Categories Earnings Call Transcripts, Technology

TE Connectivity Ltd. (TEL) Q2 2021 Earnings Call Transcript

TEL Earnings Call - Final Transcript

TE Connectivity Ltd.  (NYSE: TEL) Q2 2021 earnings call dated
Apr. 21, 2021.

Corporate Participants:

Sujal ShahVice President of Investor Relations

Terrence R. CurtinChief Executive Officer and Board Member

Heath MittsExecutive Vice President and Chief Financial Officer; Board Member

Analysts:

Craig HettenbachMorgan Stanley — Analyst

Wamsi MohanBank of America Merrill Lynch — Analyst

Amit DaryananiEvercore ISI — Analyst

Joseph SpakRBC Capital Markets — Analyst

Chris SnyderUBS — Analyst

Samik ChatterjeeJPMorgan — Analyst

Mark DelaneyGoldman Sachs — Analyst

Joseph GiordanoCowen and Company — Analyst

Scott DavisMelius Research — Analyst

Christopher GlynnOppenheimer and Company — Analyst

David KellyJefferies — Analyst

Jim SuvaCitigroup — Analyst

Luke L. JunkRobert W. Baird & Co. — Analyst

Nikolay TodorovLongbow Research — Analyst

William SteinTruist Securities — Analyst

Matt SheerinStifel, Nicolaus & Co. — Analyst

Steven B. FoxFox Advisors — Analyst

Shreyas PatilWolfe Research — Analyst

David WilliamsLoop Capital — Analyst

Presentation:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the TE Connectivity Second Quarter Earnings Call for Fiscal Year 2021. [Operator Instructions]

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

Sujal ShahVice President of Investor Relations

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. 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.

Terrence R. CurtinChief Executive Officer and Board Member

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’ll 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 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 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 $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’re strategically positioned 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 evident 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 current market 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 trends around content growth remain strong as we continue to benefit from increased electrification 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 trends 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 remains strong, it has caused 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 section.

And the last thing I want to highlight is, let’s all 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 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 had 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 $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 broader 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 and 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 $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’ll 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 this 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 segment.

Let me also, on orders, add some color what we’re seeing organically on a geographic basis, and I want 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 Communication 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 than those two regions.

So let me get into our year-over-year segment results and there are slides 5 through 7. I’m going to touch upon each segment briefly before I turn it 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, the 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 powertrain 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 the segment 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 declined 4% organically year-over-year. During the quarter, the 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 quarter levels. And 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 in 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 the segment grew 29% organically year-over-year, with strong growth in both data & devices and appliances. In data & 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 expenditure by our customers and our content and share gains are enabling us to grow on cloud-related sales at double the market rate. 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 a 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 the 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.

Heath MittsExecutive Vice President and Chief Financial Officer; Board Member

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 continue to expect total restructuring charges in the ballpark of $200 million for fiscal ’21. Adjusted EPS was $1.57 and GAAP EPS was $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 ’21. 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 $115 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 of 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 of approximately $1 billion, which is a record for the first half of a fiscal year. We returned approximately $340 million to shareholders through dividends and share repurchases in the quarter. Our strong free cash flow performance demonstrates the strength of our cash generation model, and we expect to — we continue to expect free cash flow conversion to approximate 100% for the full year. We remain committed to our disciplined use of cash, and over time, we expect two-thirds of 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 were 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 the 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 with 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 to our business model performance. And we remain focused on value creation for our stakeholders going forward.

Now let’s open it up for questions.

Terrence R. CurtinChief Executive Officer and Board Member

Okay. Thank you, Heath. Michele, could you please give the instructions for the Q&A session?

Questions and Answers:

Operator

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

Craig HettenbachMorgan Stanley — Analyst

Thank you. A question for Terrence. There are a number of references to replenishment on the call. So can you just talk about the strength you’re seeing in the business, when customers you think will get caught up on inventory and importantly the type of sell-through you’re seeing?

Terrence R. CurtinChief Executive Officer and Board Member

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 the 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 try and not only to make — get the products in for what they want to make, but also to get the supply chains up, ensure that there aren’t some of the stresses that we hear about and 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 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.

