TE Connectivity Ltd. (NYSE:TEL) Q3 2024 Earnings Call Transcript

TE Connectivity Ltd. (NYSE:TEL) Q3 2024 Earnings Call Transcript July 24, 2024

TE Connectivity Ltd. beats earnings expectations. Reported EPS is $1.91, expectations were $1.89.

Operator: Everyone, thank you for standing by and welcome to the TE Connectivity Third Quarter Results Call for Fiscal Year 2024. At this time, all lines are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions]. 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 third quarter 2024 results and outlook for our fourth quarter. With me today are Chief Executive Officer, Terrence Curtin; and Chief Financial Officer, Heath Mitts. During this call, we will be providing certain forward-looking information. We ask you to review the forward-looking cautionary statements included in today’s press release. In addition, we will be using certain non-GAAP measures in our discussion this morning, and we ask you to review the sections of our press release and the accompanying slide presentation that address the use of these items. The press release and related tables, along with the slide presentation, can be found on the Investor Relations portion of our website at te.com.

Finally, during the Q&A portion of today’s call, due to the number of participants, we’re asking everyone to limit themselves to one question, and you may rejoin the queue if you have a second question. Now, let me turn the call over to Terrence for opening comments.

Terrence Curtin : Thank you, Sujal. And I also appreciate everybody joining us today for the call. As I’d like to do before we get into the slides and the details, I do want to take a moment to provide some performance highlights, along with what we’re seeing versus our call just 90 days ago. As we’ve shared in our calls throughout this year, we continued to be in a dynamic global economic environment. I just want to take a few minutes of explaining what that means when you think about where TE is positioned. First off, in our largest market Automotive, we’re seeing stability on a global basis. In our Industrial Solutions segment, we continue to see growth in three out of our core businesses, and those businesses are focused on aerospace and defense, energy, as well as medical applications.

In our Communications segment, like we talked last quarter, we have returned to growth, and we are benefiting from acceleration in Artificial Intelligence applications. Now, against these growth areas, we are still being offset by ongoing weakness in just the general industrial markets, and we’ll highlight where they are throughout the call and the Q&A. Within this backdrop, our sales in the third quarter were in line with our guidance and roughly flat year-over-year. I am pleased that we delivered strong adjusted margin expansion of 200 basis points year-over-year and adjusted EPS that exceeded our guidance. As we look at our performance year-to-date, our teams have delivered record adjusted operating margins and earnings per share, even in a dynamic market environment, which demonstrates our strong operational performance.

Our results continue to reflect successful execution against the key initiatives we committed to coming into this fiscal year. We anticipated a slow demand environment overall in our markets, so our focus has been on driving margin and earnings improvement this year. Our teams have driven strong margin expansion year-over-year, and this is most evident in our Transportation and Communications segments. The high quality of our earnings continues to be reflected also in our strong cash generation model, and I’m pleased with the record free cash flow of $2 billion through the first three quarters of this year, and we do expect this to continue into our fourth quarter. Now, let me briefly share what we’re seeing in our markets since our call 90 days ago, and what we’re seeing in our order patterns, and I’ll get into order patterns in more detail a little bit later.

First off, in Transportation, our outlook for global auto production is consistent with our view 90 days ago. We continue to see growth in China, and that’s offsetting incremental weakness in Europe. In our Industrial Solutions segment, our view remains unchanged. We continue to see three out of our core businesses with growth momentum and continued weakness in industrial equipment end markets. As I said earlier in our Communications segment, our markets are back to growth, and that’s in both businesses. Finally, before we get into the slides, I do want to reiterate that our long-term value creation model remains unchanged, and it’s centered around three pillars. First off, is our portfolio is strategically positioned around secular growth trends, including adoption of renewable energy, applications for artificial intelligence, and growth in the global hybrid and electric vehicle production, along with further electronification of the vehicle.

The second pillar of value creation is that we have operational levers to drive strong margin performance through economic cycles, and you’re seeing the results in this quarter, and we have more opportunity as we go forward. Thirdly, we have established a strong cash generation model to return capital to shareholders while investing on bolt-on M&A opportunities as the opportunities present themselves. By executing on these pillars, we expect to deliver double-digit earnings growth this fiscal year, driven by a couple hundred basis points of adjusted operating margin expansion. As we look beyond this year, we are set up for strong performance. We expect to continue to benefit from the secular growth drivers, as well as also expect continued growth in areas like commercial airspace, along with normalization of destocking and industrial equipment.

This sets us up for an improved growth trajectory, leading to further operating earnings growth going forward. Now, with that as an overview, I’d like to get into the slides, and if you could look at Slid 3, I’ll discuss some of the additional highlights for the third quarter and our outlook for the fourth quarter. Then Heath will get into more detail as he gets into his section. Our third quarter sales were $4 billion, which was in line with our guidance and up 2% organically year-over-year. Orders of $4.1 billion were up year-over-year, and sequentially driven by momentum in artificial intelligence design wins. Adjusted earnings per share was ahead of our guidance at $1.91, and this was up 8% versus the prior year. Adjusted operating margins were 19.3%, up 200 basis points year-over-year, driven by the strong operational performance of our teams.

