TE Connectivity Ltd

everyone thank you for standing by and welcome to the te connectivity second quarter earnings call for fiscal year 2025. at this time all lines are in a listen only mode later we will conduct a question and answer session if you'd like to ask a question during that time please press star followed by one on your telephone keypad as a reminder today's call is being recorded i would now like to turn the conference over to our host Vice President of Investor Relations, Sue Joel Shaw. Please go ahead.

Good morning, and thank you for joining our conference call to discuss TE Connectivity's second quarter results and our outlook for our third quarter of fiscal 2025. With me today are Chief Executive Officer Terrence Curtin and Chief Financial Officer Heath Mitts. 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. Finally, during the Q&A portion of today's call, due to the number of participants, we're asking everyone to limit themselves to one question, and you may rejoin the queue if you have a second question. Now, let me turn the call over to Terrence for opening comments.

Terrence E. Thanks, Sujal, and thank you, everyone, for joining us today. As you're all well aware, we continue to be in a dynamic global environment that has gotten more complex over the past month due to trade dynamics. As Heath and I will cover on today's call, We are performing well and continue to execute on what we can control to deliver strong financial performance as is evident in our second quarter results we published this morning. But before I get into the quarter details and our guidance, I want to begin by sharing how the recent tariff announcements are impacting us and the actions that we're taking to navigate these impacts. I think it's first very important to start by framing TE's business and how global we are. First, it's important to highlight that three-quarters of our sales are outside the United States, and we've invested to manufacture close to our customers to be aligned with their supply chains. A second key point is that our manufacturing strategy was developed by working with our customers and has resulted in over 70% of our production being localized within each region. When you think about combining the first point of how much of our sales are outside the United States combined with the second point of our manufacturing and our localization strategy, it does result in a small percentage of our sales being impacted by current tariffs with more of the impact being seen in our industrial segment than in our transportation segment. For those products that are impacted, we have already been working with our customers to minimize the impact. We are implementing a combination of mitigation actions. This will include sourcing changes by both TE as well as our customers. As well as where sourcing changes are not possible, we will be implementing price actions. We will continue to monitor changes to trade policy, but due to the mitigation levers I just laid out, We do not expect tariffs to have a meaningful impact on our third quarter earnings based upon what is enacted currently. And Heath will get into more details in his section about the tariff levers. I feel our teams are well positioned to navigate this dynamic environment around us to deliver on the value proposition for our owners and our customers. Our performance and momentum to consistently execute on our business model is reinforced by the current year results, which include our strong second quarter and guidance for the third quarter. When we step back from some of the noise, we are hitting on all cylinders as a company. We're growing in line with our business model. Adjusted operating margins are running at the 19-plus percent range. We continue to demonstrate our cash generation model, and we have a strong balance sheet that enables us to continue our balanced capital deployment strategy. So with that as an overall backdrop, and I'm sure we'll cover more in the Q&A, I'd like to get into the presentation, which starts with slide three, and I'll discuss some of the highlights and guidance for the third quarter of fiscal 25. Our second quarter sales were above guidance at $4.1 billion, and this was up 5% organically and 4% on a reported basis year over year. You know, these results were driven by double-digit growth in our industrial solution segment, and what we saw there was very broad-based in that growth. We had record adjusted earnings per share of $2.10, and this was ahead of our guidance and up 13% versus the prior year. Adjusted operating margins were 19.4% of 90 basis points over last year, driven by strong operational performance in both of our segments, And the overall expansion was driven by a 260 basis point increase in the industrial segment. Our orders were $4.25 billion, and these were up 6% on both a year-over-year and a sequential basis. And this supports our outlook for the sequential growth into the third quarter. And I'll get into more details on the order levels in a little bit. We delivered strong free cash flow of $1.1 billion in the first half of this year, with approximately $1 billion returned to shareholders. And we also announced a 9% increase to our dividend. And this reinforces our strong cash generation model. I also want to highlight that in April, we closed on the Richards acquisition in the industrial segment, and we deployed $2.3 billion related to