TE Connectivity Ltd

Thank you for standing by and Welcome to the TE connectivity and final fiscal 2024. At this time, all lines are in listen-only mode. Later, we will conduct a question and answer session. If you'd like to ask a question during that time, please press start and then number one on your telephone keypad. As a reminder, today's call is being recorded. I'd now like to turn the conference over to our host, Vice President of Investor Relations. So, Joel Shah, you may now begin.

Good morning, and thank you for joining our conference call to discuss TE Connectivity's fourth quarter and full year 2024 results and outlook for our first quarter of fiscal 2025. With me today are Chief Executive Officer Terrence Curtin and Chief Financial Officer Heath Mintz. During this call, we will be providing certain forward-looking information, and we ask you to review the forward-looking cautionary statements included in today's press release. In addition, we will use certain non-GAAP measures in our discussion this morning, 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. As you know, in September, we announced a reorganization into a two-segment structure effective with the start of fiscal 2025. Our transportation solutions and now a larger industrial solutions segment, which adds the two businesses from communications. Our data and devices business moves into the industrial segment and is renamed Digital Data Networks. Our appliances business will be combined with industrial equipment, and the new business is named Automation and Connected Living. As we talk about our results today, they will be discussed in the old three-segment structure, and we will begin reporting our financial results in the new structure beginning in the first quarter of fiscal 2025 with an 8K of recast financial information being issued before the end of our fiscal first quarter. 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.

