This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk04: Everyone, thank you for standing by and welcome to the TE Connectivity second 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. To ask a question, please press star 1 on your telephone keypad. 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, Sujil Shah. Please go ahead.
spk05: Good morning and thank you for joining our conference call to discuss TE Connectivity's second quarter 2024 results and outlook for our third quarter. With me today are Chief Executive Officer Terrence Curtin and Chief Financial Officer Heath Mitz. During this call, we will provide 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 gap measures in our discussion this morning. and we ask you to review the sections of our press release and the accompanying slide presentation that address the use of these items. 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 are 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 Terence for any comments.
spk02: Thanks, Sujal, and we appreciate everyone joining us today. As I'd like to normally do before I get in the slides, I do want to take a moment to provide some performance highlights along with what we're seeing versus our call 90 days ago. We continue to be in a dynamic global economic environment. Against this backdrop, the performance of our markets are largely consistent with our expectations resulting in second quarter sales being in line with our guidance, with sequential growth in all three of our segments. In addition, we experienced improved order levels with sequential growth in orders in all of our segments, and I'll provide you more details on orders later in the call. Our results reflect execution against key items we committed to coming into fiscal 2024. We highlighted to you our focus on margin performance and the benefits from non-volume related operational levers to drive margin expansion. Our progress on these are evident in our results as we delivered 13% year-over-year adjusted earnings per share growth, which was driven by adjusted operating margin expansion of 250 basis points. Adjusted operating margins were up in each segment versus the prior year and we expect to continue to deliver strong margin performance through the remainder of this year. With the improvements that we've made, we expect to deliver double-digit earnings growth this fiscal year, driven by a couple hundred basis points of adjusted operating margin expansion, even in this slow growth environment. The high quality of our earnings continues to be reflected in our strong cash generation model. Through the first half of this year, we delivered record free cash flow of $1.1 billion, which is up over 30% versus the prior year, and we expect to deliver another year of free cash flow conversion above 100%. With the strong cash generation, we deployed over $1.5 billion so far this year, with $1.2 billion being returned to shareholders and approximately $350 million being deployed last quarter for the Schaffner acquisition That'll be in our industrial segment. Our cash generation model continues to give us both confidence and opportunities to return capital to shareholders while continuing to support bolt-on M&A activities. So let me now share what we're seeing in our market since our call 90 days ago. Our view of the transportation and markets remains unchanged from our prior view with global auto production still expected to grow slightly this year, while we continue to expect weakness in commercial transportation and markets, both in Europe and in the Americas. In our communications segment, we continue to see momentum in high-speed cloud and AI applications, and are seeing the impacts of the stocking coming to the end in both of our businesses in this segment. Excuse me. Because of these trends, we expect the communications segment to return to year-over-year growth in our third quarter. In our industrial solutions segment, the picture is the same that we've been seeing for the last six months. We see three out of our four businesses continue to have growth momentum. However, our industrial equipment business continues to be impacted by the stocking. As we think about the industrial equipment business, We are seeing early indications pointing to a potential normalization later this fiscal year. And then one other thing I'd like to highlight is that we have seen the dollar strengthen against other currencies since our last earnings call. And this is resulting in an increased headwind to growth and earnings in our second quarter. And this will impact the third quarter as well. And lastly, I want to reiterate that our long-term value creation model remains unchanged and is centered around three pillars. First, our portfolio is strategically positioned around secular growth trends, including the adoption of renewable energy, applications for cloud and artificial intelligence, and growth in global hybrid and electric vehicle production. And when you think about the vehicle, we not only benefit from the electrification of the powertrain, but we also benefit from the electronification trends that include increased software-defined vehicle as well as increased safety and comfort features. The second pillar of value creation is that we have operational levers to drive strong margin performance through an economic cycle. And our third lever is that we've established a strong cash generation model to return capital to shareholders while investing in bolt-on M&A opportunities. Now with that as an overview, let's get into the presentation. I'd ask you to turn to slide three, and I'll discuss some of the highlights for the second quarter, as well as our outlook for the third quarter. And then I'll hand it off to Heath, who'll get into more details in his section. Our second quarter sales were $3.97 billion, which was in line with our guidance, and up 3% organically on a sequential basis, with each segment delivering sales in line with our expectations. Adjusted earnings per share was ahead of our guidance at $1.86, which was up 13% versus the prior year. Adjusted operating margins were 18.5%, and this was up 250 basis points year-over-year driven by strong operational performance. We are expecting third quarter sales of approximately $4 billion, reflecting organic growth on both the sequential and year-over-year basis. The year-over-year growth is expected to be driven by transportation and communication segments, partially offset by the effect of a stronger dollar. Adjusted earnings per share is expected to be approximately $1.85, and this is up 5% year-over-year, and it does include a 15-cent headwind from both tax and currency exchange rates. And just moving away from the financials for one second, We did just issue our Connecting Our World report, which details our commitments around corporate responsibility. There are a number of initiatives that we're driving internally, and our goals are in line with both our purpose as well as our expectations from our customers. Some of the key highlights that I want to bring up to you is that we did achieve a 70% plus reduction in both Scope 1 and Scope 2 greenhouse gas emissions over