that acquisition. As we look forward, we are expecting our third quarter sales to increase sequentially to $4.3 billion, and this will be up 5% organically year over year. Our guidance includes a Richards acquisition, as well as two points of pricing related to tariff recovery. Adjusted earnings per share is expected to be around $2.06. This will be up 8% year over year. So if you could, I'd appreciate if you could turn to slide four, and I'll get into more details on the order trends. In the quarter, we saw orders grow to $4.25 billion, and we had a book to bill of 1.02. In the transportation segment, our orders were flat versus the prior year, and we had growth in Asia of 18% in transportation that was offset by declines in Europe and North America. The global auto market continues to be uneven by region, and you see the strength of our Asia position in both our orders as well as sales, which is helping to cover weak Western auto markets. Sequentially, we saw orders growth in all business and transportation. In the industrial segment, we continue to see strong order momentum with 13% year-over-year growth and 4% growth sequentially. And this growth reflects ongoing strength in artificial intelligence applications, as well as strength in our energy and AD&M businesses. Another thing I would like to highlight is that for the first three weeks of April, we continue to see stable order patterns and a book to bill greater than one, which further supports our Q3 guidance. Now, let me discuss year-over-year segment results, and I'll start with transportation on slide five. Our auto business was flat organically in the second quarter with growth in Asia of 16%, being offset by declines in western regions of 11%. Our sales growth in Asia outperformed a 5% increase in Asia car production and reinforces our strong position in that region. As we look forward, we expect our global content growth to be at the low end of our four to six point range for the second half of our year. While we do expect global auto production to decline this year, we anticipate electronification across all powertrains to be a key driver for our growth of our market in the second half. And as we talked before, it'll be driven by software-defined vehicle architecture and the related proliferation of data connectivity in the car. We also continue to expect 20% growth in hybrid and electric vehicle production, with roughly 80% of that production occurring in Asia. where we're strongly positioned and we produce locally. Turning to the commercial transportation business, the 5% organic decline was as we expected and driven by market weakness in Europe and North America that was partially offset by growth in Asia. We continue to expect this market to be slow next quarter, with sales looking a lot like the second quarter. And in our sensors business, the sales decline was driven by weakness in the broader industrial markets in Europe and North America. For the transportation segment overall, our teams continued to execute well in a slow environment reflected by adjusted operating margins that remained above 20% in the second quarter. Now let's turn over to the industrial solutions segment. I ask you to turn to slide six. And just start with that the segment had very nice growth this quarter of 17%. You know, that growth was driven by our digital data networks, which grew nearly 80% organically, with increasing ramps from hyperscale platforms. We now expect revenue from artificial intelligence applications to be above $700 million in fiscal 2025, reflecting strong program ramps, and leadership in multiple hyperscale AI platforms across the customer base. In automation and connected living, it was nice to see that the unit returned to growth in the quarter, with 2% organic growth, and just, I would tell you, it was broad-based. For the third quarter, we are expecting sales to be roughly flat to the second quarter in our ACL business. In aerospace, defense, and marine, our sales were up 11% organically, driven by growth across commercial aerospace, defense, and space applications. In these markets, we continue to see favorable demand trends coupled with ongoing supply chain recovery, and we see the momentum in these markets continuing. And in our medical business, we did decline 14% in the quarter due to the inventory normalization by our customers that we've been talking to you about. But a key for this business is we did see double-digit sequential growth in this business, as we expected. And let me wrap up with energy, where we saw 8% sales growth organically, driven by continued momentum in grid hardening and renewable applications, with double-digit growth in the United States. The Richards acquisition enables us to capitalize on strong growth opportunities in the North American utility market. I would like to welcome the employees of Richards to the TE team and look forward to the value they will create as we strengthen our position in North America together. Now, let me turn to margins. In this segment, you know, in the industrial segment, adjusted operating margins expanded 260 basis points to 17.9 percent as the teams executed well on the strong sales volumes. I am pleased with the progress that we're making on our margin journey in this segment. So with that, as an overview, let me hand it over to Heath. He'll get more detail on the financials, tariffs, and our expectations going forward.

