TE Connectivity plc (TEL) — Q2 2017 Earnings Call Transcript

Good morning and thank you for joining our conference call to discuss TE Connectivity's second-quarter 2017 results. With me today are Chief Executive Officer, Terrence Curtin; and Chief Financial Officer, Heath Mitts. During the course of 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. 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. Now, let me turn the call over to Terrence for opening comments.

Thanks, Sujal, and thank you, everyone, for joining us today for the earnings call. While many of you know me well, it's very exciting for me to hold my first earnings call as CEO and share our strong results for the second quarter as well as an improved growth and earnings outlook for the year. In the second quarter, we delivered sales of $3.2 billion, representing 8% organic growth year-over-year, and we experienced growth across all regions. We delivered record second-quarter profitability, with 170 basis points of adjusted operating margin expansion year-over-year and adjusted earnings per share of $1.19, which was up 32% over the prior year. This second-quarter performance was ahead of our prior guidance due to the higher organic growth as well as strong execution by our teams. All of our segments contributed to our sales growth and margin expansion, which was driven by our Industrial and Communications segments. Based upon these strong results and our view of market conditions for the second half, we are raising the midpoint of our revenue and adjusted earnings per share guidance to $12.7 billion and $4.62, representing 6% organic revenue growth and 17% earnings per share growth, respectively. I want to take a moment to reiterate the key pillars of our strategy that we've discussed in the past. First is our focus on harsh environment applications, which demand high levels of engineering and manufacturing excellence and provide competitive differentiation. Second is our TEOA operating system that drives customer service enhancements and productivity that reduces our fixed cost footprint. Third is our consistent execution of our balanced capital allocation strategy, which enables us to make strategic acquisitions that have expanded our portfolio, while consistently increasing dividends and repurchasing our shares. Additionally, we are focused on ensuring that we align and enable our teams around the world to be focused on executing towards these pillars. With our portfolio focused on harsh environments, I'm pleased that our business is now firing on all cylinders with revenue and profitability growth across each of our segments. Our second-quarter performance and increased guidance for fiscal 2017 demonstrate successful execution of our strategy, and we believe this foundation will continue to drive growth ahead of our markets, deliver improved financial performance, and generate strong returns for our owners. If you could, please turn to slide three to review some additional highlights from the second quarter. As I indicated, we have growth across all segments and regions, with particular strength in Asia, where our organic growth was 16%. We delivered 10% organic growth in our Transportation segment, with auto and commercial transportation driving significant performance above-market growth rates due to content gains. In Industrial Solutions, markets are improving and we generated 3% organic growth, which was in line with our prior guidance for the segment. In the Communications segment, sales increased 9% organically with growth across each of our three business units. At the company level, adjusted operating margins were 16.6%, with year-over-year expansion driven by the Industrial and Communications segments. As we look forward to guidance, we're raising our organic growth expectations from 4% to 6% for the year, with second-half growth expected across all segments year-over-year. Adjusted earnings per share will be raised from $4.40 to $4.62 at the midpoint, reflecting higher growth and a slightly lower tax rate. Heath and I will go through the details on the guidance later in the call, but as you think about our revenue guidance increase, please keep in mind that we had stronger-than-expected second quarter performance, and that outperformance explains about half of the full-year increase. We're also seeing strong momentum in orders, which reinforces slightly higher growth expectations for the second half in our commercial transportation business and our Communications segment, along with a slightly reduced headwind from add-backs versus our prior guidance view. Before we get into the segment results and updates, I would appreciate if you could turn to slide four, so I can cover our orders for the quarter, which will help provide context for the trends that we're seeing and our expectations. Demonstrating continued momentum, our total orders were $3.4 billion in the second quarter; if you exclude SubCom, orders were $3.2 billion, which were up 16% year-over-year and up 15% organically. We saw organic order growth across all of our segments in the second quarter as well as growth among all our regions. By region and excluding SubCom, orders in the Americas grew 14%, in Europe, they grew 13%, and in Asia, they grew 18%. As we want to remind you that these growth rates are somewhat amplified due to a relatively weaker comparison versus last year's second quarter when we were contending with both inventory corrections and certain