the past three years, and we also set our Scope 3 reduction targets and these have been validated by the Science-Based Targets Initiative. So with that as a quick overview of the quarter and our outlook, let me get into more details on orders, and that starts on slide four. As I highlighted earlier, we are seeing improved order levels. Our orders were up 6% sequentially to $4 billion, with sequential growth in each segment. And really, this is the first time in a year and a half that orders have been above $4 billion, and our book-to-bill is above one. And we do believe that order patterns are indicating stability in most of our end markets we serve, as well as the consistent service levels that we're providing to our customers. Now, getting into orders by segment. Transportation orders grew sequentially despite auto production declining sequentially to a little bit below 21 million units in the second quarter. We saw production in China that offset incremental weakness in North America. And going forward, we expect global auto production to be roughly 21 million units per quarter as we move through the second half of this fiscal year. In our industrial segment, we saw 7% growth in orders sequentially. And this reflects the continued momentum that is offsetting ongoing stocking in the industrial equipment and markets. And in our communications segment, our orders grew 30% sequentially, reflecting design wind momentum in data center programs, and about half of the increase was driven by AI orders for delivery in 2025 in our data device businesses. Now, with that as an overview of orders, Let me now discuss year-over-year segment results, and I'd ask you to turn to slide five, and I'll start with transportation. In transportation, our auto business grew 1% organically, with double-digit growth in China offset by declines in North America and Europe. While global auto production levels are consistent with our prior view, we are seeing different dynamics by region. Versus 90 days ago, Our expectations of vehicle production have increased in China, with a continued strong outlook for EV adoption and expansion in our content per vehicle. In North America and Europe, OEMs are adapting their mix of production to better align with consumer preferences. Factoring in these dynamics, on a global basis, EV and hybrid production are both expected to increase by 24% this fiscal year, and we'll continue to see declines in internal combustion engine production. The increase in the electrified powertrain autos will be driven by increased production in Asia, which is our largest sales region and where our auto team has a strong position. And just to give you a reminder, our content per vehicle is one and a half times higher on a hybrid and two times higher on a full electric EV. versus internal combustion platforms. We have established a global leadership position across all vehicle platforms at all major OEMs and startups, and continue to expect long-term content growth above production of four to six points. Now turning to the commercial transportation business, we saw a 4% organic decline, and this was driven by the heavy truck market declines in North America as well as in Europe. This was partially offset by return to growth in China, and we expect this business to be down sequentially in the third quarter and expect these markets that we serve here to be down approximately mid-single digits this year due to market declines 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 that we've talked to you about where we've continued to organically exit lower margin and lower growth products. For the transportation segment, adjusted operating margins were 20.4%, which is slightly above our target levels, and we expect to run at our target margins for the rest of this year. We are continuing to invest in our – increase our investment in our auto business to support engineering requirements for next-generation vehicles. and whether they're around the 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. Now, let's get into the industrial solutions segment, and that's on slide six. In this segment, we continue to see the trends that we've discussed for the past few quarters. And while sales were down 6% organically at the segment level in the second quarter, We saw growth in three of our four businesses, and we expect continued growth in our AD&M medical and energy businesses. In the second quarter, our AD&M sales were up 17% organically, driven by growth in both the commercial aerospace and defense markets. In medical, sales in the quarter were up 6% organically, driven by ongoing increases in interventional procedures. And in energy, we saw organic growth driven in the Americas offset by weakness in Europe with continued strong momentum in renewable applications. And then finally, in our industrial equipment business, where we're continuing to see the stocking, our sales were down 28% organically. While we're seeing some stabilization in order patterns pointing to normalization later this year, We still expect to see year-over-year declines in this business for the next couple of quarters as our customers adjust their inventory levels. On a margin perspective, the industrial segment achieved 15%, which was in line with our expectations given current volume levels and business mix. We continue to expect segment margins to run into the mid-teens until the industrial equipment business returns to growth. I'd ask you to turn to slide seven and let me get into the communications segment. In communications, I am excited about a return to year-over-year growth in our third quarter now that the stocking trends are largely behind us and momentum continues to build in next-gen cloud applications. Going forward, we now expect to deliver higher growth from artificial intelligence applications where we're increasing our investment to support future growth opportunities. Based upon our design wind momentum, we expect to double our AI revenues from $200 million this year to $400 million next year, and expect to build on this momentum to achieve annual revenues of roughly a billion dollars in the following few years. Just to remind you where we play, we are focused on providing high-speed, low-latency connectivity to meet the needs of artificial intelligence workloads. and we generate 50 percent more content in accelerated compute platform versus traditional compute servers. Also, we're working closely with cloud customers as well as leading semiconductor companies with reference design to call out TE connectivity solutions. The segment had adjusted operating margins of 17.3 percent, and this was up 100 basis points over last year despite the decline in sales in the second quarter. Our teams are executing extremely well, and we continue to expect to maintain high team's margin in this segment as we move through the year while supporting investments for growth. As volumes increase over time, we expect to achieve our long-term margin target for this segment of approximately 20%. Now, with that as a segment overview, let me hand it over to Heath, who will get into more details on the financials and our expectations going forward.
