Q4 2024 TE Connectivity Ltd Earnings Call
Speaker Change: Everyone, thank you for standing by and welcome to the TE Connectivity Fourth Quarter and final year fiscal 2024. At this time, all lines are in listen only mode. Later, we will conduct a question and answer session. If you'd like to ask a question during that time, please press star and then number one on your telephone keypad. As a reminder, today's call is being recorded.
Speaker Change: I'd now like to turn the conference over to our host, Vice President of Investor Relations. So, Jules Shah, you may now begin.
Jules Shah: Good morning and thank you for joining our conference call to discuss TE Connectivity's fourth quarter and full year 2024 results and outlook for our first quarter of fiscal 2025.
Jules Shah: with me today are Chief Executive Officer Terrence Curtin and Chief Financial Officer, Heath Mitts.
Jules Shah: 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.
Jules Shah: In addition, we will use certain non-gap 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.
Jules Shah: 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.
Jules Shah: As you know, in September, we announced a reorganization into a two-segment structure effective with the start of fiscal 2025.
Jules Shah: are transportation solutions and now a larger industrial solutions segment which adds the two businesses from communications.
Jules Shah: Our data and devices business moves into the industrial segment and is renamed Digital Data Networks.
Jules Shah: Our appliances business will be combined with industrial equipment, and the new business is named Automation and Connected Living.
Jules Shah: As we talk about our results today, they will be discussed in the old three-segment structure, and we will begin reporting our financial results in the new structure beginning in the first quarter of fiscal 2025.
Jules Shah: with an 8K of recast financial information being issued before the end of our fiscal first quarter.
Speaker Change: Finally, during the Q&A portion of today's call, due to the number of participants, we're asking everyone to limit themselves to one question, and you may 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 as always, we appreciate everyone joining us today.
Terrence Curtin: And before I get into the slides, let me just make some comments.
Terrence Curtin: For our fourth quarter, I am pleased that we delivered revenue and adjusted earnings per share that was ahead of our guidance, driven by continued solid execution across the segments.
Terrence Curtin: Our teams delivered consistently in 2024 on the operational levers to drive margin improvement, along with strong cash flow generation, which was our key focus that we discussed with you all throughout this year.
Terrence Curtin: We delivered strong margin expansion and double-digit growth in adjusted earnings per share in what continues to be a dynamic market backdrop.
Terrence Curtin: When we look at our results for fiscal 2024, we delivered record operating margins, earnings per share, and free cash flow.
Speaker Change: and I guess a few things to highlight building on this.
Speaker Change: We generated over 200 basis points of adjusted operating margin expansion and double-digit earnings growth year-over-year against a flattish volume environment.
Speaker Change: We also continue to demonstrate the strategic positioning of our portfolio and alignment to secular trends, as we benefit from the electrification and increased data connectivity adoption within the vehicle.
Speaker Change: Growth in Renewable Energy and Aerospace and Defense Markets
Speaker Change: and Accelerated Momentum in Artificial Intelligence Applications.
Speaker Change: and the content outperformance that we saw in these markets were offset by the softness we saw in the broader industrial markets.
Speaker Change: And lastly, we demonstrated the strength of our caste generation model.
Speaker Change: with free cash flow of approximately 2.8 billion dollars and disciplined capital deployment that included a strong return to shareholders.
Speaker Change: I'm also pleased that today to announce that our board authorized a 2.5 billion dollar increase to our share repurchase program
Speaker Change: that reinforces our value creation model.
Speaker Change: Now let me share some of the market trends and what we're seeing versus our earnings goal that we did 90 days ago.
Speaker Change: We do continue to have some markets that are accelerating, some that are stable, and some that are weak that are still trying to gain some traction. And let me highlight them by our segments.
Speaker Change: In our transportation segment, global auto production was essentially flat in fiscal 2024, with growth in Asia being offset by declines in production by Western OEMs.
Speaker Change: As we look forward, we expect a slight decline in global auto production in fiscal 2025.
Speaker Change: We do expect continued growth in hybrid and electric vehicle production with over 70% of that production occurring in Asia, which is our largest revenue region in auto and where we're extremely well positioned.
Speaker Change: We also expect further electronification in the vehicle, which will benefit across all powertrains and will continue to drive content growth for us.
Speaker Change: In the commercial transportation markets, we continue to see end market declines with some potential improvement in the cycle later in 2025.
Speaker Change: In our industrial segment, we continue to see strong growth in the airspace and defense and energy markets, coupled with ongoing weakness in factory automation, and that's particularly weak in Europe.
Speaker Change: In the communication segment, growth trends that we've been talking about are continuing.
Speaker Change: In the Cloud Data Center, we see momentum accelerating in artificial intelligence across our broad customer base.
Speaker Change: We had $300 million of sales for AI applications in fiscal 2024, which is higher than our expectations, and we expect these sales will double in fiscal 2025.
Speaker Change: We are set up for strong performance in fiscal 25, which will build upon the momentum we established in 24.
Speaker Change: While we're continuing to work through sluggish industrial land markets, we do expect them to return to growth in 2025.
Speaker Change: We also are continuing to invest in our engineering skills, technology, and operations capacity to support the growth.
Speaker Change: Key examples of some of the larger investments we are making are the further expansion of our Asian operations to support the ongoing growth in EV in that region, as well as our continued investment to expand our engineering and capacity to support the ramps of design wins that we have in AI.
Speaker Change: With these investments and what we see in our end markets, we do expect an acceleration of growth as we move through this coming year.
Speaker Change: Finally, I want to reiterate that our long-term value creation model is centered around having a portfolio aligned to secular growth trends.
Speaker Change: operational levers to drive further margin expansion and a strong cash generation model to return capital to shareholders while investing in bolt-on M&A opportunities.