regional weaknesses. By segment in Transportation, orders increased 17%, with growth in all regions. Industrial orders grew 22% year-over-year due to the Creganna and Intercontec acquisitions, while orders organically were up 8%. In the Communications segment, excluding SubCom, we saw year-over-year organic orders growth of 17%, including 9% growth in Data and Devices, primarily due to our high-speed connectivity focus, as well as Appliance orders grew 27% organically, reflecting continued strength and market share gains in Asia. When looking at our sequential orders growth in Industrial and Communications, both of these support our growth outlook for the second half. So, please turn to slide five, so I can discuss the segment results, starting with our Transportation segment. Quarter two was a very strong quarter for Transportation, with sales growing 10% organically year-over-year and operating margins in the range of our expected levels. Segment sales exceeded expectations due to auto demand in China, where we saw another quarter of production growth versus the prior year and growth from our leading position in the heavy truck market. Our Auto sales were up 9% organically due to growth in Asia and Europe, and auto production growth was estimated to be up approximately 4% in the quarter. We continue to outperform the market due to content growth and share gains. For the full year, we expect global auto production to be up 2% to 3% based upon stronger-than-expected first-half production. Given the strong production we experienced in the first half, we expect the estimated growth for the year from a production perspective to be primarily driven by the first-half production growth. Looking at the second half, it implies flat to 1% production growth in that period, which is consistent with our expectations from the beginning of the year, and we expect production growth to moderate and this has not changed from our prior guidance. Turning to commercial transportation, our business delivered another very strong quarter, as this segment continued to outperform the market. Organic revenue growth grew 21%, driven by our strong global position, strength in the heavy truck market in China, and content growth due to the adoption of new emission standards and regulations. In our Sensors business, we had 3% growth organically with growth driven by Transportation and benefiting from improving Industrial markets. Adjusted operating margin for the segment remained strong at 19%, which was where we expected. We continue to support a robust pipeline of design wins that will generate future growth above production. As we've indicated before, you should continue to think of a steady-state Transportation operating margin as 20%, plus or minus a point. If you could, please turn to page six to discuss our Industrial Solutions segment. Sales in this segment grew 16% on a reported basis, driven by the Creganna and Intercontec acquisitions, and 3% on an organic basis, which was consistent with our expectations. We are very pleased with the growth and performance of our acquisitions, as they're contributing favorably to the segment both on the top and bottom line. In industrial equipment, we grew 4% organically, with increased demand from factory automation applications and we're seeing the benefit of that across all regions. In our aerospace and defense unit, our defense business grew organically, while our commercial air business was negatively impacted by timing of programs in the quarter. Our oil and gas business has stabilized and is no longer expected to be a headwind to revenue or operating margins on a year-over-year basis. Our energy business grew 7% organically, driven by strength both in Europe and in Asia. Adjusted operating margins for this segment increased 130 basis points to 12.7%, as we expected, and we believe operating margins will expand from this level in the second half with revenue growth. To help illustrate the progress, excluding the impact from the acquisition-related amortization, adjusted EBITDA margin expanded 160 basis points to 16.9%. So, please turn to page seven, so I can cover Communications Solutions. The second quarter really demonstrates the progress that we've made in this segment. We had 9% organic growth and continued momentum in all three businesses. Segment adjusted operating margins expanded significantly year-over-year and improved versus last quarter, now standing at 15.2%. Data and Devices reported another quarter of organic growth, as we continue to benefit from the high-speed ramps at cloud infrastructure customers. As we discussed last quarter, growth in this business is the result of our multi-year transformation to focus the product portfolio on key growth applications, and we expect organic growth for the full year. In addition, D&D more than doubled its adjusted operating margin from a year ago, driving significant improvement at the segment level as actions taken to transform the portfolio and optimize operations are bearing fruit. Our Appliance business performed strongly, achieving 14% organic growth year-over-year as demand remained strong, particularly in Asia. Our SubCom business also grew 11% in the second quarter. Adjusted operating margins of 15.2% were up 680 basis points from the prior year with contributions from all businesses, and this was actually up 200 basis points sequentially. With that segment overview, I'll turn it over to Heath, who'll cover the financials.