spk03: Thank you, Terrance, and good morning, everyone. Please turn to slide 8, where I will provide more details on the second quarter financials. Adjusted operating income was $735 million with an adjusted operating margin of 18.5%. GAAP operating income was $692 million and included $3 million of acquisition-related charges and $40 million of restructuring and other charges. For the full year, our expectations are unchanged and we continue to expect fiscal 2024 restructuring charges to be approximately 100 million. Adjusted EPS was $1.86 and GAAP EPS was $1.75 and included restructuring and acquisition and other charges of 11 cents. The adjusted effective tax rate was 21% in Q2. And for the third quarter and the remainder of the year, we expect our adjusted effective tax rate to be approximately 22%. Importantly, as always, we continue to expect our cash tax rate to stay well below our adjusted ETR for the full year. Now, if you turn to slide 9, sales of $3.97 billion were down 5% on a reported basis. and down 3% on an organic basis year over year, which is as expected. Sequentially, we saw 3% organic growth in sales. Adjusted operating margins were 18.5% in the second quarter, expanding 250 basis points year over year. And this was driven by margin expansion in all three segments on a year over year basis. We have been focused on executing on a number of operational levers this year that are not volume related, and this has enabled strong margin expansion despite the low growth environment that we are dealing with. Adjusted earnings per share were $1.86, up 13% year over year, driven by the strong margin expansion. Turning to cash flow, cash from operations was $710 million in free cash flow, was $543 million in the second quarter. Through the first half of our fiscal year, free cash flow was $1.1 billion, which is up 32% year over year. Our long-term capital strategy remains unchanged, which is to return approximately two-thirds of free cash flow to shareholders and use one-third for bolt-on acquisitions over time. As mentioned earlier, we expect our free cash flow conversion to exceed 100% again this year. Now, before I turn it over to questions, let me reinforce some of the key points that we are excited about and share how we are thinking about our performance in the current macro environment. We are delivering margin expansion, EPS growth, driven by strong execution and operational levers. At the same time, we are investing to support future growth in markets with strong secular drivers, including next-generation automotive, renewables, and the artificial intelligence applications that Terrence just discussed. We are seeing an improvement in order patterns and sequential orders growth in all of our segments, indicating stability in most of the markets we serve and giving us confidence in future growth. Our communications segment is returning to growth in the third quarter, which reflects both the normalization of supply chains as well as our momentum and high-speed data center applications. And finally, we are demonstrating our 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 stakeholders. With that, let's now open this call up to questions.
spk05: Dennis, can you please give the instructions for the Q&A session?
spk04: Yes. At this time, I would like to remind everyone to ask a question. Press star 1 on your telephone keypad. In order to have time for all questions, each participant is limited to one question. If you would like to ask a follow-on question, press star 1 to re-enter to return to the queue. Your first question comes from the line of Mark Delaney with Goldman Sachs. Your line is open.
spk07: Yes, good morning. Thanks very much for taking my question. I'm hoping to better understand the more constructive comments TE made on auto, especially as EV industry growth has decelerated and several traditional Western auto OEMs have announced they're planning to focus more on plug-in hybrids, at least in the near to intermediate term, and shift toward BEVs more slowly than they previously targeted. Could you help better contextualize what underpins TE's more positive view on auto and to what extent auto can keep growing? Or might it be impacted by certain customers needing to take down inventory as they adjust their product mix plans? Thanks.