Speaker Change: Executing on these pillars will enable sales growth, margin and EPS expansion and strong cash generation in fiscal 2025 and beyond.
Speaker Change: So with that as an overview, let me get into the presentation, starting with slide three.
Speaker Change: And I'll jump into some additional highlights and our guidance for the first quarter of fiscal 25 and then Heath will jump into more details in his section.
Speaker Change: Our fourth quarter sales were $4.1 billion, which was above our guidance and up 2% organically year over year.
Speaker Change: The upside versus our expectations was driven by the communications segment with higher sales from artificial intelligence applications.
Speaker Change: Adjusted earnings per share of $1.95 was ahead of our guidance on a quarterly record and was up 10% versus the prior year.
Speaker Change: Our adjusted operating margins were 18.6% and they were up 130 basis points over last year.
Speaker Change: Our free cash flow generation was very strong and was approximately 830 million dollars in the fourth quarter.
Speaker Change: Now let me turn to the full year results that you see on the slide.
Speaker Change: Full year sales were $15.8 billion, with organic growth in communications and transportation segments offset by weakness in our industrial equipment and markets, and headwinds from a stronger dollar.
Speaker Change: Adjusted earnings per share was $7.56 and was up 12% versus the prior year, and please keep in mind that this included 39 cents of currency exchange and tax headwinds.
Speaker Change: Adjusted operating margins were 18.9% for the full year, and they expanded 220 basis points over 23.
Speaker Change: The high quality of our earnings continues to be reflected in our cash generation model and I'm pleased with our record free cash flow of approximately $2.8 billion in 2024.
Speaker Change: Now, as we look forward to the first quarter of 2025, we are expecting our sales to be $3.9 billion, up 2% year-over-year, and it reflects the typical seasonality in our business.
Speaker Change: We expect adjusted earnings per share to be around $1.88, and this includes a 4 cent tax rate headwind versus the prior year.
Speaker Change: Now if you could please turn to slide four, let me make some comments on the order trends that are highlighted there.
Speaker Change: Our orders were over 3.8 billion dollars, reflecting typical seasonality, ongoing momentum in AI programs, and continued weakness in general industrial end markets.
Speaker Change: By region, our order patterns reflect strength in Asia, with weakness in the West.
Speaker Change: In transportation, sequential order patterns reflect stability in global auto production, along with ongoing market declines in commercial transport.
Speaker Change: And auto or orders continue to reflect growth in Asia with weakness in Western markets.
Speaker Change: In the industrial segment, we continue to see softness across factory automation and building our automation, particularly in Europe.
Speaker Change: And in our communications segment, where order levels came in as we expected, and they increased nearly 40% year over year, in addition to the strong order growth we had last quarter.
Speaker Change: This supports the strong growth we're expecting in fiscal 2025 from artificial intelligence programs.
Speaker Change: Thank you.
Speaker Change: Now, with that as a backdrop about orders, let me get into segment results and I'll start with our transportation segment that is on slide 5.
Speaker Change: Highlighting our ability to generate growth over market, our auto business declined 1% organically against a global auto production decline of 5% in the fourth quarter.
Speaker Change: The 400 basis points of outperformance versus production was driven by double-digit organic growth in Asia, offset by mid-single-digit declines in the West.
Speaker Change: And, quite frankly, this continued the trends that we've been seeing by region all year.
Speaker Change: As everybody knows, automotive production and car sales dynamics are very different by different regions in the world.
Speaker Change: We do continue to expect content growth to be in the 4-6 point range long term. This is supported by data connectivity and further electronification benefit across all powertrains, our leading global position in hybrid and electric vehicles, and our strong position in Asia.
Speaker Change: I do want to emphasize that and remind everyone that over 70% of EV and HEV production occurs in Asia, where we are very well positioned and we expect the adoption of EVs and HEVs in Asia to continue the pace they've been at.
Speaker Change: Our differentiated position is proven by the fact that we grew sales in mid-teens in Asia this year in an environment where regional production was only up mid-single digits.
Speaker Change: Turning to the commercial transportation business, we did see a 4% organic decline and this was primarily driven by weakness in Europe.
Speaker Change: We do expect this business to be a down again sequentially in the first quarter, with potential improvement in the cycle as we move throughout the year.
Speaker Change: In our sensors business, the sales decline continues to be driven by market weakness in industrial applications, as well as portfolio optimization efforts that we've talked to you about.
Speaker Change: We do expect these exits that we've talked about to be completed in 2025.
Speaker Change: For the transportation segment, adjusted operating margins were 19.3% in the fourth quarter.
Speaker Change: For the full year, we delivered 20% adjusted operating margins, and these were at 300 basis points year-over-year, driven by strong operational performance, and we expect our first quarter margins to be similar to the fiscal year 24 levels.
Speaker Change: So please turn to slide 6 and let me get into the industrial solutions segments.
Speaker Change: As you can see on the slide, our AD&M sales were up 14% organically, driven by growth in the commercial airspace and defense markets.
Speaker Change: In both of these markets, we continue to see favorable demand trends as well as ongoing supply chain recovery.
Speaker Change: In our energy business, sales are up 14% organically, driven by strength in the Americas and in Europe.
Speaker Change: We continue to benefit from momentum and renewables as well as investments that are being made to support increased power generation needs.
Speaker Change: Our medical business declined slightly in the quarter, and the industrial equipment business declined 20% organically.
Speaker Change: For the full year, we saw growth in the aerospace and defense, energy, and medical businesses.
Speaker Change: On the margin front, industrial segment margins were 15.6%, and this was in line with our expectations given the current volume levels and business mix.
Speaker Change: So let me wrap up this segment discussion with the communication segment, and this is on slide 7.