Sujal ShahVice President of Investor Relations

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

Operator

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

Wamsi MohanBank of America Merrill Lynch — Analyst

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?

Terrence R. CurtinChief Executive Officer and Board Member

Thanks, Wamsi. In Communications, I think one of the things that we have to keep [Technical Issues] when you look at the results that segment have are 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, continue 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 clients’ 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 global these two businesses are. So certainly I talked about 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 is probably middle teen at these types of levels. You’ll 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 the team’s done. And so thanks, Wamsi, for the question.

Sujal ShahVice President of Investor Relations

Thank you, Wamsi. Can we have the next question, please?

Operator

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

Amit DaryananiEvercore ISI — Analyst

Good morning, everyone. Thanks for taking my question. Terrence, I was wondering if you could maybe reconcile the deviation between the strength we’re seeing on both the book-to-bill and the order number that you put out. More so the June quarter guide, right? I mean, if I think about the book to bill of 1.22, I would have thought June quarter guide would be north of $4 billion in revenue. So I’d just love to understand what’s the delta between the book to bill versus your guide. And related to that, the auto strength you’re talking about — is there any deviation between channel versus OEM there?

Terrence R. CurtinChief Executive Officer and Board Member

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 in also with some of the supply chain stress, you do see — orders in the channel were probably a couple of hundred million higher than what we built, and our channel sales grew similar to what the total Company grew. So you do see our — the channel partners trying, their inventories are low, they’re trying to catch up. But I won’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 the fast recovery get in the 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’s sitting out there, not only getting orders for production, but also trying to replenish. And there is pain points in the world. So there are 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, but there’ll be more check. But right now, you have a supply chain replenishment going on after COVID in 2020 took a lot of supply chains to a full stop.

Sujal ShahVice President of Investor Relations

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

Operator

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

Joseph SpakRBC Capital Markets — Analyst

Thank you very much. If we — 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.

Heath MittsExecutive Vice President and Chief Financial Officer; Board Member

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 — 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 are certain things that will continue — that we will continue to expect to get the pressure on whether that’s freight charges, freight inflation or inflation on input materials otherwise. 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.

Sujal ShahVice President of Investor Relations

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

Operator

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

Chris SnyderUBS — Analyst

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

Terrence R. CurtinChief Executive Officer and Board Member

Yeah, no, thanks. So a couple of things. Just remember that our share is very — leading position in what we do already. So I won’t say share is higher. I would say it’s in line with our leading share across automotive and transportation. What is nice, 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 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 continues to see the option, you see the new models coming out, the models are much more attractive and the consumer acceptance of those is strong and it falls in line with our overall content growth and the CPV. We do expect to be that 2x on those high-voltage because of what happened with the powertrains. So it is one of the things that with an improving recovery, the secular trends of where we position TE, whether it’s the electric vehicle and 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 after ’25, ’26, 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.

Sujal ShahVice President of Investor Relations

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

Operator

The next question comes from Samik Chatterjee from JPMorgan. Your line is open.

Samik ChatterjeeJPMorgan — Analyst

Great. Thank you for taking my question. I wanted to ask on automotive as well. You had strong results in automotive despite the uncertainty we are seeing there with the semiconductor shortages. I just wanted to ask, Terrence, what are you hearing from your automotive OEMs in terms of how they want to manage the supply chain. Are they still seeking goods [Indecipherable] or are they ordering ahead and when to start to expect some of the shortages in terms of impact on production to start to moderate?

Terrence R. CurtinChief Executive Officer and Board Member

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 were talking about is the consumer showing up and I think that’s great for the industry, and our OEMs are trying to work through the supply chain pressures at a bigger percent than even we’re dealing with. So what was nice, and certainly semiconductors are the big news out there and very well documented. That impacted production. A little bit less than 1 million units in quarter two. I think it’s going to be a similar number in quarter three — the global auto production stay in the 19 million to 20 million unit range. And what’s nice is probably this year auto production will be back to 2019 levels. That’s a lot 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, we’re 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 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.

Sujal ShahVice President of Investor Relations

All right. Thank you, Samik. Can we have the next question, please?

