And I think we've proved that with our leading position in what we've done on the ICE and what's nice is our ICE products carry over, because they're mainly in the electrical architecture that carries over into the EV.

So there isn't real cannibalization, because the power train is not as big from electrical side from an ICE, it just goes way up when you get to a EV or hybrid. .

Okay, thank you.

Can we have the next question, please?.

Next question comes from David Williams from Loop Capital. Your line is open..

Hey, good morning, and thanks for letting me ask the question. Wanted to ask maybe on the mix shift from the automotive OEMs. Obviously, they have pivoted to the higher end, maybe even more luxury vehicles.

As we see that shift mix maybe move back towards a mid-range to lower range vehicles as the semi shortage eases, how do you think that impacts maybe revenue and a margin impact there?.

Well, when you look at that, certainly the OEMs are getting to make the vehicles they want to make and they make money off. And I think that's one of the things that are nice about this improving economy. But I would also say many of the OEMs are also have changed their platform pretty dramatically about what vehicles and platforms they make.

So certainly when you have increased options that are put on cars, we will get a little bit of benefit and content in our traditional product. And that's what ebbs and flows over time. And I would also make sure we take a global perspective of it. I know that very much in the U.S.

there's a view of a pickup trucks and that has more content but when you think about TE, you need to really think globally. And some of those trends aren't as real elsewhere in the world as they may be in the North American market. .

Okay, thank you, David.

Can we have the next question, please?.

Your next question comes from Wamsi Mohan from Bank of America. Your line is open. .

Yes, thanks for taking my follow-up.

Terrence, I was wondering if you could comment, I know it's still early days but if you could comment on any puts and takes associated with the infrastructure plan, particularly given the amount of investment in EV infrastructure or how that might be a tailwind for TE versus any potential tax headwinds from the proposed tax hikes? Thank you. .

Well, on both sides of those equations, obviously, there's a lot of things out there. So, sizing that today is very difficult, though, when that there is a lot of things being thrown around. So let's just keep that as an overlay. But I think if you think about any infrastructure, how could that benefit TE I think is important.

And, certainly I answered a question earlier about energy infrastructure. Certainly there's investments that have to happen there that would benefit our energy business. If you get infrastructure put in for battery electric capacity in North America versus relying on other parts of the world, certainly our factory automation team would do it.

And any other infrastructure, I think that the other benefit should be is and we've been very clear on it, we only view acceleration of electric vehicles in Asia and Europe, are going to happen quicker than the United States, because there has not been as much government support around getting those vehicles adopted.

So that could also benefit our auto business. So they're just some of the bigger elements, and then you get in your traditional infrastructure where you would have a very strong position in commercial transportation depending upon what happens with roads, and if that creates a machinery cycle.

We would participate very well on increases around certainly the heavy equipment side due to our industrial transportation. But there's some of the positives that could occur. Certainly, we got to see how the bills and the plan shake out. I will let Heath handle packs and I'll hand it off to him for that piece of it. .

Thanks, Terrence. Yeah, and Wamsi you probably recall, on the tech side again, there's a lot of things that are still to be determined. But as you recall, when the last tax reform, lower the corporate rate, it didn't have a big impact on us, given our structure and where we're domiciled and where our profit pools lie.

So, early look at any of these proposal kind of indicate we probably wouldn't have that much of an impact on us in the other direction, either. So, more to come as things get solidified there, but I think it's important to look at not just the impact there, but where we pay cash taxes. And so not a huge concern at this point, but stay tuned. .

Okay, we have no further questions. I want to thank everyone for joining us on the call this morning. And if you have further questions, please contact Investor Relations at TE. Thank you and have a great day..

Ladies and gentlemen, your conference will be made available for replay beginning at 11:30 AM Eastern time today, April 21, 2021 on the investor relations portion of TE Connectivity’s website. This will conclude your conference for today. You may now disconnect..