TE Connectivity Ltd. (NYSE:TEL) Q1 2025 Earnings Call Transcript

TE Connectivity Ltd. (NYSE:TEL) Q1 2025 Earnings Call Transcript January 22, 2025

TE Connectivity Ltd. beats earnings expectations. Reported EPS is $1.95, expectations were $1.89.

Operator: 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. [Operator Instructions] And as a reminder, today’s call is being recorded. I would now like to turn the conference over to our host, Vice President of Investor Relations, 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. During this call, we will be providing certain forward-looking information, and we ask you to review the forward-looking cautionary statements included in today’s press release. In addition, we will use certain non-GAAP measures in our discussion this morning. We ask you to review the sections of our press release and the accompanying slide presentation that address the use of these items. The press release and related tables along with the slide presentation can be found in the Investor Relations portion of our website at te.com.

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. As we talk about our results today, they will be discussed in the new segment structure. Please refer to our 8-K filed in December for recast financial information under the new structure. 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. 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: 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. 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. Global economic uncertainty is creating noise as we think about 2025, but what’s key is we’re performing well and our focus is to execute on what we can control to drive financial improvement as we move through 2025. Within this backdrop, the results that our team delivered for the first quarter are very straightforward. On the top-line, our sales organically were in line with our expectations, our adjusted operating margin and EPS were records and ahead of our guidance, and our free cash flow was a record for the quarter, all driven by the execution of our teams.

Our orders were slightly ahead of our expectations and accelerated both year-over-year as well as sequentially, 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 Solutions segment as we go through the year. 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. I am proud of our team’s performance on what we control to deliver earnings and free cash flow that were above our expectations. 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. 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.

We are supporting their effort in ramping key programs to drive application growth. 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. 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. Thirdly, an area that we’ve been working on a lot and we’ve invested in is really making sure we benefit from how we — our global manufacturing strategy.

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. And the fourth key and lastly is continuing to drive our strong cash generation model that enables optionality of returning capital to owners as well as capitalizing on bolt-on M&A opportunities as they occur. So, with that as an overview, I’d like to get into presentation. If you can move to Slide 3, and let me discuss some additional highlights and our guidance for the second quarter and then Heath will provide further details. Our first quarter sales were $3.84 billion, which were flat year-over-year.

Adjusted earnings per share of $1.95 was ahead of our guidance and up 6% versus the prior year. And adjusted operating margins were record at 19.4%, up 30 basis points over last year and up in both segments. Orders of $4 billion in the first quarter grew both year-over-year and sequentially. And as I said earlier, this was slightly better than we expected. This reflects broader growth within the Industrial segment, including increased momentum in artificial intelligence programs. 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. And as we look forward, we are expecting our second quarter sales to increase sequentially to $3.95 billion.

On a year-over-year basis, we expect to be impacted by unfavorable currency exchange headwinds of over $100 million. 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 $0.06 headwind from currency exchange and tax versus the prior year. 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. This designation continues to demonstrate our dedication to sustainable business practices that is expected by our customers and also provides value to our owners. So, with that as an overview, let me get into the order trends and you can see that on Slide 4. In the quarter, we saw orders grow to $4 billion and our book to bill was 1.05.

In our Transportation segment, orders came in as we expected, 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. In Transportation, our auto orders came in as expected, reflecting continued growth in Asia and offsetting softness in Western car production. When you look at the orders decline for the segment, it was driven by weakness in commercial transportation and sensor end markets. Turning to the Industrial segment, all of our business had a book to bill over 1 in the quarter and it supports our growth outlook. 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 end markets.

We’ve also talked to you about our momentum in artificial intelligence applications, and this is continuing. 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 talked to you about. Now, let me get into year-over-year segment results, and I’ll start with Transportation on Slide 5. 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. As we look forward, we continue to expect global auto production to be down 1% to 2% in fiscal 2025, and we continue to expect our content growth to be at the low end of 4 to 6 point range for the year.