Thank you, Suzhou. And as always, we appreciate everyone joining us today. And before I get into the slides, let me just make some comments. For our fourth quarter, I am pleased that we delivered revenue and adjusted earnings per share that was ahead of our guidance, driven by continued solid execution across the segments. Our teams delivered consistently in 2024 on the operational levers to drive margin improvement along with strong cashflow generation, which was our key focus that we discussed with you all throughout this year. We delivered strong margin expansion and double-digit growth and adjusted earnings per share in what continues to be a dynamic market backdrop. When we look at our results for fiscal 2024, we delivered record operating margins, earnings per share and free cashflow. And I guess few things to highlight building on this. We generated over 200 basis points of adjusted operating margin expansion and double-digit earnings growth year over year against the flattish volume environment. We also continue to demonstrate the strategic positioning of our portfolio and alignment to secular trends as we benefit from the electrification and increased data connectivity adoption within the vehicle, growth and renewable energy and aerospace and defense markets, and accelerated momentum in artificial intelligence applications. And the content outperformance that we saw in these markets were offset by the softness we saw in the broader industrial markets. And lastly, we demonstrated the strength of our cash generation model with free cashflow of approximately $2.8 billion and disciplined capital deployment that included a strong return to shareholders. I'm also pleased that today to announce that our board authorized a $2.5 billion increase to our share repurchase program that reinforces our value creation model. Now let me share some of the market trends and what we're seeing versus our earnings call that we did 90 days ago. We do continue to have some markets that are accelerating, some that are stable and some that are weak that are still trying to gain some traction. And let me highlight them by our segments. In our transportation segment, global auto production was essentially flat in fiscal 2024 with growth in Asia being offset by declines of production by Western OEMs. As we look forward, we expect a slight decline in global auto production in fiscal 2025. We do expect continued growth in hybrid and electric vehicle production with over 70% of that production occurring in Asia, which is our largest revenue region in auto and where we're extremely well positioned. We also expect further electronification in the vehicle which will benefit across all power trains and will continue to drive content growth for us. In the commercial transportation markets, we continue to see end market declines with some potential improvement in the cycle later in 2025. In our industrial segment, we continue to see strong growth in the aerospace and defense and energy markets coupled with ongoing weakness in factory automation and that's particularly weak in Europe. In the communication segment, growth trends that we've been talking about are continuing. In the cloud data center, we see momentum accelerating in artificial intelligence across our broad customer base. We had $300 million of sales for AI applications in fiscal 2024, which is higher than our expectations and we expect these sales will double in fiscal 2025. We are set up for strong performance in fiscal 25, which will build upon the momentum we established in 24. While we're continuing to work through sluggish industrial end markets, we do expect them to return to growth in 2025. We also are continuing to invest in our engineering skills, technology and operations capacity to support the growth. Key examples of some of the larger investments we are making are the further expansion of our agent operations to spark the ongoing growth in EV in that region, as well as our continued investment to expand our engineering and capacity to support the ramps of design wins that we have in AI. With these investments and what we see in our end markets, we do expect an acceleration of growth as we move through this coming year. Finally, I wanna reiterate that our long-term value creation model is centered around having a portfolio aligned to secular growth trends, operational levers to drive further margin expansion and a strong cash generation model to return capital shareholders while investing in bolt-on M&A opportunities. Executing on these pillars will enable sales growth, margin and EPS expansion and strong cash generation in fiscal 2025 and beyond. So with that as an overview, let me get into the presentation starting with slide three and I'll jump into some additional highlights and our guidance for the first quarter of fiscal 25 and then Heath will jump into more details in his section. Our fourth quarter sales were $4.1 billion, which was above our guidance and up 2% organically -over-year. The upside versus our expectations was driven by the communication segment with higher sales from artificial intelligence applications. Adjusted earnings per share of $1.95 was ahead of our guidance on a quarterly record and was up 10% versus the prior year. Our adjusted operating margins were .6% and they were up 130 basis points over last year. Our free cash flow generation was very strong and was approximately $830 million in the fourth quarter. Now let me turn to the full year results that you see on the slide. Full year sales were $15.8 billion with organic growth and communications and transportation segments offset by weakness in our industrial equipment and markets and headwinds from a stronger dollar. Adjusted earnings per share was $7.56 and was up 12% versus the prior year. And please keep in mind that this included 39 cents of currency exchange and tax headwinds. Adjusted operating margins were .9% for the full year and they expanded 220 basis points over 23. The high quality of our earnings continues to be reflected on our cash generation model and I'm pleased with our record free cash flow of approximately $2.8 billion in 2024. Now as we look forward to the first quarter of 25, we are expecting our sales to be $3.9 billion up 2% year over year and it reflects the typical seasonality in our business. We expect adjusted earnings per share to be around $1.88 and this includes a 4 cent tax rate headwind versus the prior year. Now if you could please turn to slide four, let me make some comments on the order trends that are highlighted there. Our orders were over $3.8 billion reflecting typical seasonality, ongoing momentum in AI programs and continued weakness in general industrial and markets. By region our order patterns reflect strength in Asia with weakness in the West. In transportation, sequential order patterns reflect stability in global auto production along with ongoing market declines in commercial transport. In auto, our orders continue to reflect growth in Asia with weakness in Western markets. In the industrial segment, we continue to see softness across factory automation and building our automation, particularly in Europe. And in our communication segment, our order levels came in as we expected and they increased nearly 40% year over year in addition to the strong order growth we had last quarter. This supports the strong growth we're expecting in fiscal 2025 from artificial intelligence programs and the trends and the innovation that are happening in these applications is an exciting growth opportunity for both TE and our industry. Now with that as a backdrop about orders, let me get in to segment results and I'll start with our transportation segment that is on slide five. Highlighting our ability to generate growth over market, our auto business declined 1% organically against a global auto production decline of 5% in the fourth quarter. The 400 basis points of app performance versus production was driven by double digit organic growth in Asia offset by mid single digit declines in the West. And quite frankly, this continued the trends that we've been seeing by region all year. As everybody knows, automotive production and car sales dynamics are very different by different regions in the world. We do continue to expect content growth to be in the four to six point range long term. This is supported by data connectivity and further electronification benefit across all power trains, our leading global position in hybrid and electric vehicles and our strong position in Asia. I do wanna emphasize that and remind everyone that over 70% of EV and HEV production occurs in Asia where we are very well positioned and we expect the adoption of EVs and HEVs in Asia to continue the pace they've been at. Our differentiated position is proven by the fact that we grew sales in mid teens in Asia this year in an environment where regional production was only up mid single digits. Turning to the commercial transportation business, and we did see a 4% organic decline and this was primarily driven by weakness in Europe. We do expect this business to be a down again sequentially in the first quarter with potential improvement in the cycle as we move throughout the year. In our sensors business, the sales decline continue to be driven by market weakness and industrial applications as well as portfolio optimization efforts that we've talked to you about. We do expect these exits that we've talked about to be completed in 2025. For the transportation segment, adjusted operating margins were .3% in the fourth quarter. For the full year, we delivered 20% adjusted operating margins and these were at 300 basis points year over year driven by strong operational performance and we expect our first quarter margins to be similar to the fiscal year 24 levels. So please turn to slide six and let me get into the industrial solution segments. As you can see on the slide, our ADNM sales were up 14% organically driven by growth in the commercial airspace and defense markets. In both of these markets, we continue to see favorable demand trends as well as ongoing supply chain recovery. In our energy business, sales were up 14% organically driven by strength in the Americas and in Europe. We continue to benefit from momentum and renewables as well as investments that are being made to support increased power generation needs. Our medical business declined slightly in the quarter and the industrial equipment and business declined 20% organically. For the full year, we saw growth in the aerospace and defense, energy and medical businesses. On the margin front, industrial segment margins were .6% and this was in line with our expectations given the current volume levels and business mix. So let me wrap up the segment discussion with the communication segment and this is on slide seven. Our data and devices business grew 35% organically and our design wins are reflecting accelerating momentum. Our AI revenue came in at $300 million in fiscal 2024 and we expect sales from AI applications to double from this level in fiscal 2025 from design wins across the board, broad-based customers. Our appliance business grew double digits again for the second quarter of grow and this was really driven by strength that we saw both in the Americas as well as in Asia. The segment had adjusted operating margins of .7% and this was aligned with our expectations. Margins did show a significant improvement over last year and that was driven by strong operating leverage on the higher volume that we had on the segment. So with that summary, let me turn it over to Heath. He'll get into more details on the financials as well as our expectations going forward.