Thank you, Terrence, and good morning, everyone. Please turn to slide seven. For the quarter, adjusted operating income was $805 million with an adjusted operating margin of 19.4%. GAAP operating income was $748 million and included $12 million of acquisition-related charges and $45 million of restructuring and other charges. For the full year, our view of restructuring is unchanged at around $100 million. Adjusted EPS was $2.10 and GAAP EPS was $0.04 for the quarter and included a one-time non-cash tax charge of $1.91 due to change in tax law as well as restructuring, acquisition, and other charges of 14 cents. Our beat versus guidance was driven by strong operational performance in both segments. The adjusted effective tax rate was approximately 22 cents in Q2, and we expect both the third quarter and the second half adjusted tax rate to be in the 24% to 25% range. The higher tax rate will result in a six-cent sequential headwind to EPS in the third quarter. For the full year, the adjusted tax rate is expected to be roughly 24%. And as a reminder, the increase versus the prior year is primarily related to the impact of the Pillar 2 global min-tax and jurisdictional mix of our earnings. Importantly, and as always, we anticipate our cash tax rate to be well below our adjusted ETR. Now, if you turn to slide 8, sales of $4.1 billion were up 5% organically year-over-year. Adjusted operating margins were 19.4% in the second quarter, expanding 90 basis points year-over-year. Adjusted earnings per share were $2.10, a company record, and up 13% year-over-year, driven by revenue growth and margin expansion. Turning to cash flow, cash from operations was $653 million and free cash flow was $424 million. Through the first half of the fiscal year, cash flow was $1.1 billion. We continue to expect our free cash flow conversion to be over 100% this year. While we are in a dynamic environment, I feel comfortable with where we are as a company and our ability to effectively navigate through this. Our cash generation and healthy balance sheet position us well and provides us optionality with uses of capital. Through the first half of this fiscal year, we returned approximately $1 billion to shareholders, and, as Terrence mentioned, we recently made an announcement to raise our dividend by 9%. And, also as Terrence mentioned, earlier this month we deployed $2.3 billion of cash for the Richards acquisition in our energy business. All this activity demonstrates the strength of our balance sheet and the confidence we have in our cash generation model. We will continue to monitor the environment as we make decisions on capital deployment going forward. Let me add a couple of other details on our third quarter guidance that Taryn shared. First, we are including Richards, which contributes roughly $70 million to sales and is roughly neutral to adjusted EPS, including the impact on financing. The second item I want to cover is the tariff impact that is factored into our Q3 guidance. For those products that are affected by enacted tariffs, we estimate a cost impact of approximately 3% of sales. We anticipate that about one-third of this impact will be mitigated by sourcing changes by TE and our customers, and we expect to recover the vast majority of the remaining two-thirds of the tariff impact through pricing actions which will represent about two points of price related to tariff recovery in the third quarter. These are the actions that we can control with the direct impact, and we will continue to work with our customers as they evolve their supply chain strategies. Before I turn it over to questions, let me reinforce that we are executing well to deliver strong results and have positioned the company to successfully navigate the current dynamic environment. So with that, let's open it up for questions.

Ellie, can you please give the instructions for the Q&A session?

We are now opening the floor for question and answer session. If you'd like to ask a question, please press start, followed by one on your telephone keypad. Your first question comes from Scott Davis from Marius. Your line is now open.

Hey, good morning, Terrence and Ethan. Congrats on the numbers and and on all this it's uh encouraging um hey i have to ask on on the tariff stuff just because it's so topical right now and what people are focused on but you know there's another kind of concern that people have and that is an anti-american sentiment in the supply chain that perhaps um certain regions may favor local suppliers versus uh you know u.s suppliers Talk through us, and I guess the other kind of natural question is that it sounds like it's easier to get price within your auto contracts. Is that because specifically in your auto contracts, it allows for changes in pricing if there's tariffs? I just want some clarity on that. But I'm more interested really in the geopolitical challenges and what that does perhaps to the U.S., you know, a U.S. company like TEE.

So twofold. Let me take the second part first, Scott, on the pricing. The tariff impact that we have is much more in our industrial segment than our transportation segment. Because of our global scale and how much we make in the region, the tariff impact that we even talk about is much more in our industrial segment where you have more fragmentation and a little bit where you're crossing borders. So when you look at it, There will be elements where we will be doing surcharges for tariffs and transportation, but in the numbers Heath highlighted, the vast majority relates to our industrial segment. And we've been working with our automotive customers for that part on mitigation sourcing, how do we do supply differently, as well as moving tools. So I want to make sure that's clear. On your anti-American sentiment, I think there's a couple things that are important that our teams are viewed very locally When you think about how our business model works, it is local teams designing at the design centers. It's also manufacturing and sourcing that's done from a localization, so you get that feel that's very local. We are an extremely global company. Yes, we have American executives at the top, but when you look at really what our customers see, it is very much driven down into those local markets whether that is in China, whether that's in Germany, whether that's in Japan, whether that's Brazil, everywhere. And localization's always been a big part of our strategy, how we do business. As you see in our China auto results, as well as China overall, we have good traction. We have not seen anti-American sentiment around what we do, but it is certainly something we always keep in front of us. And it's something that we've run locally for a long time, and that's why that tariff amount is as low as it is, because we've always said we want to be tied to the design center locally as well as to the supply chain locally. And we don't export things from the United States elsewhere to the world. I think that's a key element when you look at it. These tariff impacts are really where, for what we do in the United States, which is about $4 billion of our $16-plus billion of revenue, it really is things that we bring in from scale from elsewhere in the world, and we'll have to look at do we move some of that tooling to be much more local here as we work through our mitigation strategies.

