TE Connectivity plc (TEL) — Q1 2026 Earnings Call Transcript

Good morning, and thank you for joining our conference call to discuss TE Connectivity's first quarter results and our outlook for the second quarter of fiscal 2026. 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. Let me now turn the call over to Terrence for opening comments.

Thank you, Sujal. And I also want to thank everyone for joining us today, and I also want to thank those of you who attended our Investor Day last quarter. Before I get into details on the slide, I do want to frame today's call around the key messages that we shared at the event in November and are reinforced by our first quarter results as well as our outlook. And briefly, we conveyed several key tenets of our strategy and business model. First, we have been investing and have broadened our growth drivers to benefit from secular trends driven by the increased needs of our customers around data and power connectivity. Second, our co-creation engineering models ensure product innovation. That, coupled with our global supply chain investments, will drive value for our customers. Lastly, we will capitalize on growth and investments to drive margin expansion with double-digit earnings per share growth and a continued strong cash generation model. Our first quarter results and our expectations going forward reinforce these key messages that we conveyed. We delivered over 20% sales growth in the first quarter with growth in both segments by driving content growth above market. We had record orders of over $5 billion, representing a growth of more than $1 billion from the prior year, and this order growth was across our businesses. This growth is being driven by new program awards from our customers, demonstrating the operations and engineering moat that we outlined. Our sales growth and order momentum reinforce the broadening that we talked about at our Investor Day. We also have improved our operating resilience through localization of our supply chain. Our teams continue to execute well despite ongoing macro unevenness to deliver record adjusted operating margins and earnings per share in the first quarter, along with strong cash generation. Lastly, we outlined a long-term through-cycle target of 6 to 8 points of annual average growth. With the momentum that we're seeing, we expect to deliver growth in fiscal 2026 that is ahead of this target. So with that as a backdrop, let's get into the slides that we sent out, starting with Slide 3, and I'll discuss first quarter results and our guidance for the second quarter of fiscal 2026. Our first quarter sales were $4.7 billion, growing 22% on a reported basis and 15% organically year-over-year with growth in both segments, and both segments contributed to our sales being above guidance. As I mentioned, we saw orders increase to a record level of over $5 billion, and our book-to-bill was 1.1, reinforcing our momentum, and I'll provide more color on orders as I get into the next slide. We delivered record adjusted earnings per share of $2.72, which was above guidance and increased over 30% versus the prior year due to strong execution by our teams. Adjusted operating margins were 22%, and this was an increase of 180 basis points over last year. We continue to demonstrate our strong cash generation model with free cash flow above $600 million, and we returned 100% of our free cash flow to shareholders in the quarter while continuing to support investments for future growth. As we look forward, we expect our second quarter sales to be $4.7 billion, reflecting an increase of 13% year-over-year on a reported basis and 6% organically. We expect adjusted earnings per share to be around $2.65, a 20% growth year-over-year. Sequentially, we expect our Industrial Solutions segment to grow, partially offset by transportation's typical auto seasonality trends that we see globally. So with that as a quick overview of results, let's turn to Slide 4, so I can get into more detail on our order trends. In the quarter, we saw orders increase by over $1 billion versus the prior year to $5.1 billion. By geography, we saw double-digit organic order growth in all regions on a year-over-year basis. At our Investor Day, we discussed our engineering-centric design model and focus on the need for more data and power connectivity to create value for our customers that will also translate into value for our owners. Our momentum in the key applications continues, whether that is secular growth in AI, the positioning of TE for power connectivity in the utility space, or the data connectivity needed for next-generation vehicles as a key driver of content growth for our transportation businesses. Getting into orders by segment. In the Industrial segment, orders grew over 40% versus the prior year, with essentially every business posting double-digit growth versus the prior year. We see ongoing momentum in digital data networks, energy, as well as automation and connected living. In our automation and connected living business, we are seeing recovery in the factory automation applications with organic sales growth in all regions, both year-over-year and sequentially, and I meant orders growth, not sales growth. Transportation orders increased by 11% versus the prior year and grew in all businesses. In our automotive business, orders grew year-over-year and sequentially from the fourth quarter to the first quarter; we saw our normal seasonal trends that follow auto production. Commercial transportation organic orders grew both year-over-year and sequentially, indicating ongoing market improvements in both Asia and Europe. So with that as an overview of the orders, let's get into the quarterly segment results, and I'll start with our Industrial segment, which is on Slide 5. Our sales in the Industrial Solutions segment grew 38% in the quarter and 26% on an organic basis year-over-year, reinforcing the broadening of growth within the segment. Digital data networks had another outstanding quarter where the business grew 70% year-over-year, and our AI revenue was higher than our expectations. Our customers continue to award us new