Thank you, Terrence and good morning, everyone. Before I get into the details of our financials, I want to reiterate something that Terrence said earlier. We are dealing with a dynamic market environment so our focus this past year has been on improving margins and earnings. I am pleased that we delivered record market growth margin EPS and free cashflow and fiscal 24. For the quarter, adjusted operating income was 755 million with an adjusted operating margin of 18.6%. Gap operating income was 651 million and included 5 million of acquisition related charges and 99 million of restructuring and other charges. For the full year restructuring charges were 144 million reflecting continuing footprint optimization efforts and I expect restructuring charges and fiscal 25 to be at or below the $100 million level. Adjusted EPS was $1.95 and gap EPS was 90 cents for the quarter and included a tax charge of 78 cents related to the increase in the valuation allowance for deferred tax assets. Additionally, we had restructuring acquisition and other charges of 26 cents. For the fourth quarter and for the full year, the adjusted effective tax rate was approximately 22% which was as we expected. As we move into fiscal 25, we expect our adjusted effective tax rate in Q1 to be approximately 23% with the full year 2025 being in the 23 to 24% range. The increase versus the prior year is primarily related to the impact of the pillar two global minimum tax implementation. Importantly, our fiscal 24 cash tax rate was in the mid teens significantly below our adjusted effective tax rate and you can continue to expect our cash tax rate to stay in the mid teens longer term. Now, turning to slide nine for additional information on full year performance, fiscal 24 sales of 15.8 billion were flat on organic basis. We did have organic growth in the communications and transportation segments, which was offset by the industrial segment. Adjusted operating margins were .9% for the full year with margin expansion of 220 basis points year over year driven by strong operational performance. At the segment level, we expanded margins by 300 basis points in transportation and nearly 400 basis points in communications resulting in roughly 20% adjusted operating margins for both segments in 2024. Adjusted earnings per share were $7.56 up 12% year over year driven by margin expansion and included headwinds of 39 cents from currency exchange and a higher tax rate. Now, given the flattish market environment, double digit EPS growth in this environment is something that I'm very proud of. Turning to cash, as you may recall, we generated record free cash flow of approximately 2.4 billion in our fiscal 23 and I'm pleased to share that we exceeded this by 400 million to a new record of 2.8 billion in fiscal 24, which was up 17% year over year. Our free cash flow reflects 120% conversion to adjusted net income and was in the high teens as percent as your sales, demonstrating the high quality of our earnings. And as we look forward, we expect free cash flow conversion to remain above 100%. In fiscal 24, we returned roughly 2.8 billion to shareholders through share buybacks and dividends and we deployed approximately 340 million aligned with our bolt-on acquisition strategy. Our cash generation and healthy balance sheet gives us more optionality with uses of capital. We will continue to have a strong return of capital to shareholders and as you saw today, we announced an additional 2.5 billion repurchase authorization, which supports our optionality. We will also look to pursue more bolt-on acquisition opportunities that attract evaluations. We are seeing a more favorable deal environment than we have seen in the past few years, so I'm a bit more bullish on our inorganic opportunities. Before we turn over to questions, let me reinforce that we expect to build upon our performance in 24 to deliver even stronger financial performance in 2025. We are expecting a return to growth this fiscal year and our investments in markets with secular trends are expected to accelerate as we move through the year. In addition, we expect to deliver margin EPS expansion along with strong pre-casual generation.

Now with that, let's open it up to questions. Thank you, Heath. Ellie, can you please give the instructions for the Q&A session?

At this time, I would like to remind everyone to ask a question. Please press star and number one 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-up question, please press star and number one to return to the queue. Your first question comes from Amit Baryanani from ISI Evercore. The line is now open.

Good morning, everyone. Thanks for my question. Good morning, Amit. Good morning. I'm hoping you can just perhaps expand more on the AI opportunity that you see unfolding going forward. There's been a lot of discussion around what's happening and some of the shifts here. So we'd love to hear your perspective. What sort of customer diversity do you folks have here? And if some of the recent architectural changes that we're seeing has any impact to TE, and perhaps you can move into this discussion. How should we think about this billion dollar AI opportunity you talked about longer term? Is that getting bigger or perhaps going to happen sooner? Thank you.