Okay, thank you.

Thanks, Scott.

Thank you, Scott. Can we have the next question, please?

Your next question comes from the line of Mark Delaney. From Goldman Sachs, your line is now open.

Yes, good morning. Thank you very much for taking my question. I'm hoping to better understand how tariffs are affecting your outlook by end market and to what extent that's informed by your recent customer conversations and order patterns, including in April. And importantly, as you think about how tariffs are affecting your views by end market, what gives you confidence that there isn't a material amount of pull-in sales occurring in the near term due to tariffs? Thanks.

Yeah, so, hey, Mark, let me talk about the pull-in question, and then I'll get into some of the market dynamics. First off, you know, while there were discussions with customers about maybe thinking about, hey, do they pull some things forward, I would tell you they were just scenario planning. We did not see anything meaningful, whether it be from our direct customers or our distribution customers. So when you look at it, I think in an environment where lead times are relatively normal, there is inventory available because we've been through the supply chain elements, as well as uncertainty, it's not something where people say, hey, I want to pull things forward. And we did not see pull-ins meaningfully. As I said on the call, our orders have been remaining stable. There are a lot of customer discussions of how do you work through the mitigation strategies where you do have tariffs. And our teams have continued to work with our customers on the things that they have choices they can make. We also have things that we're proposing to say how do we work through to say how do you do as much as you can to localize to eliminate it. I also have to be very honest with you. We are a small part of the bomb. Some of our customers have bigger things they have to figure out. We are not involved in all those discussions. We're just trying to figure out how do we help them. And we're very much running the business on what we see in our orders and these customer discussions. And when we look at what I said on the call, and let me just recap it a little bit. In industrial, there's areas we just see momentum that continues to crack. DDN, the AI ramps, what we see, those ramps have accelerated. We told you in the call that we expect that to be over $700 million versus $600 million We just told you last quarter. In energy, you know, the growth vectors around hardening and renewables, we continue to see further strengthening there. Richard will add to that. In aerospace and defense, continues to crank along. The space applications continue to crank along. We really have seen no pauses there. And then one bright spot that I would say in the quarter in our ACL business, it finally returned to growth. but we're taking a view due to what's going on that we think that's going to stay flat line. And then in transportation, we just sort of view, we don't view ICT and sensors to improve near term with the dynamics going on. And in automotive, we do expect auto production to go down sequentially. We do expect auto production to be down 5% year over year. And that's going to be the trends continue that we saw in the second quarter. Growth in Asia, declines in the West that are probably pushing, you know, closer to 10%. So, you know, it's still a very mixed environment. I think those feel right based upon what we're seeing and do view they're balanced, but it isn't everything is just going up. And I think our team's operating well in this uneven environment, and hopefully that gives you a flavor of how recapping the markets that we see today.

Okay. Thank you, Mark. We have the next question, please.

Your next question comes from the line of Amit Duryanani from Evercore ISI. Your line is now open.

Good morning, everyone. I just have a question on the margin expansion. And, you know, I think you've seen some really good margin expansion over the last few quarters, in fact, the last couple of years. As you go forward, can you just talk about if margin expansion and the EPS growth can sustain, especially if you end up in a more difficult, choppy end market environment? Just hoping you could flesh out, you know, margin expansion vectors that peak and leverage across both transport and industrial segments, and how much of that going forward do you think is demand versus self-help driven? Thank you.

