TE Connectivity plc (TEL) — Q2 2024 Earnings Call Transcript

Good morning, and thank you for joining our conference call to discuss TE Connectivity's second quarter 2024 results and outlook for our third quarter. With me today are Chief Executive Officer, Terrence Curtin; and Chief Financial Officer, Heath Mitts. During this call, we will provide 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. Now let me turn the call over to Terrence for opening comments.

Thanks, Sujal, and we appreciate everyone joining us today. As I'd like to normally do before I get into the slides, I do want to take a moment to provide some performance highlights along with what we're seeing versus our call 90 days ago. We continue to be in a dynamic global economic environment. Against this backdrop, the performance of our markets are largely consistent with our expectations, resulting in second quarter sales being in line with our guidance with sequential growth in all three of our segments. In addition, we experienced improved order levels with sequential growth in orders in all of our segments, and I'll provide you more details on orders later in the call. Our results reflect execution against key items we committed to coming into fiscal 2024. We highlighted our focus on margin performance and the benefits from non-volume-related operational levers to drive margin expansion. Our progress on these are evident in our results as we delivered 13% year-over-year adjusted earnings per share growth, which was driven by adjusted operating margin expansion of 250 basis points. Adjusted operating margins were up in each segment versus the prior year, and we expect to continue to deliver strong margin performance through the remainder of this year. With the improvements that we've made, we expect to deliver double-digit earnings growth this fiscal year, driven by a couple of hundred basis points of adjusted operating margin expansion even in the slow growth environment. The high quality of our earnings continues to be reflected in our strong cash generation model. Through the first half of this year, we delivered record free cash flow of $1.1 billion, which is up over 30% versus the prior year. And we expect to deliver another year of free cash flow conversion above 100%. With the strong cash generation, we deployed over $1.5 billion so far this year, with $1.2 billion being returned to shareholders and approximately $350 million being deployed last quarter for the Schaffner acquisition that will be in our Industrial segment. Our cash generation model continues to give us both confidence and opportunities to return capital to shareholders while continuing to support bolt-on M&A activities. So let me now share what we're seeing in our market since our call 90 days ago. Our view of the transportation end markets remains unchanged from our prior view, with global auto production still expected to grow slightly this year, while we continue to expect weakness in commercial transportation end markets both in Europe and in the Americas. In our Communications segment, we continue to see momentum in high-speed cloud and AI applications and are seeing the impacts of the destocking coming to the end in both of our businesses in this segment. Because of these trends, we expect the Communications segment to return to year-over-year growth in our third quarter. In our Industrial Solutions segment, the picture is the same that we've been saying for the last six months. We see three out of our four businesses continue to have growth momentum. However, our Industrial Equipment business continues to be impacted by destocking. As we think about the Industrial Equipment business, we are seeing early indications pointing to a potential normalization later this fiscal year. And then one other thing I'd like to highlight is that we have seen the dollar strengthen against other currencies since our last earnings call, and this is resulting in an increased headwind to growth and earnings in our second quarter, and this will impact the third quarter as well. And lastly, I want to reiterate that our long-term value creation model remains unchanged and is centered around three pillars. First, our portfolio is strategically positioned around secular growth trends, including the adoption of renewable energy, applications for cloud and artificial intelligence and growth in global hybrid and electric vehicle production. And when you think about the vehicle, we not only benefit from the electrification of the powertrain, but we also benefit from the electronification trends that include increased software-defined vehicle as well as increased safety and comfort features. The second pillar of value creation is that we have operational levers to drive strong margin performance through an economic cycle. And our third lever is that we've established a strong cash generation model to return capital to shareholders while investing in bolt-on M&A opportunities. Now with that as an overview, let's get into the presentation. I'd ask you to turn to Slide 3, and I'll discuss some of the highlights for the second quarter as well as our outlook for the third quarter, and then I'll hand it off to Heath who will get into more details in his section. Our second quarter sales were $3.97 billion, which was in line with our guidance and up 3% organically on a sequential basis, with each segment delivering sales in line with our expectations. Adjusted earnings per share was ahead of our guidance at $1.86, which was up 13% versus the prior year. Adjusted operating margins were 18.5%, and this was up 250 basis points year-over-year, driven by strong operational performance. We are expecting third quarter sales of approximately $4 billion, reflecting organic growth on both a sequential and year-over-year basis. The year-over-year growth is expected to be driven by Transportation and Communications segments, partially offset by the effect of a stronger dollar. Adjusted earnings per share is expected to be approximately $1.85, and this is up 5% year-over-year and it does include a $0.15 headwind from both tax and currency exchange rates. And just moving away from the financials for one second. We did just issue our Connecting Our World report, which details our commitments around corporate responsibility. There are a number of initiatives that we're driving internally, and our goals are in line with both our purpose as well as our expectations from our customers. Some of the key highlights that I want to bring up to you is that we did achieve a 70%-plus reduction in both Scope 1 and Scope 2 greenhouse gas emissions over the past three years. And we also set our Scope 3 reduction targets, and these have been validated by the Science Based Targets initiative. So with that as a quick overview of the quarter and our outlook, let me get into more details on orders, and that starts on Slide 4. As I highlighted earlier, we are seeing improved order levels. Our orders were up 6% sequentially