Operator

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

Mark DelaneyGoldman Sachs — Analyst

Yes. Good morning. 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? I recognize we have 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.

Terrence R. CurtinChief Executive Officer and Board Member

Mark, thanks for the question. I think we’ve — one of the things that as I look at the free cash flow, the components and the leverage we get to build 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 moderate a bit more closer to the 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, 5%, maybe a tad under that this year is helpful in terms of how that converts to cash flow. The other thing that we obviously benefit from is the way we manage our cash structure and our ability to pay and our cash tax rate being much lower than — well below our ETR. And so there is 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 by year despite this volatile environment has been has been good. So nothing unusual in our FY ’21 numbers or outlook from a cash flow perspective. I continue to — we continue to monitor it and we’re not starving the businesses for investments. The organic revenue growth, it’s first priority, as you can imagine. So we feel good about how we — how we’ve positioned that. And going forward, now if there’s a year coming forward that we have a more significant step-up in terms of investment or restructuring or something, I will highlight that, but I think we’re in a good position right now.

Sujal ShahVice President of Investor Relations

All right. Thank you, Mark. Can we have the next question, please?

Operator

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

Joseph GiordanoCowen and Company — Analyst

Hey, good morning.

Terrence R. CurtinChief Executive Officer and Board Member

Hey, Joe.

Joseph GiordanoCowen and Company — Analyst

Hey. [Technical Issues] little bit of that here. Just if I look back in auto last year in 2Q [Technical Issues] 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 secular basis points [Technical Issues] is that how I should think about it? 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?

Terrence R. CurtinChief Executive Officer and Board Member

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 all 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, I mean, we sort of look at mix of vehicles this year. We sort of view — it gets to be in the mid-70s without supply chain effects, and that’s something that as — 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 as autonomy infrastructure gets put in the car. And then the other half is just electronification as our core products that continues to be sourced in 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 chain to try to move, it is difficult to get it into one number in the quarter.

Sujal ShahVice President of Investor Relations

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

Operator

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

Scott DavisMelius Research — Analyst

Hey, good morning, guys.

Terrence R. CurtinChief Executive Officer and Board Member

Hey, Scott.

Scott DavisMelius Research — Analyst

How do you handle — how are the contracts handled when you have kind of these excess orders about — double ordering or folks that are — can you get additional price and help offset some of cost issues and such?

Terrence R. CurtinChief Executive Officer and Board Member

Sure. So on pricing, Scott, when you think about in distribution, which is about 20% of our business, we did price increases that we’re doing 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 for some of our larger customers, metal writers that have adjusters per metal. So as Heath talked about, we do expect modest margin expansion as we go into the third quarter, some of 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 mechanism set with our customers.

Sujal ShahVice President of Investor Relations

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

Operator

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

Christopher GlynnOppenheimer and Company — Analyst

Thanks. Good morning, everybody. A 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 learned to do more with personnel disruptions and robotics has been a 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.

Terrence R. CurtinChief Executive Officer and Board Member

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 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, inside 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 signs of hope. We really saw an acceleration this quarter in it. 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 Comm Air and Medical, which have been both impacted by COVID, where we play in medical. So I do think you could have a stronger like year in industrial capital equipment cycle stronger coming out of COVID.

Sujal ShahVice President of Investor Relations

All right. Thank you, Chris. Can we have the next question, please?

Operator

And your next question comes from David Kelley from Jefferies. Your line is open.

David KellyJefferies — Analyst

All right. Thanks. And good morning, Terrence, Heath and Sujal.

Terrence R. CurtinChief Executive Officer and Board Member

Hi, David.

David KellyJefferies — Analyst

Hi. A quick follow-up question on the prior distribution channel exposure. Just hoping, you could maybe give us the percent of the order trends there. And if you don’t mind, could you remind us of your distribution mix within Communications and Industrials as well?

Terrence R. CurtinChief Executive Officer and Board Member

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, in those cases you’re up 40% plus. In automotive, there is 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 than total Company; it was more like a 1.50 [Phonetic] book-to-bill. And their inventory levels are low, and it’s not surprising. As the world accelerated, people are trying to secure inventory, they’re also trying to rebuild their inventory levels to more appropriate turns. 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.