No, thanks, Amit. And obviously you've heard us talk about this for a number of quarters, and it's a great trend, which also demands really excellent engineering and tough engineering problems to be solved. It's about higher speed that all of our cloud customers need with lower latency, as well at the same time, really helping solve the power efficiency that's needed with what we provide from a product. So it is something that we like, that engineering stickiness. I do think when you look at the trend, let's face it, the baseline when we look at the growth is the design wins we have, as well as where cloud capex spending is going. And you can see from their reports that just continues to increase and expected to be up 20% again. And that's really what's really funding these programs and the designs that we're working on with our customers. And our position really built on what we did from our cloud penetration from them and that we talked about a few years ago. So when we look at the momentum, to get to the momentum that you talk about, let's face it, a few quarters back, we started with 200 million and then we said 250, now we ended the year at 300. So we do continue to see increased momentum, things pulling in more and actually getting pushed out. And let's face it, our customers really are just asking for everything to be accelerated. And you see that in the order patterns that we had last quarter where our orders were up almost 100% in our communication segment. And this quarter, it'll be enough 40%. So we did talk about today in the prepared comments, we do still expect doubling of our 300 million to the 600 million next year. So the momentum feels really good. And the billion that we talked about, if anything, I think it slides to the left more than it's gonna slide to the right. You know, it's gonna be closer in on us as we continue to execute on these programs. The one thing that, you know, I guess I didn't talk about when it comes to who our customers are, they are the hyperscalers, they are the semi-companies, it's pretty broad-based similar to like we had in the cloud. And the other thing that's just as important is how you play in the ecosystem to the other people that actually have to make the architecture come to life, you know, the other players that make acceleration chips and other silicon solutions that are very important as well. So we do have engagement across that. And I do think it's not concentrated on one customer, it's really across the ecosystem. And that's what I'm really proud of what the team has done. So I think you're gonna continue to see, you know, our revenue increase in this area. You know, we've been investing, as I said, in the prepared comments around engineering skills, you know, to make sure we have the capacity to really support these ramps. And it's gonna probably be the biggest growth driver for us in next year as you look at 25, clearly with what we've laid out for you.

Okay, thank you, Amit. We have the next question, please.

Next question comes from the line of Wamsi Mohan from Bank of America. Your line is now open.

Yes, thank you so much. Terrence was hoping maybe you could unpack your comment on the content outgrowth in Asia that sounded closer to 10 points of outgrowth. I was wondering how much of that is coming from EV mix versus increased electronification in that region. And do you see those trends sustaining in fiscal 25 as well? Thank you.

Yeah, a couple of things. I think what's important is first off being, you know, when we sit here today and you think about Asia, Asia is very much, you know, it's our largest revenue region, is also where the vast majority of EVs are made. And if you look at just last year, Wamsi, you know, there were 4 million more electric vehicles made last year. They were all made in Asia while the West was sideways and slightly down from a production perspective. And when you look at overall Asia car production, it was up mid single digit, you know, all revenue was up mid double digit. So really nice content outperformance. Certainly it's the EV momentum. It is also, you know, data in the vehicles, you know, a Chinese vehicle, as well as any Asian vehicle. You look at the software that's getting put into them, that needs more data connectivity in the car, as well as the architecture contingent valve. So the outperformance is both EV, as well as everything we get from a content across all power trains. And we do expect that you're gonna continue to see EV production growth, probably similar in the units that we had this year, around 4 million units. That's gonna be mainly driven by Asia. And we feel very well positioned for that.

Okay, thank you, Wamsi. Can we have the next question,

please? Question comes from Steven Fox of Fox Advisors. Your line is now open.

Hi, good morning, everyone. I was wondering if you could help us maybe reset a little bit on the new segments that you're switching to this year in terms of just how to think about growth by the two segments, maybe margin expansion, and how it maybe compares on a pro forma basis to what you just reported. Thanks.

Yeah, a couple of things. We will, as Sujal said in his pre-made remarks, we're gonna give you all data through an AK later in the quarter, Steve. So when you sit there and, you know, when you think about the growth, it's really combining the IS and the CS segment today together. And I think that'll be a good baseline until we get that out. I do think when you look back at this year, you see a couple of things. The growth this year, places like ADNM, energy, and what we saw in the communication segment, that growth is just gonna continue as we go into next year. You know, auto, we're gonna, we feel good with the four to six out performance over production, even though auto production will be slightly down, we do think we can drive that. And, you know, I think the real question as we look ahead is gonna be some of the areas where we've seen softness, whether it be industrial equipment, commercial transportation, and also in our sensors business, just where the industrial markets have been weak and you have been impacting us, you know, when does that relieve as we go in there and you know, that becomes a lesser of a headwind as we go into 25. We do think that will happen through the year. We do expect growth to improve through the year, but that's how you should be thinking about 25 growth. And Heath, I don't know if you wanna comment on the margin side.

Sure, Steve, you know, as both Suzhal and Terrence have commented, we will put out some pro forma backward looking here later in the quarter so you can update your modeling. But I'd say from, you know, there's not much change in transportation at all. So we kind of know what that stands. And then as you add the other two segments together, you can probably get pretty close doing your own math in terms of that. But, you know, it's fair to say that the new industrial segment would have finished 2024 in the high teens in transportation in our 20% range. As we look forward, you know, transportation is unchanged with the growth opportunities that are there that Terrence just outlined and some of the investments that we're making, we feel comfortable with where we are with transportation as we move into 25, with transportation being a 20% or better as we move through the year. And then the biggest move opportunity for us is in the industrial segment. And we'll see improvement there in the new industrial segment in 25 versus 24 on the margin front, but moving them closer to 20% at the segment level for the total company to be at 20% is the goal over the midterm. So, you know, we're working that and feel good about where we're gonna go. The biggest move though you'll see is gonna be an industrial in FY25. Okay,

thank you, Steve. Can we have the next question, please?