to $4 billion with sequential growth in each segment. And really, this is the first time in one and a half years that orders have been above $4 billion, and our book-to-bill is above 1. And we do believe that order patterns are indicating stability in most of our end markets we serve as well as the consistent service levels that we're providing to our customers. Now getting into orders by segment. Transportation orders grew sequentially despite auto production declining sequentially to a little bit below 21 million units in the second quarter. We saw production in China that offset weak incremental weakness in North America. And going forward, we expect global auto production to be roughly 21 million units per quarter as we move through the second half of this fiscal year. In our Industrial segment, we saw 7% growth in orders sequentially, and this reflects the continued momentum that is offsetting ongoing destocking in the industrial equipment end markets. And in our Communications segment, our orders grew 30% sequentially, reflecting design win momentum in data center programs, and about half of the increase is driven by AI orders for delivery in 2025 in our data and device businesses. Now with that as an overview of orders, let me now discuss year-over-year segment results, and I'd ask you to turn to Slide 5, and I'll start with Transportation. In Transportation, our Auto business grew 1% organically with double-digit growth in China, offset by declines in North America and Europe. While global auto production levels are consistent with our prior view, we are seeing different dynamics by region. Versus 90 days ago, our expectations of vehicle production have increased in China with a continued strong outlook for EV adoption and expansion in our content per vehicle. In North America and Europe, OEMs are adapting their mix of production to better align with consumer preferences. Factoring in these dynamics, on a global basis, EV and hybrid production are both expected to increase by 24% this fiscal year, and we'll continue to see declines in internal combustion engine production. The increase in the electrified powertrain autos will be driven by increased production in Asia, which is our largest sales region and where our auto team has a strong position. And just to give you a reminder, our content per vehicle is 1.5 times higher on a hybrid and 2 times higher on a full electric EV versus internal combustion platforms. We have established a global leadership position across all vehicle platforms at all major OEMs and start-ups and continue to expect long-term content growth above production of 4 to 6 points. Now turning to the Commercial Transportation business, we saw a 4% organic decline, and this was driven by the heavy truck market declines in North America as well as in Europe. This was partially offset by a return to growth in China. And we expect this business to be down sequentially in the third quarter and expect these markets that we serve here to be down approximately mid-single digits this year due to market declines in the West. In our Sensors business, the sales decline continued to be driven by market weakness in industrial applications as well as portfolio optimization that we've talked to you about, where we've continued to organically exit lower-margin and lower-growth products. For the Transportation segment, adjusted operating margins were 20.4%, which is slightly above our target levels, and we expect to run at our target margins for the rest of this year. We are continuing to invest in our Auto business to support engineering requirements for next-generation vehicles and whether they're around the electrification of the powertrain, high-speed Ethernet for data applications in the vehicle or miniaturized power and signal products to leverage next-generation architectural shifts. Now let's get into the Industrial Solutions segment, and that's on Slide 6. In this segment, we continue to see the trends that we've discussed for the past few quarters. And while sales were down 6% organically at the segment level in the second quarter, we saw growth in three of our four businesses. And we expect continued growth in our AD&M, Medical, and Energy businesses. In the second quarter, our AD&M sales were up 17% organically, driven by growth in both the commercial aerospace and defense markets. In Medical, sales in the quarter were up 6% organically, driven by ongoing increases in interventional procedures. And in Energy, we saw organic growth driven in the Americas, offset by weakness in Europe, with continued strong momentum in renewable applications. And then finally, in our Industrial Equipment business, where we're continuing to see the destocking, our sales were down 28% organically. While we're seeing some stabilization in order patterns pointing to normalization later this year, we still expect to see year-over-year declines in this business for the next couple of quarters as our customers adjust their inventory levels. On a margin perspective, the Industrial segment achieved 15%, which was in line with our expectations given current volume levels and business mix. We continue to expect segment margins to run into the mid-teens until the Industrial Equipment business returns to growth. Now I'd ask you to turn to Slide 7, and let me get into the Communications segment. In Communications, I am excited about a return to year-over-year growth in our third quarter now that destocking trends are largely behind us and momentum continues to build in next-gen cloud applications. Going forward, we now expect to deliver higher growth from artificial intelligence applications where we are increasing our investment to support future growth opportunities. Based upon our design win momentum, we expect to double our AI revenues from $200 million this year to $400 million next year and expect to build on this momentum to achieve annual revenues of roughly $1 billion in the following few years. Just to remind you where we play, we are focused on providing high-speed, low-latency connectivity to meet the needs of artificial intelligence workloads. And we generate 50% more content in accelerated compute platform versus traditional compute servers. Also, we're working closely with cloud customers as well as leading semiconductor companies with reference designs that call out TE Connectivity solutions. This segment had adjusted operating margins of 17.3%, and this was up 100 basis points over last year despite the decline in sales in the second quarter. Our teams are executing extremely well, and we continue to expect to maintain high-teens margin in this segment as we move through the year while supporting investments for growth. As volumes increase over time, we expect to achieve our long-term margin target for the segment of approximately 20%. Now with that as a segment overview, let me hand it over to Heath, who will get into more details on the financials and our expectations going forward.

