Ladies and gentlemen, thank you for standing by and welcome to the TE Connectivity Third 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] As a reminder, today’s call is being recorded.

I would now like to turn the conference over to our host, Vice President of Investor Relations, Mr. Sujal Shah. Sir, please go ahead..

Good morning and thank you for joining our conference call to discuss TE Connectivity's third 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 I also appreciate everyone joining us today to cover our results for the third quarter, as well as our expectations for our fourth fiscal quarter. Before Heath and I get into the slides and the details of the quarter, I want to frame our view of the environment that we're operating in as well as our performance.

We are in an economy that is showing strong GDP growth globally, driven by the recovery from last year's COVID shutdowns with consumer spending that is robust, as well as corporations around the world increasing investment to capitalize on this recovery.

In addition to the recovery, it's also important to note that we've strategically focused TE around select secular trends and these trends are accelerating in the key markets that we serve.

You'll see this in our transportation segment with electric vehicle adoption accelerating in our communications segment around cloud investment and in our industrial segment with capital spending accelerating globally around factory automation as well as digitization.

While we have a recovery that is happening faster and is more robust than we all thought, the reality is that the world is dealing with supply chains trying to catch up to this faster recovery. This is causing volatility for our customers as well as everyone that's in our customer supply chains.

In this backdrop, we are performing well in this environment and our strong results for the quarter and our performance so far this year demonstrates the strength and diversity of our portfolio. You'll see this with contributions from each of our three segments.

We are generating sales, adjusted operating margins and adjusted earnings per share that are above pre-COVID levels and we remain excited about the additional growth and margin opportunities that we'll be on this year. With this backdrop, let me provide some key messages from today's call about our performance.

First, I am pleased with our execution in the third quarter and the quarterly records that we achieved. These records include sales of over $3.8 billion, adjusted earnings per share of $1.79 and adjusted operating margins of over 19%.

Our results were ahead of our expectations, driven by the continued recovery in most end markets that we serve, our broad leadership positions and strong operational performance by our teams.

It's also important to note that, while we are in a recovery, our growth also continues to be driven by the secular trends across our markets that are driving our market outperformance this year and will continue to drive the outperformance going forward.

Another key factor that you see is that, we are continuing to demonstrate our strong free cash generation model, and continue to expect free cash flow conversion to approximately 100% for this full fiscal year.

And as we look forward, you'll see and we'll talk about our orders in quarter three remain consistent with our second quarter, and we expect our quarter four sales to be roughly flat to our quarter three sales.

And we expect that these revenue levers will translate into strong performance with $1.65 in adjusted earnings per share in the fourth quarter. As I mentioned, our results are demonstrating the strength and diversity of our portfolio, with growth and margin contributions from each segment.

In communications, you see the growth opportunities in the cloud and the ongoing increase in capital expenditure trends by the cloud providers. In our industrial segment, you see increased investments in capacity and higher levels of factory automation.

And in transportation, you see content growth trends for electrification, as well as further electronification of both autos and trucks. And in each of our segments, we are delivering strong operational performance, which are evident in the margins.

And when we look back to our discussion we had in October, we did indicate that our first quarter would be the peak of global quarterly auto production for our fiscal year, but not the peak of our earnings. This is playing out as we anticipated because of our diverse portfolio.

For this fiscal year, we are expecting over 20% growth in sales, approximately 400 basis points of adjusted operating margin expansion and over 50% growth in adjusted earnings per share.

I am very pleased with this level of progress towards our business model and our team's ability to execute, especially with some of the markets continuing to recover and the broader challenges we've faced in the supply chain.

So, now, let me turn -- and I want to take a moment to frame the current market environment and our business relative to where we were just 90 days ago when we last spoke. So, starting with transportation. Consumer demand for autos remains robust, but ongoing challenges with semiconductor supply continue to impact our customers' ability to produce.

Global auto production came in slightly lower than expected in the third quarter, and we're expecting auto production to be approximately 19 million units in our fourth quarter. The trends around our content growth remain strong in the transportation segment.

Our content per vehicle has accelerated from the low $60 range, a few years ago into the $70 range this year. We continue to benefit from increased electronification and higher production of electric vehicles, which will enable us to continue to outperform auto production going forward, as content continues to grow.

In our industrial segment, we continue to see an industrial backdrop that is improving, which is benefiting our industrial equipment, as well as our energy businesses. Also, in our quarter, our orders in medical have begun to recover, and we returned to growth as interventional procedures have started to increase again.

And the one area, where we are not seeing acceleration is in our AD&M business, but I will highlight, the business does feel stable at current revenue levels. From 90 days ago, let me talk about communications. The end market trends that we mentioned last quarter are continuing.

Consumer demand continues to be robust in appliances and capital expenditure trends remain strong in cloud applications. And while that to look at where we were versus 90 days ago by our segments, I do want us all to remember that we are in a world that's still dealing with COVID and the uncertainties around variants.

While all our global factories are operational, we continue to watch developments in each of the regions we operate and 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 now let me get into the slides and please turn to Slide 3, so I can get into some additional details for the third quarter, as well as our expectations for the fourth quarter.

In the third quarter, sales of $3.8 billion were better than our expectations and were up over 50% year-over-year, demonstrating strong performance through the economic recovery with growth in all segments. Also on a sequential basis, sales were up 3% and our earnings per share was up 14% with sequential margin expansion in each segment.

