Q1 2025 TE Connectivity Ltd Earnings Call

David Brown: Everyone, thank you for standing by and welcome to the TE Connectivity first quarter earnings call for fiscal year 2025. At this time, all lines are in a listen-only mode. Later, we will conduct a question and answer session.

David Brown: If you would like to ask a question, please press star 1 on your telephone keypad. And if you would like to withdraw that question, again press star 1. And as a reminder, today's call is being recorded.

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

Sujal Shah: Good morning and thank you for joining our conference call to discuss TE Connectivity's first quarter results and outlook for our second quarter of fiscal 2025. With me today are Chief Executive Officer Terrence Curtin and Chief Financial Officer Heath Mitts.

Sujal 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.

Sujal Shah: In addition, we will use certain non-GAP measures in our discussion this morning. We ask you to review the sections of our press release and the accompanying slide presentation that address the use of these items.

Sujal Shah: As a reminder, we reorganized into a two-segment structure effective with the start of fiscal 2025. Transportation solutions, where the end markets remain the same, and industrial solutions, which adds the two businesses from communications.

Sujal Shah: As we talk about our results today, they will be discussed in the new segment structure.

Sujal Shah: Please refer to our 8K, filed in December, for recast financial information under the new structure.

Sujal Shah: 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.

Terrence Curtin: You know, thank you Sujal, and I first off want to say Happy New Year to everyone, and thank you for joining our first quarter earnings call.

Terrence Curtin: As you all are well aware, we continue to be in an uneven global economy where we see pockets of strengths and pockets of weakness.

Terrence Curtin: Within this backdrop, the results that our team delivered for the first quarter are very straightforward.

Terrence Curtin: On the top line, our sales organically were in line with our expectations.

Terrence Curtin: Our adjusted operating margin and EPS were records and ahead of our guidance.

Terrence Curtin: and our free cash flow was a record for the quarter, all driven by the execution of our teams.

Terrence Curtin: Our orders were slightly ahead of our expectations and accelerated both year over year as well as sequentially.

Terrence Curtin: which gives us confidence in our guidance for the sequential improvement in our top line in the second quarter and further growth in our industrial solution segment as we go through the year.

Terrence Curtin: The one area that was not in line with our expectations was the impact of a stronger dollar, which will impact us through this year.

Terrence Curtin: I am proud of our team's performance and what we controlled to deliver earnings and free cash flow that were above our expectations.

Terrence Curtin: Now as we expect this environment to remain dynamic, I want to reiterate four key areas that we're focused on.

The first one is innovation.

Terrence Curtin: and even with the unevenness that we see, our customers are continuing to innovate on next-generation architectures and what we do from a connectivity and sensing perspective is a key enabler.

Terrence Curtin: We are supporting their effort in ramping key programs that drive application growth.

Terrence Curtin: And you're going to hear about them, whether they're the secular drivers such as high-speed connectivity for AI programs, hardening and monitoring applications of the energy infrastructure, next-generation vehicle architecture, as well as continued ramps to support our AD&M customers.

Terrence Curtin: The second thing that's important that we're focused on is making sure we're executing on the operational levers to drive further adjusted margin expansion and you see this in our first quarter results as well as our guidance.

Terrence Curtin: Thirdly, an area that we've been working on a lot, and we've invested in, is really making sure we benefit from our global manufacturing strategy.

Terrence Curtin: And this includes the localizations that we've done, where our customers need China Plus One strategies, and also on the tariff subject, we will deploy our playbook that we exercised during the 2017 tariff cycle, and we're prepared to do so if tariffs are implemented.

Terrence Curtin: And the fourth key, and lastly, is continuing to drive our strong cash generation model that enables optionality of returning capital owners as well as capitalizing on bolt-on M&A opportunities as they occur.

Speaker Change: So with that as an overview, I'd like to get in the presentation, if you can move to slide three, and let me discuss some additional highlights and our guides for the second quarter, and then Heath will provide further details.

and the other.

Speaker Change: Our first quarter sales were $3.84 billion, which were flat year over year.

Speaker Change: Adjusted earnings per share of $1.95 was ahead of our guidance and up 6% versus the prior year.

Speaker Change: and Adjusted Operating Margins were a record at 19.4%, up 30 basis points over last year and up in both segments.

Speaker Change: This reflects broader growth within the industrial segment, including increased momentum in artificial intelligence programs.

Speaker Change: We delivered record first-quarter free cash flow of $674 million and this was up 18% year-over-year and this demonstrates the high quality of our earnings.

Speaker Change: And as we look forward, we are expecting our second quarter sales to increase sequentially to $3.95 billion.

Speaker Change: On a year-over-year basis, we expect to be impacted by unfavorable currency exchange headwinds of over $100 million.

Speaker Change: Adjusted earnings per share in the second quarter is expected to be around $1.96 which will be up 5% year-over-year and this includes a six cent headwind from currency exchange and tax versus the prior year.

Speaker Change: Stepping away from the financials for a second, we are pleased to be included in the Dow Jones Sustainability Index this quarter for the 13th year.

Speaker Change: This designation continues to demonstrate our dedication to sustainable business practices that is expected by our customers and also provides value to our owners.