Your next question comes from Scott Davis of Meliis Research. Your line is now open.

Hey, good morning, guys, Terrence and- Hey, Scott. Good morning. Grads, I'm managing through a tough year as a margin. As I wanted just to turn to industrial a little bit, factory automation side. Is there any visibility on when that business stabilizes? It seems to be kind of your toughest one right now. I wanna get a snap back on that in 25, it'd be pretty helpful.

No, thanks, Scott, for the question. And, you know, it's an area that in many ways we would have thought, and as we commented, we would have expected a little bit of recovery this year. I would say the areas where we really see the weakness just to make sure you're here where we're seeing it, you know, it is, you know, in the factory, discrete factory automation space where we have a very nice position. It's also in around building automation. And, you know, the one thing I would say where while it feels it's bouncing around the bottom, I do wanna make sure that that's clear. We do feel it's bouncing around bottom. Europe got a little weaker. I would say America's is stable and we have seen in Asia a slight improvement. So I do think we're dealing with some regional mixes as well, Scott. I do feel there is, you know, with some of our customers, they are still working off a little bit inventory of what they have. So there is a little bit of the stocking in there. I do think we're probably gonna have to get out into our calendar 25 until we see that improvement. But right now it's sort of bounce around the bottom. And, you know, it has been a big headwind this year. It has absorbed some of the growth we had in other areas. And we do think with the trends out there will improve, but I think we still need a little bit more time.

Okay, thank you, Scott. Can we have the next question,

please? Question comes from Mark Delaney from Goldman Sachs. Your line is now open.

Yes, Doug, good morning. Thanks for taking my question. You spoke about the success the company's having with content growth and the four to six points of outgrowth, something you think you can sustain. But as you think about auto content growth over the longer term, I'm hoping you may be able to share thoughts on the announcement from Tesla earlier this week around the plan to look to simplify their low voltage connector architecture and any implications for your company. Thank you.

Sure, thanks, Mark. And, you know, we don't comment on individual customers because we play with everyone, but I would just tell you, an announcement like that gets us excited because we do work with every, you know, car company in the world. And when you go into messing with the architecture and evolving the architecture, there are real challenges to that. And that can be whether it's you're trying to go and say, how do I go from 12 volt to 48 volt? How do I go from distributed compute to zonal compute or central compute? And these are things that have nothing to do with an electric vehicle. They are architecture changes that happen across all power trains. And in each one of those, you may be going, also trying to solve how do you improve assembly efficiency, which certainly Tesla always does a great job. So in these cases, typically the interconnects get more complicated because you're combining things together. They typically get more miniaturized, especially when you're going from 12 to 48 volt, you're using thinner wires, which also create challenges in the assembly process. And what occurs as you get to these more complex problems and engineering problems, it typically increases the content for us. And that's when we use the word electronification versus electrification. As you have any change where you're trying to hang more electronics on an architecture in a car, you're trying to basically improve that, that creates content opportunity for us. And even when we talk about the four to six, we have to realize, electronification is just as important as electrification of the power train. And that happens across everything. So those types of changes we're excited about. And we're fortunate that we can work with every car company in the world as they work on these next gen architectures.

Okay, thank you, Mark. We have the next question,

please. Your next question comes from Christopher Glynn from Oppenheimer. Your line is now open.

Thanks, good morning. Heath, you talked a little bit about capital allocation. I was noting the two and a half billion repurchases. I think it's a little bigger than normal. So just wanted to go back to that discussion is that, suggest any adaptations for your capital strategy.

Thanks, Chris. And I appreciate the follow-up question on this. Now, I think, when we sat with our board and went through it, part of this announcement was taking into consideration the amount of cashflow that we've been generating as a company and where we need to be positioned to give us options. And we've used the word optionality a couple of times today. And that seems to be the word that's resonating with us in terms of, we do have a stronger M&A pipeline in front of us, but we've got to do deals that make sense for our owners and valuations and value creation opportunities. Having said that, we still have a ample excess cashflow and we have no intention of piling up on our balance sheet here. So we never have, and that's not our strategy. So it gives us an opportunity to deploy capital, via share buyback to our owners, in addition to what we do with the dividend, which will increase as our earnings and cashflow increases. So it's just another mechanism. I suspect it will take us out over the next couple of years in terms of that authorization, but no change in that, just maybe a little bit more bullishness about our ability to continue to generate cashflow, utilize our balance sheet and stay balanced with what we're doing.

Okay, thank you, Chris. Can we have the next question,

please? Your next question comes from Luke Junk from Baird. Your line is now open.