We are expecting fourth quarter sales of approximately $4 billion, including approximately $60 million of year-over-year currency exchange headwinds. On the margin front, quarter four will be another quarter of strong year-over-year expansion, and we expect adjusted earnings per share to be approximately $1.94, which will be up 9% year-over-year, and which includes a $0.10 headwind from both currency exchange rates and a higher tax rate. I talked to you earlier about the performance we’ve been driving in this market environment, and when you think about what’s implied for the full year given our fourth quarter guidance, you really get to see the strong performance. With adjusted earnings per share expected to be up 12% year-over-year, with sales that are essentially flat.

So, with that as a brief overview, let me get into some more details on order trends, and they are on Slide 4 of the presentation we posted. Our orders were up 4% year-over-year, and 3% sequentially to over $4.1 billion, and we had a book-to-bill of 1.04. As I talk about orders by segment, I will be talking about orders sequentially, as we believe this reflects business trends better. At the company level, order growth was driven by the Communications segment, which grew over 50% sequentially. Growth was driven primarily by orders for AI applications with multiple customers, and reflects that destocking in both data and devices, and appliance are behind us. In Transportation, you see a slight sequential order decline, but this was really driven by weakness in commercial transportation and our sensors end markets that are tied really to the general industrial market.

Our orders in auto were relatively flat sequentially. In Industrial, order patterns continue to reflect ongoing destocking in industrial equipment end-markets. Now, let me get into year-over-year segment results, and I’ll start with our Transportation segment on Slide 5. Our auto business grew 4% organically against our global auto production decline of 1%. Our content growth over production was 5 points in the third quarter, with strong double-digit organic sales growth in China, more than offsetting declines in Europe and North America. While we continue to see different production dynamics by region, as well as some shifts in production of different powertrains, we continue to expect content growth in our second half and longer term to be in the 4 point to 6 point.

Our growth of our market will continue to be driven both by increased electric vehicle and hybrid production and greater electronification of the vehicle. Turning to our Commercial Transportation business, the 8% organic decline that you see was driven primarily by weakness in Europe. We expect this business to be again down sequentially in the fourth quarter and expect the markets we serve to be down in the mid to high single digits this fiscal year, due to market declines that are happening in the West. In our Sensors business, the sales decline continued to be driven by market weakness and industrial applications, as well as portfolio optimization efforts that we’ve discussed with you, where we’re continuing to organically exit lower margin and lower growth products.

For the Transportation segment overall, adjusted operating margins were up to over 200 basis points to 21%, driven by continued strong execution on operational levers. We also continue to invest to support next generation vehicles, whether they’re around electrification of the powertrain, high speed Ethernet for data applications in the vehicle, or miniaturized power and signal products to leverage next generation architectural shifts by our global customers. Now, let’s get into the Industrial Solutions segment, and that’s on Slide 6. In this segment, we continue to see the same trends we’ve been discussing all year. Sales were down slightly 2% organically. Our aerospace, defense and marine business sales were up 19% organically, driven by growth both in commercial airspace as well as defense markets.

In medical, sales in the quarter were up 7% organically, driven by ongoing increases in interventional procedures, and in energy sales were up 3% organically, driven by strength in the Americas and Europe, with continued strong momentum in renewable applications. As you can see on the slide, the pocket of weakness for the segment is in the Industrial Equipment business, where our sales are down 24% organically. While we are starting to see some signs of order patterns flattening, we still expect to see year-over-year declines in this business in the fourth quarter, as our OEM customers and channel partners continue to reduce inventory levels. Industrial segment adjusted operating margins were 15.1%, which was in line with our expectations given current volume levels and business mix.

We continue to expect the segment margins to run into mid-teens until the Industrial Equipment business returns to growth. Now, if you could turn to Slide 7 and I’ll get into the discussion around the Communications segment. First of all, and you can see it on the slide, I am excited about the return to year-over-year growth and our strong margin performance. In data and devices, we grew 32% organically, and our design wins are reflecting accelerating momentum. I discussed our order momentum earlier, and based upon these wins, we are increasing our near-term expectations of AI revenue to over $250 million this year, and we expect this to more than double as we get into 2025. In our Appliances business, we grew 12% organically, driven by both the Americas and China.

From an operating margin perspective, the segment had adjusted margins of 20%. This was up over 600 basis points over the last year, driven by the higher volumes coupled with stronger operational performance. So, with this as a quick summary of our segment performance, let me turn it over to Heath, who’s going to 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 8. Before I get into the details of the financials, I want to reiterate something that Terrence said earlier. We are dealing with a slower market environment. We’ve talked to you about that throughout the year, but our focus this year as discussed has been on improving margins and earnings, and I’m pleased to be able to sit here and say that we have set TE records for quarterly adjusted operating margins and earnings per share in the third quarter, and we feel good about the momentum going forward. Now, the details. Adjusted operating income was $766 million with an adjusted operating margin of 19.3%. GAAP operating income was $755 million and included $5 million of acquisition-related charges and $6 million of restructuring and other charges.

