Q2 2025 TE Connectivity Ltd Earnings Call
Speaker Change: Everyone, thank you for standing by and welcome to the TE Connectivity 2nd quarter
Speaker Change: At this time, all lines are in a 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 followed by one on your telephone keypad. As a reminder, today's call is being recorded. Thank you very much.
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 second quarter results and our outlook for our third 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 statement concluded in today's press release.
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 open and comment.
Thanks, Sujal, and thank you everyone for joining us today.
Terrence Curtin: As you are all well aware, we continue to be in a dynamic global environment that has got more complex over the past month due to trade dynamics. Thanks.
Speaker Change: As Heath and I will cover on today's call, we are performing well and continue to execute on what we can control to deliver strong financial performance, as is evident in our second quarter results we publish this morning.
Speaker Change: But before I get into the quarter details and our guidance, I want to begin by sharing how the recent tariff announcements are impacting us and the actions that we're taking to navigate these impacts.
Speaker Change: I think it's first very important to start by framing TE's business and how global we are.
Speaker Change: First, it's important to highlight that three-quarters of our sales are outside the United States.
Speaker Change: and we've invested to manufacture close to our customers to be aligned with their supply chains.
Speaker Change: A second key point is that our manufacturing strategy was developed by working with our customers and has resulted in over 70% of our production being localized within each region.
Speaker Change: When you think about combining the first point of how much of our sales are outside the United States.
Speaker Change: Combined with the second point of our manufacturing and our localization strategy, it does result in a small percentage of our sales being impacted by current tariffs with more of the impact being seen in our industrial segment than in our transportation sector.
Speaker Change: For those products that are impacted, we have already been working with our customers to minimize the impact.
Speaker Change: We are implementing a combination of mitigation actions. This will include sourcing changes by both TE as well as our customers as well as where sourcing changes are not possible. We will be implementing price actions.
Speaker Change: We will continue to modern changes to trade policy, but due to the mitigation levers I just laid out, we do not expect to have a meaningful impact on our third quarter earnings based upon what is enacted currently.
Speaker Change: and Heath will get into more details in his section about the terrif levers.
Speaker Change: I feel our teams are well positioned to navigate this dynamic environment around us to deliver on the value proposition for our owners and our customers
Speaker Change: Our performance on momentum to consistently execute on our business model is reinforced by the current near results which include our strong second quarter and guidance for the third quarter.
Speaker Change: When we step back from some of the noise, we are hitting on all cylinders as a company.
Speaker Change: We're growing in line with our business model. Adjusted operating margins are running at the 19 plus percent range. We continue to demonstrate our cash generation model and we have a strong balance sheet that enables us to continue our balance capital deployment strategy. Thank you very much.
Speaker Change: So with that as an overall backdrop, and I'm sure we'll cover more in the Q&A.
Speaker Change: I'd like to get into the presentation which starts with slide three and I'll discuss some of the highlights and guidance for the third quarter of fiscal 25
Thank you.
Speaker Change: Our second quarter sales were above got into $4.1 billion and this was up by percent organically and 4% on a reported basis year every year.
Speaker Change: You know, these results were driven by double digit growth in our industrial solution segment and what we saw there was very broad base in that growth in our industrial solution segment.
Speaker Change: We had record adjusted earnings per share of $2.10 and this was ahead of our guidance and up 13% versus the prior year.
Speaker Change: Adjusted operating margins were 19.4 percent of 90 basis points over last year driven by strong operational performance in both of our segments and the overall expansion was driven by a 260 basis point increase in the industrial segment.
Thank you. Thank you. Thank you.
Speaker Change: Our orders were $4.25 billion and these were up 6% on both a year-over-year and a sequential basis and this supports our outlook for the sequential growth into the third quarter and I'll get into more details on the order levels in a little bit.
Speaker Change: We delivered strong free cashflow of 1.1 billion dollars in the first half of this year with approximately 1 billion return to shareholders and we also announced a 9% increase to our dividend and this reinforces our strong cash generation model.
Speaker Change: I also want to highlight that in April . We closed on the Richards acquisition in the industrial segment and we deployed $2.3 billion related to that acquisition.
Speaker Change: As we look forward, we are expecting our third quarter sales to increase sequentially to $4.3 billion and this will be a 5% organically year-over-year
Speaker Change: Arguidance includes a Richard's acquisition, as well as two points of pricing related to tariff recovery.
Speaker Change: Adjusted earnings for shares expected to be around $2.06, this will be up 8% year-over-year.
Speaker Change: So, if you could, I'd appreciate if you could turn to slide four and I'll get into more details on the order trends.
Thank you.
Thank you.
Speaker Change: In the quarter, we saw orders grow to $4.25 billion and we had a book to bill of $1.02 $1.02 billion.
Speaker Change: In the transportation segment, our orders were flat versus the prior year, and we had growth in Asia of 18% in transportation that was all set by declines in Europe and North America.
