Release Date: July 24, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- TE Connectivity Ltd (TEL, Financial) delivered strong adjusted margin expansion of 200 basis points year-over-year.
- The company achieved record adjusted operating margins and earnings per share, demonstrating strong operational performance.
- TE Connectivity Ltd (TEL) reported record free cash flow of $2 billion through the first three quarters of the year.
- The communications segment returned to growth, driven by momentum in artificial intelligence applications.
- The company expects double-digit earnings growth for the fiscal year, driven by adjusted operating margin expansion.
Negative Points
- Ongoing weakness in general industrial markets continues to offset growth in other segments.
- The industrial equipment business experienced a 24% organic sales decline due to ongoing destocking.
- Commercial transportation business saw an 8% organic decline, primarily driven by weakness in Europe.
- The sensors business faced sales declines due to market weakness in industrial applications.
- TE Connectivity Ltd (TEL) anticipates approximately $60 million of year-over-year currency exchange headwinds in the fourth quarter.
Q & A Highlights
Q: Can you discuss the drivers behind the higher growth expectations for AI-centric business this year and next year? Also, what does your customer mix look like on the AI side?
A: The growth is driven by accelerating hyperscaler and cloud CapEx focused on AI applications. Our strong position with cloud customers is translating into AI design wins across multiple hyperscalers. Orders and design wins are increasing, with AI revenue expected to exceed $250 million this year and more than double in 2025. The growth spans across the entire ecosystem, including hyperscalers and semiconductor companies.
Q: Can you talk about the margin outlook for the segments and how incremental margins should trend in communications in light of AI momentum? Also, how do rising commodity prices impact this?
A: Our focus has been on margin expansion through restructuring, price adjustments, and portfolio optimization. We expect high teens margins in industrial to improve as the industrial equipment business returns to growth. In communications, incremental margins on AI revenue should be in the 25% to 30% range. For transportation, we are steadying at 21% margins, with potential for improvement as commercial transportation recovers. Commodity price fluctuations are managed through hedging and pricing strategies.
Q: Are you seeing any cross-licensing deals between interconnect players for AI, and how does this impact margins?
A: Cross-licensing and dual sourcing are common in this space due to the volume and ramping required. This ensures certainty of supply for customers and involves collaboration among interconnect players. This practice is not new and does not significantly impact margins.
Q: What are your updated thoughts on hybrid versus EVs, and how does TE Connectivity adapt to market changes?
A: Electrified powertrains are up 20% this year, with significant growth in Asia. In the Americas and Europe, consumers are moving more towards hybrids. TE Connectivity benefits from increased content in all types of electrified powertrains, including hybrids, plug-in hybrids, and battery electrics. We expect these trends to continue, driving content growth for us.
Q: Can TE Connectivity see the 4 to 6 points of targeted outgrowth in automotive revenue, considering potential delays and inventory corrections?
A: Yes, we are confident in achieving the 4 to 6 points of outgrowth. This is driven by increased content from electrification and electronification trends, including data connectivity and safety applications. Our global position and diverse customer base help mitigate the impact of platform changes and delays.
Q: What are your CapEx commitments for fiscal '25, especially with the ramping AI segment?
A: Our CapEx runs at about 5% of revenue, supporting growth areas like automotive electrification and AI applications. We are ramping up CapEx for AI, particularly in Asia, but this is within our existing CapEx profile. We do not expect significant incremental pressure on CapEx.
Q: Can you provide insights into order patterns and book-to-bill ratios, particularly in industrial solutions?
A: Order growth is strong in communications, driven by AI and appliance business recovery. In industrial solutions, we see ongoing destocking in industrial equipment, but other markets like aerospace, defense, and medical show persistence. Destocking is starting to flatten, indicating potential recovery.
Q: Given the increase in AI revenue expectations, what is the updated timeline for reaching $1 billion in AI sales?
A: With the current trajectory, we are confident in reaching $1 billion in AI sales, but the exact timing will depend on ongoing design wins and market developments. We will continue to update as we progress.
Q: Can you elaborate on the impact of new automotive architectures on content and margins?
A: New architectures, such as zonal and centralized compute, simplify harnesses but increase the complexity and content of connectors. This drives higher content and margins for TE Connectivity, as these architectures require advanced connectivity solutions.
Q: What is TE Connectivity's strategy and focus for bolt-on M&A?
A: Our strategy focuses on bolt-on acquisitions in markets and technologies we understand, such as industrial equipment. We prioritize financial returns and operational synergies. The pipeline is robust, particularly in industrial spaces, and we expect increased M&A activity in the coming years.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