Speaker Change: Our data and devices business grew 35% organically, and our design wins are reflecting accelerating momentum.
Speaker Change: Our AI revenue came in at $300 million in fiscal 2024, and we expect sales from AI applications to double from this level in fiscal 2025 from design wins across a broad base of customers.
Speaker Change: Our appliance business grew double digits again for the second quarter in a row, and this was really driven by strength that we saw both in the Americas as well as in Asia.
Speaker Change: The segment had adjusted operating margins of 21.7%, and this was aligned with our expectations.
Speaker Change: Markins did show a significant improvement over last year and that was driven by strong operating leverage on the higher volume that we had on the segment.
Speaker Change: So, with that summary, let me turn it over to Heath. He'll get into more details on the financials as well as our expectations going forward.
Heath Mitts: Thank you.
Heath Mitts: Thank you, Terrence, and good morning, everyone.
Heath Mitts: Before I get into the details of our financials, I want to reiterate something that Terrence said earlier. We are dealing with a dynamic market environment, so our focus this past year has been on improving margins and earnings.
Heath Mitts: I am pleased that we delivered record margin, EPS, and free cash flow in fiscal 24.
Heath Mitts: For the quarter, Adjusted Operating Income was $755 million with an adjusted operating margin of 18.6%.
Heath Mitts: GAAP operating income was $651 million and included $5 million of acquisition related charges and $99 million of restructuring and other charges.
Heath Mitts: For the full year, restructuring charges were $144 million, reflecting continuing footprint optimization efforts.
Heath Mitts: and I expect restructuring charges in fiscal 25 to be at or below the $100 million level.
Heath Mitts: Adjust EPS was $1.95 and GAP EPS was $0.90 for the quarter and included a tax charge of $0.78 related to the increase in the valuation allowance for deferred tax assets.
Heath Mitts: Additionally, we had restructuring, acquisition, and other charges of 26 cents.
Heath Mitts: For the fourth quarter and for the full year, the adjusted effective tax rate was approximately 22 percent, which was as we expected. As we move into fiscal 25,
Heath Mitts: We expect our adjusted effective tax rate in Q1 to be approximately 23% with the full year 2025 being in the 23 to 24 percent range.
Heath Mitts: The increase versus the prior year is primarily related to the impact of the Pillar 2 Global Minimum Tax Implementation.
Heath Mitts: Importantly, our fiscal 24 cash tax rate was in the mid-teens, significantly below our adjusted effective tax rate, and you can continue to expect our cash tax rate to stay in the mid-teens longer term.
Heath Mitts: Now, turning to slide 9 for additional information on full year performance.
Heath Mitts: Fiscal 24 sales of $15.8 billion were flat on an organic basis. We did have organic growth in the communications and transportation segments which was offset by the industrial segment.
Heath Mitts: Adjusted operating margins were 18.9% for the full year with margin expansion of 220 basis points year-over-year, driven by strong operational performance.
Heath Mitts: At the segment level, we expanded margins by 300 basis points in transportation and nearly 400 basis points in communications, resulting in roughly 20% adjusted operating margins for both segments in 2024.
Heath Mitts: Adjusted earnings per share were $7.56, up 12% year-over-year, driven by margin expansion and included headwinds of 39 cents from currency exchange and a higher tax rate.
Heath Mitts: Now given the flattish market environment, double-digit EPS growth in this environment is something that I'm very proud of.
Heath Mitts: Turning to cash, as you may recall, we generated record-free cash flow of approximately $2.4 billion in our fiscal 23. And I'm pleased to share that we exceeded this by $400 million to a new record of $2.8 billion in fiscal 24, which was up 17% year-over-year.
Heath Mitts: Our free cash flow reflects a 120% conversion to adjusted net income and was in the high teens as a percentage of sales, demonstrating the high quality of our earnings.
Heath Mitts: And as we look forward, we expect free cash flow conversion to remain above 100%.
Heath Mitts: In fiscal 24, we returned roughly $2.8 billion to shareholders through share buybacks and dividends, and we deployed approximately $340 million, aligned with our bolt-on acquisition strategy.
Heath Mitts: Our cash generation and healthy balance sheet gives us more optionality with uses of capital. We will continue to have a strong return of capital to shareholders, and as you saw today, we announced an additional $2.5 billion repurchase authorization which supports our optionality.
Heath Mitts: We will also look to pursue more bolt-on acquisition opportunities that attract evaluations. We are seeing a more favorable deal environment than we have seen in the past few years, so I'm a bit more bullish on our inorganic opportunities.
Heath Mitts: Before we turn it over to questions, let me reinforce that we expect to build upon our performance in 2024 to deliver even stronger financial performance in 2025.
Heath Mitts: We are expecting a return to growth this fiscal year and our investments in markets with secular trends are expected to accelerate as we move through the year. In addition, we expect to deliver margin and EPS expansion along with strong free cash flow generation.
Speaker Change: Now with that, let's open it up to questions. Thank you, Heath. Ellie, can you please give the instructions for the Q&A session?
Ellie: At this time, I would like to remind everyone to ask a question. Please press star and number 1 on your telephone keypad. In order to have time for all questions, each participant is limited to one question. If you would like to ask a follow-up question, please press star and number 1 to return to the queue. Your first question comes from Amit Daryanani from ISI Evercore.
Ellie: Your line is now open.
Amit Daryanani: Good morning, everyone. Thanks for my question.
Amit Daryanani: I'm hoping you can just perhaps expand more on the AI opportunity that you see unfolding going forward. There's been a lot of discussions around what's happening in some of the shifts here, so we'd love to hear your perspective. What sort of customer diversity do you folks have here? And if some of the recent architectural changes that we're seeing has any impact to TE, and perhaps you can weave into this discussion, how should we think about this billion-dollar AI opportunity you talked about longer term? Is that getting bigger or perhaps going to happen sooner? Thank you.