Thank you.
Speaker Change: The global auto market continues to be uneven by region, and you see the strength of our Asia position in both our orders as well as sales, which is helping to cover weak Western auto markets.
Sequentially, we saw orders growth in all business and transportation.
Speaker Change: In the industrial segment, we continue to see strong order momentum with 13% year-over-year growth and 4% growth sequentially, and this growth reflects ongoing strength and artificial intelligence applications, as well as strength in our energy and ADNM businesses.
Thank you.
Speaker Change: Another thing I would like to highlight is that for the first three weeks of April we continue to see stable order patterns and a book to build greater than one which further supports our Q3 guidance.
Thank you for watching. See you next time.
Speaker Change: Now, let me discuss the year-over-year segment results and I'll start with transportation on slide five.
Speaker Change: Our auto business was flat organically in the second quarter with growth in Asia of 16% being all set by declines in western regions of 11%.
Speaker Change: Our sales growth in Asia outperformed a 5% increase in Asia car production and reinforces our strong position in that region.
Speaker Change: As we look forward, we expect our global content growth to be at the low end of our four to six point range for the second half of our year.
Thank you.
Speaker Change: While we do expect global auto production to decline this year, we anticipate electrification across all powertrains to be a key driver for our growth over market in the second half.
Speaker Change: and as we talked before, it will be driven by software to find vehicle architecture and the related proliferation of data connectivity in the car.
Speaker Change: We also continue to expect 20% growth in hybrid and electric vehicle production, with roughly 80% of that production occurring in Asia, where we're strongly positioned and we produce locally.
Thank you.
Turning to the commercial transportation business.
Speaker Change: The 5% organic decline was as we expected and driven by market weakness in Europe and North America that was partially offset by growth in Asia.
Speaker Change: We continue to expect this market to be slow next quarter with sales looking a lot like the second quarter.
Speaker Change: And in our center's business, the sales decline was driven by weakness in the broader industrial markets in Europe and North America.
Speaker Change: For the transportation segment overall, our teams continued to execute well in a slow environment reflected by adjusted operating margins that remained above 20% in the second quarter.
Speaker Change: Now, let's turn over to the industrial solution segment. I issued a turn to slide six and just start with let the segment had very nice growth as quarter of 17 percent.
Speaker Change: You know, that growth was driven by our digital data networks which grew nearly 80% organically with increasing ramps from hyperscale platforms.
Speaker Change: We now expect revenue from artificial intelligence applications to be above $700 million and fiscal 2025, reflecting strong program ramps and leadership in multiple hyperscale AI platforms across the customer base.
Speaker Change: In automation and connected living, it was nice to see that the unit returned to growth in the quarter with 2% organic growth and just I would tell you it was broad based. Thank you very much.
Speaker Change: For the third quarter, we are expecting sales to be roughly flat to the second quarter in our AAC
Speaker Change: In aerospace defense and marine, our sales were up 11% or organically, driven by growth across commercial aerospace defense and space applications operations.
Speaker Change: In these markets, we continue to see favorable demand trends coupled with ongoing supply chain recovery and we see the momentum in these markets continuing. [inaudible]
Thank you.
Speaker Change: And in our medical business, we did decline 14% in the quarter due to the inventory normalization by our customers that we've been talking about. But a key for this business is we did see double-digit sequential growth in this business as we expected.
Speaker Change: Thank you for watching. Please subscribe to my channel. I upload videos on a weekly basis. I hope you enjoy them.
Thank you.
Speaker Change: And let me wrap up with energy where we saw 8% sales growth organically driven by continued momentum in grid hardening and renewable applications with double-digit growth in the United States.
Speaker Change: The Richard Jackquisition enables us to capitalize on strong growth opportunities in the North American utility market.
Speaker Change: I would like to welcome the employees of Richards to the TE team and look forward to the value they will create as we strengthen our position in North America together.
Now let me turn to margins.
Speaker Change: In the industrial segment, adjusted operating margins expanded 260 basis points to 17.9% as the teams executed well on the strong sales volumes.
Speaker Change: I am pleased with the progress that we are making on our margin journey in this segment.
Speaker Change: So with that, as an overview, let me hand it over to Heath, we'll get more detail in the financials, Terrence and our expectations going forward.
Heath Mitts: Thank you Terrence and good morning everyone. Please turn to slide 7.
Heath Mitts: For the quarter, adjusted operating income was $805 million with an adjusted operating margin of 19.4 percent.
Heath Mitts: Gap operating income was $748 million and included $12 million of acquisition related charges and $45 million of restructuring in other charges.
Heath Mitts: change in tax laws as well as restructuring acquisition other charges of 14 cents. RB versus guidance was driven by strong operational performance in both seconds.
Heath Mitts: The adjusted effective tax rate was approximately 22 cents in Q2.