spk02: Thanks, Mark, and I appreciate the question. I know one of the things that's important when we do this is I always have to remind everybody of our great global position, and we've got to keep that in front of us. First of all, on auto production, what's interesting, even though there's been a lot of moves by various players around the world, if we went back to you back in October and said, where do we think auto production would be, We still think it's slightly up this year. It's going to be around 86 million vehicles made on the planet this year. And we have seen increases in Asia production, both in China as well as outside of China, because we do have a strong position in Japan and Korea as well, that have offset some of the weakness that you've seen here in North America as you have some of these consumer preference shifts. The other thing that is, when you think about what we've always called the e-mobility category, which includes hybrids, plug-in hybrids, and EVs, because we get very nice content uplift on all of them, we expect it to be about 25 million units this year still. And versus where we were earlier in the year, that's probably only off about 300,000 units when you look at it on a global basis. So net-net on a global basis, EV production and adoption is still happening. And EVs and plug-in hybrids and hybrids or about 30% of all the vehicles on the planet today that are coming out. And I said on the call, both categories are going to grow about 24% this year. Now by region, you know, the trends in China are full steam ahead. EV production, EV adoption across all types, whether it's plug-in hybrids, you know, hybrids, and we have a very strong position there. We've talked to you about what we do with the locals. We have a strong position with the multinationals, and as I said on the call, our content per vehicle as EV adoption continues in China is just going up. You know, in the Western world, you do have the adapting that I talked about, and it's really creating more of a shift from EVs to PHEVs and hybrids. And we've got to realize that shift is important for us because that does help as you move from a nice vehicle to any of the EV categories, we get content increase. And all the regions are expected to see double-digit EV growth this year. So while there's been some things that have shifted around, certainly as people make choices about what models they like versus they don't like, it's really been driving content growth. Now, the last thing is we remain to be confident around our four to six points of outperformance. And we're always going to caution you, like we do every call, please don't look at it on a quarter basis because there's always swings that can occur. But we expect content growth to be in that four to six points. And it's also important to say content in the four to six points above production, EB is the biggest driver, but it's not the only driver. The electronification of the vehicle, the data Ethernet that goes in for autonomy that you need for software-defined vehicles, that's a driver, as well as all the other electronics that go in. So all of them drive the content increase. And while there may be some shifts between EVs and hybrids, the content growth that we get on either of those categories, whether it's one and a half times or two, we're going to drive content growth for us. and why we feel so constructive about the four to six points of outperformance, and we expect we'll be there this year. So I know that's probably more than you wanted, Mark, but I appreciate the question.
spk05: All right. Thank you, Mark. Can we have the next question, please?
spk04: Your next question comes from the line of Luke Junk with Baird. Your line is open.
spk11: Good morning. Thanks for taking the question. Terrence, hoping you could just double-click on what order panders are telling you right now about market health, and especially D stocking, I'd be most interested in what it says about the trajectory of communications from here, especially legacy applications, in addition to what you already spoke to, with respect to AI, as well as, as we look for that bottom in industrial equipment. Thank you.
spk02: Sure. Now, thanks, Luke, and appreciate the question. Yeah, as I said, in my upfront comments, I can't stress enough, this is the first time in six quarters or a year and a half that we have orders above $4 billion and a book to bill above one. And you see the sequential growth in every segment. And the stocking, which we always told you really was in our communications segment and our industrial equipment segment, I would tell you in the communications segment, we believe the stocking's over. Not only from the order activity we see, But I would also say the things where we go through our channel partners, and we've seen orders improve year over year there, as well as the revenue trends of where they're selling through. So I would say the stocking and the communications segment is over, and you're going to see that segment return to growth next quarter, as I talked about. The one area that we continue to see the stocking is in the industrial equipment. I think it was evident in our results in the commentary. And that's going to be with us for a couple more quarters. That started later. We're still seeing areas where I do think we're in a bottoming cycle there, both what we see and what our channel partners see. We're starting to see some lights in China and also the Americas, but there's other areas in the industrial space in Europe that remain weak. So, you know, I do think that's very important to keep in front of us, but I do think we're starting to see some light at the end of the tunnel. And outside those areas, I think you see stability and growth. And I think those sequential order momentums that we see, that you can see on the chart, really prove that. And that's what we get excited about, that the stocking's over. The stocking has masked some of our content growth as we've worked through it. But I do also think as we work through this year and get to 25, it'll be a nice tailwind that that's finally behind us.
spk05: Okay, thank you, Luke.
spk04: Can we have the next question, please? Our next question is from the line of Amit Daryanani with Evercore Partners. Your line is open.
spk00: Thanks a lot. Good morning, everyone. I guess, Terrence, you know, I'd love to kind of get your perspective. AI is really a very big focus to everyone. You just talked about some fairly strong revenue trajectory as you go forward that you expect to see. Can you maybe spend some time talking just about, you know, what exactly are you really providing when it comes to AI solutions and any sense on where the opportunities right now across you know, processor companies like NVIDIA versus cloud providers that might be running their own infrastructure? And what does the conversion to revenue look like as you go forward from here? Thank you.