Speaker Change: No, thanks Hamid and you know, obviously you've heard us talk about this for a number of quarters and it's a great trend
Speaker Change: which also demands really...
Speaker Change: excellent engineering and tough engineering problems to be solved. It's about...
Speaker Change: Higher speed that all of our cloud customers need with lower latency, as well at the same time really helping solve the power efficiency that's needed with what we provide from our product. So, you know, it is something that we like that engineering stickiness.
Speaker Change: I do think when you look at the trend, let's face it, the baseline when we look at the growth is the design wins we have.
Speaker Change: as well as where Cloud CapEx spending is going. And you can see from their reports that just continues to increase and expected to be up 20% again. And that's really what's really funding these programs and the designs that we're working on with our customers.
Speaker Change: And our position really built on what we did from our cloud penetration from them that we talked about a few years ago.
Speaker Change: So, you know, when we look at the momentum, to get to the momentum that you talk about.
Speaker Change: Let's face it, a few quarters back, we started with $200 million and we said $250 million. Now we ended the year $300 million.
Speaker Change: So, we do continue to see, you know, increased momentum, things, you know, pulling in more than actually getting pushed out.
Speaker Change: And, let's face it, our customers really are just asking for everything to be accelerated. And you see that in the order patterns that we had last quarter, where our orders were up almost 100% in our communications segment, and this quarter it will be up 40%.
Speaker Change: So, you know, we did talk about today in the prepared comments, we do still expect doubling of our $300 million to the $600 million next year.
Speaker Change: So the momentum feels really good and you know the billion that we talked about if anything I think it slides to the left more than it's going to slide to the right you know it's going to be closer in on us as we continue to execute on these programs.
Speaker Change: Thank you.
Speaker Change: The one thing that, you know, I guess I didn't talk about when it comes to who our customers are.
Speaker Change: They are the hyperscalers. They are the semi-companies. It's pretty broad-based, similar to like we had in the cloud.
Speaker Change: And the other thing that's just as important is how you play in the ecosystem to the other people that actually have to make the architecture come to life.
Speaker Change: and the other players that make acceleration chips and other silicon solutions that are very important as well. So we do have engagement across that, and I do think it's not concentrated on one customer, it's really across the ecosystem, and that's where I'm really proud of what the team has done.
Speaker Change: So, I think you're going to continue to see...
Speaker Change: You know, our revenue increase in this area, you know, we've been investing, as I said in the prepared comments, around engineering skills, you know, to make sure we have the capacity to really support these ramps. And it's, you know, going to probably be the biggest growth driver for us in next year, as you look at 2025, clearly, with what we've laid out for you all.
Speaker Change: Okay, thank you Amit. We have the next question please.
Speaker Change: Next question comes from the line of Wamsi Mohan from Bank of America, your line is now open.
Wamsi Mohan: Yes, thank you so much. Terrence, I was hoping maybe you could unpack your comment on the content outgrowth in Asia that found it closer to ten points of outgrowth. I was wondering how much of that is coming from EV mix versus increased electronification in that region and do you see those trends?
Wamsi Mohan: Sustaining in fiscal 25 as well. Thank you
Speaker Change: First off being, you know, when we sit here today and you think about Asia, Asia is very much
Speaker Change: You know, it's our largest revenue region is also where
Terrence Curtin: The vast majority of EVs are made, and if you look at just last year, Ramsey, you know, there were four million more electric vehicles made last year. They were all made in Asia while the West was sideways and slightly down from a production perspective.
Terrence Curtin: and when you look at overall Asia car production, it was at mid-single digit.
Terrence Curtin: You know, our revenue was up mid-double-digit, so really nice content outperformance.
Terrence Curtin: Certainly it's the EV momentum. It is also, you know, data in the vehicles, you know, a Chinese vehicle, as well as any Asian vehicle, you look at the software that's getting put into them, that needs more data connectivity in the car, as well as the architecture continue to evolve. So, the outperformance is huge.
Terrence Curtin: Both EV as well as everything we get from a content across all powertrains
Terrence Curtin: and we do expect that you're going to continue to see EV production growth probably similar in the units that we had this year, around 4 million units. That's going to be mainly driven by Asia and we feel very well positioned for that.
Speaker Change: Okay, thank you, Ramzi. Can we have the next question, please?
Speaker Change: Question comes from Stephen Fox of Fox Advisors. Your line is now open.
Stephen FOX: Hi, good morning everyone. I was wondering if you could help us maybe reset a little bit on the new segment that you're switching to this year in terms of just how to think about growth by the two segments, maybe margin expansion, and how it maybe compares on a pro forma basis to what you just reported. Thanks.
Speaker Change: Yeah, a couple of things. We will, as Sujal said in his
Speaker Change: pre-made remarks. We're going to give you all data through an 8k later in the quarter.
Speaker Change: Steve, so when you sit there and you know when you think about the growth it's really
Speaker Change: combining the IS and the CS segment today together and I think that'll be a good baseline until we get that out.
Speaker Change: I do think when you look back at this year, you see a couple of things. The growth this year, places like AD&M, energy, and what we saw in the communications segment, that growth is just going to continue as we go into next year.
Speaker Change: You know auto we're gonna we feel good with the four to six out performance over production Even though auto production will be slightly down. We do think we can drive that
Speaker Change: And, you know, I think the real question as we look ahead is going to be some of the areas where we've seen softness, whether it be industrial equipment, commercial transportation, and also in our sensors business, just where the industrial markets have been weak and have been impacting us.
Speaker Change: You know when does that relieve as we go in there and you know that becomes a lesser of a headwind as we go Into 25 we do think that will happen through the year. We do expect growth
Speaker Change: to improve through the year.