Well, Ahmed, this is Heath. I'll take this. You know, obviously I think we've covered in this first half hour here of this call, you know, some of the volatility in the markets. You know, we do have some markets that are growing nicely. We have some that are kind of more stable, and we have some that are weak. You add it all up, and it's a fairly even or uncertain market, if you will. We're not getting a lot of support there at the aggregate level. However, we have, over the last several years, as you're aware, reduced our manufacturing footprint, and we have taken sites offline, and this is part of our localization strategy that is aligned with where our customers want us to be and in markets where we can also then get scale and get leverage. So I do feel good about our ability to continue to ramp margins. It is a huge focal point here. Over the next year or so, the bigger jump is going to continue to be in the industrial segment as industrial continues its journey. And that's a combination of a variety of factors. A lot of that is volume and continued rationalization of locations. But I continue to see that. Our transportation business has been hovering between 20% and 21% here for the last several quarters. I feel good about where they can be. Obviously, Terrence just outlined softer markets there. And so our ability to hold our head there above the 20% line feels like the right place to be until we can get back into a situation where we're growing the top line. So we've got a series of different operational levers that we're pulling in terms of protecting both margins and growing in the industrial segment as well as how that converts into EPS. So our business model contemplates where we sit today. We had a good quarter. Our outlook for the third quarter is good. We look to finish strong in FY25 and then jump into 26th. without a lot of certainty of what these markets are going to do.

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

Our next question comes from the line of Juan C. Malheim from Bank of America. Your line is now open.

Hi, yes, thank you. Good morning. Terrence, can you address how you're thinking now about content growth for the year, given your commentary on production trends getting worse, and obviously it's been a slower start? in the first half of the year from a content perspective. And a quick clarification for Heath, if I could. The 3% of cost impact that you're noting for next quarter, how much of that is direct impact from tariffs versus your own cost increases for maybe operations or logistics or just in managing these tariffs? And how should we think about it going forward as well? Thank you.

Yeah, Ramzi, I'll take both of those just for ease. First off, being on auto production, I think the one thing that we've talked to you all about with content this year is, you know, with Europe being extremely weak, Europe is our strongest content region historically. And when you look at European production this year, like last quarter, it was down basically 10%. That has pressured our content, and we had about a two-point outperformance last in this past quarter over production, Asia is very strong. So we're feeling a little bit uneven by region and just different regions have different content levels. As I said on the call, as we look through the remainder of the year, we're expecting to be at that low end of the four to six. We have ramps that are going on in Asia that we feel very good about. We talked about through your last quarter some of them. You know, the data momentum around data connectivity in the car, I know years ago it was a lot about electrified powertrain. The data connectivity growth and the programs that we've run around the world, as people get ready for autonomy and software defined, you need Ethernet architecture in the car to really make this happen, and that's what we mean by data connectivity. That's going to be the element that allows us to get it up to the low end of the four to six. But right now we are being impacted by Europe being weak and being our higher content per vehicle region is creating a little bit of headwind of what you see overall. On your second part of your question that I'll just jump right on to, when you look at the impacts that we have, the tariff costs that we have, that 3% of sales, they are things and most of what we have due to our localization is just where we source something could be something from Germany or Japan that we bring over here that we have scale advantage on that create the tariff impact. So it is tariff surcharge, and that's based upon the tariffs that are enacted today.

Okay. Thank you, Wamsi. Could we have the next question, please?

Your next question comes from the line of Luke Junk of Baird. Your line is now open.

Great. Thank you for taking the question. Terrence, hoping you can maybe just parse out what you're seeing in automation and connected living between those two subsegments, the inflection this quarter. Should we think that automation within that is also inflecting? And maybe if you could also comment just what you're seeing geographically across those two parts of the business, including maybe indirect tariff impacts and picking appliances in China especially. Thank you.

Yeah, certainly. So when you look at it, Appliance has been growing and continued to grow. And I would tell you, that's been growing pretty much in all regions. The big area that we were running behind was in the automation side of it. And what we saw in the quarter loop, which was really nice and took the entire unit up to growth overall, was we saw orders started to pick up. You saw in Europe they started to inflect upward. Certainly saw them also inflect upward in Asia. North America was steady. So right now when you look at them, you know, the order trend started to show an inflection point. Right now what we're assuming with everything going on with tariffs and this is capital goods, you know, we sort of have an outlook that we expect our sales to sort of stay where they were in the second quarter because we'd like to see that momentum stick a little bit longer just knowing to what's going on on the tariff uncertainty. And this is one of the markets where when we talk about impact by tariffs, you do have a lot of supply chain crossover that happens because of the fragmentation here. So we've probably taken a more conservative view than the orders we saw, but it is something right now, hopefully we can tell you next quarter, we continue to see momentum in the orders from what we saw just this last quarter.

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

Your next question comes from the line of Samit Chatterjee from JPMorgan. Your line is now open.