Sujal ShahVice President of Investor Relations

All right. Thank you, David. Can we have the next question, please?

Operator

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

Jim SuvaCitigroup — Analyst

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 you in normal orders versus stretch lead times. Thank you.

Terrence R. CurtinChief Executive Officer and Board Member

Jim, a 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. In the rest of our business, our lead times are four to six weeks on typical. We do have some pain points, and I would probably say some areas where 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 low and the economy is doing better. In addition, as 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 in other components and Tier 2 products. So I think that’s why you see what’s happening with distribution. I think it’s also — on some of those markets that are very hot that you see that happening. And honestly, our lead times are proving out significantly. Except in very finite product sets, we have some pain points.

Sujal ShahVice President of Investor Relations

All right. Thank you, Jim. Thank you. Can we have the next question, please?

Operator

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

Luke L. JunkRobert W. Baird & Co. — Analyst

Good morning.

Terrence R. CurtinChief Executive Officer and Board Member

Hey, good morning.

Luke L. JunkRobert W. Baird & Co. — Analyst

Terrence, 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 TE has to play in terms of grid hardening which of course was a focus during Texas storms this winter. Renewables — you mentioned solar in your comments…

Terrence R. CurtinChief Executive Officer and Board Member

So on our energy business in our Industrial segment, it is important where we play and that is really along the grid. And it is very much around the electrical infrastructure and it is very global. The key factors that really drive growth there is partnering, as you said, but also where we’ve 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, when you have high — 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 connection, 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 with 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 — it’s only 4% this quarter, and that exposure of those renewals is really driving the growth there. And certainly how EV is driving the 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 and other grid occur is what we get excited about.

Sujal ShahVice President of Investor Relations

Hey, thanks, Luke. Can we have the next question, please?

Operator

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

Nikolay TodorovLongbow Research — Analyst

Yeah. Thanks and 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?

Terrence R. CurtinChief Executive Officer and Board Member

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 OEMs reflect after this? Really interesting — I think that’ll be a discussion we’ll have with our customers, but right now, our customers are 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 fabs. So what we do is different, but certainly there is 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 to very low, and that’s what we’re all trying to catch up with.

Sujal ShahVice President of Investor Relations

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

Operator

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

William SteinTruist Securities — Analyst

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 — maybe it’s Heath but whomever takes 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 would expect us to be clawed back over time. Is that through essentially let’s say deflation in those costs or is it something you think you’re going to be able to pass on to customers? Thank you.

Heath MittsExecutive Vice President and Chief Financial Officer; Board Member

Hey, William. This is Heath. I’ll take the question. Certainly, we’re feeling the biggest inflation right now is on the freight side. The freight inflation has been significant, and as we battle 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 as 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 the 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 costs. So you don’t see — you see that kind of layer in a little bit slower in and out of the P&L as we hedge about 50% of our exposure out of that 18 months for metals. So as we get through there, labor cost 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 COVID where we have significant operations and [Indecipherable] availability than inflation.

In terms of the clawback, I think Terrence outlined it a couple of questions ago. In some cases, we have contractual ability to do that in terms of passing through riders 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’ll reutilize our ability to take prices up, tie with inflation for that piece of the business. And then dependent upon the business, there are surcharges and different types of mechanisms that are put in place. But I take the timing issue is a portion of it. There is no way I’m going to say we’re going to claw back 100% of what we’re counting through right now. But we also — the productivity engines in place to help offset some of these things. So, more to come.

Sujal ShahVice President of Investor Relations

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

Operator

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

Matt SheerinStifel, Nicolaus & Co. — Analyst

Yeah. Thanks. Good morning, everyone. My question is around the Industrial Solutions area, particularly how we should be thinking about operating margin going forward. I mean, you were down year-over-year for reasons you talked about, particularly weakness in the aerospace area. It 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 margin expansion from here? I know you have been targeting high teens. And is it a function of volumes here or there are still some restructuring benefits that we should be expecting? Thanks.