Great, thank you. Good morning, thanks for taking the question. Um, Terrence, would be great to get your updated perspective on TE's automotive positioning in China, specifically, we've talked a lot about Asia this morning, but I wanna zoom in on China, and just some of the key achievements underpinning what's been seemingly a very strong year overall there. I guess I'm thinking about your positioning with current customers, turning on new customers maybe, and especially leverage to locals, and just what that might mean is we move into next year, and then simultaneously from a competitive standpoint, are you seeing any changes there, especially any local players making incremental incursions into the market in China, thanks.

No, fair, thanks, Luke, and you know, first off, you have to assume when we talk about Asia, China plays a very big part in that. You know, about half of Asia's vehicles are made in China, so when you think about the world, and we always talk about global auto production, while there's 87 million cars made in the world, 50 million of those are made in Asia, and of those 50 million, half of those are in China, and you know, China is a very important position for us, and is about $2 billion of our automotive revenue, is China alone, and you know, with that type of weighting, the trends that we talk about relate about the growth outperformance I mentioned on Asia, you can assume the same type of growth outperformance in China, and one of the things that I think has always been a strength of ours, is because we play with every OEM, not just multinationals, we would not be able to drive this content outperformance if we weren't with the local OEMs, you know, it's not a secret, multinationals are losing share in China, and it's inverted, so we're used to have multinationals have two thirds of the share, and local Chinese OEMs have one third, today is two thirds Chinese OEMs, one third multinationals, and the growth that we've had just sort of proves that we are winning with the locals, and winning with everybody, and our market share is similar between the two, and it's something that, I think our team has done a great job, and something we've invested heavily in, and we're actually, as I mentioned in my prepared remarks, we're actually opening our sixth automotive factory in China to support the growth that we have, so we're continuing to expand with our local resources, local engineers, local capacity, because that is served locally, which is very important. Competitively, you know, we still have primarily Western competitors here, it is the other companies that you cover, as well as Japanese competitors play there, and there are some traditional Chinese competitors that we've competed against for some time, they are not new competitors, but there are also competitors that, you know, quality, cost, and everything that is important, we have to make sure we're winning against them as well. So I feel good about our position, it is gonna be something as we look at 25, we expect Asia is gonna be the driver of volume production on the world, it's gonna be the driver of EV, and our content outperformance that we saw in the second half of these five points of outperformance we had in the second half, you know, our content outperformance will be driven by Asia, and then we hope the Western trends pick up, and that can also help us as well, but really the Asian position is very important.

Okay, thank you, Luke, can we have the next question, please?

Your next question comes from Sari Burditsky from Jeffreys, your line is now open.

Hi, thanks for taking the question, and I know you're going to do some new segments, but just given the strong growth expected in communication for 2025, are you still looking for 25 to 30% incremental margins on that growth specifically, or are there additional investments needed that we should think about? Thank you.

Sure, I'll take that. You know, as you would expect with the type of growth that we're seeing, there are investments that we are making in that space, both on the capital front to increase capacity for production to handle that type of uplift, as well as engineering investments that we're making. Now, those have been underway, and some of those are already embedded in our run rate for our 2024, so I'm not here to suggest that it's going to be, I don't know, a massive uptick as we go into 25, but some of these programs have been underway for a while. But as we move forward, you should expect us to continue to. From a, at the segment level, from an incremental flow through perspective, which I think you were asking, you know, we need to dial that in a little tighter, and we can give you a little more color when we come back out in the January timeframe, which will be when we first report on the new segments. But having said that, I think 30% is probably a decent number, but that's not just coming from this AI side, that's also coming from some cost actions and other things that we're doing in the rest of that segment. So I think you can be dialed in somewhere in that ballpark, and we'll tighten it up for you.

All right, thank you, Sarie. Can we have the next question, please?

Your next question comes from Joe Speck of UBS. Your line is now open.

Thanks, Heath. You converted over 100% of free cashflow this year. I was wondering if you'd just give us a little bit of color on, you know, cat-backs plans for next year and whether, you know, free cashflow conversion could be similar. And then just to follow up on the earlier question, like if that M&A pipeline doesn't materialize, should we still expect about, you know, 100% of that free cashflow to be distributed to via dividends and the new buyback?

Well, Joe, a couple of things there. First, I think, you know, and I know we may sound like a broken record, but from a modeling perspective, I would still assume roughly 5%, 5% of revenue towards cat-backs as a modeling. We came a little under that this year, but there's always timing elements and things. I do expect our cat-backs in 25 versus 24 to probably be about $100 million higher. Most all of that is to support the AI program growth and some of the capacity we need to bring online from that. So, you know, if you're looking to dial in your model, it kind of feels like it's in that ballpark and we'll continue to update you, but nothing outsized relative to that from a cat-backs perspective. From a conversion perspective, we certainly have benefited from the fact that, you know, from a cash conversion perspective, that we've been able to manage working capital in a manner that you would expect in a flat growth environment. And when you're in a flat growth environment and the number of widgets that we're making is largely flat, you know, we can go after things like inventory pretty aggressively. The other thing that's worked in our favor is we've been able to, as the world has finally, you know, from a supply chain perspective, recovered more coming out of the COVID swings over the past four or five years, one of the things we're able to do is just plan a little bit better and, you know, have more trust in our suppliers, as well as the order patterns from our customers, as we said, in the middle of everything. Now, as we move into 25, we are expecting to grow and we are expecting our volumes to be up in 25. And so that will have a natural impact of putting a little bit of pressure on working capital, both on receivables as well as on inventory. So I think that math would tell you that we're not gonna be at 120% again, but I still feel confident that we're gonna be over 100%. And, you know, we'll continue to update as that moves forward. But I appreciate the question and stay tuned. Thank you, Joe. Can we have the

next question, please?