Heath Mitts: and we expect both the third quarter and the second half adjust a tax rate to be in the 24-25% range.
Heath Mitts: The higher tax rate will result in a six-cent sequential headwind to EPS in the third quarter [inaudible]
Heath Mitts: For the full year, the adjusted tax rate is expected to be roughly 24% [inaudible]
Heath Mitts: As a reminder, the increase versus the prior year is primarily related to the impact of the pillar to global men-tax and jurisdictional mix of our earnings.
Heath Mitts: Importantly, and as always, we anticipate our cash tax rate to be well below our adjusted ETR.
Now if you slurped, turn to slide eight.
Heath Mitts: Adjusted Armies per Share, $2.10, a company record, and up 13% year-over-year driven by revenue growth and margin expansion. $2.10, a company record, and up 13% year-over-year driven by revenue growth and margin expansion.
Heath Mitts: Turning to cash flow, cash from operations was $653 million, and free cash flow was $424 million.
Heath Mitts: Through the first half of the fiscal year, cash flow is 1.1 billion. We continue to expect our free cash flow conversion to be over 100% this year.
Heath Mitts: While we are in a dynamic environment, I feel comfortable with where we are as a company and our ability to effectively navigate through this.
Heath Mitts: Our cast generation, Healthy Balance, she positioned us well and provides us optionality with uses of capital.
Terrence Curtin: Through the first half of this fiscal year, we returned approximately $1 billion to shareholders. And, as Terrence mentioned, we recently made an announcement to raise our dividend by 9%.
Heath Mitts: and, also as Terrence mentioned, earlier this month we deployed 2.3 billion of cash for the Richard's acquisition in our energy business. [inaudible]
Heath Mitts: All of this activity demonstrates the strength of our balance sheet and the confidence we have in our cast generation model. We will continue to monitor the environment as we make decisions on capital deployment going forward. [inaudible]
Speaker Change: And we had a couple of other details on our third quarter guidance that Terrence shared.
Speaker Change: First, we are including Richards, which contributes roughly 70 million to sales and is roughly neutral to adjust to DPS, including the impact on financing.
Speaker Change: The second item I want to cover is the tariff impact that is factored into our Q3 guidance.
Speaker Change: For those products that are affected by enacted tariffs, we estimated cost impact of approximately 3% of sales.
Speaker Change: We anticipate that about one-third of this impact will be mitigated by sourcing changes by TE and our customers
Speaker Change: And we expect to recover the vast majority of the remaining two-thirds of the tariff impact through pricing actions which will represent about two points of price related to tariff recovery in the third quarter.
Speaker Change: These are the actions that we can control the direct impact. We will continue to work with our customers as they evolve their supply chain strategies.
Speaker Change: Before I turn it over to questions, let me reinforce that we are executing well to deliver strong results and have positioned the company to successfully navigate the current dynamic environment.
Speaker Change: So with that, let's over and over the questions. Ellie, can you please give the instructions for the Q&A session?
Speaker Change: We are now opening the floor for question and answer session. If you'd like to ask a question from the press store followed by one on his phone keypad. Your first question comes from Scott Davis.
Scott Davis: from Marius, you're not, you're lying as well. Hey, uh, more endurance than you can so deal.
Scott Davis: Chris Glynn, Chris on the numbers and on all this, it's encouraging. I have to ask on the tariff stuff just because it's so topical right now and what people are focused on but...
Speaker Change: You know, there's another kind of concern that people have and that is an anti-American sentiment in the supply chain that perhaps...
Speaker Change: Some regions may favor local suppliers versus US suppliers. Talk to us, and I guess the other kind of natural question is that it sounds like it's easier to get price within your auto contracts. Is that because specifically in your auto contracts they...
Speaker Change: It allows for changes in pricing if there's tariffs and just want some clarity on that but I'm more interested really in the geopolitical challenges and what that does perhaps to the US.
You know, US company like, like God. [inaudible]
He End
Scott Davis: So, twofold, let me take the second part first, Scott, on the pricing, the tariff impact that we have is much more in our industrial segment than our transportation segment.
Scott Davis: because of our global scale and how much we make in the region.
Scott Davis: and a little bit where you're crossing borders. So, when you look at it…
Heath Mitts: There will be elements where we will be doing search charges for tariffs and transportation but in the numbers we talk the Heath highlighted the vast majority relates to our industrial segment and you know we've been working with our automotive customers for that part of mitigation sourcing how do we do supply differently as well as moving tools.
Speaker Change: So I want to make sure that's clear. On your anti-American sentiment, I think there's a couple of things that are important that our teams are viewed very locally. When you think about how our business model works,
It is local teams designing.
Speaker Change: with Hector Design Centers. It's also manufacturing and sourcing that's done from a localization so you get that feel at very local. [inaudible] very, very, very,
Speaker Change: It is very much driven down into those local markets whether that is in China, whether that's in Germany, whether that's in Japan, whether that's Brazil, everywhere. And localization's always been a big part of our strategy that how we do business. [inaudible]
Speaker Change: As you see in our China auto results, as well as China overall, we have good traction, we have not seen anti-American sentiment around what we do.