programs, and the orders that we've received are creating a backlog for the second half of this year and into 2027. We now expect our AI revenues in fiscal 2026 to be a couple of hundred million dollars higher than our view 90 days ago, with growth expected across every hyperscale customer. To support this acceleration, we continue to increase our investment in our digital data networks business, and Heath will talk more about this in his section. Turning to automation and connected living. The business grew 12% organically year-over-year with growth in each region, and we continue to expect recovery in the general industrial markets as we move through the year. In our energy business, our sales grew 88%, including the Richards acquisition, which enables us to capitalize on strong growth opportunities in the U.S. utility market. Organically, sales increased 15% driven by continued increased investments by customers in grid hardening and renewable applications. What was nice this quarter is we saw strong growth both in the United States as well as in Europe. In our automation, defense and medical business, sales grew 11% organically, driven by growth across both commercial aerospace and defense applications. In these markets, we continue to see favorable demand trends coupled with ongoing supply chain improvements that are helping to support growth. In our medical business, we grew 5% organically, which was in line with what we expected. At the segment level, if you look at margins, the Industrial segment adjusted operating margins expanded by over 500 basis points to 23%, driven by strong operational performance and the benefits of higher volume. So with that as a summary of Industrial Solutions, please turn to Slide 6, and I'll get into Transportation Solutions. Our sales in the Transportation segment grew 10% in the quarter, as well as 7% organically year-over-year. Our auto sales grew 7% organically in the first quarter, driven by content growth in Asia and in Europe. Our growth over market was at the high end of our 4- to 6-point range in the first quarter, and as we shared with you at Investor Day, we expect our content growth to be balanced between data connectivity, e-mobility, as well as electronification trends in the car. Our current quarter results show the contributions from data connectivity applications in our results, which are growing across all powertrain platforms. We continue to benefit from our strong global position and localization strategy, and our growth over market in this quarter was driven by China and Europe. As we look forward, our view of auto production in fiscal 2026 remains consistent at roughly 88 million units, which is down slightly versus last year. Turning to commercial transportation, we saw strong organic growth of 16% year-over-year, and this growth was driven by Asia and Europe. After two years of cyclical declines in the commercial transportation market, we're now seeing recovery in the end markets outside the United States and expect to benefit from our leading global position and content growth driven by architectural changes. In our sensors business, sales were essentially flat, which was in line with our expectations. And on the margin side, for the Transportation segment, the team delivered adjusted operating margins above 21%, which was in line with our expectations. With that overview, let me hand it off 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 7. For the quarter, we achieved record adjusted operating income of over $1 billion with an adjusted operating margin of 22%, driven by strong operational performance by our teams. GAAP operating income was $963 million and included $6 million of acquisition-related charges, $10 million of restructuring and other charges, and $57 million of amortization expense. As I said last quarter, I continue to expect restructuring charges in fiscal '26 to be roughly $100 million. Adjusted EPS was $2.72, and GAAP EPS was $2.53 for the quarter, which included restructuring, acquisition and other charges of $0.04 and amortization expense of $0.15. The adjusted effective tax rate was approximately 22% in Q1, and we expect Q2 to be at this level as well. We continue to expect the full year tax rate to be approximately 23%, which is similar to last year. Importantly, we anticipate our cash tax rate to be well below our adjusted effective tax rate. Now if we turn to Slide 8, our results reflect the business model performance that I shared with you a couple of months ago at our Investor Day event. We are seeing broadening of growth that Terrence mentioned with 30% plus incremental margins on that sales growth, double-digit EPS growth, and a strong cash generation model with balanced capital returns. Sales of $4.7 billion were up 22% on a reported basis and 15% on an organic basis year-over-year. Adjusted operating margins were 22.2% in the first quarter, expanding 180 basis points year-over-year. Adjusted earnings per share were $2.72, up 33% year-over-year driven by sales growth and margin expansion. Turning to cash flow, cash from operations was $865 million, and free cash flow was $608 million, with roughly 100% return to shareholders through share buybacks and dividends. Our cash generation and healthy balance sheet give us continued optionality with uses of capital to support investments for future growth, both organically and through M&A. With the order momentum Terrence mentioned, we are increasing our capital expenditure this year to support the growing pipeline of customer awards for AI programs. We now expect CapEx to be closer to 6% of our sales this year; we feel strong about our cash generation model and continue to expect at least 100% free cash flow conversion for fiscal '26. Now before I turn it over to questions, let me reinforce that we continue to execute well in both segments, and our Q1 results reflect a strong start to fiscal '26. For the full year, we are set up to deliver sales growth that is ahead of our through-cycle growth target while expanding operating margins and achieving very strong earnings per share growth. And with that, let's open it up for questions.