Thank you, Terrence, and good morning, everyone. Please turn to slide eight, where I will provide more details on the Q2 financials. Adjusted operating income was $535 million with an adjusted operating margin of 16.6%, driven by strong organic growth of 8% and productivity benefits. GAAP operating income was $473 million and included $59 million of restructuring charges and $3 million of acquisition-related charges. For the full year, we continue to expect restructuring charges of approximately $150 million, driven by footprint consolidations from acquisitions and structural improvements. We aim to strike a healthy balance between investing for future growth while capturing SG&A efficiencies. GAAP EPS was $1.13 for the quarter. Adjusted EPS was a new record for the second quarter at $1.19, up 32% year-on-year. This was above our prior guidance range driven by revenue growth and the benefit from a lower tax rate. The growth above the prior year is a result of our strategy in action, with harsh applications driving growth, TEOA driving efficiency, and balanced capital deployment enabling acquisitions and share buybacks. We also benefited from a lower adjusted effective tax rate of 15.4% driven by the expirations of statutes in certain jurisdictions and additional benefits from Accounting Standards Update 2016-09 related to stock compensation. For the full year, I now expect an adjusted effective tax rate around 18%, similar to last year. However, as discussed last quarter, please keep in mind that the year-over-year dynamics. We get an EPS benefit in the first half of 2017 and have an EPS headwind in the second half of 2017, given that our Q3 2016 and Q4 2016 adjusted effective tax rates were 17% and 13%, respectively. While the first half benefit is $0.10, you have a negative impact of $0.10 in the second half, resulting in a zero net impact for the year. Going forward, I would expect an adjusted effective tax rate between 19% and 20%. Page 15 of our slide deck contains a bridge that provides the details for the first half and second half. Turning to slide nine, our strong Q2 results demonstrate that we are executing on our strategy and performing well against our business model. Adjusted gross margin in the quarter was 34.4%, a 180-basis-point improvement from the prior year, driven by fall-through on increased volumes, productivity improvements from our TEOA programs, and restructuring benefits. Adjusted operating margins were 16.6% in the quarter, up 170 basis points year-over-year driven by our Industrial and Communications segments. Adjusted EBITDA helps explain the cash earnings of our business. Adjusted EBITDA margins in Q2 were 21.3%, up 160 basis points year-on-year. Cash from continuing operations was $521 million, and free cash flow was $387 million in the quarter. Free cash flow grew year-over-year primarily due to better operational performance. We returned $234 million to shareholders through dividends and share repurchases in the quarter. Looking ahead, we continue to expect free cash to approximate net income and capital expenditures to be approximately 5% of sales. We remain committed to our disciplined long-term capital strategy for balanced return of free cash flow to shareholders while still having ample capital to invest in acquisitions. Our balance sheet is strong, with reasonable debt levels and an ability to continue to support return of capital and acquisitions going forward. We have added a balance sheet and cash flow summary in the appendix for additional details. Now, I'll turn the call back to Terrence.