Speaker Change: So with that as an overview, let me get into the order trends, and you can see that on slide four.

Speaker Change: In the quarter, we saw orders grow to $4 billion, and our book-to-bill was 1.05.

And our transportation segment orders came in as we expected.

Speaker Change: While in the industrial segment, orders were up 15% on a sequential basis, supporting our outlook for sequential organic sales growth in the second quarter.

Speaker Change: In transportation, our auto orders came in as expected, reflecting continued growth in Asia and offsetting softness in Western car production.

Speaker Change: When you look at the orders decline for the segment, it was driven by weakness in commercial transportation and sensor and markets.

Speaker Change: Turning to the industrial segment, all of our business had a book-to-bill over one in the quarter and it supports our growth outlook.

Speaker Change: We are continuing to see sales growth in aerospace, defense, and marine, as well as in energy, and our orders in automation and connected living are indicating stabilization in factory automation and markets.

Speaker Change: We've also talked to you about our Momentum and Artificial Intelligence applications and this is continuing.

Speaker Change: And just to highlight, when you look at our digital data networks business over the last three quarters, our total orders in the last three quarters for this business exceeds $1.5 billion, which sets us up for the growth that we've talked to you about.

Speaker Change: Now, let me get into year-over-year segment results, and I'll start with transportation on slide 5.

Thank you.

Speaker Change: Our auto business performed as we expected and was down 3% organically in the first quarter, with strong growth in Asia being offset by declines in western regions.

Thank you. It's been a pleasure.

Speaker Change: As we look forward, we continue to expect global auto production to be down 1-2% in fiscal 2025. And we continue to expect our content growth to be at the low end of the 4-6 point range for the year.

Speaker Change: While we expect overall auto production to decline this year, we expect continued growth in hybrid and EV production, with now roughly 80% of that production growth this year occurring in Asia, where we are strongly positioned.

Speaker Change: We also expect further electrification of the vehicles and realize when you get electrification benefits that's completely powertrain agnostic.

Speaker Change: and we're seeing increased content momentum driven by software-defined vehicle architectures, which require more data connectivity and provide content growth for us.

Speaker Change: And really to give you impact of what the momentum we're seeing, you know, I'll share with you, we just secured over a billion dollars of new design wins with a leading Chinese auto OEM for their next generation platform that is entirely around data connectivity in the car.

So let me talk turn to the commercial transportation.

Speaker Change: And as you can see on the slide, we were down 12% organically as we expected, and this is driven by heavy truck production weakness in Europe and North America.

Speaker Change: We do expect that demand trend will improve later in this year.

Speaker Change: And in our sensors business, the sales decline was driven by weakness in the broader industrial markets in Europe and North America.

Speaker Change: You know, from an adjusted operating margin perspective for the segment, our team's executed very well, and it's reflected by the adjusted operating margins that were 21.3% in the first quarter.

Speaker Change: Now, with that as an overview of transportation, let me move to the industrial solutions segment on slide six. And this segment grew double digits in the quarter.

Thank you.

Speaker Change: Starting with our digital data networks business, it grew 50% organically and our design ones are reflecting increased momentum.

Speaker Change: We now expect revenue from artificial intelligence applications to be above the 600 million dollars in fiscal 2025 and it reflects strong growth and leadership in multiple hyperscale AI platforms across the customer base.

Speaker Change: In automation and connected living, and this combines our former industrial equipment and appliance businesses, we declined 5% organically, driven by ongoing weakness in factory automation applications in Western geographies, especially in Europe.

Speaker Change: One nice thing is that we have seen order patterns begin to reflect stability in this end markets and we've seen increased strength in Asia in the automation area.

Speaker Change: In AD&M, our sales were up 15% organically, driven by broad growth across commercial airspace, defense, and space applications.

Speaker Change: In these markets, we continue to see favorable demand trends and ongoing supply chain recovery, and we expect the momentum in these markets to continue.

Speaker Change: Our medical business in the quarter declined 25% as we expected, and this resulted from inventory normalization by our customers that we're seeing as the broader medical supply chain has improved, and we do expect that our medical business will show sequential growth as we move throughout this year.

Speaker Change: And the last market that I want to highlight is our energy business.

Speaker Change: Sales were up 7% organically driven by strength in all regions and ongoing momentum and utility scale renewables along with investments that are being made to support increased power generation needs as well as hardening of the infrastructure.

Thank you.

Speaker Change: I also want to highlight that within the quarter, we acquired Harger, which is a North American leader in lightning protecting and grounding solutions that are foundation to grid reliability and a complementary to our existing product set.

Speaker Change: This acquisition expands our portfolio for grid reliability and connectivity solutions of renewable power, utilities, and industrial power applications. And I welcome the employees of Hargard to our TE team.

The Greatest, Sujal Shah, Heath Mitts,

Speaker Change: You know, for the industrial segment, adjusted operating margins were 16.8%. They expanded 100 basis points year over year, driven by the higher volume and strong operational performance.

Speaker Change: We do expect all businesses in the industrial segment to grow sequentially on an organic basis in the second quarter, as I highlighted earlier. Now, with that as an overview of our performance, let me hand it over to Heath who will get into more details on the financials and our expectations going forward. Heath Mitts

Heath Mitts: Thank you, Terrence, and good morning, everyone. Please turn to slide 7.