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. We also expect further electrification of the vehicle and realize when you get electrification benefits that’s completely powertrain agnostic. And we’re seeing increased content momentum driven by software-defined vehicle architectures, which require more data connectivity and provide content growth for us. And really to give you impact of what the momentum we’re seeing, I’ll share with you, we just secured over $1 billion of new design wins with the leading Chinese auto OEM for their next-generation platform that is entirely around data connectivity in the car.

So, let me turn to the commercial transportation. And as you can see on the slide, we were down 12% organically, as we expected, and this was driven by heavy truck production weakness in Europe and North America. We do expect that demand trend will improve later in this year. And in our sensors business, the sales decline was driven by weakness in the broader industrial markets in Europe and North America. From an adjusted operating margin perspective for the segment, our teams executed very well, and it’s reflected by the adjusted operating margins that were 21.3% in the first quarter. Now, with that as an overview of Transportation, let me move to the Industrial Solutions segment on Slide 6, and this segment grew double-digits in the quarter.

Starting with our digital data networks business, it grew 50% organically and our design wins are reflecting increased momentum. We now expect revenue from artificial intelligence applications to be above the $600 million in fiscal 2025 and it reflects strong growth and leadership in multiple hyperscale AI platforms across the customer base. 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. 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.

In AD&M, our sales were up 15% organically, driven by broad growth across commercial aerospace, defense and space applications. 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. 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. And the last market that I want to highlight is our energy business. Sales were up 7% organically, driven by strength in all regions and ongoing momentum in utility scale renewables, along with investments that are being made to support increased power generation needs as well as hardening of the infrastructure.

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 complementary to our existing product set. 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 Harger to our TE team. 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. 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: Thank you, Terrence, and good morning, everyone. Please turn to Slide 7. For the quarter, adjusted operating income was $745 million, with an adjusted operating margin of 19.4%. 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. GAAP operating income was $690 million and included $5 million of acquisition-related charges and $50 million of restructuring and other charges. Q1 restructuring charges specifically were $43 million, reflecting continued footprint optimization efforts. I expect restructuring charges in fiscal ’25 to be around $100 million level, same as we said 90 days ago.

Adjusted EPS was $1.95 and GAAP EPS was $1.75 for the quarter, and included a tax charge of $0.04 in restructuring, acquisition and other charges of $0.16. 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. We do continue to expect the full year tax rate to be in the 23% to 24% range. As a reminder, the increased ETR versus the prior year is primarily related to the impact of Pillar 2 global min tax. 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, we delivered strong adjusted margin and EPS expansion along with record first quarter free cash flow, with sales that were effectively flat year-over-year.

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. Due to the strengthening of the U.S. dollar against other currencies, we now expect year-over-year currency exchange headwinds to exceed $300 million for fiscal ’25, with roughly $100 million of impact in each of the next three quarters. Adjusted operating margins were 19.4% in the first quarter, expanding 30 basis points year-over-year. Adjusted earnings per share were $1.95, up 6% year-over-year, driven by margin expansion and included headwinds of $0.04 from the higher tax rate. Turning to cash flow, cash from operations was $878 million and free cash flow was $674 million. 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.

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 to shareholders, but as I mentioned last quarter, we are also looking to pursue more bolt-on acquisition opportunities at attractive valuations. 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, 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 this — with that, let’s open it up for questions, Sujal.

Sujal Shah: Okay. Christa, can you please give the instructions for the Q&A session?

Operator: [Operator Instructions] Your first question comes from the line of Mark Delaney. Your line is open.

Q&A Session

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 on orders by end market and 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 positively or negatively as the industry is starting to transition to Blackwell? Thank you.