Speaker Change: But it is certainly something we always keep in front of us.
Speaker Change: It's something that we've run locally for a long time and that's why that tariff amount is as low as it is because we've always said we want to be tied to the design center locally as well as to the supply chain locally.
Speaker Change: and we don't export things from the United States, elsewhere, to the world.
Speaker Change: I think that's a key element when you look at it. These tariff impacts are really where for what we do in the United States, which is about 4 billion of our 16 plus billion dollars of revenue. So,
Speaker Change: It really is things that we bring in from scale, from elsewhere in the world and we'll have to look up do we move some of that tooling to be much more local here as we work toward mitigation strategies.
Speaker Change: Okay, thank you. Thanks, Scott. Thank you, Scott. Can we have the next question, please?
Speaker Change: Your next question comes from the line of Mark Delaney from Goldman Sachs, your line is now open.
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Martin Laney: Yes, good morning. Thank you very much for taking my question. Moving to about understand how tariffs are affecting your outlook by end market and to what extent that's informed by your recent customer conversations and order patterns including in April . And importantly, as you think about how tariffs are affecting your reviews by end market, what gives you confidence that there isn't a material amount of pull-in sales occurring in the near term due to tariffs? Thanks. Thank you very much.
Speaker Change: Yes, so hey Mark let me let me talk about the pulling question and then I'll get into some of the market dynamics
Martin Laney: First of all, you know, while there were discussions with customers about maybe thinking about hey do they pull some things forward I would tell you they were just scenario planning we did not see anything meaningful whether it be from our direct customers or distribution customers. [inaudible]
Martin Laney: So, when you look at it, I think in an environment where...
Lee Times are relatively normal.
Martin Laney: There is inventory available because we've been through the supply chain elements as well as on certainty it's not something where people say hey I want to pull things forward then we did not see pull ends meaningfully. As I said on the call orders have been remaining stable there are a lot of customer discussions of how do you work through the mitigation strategies where you do have tariffs. [inaudible]
Martin Laney: and our teams have continued to work with our customers on the things that they have choices they can make. We also have things that we're proposing to say how do we work through, to say how do you do as much as you can to localize to eliminate it.
Martin Laney: I also have to be very honest with you. We are a small part of the bomb. Some of our customers have bigger things they have to figure out. We are not involved in all those discussions. We're just trying to figure out how do we help them.
Martin Laney: and we're very much running the business from what we see in our orders and these customer discussions.
Martin Laney: And when we look at what I said on the call, and let me just recap it a little bit, you know, in industrial there's areas we just see momentum that continues to crack
Martin Laney: You know, DDN, the AI ramps, you know, what we see, those ramps have accelerated. We told you in the call that we expect that to be over $700 million versus $600 million, we just told you last quarter.
Martin Laney: In energy, the growth factors around pardoning and renewables, we continue to see further
and Aerospace and Defense.
Martin Laney: continues to crack along. The space applications continue to crack along. We really haven't seen no pauses there.
Martin Laney: And then one bright spot that I would say in the quarter in our ACL business, it finally returned to growth, but we're taking a view due to what's going on that we think that's going to stay flat line.
Martin Laney: And then in transportation, we just sort of view ICT and sensors to improve near-term with the dynamics going on. And in automotive, we do expect auto production to go down sequentially. We do expect auto production to be down 5% year over year. Here we go.
Martin Laney: And that's going to be the trends continue that we saw in the second quarter.
Thin Asia,
Martin Laney: Declines in the West that are probably pushing closer to 10% [inaudible] to 10%
Martin Laney: So it's still a very mixed environment. I think those feel right based upon what we're seeing and do view their balance So it's a very mixed environment.
Martin Laney: But, but it isn't everything is just going up and I think our teams operating well in this uneven environment and hopefully that could your flavor of how recap in the markets that we see it today.
Speaker Change: Okay, thank you, Mark. We have next question, please [inaudible]
Speaker Change: Your next question comes from the line of Amit Daryanani, from Evercore ISI, Your Line Is Now Up
Thank you. Thank you. Thank you.
Speaker Change: Good morning everyone. I saw a question on the margin expansion and you know I think you've seen some really good margin expansion over the last few quarters in fact last couple of years.
Speaker Change: If margin expansion and the EPS growth can sustain, especially if you end up in a more difficult, choppy and market environment, just hoping you'd flush out margin expansion vectors that peak in leverage across both transport and industrial segments and how much of that green forwarding is demand versus self-help.
or the self-help driven thank you.
Heath Mitts: Well, I'm at the Seeth, I'll take this. Obviously, I think we've covered this first half hour here at this call, some of the volatility in the markets.