Year-to-date restructuring charges were $57 million, and for the full year we continue to expect restructuring charges to be approximately $100 million. Adjusted EPS was $1.91 and GAAP EPS was $1.86 and included restructuring, acquisition and other charges of $0.05. The adjusted effective tax rate was 23% in the third quarter, slightly higher than our guidance due to some jurisdictional rate adjustments. And for the fourth quarter and for the full year, we now expect our adjusted effective tax rate to be approximately 22%. Importantly, as always, I just want to remind you that we continue to expect our cash rates to stay well below our adjusted ETR for the full year. Now, if you turn to Slide 9, we delivered strong margin and EPS expansion along with record year-to-date free cash flow with sales that are roughly flat year-over-year.

Sales of $4 billion were down 1% on a reported basis, up 2% on an organic basis year-over-year, and we are continuing to see headwinds from a stronger dollar, which unfavorably impacted sales by roughly $80 million in the third quarter. Adjusted operating margins were 19.3% in the third quarter, expanding 200 basis points year-over-year. This was driven by year-over-year margin expansion in our Transportation and Communications segments. Adjusted earnings per share were $1.91, up 8% year-over-year, driven by strong margin expansion and included headwinds of $0.18 from currency exchange and a higher tax rate. Turning to cash flow. Cash from operations was $1 billion, and free cash flow was $867 million in the third quarter. Year-to-date, we have delivered free cash flow of roughly $2 billion.

That’s up 36% year-over-year, and we expect to deliver another year of free cash flow converging well above 100%. With the strong free cash generation, we have deployed over $2.2 billion so far this year, with $1.8 billion in return to shareholders and approximately $350 million deployed for acquisitions. Our cash generation model continues to give us both confidence and opportunities to return capital to shareholders while supporting bolt-on M&A activities. Just to reiterate, our long-term capital strategy remains unchanged, which is to return approximately two-thirds of free cash flow to shareholders and use approximately one-third for bolt-on acquisitions over time. Before I turn it over to questions, let me reinforce some of the key points that we discussed today and share how we are thinking about our performance and opportunities going forward.

Our team is navigating this environment well. We are delivering margin and EPS expansion while continuing to invest for future growth. We are very well positioned to benefit from the secular growth trends and drive further operating earnings growth. We are demonstrating our strong free cash — strong cash generation model with a balanced deployment of capital. So, we remain very excited about the opportunities we have ahead of us to drive value creation for all our stakeholders. With that, let’s now open it up for questions.

Sujal Shah: Thanks, Heath. Brianna, could you please give the instructions for the Q&A session?

Q&A Session

Operator: Thank you. [Operator Instructions]. Your first question comes from the line of Amit Daryanani with Evercore ISI. Your line is open.

Amit Daryanani : Good morning. Thanks for taking my question. I guess, Terrence, really impressive momentum on the IS side, especially with AI centric business. This is clearly a big topic for investors that are focused on. So, I was wondering if you could just talk about what is driving the expectation for higher growth, both for this year and next year, versus what you had talked about 90 days ago. And perhaps if you could also just touch on what does your customer mix look like on the AI side and where is the momentum coming from?

Terrence Curtin : Thanks, Amit. I appreciate the question. First off, I’ll get into the different elements. We have to realize, this starts with the hyperscalers and cloud CapEx. When you look at it, that just continues to accelerate. It is incremental CapEx, and you are seeing it get put towards AI applications. As you know, we built a strong position with the cloud customers previously, and it’s translating into a strong position with AI and the design wins are across customers. There isn’t one customer here. It is across the hyperscalers and that’s what I get excited about the most on it, the breadth of it. Now, as you said, you can see on the order slide I went through earlier, you saw the acceleration, the Communication orders that were up 50% or so sequentially.

When we see these orders and design wins coming in, it does take, we talked 200 last quarter, some of that will schedule in for this year, so that’s really why you’re seeing the increase to the 250. But with the design wins we’ve gotten, it gives us confidence to take up — it’s going to at least double on that 250 in the next year with the wins we have. Just to build on who we deal with, these engagements are with the hyperscale customers and realize some of them develop their own AI solutions. We also have to work with the semiconductor companies, including both the processor companies and the other semi-players that make the acceleration chips and other silicon solutions that are so necessary to really make sure you get to these high-speed, low-latency applications.

The growth that we’re seeing is across this entire ecosystem. It’s not just one customer. As I said before, I do think this is a space where a few of us really will benefit from because of the investment needed to scale the engineering and the manufacturing coupled with the technology that needs to happen here. So, I do view the momentum is real. These are real design win and orders, and we’ll continue to keep you updated as we have calls. But certainly like that traction going into ‘25 as a growth driver on top of the other ones we always talk to you about.

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

Operator: Out next question comes from Wamsi Mohan with Bank of America. Please go ahead your line is open.

