TE Connectivity Plc Q1 FY2025 earnings call

Management Statement and Operational Highlights

• Innovation: Supporting customers' innovation in next-gen architectures, including AI, energy infrastructure, next-gen vehicle architecture, and AD&M.
• Margin Expansion: Focus on executing operational levers to drive adjusted margin expansion, seen in Q1 results and guidance.
• Global Manufacturing Strategy: Benefit from localizations for China Plus One strategies and prepared to deploy tariff playbook if tariffs are implemented.
• Cash Generation: Strong cash generation model enabling capital return to owners and bolt-on M&A opportunities.

Segment Performance

• Transportation Solutions:
  • Auto business: Down 3% organically in Q1, with strong growth in Asia offsetting declines in Western regions. Expected global auto production to be down 1-2% in fiscal 2025, with content growth in the low end of 4-6% range. Secured over $1 billion in new design wins with a Chinese auto OEM for next-gen data connectivity.
  • Commercial transportation: Down 12% organically, driven by heavy truck production weakness in Europe and North America, expected to improve later in the year.
  • Sensors business: Sales decline due to weakness in broader industrial markets in Europe and North America.
  • Adjusted operating margin for the segment was 21.3% in Q1.
• Industrial Solutions:
  • Grew double-digits in Q1. Digital data networks grew 50% organically, with AI revenue expected over $600 million in fiscal 2025. Automation and connected living declined 5% organically but showed order stability, especially in Asia. AD&M sales up 15% organically, driven by growth in aerospace, defense, and space. Medical business declined 25% as customers normalized inventory, expected to show sequential growth. Energy business up 7% organically, driven by utility-scale renewables. Acquired Harger, a North American leader in lightning protecting and grounding solutions.
  • Adjusted operating margin for the Industrial segment was 16.8%, expanding 100 basis points year-over-year.

Guidance

• Top-line: Sales organically in line with expectations, orders slightly ahead of expectations and accelerated Y/Y and sequentially. Expect sequential improvement in top-line in Q2 and further growth in Industrial Solutions.
• Adjusted Operating Margin and EPS: Adjusted operating margin and EPS were records and ahead of guidance. Q2 adjusted EPS expected to be around $1.96, up 5% Y/Y, with a $0.06 headwind from currency exchange and tax.
• Free Cash Flow: Record free cash flow of $674 million in Q1, up 18% Y/Y.

Risks

• Strong Dollar Impact: Impact of a stronger dollar on financial performance throughout the year.
• Global Economic Uncertainty: Uneven global economy creating noise and uncertainty for 2025.

Question and Answer

• Q: Better understand order trends and AI impact on orders
  • A: Orders ahead of expectations, broad strength in Asia, AI orders grew nicely, Industrial segment orders grew 10% Y/Y ex-AI, aerospace, energy, and automation showing momentum.
• Q: Incremental leverage in Transportation Solutions margins
  • A: Transportation margins at 20% or better, commercial transportation expected to recover, leveraging cost structure reductions in Western Europe.
• Q: AI revenue strength and margin profile
  • A: AI revenue doubled in Q1, broad-based with hyperscalers, early ramps with volume benefit to drive margin momentum.
• Q: Tariffs and M&A
  • A: Prepared to deploy 2017 tariff playbook, strong cash flow provides optionality for M&A, active in bolt-on acquisitions.
• Q: Industrial markets stabilization and regional trends
  • A: Stabilization in orders, upward momentum in Asia, sideways in US, weakness in Europe, inventory behind us.
• Q: Auto production and content growth
  • A: Global auto production expected down 1-2% in fiscal 2025, 80% of EV growth in Asia, electronification and software-defined architectures driving content growth.
• Q: Cross licensing in connector industry
  • A: Cross licensing traditional in interconnect and datacom space, collaborative to help customers with ramps.
• Q: Co-packaged optics and TE's role
  • A: TE does not play in co-packaged optics, but benefits from hybrid architectures needing connectivity.
• Q: Data in cars and pipeline
  • A: Software-defined architectures driving data connectivity, significant wins in China, content growth accelerating.
• Q: Industrial equipment orders and medical business
  • A: Industrial equipment orders stabilizing, medical business one-time inventory normalization, expected sequential growth.
• Q: Restructuring charges and margin benefit
  • A: Restructuring focused on moving to lower cost regions, Industrial segment expected margin improvement from growth and cost mitigation.
• Q: Commercial vehicle margin improvement
  • A: Confidence in improvement due to emissions standards change and pull-forward of demand before '27, expected benefit in '26.
• Q: Auto engineering recoveries and AI margin variability
  • A: Q1 margin strength due to Asia production volume, AI growth lumpy with investment impact on margins.