Thanks, Heath. Let me cover our guidance for both the third quarter and full year. So let's start with the third quarter. If you could look at slide 10, please. We expect third quarter revenue of $3.2 billion to $3.3 billion and adjusted earnings per share of $1.14 to $1.18 per share. This represents reported sales growth of 4% and organic sales growth of 5%, with 7% adjusted EPS growth at the midpoint. I want to highlight that our outlook includes the negative impact of the stronger dollar, which we expect will be a headwind of $70 million to sales and $0.04 to EPS on a year-over-year basis. Additionally, as Heath mentioned, there is an unfavorable tax impact of approximately $0.03 when compared to the prior year. Without these two headwinds, we would expect solid double-digit earnings per share growth year-over-year on 5% organic revenue growth, which is in line with our business model. Looking by segment, we expect Transportation Solutions to grow low single digits on a reported basis and mid-single digits organically. This is above the expected auto production growth levels of 1% that we expect in the third quarter, with our outperformance being driven by content growth. We also expect continued growth in our commercial transportation segment across all regions. In Industrial Solutions, we continue to expect to grow low single digits on both a reported and organic basis, with growth expected across all three of our business units. In Communications, we expect high single-digit growth on both a reported and organic basis, with growth in each of our three businesses. We expect SubCom to be particularly strong in the third quarter due to the timing of program executions. Now, let's move to slide 11 so I can cover full-year guidance. Just before I get into the guidance, as I said earlier, I'm very pleased that our business is firing on all cylinders, with revenue growth and operating margin expansion this year being driven by all three segments. As we look at the second half, the margin expansion we will experience will be driven by the Communications and Industrial segments, similar to what we saw in quarter two. Looking at our guidance for the year, we are raising the midpoint of our revenue and adjusted earnings per share guidance from our prior view by $300 million on the top line and $0.22. Roughly $100 million of the sales increase and $0.04 of the earnings per share improvement is from reduced currency exchange headwinds. Organic revenue expectations are increasing from 4% to 6%, or roughly $200 million. Of this, approximately $130 million is from the outperformance we had in the second quarter, and $70 million is driven by a higher outlook in both our Commercial Transportation business and the Communications segment for the second half. I want to note that our assumption for Auto growth in the second half has not changed from our prior view. We expect our Auto business to deliver mid-single digit growth in the second half on a slight production increase. When you look at our implied year-over-year trends in the first half to second half, I would ask you to keep in mind the impact of currency exchange rates and the tax dynamics that Heath discussed, with more details on slide 15 of the deck. For the full year, the increase I just walked you through results in revenue in the range of $12.6 billion to $12.8 billion and adjusted earnings per share of $4.58 to $4.66. This represents 6% reported and organic growth, and 17% adjusted EPS growth at the midpoint versus the 52 weeks of fiscal 2016. By segment, we expect Transportation Solutions to now be up high-single digits organically, reflecting strong results in the first half and continued content growth and share gains. While we continue to expect auto production to moderate, we expect to generate mid-single-digit revenue growth in our Auto business in the second half. Commercial Transportation is expected to outperform its end market again this year, benefiting from content expansion in the heavy truck market. We expect our Sensors business to grow mid-single digits year-over-year. In our Industrial segment, organic growth guidance is consistent with the guidance we've had since the start of the year, reflecting continued improvement in the industrial markets. In Communications, we expect to be up low single digits on a reported basis, an improvement versus our prior year, reflecting continued strength in Appliances and growth in Data and Devices. We're raising our guidance for our SubCom unit to high-single-digit growth this year. In summary, I feel very good about our ability to drive 6% organic growth, expand our operating margins, and generate strong double-digit adjusted earnings per share growth this year. I believe this demonstrates that our portfolio is delivering and continuing to benefit from the secular trend of content growth across our businesses. Before we go to Q&A, I would like to close by thanking our employees for their strong execution in the second quarter and for their continued commitment to bring our technologies to our customers all around the world. So, with that, let's open it up to questions, Sujal.

Okay, Brad, could you give the instructions for the Q&A session?

Hi. Morning, everyone, and congrats on the good first half of the year.

Thanks, Shawn.

This is the obvious question on Auto, but you have had some other players in the markets raise some red flags, be it excess inventory in North America, or China production declining. I know your fiscal year doesn’t align with the other calendar year-ends of many companies. Are you seeing any weakness in auto production out there right now, be it kind of flattish second half, that would lead you worried into the next fiscal year?

Hey, Shawn, it's Terrence. Let me take that question. When you look at Auto this year, and we go back to the beginning of the year, we expected North America to be flat to slightly down in production, and it’s sort of playing out as we expected. I think when you look at Europe, we've actually seen Europe progressively improve throughout the year incrementally, not major movement, but a positive trend. The same holds true in Asia, outside of China. When we guided at the beginning of the year and we guided to 1% growth overall, the big wildcard was around the China incentive and the impact once that incentive tailed off. We always assumed that auto production would be quite flat in the second half, and it looks like it’s playing out that way. So while we had a strong first half in production, much of it was driven by China. As we’re looking at order rates, we view the year is playing out as we've said all year, with the only real change being that China production was a little stronger in the first half, which drove the increase from our original 1% production growth projection up to 2% to 3%. So our Auto has generally been pretty consistent with the picture we’ve laid out, and we expect China auto to slow and a tough North American market, which has been challenging for almost two years now. I don’t think there are any incremental red flags; it’s playing out as we thought.

That's very helpful. As a follow-up on the SubCom business, now being up high single digits for the year, could you talk about what visibility you have into fiscal 2018? Does the business decline, can you hold it flattish into fiscal 2018 based upon the backlog you have right now?

Shawn, thanks for that question. We have a good 18-month window based on the projects in the pipeline in SubCom. During the quarter, our backlog remained steady at around $850 million, and we are also working on a number of opportunities that we’re quoting. I think when you look at where we are, the strength of the backlog indicates that modeling next year, keeping SubCom pretty much flat with the guidance we’re giving for this year is probably the most prudent approach.