Speaker Change: But that's how you should be thinking about 25's growth. And, Heath, I don't know if you want to comment on the margin side.
Heath Mitts: Sure, Steve, you know, as both Sujal and Terrence have commented, we will put out
Heath Mitts: some pro forma backward looking here later in the quarter so you can update your modeling but
Heath Mitts: As you add the other two segments together, you can probably get pretty close.
Heath Mitts: doing your own math in terms of that but you know it's fair to say that the new industrial segment
Heath Mitts: would have finished 2024 in the high teens.
Heath Mitts: and transportation in our 20% range. As we look forward, transportation is unchanged with the growth opportunities that Terrence just outlined and some of the investments that we're making we feel comfortable with.
Heath Mitts: where we are with transportation as we move into 25, with transportation being a 20% or better as we move through the year. And then the biggest move opportunity for us is in the industrial segment.
Heath Mitts: and we'll see improvement there in the new industrial segment.
Heath Mitts: in 25 versus 24 on the margin front.
Heath Mitts: but moving them closer to 20% at the segment level for the total company to be at 20% is the goal over the midterm. So, you know, we're working that and feel good about where we're going to go. The biggest move, though, you'll see is going to be an industrial in FY25.
Speaker Change: Thank you, Steve. Can we have the next question, please?
Speaker Change: Your next question comes from Scott Davis of Mellius Research. Your line is now open.
Scott Davis: Hey, good morning guys, Terrence and... Hey, Scott.
Scott Davis: Good morning.
Scott Davis: Congrats on managing through a tough year as Marge said. I wanted just to turn to industrial a little bit, factory automation side. Is there any visibility on when that business stabilizes? It seems to be kind of your...
Speaker Change: I'm going to do the toughest one right now and get a snap back on that in 25, it'll be pretty helpful.
Speaker Change: No, thanks Scott for the question and you know it's an area that in many ways we would have thought and as we commented we would have expected a little bit of recovery this year.
Speaker Change: I would say the areas where we really see the weakness, just to make sure...
Speaker Change: where we're seeing it, you know, it is, you know, in the factory, discrete factory automation space where we have a very nice position.
Speaker Change: It's also in around building automation and the one thing I would say where
Speaker Change: While it feels it's bouncing around the bottom I do want to make sure that that's clear. We do feel it bounce around bottom Europe got a little weaker
Speaker Change: I would say America is stable and we have seen in Asia a slight improvement. So I do think we're dealing with some regional mixes as well, Scott.
Speaker Change: I do feel there is, you know, with some of our customers, they are still working off a little bit of inventory of what they have, so there is a little bit of the stocking in there.
Speaker Change: I do think we're probably going to have to get out into our calendar.
Speaker Change: 25 until we see that improvement.
Speaker Change: But right now it's sort of bouncing around the bottom and you know, it has been a big headwind this year It's absorbed some of the growth we had in other areas
Speaker Change: and we do think with the trends out there, it will improve, but I think we still need a little bit more time.
Speaker Change: Okay, thank you, Scott. Can we have the next question, please?
Speaker Change: This question comes from Mark Delaney from Goldman Sachs. Your line is now open.
Mark Delaney: Yes, good morning. Thanks for taking my question. You spoke about the success the company's having with content growth and the four to six points of outgrowth, something you think you can sustain. But as you think about auto content growth over the longer term, I'm hoping you may be able to share thoughts on the announcement from Tesla earlier this week around the plan to look to simplify their low voltage connector architecture and any implications for your company. Thank you.
Speaker Change: Sure, thanks Mark and we don't comment on individual customers because we play with everyone but I would just tell you.
Speaker Change: An announcement like that gets us excited, because we do work with every car company in the world, and when you go into messing with the architecture and evolving the architecture, there are real challenges to that.
Speaker Change: and that can be whether it's you're trying to go and say how do I go from 12 volt to 48 volt
Speaker Change: How do I go from distributed compute to zonal compute or central compute? And these are things that have nothing to do with an electric vehicle. They are architecture changes that happen across all powertrains.
Speaker Change: And in each one of those, you may be going also trying to solve of how do you improve assembly efficiency, which certainly Tesla always does a great job on.
Speaker Change: So, in these cases, typically the interconnects get more complicated because you're combining things together. They typically get more miniaturized, especially when you're going from 12 to 48 volt. You're using thinner wires, which also create challenges in the assembly process.
Speaker Change: And that's when we use the word electronification versus electrification. As you have any change where you're trying to hang more electronics on an architecture in a car, you're trying to basically improve that, that creates content opportunity for us.
Speaker Change: And even when we talk about the four to six, we have to realize electronification is just as important as electrification of the powertrain.
Speaker Change: and that happens across everything. So those types of changes we're excited about and we're fortunate that we can work with every car company in the world as they work on these next-gen architectures.
Speaker Change: Okay, thank you Mark. Can we have the next question please?
Speaker Change: https://www.youtube.com
Speaker Change: Your next question comes from Christopher Glynn from Oppenheimer. Your line is now open.
Christopher Glynn: Thanks, good morning. Heath, you talked a little bit about capital allocation. I was noting the two and a half billion repurchases. I think it's a little bigger than normal.
Christopher Glynn: So, I just wanted to go back to that discussion that, you know, suggests any adaptations for your capital strategy.
Heath Mitts: Thanks, Chris, and I appreciate the follow-up question on this. Now, I think...
Speaker Change: You know, when we sat with our board and went through it, you know, part of this, part of this announcement was taking into consideration the amount of cash flow that we've been generating as a company.
Speaker Change: and where we need to be positioned to give us options. And we've used the word optionality a couple times today, and that seems to be the word that's resonated with us in terms of...
Speaker Change: We do have a stronger M&A pipeline in front of us, but we've got to do deals that make sense for our owners.