Compared to last quarter, industrial segment sales were up 5%, driven by ongoing strength in industrial equipment and increases in energy and medical. And in the communications segment, sales were up 16% with double-digit growth in both data and devices and appliances on a sequential basis.

And in our transportation segment, our sales were in line with our expectations. When you look at orders in the quarter, they remained strong at $4.5 billion consistent with the levels we had in the second quarter. And this reflects market improvement along with ongoing inventory replenishment by our customers.

If you think about the balance sheet, we continue to maintain the capital strategy between making sure we're returning capital to shareholders as well as M&A. Earlier this month, we entered into an agreement to acquire ERNI, a European connector manufacturer that has a complementary product line and serving the industrial market.

This acquisition has a purchase price of approximately $300 million and is consistent with the bolt-on strategy around acquisitions that we talked to you about. As we look forward, we expect our strong performance to continue into our fourth quarter. We expect sales to be up in the high teens over the year to approximately $3.8 billion.

Adjusted earnings per share is expected to be approximately $1.65 and this will be up 40% year-over-year. And as you can see on the slide, we've included our full year numbers and our performance relative to both fiscal 2020 and 2019 which I highlighted earlier. So let's turn to Slide 4 and I'll get into orders a little bit more.

For the third quarter, our orders remained strong at approximately $4.5 billion consistent with the second quarter levels that I mentioned earlier. Order levels continue to reflect economic recovery and replenishment across a number of our end markets. Year-over-year, we saw orders growth in all businesses and in all regions.

Transportation orders remained elevated due to the market recovery, as well as the auto industry supply dynamics. In our industrial segment, orders grew 8% sequentially and with growth in industrial equipment, energy and medical and flat orders in AD&M which indicates the stabilization that I mentioned earlier.

In communications, sequential order growth was driven by strength in data and devices. So let me also add some color on orders and what we're seeing from a geographic perspective on a sequential basis. We continue to see growth in Asia where our China orders were up 6% sequentially.

In Europe, our orders were down 7% sequentially and in North America, our orders were essentially flat versus last quarter. So with that as a backdrop around orders, let me get into our segment results that you'll see on slides 5 through 7 and I'll cover this briefly.

Starting with transportation, our sales were up approximately 70% organically year-over-year with growth in each of our businesses. Our auto business grew 90% organically and we are benefiting from the market recovery and are demonstrating continued content outperformance due to our leading global position.

We continue to benefit from increased production of electric vehicles, as TE's technology and products are enabling high-voltage architectures and applications with every leading OEM on the planet. In commercial transportation, we saw 56% organic growth driven by the market recovery, ongoing emission trends as well as content outperformance.

We are continuing to benefit from stricter emission standards around the world and increased operator adoption of Euro 6, which reinforces our solid position in China.

The other key point is that we continue to gain momentum with wins on electric powertrain platforms and trucks, which while this doesn't give revenue or orders today, it will provide future content growth for our leading position in commercial transportation.

In sensors, we saw 20% organic growth, driven primarily by auto applications and we also saw growth in the commercial transportation and industrial applications as well. For the segment, adjusted operating margins expanded sequentially to 19.4% on essentially flat sales. So let me turn to the industrial segment.

And in this segment, sales increased 13% organically year-over-year.

In our industrial equipment business, sales were up 36% organically with growth in all regions and benefiting from the momentum in factory automation applications where we continue to benefit from accelerating capital expenditures in areas like semiconductor and automotive manufacturing.

Our AD&M business, sales declined 7% organically, driven by the continued weakness in the commercial aerospace market. In our energy business, we saw 9% organic growth driven by increases in renewables, especially global solar applications.

And lastly, in our medical business as I mentioned earlier, a return to growth in the quarter and was up 10% organically year-over-year with the recovery in interventional procedures around the world.

From a margin perspective, adjusted operating margin for the segment expanded year-over-year by nearly 300 basis points to 15.8% despite the volume declines in our AD&M business. And this was driven by solid operational performance by the teams. Now let me turn to the communications segment.

And our team continues to demonstrate strong operational execution, while capitalizing on the growth trends in the markets that we serve. Sales grew 31% in the segment organically year-over-year with robust growth in both data and devices and appliances.

In data and devices, we grew 16% organically year-over-year due to the solid position we built in high-speed solutions for cloud applications. We continue to see capital expenditures increasing by our customers and our content growth is enabling us to grow cloud-related sales at double the market rate this year.

In appliances, sales grew 57% organically versus the prior year with growth in all regions driven by market improvement, our leading global market position, and ongoing share gains. I do want to say that our communications team continues to deliver outstanding performance to complement the higher sales levels that they're executing to.

And you see this with our adjusted operating margin in the segment of 23.5%, which is up 760 basis points versus the prior year. Overall, across our segments our teams are capitalizing on growth trends in their end markets demonstrating the diversity of our portfolio while delivering strong operational execution.

And with that, let me turn it over to Heath, who 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 Q3 financials. Adjusted operating income was $734 million, up significantly year-over-year with an adjusted operating margin of 19.1%.

GAAP operating income was $714 million and included $11 million of restructuring and other charges and $9 million of acquisition-related charges. We still expect total restructuring charges to approximate $200 million for fiscal 2021 as we continue to optimize our manufacturing footprint and improve the cost structure of the organization.

Adjusted EPS was $1.79 and GAAP EPS was $1.74 for the quarter which included restructuring acquisition and other charges of approximately $0.05. The adjusted effective tax rate in Q3 came in as we expected at approximately 18% with our fourth quarter tax rate expected to be around 20%.