Terrence Curtin: Sure. Thanks, Mark, for the question. And like I said on the call, orders were ahead of where we expected and certainly we had the FX impact, but when we think about them coming in stronger, 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 more broadly and I’ll talk about that. So — also I want to highlight regionally what we’re seeing. We are continuing to see orders reflect broad strength in Asia. And even when you look at the orders growth that we saw, you see Asia has been accelerating. Weakness continues to be in Europe broadly especially when you think of auto and in the industrial space and the heavy truck space where we play.

And so, you see that unevenness with United States and the Americas sort of being a little bit more neutral. To your question about the Industrial segments and the markets, what’s important is every business had a book to bill above 1. And we do have the momentum in AI, and our AI orders did grow nicely in the quarter, but the Industrial segment, if you take out the AI orders, orders grew 10% year-over-year in that segment and 7% sequentially even without the AI orders that we continue to benefit from. In aerospace, we continue to see growth as commercial air still was 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.

In energy, it’s a business that we’ve been investing in. We talked about the M&A, but you just continue to see continue order momentum around the utility applications where people are — you see increased CapEx going into the utilities and it’s pretty broad. The area that 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, but it’s an area that sort of says it’s good to finally see some stabilization in the automation and control area that maybe we can see some improvement later in the year. And in Transportation, I talked about what we’re seeing in auto production.

We do expect auto production to be down for the year, but the orders are sort of tracking that, and we still expect to be at the low end of the 4% to 6% of our growth over market there, and really the weakness we saw is 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.

Sujal Shah: Thank you, Mark. Can we have the next question, please?

Operator: Your next question comes from the line of Scott Davis with Melius Research. Please go ahead. Your line is open.

Scott Davis: Hey, good morning, guys.

Terrence Curtin: Hey, good morning, Scott.

Scott Davis: Hey, thanks for the color on the orders. That’s actually super helpful. Hey, I wanted to move to margins, because that was — operating leverage is your second thing you mentioned of your four priorities, but seems like you guys have done a really nice job managing margins and actually improving margins in relatively low-growth environment. But 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, but how do you think about incremental leverage in TS when we get a recovery? Do you have costs that need to come back proportional to that recovery or would you expect to see kind of outsized incrementals when — 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, it’s — we’ve made a lot of strides in the TS margins. If you go back a few years, we’re always talking about target margin of 20% and so forth. We don’t — 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, because our — and our China factories are always humming very strong in the first quarter, and you saw that last year as well. So — but we’re confident that we’re going to be at our 20% number or better as we — by quarter as we work our way through the year. So, we’re feeling good about 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, of the Transportation segment, the commercial transportation business, which as you’re aware is a nicely profitable component of our portfolio, has been depressed with heavy truck builds and construction and mining and ag equipment being in the rough part of the cycle.

As that returns to growth, that would be where we’re going to get a lot more of the leverage from. And 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 lever is up very nicely. From a cost perspective, Transportation segment, particularly automotive and in Europe has been a heavy focus of some of our footprint activities over the last few years. 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, particularly in Western Europe, where we’re probably too dependent if you go back over the past five or 10 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. Hopefully, that answers your question, Scott.

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

Operator: Your next question comes from the line of Amit Daryanani with Evercore ISI. Your line is open.

Amit Daryanani: Thanks a lot. Good morning, everyone. 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 what is driving the strength here. Is it better demand from hyperscalers or silicon companies? And is this more broad-based? Are you seeing more share gains that’s helping you? Just anything that can provide some clarity in the levers of the upside you’re seeing on that $600 million target would be helpful. And then, Heath, maybe just related to this, as AI ramps, how should we think about the margin profile of AI versus the broader Industrial segment average? Thank you.

Terrence Curtin: Yeah, sure. Thanks, Amit. Appreciate the question. First off being when you look at it, our AI revenue in the quarter doubled already in the quarter. And we did $300 million last year. We told you we’re going to be above $600 million. And what is nice, it is a broad group of the hyperscalers. When we think about 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. Now, what is nice the orders keep on layering in. The momentum that we’ve talked to you about as we started talking about this a year and a half ago continues. Our teams are very focused on the ramp.