Speaker Change: and valuations and value creation opportunities.
Speaker Change: Having said that we still have a ample excess cash flow and we have no intention of piling up on our balance sheet here So we never have and that's not our strategy. So it gives us an opportunity to deploy capital via share buyback to our owners in addition to what we do with the dividend which will increase
Speaker Change: as our earnings and cash flow increases. So, it's just another mechanism. I suspect it will take us out over the next couple of years in terms of that authorization. But no change in the just maybe a little bit more bullishness about our ability to continue to generate cash flow, utilize our balance sheet, and stay balanced with what we're doing.
Speaker Change: Okay, thank you, Chris. Can we have the next question, please?
Speaker Change: Your next question comes from Luke Junk from Baird. Your line is now open.
Luke Junk: Great. Thank you. Good morning. Thanks for taking the question.
Luke Junk: Terrence, it would be great to get your updated perspective on TE's automotive positioning in China. Specifically, we've talked a lot about Asia this morning, but I want to zoom in on China and just some of the key achievements underpinning what's been, you know, seemingly a very strong year overall there. I guess I'm thinking about your positioning with current customers, turning on new customers maybe, and especially leverage to locals, and just what that might mean as we move into next year and then simultaneously from a competitive standpoint, are you seeing any changes there, especially any local players making incremental incursions into the market in China? Thanks.
Terrence Curtin: No fair, thanks Luke and you know first off you have to assume when we when we talk about Asia, China plays a very big part in that.
Speaker Change: You know about half of Asia's vehicles are made in China So when you think about the world and we always talk about global auto production
Speaker Change: while there's 87 million cars made in the world, 50 million of those are made in Asia and of those 50 million, half of those are in China and you know China you know is a very important position for us and is about two billion dollars of our automotive revenue. It's China alone.
Speaker Change: And, you know, with that type of weighting, the trends that we talk about relate about the growth outperformance I mentioned on Asia. You can assume the same type of growth outperformance in China.
Speaker Change: And one of the things that I think has always been...
Speaker Change: A strength of ours is because we play with every OEM, not just multinationals. We would not be able to drive this content outperformance if we weren't with the local OEMs. It's not a secret. Multinationals are losing share in China, and it's inverted.
Speaker Change: So where you used to have multinationals have two-thirds of the share and local Chinese OEMs have one-third Today is two-thirds Chinese OEMs
Speaker Change: one-third multinationals.
Speaker Change: and the growth that we've had just sort of proves that we are winning with the locals and winning with everybody and our market share is similar between the two and it's something that I think our team has done a great job.
Speaker Change: and something we've invested heavily in. And we're actually, as I mentioned in my prepared remarks, we're actually opening our sixth automotive factory in China to support the growth that we have. So we're continuing to expand with our local resources, local engineers.
Speaker Change: local capacity, because that is served locally, which is very important. Competitively, you know, we still have primarily Western competitors here. It is the other companies that you cover, as well as Japanese
Speaker Change: competitors play there and there are some traditional Chinese competitors that we've competed against for some time that they are not new competitors.
Speaker Change: But there are also competitors that, you know, quality, cost, and everything that is important, we have to make sure we're winning against them as well.
Speaker Change: So I feel good about our position. It is going to be something, as we look at 25, we expect Asia is going to be the driver of volume.
Speaker Change: and our content, our performance that you saw in the second half of these five points about performance we had in the second half.
Speaker Change: You know, our content outperformance will be driven by Asia, and then we hope the Western trends pick up, and that can also help us as well, but really, the Asia position is very important.
Speaker Change: Okay, thank you, Luke. Can we have the next question, please? Your next question comes from Sari Boroditsky from Jeffries. Your line is now open.
Sari Boroditsky: Hi, thanks for taking the question. I know you're going to some new segments, but just given the strong growth expected in communication for 2025, are you still looking for 25% to 30% incremental margins on that growth specifically, or are there additional investments needed that we should think about? Thank you.
Speaker Change: Sure, I'll take that.
Speaker Change: You know, as you would expect with the type of growth that we're seeing.
Speaker Change: There are investments that we are making in that space, both on the capital front.
Speaker Change: to increase capacity for production to handle that type of uplift as well as engineering investments that we're making. Now, those have been underway, and some of those are already embedded in our run rate for our 2024, so I'm not here to suggest that it's going to be a massive uptick as we go into 2025, but some of these programs have been underway for a while.
Speaker Change: Thank you.
Speaker Change: from an incremental flow-through perspective, which I think you were asking, you know, we need to dial that in a little tighter and we can give you a little more color when we come back out in the January timeframe, which will be when we first report on the new segments.
Speaker Change: But having said that, I think 30% is probably a decent number, but that's not just coming from this AI side. That's also coming from some cost actions and other things that we're doing in the rest of that segment. So I think you can be dialed in somewhere in that ballpark, and we'll tighten it up for you.
Speaker Change: All right, thank you, Sari. Can we have the next question, please?
Speaker Change: Your next question comes from Joe Speck of UBS. Your line is now open. Thanks, Heath.
Joe Speck: To follow up on the earlier question, like if that M&A pipeline doesn't materialize, should we still expect about, you know, 100% of that free cash flow to be distributed via dividends and the new buyback?
Speaker Change: Well Joel, a couple of things there. First, I think, you know, and I know we may sound like a broken record, but from a modeling perspective, I would still assume
Speaker Change: Roughly 5% of revenue towards CapEx as a modeling. We came a little under that this year, but there's always timing elements and things.
Speaker Change: I do expect our CapEx in 2025 versus 2024 to probably be...
Speaker Change: about a hundred million dollars higher.