Wamsi Mohan : Yes, thank you so much. Clearly this was very outstanding margin performance in the quarter. I’m just wondering, maybe if you could talk about the margin outlook, both in terms of what you are expecting for the segment and how incremental margin should trend in communications in light of this AI momentum. Maybe you could just wrap the rising commodity pricing environment in that. I know you guys hedge, but if you could share some color of how we can think about the impact from that as we look over the next three to four quarters. Thank you so much.

Heath Mitts : Yes Wamsi, this is Heath. I’ll take this. So, I guess, you heard our prepared comments and some of the color around margins. Our focal point as we entered this year and we were very transparent externally as well as our focus was on margin expansion, which translates into earnings growth as well. We’ve had some areas of support and some areas of weakness on the top line, but net-net we’re hammering through the year. Our focus has been on the non-volume lever. So that’s getting returns on some of their past restructuring actions that we’ve done. Let’s make sure that price is sticking in terms of enough to offset the inflationary pressures and then optimizing the portfolio at certain pockets to improve growth and ultimately margins.

So, we’re running in that 19% range right now, and my thoughts in terms of as we go into ‘25 and beyond, in terms of how we – where those go, our largest opportunities in the industrial segment. So we continue to target high teens, margins and industrial. We are running right now in the mid-teens and have been here for a while, which is kind of in line with where we would expect given the pressure that we see in our industrial equipment business. That is our highest margin piece of the segment. So as we think about that business being down, we’re holding our head in the mid-teens due to the performance of the rest of the segment, which would be aerospace, energy and medical. But as we return to growth and particularly the industrial equipment business next year, we would expect some margins to improve and support the overall company margin number.

In Communications, I think Wamsi if you look at, when you go back over the past three or four years, this segment’s margin is very tightly aligned with revenue, and that may seem obvious, but it’s more correlated in this segment than anywhere else that we have. So when we saw outside revenue in both appliances and D&D in 2020 and 2021, parts of 2022, you really saw the margins stick up into the mid-20s, which we said at the time was probably overheated. Then when it corrected back down in ‘23 and earlier part of this year, you saw the margins back in the mid to high teens. So, where we are, we have raised the floor in terms of that variability and we feel good about that. We’re now at a position where we’re at about $520 million of revenue or generating target margins.

And I’ll tell you, that’s a lower revenue to get to that target margin than we had designed originally and resource the business. We feel good about that. Now, to Terrence’s earlier point, we have won and been awarded several AI programs. There is some investment required there. Now that, some of that’s in our rent rates, some of that will be a little bit incremental. That’s both on the engineering side as well as our ability to produce and these programs in the time frame that our customers require. But I think as you think about it, going forward, incremental margins on revenue for that segment in that 25% to 30% range is a fair number, which would suggest that margin, as that revenue ticks up in support of those programs, you should see some margin movement as well.

So the team has just done a terrific job there. Then Transportation, listen, a year ago we were talking about how long is it going to take for us to get to target margins, which is 20% for that segment. We got there much sooner than we thought. That’s largely attributable to the team pulling the levers that they can and really driving some of the price to offset some of the inflationary pressures that we’ve seen in the last few years. We’re sitting at 21% this quarter. I’d still say 20% plus some is a good number to model that. We’re not going to sit there and after just three quarters, announce a new target. But I would tell you that the most profitable piece of that business, which is our Commercial Transportation piece, is also the most profitable and it’s depressed right now.

So that makes improves. We feel good about that. We feel like we’re in a good position, certainly as we step into FY’25 starting in October. So, all that being said, we’re confident. The commodity situation is always in flux. As you mentioned Wamsi, we do hedge our metals. As those come in, you see that layer in slowly when commodities uptick and when they start to come back down, they are slow to come out. So that helps with our planning, that helps us reduce volatility. As we look forward, the teams are very geared up for — if we see continued spikes in inflation or anything else, in particular metals groups or resins, we will pull that pricing lever again. I think that’s one of the things that has improved in our operational muscle memory going through this process.

So more to come, and as we get into ‘25, we’ll provide more outlook.

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

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

Joe Spak : Good morning. Thanks for taking the question.

Terrence Curtin : Hey Joe.

Joe Spak : I was wondering, back to AI, we’ve been hearing a little bit more about some cross licensing deals between interconnect players for AI. I’m just wondering what you can tell us there. How common is that in other areas of the business? Mechanically, like how would this actually work if it does occur? If you manufacture some of your license, is that a lower margin profile business or is it relatively even?

Terrence Curtin : No, Joe. Hey, one is due to the size of this and the ramping that’s going to be required, in areas where you have this, dual sourcing and cross licensing is very common. There is IP here that the different players have and we work together on how do we make sure we bring the best solution together to our customers. We have said, we would expect in this area due to the volumes, the ramping, as well as our customers, making sure they have certainty of supply. You would see some dual sourcing elements as well as cross licensing. So no, that is reality in here. In this space of our data and devices space, this is not new. This has existed for a long time. So this is not a new phenomenon.