Heath Mitts: For the quarter, adjusted operating income was $745 million with an adjusted operating margin of 19.4%.

Heath Mitts: This was a record performance with year-over-year expansion in both segments, as Terrence mentioned, and it reflects strong execution by our teams to deliver on operational levers, including savings from past restructuring initiatives.

and the New York Times. Thank you. Thank you.

Heath Mitts: GAAP operating income was $690 million and included $5 million of acquisition related charges and $50 million of restructuring and other charges.

Heath Mitts: Q1 restructuring charges specifically were 43 million, reflecting continued footprint optimization efforts.

Heath Mitts: I expect restructuring charges in fiscal 25 to be around a hundred million level, same as we said 90 days ago.

Heath Mitts: Adjusted EPS was $1.95 and GAP EPS was $1.75 for the quarter and included a tax charge of four cents and restructuring acquisition and other charges of 16 cents.

Heath Mitts: Again, as we guided 90 days ago, the adjusted effective tax rate was 23% in Q1 and we expect Q2 to be at this 23% level as well.

Heath Mitts: We do continue to expect the full year tax rate to be in the 23 to 24 percent range.

Heath Mitts: As a reminder, the increased ETR versus the prior year is primarily related to the impact of Pillar 2 global Mentex.

Heath Mitts: But as always, and importantly, we expect our cash tax rate to be well below our adjusted ETR.

Now if you turn to slide 8.

Heath Mitts: We deliver strong adjusted margin and EPS expansion along with record free first quarter free cash flow with sales that were effectively flat year over year.

Heath Mitts: Sales of 3.84 billion were unfavorably impacted by increased currency exchange headwinds in the quarter that impacted us by roughly 50 million versus our guide.

Heath Mitts: Due to the strengthening of the US dollar against other currencies, we now expect year-over-year currency exchange headwinds to exceed 300 million for fiscal 25, with roughly a hundred million of impact in each of the next three quarters.

Heath Mitts: Adjusted operating margins were 19.4% in the first quarter, expanding 30 basis points.

year-over-year.

Heath Mitts: Adjusted earnings per share were $1.95 up 6% year-over-year driven by margin expansion and included headwinds of four cents from the higher tax rate.

Heath Mitts: Turning to cash flow, cash from operations was $878 million and free cash flow was $674 million.

Terrence Curtin: In the quarter, we deployed roughly $500 million to shareholders through share buybacks and dividends, and we utilized $325 million for bolt-on acquisitions in the industrial segment, including the Harger acquisition that Terrence mentioned earlier.

Terrence Curtin: Our cash generation and healthy balance sheet gives us more optionality with the use of capital. We will continue to have strong return of capital shareholders, but as I mentioned last quarter, we are also looking to pursue more bolt-on acquisition opportunities at attractive valuations.

Terrence Curtin: Now, before I turn it over to questions, let me reinforce that we expect to build upon our past performance to deliver strong financial results in 2025.

while we cannot control the dynamics of our markets.

Terrence Curtin: We are well positioned to benefit from the secular growth trends in the markets we serve while continuing to deliver strong operational performance to expand margins and drive strong cash generation this year.

So with that, let's open it up for questions, Sujal.

Speaker Change: Okay, Krista, can you please give the instructions for the Q&A session?

Speaker Change: At this time, I would like to remind everyone to ask a question. Please press star 1 on your telephone keypad.

Speaker Change: 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 1 to return to the queue.

Speaker Change: Your first question comes from the line of Mark Delaney. Your line is open.

Mark Delaney: Yes, good morning. Thanks very much for taking the question. I was hoping to better understand order trends and if you could speak a bit more around orders by end market and the linearity of orders you saw this last quarter and perhaps how that's informing your 2Q guidance. And just while you're talking about orders by end market, and we're recognizing the full year AI outlook is now for over $600 million, and that's strengthened, but just here in the shorter term, as you look at the order patterns, have you seen any volatility either

Thank you.

Mark Delaney: you know, when we think about them coming in stronger, you know, it is why we feel good about the sequential improvement we're going to see, and ongoing broad momentum in the industrial businesses to build sequentially. Certainly AI, as you talk about, but, you know, more broadly, and I'll talk about that.

So also I want to highlight regionally what we're seeing.

Mark Delaney: You know, we are continuing to see orders reflect broad strength in Asia.

Mark Delaney: and even when you look at the orders growth that we saw.

You see, Asia has been accelerating.

Mark Delaney: Weakness continues to be in Europe broadly, especially, you know, when you think of auto and in the industrial space and the heavy truck space where we play. And, you know, so you see that unevenness with United States and the Americas sort of being a little bit more neutral.

Mark Delaney: To your question about the industrial segments and the markets, what's important is every business had a book to build above one.

and, you know, we do have the momentum in A.I.

Mark Delaney: And, you know, our AI orders did grow nicely in the quarter, but the industrial segment, if you take out the AI orders, or orders grew 10% year over year in that segment, and 7% sequentially even without the AI orders that we continue to benefit from.

Mark Delaney: In aerospace, we continue to see growth as commercial air still is recovering, defense is strong, and while space applications are smaller, they are the fastest growing applications that we have in that area that you see the strong double-digit growth in aerospace.