We expect to continue our -- we continue to expect our adjusted effective tax rate for the full year to be around 19%. Importantly, we expect our cash tax rate to stay well below our reported ETR for the full year.

If we turn to slide nine, our results and progress you see on the slide reflects the strength and diversity of our portfolio and business model execution. As Terrence mentioned, we delivered record performance in Q3 on sales, adjusted operating margins, and adjusted EPS.

We are not only showing progress versus the prior year, but we are also delivering higher sales margins and adjusted EPS versus fiscal 2019, which represents a pre-COVID baseline. Sales of $3.8 billion were up over 50% versus the prior year and up 3% sequentially with solid performance in each of our segments.

Currency exchange rates positively impacted sales by $138 million versus the prior year. Adjusted EPS of $1.79 was up significantly year-over-year and up 14% sequentially reflecting our strong operational performance. Adjusted operating margins were 19.1% also up significantly versus the prior year.

Year-to-date our adjusted operating margins are running at around 18% and our fourth quarter is expected to be a continuation of this strong performance. Turning to cash flow, in the quarter cash from operating activities was $682 million.

We had very strong free cash flow for the quarter of $539 million and year-to-date free cash flow is approximately $1.5 billion. In Q3, we returned approximately $445 million to shareholders through dividends and share repurchases. Our cash flow performance demonstrates the strength of our cash generation model.

And we continue to expect free cash flow conversion to approximate 100% for the full year. We remain committed to our disciplined use of capital. And overtime, we continue to expect two-thirds of our free cash flow to be returned to shareholders and one-third to be used for acquisitions.

As Terrence noted, we entered into an agreement to acquire ERNI earlier this month. And we expect to close by the end of this quarter. ERNI has revenues of approximately $200 million annually, and will be reported as part of our industrial equipment business.

Before we go to questions, I want to reiterate, that we are performing well in this environment, despite challenges in the broader supply chain. Our results for the quarter and our performance so far this year, demonstrate the strength and diversity of our portfolio with contributions from each of our three segments.

We delivered record performance in Q3. Our fourth quarter guidance represents a continuation of our strong performance. And we are excited about growth and margin opportunities beyond this fiscal year in line with our business model. Let's now open up for questions.

Sujal?.

Okay.

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

Question-and:.

[Operator Instructions] Our first question comes from the line of Mark Delaney at Goldman Sachs. Your line is open..

Yes. Good morning. And thanks very much for taking my questions. Terrence you mentioned several secular trends that the company is addressing and longer term that TE can grow revenue and margins.

So I was hoping you could speak a bit more about, what the company is seeing with respect to this industry backdrop? And what that may mean for the company's fundamentals in the intermediate to longer term..

Yeah. Thanks Mark. And I think when you sit there, you see the performance we put up which we're very proud of. But in many ways, a lot of where the recovery is across our business is still pretty early. And I think the first thing framed to your question is probably around where can, we meet demand a little bit.

And I would still tell you one of the things is, with this quarter with some of the supply chain elements that happened within TE, there is about $100 million of revenue we estimate across our segments that due to our supply chain we couldn't get out to customers. So we are still trying to get up to the level of demand that's out there.

And certainly with the supply chain issues, we estimate it's about in quarter three, $100 million. We think it will be a similar amount in quarter four. But -- and that's really where materials impact us around metals and resins. And we think that will be with us a little bit.

But, when you think through the markets and you think about where auto production is at right now, auto production this year with the $19 million we expect in the fourth quarter is still significantly below 2019 levels, that $81 million units this year will still be down from $88 million in 2019.

And certainly are being troubled a little bit by some of the semiconductor supply chain. So we think, as you think through the cycle, auto production can go up as we do look forward. Certainly content is going to help us. We also have in industrial. As I mentioned in my comments, it really feels like, it's just getting started.

Our medical business is picking up. Our energy business that was pretty resilient continues to be strong. And you're seeing what we started a couple of quarters ago around industrial equipment. We continue to see that picking up as you have CapEx. And then in communications cloud CapEx was up 20% this year. It's expected to be up 10% next year.

So we still see there are big drivers for us that will help us. And on the margin side, we still have margin improvement that we need to deliver in two or three segments and they are our largest segments. So certainly, we're working through the supply chain elements that I think everybody in the plant is working through.

And we still see margin improvement back up to where we told you on our business model going forward. So the cycle is a recovery. And one of the things we feel very good about is the consumer is showing up whether it be to buy cars, whether it be to buy appliances. And companies now are showing up.

So it'll probably be lumpy but I would tell you it feels very good from the drivers that we positioned TE around. .

Okay. Thank you, Mark. Next question please..

Our next question comes from the line of David Kelley of Jefferies. Your line is open..

Hi, good morning, Terrence and thanks for taking my question. Wanted to focus maybe on the fourth quarter earnings guidance implies based on our math sequentially lower margins relative to the third quarter. It feels like we're seeing rising input costs some ongoing supply chain disruptions but also improved pricing and clearly volume recovery.

So with that out of mind could you talk about some of the dynamics that play here in context of how you're thinking about the fourth quarter margin trajectory?.

Sure, David. This is Heath. I'll take the questions. Listen I mean, first of all I think what we effectively had commented in my prepared statement was we're running at around 18% year-to-date in terms of margins. And we see that more or less continuing as we work our way into the fourth quarter.