Hi. Thanks for taking my question, and good morning, everyone. Hi. Hopefully you can hear me. If I can just ask you on the AI momentum that you're seeing on that front, I know for the first three months of this year, there's been a lot of concern from investors about sort of pullback from customers in relative to their sort of spend on data centers and expansion of data centers as well as new bids but maybe if you can clarify what's driving the higher guide on your front are you seeing some of the orders come in much higher than expected or was this more about you being conservative initially with the numbers and raising it with more higher visibility and just any more color on what you're hearing from the customer there primarily just in the backdrop of the investor concerns we're hearing thank you

No, Sumit, thanks for the question. And, you know, I think one of the things that's important in our second quarter, we saw 150% increase in our orders. So these are real orders. Certainly, overall, AI CapEx continues to grow. And certainly, I know some of the players have made different comments. But I think what's important is, you know, these are ramps of programs that we've won. So these are ramps that we're working with our customers on, and the hyperscalers are the ones that we're working with here across our customer base. And the increase that you saw was about $50 million more than we had in the second quarter. So some of the beat that I said was broad-based was due to us being able to ramp quicker for our customers. And then you're going to have the remaining increase in the next couple of quarters. And it's really about ramping quicker on programs we've won and orders coming in with higher demand on it. So that's something that we get excited about. And I know we talked earlier, probably two or three quarters ago, about where do we go there. You know, we're closer to that billion-dollar number that, you know, we'll probably be running at next year in 26th. as we continue to have these ramps increase. So the momentum is real, the programs are real, and certainly working hard with our customers to make sure we ramp to their needs as they're trying to deploy their AI servers.

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

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

Hey, guys. Thanks for taking my question. I wanted to talk on the automation side. You know, it's good to hear the commentary that Europe is getting better. I mean, arguably off very low levels. In the U.S., I'm curious, like, are you just still seeing kind of a pause in customers wanting to move forward with things until they know what the rules of engagement are from a policy standpoint?

No, I would say there is uncertainty, Joe. Yeah, let's face it. Everybody's trying to figure out their supply chains right now. So there is a lot of effort that are going on to say, how do I work on supply chains? How do I work upon what's in front of me? So that uncertainty, let's face it, we all have the same number of people pre-tariff than we have today. So it does create a distraction of what people work time on. I would tell you, we did see orders pick up in the United States in automation. I think the element that we're just being a little bit cautious with our guide is really, you know, this was the first quarter in a long time. We do worry just as where do people take their CapEx plans. Very honestly, our CapEx plans are not changing meaningfully. You know, we have to ramp AI programs. We have other programs. We have to ramp the facilities we need to build to support those. But I do just think the amount of effort going in around how do we make sure we make what we can I think is pretty prevalent across every company as they're trying to figure this out. So it does create a little bit of a distraction and another focus area for people to figure out real time. And typically people that are working the automation plans are the same people that are in the manufacturing area trying to figure everything else out on capacity and so forth. It's just why we have probably a little bit more of an uncertain tone around it than some of our other markets.

All right. Thank you, Joe. We have the next question, please.

Your next question comes from the line of Sari Boroditsky of Jefferies. Your line is now open.

Hi. Good morning. Thanks for taking the question. Maybe to turn to medical, obviously another tough quarter on destacking. Can you just update us on channel inventory and how you expect this market to play out for the remainder of the year? And then just a way to estimate what underlying demand is versus what you're seeing in your sales. Thank you so much.

Sure. Where we position our medical business, it's around the mid-single-digit market. We did have, coming out of COVID, in our first quarter we expected, so that's the December quarter, we saw customers pull back. majorly around, hey, all the supply chain inventory. What's really nice is you saw about a 20% sequential increase in that business. We view that inventory elements over, and you're going to continue to see us have a second half sequential improvement over the first half in that business as we work out of that.

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

Your next question comes from the line of Colleen Langen of Wells Fargo. Your line is now open.

Great. Thanks for taking my question. It sounds like you're pretty well positioned on tariff risk, given you're pretty local within regions. I guess we'll find out over the next few months how things settle in. But do you think that could be an advantage over time? Or are your competitors, do they all have pretty similar footprints Any thoughts there in terms of maybe how that shapes up going forward?

No, well, it's very much competitor by competitor, but we do view we're advantaged. The localization that we've invested in has been significant. And some of the things we did when we invested in restructuring to get things, we took capacity offline in certain regions of the world to make it much more localized is an advantage. We do have some competitors that only make in one region of the world, some of our middle and smaller competitors. So very much for you, as we deal with our customers and we look at mitigation strategies, this is something that can be advantaged as we move forward and as we help work them through it. So we have a very positive competitive tone going through this, and how do we help our customers work through it and also show we might have more options than others.

