TE Connectivity plc (TEL) — Q3 2025 Earnings Call Transcript

Good morning, and thank you for joining our conference call to discuss TE Connectivity's Third Quarter Results and Outlook for our Fourth Quarter of fiscal 2025. With me today are Chief Executive Officer, Terrence Curtin; and Chief Financial Officer, Heath Mitts. During 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, 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. I would also like to take this opportunity to announce that we are planning to hold an Investor Day on November 20 in Philadelphia with a product showcase the evening before. We are excited to share more about our opportunities for growth and further value creation for our owners, and we'll be sending out details of the event shortly. Finally, during the Q&A portion of today's call due to the number of participants, we're asking everyone to limit themselves to one question, and you may rejoin the queue if you have a second question. Now let me turn the call over to Terrence for opening comments.

Thanks, Sujal, and thank you, everyone, for joining the call today. As I normally like to do, I want to take a moment before we get into the slides to frame our results for our third quarter as well as our guidance for our fourth fiscal quarter. We are pleased that we delivered double-digit increases in both sales and adjusted earnings per share in the third quarter that exceeded our guidance and demonstrate our team's ability to continue to execute in a dynamic global environment. We delivered 14% sales growth and 19% adjusted earnings per share growth, and both of these are quarterly records for our company. A key driver of our success has been the strategic positioning of our portfolio and the investments that we've made to broaden our business to benefit from secular growth trends in both the Transportation and Industrial segments. The investments that we made are paying off and are evident in our results as we're capitalizing on the strong demand for artificial intelligence as well as growth in energy applications where our products are needed. We're also benefiting from strength in Asia in our Transportation segment, where we see increased data connectivity trends and ongoing growth of the electrified powertrain. You see the benefit of the investments on the growth side, but you also see it in our operations. We achieved record adjusted operating margins of 20% and record free cash flow generation of $1 billion this quarter. This is the result of our global manufacturing strategy, where we've invested heavily to have over 70% of our production localized, and this is proving to be a differentiator with our customers. Finally, we do expect our strong performance to continue into the fourth quarter with both double-digit sales and double-digit adjusted earnings per share growth again in the fourth quarter. So with that as a backdrop, let's get into the presentation, starting with Slide 3, and I will discuss some additional highlights and the guidance for the fourth quarter of fiscal '25. Our third quarter sales were above guidance at $4.5 billion, growing 14% on a reported basis and 9% organically year-over-year. We saw acceleration in our Industrial segment with over 20% organic growth that was broad-based and driven by our digital data networks and energy businesses. We delivered record adjusted earnings per share of $2.27 that was well above our guidance and increased 19% versus the prior year. Our adjusted operating margins were 20%, and they increased 60 basis points over last year, driven by strong operational performance by our teams. As you know, we've been on a journey to expand margins at the company level, and both segments are now essentially running at 20%. Importantly, to highlight, and we'll get into it in more details, the Industrial segment adjusted operating margins expanded nearly 400 basis points year-over-year. We also saw orders improve again this quarter to $4.5 billion, which was an increase of 8% year-over-year as well as 5% on a sequential basis. And these order levels support our outlook for double-digit growth in our fourth fiscal quarter. We delivered record year-to-date free cash flow of approximately $2.1 billion, and we returned $1.5 billion to shareholders, and we deployed $2.6 billion of capital for acquisitions in the Industrial segment, which includes the Richards acquisition that we closed this quarter. As we look forward into the next quarter, we do expect fourth quarter sales to increase to $4.55 billion, which is growth of 12% on a reported basis and 6% on an organic basis year-over-year. Adjusted earnings per share is expected to be around $2.27, which will be a 16% increase on a year-over-year basis. Our fourth quarter guidance implies strong performance in fiscal 2025 with high single-digit sales growth and double-digit adjusted earnings per share growth year-over-year. With that as an overview, now let me get into order trends, and I'd appreciate if you could turn to Slide 4. In the quarter, we saw orders grow to $4.5 billion. In Transportation, orders increased 5% versus the prior year, with growth in Asia of 17%, partially offset by declines in Europe and North America. The global auto market remains uneven by region, and we continue to see strength in our Asia position in both our orders and our sales, which is helping to offset the continued softness that we're seeing in Western markets. Looking at orders in the Industrial segment, we continue to see strong order momentum with 12% growth both year-over-year as well as sequentially, and this reflects ongoing momentum in artificial intelligence applications and in our energy and aerospace and defense businesses. One key sign that we saw in the quarter, and we're encouraged by is the improvement in orders that we're starting to see in the general industrial end markets. Now let me get into segment results, and I'll start with Transportation that's on Slide 5. Our Auto business grew 2% organically in the third quarter, with growth in Asia of 11% being offset by declines in Western regions of 5%. While Auto production on a global basis was down slightly in the third quarter, it is expected to be roughly flat this year. We continue to generate growth over market and secure key wins around data connectivity and electrification that will drive future content growth. In addition to the leading-edge products and technologies, we are also benefiting from our strong global position and localization strategy, which enables us to serve our global customer base in this environment. Turning to our Commercial Transportation business, we experienced 3% organic growth, which was driven by growth in Asia and in Europe, partially offset by declines in North America. We did see orders improve both year-over-year and sequentially, indicating that there is some traction in the commercial transportation cycle. And in our Sensors business, we saw weakness in end markets in Western regions, partially offset by growth in Asia. For the Transportation segment, adjusted operating margins were 19.4%, and we expect margins to be above 20% for the full year. Now let me turn to the Industrial Solutions segment, and that starts on Slide 6. At the segment level, we grew 30% in the quarter with over 20% organic growth and the benefit of acquisitions in our Energy business. The Digital Data Networks business grew over 80% organically with increasing ramps from hyperscale platforms across our customer base. You see the strong growth, and I just want to remind you that AI revenues last year were $300 million. We now expect our revenue from artificial intelligence applications to be above $800 million in this fiscal 2025 year and continues to reflect the strong momentum that we've been talking to you about. In Automation and Connected Living, we grew 5% organically, and we are seeing signs of recovery in factory automation applications as markets have begun to improve. In our Energy business, our sales grew 70%, which includes the Richards acquisition, enabling us to capitalize on strong growth opportunities in the North American utility market. On an organic basis, our Energy business grew a strong 20%, driven by continued momentum in grid hardening and renewable applications. In our AD&M business, sales grew 6% organically, driven by growth across commercial aerospace, defense, and space applications. In these markets, we see favorable demand trends that continue to be coupled with ongoing supply chain improvement. In our Medical business, our sales were roughly flat sequentially as we expected. Now let me turn to margins for the segment. For the segment, adjusted operating margins expanded nearly 400 basis points to over 20%, driven by strong operational performance and the benefits of higher volume. I am pleased with the progress our team has made balancing our footprint consolidation efforts with supporting the strong growth that we've had in the segment, and that's clearly evident in the growth as well as in the margins. So with that as an overview of our segment results and orders, let me turn it over to Heath to get into more details on the financials and expectations going forward.