If you pick a particular quarter you're going to have timing issues given the – how diverse we are how we're set up globally. You're going to have timing issues in any one particular quarter. So I think you've got to be careful about just picking out a quarter and trying to compare it forward or backwards.

Within our world there is price-cost differences between the different businesses. In some cases we're able to pass along that price more quickly, particularly if it runs through our channel partners where we have distribution in some of our businesses. Some are heavier dependent upon that.

And in places where we don't have that distribution partner and that mechanism to pass along price that quickly it takes a little bit longer. So the realization of that is very mixed within our portfolio.

The other thing to consider is we're still as we've talked about in the past we're still on this restructuring journey with some of our footprint optimization.

And as part of that you're going to have timing issues of when you start to realize some of those savings versus the cost of getting some of those things done and you spend a little bit ahead of before you take things offline. So there's all kinds of different moving parts in a portfolio like ours.

From an EPS perspective sequentially, we will have from a third quarter to fourth quarter we will have a tax headwind. Our tax rate is going to step up a couple of hundred basis points and that's fairly normal in terms of timing for the fourth quarter. So some of the EPS drop sequentially is tied to that tax rate. .

Okay. Thank you, David. Next question please..

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

Good morning. Thanks for taking my question. I guess Terrence, wondered if you could maybe expand a bit more on the supply chain dynamics you've talked about. There's been fair bit of discussion around this by everyone including your peers. So I'd love to get your perspective on what does really all of it mean for TEL.

And maybe you can explain what are the supply chain pressures you're referring to. And then what impact does it have with your operations and P&L broadly? Thank you..

Yes. No, thanks for the question. Let me -- supply chain, I guess, we're all using more than we would like to use on coal. So, let me make sure, what it means to TE. First of all, let's -- it all starts with end demand in our customers. So, let me spend a little bit on what we're feeling from customers.

Certainly, customers are trying to make sure, they recover. And in some cases, when you think about what we go into, and you can take a car. A car has 30,000 parts. If one or two or three parts, they can't procure, they struggle making a car. And so, what you have right now because of the recovery being faster, you have everybody's scrambling.

And also, you have a lot of the data signals that are coming down from our customers are changing a lot as they're trying to make sure they meet customer demand. So, the first thing I would say from a supply chain is, pretty severe volatility, coming from our customers, as they're trying to make sure, they get up and running.

And unfortunately, in some cases, you've seen customers having to stop production because of things like semiconductors. So that creates volatility. Now, when you look in our world, it is important that when you think about TE, we are a manufacturer. We start from very base materials with what we innovate we make.

And so, from that viewpoint, the biggest things that we use are things that are plastic, certainly resins from commodity all the way up to very highly engineered things that help with flame retardancy and temperature, as well as metals that are used for conductivity.

So, when you sit there in those two key areas, we did have some areas, where resin supply was impacted, and certainly metal supply has been impacted.

And what that has created for us is not only is supply impacted, we've had to do some things that aren't as natural for TE, which is we might have supply due to our global supply chain in certain parts of the world, and we may be shipping things around the world.

So, not only the availability, it's also created some of those pressures as you said it in your question that we're managing. Because guess what, we're trying to really make sure, we ramp, we help our customers. And the reality of it is, this is going to be with us. We've been dealing with it in the recovery. I wouldn't say it's getting better.

But I would say, we're going to continue to begin with it through our fiscal year and into early next year, as we're trying to pick up to a world that's recovering. And this type of recovery, whether you see it in our orders or in the supply chain, means there's a fast recovery that's happening out there, as people are trying to catch up to.

So hopefully, that gives some flavor. And I think, our teams have actually been managing it through the volume, the price and the productivity, as you've seen our results..

Okay. Thank you, Amit. We have the next question please..

Our next question comes from the line of Joseph Spak of RBC. Your line is open..

Thanks. Good morning. Terrence, you talked about some of the BEV wins and how that doesn't really impact the numbers today, but it helps for future growth. I was wondering, if you could help dimensionalize that for us at all.

Like, maybe quantify the bookings in this quarter or the lifetime backlog? And how fast are some of those factors going? How should we think about that?.

So, number one is from a momentum perspective, the momentum that we've talked about has not changed. And there's really two factors. We benefit from our global position.

We also benefit from the technology that we bring as you move to high-voltage architecture, whether that being connecting, it being to sensors that are resolvers and current sensors when you get into electric motors.

And when you look at it to conceptualize a little bit, I'll go back to what I talked a little bit about last call or the call before which is what it means to our content. A few years back, we were in the low $60s before in content. We're in the 70s now.

And when you think about that $10 increase in content, approximately half of that is due to high voltage. So that's about $5 of content at the total TE level across all production that has translated into revenue. And that's a key driver as we say for our content can grow above $80. So realize there's only 9 million electric vehicles made this year.

What's great is that that adoption continues to accelerate. It didn't stop during COVID. And certainly, as that accelerates, that's going to continue to drive content outperformance for us.

And it actually just continues to accelerate all around the world and it's nice to see the traction in places even like the United States which has always been a slower adopter of the technology actually pick up as well as the models that are coming out from all our global customers are showing how this trend is picking up..

Okay. Thank you, Joe.

Can we have the next question, please?.

Our next question comes from the line of Scott Davis at Melius Research. Your line is open..

Good morning guys. .

Hey, Scott..

Great to see you surviving this mess that's out there and thriving. But I kind of just wanted to follow-up on that last question a little in the context of the Chevy Bolt recall. And perhaps the architecture that is being utilized there on the high voltage side.