Mark Delaney: In energy, it's a business that we've been investing in, we've talked about the M&A, but you just continue to see continued order momentum around the utility applications, where you see increased capex going into the utilities, and it's pretty broad.

Mark Delaney: The area that, you know, a positive sign, even though stability doesn't sound positive, is the automation and control space. It's an area where we have seen orders moving sideways. We've seen acceleration in Asia. Certainly Europe in that area continues to be weak.

Mark Delaney: But it's an area that sort of says it's good to finally see some stabilization in the automation and control area that, you know, maybe we can see some improvement later in the year.

you know, in transportation.

Mark Delaney: I talked about what we're seeing in auto production. We do expect auto production.

to be down for the year.

Mark Delaney: But the orders are sort of tracking that, and we still expect to be at the low end of the four to six percent of our growth over market there, and really the weakness we saw was in the heavy truck market, and we hope that will improve later in the year. So I think that gives the color that you asked for, and thanks for the question, Mark. Thank you, Mark. We have the next question, please.

Speaker Change: Your next question comes from the line of Scott Davis with Malias Research. Please go ahead, your line is open.

Hey, good morning guys. Hey, good morning Scott.

Scott Davis: It seems like you guys have done a really nice job managing margins and actually improving margins in a relatively low-growth environment.

Speaker Change: How do you guys think about incremental leverage, and let's just focus on TS, because I think industrial is a little bit more clear.

Speaker Change: How do you think about incremental leverage in TS when we get a recovery?

Speaker Change: Costs that need to come back proportional to that recovery or do you expect to see kind of outsized incrementals when You know again, it may not be till 2026 or whatever, but whenever we do see a volume recovery there

Heath Mitts: Scott, this is Heath. I'll certainly take that and I appreciate the question. Listen, we've made a lot of strides in the TS margins. If you go back a few years, we were always talking about a target margin of 20% and so forth.

Heath Mitts: We don't, you know, we're comfortable that we're at that level. Certainly Q1 was probably, is outsized, which is pretty common as you think about our seasonality.

Heath Mitts: Our china factories are always humming very strong in the first quarter.

Heath Mitts: And you saw that last year as well. So, but we're confident that we're gonna be at our 20% number or better by quarter as we work our way through the year. So we're feeling good about.

Heath Mitts: automotive element of that. The element of the growth side as we move through this year and obviously position ourselves for next year are also the other components of TS.

Heath Mitts: of the transportation segment. The commercial transportation business, which as you're aware is a nicely profitable component of our

Heath Mitts: portfolio, you know, has been depressed with heavy truck builds and construction and mining and ag equipment.

being in the rough part of the cycle.

Heath Mitts: As that returns to growth, that would be where we're going to get a lot more of the leverage from.

Heath Mitts: And, you know, we're working our way through it, we're holding our head on that, but that's where we're going to see some of the leverage elements as we work our way into 26, because that levers up very nicely.

Heath Mitts: From a cost perspective, you know, the transportation segment, particularly automotive and in Europe, has been a heavy focus of some of our footprint activities over the past few years.

Heath Mitts: And so, we are getting the benefit of being able to tolerate low or sometimes negative growth environments because we've reduced some of that fixed cost structure.

and particularly in Western Europe.

Heath Mitts: where we're probably too dependent if you go back over the past five or ten years. So, that's been a concerted effort and that journey is not quite over. But certainly, you see it in the results now where our automotive growth is down 3% year over year, yet in aggregate, the transportation margins are quite solid. So, we feel good about that.

Heath Mitts: Hopefully that answers your question, Scott. Okay, thank you, Scott. We have the next question, please. Your next question comes from the line of Amit Daryani with Evercore ISI. Your line is open.

Thanks a lot, good morning everyone.

Amit Daryani: You know, Terrence, you folks talked about AI revenues exceeding the $600 million target for the year that you had actually given last quarter. I was just wondering if you could talk about, you know, what is driving the strength here? Is it, you know, better demand from hyperscalers or silicon companies? And you know, is this more broad-based? Are you seeing more sharing games that's helping you? Anything that can provide some clarity on the levers to the upside you're seeing on that $600 million target would be helpful. And then, Heath, maybe just related to this, as AI rams, how should we think about the

I speaking.

Heath Mitts: Yeah, sure. Thanks, Amit. I appreciate the question. You know, first off being, you know, when you look at it, you know, our AI revenue in the quarter,

Heath Mitts: doubled already in the quarter, and we did $300 million last year.

Heath Mitts: We told you we're going to be above 600 million, and what is nice, it is a broad group.

Heath Mitts: you know, of the hyperscalers, you know, when we think about...

Heath Mitts: where we positioned ourselves and it is about how you play in that ecosystem with the other semiconductor players that are in there and the hyperscalers. It isn't just one program, it is pretty broad and it's consistent with what we told you.

Heath Mitts: Now, you know, what is nice, the orders keep on layering in, you know, the momentum that we've talked to you about.

Heath Mitts: as we started talking about this a year and a half ago.

Heath Mitts: continues. Our teams are very focused on the ramp, you know, the ramping of these programs that we have across the customer base.