Well, thank you, Terrence, and good morning, everyone. Please turn to Slide 7. For the quarter, adjusted operating income was $901 million with an adjusted operating margin of 19.9%. GAAP operating income was $857 million and included $30 million of acquisition-related charges and $14 million of restructuring and other charges. For the full year, we continue to expect restructuring charges to be around the $100 million level. Adjusted EPS was $2.27 and GAAP EPS was $2.14 for the quarter and included restructuring, acquisition, and other charges of $0.13. The beat versus our guidance was driven by strong operational performance and higher volumes. The adjusted effective tax rate was 24% in Q3, and we expect a similar tax rate for the fourth quarter. As a reminder, the increase versus the prior year is primarily related to the impact of the Pillar 2 global minimum tax and our jurisdictional mix of earnings. But as importantly, and as always, we anticipate our cash tax rate to be well below our adjusted effective tax rate. I'll now discuss a couple of housekeeping items. During the quarter, we saw the U.S. dollar weakened against other currencies, resulting in a year-over-year benefit from foreign exchange of $68 million in sales and $0.05 in adjusted EPS. Our Q4 guidance assumes foreign exchange contribution of $111 million in sales and $0.03 to adjusted EPS year-over-year. These are part of the bridges in the back of the slide deck. The impact from tariffs in the third quarter was approximately 1.5% of sales with minimal earnings impact. Based upon what is currently enacted, we expect the impact on earnings in Q4 to be similar to Q3 levels. With our global footprint, we will continue our strategy of mitigating tariff impacts through both our sourcing changes by TE and our customers as well as implementing pricing actions. Turning to Slide 8. When you look at the graphs on the slide, we have set records in sales, adjusted operating margins, and adjusted earnings per share. I do want to focus on cash flow. Cash from operations was nearly $1.2 billion and free cash flow was $962 million in the quarter. Year-to-date, we have delivered free cash flow of roughly $2.1 billion, and we expect to deliver another year of free cash flow conversion well above 100%. Our cash generation and healthy balance sheet position us well and provides us optionality with uses of capital. So far this year, we have returned approximately $1.5 billion to shareholders and deployed $2.6 billion for acquisitions. Before I turn it over to questions, let me reinforce that we are executing well to deliver record results and have positioned the company to continue to deliver strong performance and value for our owners. I am pleased with the way our team is performing, the results we are delivering, and the opportunities ahead of us. We are well positioned for a strong finish to the year, setting us up for further growth and earnings expansion as we go forward into our next fiscal year. As a reminder, that starts October 1. Now let's open it up for questions.