Thank you, Terrence, and good morning, everyone. Please turn to Slide 8 where I will provide more details on the second quarter financials. Adjusted operating income was $735 million with an adjusted operating margin of 18.5%. GAAP operating income was $692 million and included $3 million of acquisition-related charges and $40 million of restructuring and other charges. For the full year, our expectations are unchanged, and we continue to expect fiscal 2024 restructuring charges to be approximately $100 million. Adjusted EPS was $1.86, and GAAP EPS was $1.75 and included restructuring and acquisition and other charges of $0.11. The adjusted effective tax rate was 21% in Q2. And for the third quarter and the remainder of the year, we expect our adjusted effective tax rate to be approximately 22%. Importantly, as always, we continue to expect our cash tax rate to stay well below our adjusted ETR for the full year. Now if you turn to Slide 9. Sales of $3.97 billion were down 5% on a reported basis and down 3% on an organic basis year-over-year, which is as expected. Sequentially, we saw 3% organic growth in sales. Adjusted operating margins were 18.5% in the second quarter, expanding 250 basis points year-over-year, and this was driven by margin expansion in all three segments on a year-over-year basis. We have been focused on executing on a number of operational levers this year that are not volume-related, and this has enabled strong margin expansion despite the low growth environment that we are dealing with. Adjusted earnings per share were $1.86, up 13% year-over-year, driven by the strong margin expansion. Turning to cash flow. Cash from operations was $710 million, and free cash flow was $543 million in the second quarter. Through the first half of our fiscal year, free cash flow was $1.1 billion, which is up 32% year-over-year. Our long-term capital strategy remains unchanged, which is to return approximately two-thirds of free cash flow to shareholders and use one-third for bolt-on acquisitions over time. As mentioned earlier, we expect our free cash flow conversion to exceed 100% again this year. Now before I turn it over to questions, let me reinforce some of the key points that we are excited about and share how we are thinking about our performance in the current macro environment. We are delivering margin expansion, EPS growth, driven by strong execution on operational levers. At the same time, we are investing to support future growth in markets with strong secular drivers, including next-generation automotive, renewables and the artificial intelligence applications that Terrence just discussed. We are seeing an improvement in order patterns and sequential orders growth in all of our segments, indicating stability in most of the markets we serve and giving us confidence in future growth. Our Communications segment is returning to growth in the third quarter, which reflects both the normalization of supply chains as well as our momentum in high-speed data center applications. And finally, we are demonstrating our strong cash generation model with a balanced deployment of capital. So we remain very excited about the opportunities we have ahead of us to drive value creation for all stakeholders. With that, let's now open this call up to questions.