Heath Mitts: We do have some markets that are growing nicely. We have some that are kind of more stable and we have some that are weak. You add it all up and it's a fairly even or uncertain market if you will. We're not getting a lot of support there at the aggregate level. [inaudible]
Heath Mitts: However, we have over the last several years as you're aware.
Heath Mitts: of reduced our manufactured footprint. And we have taken sites offline, and this is part of our localization strategy that is aligned with where our customers want us to be.
It is a huge focal point here.
Heath Mitts: The, over the next year or so, that the figure jump is going to be continued to be in the industrial segment.
As Industrial, you know, continues its journey.
Heath Mitts: And that's a combination of a variety of factors, a lot of that is volume and continued rationalization of locations.
Heath Mitts: But I continue to see that our transportation business has been hybrid between 20 and 21% here for several quarters. I feel good about where they can be, obviously Terrence just outlined. Thank you very much.
and softer markets there.
Heath Mitts: So our ability to hold our head there about the 20% line feels like the right place to be until we can get back into a situation where we're...
Heath Mitts: Rowing the top line. So we've got a series of different operational levels that we're pulling in terms of protecting both.
Heath Mitts: margins and growing in the industrial segment as well as you know how that converts into EPS.
Heath Mitts: So, our business model contemplates where we sit today and where we have a good corner, we have our outlook for the third corner is good.
Heath Mitts: We looked to finish strong in FY25 and then jump into 26 without a lot of certainty what these markets are going to do .
Speaker Change: Okay, thank you Amit. Can we have the next question, please? Your next question comes from the line of Wamsi Malhan from Bank of America. Your line is now open.
Columnist
Wamsi Malhan: Yeah, Wamsi, I'll take both of those just for ease. First of all, being on auto production, I think the one thing that we've talked to you all about with content this year is
Wamsi Malhan: You know, with Europe being extremely weak, Europe is our strongest content region historically, and when you look at European production this year, like last quarter, it was down basically 10% 10%
Wamsi Malhan: As I said on the call, as we look through the remainder of the year, we're expecting to be at that low end of the four to six.
Wamsi Malhan: We have ramps that are going on in Asia that we feel very good about, we talked about to your last quarter or some of them [inaudible]
Wamsi Malhan: You know, the date of momentum around data connectivity in the car, I know years ago it was a lot about electrified powertrain, the data connectivity growth and the programs that we've run around the world as people get ready for autonomy and software to find you need.
Wamsi Malhan: Eternet Architecture in the card to really make this happen, and that's what we mean by data connectivity. That's going to be the element that allows us to get it up to the low end of the 4-6.
Wamsi Malhan: But right now we are being impacted by Europe being weak and being for higher content per vehicle region is creating a little bit of a headwind of what you see overall.
On your second part of your question that I'll just...
Wamsi Malhan: Jump right on to, when you look at the impacts that we have, they're the terror of costs that we have, that 3% of sales.
Wamsi Malhan: And most of what we have due to our localization is just where we source something, could be something from Germany or Japan that we bring over here that we have scale advantage on that create the terror impact. So it is terror surge charge and that's based upon the terror set are enacted today.
Thank you, Wamsi. We have the next question please. Thank you.
Your next question comes from the line of Luke Junk? [inaudible]
Luke Junk: Thank you for taking the question. Terrence, hoping you can maybe just parse out what you're seeing in the automation and connected living between those two sub-segments, the inflection in this quarter, should we think that automation within that is also reflecting and maybe you could also comment just what you're seeing geographically across those two parts of the business, including maybe [inaudible]
Wamsi Malhan: indirect tariff impacts on picking appliances in China especially. Thank you.
Wamsi Malhan: Appliance has been growing and continued to grow and I will tell you that's been growing pretty much in all regions .
Wamsi Malhan: The big area that we were running behind was in the automation side of it.
Wamsi Malhan: And what we saw in the quarter-loop, which was really nice and took the entire unit up to growth overall was...
We saw orders starting to pick up.
Wamsi Malhan: You saw, in Europe they started to inflect upward, certainly saw them also inflect upward in Asia.
North America with Steady.
Wamsi Malhan: So right now when you look at them, the order trends started to show an inflection point.
Wamsi Malhan: Right now, what we're assuming with everything going on with Terrence, and this is capital goods
Wamsi Malhan: We sort of have an outlook that we expect ourselves to sort of stay where they were [inaudible]
Wamsi Malhan: in the second quarter, because we'd like to see that momentum stick a little bit longer just knowing to what's going on on the tariff uncertainty. And this is one of the markets where when we talk about impacted by tariffs, you do have a lot of supply chain crossover that happens.
Wamsi Malhan: because of the fragmentation here. So we've probably taken a more conservative view than the orders we saw, but it is something right now, hopefully we can tell you next quarter, we continue to see momentum in the orders from what we saw just this last quarter.