Okay. Thank you. Can you please give the instructions for the Q&A session?

Terrence and Heath, Sujal. Congrats on positioning the company well this year, particularly around the AI stuff, which I need to ask about because it's topical, obviously. But is that business now when you think about $800 million, which is just a big number really when you think about where you were just a couple of years ago. But is that business now fully ramped and scaled, meaning like profitability at or above company levels? How do you think about that?

Yes, thanks, Scott. To your point, I mentioned on the call that last year, we generated around $300 million in revenue from AI applications, and this year, it's projected to exceed $800 million. The growth we’re experiencing is due to ramping up. The margins we achieve in this sector are slightly higher than those in the Industrial segment. We expect to see continued strong conversion as this ramps up. I still believe we are in the early stages of this, especially with the upcoming programs we are developing with our customers. As we've noted before regarding AI, we are working with a wide range of hyperscalers, not just one customer. Our teams are not only providing the necessary technology but also ensuring effective operations to meet the pace that the hyperscalers anticipate. We feel optimistic about this momentum, and we expect it to extend beyond 2025 into 2026.

Okay. Thank you, Scott. Next question please.

Terrence, in the June quarter, something that really stands out. I think everyone is just the broadening in both growth and the margin performance across your portfolio. The double-digit growth in industrials really stands out. So can you just talk on what's driving this diversification and growth that we're seeing in June? And then really related to that, the industrial segment margins achieving 20%, I think, much faster than anyone expected. Can you spend a little bit of time on the factors contributing to this outperformance? And how sustainable do you think these margin levels are?

Yes. Thanks, Amit. Let me break that into probably two pieces. I'll talk about the growth, and I'll ask Heath to talk about the margin journey that you've all been following with us. When you think about the growth, we have an unbelievable position in transportation. It really comes down to where we need data and higher speed data. AI is front of mind, but also when we talk about software-defined vehicles, it reflects the trends that help us. We have made investments around our go-to-market and product set, and you see it in the organic growth that we've had now for a while. The other big trend is connectivity around power, and that’s where we made investments. You're seeing that throughout our results and both segments contributing. Heath, do you want to talk about the margin side of the question?