Thank you, Colin. We have the next question, please.

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

Thanks. Good morning. A lot of good panoramic topics covered. I was curious about space. It's a relatively small market, but it's scaling. Just wondering if you could help us understand the scope of that in it. Is it something that's kind of doubling from a small base or just kind of the contours of what's going on with space and how that might contribute, you know, over the next couple of years, really.

Chris, I appreciate you using the word panoramic. I don't think I've ever had that on an earnings call. You know, space is important. So when you sit there and where we serve it is really in our aerospace, defense, and marines, Not surprisingly, and one of the things that is nice is this is where you get a convergence with how the space field has changed with who actually builds current space vehicles happen. Also, what happens when lower satellites benefit us in space. So it is an area that has morphed a lot. It's an area where data speeds, things that we talk to you about in AI, similar data speeds you need to continue to work to. And we leverage what we do in our DDM business, but clearly the environment is much different in the space application. And it's where some of the standards that are there and the materials you have to use get very specialized. And it's areas where we excel at. So it has been a driver. It is something you set up very well. It's multiplying at a very quick pace, but it's on a lower base. While you also benefit from redundancy in these applications, but you do have compute that's increasing massively, and that's areas where we look at high speed, high power, and then have to do the packaging that exists in a space application. It is a vector that is a smaller vector in our ADN space, but a vector that we've been benefiting from, and we expect we're going to continue to talk to you about it.

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

Your next question comes from the line of a CEO merchant of Citigroup. Your line is now open.

Great. Good morning, everyone. Thanks for taking my question. Good morning. If you can just talk a little bit about commercial transportation. I think the guide is for it to be kind of flattish. Just how we should think about the trajectory of that segment, subsegment transition. as it is higher margins and when we should start to see some recovery in that, that could possibly be a positive driver for your transportation segment margins. Thank you.

No, certainly. So, you know, we have told you for numerous quarters now, we see an environment and when we do commercial transportation, that's class eight truck, that's ag equipment, that's also construction equipment. And, you know, The ag environment has been tough. Certainly financing has hit some of these markets. And in Europe and North America, you've seen that softness play out more, while this year we do expect that places like India and China have had increases in unit production. So really there's catalysts that are out there for Europe and North America, certainly with North America around some of the emission changes that are coming up in 27th. How does that all impact with some of the uncertainty? We do think that will create at some point an inflection point, and we just don't know if that's going to be two quarters out, three quarters out. Right now we see our business, the orders are staying very stable, so we've got it into the third quarter to stay stable. But I do think what you'll get is as some of those emission things play in, you will see a more traditional cycle for the Class 8 trucks, And your point is very valid of, you know, this does run a higher margin, and you'll expect a higher fall through when that volume comes.

Okay. Thank you, Asya. Can we have the next question, please?

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

Thanks so much, everyone. I just wanted to maybe dive in a little bit more to the industrial orders, which were strong. But are you including any of the – Richard's acquisition and that growth. And I know you sort of made some comments about, you know, AI as well. So I'm just trying to get a sense of like what the what the underlying organic, like old core historical orders, industrial orders were, because, you know, you also made a comment about, I guess, in the US, you saw a pickup, but My understanding is a lot of that equipment for factory automation comes from overseas, so it seems like it is going to get more expensive under this regime. So I just want to understand how you're thinking about that sort of order trends there.

No, when you look at our order trends in the industrial segment, pretty much across the board we had orders growth year over year. So I just want to make sure that when you look at that, You know, that was, you know, across the board, strong order growth. It was in automation. It was in the appliance area. And this would be only where we serve local customers, Joe. So if we're serving a German factory automation player, we would be getting that in our European business, not in our U.S. business. So the growth is very broad. There is no richer daughters. in our orders. We didn't close that until April, so we'll start getting that. And the growth was also, you sit there, it was across the board with Europe actually getting closer to zero than where it was before. So it was very broad geographically around the world across all the business units. And you even saw that in our results sequentially, our sales were up across all our business units from quarter one to quarter two.

Thank you, Joe. We have the next question, please.

Your next question comes from the line of Stephen Fox of Fox Advisors. Your line is now open.