Your next question comes from Joe Giordano from TD Cohen. Your line is now open.

Hey, guys, good morning. Hey, Joe. I appreciate that this is kind of happening in real time, but you're getting a lot of announcements in Germany about workers at auto facilities joining nationwide strikes. And so when you think about your auto guidance and specifically how you're dialing in the next quarter, like, how do you feel like that kind of situation is handicapped?

Well, when we guide, Joe, everything we know is in our guidance. And, you know, certainly we have customers and many of our business units that are going through unique things. And we do, you know, one thing, when we think about the first quarter, we do expect global auto production to be down similar to what it was in fourth quarter year on year. So I do think we are gonna be seeing, you know, in the West, you're gonna have that weakness. That's some of the things you've talked about. But age is gonna be the real driver of growth and then in the production as we look at next year. So next year, we do expect overall global production to be down slightly. And certainly the decline in auto production of the mid single digits we talked in quarter one, Europe's gonna be a big chunk of that.

Okay, thank you, Joe. We have next question,

please. Your next question comes from Colin Langen from Wells Fargo. Your line is now open.

Hey guys, this is Cosa Tisula filling in for Colin. I just wanted to place more focus on the commercial vehicle market. Can you just offer some color in how the business will impact your transportation, segment margins and four year 25?

Well, first off, let me talk about the market a little bit and then I'll let Heath talk about the margins. You know, when you look at their impact of financing rates, certainly a little bit of inventory, you do sort of see globally a heavy truck market, which also includes an R-World AG and construction that has weakened and we've experienced that. What's been nice is that our team has grown probably 200 basis points better than the decline. So I think as we work through this cycle, which these are common here, we will get some outperformance as we're in a negative environment. And there are some things that are in 26 that on the emissions fronts in certain parts of the world that we do think could spark demand and improve later next year. But Heath, why don't you talk about the margin side of it?

Well, it's a good question because sometimes the mix within the segment can impact the transportation segment margins. There, we've been pretty public that our commercial transportation business is a very profitable business for TE and for that segment, obviously. Now, you know, that's the softness that we're seeing does put pressure on the margins. However, it put pressure on the margins in 2024 as well. So, you know, it's kind of in our run rate as we move into 25, while we do expect things to improve as we work, are we through the year from a market demand perspective, we are not, our assumptions on transportation margins and, you know, holding their head at 20% or better are not contingent upon our commercial transportation business seeing some big uptick. So our auto business has performed very well and has been able to handle the headwinds that's come out of other parts of the segment. Thank you, Costa. Can we have the next question, please?

Your next question comes from Matt Sheeran from Stifle. Your line is now.

Good morning, this is Victor Ahn from Matt Sheeran. Thanks for taking my question. I was hoping to get some color on your data devices, BusinessX, the AI opportunity. How's that recovery for traditional data com applications been tracking and how do you view the business going into 2025?

Sure, let me get into that. And, you know, we do talk a lot about AI. First off, we're seeing, you know, when you take outside of AI and it is always difficult to try to parse between AI and true cloud, but as we parse it, we do actually see the cloud element returning to growth. We do see that being probably a mid single digit growth next year. You know, after we had a shift that really went to AI dollars versus nothing being invested elsewhere. So it's nice to actually see that we do exceed more cloud programs, you know, coming back up. Enterprise continues to be sideways is the way I would look at it as we look at next year. And then we don't play largely in telecom networks, but I do think it's nice to see the cloud recovering spend that's outside of AI going into next year.

Thank you, Victor. We have the next question,

please. Your next question comes from William Stein from Truvis Securities. Your line is now open.

Great, thanks for taking my question. Good morning. I'm hoping- You're welcome. Hey, I'm hoping you can comment on two things. First, the sequential decline in comms orders despite the strong results and the comments about growth next year. Perhaps this is just anticipated lumpiness, but it's been a little bit surprising to investors and something, I think. And then also if you could elaborate on the product exit that you mentioned, I think in the slides, you talked about this in sensors, but maybe just give us a little more color. Thanks so much.