The ramping of these programs that we have across the customer pace is really a key focus. And I think in many ways upside to the number we talked about will really be driven by how do we execute on the ramps, which is what we like. The other thing, 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 and the major connector companies are going to have the share because of the complex technology requirements that we have. 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 see it in the IS margin as well as we continue to move it up, 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.

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

Operator: 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 some of the advantages you have around your manufacturing strategy and localization in your prepared remarks. And secondarily, your 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. 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.

Terrence Curtin: Sure. Let me take the first part of it and then I’ll let Heath take the cash flow piece of it. First off, 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 from how we repositioned. Heath even talked about some of the things we’ve done in Transportation. But the first thing is we’ve been focused a lot on localization within region. So, our business is not one where you make in one region of the world and that’s the manufacturing center you ship to. Our footprint is very much aligned to our customer supply chains and we work 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. 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 adapt. 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 we’ve dealt with tariffs already in 2017. It impacted. We had about $300 million of tariff costs 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 and 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 it could be. So, it is important staying close to the customers and 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. 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 owners through dividends and share repurchases, but we’ve continued to be active in M&A. 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 versus a platform that may be a new space for us. So, I don’t want to confuse bolt-ons with size. Sometimes bolt-ons can come in as a small to midsize company, sometimes those opportunities are much larger. And we’re very active right now. We have seen the pipeline increase.

We have resourced it. 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 here.

Sujal Shah: All right. Thank you, Wamsi. Can we have the next question, please?

Operator: Your next question comes from the line of Steven Fox with Fox Advisors. Your line is open.

Steven Fox: Hi, good morning. Terrence, I was wondering if you could just maybe talk a little bit more about the industrial markets, not away from the cloud business, but traditional automation and controls. You’ve mentioned it sideways stabilization. Is that much different from what you’ve seen 90 days ago? How encouraged are you that some of these trends can improve as you go through the year in any particular region? Thank you.

Terrence Curtin: Yeah. Thanks, Steve, for the question. 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, but we were still seeing not as many strong spots in the orders as we would like and also in discussions with our customers. 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. And the other thing is what are those inflection points that are upward that we’re seeing.

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’re seeing upward order momentum. So, that is a positive in Asia. 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 a first step. And certainly, when we think about 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. So, 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. 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.

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

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

Kosta Tasoulis: Hey, guys. This is Kosta Tasoulis filling in for Colin. I just wanted to double-click on your LVP assumption down negative 1% to 1.5% growth over market, low end of the 4% to 6% range. Can you just double-click on North America, Europe and China?

Terrence Curtin: Sure. Thank you for the question. And first off, being as we said on the call, we do expect auto production this year to be down 1 point or 2 points. It was down 3% in the first quarter. And the first quarter, we saw very strong production growth in Asia. We saw Europe was down 10% in auto production. And we saw North America being down a little bit in auto production. So, you see the unevenness in the production. When we think about the 4% to 6% range, we have said we’re going to be at the low end of that range. I do want to remind everybody when it comes to Europe, Europe is our highest content per vehicle we have. So, we still believe we can be at the low end of that range. The 4% to 6% growth over market really driven out of Asia.

And the other thing is I know the discussion around electric vehicles in the West is one where there’s lots of questions, but 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. The other thing I would say, electronification, which we’ve always talked about and that includes what happens around 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.

That also gives us confidence to be at the low end of that range. And I mentioned the design win that we had just recently with the large China OEM that sort of shows the level of that content increase. So, this year we do expect the production environment to be weak in Europe. We do expect the EV environment to be weak in Europe. North America slightly down. The growth of vehicle production and then the electrified trends will driven out of Asia where we have a great position.

Sujal Shah: Okay. Thank you, Kosta. Can we have the next question, please?