spk02: Yeah, and I made some comments on that, so I do appreciate the question. And, you know, the one thing that's a little bit different that we talked about today on the prepared comments was we typically always talk to you about design when momentum, and that's continued. But we did give you more highlights about where does revenue go for here. And we told you all year, as we were seeing the ramp in AI, we were going to do about $200 million of revenue this year in AI applications. And certainly 60% of that would be in the back half. That really hasn't changed. But when we look at the design momentum that we have and also expectation of what we're hearing from our customers, Like I said on the call, we expect that $200 million to essentially double next year to $400 million, and we actually see a path that could get up to $1 billion a year a few years after that. So we're actually seeing the traction with the design ones. Our team, the investments we're making to ramp it, both from engineering and operations, are in place to drive it. And like you said, when you have to service this area, there's an ecosystem that's here. And that ecosystem, when you look at our engagements, they're with hyperscale customers, some of who are developing their own AI solutions. We also have to work closely with semiconductor companies, including both the processor companies and the other semi-players that make acceleration chips and other silicon solutions. So when you look at it, we have to play with everybody in that ecosystem, and our teams are doing a nice job. As important is, as you work with them, how do you get on reference designs that then are really ready to deploy offerings that do allow further cloud customer deployments? And our sales are across the entire ecosystem. It's not with one. So I like the breadth that we have. And that's really driving the momentum that we have. And from a product perspective, Where you start at, it starts with the socket that's right up against the GPU. You can have things that are on the board, and then you also get into things that are really a cabled backplane where you have things that are very important to make sure you don't get the latency and you keep the high speed going to really make sure that cluster can really crank at the speeds they need to. to do the LLM. So NetNet is pretty broad in the products we play, and it's just really, in many cases, what we did on the cloud moving up to the next level of performance in this application.
spk04: Okay, thank you, Amit. Can we have the next question, please? Your next question is from the line up of Wamsi Mohan with the Bank of America. Your line is open.
spk06: Yes, thank you. Terrence, appreciate all the comments here on the prior question around AI. If I could just ask a quick clarification on that. How are you thinking about your share in these high-speed, low-latency applications? And for my question, I was wondering if you could comment a little bit beyond fiscal 24. It seems like destocking is coming to an end. Your orders are bouncing back a fair amount over here, and you mentioned stability in some of the end markets as well. Any early thoughts on how fiscal 25 is shaping up from a growth and margin perspective? Thank you so much.
spk02: Yeah, so when you think about share... in the AI applications, it would be similar to the share we had in cloud applications. So I think when you look at that, and we talked about that a lot, the momentum we had when we went through the cloud during COVID and the momentum we had across a broader set of customers, I think you can expect similar share type thoughts on that for the AI applications and once again being broad. When you look at 2025, I guess the first thing is it'll be nice not to talk about the stocking. So that has been a headwind. I know we're not the only one that dealt with it, but that will be something that turns, and you're starting to see it in CS, and that'll help IS. So I do think that'll turn to a headwind, to be honest, to a tailwind as we get rid of that. And what's nice is we're going to start seeing that in communications already here later this year, and I do think we have to wait towards the end of our fiscal year to get there. with the industrial equipment business. The other thing as we look at 2025, there's going to be, if you just start with transportation, you're going to continue to have electric vehicles, the broad category that we put everything in, continue to grow in the world. And I think you can continue to look at 4% to 6% growth on top of that. I wouldn't say we view it's going to be auto production is going to boom in 2025, but I think you're going to continue to see an area where auto is below peak where we are today, and then we're going to get the content benefit on top of it that I think we've proven to you. The AI element, you know, is a big driver as we go into next year. So, you know, we quantified that for you. And then the other area that I just think has been masked a little bit by what's been going on in industrial equipment is, remember our three businesses that are in industry. They continue to have growth momentum. whether it's renewables, whether it's what we're doing in medical around interventional procedures, whether it is the recovery in commercial aerospace, as well as what's going on in defense. So those types of growth that we're seeing this year, we do think they're going to remain in the growth into 25. So I do think 25 does set up nicely. Heath, I don't know if you want to talk from a margin perspective at all.
spk03: Sure. And Wamsi, we appreciate the question. You know, obviously we're In the early stages, we're not ready to guide for our FY25, which starts October 1st. But I do feel good about where the progress that we've made on margins. We've talked a lot to this audience about our target margins, which we really look at it by segment. The transportation margins, target margin of 20%. We got there a little sooner than we even internally we were expecting. The price actions have been effective and they've been sticky. The footprint consolidation work that we've done and then we've exited some low margin product lines and the health of that business is very strong. The auto side of that is driving most of that, but even our commercial transportation business within that, which is, as you know, a high margin business, is holding its head even in negative growth environments. So we feel good about where we are achieving in FY24 and where our jumping off point is for end of 25. Communications is really, the margin side of communications is really a volume story. And again, if you had asked me six or nine months ago where we'd be running margin-wise at roughly $440 million of quarterly revenue, I would tell you we'd probably be in the mid-teens. And as I sit here today, we've been consistently in the high teens this year. So we've effectively raised the floor, and our team's done a nice job within that segment of raising the floor. to get to more of a high teen type of look. And once we budge up over the $2 billion annual revenue rate for that segment, you know, I think we're going to be pushing towards that target margin of 20% for the segment. So we feel good as we think about that. And as a reminder, and Terrence alluded to this, we are hiring to support some of the high growth areas. And that's embedded in our run rate. We're not going to call that out as a, headwind to us, but we're not starving these businesses. And that's been an exciting area to see. The industrial business, You know, we're hovering in the mid-teens. I expect improvement of significance next year as we go in. But a lot of that is tied to the destocking within the industrial equipment business going away. And Terrence has talked a fair amount already on this call about the timeframe of that towards the end of fiscal 24. So I do think there's good opportunity as we go into 25. The other three business units within the industrial segment have been performing well, but it's hard to make up for the drag on the industrial equipment business that's been down double digits this year. So if you add all that all up, we're going to exit this year and, you know, 18 and change of operating margins up a couple hundred basis points year over year. And we expect to be able to start making normalized improvement on that as we move forward. We talked, you know, to the street about in our operating model of somewhere between 30 and 80 basis points of margin improvement each year. Certainly, we feel good about that as we start planning for FY25.