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

I'm hoping to better understand the more constructive comments you made on auto, especially as EV industry growth has decelerated and several traditional Western auto OEMs have announced they're planning to focus more on plug-in hybrids at least in the near to intermediate term and shift toward BEVs more slowly than they previously targeted. Could you help better contextualize what underpins TE's more positive view on auto and to what extent auto can keep growing? Or might it be impacted by certain customers needing to take down inventory as they adjust their product mix plans?

No, thank you, Mark, and I appreciate the question. It's important to remind everyone of our strong global position. Regarding auto production, despite various changes from different players around the world, we still foresee a slight increase this year, expecting around 86 million vehicles to be produced globally. We've observed production growth in Asia, especially in China and also in Japan and Korea, which has balanced out some of the weaker trends we've seen in North America due to shifts in consumer preferences. When it comes to the e-mobility sector, which includes hybrids, plug-in hybrids, and electric vehicles, we still anticipate around 25 million units to be produced this year. This number reflects a decrease of only about 300,000 units from earlier projections on a global scale. Overall, electric vehicle production and adoption continue to progress, with electric and hybrid vehicles making up about 30% of all new vehicles today, and both segments expected to grow by 24% this year. In China, the trends for electric vehicle production and adoption are accelerating across all categories. We maintain a strong position with local manufacturers and multinationals, and as EV adoption increases in China, our component content per vehicle is also rising. In Western markets, there is a noticeable shift from electric vehicles to plug-in hybrids and hybrids, which is significant for us as it boosts content growth when consumers transition from standard vehicles to various electric categories. All regions are projected to experience double-digit growth in electric vehicles this year. Although preferences are shifting, these changes are contributing to content growth. We remain confident in our expected outperformance of four to six percentage points. As always, please keep in mind that this performance shouldn’t be evaluated on a quarterly basis due to potential fluctuations. We expect our content growth to be in that four to six percentage points range, with electric vehicles being a major contributor, though not the only one. Factors like vehicle electrification, data integration for autonomy, and advancements in software-defined vehicles also play a role in driving content increases. Even though there may be shifts between electric vehicles and hybrids, the content growth from either category will support our outlook for four to six points of outperformance, which we expect to achieve this year. I know that was more information than you were looking for, Mark, but I appreciate your question.

Terrence, hoping you could just double-click on what order patterns are telling you right now about market health and especially destocking. I'd be most interested in what it says about the trajectory of Communications from here, especially legacy applications in addition to what you already spoke to with respect to AI as well as we look for that bottom in Industrial Equipment.

Sure, I appreciate the question. As I mentioned earlier, this is the first time in six quarters or a year and a half that we have orders exceeding $4 billion and a book-to-bill ratio above 1. We are seeing sequential growth in every segment. Destocking, which we previously indicated, primarily affected our Communications and Industrial Equipment segments. In the Communications segment, we believe destocking has concluded. This is supported not only by the current order activity but also by improvements in year-over-year orders and revenue trends through our channel partners. Therefore, I expect that the Communications segment will return to growth next quarter. However, we continue to see destocking in the Industrial Equipment segment, which is evident in our results and the commentary. This trend is likely to persist for a few more quarters as it began later. We see some signs of stabilization in China and the Americas, but other areas, particularly in Europe, remain weak. It's crucial to keep this in mind, but we are starting to see some positive signs. Outside of these sectors, we are witnessing stability and growth. The sequential order momentum displayed in our charts reinforces this outlook, which is why we are excited that destocking is coming to an end. While destocking has obscured some of our content growth, I believe that as we navigate this year and move into 2025, it will serve as a beneficial tailwind as we finally put this behind us.