Speaker Change: Thank you, Luke. May I have the next question, please? Thank you.
Speaker Change: Your next question comes from the line of Samik Chatterjee, from JP Morgan, your line is settled.
Samit Chatterjee: Hi, thanks for taking my question and good morning everyone. Maybe if I can just ask, hopefully you can hear me. If I can just ask you on the AI momentum that you're seeing on that front, I know there are 4-3 months of this year there's been a lot of concern from investors about
the way forward.
Thank you.
Samit Chatterjee: No, so many thanks for the question and I think one of the things that's important in our second quarter we saw 150% increase on our orders.
Samit Chatterjee: So these are real orders, certainly overall AI CAPEX has continued to grow and certainly I know some of the players have made different comments but I think what's important is, you know, these are ramps of programs that we've won [inaudible]
Samit Chatterjee: or the ones that we're working with here across our customer base and the increase that you saw was about 50 million dollars more that we had in the second quarter.
Samit Chatterjee: So that's something that we get excited about and I know we talked earlier probably two or three quarters ago about where do we go there, you know we're closer to that billion dollar number.
Samit Chatterjee: That will probably be running at next year in 26 as we continue to have these ramps increase. So the momentum is real. The programs are real and certainly working hard with our customers make sure we ramp to their needs as they're trying to deploy their AI surge. Thank you very much.
Speaker Change: Okay. Thank you, Smith. Great. The next question, please. Thank you.
Speaker Change: Your next question comes from the line of Joe Giordano from TD Cohen. Your line is now open.
Joe Giordano: I want to talk on the automation side. You know, it's good to hear the commentary that Europe is getting better. I mean, arguably off very low levels in the US.
Speaker Change: I'm curious, are you just still seeing kind of a pause in customers wanting to move forward with things until they know what the rules of engagement are from a policy standpoint?
Speaker Change: No, I would say there is uncertainty Joe, let's face it, everybody trying to figure out their supply change right now.
Speaker Change: So there is a lot of effort that are going on to say how do I work on supply chains, how do I work upon what's in front of me?
Speaker Change: I would tell you, we did see orders pick up in the United States in automation. I think the element that we're just being a little bit cautious with our guide is really it was this was the first quarter in a long time. We do worry just as where do people take their CAP-X plans? [inaudible]
Speaker Change: Very honestly, our CAP-X plans are not changing meaningfully. We have to ramp AI programs, we have other programs, we have to ramp the facilities we need to build to support those.
Speaker Change: But I do just think the amount of effort going in around how do we make sure we make what we can I think is pretty prevalent across every company as they're trying to figure this out.
Speaker Change: So it does create a little bit of a distraction and another focus area for people to figure out.
Speaker Change: Realtime, and typically people that are working the automation plans are the same people that are in the manufacturing area trying to figure everything out on capacity and so forth. So, it's just why we have probably a little bit more of an uncertain tone around it than some of our other markets.
Speaker Change: All right, thank you, Joe. We have the next question, please Thank you.
Speaker Change: Your next question comes from the line of Saree Boroditsky of Jeffries. Your line is now open.
Sari Boroditsky: Hi, good morning, thanks for taking the question. Maybe it's trying to medical, obviously, another tough quarter on destacking. Could you just update us on channel inventory and how you expect this market to play out for the remainder of the year, and then just a way to estimate what underlying demand is, first, what you're seeing in your sales. Thank you so much.
Speaker Change: Sir, you know, where we position our medical business, you know, to round a mid single digit market?
Sari Boroditsky: We did have come out of COVID and our first quarter we expected so that's a December quarter, you know, we saw customers pull back majorly around Hanks.
Sari Boroditsky: All the supply chain inventory, which really nice as you saw about a 20% sequential increase in that business. We view that inventory elements over and you're going to continue to see us have a second half sequential improvement over the first half in that business as we work out of that.
Okay, thank you, Saree. We are the next question, please. Thank you, Saree.
Speaker Change: Your next question comes from the line of Colin Langan, of Wells Fargo, your line is Novo
Speaker Change: I guess we'll find out over the next few months how things settle in, but do you think that could be an advantage over time or are your competitors? Do they all have pretty similar footprints? Yeah, any thoughts there in terms of maybe how that shapes out going forward? [inaudible]
Speaker Change: No, well, you know, it's very much competitive, it can buy competitive, but we do view where it vanished.
Speaker Change: The localization that we've invested in has been significant and some of the things we did when we invested in restructuring to get things, we took capacity offline in certain regions of the world to make it much more localized is an advantage.
Speaker Change: You know, we do have some competitors that only make in one region of the world some of our middle and smaller competitors so...
Speaker Change: We very much for you as we deal with our customers and we look at mitigation strategies, this is something that can be advantaged
Speaker Change: as we move forward and as we help work them through it. So, we have a very positive competitive tone going through this and how do we help our customers work through it and also show we might have more options than others.