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

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

Joe Giordano : Hey, good morning guys.

Terrence Curtin : Hey, how are you Joe?

Joe Giordano : Apologies if you went through some of this. I had to join a couple minutes late from another call. But Terrence I’m just curious to hear like your updated thoughts, like maybe over the kind of very near term and maybe over like the next 12 to 18 months around hybrid versus EVs. GM’s talking about not building a plant, but they were talking about building. So where do you think that fits and what do you do from a CE standpoint to like adapt and adjust to the changing end market?

Terrence Curtin : Yeah, no. So thanks Joe for the question. One of the things that I said in my opening comments were, you know production is very stable in automotive. But I think it’s important when you think about EVs, EV production this year, and I say EV, I say battery electric, plug-in hybrid and hybrids. They are up 20% this year. So when you have global auto production flat, all of the electrified powertrains are up significantly. Beginning the year, we would have thought that would have been 25 million units. It’s going to be close to 24 million units, whereas last year was 20 million units. So with some of the news that you mentioned, sometimes it makes it feel like electrified powertrains are declining. They are not declining, they continue to accelerate, and you see different trends around the world.

I know on this call I always have to remind you, 70% of the electric vehicles made in the world are in Asia. It’s one of the things with our global position, it’s very important that that’s where you see the content outperformance, and you don’t see some of the bumps that maybe you read in the West. But in Asia overall, the electrified powertrain continues. So in Asia, battery electrics are up 20%, hybrids are up 20%, plug-in hybrids are up 50%. And certainly China drives that, but we also have to realize when you get into hybrids, which are in the West, it benefits some of our non-Chinese OEM customers, whether they are the Japanese or the Koreans, that have really nice product sets and we benefit from that. What you see in the Americas and Europe, you do see people moving more towards pure hybrids.

In U.S., Americas, they are up 40%. So consumers are making choices more towards hybrids, and you also see they are up 20% in Europe. So you continue to see penetration increase, and any of those are good for content for us. So we always tell you a nice engine probably has about $70 on it. A full battery electric is $140, plug-in hybrid about $120, and certainly when you get into a hybrid, its $105, $110. So all of that is good for us, and even as we look forward and we’re in planning now, we’re going to expect auto production to be flattish, and we expect the trends that you are going to see in EV production probably continue to increase like that 20% next year as we move forward. So it’s still a very constructive environment. I just always ask you, make sure you are keeping a global perspective on it, not just the Western view on it, because that’s where the majority of the action is.

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

Operator: Your next question comes from Mark Delaney with Goldman Sachs. Your line is open.

Mark Delaney : Yes. Good morning and thanks for taking my question. Following-up on the auto end market, hoping to better understand the ability for TE to see revenue benefit in 4Q and into next year from that content growth you were just describing Terrence. I understand the theoretical content increase TE has on hybrids and BEVs, but at times, companies in the supply chain are affected by new vehicle launch delays, maybe their own key customers aren’t selling as many cars, or there’s inventory corrections. And so, as you think about all of those cross-currents, I’m hoping to better understand, do you think TE can actually see the 4 to 6 points of targeted outgrowth in automotive show up in its revenue when you think about your own customer exposure and that content potential? Thanks.

Terrence Curtin: No, thanks Mark, and let me just start with the punch line. The answer is, yes. We feel very confident with it. I just spent there with Joe a little bit talking about the powertrain differences, and the powertrain is an important content driver, but it’s not the only content driver. When you sit there and you think about it. I mentioned it in my prepared comments. When you get data connectivity that’s needed in the vehicle for autonomy, that’s also needed for all the other data that you need in the vehicle, that creates an additional architecture that also benefits content. And the other thing is, as people continue to look at other features that are added around safety applications, they continue to evolve the architecture around the traditional backbone 1248 volt, to really make sure the vehicle comes to life for the features a consumer expects.

And all three of those elements benefit our content. I know we call one electrification and the other one electronification, but we benefit from both of those. And I think you look at this quarter, this quarter with the 5 points of outperformance, we grew in a declining auto production environment. It basically, iView proves it, and we feel confident it’ll continue to build moving forward. The other thing that, hey, you will have some lumps of time like you said, due to platform changes, things like that. But one of the great things about TE is because we’re essentially on every car in the world, you really never hear us talk about that. It’s where our great global position really comes into play, and I think it really is important to our customers as we bring them technology, but also as an investor, you don’t get to – you never hear us talking about this customer or that platform impacting us.

So I feel very good about the 4 to 6 and feel very good about the design wins we continue to get in automotive.

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

Operator: Your next question comes from Samik Chatterjee with J.P. Morgan. Your line is open.

Samik Chatterjee: Yep. Hi. Thanks for taking my question. I guess I was going to ask this more on a company sort of aggregate revenue level. All through the year, your revenues have been in the sort of $3.8 billion to $4 billion range, even as sort of AI revenues have ramped. I mean, as we go into next year, when we put AI aside, where do you think we are in the cyclical recovery where you should see growth? What drives that confidence? Because when we look at the sort of revenue track record this year, it’s been fairly sequentially flat. Outside of AI, how should we think about growth really sort of from a cyclical perspective in some of these end markets? What kind of magnitude of growth should we be thinking about? What drives that confidence? Thank you.