Heath Mitts: is really a key focus and I think in many ways, upside to the number we talked about, will really be driven by how we execute on the ramps, which is what we like.

Heath Mitts: The other thing is you sort of talk about share. Our share has not changed. It sort of stays in that 30-35% range, and that's at the level of the programs that we're winning. But it also shows how big the opportunity is when you think about the benefit that our industry has from bringing the connectivity to this technology.

Heath Mitts: and the major connector companies are going to have the share because of the complex technology requirements that we have.

Heath Mitts: On the margin, it's similar to our cloud margin products that we talked about a few years ago. We are in ramp, so these are early ramps. But margin, you're going to see the volume benefit as we move forward, and you'll see it in the IS margin as well as we continue to move it up.

Heath Mitts: feel that we can continue to scale it and it's going to continue to drive momentum not just this year but into next year.

Speaker Change: Okay, thank you, Amit. Can we have the next question, please?

Speaker Change: Your next question comes from the line of Wamsi Mohan with Bank of America. Your line is open.

Wamsi Mohan: Yes, thank you so much. I was wondering, Terrence, if you could talk a little bit about some of the levers that you can use if tariffs do get implemented. I think you noted, you know, some of the advantages you have around your manufacturing strategy and localization.

in your prepared remarks. And secondarily...

Wamsi Mohan: Cash flow has been very strong. We're entering kind of what is at least broadly perceived to be a market that's more favorable for M&A. I would be curious to get your thoughts around, I heard you say bolt-on, but how open is TE to doing larger deals as well? Thank you so much.

Heath Mitts: Sure, let me take the first part of it and then I'll let Heath take the cash flow piece of it.

You know, first off...

Heath Mitts: Let's just start with a little bit of a baseline for everybody about our footprint. And I know we've talked about our footprint historically.

Heath Mitts: from How We Reposition. He's even talked about some of the things we've done in transportation.

Heath Mitts: But the first thing is we've been focused a lot on localization within region. So, you know, our business is not one where you make in one region of the world and that's the manufacturing center you ship to.

Heath Mitts: our footprint is very much aligned to our customer supply chains and we've worked very hard to say how do we make sure it's right to supporting our customers in region and 80% of what we manufacture is in region.

So, it is very focused on our customers.

Heath Mitts: And as we do work, we feel we're playing from a good offensive position, but each customer supply chain is very nuanced and we continue to talk to them of how, no matter what comes out at us from a tariff perspective, they would adapt so that we can leverage what we have.

or DAPT.

Heath Mitts: So, with that as a little bit of an overview, I think the key that you should all think about as we're thinking about it is, you know, we've dealt with terrorists already in 2017.

Heath Mitts: You know, it impacted, we had about $300 million of tariff costs.

Heath Mitts: that we worked with our customers on, whether that be logistical lanes, whether that be moving tooling from a manufacturing perspective, and also in the areas where we couldn't find solutions with our customers or their choice, it was passing along the tariff cost to our customers via price.

Heath Mitts: and, you know, that playbook that we went through back in 2017 is what we're prepared to do and we've been preparing to do depending what we get hit with and we don't know what what what it could be.

Heath Mitts: So it is important staying close to the customers and you know we recovered the cost last time through all those options and leveraging our footprint. We think we'll do the same thing this time and we're prepared to. So Heath with that maybe on the tariff front why don't you cover the cash flow and M&A topic.

Heath Mitts: Yeah, you know Wamsi, obviously our cash flow, we've stacked up a couple of years of record free cash flow as a company and it's given us a lot of optionality. We have returned.

a fair amount to our to our owners.

Heath Mitts: through dividends and share repurchases, but we've continued to be active in M&A.

Heath Mitts: We use the term bolt-on, really referring, just as a reminder, referring that we're looking for things that are close to home or close to the areas that we know well.

Heath Mitts: versus a platform that may be a new Space Force. So I don't want to confuse bolt-ons with size. Sometimes bolt-ons can come in as a small to mid-sized company. Sometimes those opportunities are much larger.

Heath Mitts: And we're very active right now. We have seen the pipeline increase. We have resourced it.

Heath Mitts: Let's just say we've enhanced our resources around that in very particular areas where we see fragmentation and opportunities for us to go and acquire things. And it's an active environment. I'd say it's more active over the past six months in terms of discussions and deals coming to market than we had seen prior for a while. So I think there's some good opportunities out there and you should expect us to be active as we move forward.

to move forward here.

Speaker Change: All right, thank you, Omzi. Can we have the next question, please?

Speaker Change: Your next question comes from the line of Stephen Fox with Fox Advisors. Your line is open. Hi, good morning. I was wondering if you could just...

Speaker Change: Maybe talk a little bit more about the industrial markets not away from the cloud business, but traditional automation and controls

Speaker Change: You've mentioned sideways stabilization. Is that much different from what you were seeing 90 days ago? How encouraged are you that some of these trends can improve as you go through the year in any particular region?

Speaker Change: The stabilization, I would say, is good that we're seeing. I would tell you, last time we were together, I would say we're probably a little bit more in the mode of hoping for stabilization.