spk05: Okay. Thank you, Wamsi. Can we have the next question, please?
spk04: Your next question is from the line of Tom McEchatterjee with J.P. Morgan. Your line is open.
spk01: Hi. Thanks for taking my question. I'll pass it on to the one on communication, if you don't mind. You mentioned the capacity investments you're making in the communication segment, particularly around the AI demand you're seeing. If you can sort of give us some more color about what's the typical lead time between you investing, starting to invest in capacity now? Is that for revenue in fiscal 25, or is that sort of beyond fiscal 25? What's the typical lead time between starting the manufacturing and getting back to a revenue point. And then just a side question in terms of, like, what do you think customers ask you for in terms of where this manufacturing footprint is, given the geopolitical situation? Is there a preference that customers are expressing about where you invest in capacity, whether it's the Western world or somewhere else? Thank you.
spk02: Thanks, Amit, for the question. A couple of things, you know, I think that's important, you know, As we've been seeing this, we have been investing, and we've expanded operations in Mexico as well as the Philippines as well as the existing locations we've had. So from that viewpoint, there was existing and also the sites that we have, I think, positioned as well for the geopolitical options that some of our customers want to have. So when you look at that, I wouldn't say this is just starting. These investments, some of those we started to make a few years ago as we were thinking about capacity coming on. And we're going to continue to build on that. And that's both footprint capacity as well as, like he said, and there's also been engineering capacity and ramping as well. And we'll continue to do it with the line of sight of the programs we work on. Let's face it, these are programs that we work on with our customers in tandem as they're trying to work their architecture to make sure that the connectivity that's needed works in their applications. So that's one of the real positives that we have working in this ecosystem. and you're going to see us continue to capitalize on it. And like he said, it's included in our runaround.
spk05: Okay, thank you, Sammy. Can we have the next question, please?
spk04: Our next question is from the line of Joe Giordano with TD Cowan. Your line is open.
spk14: Hey, guys, good morning.
spk04: Hey, Joe.
spk14: Hey, so on the AI side, as you kind of build out and invest to support
spk13: the growth plans of your customers in this space, how do you weigh, like, obviously very robust demand and, and, uh, on the near term with like, can we, is this, are these growth outlooks on a multi-year period even feasible? Like can the, can the grid handle building all these things? Like, how do you weigh what you need to invest in now because of what your customers are saying versus like your view on, is this even achievable for a market over like a short couple of year period?
spk02: Well, when we work here, Joe, we work with our customers on the programs that they're coming out with. And then on the next generation, I would tell you, we do work with our customers on their understanding of that market outlook. But honestly, we're focused on nailing the solution with our customers on what the technical requirements they have. So I would tell you that's what we focus on. That's the way we invest as we work with our customers. So from that viewpoint, I think that's always been our mindset, and it's one of the nice things about our model that we get the benefit of working with our customers as they understand the opportunity and the ramps that they expect to hit, and how do we need to support that.
spk05: Okay, thank you, Joe. We have the next question, please.
spk04: Our next question is from the line of Asia Mergent with Citigroup. Your line is open.
spk10: Great. Thank you for taking my question. You know, if you could drill down a little bit on pricing, I think, you know, comments in the past have talked about maybe normalization of pricing, and especially as we look at, you know, auto production moving towards, you know, at least this year being a little bit more weighted towards Asia versus North America and Western Europe. How do you guys think about pricing and the margin impact from pricing normalizing, say, as we go into fiscal 25? Thank you.