Thank you. Tiffany, can you please give the instructions for the Q&A session?

Everything was pretty positive. And when you guys are spending more money, that's usually a good sign as well. But I just wanted to lead off with the AI stuff because, again, it still is the elephant in the room. I mean, it sounds like, if I heard you right, which I think I did, you're taking up your forecast by a couple of hundred million from where you were at Analyst Day. I just wanted to confirm that. But more importantly, I just wanted to address the scaling of those revenues. How can you walk us through the kind of linkage between the capacity adds and the scaling and how you expect that to improve margins as that capacity seasons? If you can't give specific numbers, just some reference points and historically when you've added capacity for growth like...

Yes. Sure, Scott, and happy new year, and I appreciate the question. And just so we're all aligned about what we said at Investor Day, we did talk about getting to $3 billion of AI revenue over a couple of years. We're certainly on track to achieve this. Versus 90 days ago, when we shared the number, we do think the number for this year will be $200 million more than what we just shared. What's nice is this year, we're going to have growth across all hyperscale customers. And that's something that we all know with the CapEx trend that's happening in cloud to make that happen. The other thing is as we continue to build the momentum, the orders that we just talked about were very strong. And certainly, DDN played a part of that strength. And as I said in the comments, some of that is layered out later in the year. On the scaling, let's face it. We have been scaling. So when you look at the growth that we've had around where we positioned ourselves with our hyperscale customers, we've been scaling very nicely. Let's face it; these programs are big programs, and that's the base to scale. Some of the awards we got in the first quarter are for later this year into 2027. I feel that the teams will have it and continue to come in with good margins on it like we have been doing. We have been improving the margins in industrial solutions across all the businesses. So it's not just AI, but certainly, we're benefiting from the volumes as we bring these in, and that's why you see some of the margin improvement that we're getting both from the benefit of the ramp of the AI volumes as well as all the businesses improving their margins going forward. And that you saw that strong growth that we talked about in the pre-read comments.

I was hoping you could double-click on order trends, both sequentially and year-over-year and what that implies for revenue by end market going forward? And I ask in part to better understand the 2Q revenue guidance of about $4.7 billion compared to orders that were over $5.1 billion at a record high. Maybe if you can speak to the duration of orders and if that's changing at all?

Sure. Thanks, Mark. As I said in the comments, our orders were a record at over $5 billion, representing $1 billion of order growth. The one thing that's important is it was very broad-based. While we had very strong orders in DDN, if you exclude the DDN orders, our orders were up double digits across TE. That's the broad growth we talked about. In Industrial, our orders were up in 4 of the 5 businesses, double digits as well. We've seen strengthening of orders here. That is continued momentum in DDN for AI applications and also energy, which let's face it, were big growth drivers for us last year. We're also continuing to see AD&M orders accelerate. They are typically in aerospace and defense, with a little bit longer lead time. What was nice in the Industrial segment, and I know we've talked to all of you about it is we're continuing to see market improvement in our automation and connected living business across all regions. Certainly, we're seeing more in factory automation applications, and we're going to continue to see growth as we go through the year in automation and connected living. Looking at Transportation, this reflects what we see in production patterns. Year-over-year orders were very strong. Our first quarter is the strongest auto production quarter of the year. We do have a 3 million unit production decline from quarter 1 to quarter 2. When we look at that, that's really when you look at the guide, you're going to see that we're going to be up double digits in Industrial as we go quarter 1 to quarter 2, but there will be some partial offset by auto production in the world, which will be down about 3 million units. Looking at the order momentum, which is very strong. We do have automotive production changes that happen here that normally happen that you'll see reflected in our guide.