Yeah, yes, sure. So first off, on the sequential decline in orders in D&D, I think you have to realize our orders grew 100% last quarter, 40% this quarter year on year, and you nailed it. Well, they're gonna be lumpy based upon when the programs are in, based upon when we get to agreements with our customers. And so I think you're gonna continue to see that lumpiness. I think the real punchline to keep in front of you is collectively in D&D, we had a billion dollars of orders in the past two quarters combined. So that's very strong. And I would really be careful in taking one quarter versus another. What's that cumulative? And what we're seeing really supports that guidance we gave you in the doubling of our AI revenue and even the cloud trends. I just talked about the non-AI cloud trends. In sensors, let me switch to the second question you had. In sensors, we've been talking about pruning we've been doing to be focused and make sure we get to basically four markets that are important to us as we reposition ourselves in sensors. It was automotive, it was heavy vehicle, it was medical and factory automation. And they're the areas that we really challenged ourselves a few years back to say, what gets in our way to winning in those four markets. And we've been doing 80, 20 work that has been exits. This coming year coming up, it'll be about $50 million of exits that we're doing to really end this program. And you can put that in as a headwind for next year, but 2025, they'll be done.

All right, thank you, Will. Can we have the next question, please?

Your next question comes from Shreyas Patil from Wolf Research, your line is now open.

Hey, thanks so much for taking my question. Keith, you mentioned a little earlier that the goal is to get to 20% operating margins.

I'm wondering

if you can expand on that a little bit. It would appear that the underlying margin is probably pretty close to that level if we were to just out some of the typical challenges in industrial and commercial, but serious on your thoughts. And then on AI, just how to interpret the revenue guidance of around 600 million for next year with what appears to be two straight quarters where your orders are probably close to somewhere around four to 500 million per quarter. Thanks.

Yeah, I'll take the margin question. We haven't gone out with formal margin guidance in terms of that, but what I was trying to do was provide a little color earlier that if you think about the new segment structure, our transportation margins are already at 20% and we'll continue running at that. There's always a little bit of quarter volatility, either direction on that side of 20%, but we feel good about where we are, particularly in light of the softness in the commercial transportation market, which is a bit of a headwind on that front. As we think about the new industrial segment, which combines our traditional communications and industrial segments together, it's a blended rate now that's gonna be somewhere in the high teams. It does provide us with that opportunity and given both some of the opportunities on the growth side, as well as some cost things that we've done to get that segment over the next couple of years to get us up over to 20%, which in total for TE would obviously put us at 20. So my comments were not intended to be an entirely a 2025 versus 24, it was meant to be where we see this thing going and getting more comfort around. This year we ended up close to 19%. We see over the next couple of years to get closer to that 20%, but volume is gonna help in that formula as well. And then Terrence, do you wanna- Yeah,

Shrey, it's just one thing, just to clarify the orders we talk about of this billion dollars, while the increases are driven by AI, there are the other parts of the business and non-cloud AI enterprise. So all I would say is I do think the momentum that we have is there to support it. It's just there is a difference between that order level versus the AI only doubling. So I do just think as you put those together as you get into 25 and 26.

Okay, thank you, Shrey. Can we have the next question,

please? From Guy Hardwick from Freedom Capital Markets, your line is now open.

Hi, good morning. Good morning. Hi gentlemen, I appreciate the guidance you gave for transportation. I think you said it'll be for Q1 will be equivalent to FY24 levels. So that's kind of around 20%. But not to quibble too much, but Q4 the transportation margin was a little bit below the expectations and I understand it's due to investment, but given you're at 20% now begs the question, how much higher can it go? Given that's kind of close to peak levels, but you are talking about 30% incremental. So what the kind of, I know you don't wanna get specific guidance for next year yet, but what are the kind of dynamics for the margin of transportation for next year given maybe a backend recovery in commercial transportation, the census business, getting through to restructuring and exits and then what you said about outlook for production and mix?

Well, Guy, I think you nailed all the various moving parts there. I'm not worried about the 19.3 and change that we did in the fourth quarter. We've also had quarters where we were 21%, right? So in a given quarter, there can be noise, it could be mix and this quarter we did have some heightened investments and some timing of things that we maybe thought would have layered in over a couple quarters. So these things happen. I don't get hung up on one quarter, particularly with the foresight that we have looking into not just our Q1, but our FY25 for that segment. In terms of moving past that 20%, the incrementals would suggest that the natural growth in that business would drive to that. Now we have not seen a ton of volume growth because where the market outgrowth we've had in auto and so forth has been offset by pressures that we've seen on the top line in both commercial transportation sensors. Now we do expect both of those sensors won't necessarily return to growth as the product exits in FY25, but we do expect the sensors or the commercial transportation business to continue to improve as we move through the year, albeit we're not calling it right now in terms of a timeframe for when that could happen. And it's probably in the second half of the year. When that business returns to growth in conjunction with the strong auto business, I do think you'll see some support there on the incrementals, but we're not ready to call that or put a number out there. And we feel good about where we've been able to hold our head right

now. All right, thank you, Guy. If there's no further questions, I just wanna thank everybody for joining our call this morning. If you have further questions, please contact Investor Relations at TE. Thanks everyone and have a great day.

Today's conference call will be available for replay beginning at 1130 AM Eastern time today, October 30 on the Investor Relations portion of the TE Connectivities website. That will conclude the conference for today.