Speaker Change: But we were still seeing not as many strong spots in the orders as we would like and also in discussions with our customers

Speaker Change: You know when we sit here, we truly have stabilization in our orders I also would tell you as we look through a lot of this market goes to our distribution partners It does look like the inventory elements are more behind us than in front of us And we've all been trying to get our arms around that

Speaker Change: And the other thing is, you know, what are those inflection points that are upward that we're seeing?

Speaker Change: I would tell you, when you look at our customers in Japan and in China, the larger automation where we serve them directly, I would tell you for the past couple of quarters, you are seeing upward order momentum.

So, that is a positive in Asia.

Speaker Change: I would say the U.S. customers we have here are probably more sideways, but that's a positive versus where it's been. And our European customers are continuing to show weakness. So overall it's stable, I think. It's not surprising when you think about the geographic mix, what we're seeing in different economies and investment levels.

but stabilization is the first step.

Speaker Change: and certainly when we think about, you know, what is needed when you think about productivity, if people do things that are needed around tariffs, about reshoring, these are all areas that we think are positive drivers where we play, which is mainly in the discrete. And let's face it, we've been a company that's been investing CapEx and investing ahead, and we think other companies are going to have to do it.

Speaker Change: Net-net, I think it's more positive than it was, but certainly it's not a full upward tilt in every region on the order book by any means. It's more sideways globally with unevenness like I talked in the early part.

Steve: So Steve, I hope that adds color, but I think that's an area that we can build off of as we move through this year.

Speaker Change: Okay, thank you, Steve. Can we have the next question, please?

Speaker Change: Your next question comes from the line of Colin Langan with Wells Fargo. Your line is open.

Speaker Change: Hey guys, this is Kostas Tassoulas filling in for Colin. I just wanted to double-click on your LVP assumption down negative one to one and a half, growth over markets, lower into the four to six range. Could you just double-click on North America, Europe, and China?

Sure. Thank you for the question.

Speaker Change: You know, first off, being as we said on the call, we do expect auto production this year to be down a point or two. It was down 3% in the first quarter, and, you know, the first quarter we saw very strong production growth in Asia.

We saw Europe was down 10% in auto production.

Speaker Change: and we saw North America being down a little bit in auto production. So you see the unevenness in the production.

Speaker Change: You know when we think about the four to six percent range, we have said we're going to be at the low end of that range.

Speaker Change: I do want to remind everybody, when it comes to Europe, Europe is our highest content per vehicle we have, so...

Speaker Change: We still believe we can be at the low end of that range of the four to six growth over market really driven out of Asia.

Speaker Change: And the other thing is, I know the discussion around electric vehicles.

in the West is one where there's lots of questions.

Speaker Change: But you know on the planet there's going to be about 4 million more electrified vehicles made And 80% of those are going to be in Asia where we have a very strong position So we still will benefit from that content increase in Asia as the Western OEMs do their transitions

Speaker Change: The other thing I would say, electronification, which we've always talked about, and, you know, that includes what happens around, you know, 48-volt introduction into a vehicle, all the safety features, autonomy features, zonal compute designs that get put in, and certainly how software-defined architectures occur. All of that creates need for connectivity.

and certainly we're seeing an acceleration on that.

Speaker Change: That also gives us confidence to be at the low end of that range. And, you know, I mentioned the design win that we had just recently with a large China OEM. That sort of shows the level of that content increase. So, this year we do expect the production environment, you know, to be weak in Europe. We do expect the EV environment to be weak in Europe.

Speaker Change: North America, you know, slightly down. The growth of vehicle production and then the electrified trend will be driven at Asia where we have a great position.

Speaker Change: Okay, thank you, Costa. Can we have the next question, please? Your next question comes from the line of William Stein with Truist Securities. Your line is open.

Great, thanks for taking my question. You're welcome.

Speaker Change: Hey, thanks. I'd like you to maybe take my opportunity a little bit It may be one level down. We've heard quite a bit

Speaker Change: about cross-licensing technology in this area. I don't think that's new to the connector industry so maybe you can confirm that or put it in context and maybe also help us understand the effect on revenue and margins when there's

Speaker Change: when there's cross-licensing of IP going on in that space. Thanks so much.

Speaker Change: Yeah, sure, Will. A couple of things. When we do have cross-licensing, and you have seen it over time in the telecom and datacom space, so you're right, this is not new. And it's an area that, as you have ramps, you know, our customers ask for, hey, I want to make sure I have security of supply.

Speaker Change: and you know we have cross-licensed with competitors over time to really make sure we help the customers with these ramps.

Speaker Change: So when you sit there, you know, you have a sharing of share, obviously. It is a collaborative, but it's also, let's face it, you know, we have to cross-license each other's technology, really make sure we help the customer get to the solution.

Speaker Change: and so I actually viewed something that's about an exciting growth trend.

Speaker Change: And let's face it, as we cross-license to each other, we have to make sure we have partners that can meet the ramps.

Speaker Change: of the volumes that are coming and it's really something that's been very traditional.

Speaker Change: in the interconnect space, and the data comes based for a long time. Okay, thank you, Will. Can we have the next question, please?

Speaker Change: participating in. How do you guys think about this AI opportunity? I think you've outlined it as 1 billion.