Is there -- are there learnings from that recall and that perhaps increases your content growth going forward and having more backup and safety systems around particularly around high voltage.

Is there anything to be gleaned there or nothing new?.

Scott, great question. And good to hear from you. I think the thing that you look at I wouldn't say -- when you think about does that learning out of that recall provide extra content? I wouldn't say it does, but I think it shows how fast the technology is moving as well as when you look at the architecture evolution, the pace of which it's coming at.

When you think about combustion engines and how long they took to develop as well as everybody getting their models out, you will have situations where there will be events that there will be learnings of what -- how do you need to harden the electrical architecture. I don't think that will create incremental content opportunity.

But what I would tell you for TE is when those issues occur, we're the type of company that they look to. Because we're working on up to 1000 volts. We play not only from the charger inlet, we play into where the motors go the high-voltage there.

You also play on what's happening on the cell-to-cell or module-to-module connections as well as the sensing that occurs. So certainly, GM will really work hard to make sure those types of events won't occur in the future. But actually, it also creates a bigger opportunity for stickiness for us.

And certainly, on the new truck platforms at GM, we have very strong content that's in line with that 2X content we've talked to you about..

Okay. Thank you, Scott.

Can we have the next question, please?.

Next question comes from the line of Chris Snyder with UBS. Your line is open..

Thank you. My question is around TE's high voltage differentiation. The company has invested significantly in both -- in developing, but also scaling these solutions globally in recent years.

And is this leading to high-voltage share gains relative to low voltage? It also seems like the OEMs would lean more heavily on top suppliers, just given how important these initial EV rollouts are? And then particularly, within high voltage as it's a new, but also extremely critical component for them?.

Yeah. So Chris, when we look at it I think – let me take a step back just for a second. With what we do around our interconnect and sensing portfolio, anywhere you have data, you have power, you have sensing and guess what getting into smaller packages and then higher power and higher data that's what our engineers do.

And so when you deal with high-voltage architecture in a car, certainly, our customers that's why they like the position we have and it's a global position as I said where we design all around the world with all the OEMs.

So when you think about it, it is – one point, I want to highlight is the low voltage architecture carries over for us, because you're not putting in your low voltage applications onto the battery and the motors. So our low voltage carries over. And where we really get into – and I mentioned it to Scott's question it starts at the charging inlet.

It goes into, how does – you get the connections and the sensing occur, around the high-voltage connection that you need around the motors. It gets into the battery solutions. It gets into the contactors that we provide to switch the power over as you go from DC to AC and back, as well as the position in the current sensors.

So it's completely across, and I think the other thing that's unique for us versus some others that might be a Tier 1 – now we're Tier 2. Our customers really like that we're agnostic. We are there to solve their challenges that they're trying to get to.

How are they trying to solve fast charging? What type of cells are they using in their battery pack? And that agnostic element is what they really like about our global position as they come into and we focus on the connection systems. We don't get complicated about harnesses and other things. That's what the Tier 1's do.

But it's really about the connection technology that we invest in as they think about the platforms and how they have to evolve these platforms. And that's where you get the content increase that we mentioned and we shared examples. But it gives us a real content opportunity to double our content in electric vehicles.

And like I said earlier, the content growth you're seeing in TE about half of it over the past couple of years is due to high voltage wins..

Okay. Thank you, Chris.

Could we have the next question please?.

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

Yes. Thank you. Terrence you had a pretty solid fiscal third quarter. You're guiding to a pretty strong exit for this fiscal year. Can you maybe share some early thoughts into next fiscal year? It feels like there should be some nice production growth since other end markets seem to be in recovery mode as well.

So, any bookends around dimensioning fiscal 2022 will be helpful? Thank you..

Thanks, Wamsi. And I guess, I have to give you the caveat that, we only guide for the fourth quarter, and we'll talk to you in 90 days about what we see going into 2022. But I just do want to reflect on what we say our business model is maybe before I talk to markets. It is about the content we've talked about even to your questions.

It is about where our underlying production – go in the different – various markets that we serve. And it is about also continuing to capitalize on some of the execution things that Heath talked about on restructuring. We're still not at the target margin in two of our three segments, and its how do we use that capital to return it to you.

So I do think it's important – that's the way we think about TE, and it's important that we keep it in front of us. And some of this I talked about. In transportation, we do still see a runway around production. Semiconductors had been a little bit of a governor this year. That probably will get fixed I think people see in 2022 at some point.

But also that the consumer demand and inventory being depleted on car lots really are something that you could see auto production going up. Certainly our content will continue. In industrial, manufacturing CapEx is accelerating. I mentioned we're seeing it, in semiconductor we're benefiting from that. We're seeing it in the automation.

We're benefiting from that. And what we're seeing in medical as well as energy looks like very nice legs to it. The one spot that we don't sort of see any signs of acceleration is around aerospace and defense. And that's just something -- there's good consumer trends. We aren't seeing it yet in that supply chain.

And then, in communications, I would just say, cloud we expect to be strong, when it comes to appliances. The consumers are showing up strong. That probably will normalize at some point. I don't know if that will be in 2022 or later. But certainly we're benefiting from a very strong appliance cycle here around the consumer.

So, really like how the end markets could be teeing up for 2022 and we'll share more with you in 90 days..

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

Next question coming from the line of Joe Giordano of Cowen. Your line is open..

Hey, guys. Good morning..

Hey, Joe..