I just want to go back to the AI discussion for a bit. I'm hoping you folks can provide some color on what is driving the uptick in AI revenue expectations for the year. Is it just that the existing programs are doing better? Or do you see a better narrative around share gains? I'd love to just understand what's driving the uptick here? And then maybe if I can just extend that, can you elaborate on what investments TE needs to make to meet this growing demand, both from a CapEx and OpEx perspective?

Sure, Amit, and happy new year. I'll take the first half, and I'll let Heath take the second half. I think the first thing you have to recognize is that the orders reflect new program awards and with the hyperscalers. Even on some of that backlog, those programs will ramp here over the next couple of quarters and really be bigger inquarter 3 and quarter 4 than what's happening now. They do extend out a little bit. What's nice, and I said it to Scott's question, is it's across the hyperscalers. We're going to have growth across the hyperscalers this year. It is a mix of some programs continuing to ramp, but also new programs with the customers that will ramp in the second half. Heath, why don't you talk about the investments that you commented on.

Sure. Amit, as you can imagine, as we're winning these programs, the ramps are fairly aggressive in terms of the time window to get up to speed and deliver on their production schedule. When we talk about increasing our CapEx investments, we're primarily referring to specific program wins. The timing of those means we're going to have to spend money over the next couple of quarters to support production in the later part or the second half of our fiscal year and certainly into '27. As we're stacking up these programs, we're just trying to be transparent about the fact that there is specific tooling involved, and most of that is going into existing production facilities throughout Asia and a little bit in North America. We feel good about our ability to ramp; our teams have shown the capacity to ramp quickly, but it's an acceleration of that, which is requiring us to increase our CapEx number for this year, but all is feeling good. As you know, we wouldn't be spending that money if we didn't have revenue and profits tied to it.

Just to stay on the AI topic, I guess, maybe Terrence, could you share some granularity if these programs are NVIDIA-centric, or are they TPU- or other ASIC-centric? Any color on signal versus power? Just to give us some sense of the content may be split across those and what you're seeing in your orders?

No, first off, as we've talked with many of you, if not all of you, we won't be talking at the customer level. However, I can tell you, Wamsi, these are hyperscaler programs, and they have driven our growth to date. You can assume it's a continuation of that growth with those customers, across power and data and signal, which we discussed at the Investor Day. It's broad across both spectrums as we move to next-generation architectures. What’s really encouraging is the momentum we've had with our hyperscale customers is just continuing, and you see it in the orders.

Terrence, hoping we could just double-click on the trends you're seeing within ACL, especially in the industrial trends. It sounds like you're feeling a bit better or maybe quite a bit better than 90 days ago. And Heath, in terms of the incremental margin story in Industrial Solutions, is this strength something that we should think about just as an incremental margin driver as well?

No. First off, your comments are fair. We've been very much in the mode of reconciling and I would say there are two businesses I would put in there, not only ACL, but our industrial transportation business, both in a multiyear downturn. We continue to see, and we started to see it last year, improvement in orders. It's nice to see them broaden out across all regions in ACL. In Industrial transportation, it's really in Asia and Europe. With the momentum we're seeing and what we hear from our customers, we do view more momentum is there. You saw on the slide, we grew 12%. Orders were strong. One thing I would mention when we look at ACL for us, it is around the factory automation and the CapEx side of our Industrial business. Places around HVAC and appliances continue to be soft, but we're seeing the CapEx side improving, and it's broadening across all regions, including Asia, China, Europe, and North America. It's nice to see some cyclical pain we had a couple of years behind us. As these businesses come up, they are better profit pools naturally and will also benefit our margin as they recover.