Operator: Your next question comes from the line of William Stein with Truist Securities. Your line is open.

William Stein: Great. Thanks for taking my question.

Terrence Curtin: Hey, Will.

William Stein: Hey, thanks. I’d like you to maybe [indiscernible] opportunity a little bit, maybe one level down. We’ve heard quite a bit 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 cross licensing of IP going on in that space? Thanks so much.

Terrence Curtin: 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, our customers ask for, hey, I want to make sure I have security of supply, and we have cross-license with competitors over time to really make sure we help the customers with these ramps. So, when you sit there, you have a sharing of share obviously. It is a collaborative, but it’s also, let’s face it, we have to cross-license each other’s technology to really make sure we help the customer get to the solution. And so, I actually view it as something that’s about an exciting growth trend, 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 of the volumes that are coming and it’s really something that’s been very traditional in the interconnect space and the datacom space for a long time.

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

Operator: Your next question comes from the line of Asiya Merchant with Citigroup. Your line is open.

Asiya Merchant: Great. Thank you for the question. We got some questions recently about the co-packaged opportunity that some of the semiconductor players are participating in. How do you guys think about this AI opportunity? I think you’ve outlined it as $1 billion, perhaps, 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.

Terrence Curtin: First off being while we do play in optics, we don’t play in co-packaged optics. That is a capability we do not bring. But even when you get into that, you have connectivity you’re going to need that will still be on copper, and let’s face it, that is our strength. And when you look at the architectures, you do have customers, how they’re going to experience, what happens close to the chip, what happens further away, and over time, it will be a hybrid approach. So, when we think about what we’ve gone out with the 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.

Sujal Shah: Okay. Thank you, Asiya. Can we have the next question, please?

Operator: Your next question comes from the line of Luke Junk with Baird. Your line is open.

Luke Junk: Good morning. Thanks for taking the question. Terrence, hoping you could just expand a little bit more on your comment about the opportunity for TEL around data in the car, specifically — and of course coming out of [SDB] (ph) architectures. You mentioned that major award in China, but maybe if you could just zoom out to the pipeline more broadly, especially in Asia where that trend is ahead of the West and maybe would it be possible to put some guardrails around [CPV] (ph) terms as well as a lot of attention on electrification in terms of incremental content, but maybe this could be an underappreciated driver? Thank you.

Terrence Curtin: Luke, no, a couple of things. When we’ve always talked to everybody about content, we’ve always sort of said as the electrified powertrain moves that plays a big chunk of the content, but there’s this other bucket that’s electronification that is just as important. 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. And it’s an area that we’ve always been excited about. 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, 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. And what’s been nice is our product set here has continued to grow, it’s up to about $600 million this year, which doesn’t even include the win, 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. And even when you think about that $1 billion of wins we’ve got recently from one customer, those wins are accelerating, and it’s adding another content lever that supports our 4% to 6%, and it’s one of the things that we get excited about and we’ll continue to share thoughts about how those wins continue to impact us as that acceleration continues to occur.

Sujal Shah: Okay. Thank you, Luke. Can we have the next question, please?

Operator: Your next question comes from the line of Joe Giordano with TD Cowen. Your line is open.

Joe Giordano: Hey, guys. I think we’ve talked a lot on the major subjects. So maybe, if I can just ask quickly on industrial equipment. I know you’ve mentioned orders suggest stabilization. Are you seeing any evidence of, like, that orders need to kind of ramp from here, or we kind of just had a level that seems consistent with end demand? And then, similarly on medical, the pretty substantial kind of 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 kind of a one-time correction and we’re kind of back to a normal rate? How do you kind of view that market?

Terrence Curtin: 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 to call it broader on that inflection point like I talked earlier, but 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. On the medical, I would say, that’s a one-time event. We did expect this. We had some customers that over-inventoried, 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 book to bill well above 1, but it really was a pocket here in the supply chain that will build sequentially back up as we move through the year. So, thanks for the question, Joe.