I guess, Terrence, I'd love to kind of get your perspective, AI is still a very big focus for everyone. You just talked about some fairly strong revenue trajectory as you go forward that you expect to see. Can you maybe spend some time talking to us about what exactly are you really providing when it comes to AI solutions? And any sense on where the opportunities right now across processor companies like NVIDIA versus cloud providers that might be running their own infrastructure? And what does the conversion to revenue look like as you go forward from here?

Yes, no, and I made some comments, Amit. So I do appreciate the question. And the one thing that's a little bit different that we talked about today on the prepared comments was we typically always talked to you about design win momentum, and that's continued. But we did give you more highlights about where does revenue go for here. And we told you all year, as we were seeing the ramp in AI, we were going to do about $200 million of revenue this year in AI applications. And certainly, 60% of that would be in the back half. That really hasn't changed. But when we look at the design momentum that we have and also expectation of what we're hearing from our customers, like I said on the call, we expect that $200 million to essentially double next year to $400 million. And we actually see a path that could get up to $1 billion a year a few years after the 2025. So we're actually seeing the traction with the design wins, our teams, the investments we're making to ramp it, both from engineering and operations, are in place to drive it. And like you said, when you have to service this area, there's an ecosystem that's here. And that ecosystem, when you look at our engagements, they're with hyperscale customers, some of who are developing their own AI solutions. We also have to work closely with semiconductor companies, including both the processor companies and the other semi players that make acceleration chips and other silicon solutions. So when you look at it, we have to play with everybody in that ecosystem, and our teams are doing a nice job. And then as important is as you work with them, how do you get on reference designs that then are really ready-to-deploy offerings that do allow further cloud customer deployments. And our sales are across the entire ecosystem, it's not with one. So I like the breadth that we have, and that's really driving the momentum that we have. And from a product perspective, where you start at, it starts with the socket that's right up against the GPU. You can have things that are on the board. And then you also get into things that are really a cable backplane where you have things that are very important to make sure you don't get the latency and you keep the high speed going to really make sure that cluster can really crack at the speeds they need to, to do the large language models. So net-net, it's pretty broad in the products we play. And it's just really, in many cases, what we did on the cloud moving up to the next level of performance in this application.

Terrence, I appreciate all the comments here on the prior question around AI. If I could just ask a quick clarification on that. How are you thinking about your share in these high-speed, low-latency applications? And for my question, I was wondering if you could comment a little bit beyond fiscal '24. It seems like destocking is coming to an end. Your orders are bouncing back a fair amount over here, and you've mentioned stability in some of the end markets as well. Any early thoughts on how fiscal '25 is shaping up from a growth and margin perspective?

When considering our share in AI applications, it mirrors the share we held in cloud applications. The momentum we experienced during the cloud surge in COVID, along with the widespread customer engagement, suggests we can expect similar dynamics for AI applications. Looking toward 2025, it will be refreshing not to mention destocking anymore, which has been a challenge we've faced, as have others. We're starting to see a shift in customer success that will also benefit industrial sectors. This transition will turn from a headwind to a tailwind as we eliminate redundancies, with noticeable improvements in Communications anticipated later this year. We might need to wait until the end of our fiscal year to see these changes reflected in the Industrial Equipment sector. In terms of Transportation, electric vehicles will continue to grow globally, and we foresee a growth rate of about 4% to 6%. While we don't expect auto production to surge in 2025, we do believe it will stay below current peak levels, which allows us to benefit from increased content. AI will also significantly impact our performance next year. We’ve laid out that expectation for you. Additionally, our three businesses within Industrial are still growing, despite some challenges. Growth in renewables, medical interventional procedures, recovery in commercial aerospace, and defense sectors hold promise. We believe this growth trajectory will persist into 2025, leading us to believe that 2025 will be a strong year.