Hey. Just curious on -- in auto on the customer inventory side of component parts, a lot of different commentary coming out so far in earnings season from what different companies are seeing.

Just curious what you do internally to kind of make sure you're understanding whether order -- what percentage of orders that you're getting are for like actual production of cars right now? And how much is for your own customers building some stock? So, like what's the internal procedure for kind of fleshing that out?.

Well, a couple of things that we do. So, it's not unreasonable to assume that people will be trying to hold a little bit more buffer stock right now. But as I said, we're not even able to make current full demand and I said that was about $100 million. We do actually make sure as we check with our customers.

Actually in some cases, we visit their warehouses to make sure we don't see hoarding occurring. And we also talk to our OEM customers. Because let's realize in some cases we ship into Tier 1s. And there's lots of discussions between the OEM, the Tier 1s to make sure flow continues to happen.

So, I'm sure in some parts, there maybe some people trying to build up a little bit extra buffer stock, especially in the supply chain environment. I would tell you we're still trying to get to make sure we keep demand flowing to keep production going with the OEM lines..

Okay. Thank you, Joe. Could we have next question please..

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

Yes. Thanks. Also wanted to double down a little bit on the relationship between orders and consumption, and as pertains to revenue.

I'm wondering if there's any mismatch relative to the actual production now with the transportation segment specifically that we might qualify our view of production advancement next year? And then, as far as orders go, would we anticipate a quarter or two where maybe you have the reciprocal of what we're seeing now and kind of mismatched the other way with the continued outsized book-to-bills for the trailing periods?.

You asked about three questions there. So no let me start at the total company level first. And we've had $4.5 billion of orders last quarter and this quarter. And if you take this quarter, we built $3.8 billion. I think when you look at that gap, that gap is certainly larger than normal.

There is about $100 million of that gap that is real demand that due to our supply chain we could not fulfill. When you look at that remaining gap, I sort of think about it in a couple of buckets, and certainly, we look at it a lot. We study it by our different end markets.

There is probably about half of that element which relates to our distribution partners. That is where people may not be able to get goods from us, they're looking to our channel partners to procure, and from that viewpoint we have seen an increase -- a very strong increase over the past two quarters in our channel partner orders.

But what I would tell you, our channel partner inventory is at the same levels as last year. So their turn is up very big. They're placing orders. Certainly, we're not able to meet them to the levels that they're ordering.

The other portion would be from our direct OEM customers and it will be that they're trying to make sure TE parts are not that one, two or three parts that they can't make something. So we have seen people go out an extra quarter in some of their ordering patterns due to the current environment.

And I think as the supply chain continues to get better what you would see in places like transportation -- and transportation book-to-bill is typically around one. It's not typically 1.1, 1.2.

And I think as the supply chain catches up you will see things get more normal and get closer to where they should be as they normalize and the whole supply chain gets better. So I would expect at some time orders will get closer to billings clearly as the supply chain continues to improve and things become better..

Okay. Thank you Chris. Operator, next question please..

Our next question comes from the line of Samik Chatterjee of JPMorgan. Your line is open..

Hi. Good morning. Thanks for taking my question. I guess, Terrence just wanted to follow-up on your comment about order trends by geography. And seem like Europe is kind of the outlier there where you're still -- you're seeing some weakness in the order.

So just if you can talk about what you're seeing in terms of the difference there in Europe and the recovery there.

And why probably kind of the order trends being kind of an outlier to the other regions?.

No. Honestly, when you look at that, I know it's down by about 7% sequentially. I would say, when you look at that that's more around some of the normal summer shutdowns in transportation. Then I would say, it's a big deceleration.

I would say, we continue to see orders even as we're into July stay at elevated levels, because the conditions we're in aren't changing. And I wouldn't say, it's one barometer negative or positive. It's just a little bit slower.

And certainly we would normally see that as some of our customers do summer shutdowns in Europe in the automotive space and they are still doing those..

Okay. Thank you Samik. Operator, next question please..

Next question is from William Stein of Truist. Your line is open..

Great. Thanks for taking my question. Terrence you mentioned earlier this fact of manufacturing where a car has 30,000 parts or whatever it is and you need all of them to make the car, not just a subset. Even if you're missing a couple you have a problem. It's certainly true in almost all products.

In autos though, I'm sure you'd acknowledge that there are cases where these companies can decide, well, there's a feature or two that we can isolate and perhaps decontent it and get a car shipped. We're picking this trend up pretty clearly from multiple sources that we're seeing decontenting going on in order to get around the shortages.

I'm wondering if TE is seeing this. If so to what degree? And in particular does it take away from your growth in sort of the next couple of quarters in any way where perhaps a more content-rich car would have provided a better opportunity.

But what the company is shipping is something of a smaller content opportunity or vice versa?.

Hey, Will, great question. Number one let's face it. The auto manufacturers are being creative because there's consumer demand. And let's face it they want to get the vehicles out. And if there's a feature where they can't get a component, they certainly are taking some of those features out near-term.

I would tell you on our revenue while we do see that around certain OEMs that is not having a meaningful effect. Where we play in the core architecture and the electrical network as well as in the backbone in an EV, you may lose a couple of interconnects, but that is not that much from a big-picture content.

And even if you look at our content growth this year over production, it's not evident in any way. So I would also say in this type of environment while you have some of that decontenting, they are also being able to add options to it, which we also benefit from. But that isn't meaningful and a big number either.

So it would probably impact others more than us. But with our breadth that we have across where we play in the architecture, while they're doing it it's not having a meaningful impact on TE..