spk02: No, sure. I think when you look at pricing, first off, and you see it in the margin this year, you know, we recovered finally the inflation that we had during the mega wave of inflation. And, you know, we caught up on that and our approach always was, was we were covering costs with our customers. You know, when you still look at this year, nothing has changed with what we told you before. We expect pricing to be neutral this year at the TE level. So, yeah, we are doing targeted price increases where we have to, where we continue to have material inflation on certain metals. Certainly, we're doing things to make sure where we can be competitive. And I don't think you assume that margins go down in a different pricing environment. So I think you sit there as we look forward. A big element of where pricing goes is going to be around where the material environment is. Where's copper, gold, resin trading? of the input costs that were the things that we recovered, and they will be the bigger driver of where pricing goes from here.
spk05: Okay, thank you, Asya. Can we have the next question, please?
spk04: Your next question is from the line of Sari Baradinsky with Jefferies. Your line is open.
spk09: Thanks for taking the question. You know, you talked a lot about maybe a line of sight to the end of industrial equipment destocking by year end. Could you just talk through the underlying demand environment there? And then how do you think about the tail end from destocking then as we get into 2025? Thank you.
spk02: Sure. Thanks, Sarah, and welcome to the call. First off being the demand environment is cloudy because we have had both with and in our industrial equipment business, just to take a step back and remind everybody, about 50% of our revenue goes through our channel partners and 50% goes directly to the OEMs. So it is an area where channel partners play a bigger role. I would say when we look at the end demand environment, there are pockets where you continue to see strength. That wouldn't surprise you, certainly in the process side. But there's other areas that right now it is still foggy because we have customers that are working off buffer stock that they built up when they were worried about being able to get component supply. as well as our channel partners are doing the same. So right now we're in the middle of that destock period. But what we are seeing is we're seeing order patterns start to move sideways. They aren't decelerating. We're seeing that both direct and with our channel partners. And we're also seeing certain regions where we see that work off occurring. So I think what you're going to have probably for the next couple of quarters, we're still going to have those impacts as that works off. And then as we get to 25, you'll actually see that business get back more in line, growing a little bit above the underlying market of factory automation.
spk05: Okay. Thank you, Sari. Can we have the next question, please?
spk04: Your next question is from the line of Stephen Fox with Fox Advisors. Your line is open.
spk08: Hi. Good morning. Hey, Steve. Hey. I was wondering if you could talk a little bit about how key connectivity products into EVs help on the cost front for your customers? I mean, Tesla obviously is talking a lot about that lately. And on the alternative, does it create any kind of competitive risk as some of your customers realize that they really need to get some of these EV prices down in the next couple of years? Thanks.
spk02: Well, I do think there's an element that one of the things that we do that even starts before the product is how we work with our customers when they are trying to sit down and do value engineer of how do you get a sub-application to a lower cost point. That's very important, Steve, as we move through generations in every part of TE. And that's just not on where does our product cost come in? How do you assemble a car? How do you put the car together? How does that make sure it has quality? And any time you get into somebody looking at a next generation, and that could be a battery pack, that could be the connectivity on the motor, it could even be a next generation inlet. So all of those are things that create opportunities where our stickiness and global position play really well. And that we have such a strong position in China, I would tell you, certainly you have a cost point that is always a better cost point, and how our global teams bring that to other OEMs around the world due to our strong position is something that we get excited about. Because I know I say this on this call, probably every other call, automotive is a scale business. And one of the things that is very important is how does EV scale? How do you bring our technology to it that helps it scale? And that's the opportunity that we've always been excited about with EVs. And having some of the consumer choices that are being made also allow our customers to get focused to make sure they're making where their platforms go. So net-net, that's what our engineers like to do, improving the innovation they can bring. But also, how do you sit there and make sure how we're making it more productive for the world.
spk05: Okay, thank you, Steve. Can we have the next question, please?
spk04: Your next question is from the line of Colin Langan with Wells Fargo. Your line is open.
spk18: Thanks for taking my question. I just want to ask, on the auto side, growth was 1%. I think the target is 4%, and I think the market is fairly flat in the quarter. The long-term target is 4% to 6% outperformance rate. Why the underperformance versus the target in the last couple quarters?
spk02: Twofold. We're probably running about three points above production right now. I would say, Colin, in the second quarter, global auto production was negative. So there is a there. We always tell you, don't look at an individual quarter. Next quarter, I think you're going to see very nice outperformance, and for the year we expect to be in the four to six range. But on any quarter, you get into a lot of little things that some quarters will be above the range. Still feel good about the four to six.
spk05: Okay, thank you, Colin. We have the next question, please.
spk04: Your next question is from the line of Christopher Glenn with Oppenheimer. Your line is open.
spk15: Thanks. Good morning. Just wondering if you could talk about the kind of complexion and forward kind of drivers, touch on the mix for the commercial vehicle platform. I know you kind of, you know, said kind of similar levels for passenger vehicle would be appropriate way to think about next year. And we can see that that makes sense. Commercial is a little more disparate and complex. So I wonder if you could elaborate a little bit on how you see that market unfolding as you work through some mixed markets this year.