Speaker Change: perhaps, you know, in a few years, clearly that's accelerating or seems to be accelerating here just given what you guys are forecasting for fiscal 25. But longer term, how do you think about co-packaged optics and how TE plays in that space? Thank you.

Speaker Change: First off being while we do play in optics, we don't play in co-package optics. You know that that is a capability we do not bring

Speaker Change: But even when you get into that, you have connectivity you're going to need that will still be on copper.

Speaker Change: and, you know, let's face it, that is, you know, our strength.

Speaker Change: And when you look at the architecture, if you do have customers that are going to experience what happens close...

Speaker Change: to the chip what happens further away, and over time it will be a hybrid approach.

Speaker Change: So, when we think about what we've gone out with a guide, that includes that you will have evolution of the architecture, and when you get into things like that, it just means you're going to have harder problems you have to solve, which typically means that's where engineers do their best work, and we get excited as the architecture gets evolved.

Speaker Change: Okay, thank you, Asya. Can we have the next question, please?

Speaker Change: Your next question comes from the line of Luke Despaired. Your line is open.

Speaker Change: Good morning, thanks for taking the question. Terrence, hoping you could just...

Speaker Change: You mentioned that major award in China, but maybe if you could just zoom out to the pipeline more broadly.

Speaker Change: especially in Asia where that trend is ahead of the West and maybe would it be possible to put some guardrails around CPV terms?

Speaker Change: as well as a lot of attention on electrification in terms of incremental content, but maybe this could be an underappreciated driver. Thank you.

Speaker Change: No, Luke. No, a couple of things. You know, when we've always talked to everybody about content, we've always sort of said, you know, as the electrified powertrain moves, you know, that plays a big chunk of the content, but there's this other bucket that's electronification, that is just as important.

Speaker Change: And as you said, when you think about software-defined, our Asian customers are clearly leading the way here, and we continue to see that momentum.

Speaker Change: and it's an area that we've always been excited about. You know, you're really looking here, how do you get data connectivity, Ethernet in a car, that really allows all the software definitions as mechanical buttons move and so forth get eliminated.

Speaker Change: You need to have that software-defined architecture that allows that configuration to occur. And let's face it, there needs to be connections that go into all the modules to make sure this comes to life.

Speaker Change: And what's been nice is, you know, our product set here has continued to grow. You know, it's up to about $600 million this year, which doesn't even include the wind. And you can get a feel of what that does already on a content per vehicle. And we only expect that that's going to accelerate.

Speaker Change: And even when you think about that billion-dollar of wind we've gotten recently from one customer.

You know, those winds are accelerating.

Speaker Change: and, you know, it's adding another content lever that supports our 4-to-6.

Speaker Change: and it's one of the things that we get excited about and we'll continue to share thoughts about how those winds continue to impact us as that acceleration continues to occur. Okay, thank you, Luke. Can we have the next question, please?

Speaker Change: Your next question comes from the line of Joe Giordano with TD Cowan. Your line is open.

Joe Giordano: Hey guys, I think we've talked a lot on the major subjects. So maybe If I could just ask quickly on industrial equipment. I know you've mentioned orders suggest stabilization. Are you seeing any evidence?

of like...

Joe Giordano: that orders need to ramp from here or are we just at a level that seems consistent with end demand? And then similarly on medical, a pretty substantial decline there in the quarter and much different than the last couple that we've been seeing here. So is that the beginning of something that you're seeing there or is that a one-time correction and we're back to a normal rate? How do you view that market?

Joe Giordano: Sure, Joe, two very different questions. Joe, on industrial equipment, I think what we're seeing is stabilization, and we would like to see other regions strengthening more.

Joe Giordano: I think from a modeling perspective right now, we'll get a little bit of sequential improvement and then hopefully that accelerates, but I would say have a view of stabilization right now.

Joe Giordano: You know, on a medical, I would say that's a one-time event. You know, we did expect this, you know, we had...

Joe Giordano: and across the medical device we did see them take it down and then we think that as we move forward you're going to see sequential improvement off the first quarter. You shouldn't assume it stays there and we've seen orders already improve. Booked a bill well above one but it really was a pocket here in the supply chain that'll build sequentially back up as we move through the year.

Speaker Change: So thanks for the question, Joe. Thank you, Joe. Can we have the next question, please?

Speaker Change: Your next question comes from the line of Sari Boroditsky with Jeffreys. Your line is open. Hi, good morning. So maybe just building on some of the margin commentary that you've made. You know, you spoke about some of the restructuring charges related to footprint consolidation this year. Maybe talk a little bit about the benefit of that restructuring for margins for 2025 or maybe 2026. Thank you so much.

Speaker Change: Our footprint journey has been going on for several years now, and a lot of it is

Speaker Change: the continuation of moving legacy western or more expensive production areas to lower cost regions.

Speaker Change: and that has continued, that will continue. You see it currently in our, certainly as we can leverage modest to negative growth in our transportation segment, yet the ability to expand margins.

Speaker Change: So, you know, that is a global comment, but certainly most of our restructuring there has been a little bit more focused in Europe as we've moved away from Western Europe into Eastern Europe and in Morocco.

Speaker Change: For the industrial segment though, the industrial segment is obviously a little bit more fragmented with five different business units within that segment that we report on here.