Sure, Wamsi, thank you for your question. We're still in the early stages and not ready to provide guidance for our fiscal year 2025, which begins on October 1. However, I am optimistic about the progress we've made with our margins. We've shared our target margins, particularly by segment. In Transportation, we aimed for a 20% target margin and achieved that sooner than anticipated. Our price actions have been effective and consistent. We've consolidated our footprint and exited some low-margin product lines, leading to strong business health, especially in the auto sector. Our Commercial Transportation business, which is high-margin, has also held steady despite a negative growth environment. Overall, we're pleased with our achievements in fiscal year 2024 and the position we will have entering the end of 2025. In Communications, margin growth is largely tied to volume. Six to nine months ago, I would have expected margins to be in the mid-teens with approximately $440 million in quarterly revenue, but we have consistently reached the high teens this year. Our team has successfully elevated our margins, and as we approach an annual revenue rate of over $2 billion for that segment, I believe we can reach the 20% target margin. We're hiring to support our high-growth areas, and this is reflected in our ongoing operations. We are not limiting resources for these sectors, which is encouraging. In the Industrial business, we're currently in the mid-teens with expectations for significant improvement next year, largely driven by the end of destocking in the Industrial Equipment sector. Terrence has already addressed this timeline for the latter part of fiscal year 2024. Therefore, I see good potential as we head into 2025. The other three units within the Industrial segment are performing well, though it's challenging to offset the decline in the Industrial Equipment division, which has seen double-digit losses this year. Overall, we anticipate finishing this year with operating margins in the 18% range, an increase of a couple of hundred basis points year-over-year, and we expect to see normalized improvement going forward. We typically talk about a margin enhancement of 30 to 80 basis points each year, and we feel confident about this as we plan for fiscal year 2025.

I'll ask about Communications, if that's alright. You mentioned the capacity investments you're making in the Communications segment, especially regarding the AI demand you're experiencing. Can you provide more details about the typical lead time between starting to invest in capacity now and when that will translate to revenue? Will this be impacting fiscal '25, or is it beyond that? Also, how long does it usually take between starting the manufacturing process and achieving revenue? Additionally, what feedback are you receiving from customers regarding the location of your manufacturing footprint? Considering the current geopolitical situation, do customers have preferences about where you invest in capacity, whether in the Western world or elsewhere?

Thanks, Samik, for the question. A couple of things, I think, that's important. As we've been seeing this, we have been investing, and we've expanded operations in Mexico as well as the Philippines as well as the existing locations we've had. So from that viewpoint, there was existing investment. And also the sites that we have, I think, position us well for the geopolitical options that some of our customers want to have. So when you look at that, I wouldn't say this is just starting. These investments, some of those we started to make a few years ago as we were thinking about capacity coming along, and we're going to continue to build on that. And that's for the footprint capacity as well as like Heath said, there's also been engineering capacity and ramping as well, and we'll continue to do with the line of sight of the programs we work on. Let's face it, these are programs that we work on with our customers in tandem as they're trying to work their architecture to make sure that the connectivity that's needed works in their applications. So that's one of the real positives that we have working in this ecosystem, and you're going to see us continue to capitalize on it. And like Heath said, it's included in our run rate.

Regarding the AI aspect, as you expand and invest to support your customers' growth plans in this area, how do you evaluate the strong near-term demand? Are the anticipated growth projections over a multi-year timeline realistic? Can the infrastructure accommodate all these developments? How do you determine what to invest in now based on your customers' feedback while also considering whether these goals are truly attainable in the short term?

When we work here, Joe, we work with our customers on the programs that they're coming out with. And then on the next generation, I would tell you, we do work with our customers on their understanding of that market outlook. But honestly, we're focused on nailing the solution with our customers on what the technical requirements they have. So I would tell you, that's what we focus on. That's the way we invest as we work with our customers.