spk02: yeah so you know to your point i'm gonna i'm gonna go down here a little bit of how we look about the commercial transportation because obviously that market has three major drivers to it yeah certainly the on-road truck and bus what's happening in agriculture equipment and also construction equipment they're the three big levers and when you think about that globally and you know production and our revenue about half of our revenue is truck and bus What we're seeing on truck and bus right now is America is in Europe weak. Actually, China and Asia is recovering. So they were weak last year. So what we're actually seeing is very much a China positive market that we expect will continue. Certainly, Western world down. And we even said in the call we expect next quarter we'll be down a little bit sequentially due to some of these dynamics. On the ag and the construction side around the world, that is slow everywhere around the world. Certainly, you get into financing rates and things like that. That's a little bit different. And we expect that that'll run through this year. And we are thinking that early next year, we'll get into a more constructive environment than we're in right now. But right now, we think if you take all of them together, the global market's probably at minus 5% this year, plus or minus a little. And we would think they'll get more constructive into 25.
spk05: All right. Thank you, Chris. Can we have the next question, please?
spk04: Our next question is from the line of Matt Sheeran with Stiple. Your line is open.
spk12: Thank you. Good morning. I had a question, Terrence, on the energy markets within your industrial group. You've had strong growth here the last few quarters, but it looks like it's slowed in the March quarter. And we're hearing some pockets of weakness from other parts of the supply chain. What's your outlook there, both in your turn and in terms of long-term position?
spk02: Yeah, no, sure. Thanks, Matt. And on energy, what I would say is we're still very constructive on it. I think what you see in our results here is we continue to see the U.S. and America's very strong. We also see global renewables where we play, and we do utility-scale renewables. We do not do residential renewables. renewables. We see that strong. The one pocket where I say we see a little bit of softness is around the utilities in Europe. I do think that's an element of the business that I talked about on my prepared comments that we've been a little bit of where I think utilities are bringing down inventory a little bit. But certainly with the grid maintenance that everybody's investing in around the world, I think that will return to growth. So we're still constructive on global energy, and our business is very much Europe and the United States are the bigger elements of where we play.
spk05: Okay, thank you, Matt. Can we have the next question, please?
spk04: Your next question is from the line of Shreyas Patel with Wolf Research. Your line is open.
spk17: Hey, thanks so much for taking my question. As we look out past this year and we think about some of the growth drivers in electrification, AI, renewables, you've also got typical recoveries in parts of communication and eventually industrial equipment. How do we think about the sustained organic growth for TE overall? In the past, you've talked about 4% to 6% organic growth over time. I'm just curious how to think about what the reasonable framework for the company should be at this point.
spk02: I still think that's the right way to think about it. Certainly, we're going to have cycles. You take a year like this year where, you know, We are more flattish than growing at the four to six, but there will be areas exactly around the point you made where you could have some stocking or type effects that may be ahead in one year that will come back and be above that in the future. But I do think the four to six is the right way to think about when we think about the portfolio that's constructed.
spk05: Okay, thank you, Shreyas. Can we have the next question, please?
spk04: Today's final question will come from the line of William Stein with Truist Securities. Your line is open.
spk16: All right. Thanks so much for fitting me in. I'm going to ask yet another question about AI. Terrence, my industry checks reflect that there's really about three companies that have meaningful content here, and TE is one of those three. There's a couple, two others. Can you talk about the competitive dynamics among these three? Maybe you're defensibility and your opportunity to push into their spaces. And also, what makes the three of you more capable than others that sort of protects, that maybe protect you against new entrants into this very attractive category? Thank you.
spk02: No, thanks, Will. So first off being, I think there's an element here when you deal with high speed, the three of us all have a very good capability. And when you sit there, we're all different. Some of us have different scale than others. But I do think that is the uniqueness. When you're getting to the speed levels of where these chips are going to, GPUs are going to, TPUs are going to, you're dealing with speeds that are very unique. That is a very technical innovation that I think we all do well in. And so I think it is a competitive space between us. I also think that you continually move up the technology curve, and you also have ramps that our customers expect to bring them to life are all very important to our customers. And that's why we even said earlier to the question that I answered, I expect our share to be similar to what it was in the cloud. So I think it's very important how we make sure what we do in the connectivity space really makes sure we enable the AI path because we do play an important role in it to really make sure it comes to life. And that's what we get excited about, Will. So it's a great opportunity we have. Certainly it's a great opportunity for industry to capitalize on as well.
spk05: Okay. Thank you, Will. I'd like to thank everybody for joining us this morning on the call. If you have any additional questions, please contact Investor Relations at TE. Thanks again and have a nice day.
spk04: Today's conference call will be available for replay beginning at 1130 a.m. Eastern Time today, April 24th, on the Investor Relations portion of TE Connectivity's website. That will conclude the conference for today.
Disclaimer