Terrence Curtin: So Samik, thank you for the question. I think first thing, AI we laid out very clearly. I think the other thing that you’re going to have – that you have to be there is, the 4 to 6 points on top in automotive. We do think we should be planning and we’re planning a flattish environment. So I do think you are going to see that. On top of that, I wouldn’t be lost on the trends that are really being masked right now in our industrial segment due to the stocking. If the stocking will end, you even see it in our appliance business, it is very important. So you’ve seen our appliance business return to growth. Some of that is the stocking ending. You are going to see that in industrial equipment. And then some of the other industrial cycles may be a little bit middle to later in the year, but it is very important that as you sit there, the stocking has had a big impact on our revenue this year, earlier in the year probably pushing $100 million of headwind.

So they are the types of things that I think build. Some of them are content. Some of those are certainly market, but I think they are the things that get us excited about the growth momentum. And I know I said flattish earlier. I meant flattish production in automotive from a planning, not content. Content will be on top of the production environment. So, just to correct that sentence, I didn’t complete my thought, so. Thanks Samik.

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

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

Asiya Merchant: Great. Thank you for taking my call, my question. On the cash flow, obviously a great quarter here. As you guys think about revenues ramping here and especially in the AI segment, maybe if you could talk to us about your CapEx commitment as you look into fiscal ’25, and I think you’re talking about AI revenues more than doubling now. Thank you.

Terrence Curtin: Sure, and I appreciate the question. First of all, our CapEx runs roughly from a modeling perspective about 5% of revenue. In different times we’ll run just under that. In different times we’ll run just modestly over there, but that’s a good planning assumption. Inside that, in that run rate, you have to assume all of the growth areas that we’ve been talking about today have been supported. So whether that’s the things around the content outperformance relative to automotive, which is largely driven by the electronification as well as the adoption of the various power trains. Some of that CapEx has supported tooling and product lines that we’ve had to put in place that are in those, so that’s not going to be incremental pressure as we move forward.

Now, we are ramping up a little bit in CapEx to support some of the AI applications, particularly coming out of Asia. We’ve opened up a facility in the Philippines. Some of that is in our run rate as well. And there will be other tradeoffs that we make as we do across the portfolio, but I don’t see anything that’s putting incremental pressure on our CapEx that’s going to materially change that planning assumption, because some things that will come on, that will need a support for the AI applications and product lines. There will be other things that come off because we’ve completed some expansion in other areas, whether that’s in industrial or otherwise. So it’s kind of always a rolling process for us, but I still think we can absorb this within our CapEx profile.

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

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

Christopher Glynn: Thanks. Good morning, everyone.

Terrence Curtin: Hey Chris.

Christopher Glynn: I wanted to ask generally about order patterns and any particular insights into markets under the quarter or under the book-to-bills. In particular, I think you have the positive book-to-bill at Industrial Solutions with still industrial equipment destocking. So it seems like the persistence at the other markets is pretty high visibility, but maybe take that question where you will.

Terrence Curtin: Thanks Chris. What you presume about industrial is right on. And in Communications, clearly you see the benefit of the AI orders as well as our appliance business had nice growth as well. So tying back to where we see the stocking ending, you are seeing that strength and getting back to at least market and then some. When you look across the other dynamics that we continue to see, number one is there was a point in time probably three quarters ago we would talk about backlog. Our backlog continues to be strong, and what you see is the service levels, our service levels to our customers come up. You see people saying, hey, I want to work out my backlog a little bit. Why do I need something if it was an eight to 10 week lead time?

Why do I need backlog out this far? So we do see that, those effects happening, in those areas where our service levels are very strong. So you know, in places like auto, our service levels have returned above pre-COVID levels. So you see some of those factors. And then in the general industrial spaces, and that is our industrial equipment market. That is our commercial transportation market. In our sensors business that we have pivoted to transportation and industrial, the industrial piece, you just see ongoing weakness that’s pretty global and I would also say just sort of moving sideways. So if you peeled those out, you would say, ‘boy, your orders look really strong, really nice position.’ But they are just areas where we’re seeing pockets of the stocking.

It is both with OEMs as well as distribution partners. And we are seeing some signs that’s starting to move sideways, which is a good first sign, but it still seems like it’s taking a little bit longer to work through in that general industrial space, but it will come to an end here. They always do. It’s just, I can’t give you the exact date.

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

Operator: Your next question comes from Saree Boroditsky with Jeffries. Your line is open.

Saree Boroditsky: Hi. Thanks for taking my question.

Terrence Curtin: Good morning.

Saree Boroditsky: Going back to the AI conversation you previously talked about $400 million in sales next year. I think you just increased that to $500 million. Given this increase, could you just give us an update on the $1 billion sales estimate and what’s the timeframe for that? Thank you so much.