Just if you could drill down a little bit on pricing. I think comments in the past have talked about maybe normalization of pricing and especially as we look at auto production moving towards, at least this year, being a little bit more weighted towards Asia versus North America and Western Europe. How do you guys think about pricing and the margin impact from pricing normalizing, say, as we go into fiscal '25?

No, sure. I think when you look at pricing, first off, and you see it in the margin this year, we recovered finally the inflation that we had during the mega wave of inflation. And we caught up on that. And our approach always was to cover cost with our customers. When you still look at this year, nothing has changed with what we told you before, we expect pricing to be neutral this year at the TE level. So yes, we are doing targeted price increases where we have to, where we continue to have material inflation on certain metals. Certainly, we're doing things to make sure where we can be competitive. And I don't think you assume that margins go down on a different pricing environment. So I think you sit there as we look forward, a big element of where pricing goes is going to be around where the material environment is, where's copper, gold, resin trading, the input costs that were the things that we recovered, and they will be the bigger driver of where pricing goes from here.

You talked a lot about maybe a line of sight to the end of Industrial Equipment destocking by year-end. Could you just talk through the underlying demand environment there? And then how do you think about the tailwind from destocking then as we get into 2025?

Sure. Thanks, Saree, and welcome to the call. The demand environment is uncertain, particularly in our Industrial Equipment business. To recap, about 50% of our revenue comes through our channel partners and the other 50% goes directly to the OEMs, which makes channel partners significant in this area. When we examine the end-demand environment, there are some segments that continue to show strength, especially in the process side. However, there are also areas that remain unclear as customers are working through buffer stock they accumulated when they were concerned about component supply. Our channel partners are experiencing a similar situation. Currently, we are in a destocking phase, but we are beginning to see order patterns stabilize without a decline, both directly and with our channel partners. We're also noticing certain regions where this work-off is taking place. I believe that for the next couple of quarters, we will still experience these impacts as the inventory is worked down. By 2025, we expect that business to return to a more aligned position, growing slightly above the factory automation market rate.

Terrence, I was wondering if you could talk a little bit about how TE Connectivity's products into EVs help on the cost front for your customers? I mean, Tesla obviously is talking a lot about that lately. And on the alternatives, does it create any kind of competitive risk as some of your customers realize that they really need to get some of these EV prices down in the next couple of years?

Well, I do think there's an element that one of the things that we do that even starts before the product is how we work with our customers when they are trying to sit down and do value engineering of how do you get a sub application to a lower cost point. That's very important, Steve, as we move through generations in every part of TE. And that's just not on where does our product cost come in, how do you assemble a car, how do you put the car together, how does that make sure it has the quality? And any time you get into somebody looking at a next generation, and that could be a battery pack, that could be the connectivity on the motor, it could even be a next-generation inlet, so all of those are things that create opportunities where our stickiness and global position play really well. And that we have such a strong position in China, I would tell you, certainly, you have a cost point that is always a better cost point. And how our global teams bring that to other OEMs around the world due to our strong position is something that we get excited about because, I know I say this on this call, probably every other call, automotive is a scale business. And one of the things that is very important is how does EV scale, how do you bring our technology to do it that helps it scale, and that's the opportunity that we've always been excited about with EVs. And having some of the consumer choices that are being made will also allow our customers to get focused to make sure they're making where their platforms go. So net-net, that's what our engineers like to do, improving the innovation they can bring, but also how do you sit there and make sure how we're making it more productive for the world.

I would like to ask about the auto segment, where growth was 1%. The target is 4%, and I believe the market has been relatively flat this quarter. The long-term goal is to achieve 4% to 6% outperformance. What accounts for the underperformance compared to the target over the past few quarters?

Twofold. We're probably running about three points above production right now. I would say, Colin, in the second quarter, global auto production was negative. So the reason there, we always tell you, don't look at an individual quarter. Next quarter, I think you're going to see a very nice outperformance. And for the year, we expect to be in the 4% to 6% range. But on any quarter, you get into a lot of little things that some quarters will be above the range. I still feel good about the 4% to 6%, though.