Okay. Good morning. Terrence, I was wondering if you could just more broadly talk about your pricing power going forward from two aspects. One, you know, you sell into a lot of large OEMs that may be feeling, you know, demand pain down the road in addition to, like, all the tariff questions. And then two, like you mentioned, you know, there's a lot of different types of competitors out there that you may run into, regional, smaller, large, global, otherwise, and just sort of how responsible you think they will be on pricing. Thanks.

Yeah, no, good question, Steve. I think when you look at it, you know, this year before the tariffs hit us, our pricing is neutral at the total TE level. You know, we are price positive in our industrial segment. and, you know, just a little negative in the transportation segment. So, you know, one of the things that we've had this year, let's face it, certain input costs have gone up on certain materials. You know, we've been very disciplined on that, as well as the tariffs that we talked about today. So, you know, I tend to think that the pricing environment will continue to be dictated by where input costs go and also the tariff impacts. And, you know, I feel our team has done a good job managing it as well as the other things that we can do to help our customers, like we talked about on the mitigation actions. Are there things we localize, move tools on? The way we have our supply chain set up with our customers, is there things we can do together? And they're the ideas we're going that are also ways we provide value that's a little bit different than we talk to you about in a certain environment like that. So that's the benefit that we have in this uncertain time. But I feel good how the teams are managing through the pricing aspects. And I do think it's different than how we used to do it.

All right. Thank you, Steve. Can we have the next question, please?

Your next question comes from the line of William Stein from Truist Securities. Your line is now open.

Great. Thanks for taking my question. But first, I'd say it falls also high dramatic. Uh, the, uh, the question is about not AI data center business, um, industry prospects to reflect a pretty meaningful full in activity that went on to some degree during. Uh, counter Q1, but more so that's sort of accelerating today. I wonder how, uh, certain you are about your earlier comment about not seeing meaningful pull-ins. I wonder what your visibility is to that. And also, I'm hoping you can comment on the customer concentration or dispersion and any anticipated change in that. Thanks so much.

So, Will, on the AI side, you know, we do play across the hyperscalers. We also partner with the other semiconductor companies that would be more of our peers in that space that do some of the signal elements from a semiconductor. So, Our focus is more on the hyperscaler side. I would say we did not see pull-ins related to this. This has been very much a function of ramping, ramping with our customers on the AI side. It's what gives us confidence of what they're telling us, as well as how we're working with them together to continue to ramp up. That gives us confidence in the over 700 million. So we did not see pull-ins. from the AI customers at all.

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

Your final question comes from the line of Shreyas Patil of Wolf Research. Your line is now open.

Hey, thanks so much for taking my question. Just maybe to put a finer point on a previous question, how should we think about the pace at which you can get recoveries in the auto end market? I believe in the past we've talked about how it takes longer than industrial, but I'm wondering if you'd expect recoveries to be faster in this scenario. And then maybe just on capital allocation, curious how you're thinking about the priorities there between buybacks and M&A, especially following this Richard's acquisition. Thank you.

I'll let Heath take this, but I do want to stress what I said earlier, that the bulk of our tariff exposure is more in our industrial segment than our transportation segment. So I know I said that a couple times. I want to make sure that comes through, where certainly in the industrial segment, we have more pricing levers. Heath, things you want to add on capital or that?

I just think on the capital allocation, obviously, we did deploy a significant amount of capital with the Richards deal. It was $2.3 billion. So you've seen that, and you'll see that result in a modest amount of increase in our debt levels as well. Having said that, as we look forward, we still feel very confident in our cash generation model. Our ability to generate cash in this environment has been fairly resilient, and we feel good about it. So an M&A engine is not something you just turn on and off. It's something you have to cultivate over time, and so we're always active in that. Having said all that, you know, there's opportunities to buy our shares as well. So you'll see a balance of that as we go through the year. I don't mean to intend to be too vague here, but deals kind of come in a lumpy format. It's never a linear process in terms of when acquisitions get done. But we have a lot of, you know, sticks in the fire right now with that and looking at things not of the same size as Richard's, though. but it's still in the bolt-on category of things that we look at. In the meantime, we're in the market every day with share buyback. All right.

Thank you, Shreyas. If you have further questions, please contact Investor Relations at TE. I want to thank everybody for joining us this morning, and have a nice day.

Today's conference call will be available for replay beginning at 11.30 a.m. Eastern Time today. April 23rd on the investor relations portion of TE Connectivity's website. That will conclude today's conference call. Have a good day.