Sure. Amit, I appreciate the question. We would expect these levels of margins at these volumes. So we've done a lot of footprint work in the Industrial segment, navigating from mid-teens into the high teens and now crossing over the 20% threshold for that business. We've been transparent that this restructuring journey to optimize our facilities correlated with volume leverage at these levels, and we would expect these margins to hold as we continue to grow.

Alright, thank you, Amit. Can we have the next question please?

I'm hoping you can comment more on your view about the sustainability of the current fundamental strength. If you think any of the current demand is due to customers prebuying in order to mitigate tariff risk?

Yes. Thanks, Mark. We don't see any meaningful impact from pull-ins. In our product set and when we talk to our channel partners, we don't see that. There may be some in semiconductors, but we do not see meaningful pull-ins. Both year-over-year and sequentially, we saw nice growth. The levels support our outlook for double-digit growth in the fourth quarter, and the trends reflect a positive outlook moving forward.

Thank you, Mark. Can we have the next question, please?

Terrence, I was hoping we could maybe touch on the industrial book-to-bill, especially any timing-related impacts we might be seeing there in terms of AI that could be causing some distortion plus or minus? If you could just comment on AI awards, specifically, I'd be especially interested in any acceleration in like-for-like growth.

Yes. The momentum is continuing. We continue to see traction with no incremental platforms or customers. It is really where we have been strong. Our orders have broad-based momentum. It isn't just one AI order taking things up. It's broad-based across the markets, and this reflects a tone that is encouraging due to improvement in orders across the board.

Thank you, Luke. Can we have the next question please?

I think it would be helpful to consider a new aspirational margin target for the company over the next couple of years, especially given that everything you mentioned seems sustainable.

I will let Heath take that.

Joe, I appreciate the question. It's something that we work through internally as well, but looking at where the growth is, certainly, we are focused on a total company margin. Our target is generally to be at or above 30%. We measure our success based on operating excellence, and in aggregate, this should gradually move our margin up.

Okay. Thank you, Joe. Can we have the next question, please?

A question on the Energy segment. I'm wondering the renewable energy and the grid hardening, the degree of codependence of those two versus maybe some independent drivers, and if you're starting to see Richards cross-sell or bilateral pull creeping in there.

Great question. The trends start with electricity growth as the common theme. When you consider grid hardening and renewables, they are independent. The Richards acquisition aligns well with our grid hardening initiatives, and we believe there are future revenue opportunities there. For the growth that we had this quarter of 20% organically, it reflects a strong trend.

Thank you, Chris. Can we have the next question, please?

Terrence, maybe I'll go back to something you mentioned in the Q&A earlier, which is you still think we are in the early innings in terms of the AI opportunity. There's also an investor perception that you're a bit early innings in terms of market share opportunity as well in AI. If you could sort of highlight how you think about market share among hyperscalers versus chip companies, and where you see more opportunity moving forward?

Well, we need to penetrate with all players. Some people design their own chips, while others leverage leading chips. We need to be playing across the ecosystem. The tech positioning is strong, but we also have to ensure we ramp the programs we've won. Growth from $300 million to $800 million is clear and expected to continue.

Thank you, Samik. Can we have the next question, please?

Great quarter. I was going to focus on AI, but I feel like that's been covered pretty well already. I'd like to ask about a couple of weak spots. Book-to-bill was slightly below 1, and it looks like that's driven by Transportation. Can you talk about what's causing that? And is it an important metric for us to focus on?

It's a metric to consider, and I would say it's not alarming. The automotive market typically declines sequentially going from our quarter 3 to quarter 4, and we expect that to continue. Orders did come down, but that's more with a seasonal trend. Auto production is expected to decline, impacting the book-to-bill, yet our guidance supports double-digit growth at the overall level.

Thank you, Will. Can we have the next question, please?

Congrats on a good quarter. I just want to ask a little bit about the organic growth in transport and auto. I thought the long-term target was to be 4% to 6% over market. I thought you were trending at the low end. I think S&P is up 2% on light vehicles. So it seems you're kind of in line with market growth in that segment. Any color there? And how should we think about that? Is that being impacted by all the EV push-outs in the U.S. and Europe?