Okay. Thank you Will. Next question please..

Your next question from Matt Sheerin of Stifel. Your line is open..

Yes, good morning. Terrence, I wanted to just ask about the strength that you're seeing in the communications segment and specifically the cloud business and the margins there. It looked like record margins.

So the question is how sustainable is that? And then within the cloud demand side, how diversified are you? I know obviously there's just a handful of really big hyperscale players, but in terms of the diversification and the lumpiness of that business if you could provide more color?.

Sure Matt and thanks. So a couple of things. Let me talk about the cloud element and then I'll talk about segment margins. On the cloud element, what's really been nice is -- and those of you that follow us, we very much -- our D&D business years ago, we basically made the strategic decision to get at consumer so we could focus on just high speed.

And I remember when we had less than $100 million with our cloud customers. It's well over $300 million today. And our market share at one point in time was with one of the cloud providers. Our market share is pretty even across all the cloud providers and not only the US cloud provider but also globally.

So the breadth and the strengthening of it as well as the share gain it's both the growth of the CapEx and their investment but also how our teams executed on share gain as well and bringing important technology to it. And it has been a strong cloud environment. I think I mentioned already close to 20% CapEx growth in cloud.

What's nice is next year we still see double digit again. And as you not only get that underlying growth, it goes back to the secular trend around content is content to next generation as new chips come out on those servers we also benefit from our next-generation products from what the content is.

So we feel very good with where we're positioned there. When you look at the segment margin performance by the team has been very strong. It's benefited not only by what we've done in cloud.

I would also say our appliance business and that global leading position that growth there in that business has also very much contributed to the margin in that segment. So we still think that's a high-teens business through cycle. So with having both segments being very strong -- it's benefiting the margin there.

And it's something that as probably appliance normalizes we could have some pressure. But net-net that that segment is above target margins is something we're proud of. .

Okay. Thank you, Matt. Can we have the next question, please..

Next question is from Steven Fox. Your line is open..

Hi. Good morning, everyone.

Terrence and Heath, I was just curious if you could talk about when you start considering some of these supply chain pressures and inflation pressures to be sort of a new normal and how you might change managing your supply chain? How you might change hedging? How your customers might change? And within that context can you just, sort of, give us a baseline for what you're doing on hedging inflation? Thanks..

Sure. Steven, this is Heath. I'll take that. Our biggest input pressures that we have when we talk about things that are impacting our P&L would be around resins and being around certain specialty metals right that we use in our products. In many cases for the metals we do have a hedging program.

That generally hedges out about 18 months of our anticipated usage or purchase and subsequent usage. So when we see inflation or deflation relative to the metals that tends to kind of layer in more quietly into our results both directions. So that is unchanged and we'll continue to do that.

The bigger issue that we are seeing when we are looking at some of these -- and we throw them into the broader supply chain bucket is we do have local sourcing which is really good.

It enables a lot of nimbleness and agility for our businesses whether that's in Asia, Europe or in the Americas to be able to procure product locally versus shipping things around the world.

It also has the challenges that when we do have supply chain disruption in a particular location or in a particular region whether that's driven by natural causes like floods or otherwise the situation down in Texas earlier this year where a lot of the chemical companies came offline and put a lot of pressure through the resins and so forth in the Americas.

Those types of things when they happen -- or floods in Germany. So when those things happen we still have to be responsive to our customers. So sometimes that means we are then moving some of our supply around the world and that can get very expensive.

So the freight costs it's a long-winded way of saying some of the freight costs layer into some of the supply chain pressures as well from us because of some of our structure. For us we're going to continue to take advantage of those local supply chains and we just need to make sure that we have that flexibility going forward.

In terms of our ability to manage it and when do we foresee it being part of the new norm I don't know. I mean the semicon doesn't impact us directly, but impacts our customers. So you're probably better equipped to come up with answers to when semicon shortages dissipate.

In terms of some of the other things relative directly to us I would say, we're working through those and feel pretty good about how we're ready to jump into FY 2022..

Okay. Thank you, Steve.

Can we have the next question please?.

Next question coming from the line of Jim Suva of Citigroup. Your line is open..

Thank you. And my one question is actually a follow-on to your response Heath that you just gave. And not talking about the semiconductor shortages, but the resins input costs and all that You talked about hedging and such.

I'm wondering as shipping costs have been around for a while now, the same amount of time all through COVID and these additional raw material costs. I'm wondering is there come time to start like repricing some of your contracts with customers or put in indexing for raw materials.

Or all your answers so far talk more about hedging and dealing with your supply and stuff. So, I'm just wondering is it time to go back to talk to the customer or are we just not there yet. .

No Jim. It's Terrence. Twofold. We've been there quite frankly. So, to sort of go where we are on it across our channel partners, we did a price increase. And this is 20% of our business in January. We just implemented another price increase and we're going to continue to look in this environment.

And our direct customers, we are having those discussions right now. We do have metal riders in many of our agreements that are sort of like towers. If you bust out of an area on metal, we have ability to recapture. And then when you deal with resins and freight which are newer, we are having those discussions with our customers.

It's very different by industry. And that's what has been going on and that they will layer in at different times. But I feel we are having those discussions real time. .

Okay. Thank you, Jim.

Next question please?.

Next question coming from the line of Luke Junk of Baird. Your line is open. .

Thank you. Probably a question for Heath this morning. I was hoping you could walk us through the sequential margin walk in industrial margins, given the step-up that we saw versus first half levels.