Thank you.
Thank you, Colin. We have the next question, please.
Speaker Change: Your next question comes from the line of Christopher Glynn of Openheimer. Your line is now open.
Christopher Glynn: Thanks. Good morning. Hey, a lot of good panoramic topics covered.
Christopher Glynn: It was serious about space, it's a relatively small market, but it's scaling...
Christopher Glynn: I just wonder if you could help us understand the scope of that and it is something that's kind of doubling from a small base or just kind of the contours of what's going on with space and how that might contribute, you know, over the next couple of years really.
Christopher Glynn: Chris, I appreciate you using the word panoramic. I don't think I've ever had that on a learning school. Space is important. So when you sit there and where we serve it is really in our aerospace defense and marine. It's a great day.
Christopher Glynn: Not surprisingly, and one of the things that is nice is where this is where you get a convergence with how the space field has changed with who actually builds current space vehicles
Happen, also what happens in lower satellites.
Christopher Glynn: Benefit us in space. So it is an area that has morphed a lot.
Christopher Glynn: It's an area where data speeds, things that we talk to you about in AI, similar data speeds you need to continue to work to, and we leverage what we do in our DDM business, but clearly the environment is much different in the space application. [inaudible]
Christopher Glynn: and it's where some of the standards that are there in the materials you have to use get very specialized, and it's areas where we excel at.
Christopher Glynn: So, it has been a driver. It is something you set up very well. It's multiplying at a very quick pace, but it's on a lower base.
Christopher Glynn: But you do have compute that's increasing massively and that's areas when we look at high speed, high power and then have to do the packaging that exists in a space application.
Speaker Change: It is a vector that is a smaller vector in our ADNM space but a vector that we've been benefiting from and we expect we're going to continue to talk to you about it.
Speaker Change: Your next question comes from the line of Asiya Merchant, of Shetty Group. Your line is now open.
Great. Good morning, everyone. Thanks for taking my morning. Good morning.
Speaker Change: If you can just talk a little bit about commercial transportation, I think the guide is for it to be kind of flatish. Just how we should think about the trajectory of that segment, sub-segment, as it is by your margins and
Speaker Change: when we should start to see some recovery in that that could possibly be a positive driver for your transportation segment margins. Thank you.
Speaker Change: No, certainly. So, you know, we have told you, for numerous quarters now, we see an environment and when we do commercial transportation, that's Class A truck.
Speaker Change: That's ag equipment. That's also construction equipment. And the ag environment has been tough, certainly financing has hit some of these markets.
Speaker Change: So really, there's catalysts out there out there for Europe and North America, certainly with North America around some of the emission changes that are coming up in 27 .
Speaker Change: How does that all impact with some of the uncertainty? We do think that will create at some point an inflection point. And we just don't know if that's going to be, you know, two quarters out, three quarters out. Right now, we see our business, the orders are staying very stable. So we've got it in the third quarter to stay stable.
Speaker Change: But I do think what you'll get is as some of those emission things play in. You will see a more traditional cycle for the Class A trucks and your points very valid of, you know, this does run a higher margin and you'll expect a higher fall through when that volume comes.
Speaker Change: Okay, thank you, Asiya. Can we have the next question, please?
Speaker Change: For next question comes from the line of Joseph Spak of UBS. The line is now open.
Are you including any of the...
Speaker Change: Richard's acquisition in that growth. And I know you sort of made some comments about...
Speaker Change: You know, AI as well. So I'm just trying to get a sense of like what the underlying organic like old core historical orders industrial orders were because you know you also made a comment about I guess in the U.S. You saw pick up but
Speaker Change: Like, you know, my understanding is a lot of that equipment for factor automation comes from overseas so it seems like they're, you know, it is going to get more expensive under this regime. So just want to understand how you're thinking about that sort of order trends there.
Speaker Change: No, when you look at our order trends in the industrial segment
Speaker Change: Pretty much across the board, we had orders grown to you over here.
Speaker Change: So, I just want to make sure that when you look at that, you know, that was, you know.
Speaker Change: Cross the Board, Strong Order Growth. It was an automation, it was in the appliance area and this would be only where we serve local customers Joe.
So, if we're serving a German factory automation player
Speaker Change: We would be getting that in our European business, not in our U.S. business. So the growth is very broad. There is no richer daughters.
and our awarders.
Speaker Change: We didn't close that to Laverall, so we'll start getting that.
Speaker Change: And the growth was also, you sit there, it was across the board.
Speaker Change: with Europe actually getting closer to zero than where it was before. So, it was very broad geographically around the world, across all the business units.
Speaker Change: And you even saw that in our results sequentially, our sales rep across all our business units from quarter one to quarter two.
All right. Thank you, Joe. We have the next question, please Thank you.
Speaker Change: Your next question comes from the line of Steven Fox, of Fox Advisors, your line is Noah.