And Luke, on your incremental margins, as we talked about in our business model, certainly both segments, I'm confident, will be at their 30% plus flow-through on their growth for FY '26. For the Industrial segment, certainly, the volume growth at these levels is helping a lot. We are able to achieve volume leverage on this kind of scale. I would still tune into the 30% plus, but there'll be quarters when we're well out ahead of that for sure.

Just within DDN, two quick questions. I guess you're talking about continued AI growth. So, with the total revenue flattish quarter-over-quarter, that would suggest the growth kind of slowed or has been really down, I guess, quarter-over-quarter. Maybe you could help us understand what's going on there. And then even with the AI portion raise, it seems like you might actually be at a run rate higher than the level you just raised to. I'm just wondering, is that constrained by some of the capacity? Or would you classify that as just some conservatism?

No, Joe, a couple of things. We grew AI programs from quarter 4 to quarter 1 sequentially. There was growth sequentially there. We also expect our Industrial Solutions segment to grow sequentially from quarter 4 to quarter 2. We have the production decline in automotive. However, I feel very good about the momentum. The orders we have set up for quarter 3 and quarter 4, where the bulk of the increase I talked about—the $200 million—will come as these programs ramp into '27. I feel optimistic about the momentum. The orders reflect it. The DDN orders were up 70% year-over-year in the quarter; that's very strong, and we continue to feel that momentum is strong. I don't think it has anything to do with capacity constraints.

Maybe just staying with the AI theme, but more a question on the supply chain and what you're seeing on that front in terms of either tightness on the components or inflation thereof. I'm just wondering what you're seeing overall from that perspective in the supply chain? Is that the driver of why the hyperscalers are giving you more forward visibility with the orders for the new programs? Or is it just the complexity? Is it more the complexity of the new programs that's driving these sort of longer-dated orders? Any color there would be helpful.

First off, our customers are expecting ramps that are very fast. So, you're really talking about program launches that will happen later in the year. In our supply chain, honestly, we feel that we can procure what we need. There is inflation around things that are metal-related, and that's not just the AI supply chain; that’s everywhere around us. Our teams are managing appropriate pricing to ensure we recover from that. As they're looking out, they're reserving capacity for the programs, which are very specific to those customers. What's nice is our team continues with the momentum in getting these wins with our hyperscale customers, and they're giving us visibility to ensure that the ramps occur.

Just DRAM prices have really skyrocketed. Do you have any direct impact from that? And if not, do you also see any risk to auto production because of the potential supply issues there? Any thoughts on that risk and issue?

Yes, regarding the memory situation, we don't buy significant memory impacting our supply chain. That's what we're focused on. Our discussions with customers show no slowdowns due to memory issues impacting us. What's important is how we service our customers, and it's been really nice to see the growth we delivered across all three of the levers. The memory situation is not impacting us at all, and our teams are doing a good job managing growth above market in Transportation.

Congrats on the excellent results. The commercial transportation business was probably stronger than people expected. Was that down to easy comparatives? I know in the slide deck, you said that's growth driven by Asia and Europe. In terms of order momentum, what would you say the outlook is for commercial transportation for the rest of the year?

No, Guy, last year's first quarter was easier to compare. So when you look at that growth rate, it is benefiting from that. However, in the first quarter and even throughout the year, we notice improvements in places like China, Europe, and India regarding truck builds and construction equipment builds. The growth over the market has been strong, and we expect global truck build will be up 200 basis points. We feel, with confidence, we'll outgrow that this year. The real wildcard is North America; the truck market there is still negative, and that's something we need to monitor since we're not seeing order improvements there yet. Outside the U.S., there’s been an uptick globally. We hope for improved order production in North America as we move through the year.

I just wanted to double-click on the EPS guide, slightly down versus sales, which were flat. Are these some below operating income items that we should consider here? Relatedly, what could be drivers for further expansion in those increments?

Yes, Asiya, I'd say Q1 to Q2 has about $0.04 or $0.05 of higher taxes and increased interest expense. That's the major bridging item for the two quarters if you're just considering that. In terms of incrementals, we feel good about being at 30% or better. There’s nothing that derails it; certainly, volume is essential. We’ve done well to reduce our operating footprint, which has reduced some fixed costs, especially in Western Europe. That’s lending itself to improving our operating margins, which we've seen happen consistently. We feel positive about our trajectory for the full year, given the incremental investments we need to make.