Speaker Change: Most all of that is to support the AI program growth and some of the capacity we need to bring online from that so You know if you're if you're looking to dial in your model It kind of feels like it's in that ballpark, and we'll continue to update you, but nothing outsized
Speaker Change: relative to to to that.
Speaker Change: from a CapEx perspective. From a conversion perspective, we certainly have benefited from the fact that, you know, from a cash conversion perspective, that we've been able to manage working capital in a manner that, you know, you would expect in a flat growth environment.
Speaker Change: And when you're in a flat growth environment, and the number of widgets that we're making is largely flat, you know, we can go after things like inventory pretty aggressively. The other thing that's worked in our favor is we've been able to, as the world has finally, you know, from a supply chain perspective, recovered more.
Speaker Change: coming out of the COVID, you know, swings.
Speaker Change: over the past four or five years.
Speaker Change: One of the things we're able to do is just plan a little bit better and have more trust in our suppliers as well as the order patterns from our customers as we sit in the middle of everything. Now as we move into 2025, we are expecting to grow and we are expecting our volumes to be up.
Speaker Change: and 25 and so that will have a natural impact of
Speaker Change: are putting a little bit of pressure on working capital, both on receivables as well as on inventory. So I think that math would tell you that we're not gonna be at 120% again, but I still feel confident that we're gonna be over 100%. And we'll continue to update as that moves forward. But I appreciate the question and stay tuned. Thank you, Joe. Can we have the next question, please?
Speaker Change: Your next question comes from Joe Giordano from TD Cohen. Your line is now open.
Joe Giordano: Hey guys, good morning.
Joe Giordano: Hey Joe, I appreciate that this is kind of happening in real time, but you're getting a lot of Announcements in Germany about workers at auto facilities joining nationwide strikes And so when you think about your auto guidance and specifically how you're dialing in the next quarter like how do you feel like? That kind of situation is handicapped
Speaker Change: Well, when we guide you, everything we know is in our guidance and, you know, certainly we have customers in many of our business units that are going through unique things. And we do, you know, one thing when we think about the first quarter, we do expect global auto production.
Speaker Change: to be down similar to what it was in fourth quarter year-on-year. So I do think we are going to be seeing in the West.
Speaker Change: You're going to have that weakness, that's some of the things you've talked about, but age is going to be the real driver of growth and in the production as we look at next year. So next year we do expect overall global production to be down slightly.
Speaker Change: and certainly the decline in auto production of the mid-single digits we talked in quarter one. Europe is going to be a big chunk of that.
Speaker Change: Okay, thank you, Joe. Can we have the next question, please?
Speaker Change: Your next question comes from Colin Longin from Wells Fargo. Your line is now open.
Speaker Change: Hey guys, this is Cosa Sicilis filling in for Colin. I just wanted to place more focus on the commercial vehicle market. Can you just offer some color on how the business will impact your transportation, segment margins, and Foyer 25?
Speaker Change: Well first off let me talk about the market a little bit and I'll let Heath talk about the margins. You know when you look out there you know impact of financing rates certainly a little bit of inventory you do sort of see globally
Speaker Change: heavy truck market, which also includes in our world ag and construction, that, you know, has weakened and, you know, we've experienced that. What's been nice is that our team has, you know, grown probably 200 basis points better than the decline. So, I think as we work through this cycle,
Speaker Change: which these are common here. We will get some outperformance as we're in a negative environment and there are some things that are in 26.
Speaker Change: that on the emissions fronts in certain parts of the world that we do think could spark demand and, you know, improve later next year. But, Heath, why don't you talk about...
Heath Mitts: Well, it's a good question because sometimes the mix within the segment can impact the transportation segment margins.
Heath Mitts: They're there and we've been pretty public that there are commercial transportation businesses is
Heath Mitts: A very profitable business for TE and for that segment, obviously.
Heath Mitts: Now, you know, that the softness that we're seeing does put pressure on the margins. However, it put pressure on the margins in 2024 as well.
Heath Mitts: So, you know, it's kind of in our run rate as we move into 25.
Heath Mitts: While we do expect things to improve as we work our way through the year, from a market and demand perspective,
Heath Mitts: We are not, our assumptions on transportation margins and holding their head at 20% or better are not contingent upon our commercial transportation business seeing some big uptick.
Heath Mitts: So, our auto business has performed very well and has been able to handle the headwinds that's come out of other parts of the segment.
Speaker Change: Thank you, Costa. Can we have the next question, please?
Speaker Change: Your next question comes from Matt Sherin from Stifle. Your line is now open.
Speaker Change: Good morning. This is Victor Ahn from Matt Shearing. Thanks for taking my question. I was hoping to get some color on your data and devices business X, the AI opportunity. How has that recovery for traditional Datacom applications been tracking? And how do you view the business going into 2025?
Speaker Change: Sure, let me get into that and you know we do talk a lot about AI.
Speaker Change: First off, we're seeing, you know...
Speaker Change: When you take outside of AI, and it is always difficult to try to parse between AI and true cloud, but as we parse it, we do actually see the cloud element returning to growth. We do see that being probably a mid-single-digit growth next year, you know, after we had a shift that really went to AI dollars versus...
Speaker Change: Nothing being vested elsewhere. So it's nice to actually see that we do exceed more cloud programs, you know coming back up
Speaker Change: Enterprise continues to be sideways is the way I would look at it as we look at next year and then we don't we don't play largely in telecom networks but I do think it's nice to see the cloud recovering spend that's outside of AI going into next year.
Speaker Change: Thank you, Victor. Can we have the next question, please?
Speaker Change: Your next question comes from William Stein from ThruVist Securities. Your line is now open.
William Stein: Perhaps this is just anticipated lumpiness, but it's been a little bit surprising to investors, I think. Also, if you could elaborate on the product exits that you mentioned, I think in the slides you talked about this in sensors, but maybe just give us a little more color. Thanks so much.