Thanks so much.

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

Yes, thanks. Good morning, guys. I have two questions, both on the Transportation side. Could you talk about the operating margin dynamics you saw on a sequential basis? I think it was down about 300 basis points. What kind of happened there and how do you view margins broadly as you go through fiscal 2017; when do you see the headwinds, which I think might be an issue for you right now, abating?

Amit, this is Heath. If you go back and look at our comments from 90 days ago, we were clear that the Transportation segment margins were running very hot and are not sustainable. Internally, we looked at the 19% margin, and it was in line with where we thought we would come in, consistent with our guidance of around 20%, plus or minus a point. There’s some investment activity going on in the segment as we’re ramping up, because our revenue pipeline is strong in Transportation globally. We’ll continue to make those investments, and I think modeling plus or minus 20% is probably a good number.

Got it. You mentioned the $150 million restructuring plan for the year. How much of that is just M&A integration versus implementing structural improvements within TE Connectivity's portfolio? And how should we think about the payback period for the cost take-out that you guys are doing?

There is some acquisition-related integration, particularly with more recent acquisitions, including Sensors and into the medical space. There is also broader footprint consolidation we're implementing. I think in general, most of our restructuring has somewhere between an 18-month and two-year payback in terms of cash-on-cash returns.

Perfect. Thank you, and congrats on the quarter, guys.

Thank you, Amit.

Thanks, Amit.

Could we have the next question please?

Congrats on the quarter. I've seen several news releases highlighting some of your products, and I noticed you have a pretty significant presence at the upcoming LIGHTFAIR trade show. Are you trying to accelerate your penetration in the connected home market?

Thanks, Joe. When you look at LIGHTFAIR, we have a lot in the home, particularly through our Appliance business. Over the past five years, we've increased our investment in lighting, which links to our Industrial business. As lighting evolves, we're also focusing on sockets, a natural opportunity for us. I think it illustrates where we provide engineering solutions, and while I don’t know the exact revenue at this time, our push into this application area is in line with our objectives to maintain growth.

Thank you. Can you give us some details on what you're seeing in Data and Devices, particularly in China?

On Data and Devices, our performance was strong and slightly exceeded expectations. We've strategically repositioned our portfolio toward high-speed applications. In Asia, particularly in China, we've seen double-digit organic growth, and we grew even more outside of China, including Japan and Southeast Asia. Our traction in this business continues to be driven by operational success and infrastructure investments in China.

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

Yes, thanks. Can you expand on the theme of increasing automotive content, mentioning any particular applications driving growth in fiscal 2017? As you look to 2018, are there specific applications you're excited about?

Certainly, it's broad-based content growth across all regions. This year, we’re seeing growth notably outpace production in all markets. That’s been due to infotainment systems, safety applications like traction control, and powertrain improvements. While powertrain products still dominate, we foresee positive growth across all areas. Our anticipation of $80 of content in five years reflects our efforts to enhance content across diverse applications, including safety, powertrain, and connectivity.

As a follow-up, I wanted to focus on capital allocation. There’ve been discussions on increased discipline around OpEx and M&A. Can you share insights on how your approach is changing, particularly regarding future M&A investments?

Craig, this is Heath. There hasn't been a pivot in our approach. We’ll continue to be disciplined in our capital deployment, maintaining focus on our dividend and share repurchase strategies. We're actively engaging in M&A, though the market remains challenging in terms of valuations. We'll approach future deals judiciously, ensuring that investments meet our return criteria for our shareholders.

Got it. Thanks.

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

Hi, thank you. Terrence, the market's worried about deceleration in auto production trends. You guys outperform based on content growth commentary in your guidance. Can you remind us of the levers you might lean on if deceleration continues to be stronger? How should investors think about your capacity to grow in a potential downturn?

In a potentially flat production environment, we expect to maintain mid-single-digit growth by leveraging our existing content wins. Even in a slight production downturn, we believe our content growth position from mechanical and electrical products will permit us to post growth. We would adjust investment strategies without compromising our financial performance, avoiding a free-for-all scenario. Our position now reflects robust performance that stems from substantial content gain, particularly in the vehicle electrification and other technologies as directed by emissions regulations.

That's very clear, Terrence. Thank you for that insight. As a follow-up, we have heard reports of increased restock activity in the channel. Can you comment on the inventory levels outside automotive and the discrepancies between your SubCom order pattern versus the guide?