Can you touch on the fact that we've seen metal prices exploding here, copper, gold, silver? Can you talk about implications for you guys in terms of procurement and the need to pass costs on and how customer acceptance has been?

Yes. Joe, you're correct; we are experiencing inflationary pressure specifically on metals. That category is our largest purchase category. The team is focused on those pressures; we've made investments, as discussed at the Investor Day, with supply chain investments to gain scale and leverage purchases, which helps. The price increases in the spot market are felt by us. However, we aim to pass those costs through pricing or through other sourcing mechanisms. While we're not using that as an excuse on margins, we realize we are feeling the impact, and it factors into our pricing elements.

I want to follow up on some of the supply chain questions from two aspects. Just to clarify, when you're passing them through, are you able to do so on a similar timeline? Additionally, as you think about supply chain and capacity, the good news is you're seeing a broadening of demand, while AI is still growing quickly. How do you feel about your ability to keep up from a capacity standpoint as we progress through this year and into next fiscal year?

Heath can address the first half; I’ll handle the second. On our ability to pass pricing, we've improved over the years in our agility to pass on inflationary measures more quickly, be it through distributors and channels, or OE direct discussions. Therefore, we expect no significant time lapse ensuring those discussions commence quickly given the inflationary pressures we're facing. Regarding capacity, we noted asset growth at Investor Day. The AI ramps are specific customer programs, and we find ourselves in a good place for capacity across various sectors. We’re increasing capacity in energy and aerospace; Richards is performing well and aligns with expansions in our energy business. We expect to see a continuous rise in those sectors as demand remains strong.

A question on energy. The organic comps are pretty notably steeper in the second half. I'm wondering how orders and new applications are phasing into that. Would there be a growth adjustment period as you normalize into the long-term outlook from Investor Day, or would you expect to settle right into that?

The momentum continues to be very strong, Chris. It hasn't slowed down at all. As I said previously, we've also started to see an uptick in Europe, an area where we've established a historical presence and had a focus more on the U.S. We're still experiencing positive growth across the businesses, including those we acquired. It’s centered around grid hardening and capacity and as the energy network evolves, we anticipate remaining double-digit growth for the year on top of the inorganic piece early on, so we feel good about that momentum.

I’m hoping to reconcile the outlook with the bookings. The business trends overall sound good; they're broadening into industrial, as you highlighted. You had a record booking quarter, strong book-to-bill. With seasonality and order durations, the 2Q revenue guidance looks a few points below normal. My guess is this relates to auto production in China, specifically for EVs. Can you verify that and perhaps linger on it for a moment?

Will, when you look at it, there is an element in our second quarter guide that indicates our segments are moving in two different ways. Industrial Solutions is going to be up double digits year-on-year. Everything related to orders aligns, excluding some AI orders that are pushed further out, but we do have a 3 million unit auto production decline from quarter 1 to quarter 2, which is more severe than usual. This reflects in our guidance, but we feel strongly about the order momentum transitioning to the year. While Q1 was higher than seasonal, we maintain confidence in our projections for upcoming quarters.

If we could double-click on the incremental margins. It looks like overall, stripping out M&A and FX, incrementals were at 31% in Q1, but across segments, Industrial might have been closer to 40% plus while Transportation was in the teens. Do you expect both segments to converge towards the 30% plus figure that you've talked about previously, or should we expect Industrial to run hotter than that?

Yes, Shreyas. As I stated earlier, I expect that both segments will be at or better than their incremental flow-through math here, near the 30% for the full year. In a given quarter, you can have some noise, and I think Transportation this quarter was affected by foreign exchange concerns that impacted their flow-through math. That said, I'm not overly worried. As for the second half of your question about the Industrial segment being higher, we'll see—there are investments being made—but I maintain a positive outlook on both segments and what their trajectories are for the year.

Thanks, Shreyas. I want to thank everybody for joining us this morning for the call. If you have further questions, please contact Investor Relations at TE. Thanks again, and have a nice day.