Speaker Change: We will see more growth there this year, and to Terrence's point, some of that's obviously driven by the AI activity within our DDN business, but it's also more broad-based across other areas like energy and aerospace and defense.

Speaker Change: and then, you know, modest recoveries and things like it are.

Speaker Change: our ECL business which is the the old industrial equipment and appliances. So we are expecting not just top-line support there but pretty significant margin improvement as we work our way through the year.

Speaker Change: and we feel good about that. We know we're below where we need to be from an entitlement perspective there.

Speaker Change: at that segment level, certainly getting some help from the factory automation side of industrial equipment.

Speaker Change: which is a nice margin business, will help in that journey.

Speaker Change: But, in the meantime, there's some things that we've done on the cost side and otherwise to mitigate some of this as we start to pull ahead margin-wise within that segment. I think when you sit back, and we're sitting back at the end of the year, you'll see more margin expansion there than you will anywhere else in the company.

and the

Speaker Change: All right, thank you, Sari. Can we have the next question, please?

Speaker Change: Your next question comes from the line of Samik Chatterjee with J.P. Morgan. Please go ahead. Hi, thanks for taking my question. Just a quick one here. I know multiple times in your prepared remarks you mentioned that you expect commercial vehicles to improve.

Speaker Change: during the year and that to drive transportation margins to be better. Can you just sort of highlight what is driving that confidence, what are you seeing in data points to inform that view? I mean, just would help to understand sort of the indications that you're getting. Thank you

Thank you.

Speaker Change: Yes, the ICT business, and I think we've been pretty public with it, is a nice margin business and has been for quite a long time.

Speaker Change: It does cycle. It cycles with heavy truck production. We're well positioned globally there, so sometimes we do feel the impact of certain regions as they go through different parts of their cycle, both directions.

Speaker Change: and so my comment earlier was really referring to even though there's the the top line and is there's a dilutive impact there coming from that part of the of the segment

relative to, you know, where it fits in.

Speaker Change: We've been able to hold, you know, our margins okay, but as we start to see growth in that segment...

Speaker Change: I'm sorry, in that business unit, the commercial transportation business unit.

Speaker Change: hopefully towards the end of this fiscal year, but certainly where we see things starting to line up.

with our customers for 2026.

Speaker Change: we would expect some outsized margin support there just given how it weights into that segment. We're not spiking the ball now, we're not calling for a recovery in the next quarter or two.

Speaker Change: but certainly some of the discussions that we're seeing and there is a little bit of a longer view.

Heath Mitts: There is typically pull forward of demand before that, and that's one of the elements as we look further out in the year and into 26, we would expect that that's when that cycle you'll probably see some benefit from it to Heath's point.

Speaker Change: All right, thank you Samek. Can we have the next question please?

Speaker Change: Your next question comes from the line of Joe Speck with UPS. Please go ahead.

Joe Speck: Thanks so much. Two quick converging questions for me. First, in auto, you know, we know typically that some recorder companies tend to get some engineering recoveries from the customers. I was wondering if that occurred at all and helped.

determination functions, so by how much, and...

Speaker Change: From the old reporting segment, we could surmise that, you know, digital data networks is an above-average segment margin business. You talked about how you're investing ahead, the need to invest, and I'm just wondering if, as you sort of continue to see strong AI growth, whether we could actually see a little bit of margin variability from that growth, depending on the pace of investment and when business comes on.

Speaker Change: A couple of things. You know, we have been investing for these ramps, so let's take the second part of your question, Joe, and the first part I'm going to ask you to...

Re-ask it, it broke up a little bit.

Speaker Change: But on DDN, you know, you've seen where it was in the cloud cycle. We have been investing ahead to make sure we're adding capacity to really, you know, handle the ramps we have, you know, doubling businesses, you know, does create a lot of execution and investment in the head that we have been doing that. And you know, there will, programs will be lumpy at times.

Speaker Change: and you'll see that in our orders already so you know you will see that impact on our margin in this segment. Can you talk about the transportation question again? I missed that one around December.

Speaker Change: Sorry, you know, in auto, typically we see in the December quarter, sometimes companies get some engineering recoveries from their customers. I was just wondering whether that that occurred or helped the market.

at all.

Speaker Change: No, we do not have that. When you look at the first quarter margin, he said it well earlier.

Speaker Change: You know, it is the highest production period of the year, mainly out of Asia. Our plants really crank at that time and, you know, we get the volume benefit from it. And if you look back in many years, our first quarter margin is a little bit hotter than other times of the year, and it's really due to Asia. It has nothing to do with engineering reimbursement, Joe.

Speaker Change: All right. Thank you, Joe. Can we have the next question, please?

Speaker Change: Your next question comes from the line of Christopher Glenn with Oppenheimer. Please go ahead.

Thank you.

Thank you.

Thank you.

Thank you.

Do we have any answers?

Thank you.

Speaker Change: Okay, I think we're having some trouble with Chris's line, so Chris, we will circle back with you later. But if there's no further questions, I want to thank everybody for joining us this morning. And if you do have more questions, please contact Investor Relations at TE. Thanks, everyone, and have a nice day. This concludes today's conference call. Thank you for your participation, and you may now disconnect.