Just wondering if you could talk about the kind of complexion and forward kind of drivers, touch on the mix for the commercial vehicle platform. I know you kind of said kind of similar levels for passenger vehicle would be appropriate way to think about next year. And we can see that, that makes sense. Commercial is a little more disparate and complex. So I wonder if you could elaborate a little bit on how you see that market unfolding as you work through some mixed markets this year.

Yes. To your point, I want to discuss how we view the commercial transportation sector, as it has three major drivers: on-road trucks and buses, agriculture equipment, and construction equipment. These are the primary factors influencing the market. Globally, about half of our revenue comes from truck and bus sales. Currently, the situation in the Americas and Europe for trucks and buses is weak, while China and Asia are showing signs of recovery after a downturn last year. We anticipate that the positive trends in China will continue; however, the Western markets are declining. We have indicated that we expect a slight decrease in revenue next quarter due to these conditions. In agriculture and construction, the slow pace is evident worldwide. Financing rates vary, but we foresee these trends continuing throughout the year. We believe that by early next year, the market conditions will improve compared to the current situation. Overall, we think the global market will decline by approximately 5% this year, plus or minus, but we expect a more positive outlook by 2025.

I had a question, Terrence, on the energy markets within your Industrial group. You've had strong growth there over the last few quarters, but it looks like it slowed in the March quarter, and you're hearing of some pockets of weakness from other parts of the supply chain. What's your outlook there, both near term and in terms of long-term position?

Thank you, Matt. Regarding energy, we remain optimistic. Our results indicate that both the U.S. and Americas are performing very well. We also see strength in global renewables, particularly in utility-scale projects, as we do not engage in residential renewables. However, we have noticed some softness in European utilities, partly due to those companies reducing their inventory levels. Nonetheless, with the ongoing investments in grid maintenance worldwide, I believe this sector will rebound. Overall, we are positive about global energy, with a significant focus on Europe and the United States in our business.

As we look out past this year and we think about some of the growth drivers in electrification, AI renewables, you've also got typical recoveries in parts of communication and eventually industrial equipment, how do we think about the sustained organic growth for TE overall? In the past, you've talked about 4% to 6% organic growth over time. I'm just curious how to think about what the reasonable framework for the company should be at this point.

I still think that's the right way to think about it. Certainly, we're going to have cycles. You take a year like this year where we are more flattish than growing at the 4% to 6%, but there will be areas, exactly around the point you made, where you could have some destocking or type effects that may be a headwind one year that will come back and be above that in the future. But I do think the 4% to 6% is the right way to think about when we think about the portfolio that's constructive.

I'm going to ask another question about AI. Terrence, my industry research indicates that there are really only three companies with significant content in this space, and TE is one of them. Could you discuss the competitive landscape among these three, including your strengths and the opportunities to expand into their markets? Additionally, what distinguishes the three of you from others and helps shield you from new entrants in this appealing sector?

No, thanks, Will. So first off, I think there's an element here when you deal with high speed, the three of us all have a very good capability. And when you sit there, we're all different. I mean some of us have different scale than others, but I do think that is the uniqueness. When you're getting to the speed levels of where these chips are going to, GPUs are going to, TPUs are going to, you're dealing with speeds that are very unique. That is a very technical innovation that I think we all do well. And so I think it is a competitive space between us. I also think that you continually move up the technology curve. And you also have ramps that our customers expect to bring them to life for all, very important to our customers. And that's why we even said earlier to the question that I answered, I expect our share to be similar to what it was in the cloud. So I think it's very important how we make sure what we do in the connectivity space really make sure we enable the AI path because we do play an important role in it to really make sure it comes to life. And that's what we get excited about, Will. So it's a great opportunity we have. Certainly, it's a great opportunity for our industry to capitalize on as well.

Okay. Thank you, Will. I'd like to thank everybody for joining us this morning on the call. If you have any additional questions, please contact Investor Relations at TE. Thanks again, and have a nice day.