And also looking forward here, maybe just in the fourth quarter if you could give us any help on what the -- what that margin outlook might look like in industrial specifically?.

Sure. Well, I mean first of all thanks for the questions. We've been pretty public with the journey that we're on within the industrial segment margins, right? And we started this in the low teens and with the multiyear trajectory through a lot of rooftop consolidations of getting this business into the high teens.

We're kind of -- we're in that journey. We made a lot of improvements here in the quarter. Certainly, a couple of the things that industrial benefits from. One, the restructuring activity that has been underway continues. That comes in chunks of time as operations get taken offline.

And so, you might have some costs in one quarter before something comes offline. And that tends to create quarter-to-quarter lumpiness, but we smooth it out over a year or longer. You can kind of see that result.

The other thing is, and Terrence just hit on this, the industrial segment does benefit from the opportunity on the price side because more of the industrial business goes through distribution.

And so fairly large chunks of our industrial segments did have the opportunity to not only do price increases back at the beginning of the calendar year, but in July implemented additional price increases.

And that does have more of a near-term benefit for the segment versus some of the other segments where it's more of a direct to OEM relationship and it takes a little bit longer to work that way through. So those are a couple of the pieces.

As we look forward in the fourth -- into the fourth quarter, listen, timing on things, you're always going to have that with the business as big and complex as we are. Our Industrial segment, being a $4 billion segment, has a lot of moving pieces.

But I feel very good about the trajectory, as we move from the first half to second half or third quarter to fourth quarter. But I think even more importantly, as we work our way into 2022 and beyond, there is still margin upside for the segment and the team is hyper-focused on that, so more to come. Thanks for the question. .

Thank you, Luke.

Can we have the next question, please?.

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

Yes. Thanks. Good morning. I think the near-term dynamics on supply chain are well publicized. But my question is, Terrence, do you see any impact on the longer-term dynamics like design by your customers, specifically in automotive.

Do you see any changes in the way they operate or think about design in the current environment? And if you do, what's the impact that you have from these changes on your business? Thanks..

Two-fold. From a design perspective, when I think about the velocity and even coming through COVID, the velocity did not change during COVID. So, if anything, especially in transportation, specifically on EVs, you see the launches that are happening. You see the innovation that's happening real time.

What typically happens with customers, I think, with all of us, is just seeing the pace continues to accelerate, because the consumer expects it. So -- and that's -- that I think not only is in transportation, it’s everywhere, but it's also how it goes through their supply chain.

And also, some of the benefits we get in our industrial business over people's investments, including our own around how their factories have to be more flexible and digitized. When it comes to the question about supply chain design, clearly customers will reflect going through this period of what needs to be different.

And the more JIT [ph] you are, they'll probably pick some spots of what do they have to do differently. I would say, we're not seeing anything near term. We don't see people thinking about vertically integrating interconnects versus maybe some other areas, especially in the transition to EV. But what's good is, we're very close to our customers.

And hopefully, we can take advantage of it for opportunity for TE versus risk, as they work through it. Because, once again, being with every OEM, we have a pretty good purview, especially in automotive as we go forward. .

Okay. Thank you, Nik.

Can we have the next question, please?.

And our last question coming from the line of Rod Lache of Wolfe Research. Your line is open..

Hey. This is Shreyas Patil on for Rod. Just two quick ones. One, could you help quantify the supply chain impact that you saw in the quarter? I believe last quarter you mentioned it was a $50 million headwind. And then, second, just looking at the year-over-year comparison, I know, it's a bit challenging given the base effect.

But it looked like your incremental margin, ex currency, was maybe closer to 40%. And I think in the past you've talked about 30% to 35% incremental margins.

So, maybe, just how we should think about that, going forward?.

Sure. This is Heath. I'll take the question. I think, in the quarter, and Terrence mentioned this earlier, that we quantify the supply chain impact to us and define it more or less as our availability to -- or in some cases, inability to get the input materials that we need.

But that impact to us was about $100 million and I would say that probably two-thirds of that would have been in transportation. So our inability to ship was about $100 million that I would quantify on the topline for the supply chain impact. And obviously, the teams are scrambling day by day to recover that and keep customers happy.

In terms of the flow-through, listen, the year-over-year flow-through I would -- we're proud of it. We're proud of it when we look at it and not just in the third quarter and anticipated flow-through in the fourth quarter, but also on a year-to-date and full year basis. And we are proud of it.

I think yes, I would caution you last -- our compares last year were so far off relative to the severe downtick and that had a disproportionate impact to our margins as well last year.

So, when we look at that on the downtick versus the recovery a year later, you're going to see some -- in a quarter -- in a given quarter, you're going to see some outsized numbers. I don't -- I would not want to guide you to reset your expectation that 40% is the new norm for our flow-through.

We are still confident in that 30% to 35% number which was up -- which we took up earlier this year due to some of the restructuring activities that have been underway and I think it normalizes into that range. But you're going to have a quarter noise from time to time particularly in a year-over-year basis like we had in the third quarter..

Okay. Thanks for the question Shreyas. And I want to thank everybody for joining us this morning. If you have more questions please contact Investor Relations at TE. Thank you and have a good morning..

Thank you. Ladies and gentlemen, your conference will be made available for replay beginning at 11:30 A.M. Eastern Time today July 28, 2021 on the Investor Relations portion of TE Connectivity's website. That concludes your conference for today. You may now disconnect..