Stephen FOX: Hey, good morning. Terrence, I was wondering if you could just more broadly talk about your pricing power going forward.
Speaker Change: from two aspects. One, you know, you sell into a lot of large OEMs that may be feeling...
Stephen FOX: You know, to maintain down the road in addition to, like, all the tariff questions. And then, too, like you mentioned, you know, there's a lot of different types of competitors out there that you may run into regional, smaller or large, global, otherwise. And just sort of how responsible you think they will be on pricing. Thanks.
Speaker Change: Good question, Steve. I think when you look at it, you know, this year before the terror set us, our pricing is neutral at the total TE level.
We are quite positive in our industrial segment.
Speaker Change: and just a little negative in the transportation segment. So, we have one of the things that we've had this year, let's face it.
Speaker Change: We've been very disciplined on that as well as the tariffs that we talked about today so I tend to think that the pricing environment will continue to be dictated by where input costs go and also the tariff impacts.
Speaker Change: and I feel our team has done a good job managing it.
Speaker Change: As well as the other things that we can do to help our customers like we talked about
Speaker Change: You know, on the mitigation actions, you know, are there things we localize, move tools on, you know, the way we have our supply chain set up with our customers is there things we can do together and they're the ideas we're going that are also ways we provide value. That's a little bit different than we talked to you about in a certain environment like that. [inaudible]
Speaker Change: So, that's the benefit that we have in this uncertain time, but I feel good how the teams are managing through the pricing aspects and I do think it's different than how we used to do.
Speaker Change: Alright, thank you, Steve. We have the next question, please.
Speaker Change: Your next question comes from the line of William Stein from Tourist Securities. Your man is noble.
Speaker Change: Great. Thanks for taking my question. But first, Terrence Curtin, I'd say it involves also hydramatic.
Speaker Change: Sir, you are about your earlier comment about not seeing meaningful poems. I wonder what your visibility is to that .
Speaker Change: And also, I'm hoping you can comment on the customer concentration or dispersion and any anticipated change in that. Thanks so much.
Speaker Change: So while on the AI side, we do play across the hyperscalers, we also partner with the other semiconductor companies that would be more of our peers in that space and do some of the signal elements from a semiconductor. So our focus is more on the hyperscaler side.
Speaker Change: I would say we did not see pull-ins related to this. This has been very much a function of ramping.
Speaker Change: Ramping with our customers on the AI side, what gives us confidence of what they're telling us as well as how we're working with them together to continue to ramp up, that gives us confidence in the over 700 million. So we did not see pull one from the AI customers at all.
Speaker Change: All right. Thank you. We'll clear the next question. Please
Speaker Change: Your final question comes from the line of Shreyas Patil of Wolf Research, your line is now open.
Shreyas Patel: Hey, thanks so much for taking my question. Just maybe to put a finer point on a previous question, how should we think about the pace at which you can get recoveries in the auto end market? I believe in the past you've talked about.
Thank you.
Faster in this scenario.
Speaker Change: Curious how you're thinking about the priorities there between buybacks and M&A.
Richard's acquisition. Thank you.
Speaker Change: Thank you. I'll let Heath take this, but I do want to stress what I said earlier that the bulk of our tariff exposure is more in our industrial segment.
and then our transportation segment.
Speaker Change: So I know I said that a couple of times, I want to make sure that comes through where you're certainly in the industrial segment we have more pricing lovers. He thinks you want to add a capital or that.
Speaker Change: Now you just think on the capital allocation obviously we we did deploy significant amount of capital with the Richard's deal it was $2.3 billion so you've seen that and you'll see that result in a bit of modest amount of increase in our debt levels as well so
Speaker Change: Having said that as we look forward, we still feel very confident in our cast generation model.
Speaker Change: Our ability to generate cash in this environment has been fairly resilient.
Speaker Change: and we feel good about it. So, you know, an M&A engine is not something you just turn on and off it's something you have to cultivate over time and so we're...
Speaker Change: Always active in that. Having said all that, you know, there's opportunities to buy our shares as well. So you'll see a balance of that as we go through the year. I don't mean it tend to be too vague here, but deals kind of come in and lumpy format. It's never a linear process in terms of when acquisitions get done, but we have a lot of, you know, sticks in the fire right now with that and looking at things, not of the same size as Richard G. So you'll see a balance of that, you'll see a balance of that, you'll see a balance of that and looking at things, not of the same size as Richard G.
Speaker Change: So, but still in the bolt-on category of things that we look at, and the meantime, we're in the market every day with Saree Bye-bye.
Speaker Change: All right, thank you, Shreyas. If you have further questions, please contact Investor Relations at TE. I want to thank everybody for joining us this morning and have a nice day.
Speaker Change: Today's conference call will be available for replay beginning at 11.30 a.m. eastern time today, April 23rd on the investor relations portion of TE Connectivity's website. That will conclude today's conference call. Have a good day.