Speaker Change: Yeah, yes, sure. Well, so first off...
Speaker Change: On the sequential decline in orders in D&D, I think you have to realize our orders grew 100% last quarter, 40% this quarter, year on year, and you nailed it, Will.
Speaker Change: They're going to be lumpy, based upon when the programs are in, based upon when we get to agreements with our customers. And so I think you're going to continue to see that lumpiness. I think the real punchline to keep in front of you is...
Speaker Change: You know collectively in D&D we had a billion dollars of orders in the past
Speaker Change: Two quarters
Speaker Change: combined. So that's very strong and I would really be careful and taking one quarter versus another it's you know what's that cumulative and you know what we're seeing really supports that guidance we gave you in the doubling of our AI revenue and even the cloud trends I just talked about the non AI cloud trends.
Speaker Change: In sensors, let me switch to the second question you had.
Speaker Change: It was heavy vehicle, it was medical and factory automation.
Speaker Change: and they're the areas that we really challenged ourselves a few years back to say, what gets in our way to winning in those four markets? And we've been doing 80-20 work that has been exits.
Speaker Change: This coming year, coming up, it'll be about $50 million of exits that we're doing to really, you know, end this program. And, you know, you can put that in as a headwind for next year, but 2025, you know, they'll be done.
Speaker Change: Alright, thank you Will. Can we have the next question please?
Speaker Change: Your next question comes from Shreyas Patel from Wolf Research. Your line is now open.
Shreyas Patel: It's probably pretty close to that level if we were to just out some of the typical challenges in industrial and commercial, but it's curious on your thoughts, and then on AI, just how to interpret the revenue guidance of around $600 million for next year.
Shreyas Patel: Thanks.
Speaker Change: Yeah, I'll take the I'll take the margin question, you know.
Speaker Change: We haven't gone out with formal margin guidance in terms of that, but what I was trying to do was, you know, provide a little color earlier.
Speaker Change: that if you think about the new segment structure, our transportation margins are already at 20% and will continue.
Speaker Change: running at that. There's always a little bit of quarter volatility either direction on that side of 20%, but we feel good about where we are particularly in light of the softness in the commercial transportation market which is a bit of a headwind on that front.
Speaker Change: As we think about the new industrial segment, which combines our traditional communications and industrial segments together, it's a blended rate now that's going to be somewhere in the high teens.
Speaker Change: versus 24, it was meant to be where we see this thing going and getting more comfort around. This year we ended up close to 19%. We see over the next couple of years to get closer to that 20%.
Speaker Change: But, you know, volume is going to help in that formula as well. And then Terrence, do you want to... Yeah, Trey, it's just one thing, just to clarify. The orders we talk about of this billion dollars,
Speaker Change: While the increases are driven by AI, there are the other parts of the business in a non-cloud AI enterprise. So all I would say is I do think the momentum that we have is there to support it.
Speaker Change: It's just there is a difference between that order of level versus the AI only doubling So I do just think as you put those together as you get into 25 and 26
Speaker Change: Thank you, Shreyas. Can we have the next question, please?
Speaker Change: Your final question comes from Guy Hardwick from Freedom Capital Markets. Your line is now open.
Speaker Change: Hi, good morning. Good morning.
Guy Hardwick: Hi gentlemen. I appreciate the guidance you gave for transportation. I think you said for Q1 it would be equivalent to FY24 levels, so that's kind of around 20%.
Guy Hardwick: Transportation margin was a little bit below consensus expectations, and I understand it's due to investment, but given you're at 20% now, it begs the question, how much higher can it go, given that it's kind of close to peak levels, but you are talking about 30% incrementals, so...
Guy Hardwick: I know you don't want to get specific guidance for next year yet, but what are the kind of dynamics for the margin for transportation for next year, given maybe a back-end recovery in commercial transportation, the census business getting through to restructuring and exits, and then what you've said about...
Speaker Change: Outlook for Production and Mix.
Speaker Change: Well, Guy, I think you nailed all the various moving parts there.
Speaker Change: I'm not worried about the 19.3 and change that we did in the fourth quarter. We've also had quarters where we were 21%, right? So in a given quarter, there can be noise, it could be mix. In this quarter, we did have some heightened investments and some timing of things that we.
Speaker Change: Maybe thought would have layered in over a couple quarters. So these things happen. I don't get hung up on one one quarter particularly with
Speaker Change: the foresight that we have looking into not just our Q1 but our FY25 for that segment.
Speaker Change: In terms of moving past that 20%
Speaker Change: You know, the incrementals would suggest that, you know, the natural growth in that business would drive to that. Now, we have not seen a ton of volume growth because where, you know, where the market outgrowth we've had in auto and so forth.
Speaker Change: has been offset by pressures that we've seen on the top line in both commercial transportation sensors.
Speaker Change: Now, we do expect both of those sensors won't necessarily return to growth as the product exits.
Speaker Change: and FY25, but we do expect the sensors, the commercial transportation business to continue to improve.
Speaker Change: as we move through the year, albeit we're not calling it right now in terms of a time frame for when that could happen, and it's probably in the second half of the year.
Speaker Change: When that business returns to growth in conjunction with the strong auto business, I do think you'll see some support there on the incrementals, but we're not ready to call that or put a number out there, and we feel good about where we've been able to hold our head right now.
Speaker Change: All right. Thank you, Guy. If there's no further questions, I just want to thank everybody for joining our call this morning. If you have further questions, please contact Investor Relations at TE. Thanks, everyone, and have a great day.
Speaker Change: Today's conference call will be available for replay beginning at 1130 a.m. Eastern Time today, October 30, on the investor relations portion of the TE Connectivity's website. That will conclude the conference for today.