Sujal Shah: Thank you, Joe. Can we have the next question, please?

Operator: Your next question comes from the line of Saree Boroditsky with Jefferies. Your line is open.

Saree Boroditsky: Hi, good morning. So, maybe just building on some of the margin commentary that you’ve made, 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 and maybe 2026? Thank you so much.

Heath Mitts: Saree, it’s Heath. I’ll take that. Well, our footprint journey has been going on for several years now, and a lot of it is the continuation of moving legacy Western or more expensive production areas to lower cost regions. 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 ability to expand margins. So, 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 and into Eastern Europe and in Morocco. 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.

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, and then modest recoveries and things like our [ECL] (ph) business, which is 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. And we feel good about that. We know we’re below where we need to be from an entitlement perspective there at that segment level. Certainly, getting some help from the factory automation side of industrial equipment, which is a nice margin business, will help in that journey, 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.

Sujal Shah: All right. Thank you, Saree. Can we have the next question, please?

Operator: Your next question comes from the line of Samik Chatterjee with JPMorgan. Please go ahead.

Samik Chatterjee: 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 vehicle to improve 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 there. Thank you.

Heath Mitts: Yeah, Samik. The ICT business, I think we’ve been pretty public with it. It is a nice margin business and has been for quite a long time. It does cycle. It cycles with heavy truck production. We’re well positioned globally there. Sometimes we do feel the impact of certain regions as they go through different parts of their cycle both directions. And so, my comment earlier was really referring to even though there’s the top-line and there’s a dilutive impact there coming from that part of the segment relative to where it fits in, we’ve been able to hold our margins okay, but as we start to see growth in that segment — I’m sorry, in that business unit, the commercial transportation business unit, hopefully towards the end of this fiscal year, but certainly where we see things starting to line up with our customers for 2026, we would expect some outsized margin support there, just given how it weights into that segment.

So, we’re not spiking the ball now. We’re not calling for a recovery in the next quarter or two, but certainly some of the discussions that we’re seeing and there is a little bit of a longer view in terms of where things are and particularly with some of the emissions standards change for heavy truck.

Terrence Curtin: Yes, there will be an emissions change in ’27 and there will — 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.

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

Operator: Your next question comes from the line of Joe Spak with UBS. Please go ahead.

Joe Spak: Thanks so much. Two quick margin questions for me. First, in auto, we know typically the December quarter, companies tend to get some engineering recoveries from the customers. I was wondering if that occurred at all and helped the Transportation margins? If so, by how much? From the old reporting segment, we could surmise that Digital Data Networks is an above-average segment margin business. You talked about how you’re investing ahead, the need to invest. 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?

Terrence Curtin: Couple of things. We have been investing for these ramps. So, let’s take the second part of your question, Joe. On the first part, I’m going to ask you to re-ask it. You broke up a little bit. But on DDN, you’ve seen where it was in the cloud cycle. We have been investing ahead to make sure we’re adding capacity to really handle the ramps we have, doubling businesses does create a lot of execution and investment in the head and we have been doing that. And there will — program will be lumpy at times and you’ll see that in our orders already. So, 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?

Joe Spak: Yes, sorry. In auto, typically we see in the December quarter sometimes companies get some engineering recoveries from their customers. I was just wondering whether that occurred or helped the margins at all in the quarter?

Terrence Curtin: No, we do not have that. When you look at the first quarter margin, Heath said it well earlier, it is the highest production period of the year, mainly out of Asia. Our plants really crank at that time and that 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, has nothing to do with engineering reimbursement, Joe.

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

Operator: Your next question comes from the line of Christopher Glynn with Oppenheimer. Please go ahead. Your line is open. Christopher, you may be on mute.

Sujal Shah: Okay. I think we’re having some trouble with Chris’ 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.

Operator: This concludes today’s conference call. Thank you for your participation, and you may now disconnect.