Terrence Curtin: No. I think when you look at that, clearly with the trajectory that we have, that will probably move in a little bit. We’re going to continue to keep you updated on that as we have design wins. You do have an element here. We are taking your next year’s up versus the $400 million we just told you 90 days ago. So I think, the $1 billion is definitely confident, but the timing will be split in a little bit and we’ll continue to keep you updated on it.

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

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

Luke Junk: Good morning. Thanks for taking the questions. Terrence, one of the things you highlighted in your remarks that I thought was interesting around auto investment specifically was miniaturized products for next-gen architectural shifts. Can you just double-click on that trend with respect to potential impacts to content? And it sounds like its more engineering-intensive and maybe margins as well. You know this is an area, of course, that’s gotten a lot of attention, architecture that is, in the [inaudible] review of EV’s. So maybe we could just revisit that overall trend for TE as well. Thank you.

Terrence Curtin: Yeah. No, it does create content opportunity, and it’s one of the things I think is important when you talk about content. Clearly, we get a benefit as you move to high-voltage architectures around the power train, but you have to realize there’s a whole other architecture that exists to move data around, as well as power and signal around in the car, and both of those trends impact every vehicle, not just an electric vehicle. So data I think is clear, but as everybody continues to want more features and functionality in the car, whether you get into zonal architecture, whether you want to get into centralized compute, while that simplifies and rationalizes the harness, the interconnects get more miniaturized and much more complex.

And in those situations, that does – it is part of the content driver we have. So anytime you think and you sit in a car, forget about the engine running, but every other feature you sit there when you move to a new vehicle that you expect, there’s connectivity associated with it, because power and signal and data need to move around, whether it’s sensing something on the front end of the car, its sensing something in the braking system, it needs to transmit that power signal and data someplace, and all of that are real hard architectural problems. And our engineers at the design centers where our OEM customers are, that’s where we design. It’s really where that magic occurs that drives that content growth. And these are things that don’t stop because people are only working on electric vehicles.

That’s architecture that helps OEMs compete. It also gets people, consumers what they want, and it’s where our teams excel. So sometimes I think it’s taken for granted when we talk about content, but that’s the electronification element of content, and that’s why we feel so confident about the 4 to 6, both the electrification and electronification that happens in the vehicle really help drive that content.

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

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

Colin Langan: Oh, great. Thanks for taking my question. I’m actually just going to follow-up on the zonal architecture question. I know there’s been talk that if you go to zonal, there’s actually less wires and connectors. I think that’s when you put in these big domains. It sounds like you don’t see an impact there. Is it really just the wiring that’s impacted as you go to zonal, and you are actually still seeing the same or higher content connectors, or is there a little bit of a content loss as you shift from a traditional architecture to the future zonal?

Terrence Curtin: No, it’s a great question. Actually, when you go from – you get wire reduction and harness simplification. You don’t get connector simplification, but you are still going to need a power signal or data transfer that occurs. It may be in a simplified wire structure or a different type of cable, but what you come into when you get into that zonal is you have a much more complex connector. Something that might have been only transmitting one signal, you might have something that’s transmitting 400 different signals, and that gets into a higher contact count, more complex connector into that compute, and that’s actually areas where we actually drive content increase. When you get into those areas of zonal and things like that, that everybody talks about and has been talking about for a long time, typically you’ll get into more complex, more engineered connectors that drive more increased content for us.

It certainly simplifies the harness, but it does not simplify the connectivity.

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

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

William Stein: Great. Thank you for taking my question.

Terrence Curtin: Hi Will.

William Stein: Hey. In the prepared remarks, I think it was Heath who mentioned the potential for bolt-on M&A a couple of times. We’ve seen one of your competitors really accelerate M&A investments recently, and in a number of years you guys haven’t been very visible. I’ll say there may have been tuck-ins that perhaps you didn’t announce, or maybe I didn’t get them, but I wonder if you can just remind us of your strategy and tactics when it relates to just your perhaps in-market focus or technology focus, returns, metrics, hurdles, anything that you can help us understand and maybe did you mention is the opportunity for. Thank you.

A – Heath Mitts: Thanks Will. This is Heath. I think, and I appreciate the question. Listen, our comment around bolt-on M&A being a focus is not new. We’ve been talking about that here for a couple of years. When we say bolt-on, it doesn’t always necessarily have to mean small though. Bolt-on’s mean they are things that are kind of – are similar to what we do, in markets that we do, in technologies that we understand, and in production environments that we understand. And so those tend to be things like the ERNI acquisition in industrial equipment or the Schaffner acquisition we completed in December, which is also in the industrial equipment business, things that enhance our portfolio and give us an opportunity to drive value through some of the operational and sales synergies.

