TE Connectivity Plc Q2 FY2025 earnings call

Management Statement and Operational Highlights

• Global Business Layout: Three-quarters of sales are outside the US, and over 70% of production is localized within each region. Tariff impact is small, with more in industrial segment than transportation, and mitigation actions including sourcing changes and price actions are being implemented.
• Second Quarter Results: Sales were $4.1 billion, up 5% organically and 4% reported year-over-year. Record adjusted earnings per share of $2.10, up 13% vs prior year. Adjusted operating margins 19.4%, up 90 basis points. Orders $4.25 billion, up 6% YOY and sequentially, with book to bill of 1.02.
• Acquisition and Cash Flow: Closed Richards acquisition in industrial segment for $2.3 billion. Delivered strong free cash flow of $1.1 billion in first half, returned ~$1 billion to shareholders, and increased dividend by 9%.
• Order Trends: In Q2, orders grew to $4.25 billion with book to bill of 1.02. Transportation orders flat YOY with Asia growth offsetting declines in Europe and North America; industrial segment had 13% YOY and 4% sequential order growth.

Segment Performance

• Transportation Segment:
  • Auto business: Organic growth of 16% in Asia offset by declines in Western regions. Commercial transportation had 5% organic decline, driven by market weakness in Europe and North America, partially offset by growth in Asia. Sensors business declined due to weakness in broader industrial market in Europe and North America. Adjusted operating margins remained above 20% in Q2.
  • Orders: Flat vs prior year in transportation, with 18% growth in Asia offset by declines in Europe and North America. Sequentially, orders grew in all transportation business.
• Industrial Solutions Segment:
  • Digital data network: Nearly 80% organic growth driven by increasing ramps from hyperscale platforms, with revenue from AI applications expected to be above $700 million in FY2025.
  • Automation and connected living: Returned to growth with 2% organic growth, broad-based across regions.
  • Aerospace, defense, and marine: 11% organic sales growth driven by commercial aerospace, defense, and space applications, with favorable demand trends and supply chain recovery.
  • Medical: Declined 14% in Q2 due to customer inventory normalization but saw double-digit sequential growth.
  • Energy: 8% organic sales growth driven by grid hardening and renewable applications, with double-digit growth in the US; Richards acquisition enables capitalizing on growth opportunities in North American utility market.
  • Adjusted operating margins in industrial segment expanded 260 basis points to 17.9%.

Guidance

• Third Quarter Outlook: Sales expected to increase sequentially to $4.3 billion, up 5% organically YOY. Adjusted earnings per share expected to be around $2.06, up 8% YOY. Includes Richards acquisition and two points of pricing related to tariff recovery. Anticipates tariffs will not have meaningful impact on Q3 earnings based on current enactment.

Risks

• Trade Policy Risks: Uncertainty in trade policy, particularly tariffs, which could impact sales and earnings. The tariff impact on industrial segment is more significant, and mitigation actions may not fully offset all effects.
• Geopolitical Risks: Potential anti-American sentiment in supply chains in certain regions, which could favor local suppliers over US-based companies like TE Connectivity.

Question and Answer

• Q: Scott Davis on tariff impact and anti-American sentiment in supply chain A: Tariff impact is more in industrial segment. TE's business model is local with local design centers, manufacturing, and sourcing, so anti-American sentiment not seen, but monitored. Pricing in automotive contracts has elements for tariff mitigation.
• Q: Mark Delaney on tariff impact on market outlook and pull-in of sales A: No meaningful pull-in of sales seen. Industrial segment has momentum with AI ramps, energy growth, aerospace and defense cranking; transportation has mixed regional dynamics.
• Q: Amit Daryanani on margin expansion sustainability A: Margin expansion continues with localization strategy, rationalization of locations, and operational levers. Industrial segment has margin journey, transportation margins hover between 20%-21%.
• Q: Wamsi Mohan on content growth in auto and tariff cost impact A: Europe's weak auto production impacts content, but Asia ramps and data connectivity in cars help. Tariff cost impact is 3% of sales, with one-third mitigated by sourcing changes and majority recovered via pricing.
• Q: Luke Junk on automation and connected living and geographic impacts A: Automation and connected living saw order inflection, with Europe and Asia showing upward trends. Sales outlook for third quarter is flat due to tariff uncertainty.
• Q: Samik Chatterjee on AI momentum A: AI momentum is real with 150% increase in orders, ramps with customers, and expected to reach over $700 million in FY2025.
• Q: Joe Giordano on automation in US and policy uncertainty A: Uncertainty causes distraction in automation plans in US, but orders picked up, with cautious outlook due to tariff uncertainty.
• Q: Saree Boroditsky on medical channel inventory and demand A: Medical business saw 20% sequential increase, with second half expected to improve over first half as inventory normalizes.
• Q: Colin Langan on tariff risk advantage over competitors A: TE's localization strategy is an advantage, with more options for mitigation compared to some competitors.
• Q: Christopher Glynn on space segment A: Space segment is a smaller vector but benefits from convergence in space applications, leveraging DDM business, with specialized standards and materials.
• Q: Asiya Merchant on commercial transportation trajectory A: Commercial transportation guide is flattish, with catalysts like emission changes in North America potentially driving recovery in the future.
• Q: Joe Spak on industrial orders and Richard's acquisition A: Industrial orders had strong growth across all business units, with no Richard's acquisition impact in orders yet as it closed in April.
• Q: Steven Fox on pricing power and competitors A: Pricing environment dictated by input costs and tariffs, with TE managing it through mitigation actions and providing value differently. Teams are good at managing pricing.
• Q: William Stein on AI pull-ins and customer concentration A: No meaningful pull-ins seen in AI business, with focus on hyperscalers and confidence in over $700 million AI revenue.
• Q: Shreyas Patil on auto end market recovery pace and capital allocation A: Tariff exposure is more in industrial segment. Capital allocation includes balance between buybacks and M&A, with Richards acquisition deployed $2.3 billion, and ongoing M&A and buyback activity.