We’ve seen channel partners increase their orders, but inventory levels in indirect channels are steady, not built up. Our channel partners are actively ordering due to shortages in other components. We saw an acceleration in ordering through our channel partners, which typically indicates positive momentum, not inventory buildup. As for SubCom, the orders from them can fluctuate based on program arrangements, but overall trends indicate that we might want to moderate expectations but remain confident in future orders.

Thanks, Terrence.

Thanks, Wamsi. Could we have the next question please?

Thank you very much. I have two questions. One CEO-type question and a CFO question. You mentioned your auto forecast for this year remained unchanged, which is a pleasant surprise amidst concerns from the market. Why do you think your forecast is different from others? Are we facing potential inventory buildup issues in the future?

I get it, Jim. Our unique fiscal year cycles impact our expectations, and our outlook reflects insights directly from our customer engagements. Based on what they’re relaying and supply chain insights, we feel solid about our position. It seems our perspective aligns with the moderation in market assumptions, especially with China production adjusting but being currently steady.

That's very clear, thank you. My follow-up question involves restructuring charges. Should we expect the $150 million restructuring to persist, or is this peak, given your operating margins are higher?

I would not point to $150 million as something set in stone moving forward, as we assess the specific opportunities while maintaining cash-on-cash returns. While we plan for further refinements of the operating model, the restructuring impacts will evolve between M&A-related activities and broader optimizations. We'll provide more details in the future.

Great, thank you so much for the details. Greatly appreciated.

Thanks.

Thanks, Jim. Can we have the next question, please?

Thanks, and good morning, guys. I have a question regarding the strong operating margin in the Communications Solution segment. That seems to be the highest since you changed the reporting segments. I know a lot of that was driven by portfolio mix and deselecting products. Can you clarify how much of that strength was driven by Subsea Communications versus mix and portfolio changes? How sustainable is that margin going forward?

Matthew, that's an excellent question. The year-over-year improvement of nearly 700 basis points in this segment was pretty well balanced across the three business units, and all contributed roughly equally to that margin improvement year-over-year.

Okay. In terms of targets, particularly, you've given that, it looks like Subsea will be flattish over the next few quarters into next fiscal year. I imagine you're still looking at growth within Appliances and Data and Devices. Is there still an incremental margin that you expect to generate?

While productivity plans will remain in place, the heavy lifting around footprint consolidation in this segment is behind us. I wouldn't want to imply another 700 basis point improvement going forward, but we feel good about where the margin is currently. Most of the improvement moving ahead is expected to come from Appliances and D&D, but those segments are already running quite hot.

Got it. That's very helpful. And just circling back to Transportation, specifically the commercial segment where you've seen strong organic growth in an overall market that has been flat to down. What's your view on underlying growth?

Great question. Our performance extends over the last couple of years during a generally negative market, particularly in North America. Our growth this quarter stems from our strong position not just in North America, but also from emission standards driving content gains in China. Going forward, I see construction picking up after a tough period and agricultural trends remain challenging, whereas our position allows us to weather those fluctuations.

Thank you very much.

You're welcome.

Can we have the next question, please?

Hi, it’s Adrienne Colby for Sherri. Thanks for taking the question. Within Industrial, what drove the declines in aerospace and defense? Additionally, from a margin perspective, what was driving some of the upside? Is it mainly the moderation in the drag from oil and gas, or are you seeing contributions from other parts of the business?

In aerospace and defense, we maintain confidence in our annual outlook. In this past quarter, we observed slower pickups from a major airplane manufacturer. This was offset by defense, which picked up and was a positive note. With oil and gas, we’re experiencing stability and are not viewing it as a headwind for margins anymore. The actual margin improvement resulting from actions we've taken is evident, and we expect momentum to continue in the Industrial segment into the second half.

Great. As a quick follow-up, it appears SG&A ticked up a bit this quarter. Can you comment on that going forward?

The SG&A uptick is typically seasonal, which you can see going back to prior years. It is relatively normal to see this increase from the first quarter to the second quarter in a percentage perspective, and it aligns with our internal expectations.

Thank you.

Thank you very much. I want to appreciate everyone for joining us. If you have further questions, please contact Investor Relations at TE. Thank you and have a great day.

Thank you, everyone.