So when we say bolt-on, it doesn’t always have to be small. It just means that it’s not very far adjacent to us. Now, our focus is across the businesses, but admittedly, there are some businesses that we have been focused on a little bit more internal self-help. And as we progress through those things and that is reflected in some of the margin improvement that you’ve seen, we will, in certain businesses, be pivoting a little bit more towards M&A focus. I would tell you that the pipeline, particularly in the industrial spaces, and that’s not just the industrial equipment, but the industrial spaces in general in that segment, the pipeline is more robust than it has been in a very long time. A lot of cultivation activities, and we feel very good about our ability to see an uptick in transactions there.

Now, I’m not about to go on record and try to quote a dollar amount, because although that would be a more satisfying answer for you, these things come in a little bit more lumpy and things outside our control in terms of how processes go and how sellers react. In terms of us being more quiet, I can’t speak on that relative to others, but I would say that we are a return-focused company and we are looking – we’re not just going to buy growth for the sake of growth. We are looking for things that we are the right owner of and things that have a good financial return for our owners. And so in certain environments in the last few years, we’ve seen elevated acquisition prices, and we have to be cautious on some of those things. At the same time, we know where our sweet spot is.

We know where we can drive value, and we’ve proven that to ourselves in a few of these transactions we’ve done in the last couple of years. I think you’ll continue to see us talk more about this as a bigger part of our story over the next year or two, and I think a lot of it will be in the industrial space as I look at where the opportunity sits today. I appreciate the question and the opportunity to provide a little more color on that.

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

Operator: Our final question comes from Shreyas Patil with Wolf Research. Your line is open.

Shreyas Patil: Hey, thanks so much for taking my question.

Terrence Curtin: Hey Shreyas.

Shreyas Patil: Hey Heath, you talked about the strengths you are seeing in transportation, particularly on the profitability side. Just trying to think about the puts and takes from here. I mean, typically incremental margins are in the low 30’s. Commercial transportation volumes should improve at some point next year, and there are additional restructuring savings in the pipeline coming in 2025 and 2026. So what are we missing as we think about the puts and takes and how margins could actually go from here? And then maybe just to put a finer point on the earlier question on the new automotive architectures, are you seeing wins today in this area? There are a few OEMs that are ahead of the curve, so just curious what you are seeing with them as well.

A – Terrence Curtin: Yeah, let me answer the second part, and then I’ll let Heath, Shreyas, answer your first part. We’re absolutely seeing these wins. We’ve been working on these designs. In some cases, some designs never made it for decades. So when you think about these architectural changes, we are working on them. Even with the EV move, some OEMs around the globe actually jumped to some of these architectures, because they weren’t evolving legacy architectures. So that is part of our content story. We are seeing it. What’s great is our teams see that content uplift when you have these moves. But certainly, it’s by OEM-by-OEM, and also by the platform design evolutions that they are going through, but clearly see that in our turbines. And I’ll hand it over to Heath for the first part of your question.

A – Heath Mitts: Yeah, listen Shreyas. When I think about the margin journey that transportation has been on, a lot of it has been self-helped around restructuring. And we have moved, over the last several years, a fair amount of activity in terms of production environments out of Western markets, in terms of where production is, and into places where we can take advantage of our scale, in places like Eastern Europe, Morocco, Mexico, and in parts of Asia. So that has had a nice uplift, and it has not been cheap or painless. The team has executed well, and we appreciate our owners’ patience as we’ve spent some of their money to do some of this restructuring. Now, you do see some of that reflected in the margins. The other piece is around price, and price is something that historically we’ve kind of been – kind of, I don’t know what normal is anymore, but if you go pre-pandemic years, we would have said price is kind of minus 1%, minus 1% to 2% a year, particularly in automotive.

Certainly, we’ve tightened that up. Price is not a tailwind, but it’s not as much of a headwind, and as we think about where that will track very closely to where we see input costs and inflations there, both on the labor and on the material side. And the team, is new in last couple of years. There’s a much tighter discipline there around our thinking. Now, having said all that, you have to remember, it wasn’t but this time last year when people were asking the same question you are, but they were asking, when do you get from the high teams up to 20%. And we put a lot of legwork in, and the team has executed really well this year to put us to the point we are. We will continue to evaluate that. I think your 30% incremental is probably a good number.

The recovery of the commercial transportation market as you mentioned, is a nice help for us. But you also have to remember that even though commercial transportation has been down from a top line, they’ve held their head internally on the margin front. And so there’s opportunity there, and quite honestly, there’s opportunity in our centers business to continue to improve margins as we’ve exited some lower margin net programs. So when you add all that up, yes, your math would suggest that we are going to move above 20. But give us the opportunity to work through there and contemplate everything before we start issuing new targets. So I do appreciate your questions Shreyas.

Sujal Shah : All right. Thank you, Shreyas. If there’s no further questions, I’d like to thank everybody for joining us today. If you have additional questions, please contact Investor Relations at TE. Thanks everyone, and have a nice day!

Operator: Today’s conference call will be available for replay beginning at 11:30 a.m. Eastern Time today, July 24th, on the Investor Relations portion of TE Connectivity’s website. That will conclude the conference for today. Thank you for your participation. You may now disconnect.