It's a great question. We have outperformed despite the production decline in the automotive market. Even as production declined about 1% in the third quarter, we've performed well with a 2% gain, reflecting our positioning. However, we're slightly below our 4% to 6% target due to the unevenness in production levels, particularly in the West, affecting our overall content growth. Nonetheless, we feel good about our trajectory going forward.

Thank you, Colin. Can we have the next question, please?

Can you talk about pricing a little bit? How was that in the quarter end? How do you think about that going forward? Most of your price was surcharges related to tariffs. If we're going into a de-escalation phase, can price become a modest headwind on the top line with better margins coming through?

Yes. Let me talk about price a bit. The tariff impact was about 1.5% of sales with minimal earnings impact. Our teams mitigated that through sourcing strategies, and we implemented pricing where necessary. We assume the same impacts carried into our fourth quarter guide. In the Industrial segment, we remain positive on pricing, closely monitoring costs of materials as they remain variable. We feel we're managing to minimize impact on earnings.

Alright, thank you, Joe. Can we have a next question please?

You're going to be exiting this fiscal year with very strong momentum. Any thoughts on early puts and takes on fiscal '26 and the momentum of high teens EPS growth? Is that something we should be underwriting? And I know you just noted the impact of rising copper pricing at least. So if you could frame that in that thought process around '26, that would be great.

Yes. The growth momentum we have is clear for FY '26. We're focused on ensuring that we have the capacity to absorb volume. We've done structural work and proven our operations across many businesses, creating strong levers to achieve double-digit earnings growth. Our cash conversion this year is above 100%, which gives us flexibility for owner returns and acquisitions. The levers to keep this momentum are evident, and we will continue to execute.

Alright, thank you, Wamsi. Can we have the next question please?

Great. Just some early thoughts on the passage of the new bill and how it may offset some macro pressures due to tariffs. Any early insights on that? And one on the cash flow; you talked about the optionality regarding strong free cash flow. Where do you see yourself using that optionality for acquisitions, and how does the pipeline look for those acquisitions?

We're a global company playing everywhere, and it’s essential we strengthen our localization in various markets to capitalize on global trends. The new bill will support certain areas, especially in Energy. However, our focus remains on our customers and innovation. Heath, would you like to discuss our acquisition pipeline?

Sure. We have been selective but active in acquisitions, particularly in the Energy space with a focus on bolt-on opportunities. The landscape is fairly fragmented, and we see potential for consolidation. Our strong balance sheet and cash flow generation give us the flexibility to pursue various opportunities while continuing to cultivate the pipeline for the future.

Okay, thank you, Asiya. Can we have the next question, please?

I was just wondering on the AI growth that you talked about, the 80% growth. How successful do you feel you are in keeping up with demand? What kind of investments do you see yourselves making into next year, whether it’s capacity or if you're being pushed to expand your product set with the customers?

First off, we have been investing ahead. Capital this year is up almost 30%, with the majority directed towards AI. We have been investing time and effort into capacity planning and ensuring we can absorb the expected demand from customers. I feel we’re positioned well to maintain our growth trajectory.

Right. Thank you, Steve. Can we have the next question, please?

As we look at the company today, you're delivering 20% EBIT margins in both segments. I believe you have additional restructuring savings coming through in 2026 based on prior actions, and some higher-margin segments appear to be turning a corner. How should we think about the trajectory of margins from here? Are there strategic investments you think the organization needs to make that may offset the incremental margins from strong top-line growth?

We have made ongoing investments. These are embedded in our existing run rate, whether that be operating expenses or capital investments. There will be trade-offs as we maneuver through growth opportunities, but we don’t foresee margins coming down due to these considerations. Our focus is on maintaining healthy margins as revenue increases.

Okay. Thank you, Shreyas. We want to thank everybody for joining us this morning. And if you have further questions, please contact Investor Relations at TE. Thank you and have a nice day.