Heath MittsExecutive Vice President and Chief Financial Officer; Board Member

Matt, this is Heath. I’ll take the question. And thank you. First of all, nothing has changed in terms of our outlook. We’ve been on a multiyear journey to get the footprint right in the Industrial segment and that involves reduction of and consolidation of a lot of rooftops. Nothing has changed there in terms of our multiyear plan to get to mid to high teens operating margin. 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 has a touch point in terms of margins. However, there is 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’re — 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. But I am confident as we move into the second half of our year that we will see improvement there, though.

Sujal ShahVice President of Investor Relations

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

Operator

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

Steven B. FoxFox Advisors — Analyst

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 why you’re gaining share or if there is anything you would point to within the different segments that are driving share gains? Thanks.

Terrence R. CurtinChief Executive Officer and Board Member

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 there is share gain, not just market improvement. And there are areas that I think we’ve differentiated during COVID where that creates some opportunities. And I think you see that. And both units in the CS segment certainly in regard to our industrial-transportation business and how we continue to gain share there. So they are 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.

Sujal ShahVice President of Investor Relations

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

Operator

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

Shreyas PatilWolfe Research — Analyst

Hey, this is Shreyas Patil on for Rod. You talked about the — 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 to $120 on bus. But with certain programs, it seems like you’re — you are 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 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?

Terrence R. CurtinChief Executive Officer and Board Member

On the vehicles, we’re winning. One of the things that you have along as the architecture continues to get scaled and aligned, there is a broader breadth of content per vehicle — on electric vehicles for us than you sort of have on traditional ICE. And that — we get excited about that. And there are some electric vehicles. It’s a traditional 2x and they’re selling at a much higher where customers have asked us to do more. So there is a broader breadth than you have on a traditional ICE. On 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 to 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’ve 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 of COVID, but also as when you look at how the architecture in 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 and what we’ve done to the ICE, 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 powertrain is not as big from an electrical side from an ICE. It just goes way up when you get to a BEV or a hybrid.

Sujal ShahVice President of Investor Relations

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

Operator

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

David WilliamsLoop Capital — Analyst

Hey, good morning. And thanks for letting me ask the question. I wanted to ask maybe on the mix shift from the automotive OEMs. Obviously, they’ve pivoted to the higher end, maybe even more luxury vehicles. As we see that shift mix maybe move back towards mid-range and lower range vehicle, the semi shortage eases, how do you think that impact maybe revenue and a margin impact there?

Terrence R. CurtinChief Executive Officer and Board Member

Well, when you look at that, certainly the OEMs are getting to make the vehicles they want to make and they make money on, and I think that’s some of the things that are nice about this improving economy. But I would also say, many of the OEMs 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 in 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 US, there is 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 are as real elsewhere in the world as it may be in the North American market.

Sujal ShahVice President of Investor Relations

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

Operator

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

Wamsi MohanBank of America Merrill Lynch — Analyst

Yes. Thanks for taking the 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, how that might be a tailwind for TE versus any potential tax headwinds from the proposed tax hikes? Thank you.

Terrence R. CurtinChief Executive Officer and Board Member

Well, on both sides of those equations, obviously there’s a lot of things out there. So, sizing that today is very difficult knowing 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 it’s important. And certainly, I answered a question earlier about energy infrastructure. Certainly, there is 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 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 are just some of the bigger elements. And then you get in your traditional infrastructure where you would have our very strong position in commercial transportation depending upon what happened with roads and if that creates machinery cycle, we would participate very well on increases around certainly the heavy equipment side due to our industrial transportation. They are some of the positives that could occur. Certainly, we want to see how the bills and the plan shake out. How well Heath handles that, let me hand over to him for that piece of it.

Heath MittsExecutive Vice President and Chief Financial Officer; Board Member

Thanks, Terrence. And, Wamsi, you probably recall, on the tax side, again, there is a lot of things that are still to be determined. But if you recall, when the last tax reform lowered the corporate rate, it didn’t have a big impact on us given our structure and where we are domiciled and where our profit pools lie. So early look at any of this proposal kind of indicated 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.

Sujal ShahVice President of Investor Relations

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.

Operator

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.

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