TE Connectivity plc — 2024 Q2
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
Everyone, thank you for standing by, and welcome to the TE Connectivity Second Quarter Results Call for Fiscal Year 2024. [Operator Instructions] As a reminder, today's call is being recorded.
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.
Thanks, Sujal, and we appreciate everyone joining us today.
Thank you, Terrence, and good morning, everyone.
Dennis, can you please give the instructions for the Q&A session?
[Operator Instructions] Your first question comes from the line of Mark Delaney with Goldman Sachs.
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, thanks, Mark, and I appreciate the question. And I know one of the things that's important when we do this is I always have to remind everybody our great global position, and we got to keep that in front of us.
Your next question comes from the line of Luke Junk with Baird.
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. No, thanks, Luke, and I appreciate the question. Yes, as I said in my upfront comments, I can't stress enough, this is the first time in 6 quarters or 1.5 years that we have orders above $4 billion and a book-to-bill above 1. And you see the sequential growth in every segment. And destocking, which we always told you, really was in our Communications segment and our Industrial Equipment segment. I would tell you, in the Communications segment, we don't -- we believe destocking is over.
Your next question is from the line of Amit Daryanani with Evercore Partners.
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.
Your next question is from the line of Wamsi Mohan with Bank of America.
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?
Yes. So when you think about share in the AI application, it would be similar to the share we had in cloud applications. So I think when you look at that, and we talked about that a lot, the momentum we had when we went through the cloud during COVID and the momentum we had across a broad set of customers, I think you can expect similar share-type thoughts on that for the AI applications and once again being broad.
Sure. Wamsi, we appreciate the question. Obviously, we're in the early stages, we're not ready to guide for our FY '25, which starts October 1. But I do feel good about where -- the progress that we've made on margins. We've talked a lot to this audience about our target margins, which we really look at it by segment. The Transportation margins, target margin of 20%, we got there a little sooner than we even, internally, we were expecting. The price actions have been effective and they've been sticky. The footprint consolidation work that we've done and then we've exited some low-margin product lines, and the health of that business is very strong.
Your next question is from the line of Samik Chatterjee with JPMorgan.
I'll ask on Communications, if you don't mind. You mentioned the capacity investments you're making in the Communications segment, particularly around the AI demand you're seeing. If you can sort of give us some more color about what's the typical lead time between you investing -- starting to invest in capacity now? Is that for revenue in fiscal '25? Or is that sort of beyond fiscal '25? What's the typical lead time between starting the manufacturing and getting back to a revenue point?
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. And also the sites that we have, I think, position us well for the geopolitical options that some of our customers want to have.
Your next question is from the line of Joe Giordano with TD Cowen.
So on the AI side, as you kind of build out and invest to support the growth plans of your customers in this space, how do you weigh -- like obviously, very robust demand and on the near term with like, can we -- is this -- are these growth outlooks on a multiyear period even feasible? Like can the grid handle building all these things? Like how do you weigh what you need to invest in now because of what your customers are saying versus like your view on is this even achievable for a market over like a short, couple-of-year period?
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.
Your next question is from the line of Asiya Merchant with Citigroup.
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, was we were covering 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.
Your next question is from the line of Saree Boroditsky with Jefferies.
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. First off, being the demand environment is cloudy because we have had both with -- and in our Industrial Equipment business, just to take a step back and remind everybody, about 50% of our revenue goes through our channel partners and 50% goes directly to the OEMs. So it is an area where channel partners play a bigger role.
Your next question is from the line of Steven Fox with Fox Advisors.
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 engineer 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?
Your next question is from the line of Colin Langan with Wells Fargo.
Just want to ask, on the auto side, growth was 1%. I think the target is 4 -- and I think the market is fairly flat in the quarter. The long-term target is 4% to 6% outperformance. Why the underperformance versus the target in the last couple of quarters?
Twofold. We're probably running about 3 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.
Your next question is from the line of Christopher Glynn with Oppenheimer.
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. So to your point, I'm going to -- I might go down here a little bit on how we look about the commercial transportation because, obviously, that market has 3 major drivers to it. Certainly, the on-road truck and bus, what's happening in agriculture equipment and also construction equipment, they're the 3 big levers. And when you think about that globally and production and our revenue, about half of our revenue is truck and bus.
Your next question is from the line of Matt Sheerin with Stifel.
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?
Yes, no, sure. Thanks, Matt. And on energy, what I would say is we're still very constructive on it. I think what you see in our results here is we continue to see the U.S. and Americas very strong. We also see global renewables where we play, and we do utility scale renewables, we do not do residential renewables, we see that strong.
Your next question is from the line of Shreyas Patil with Wolfe Research.
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 1 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.
Today's final question will come from the line of William Stein with Truist Securities.
I'm going to ask yet another question about AI. Terrence, my industry checks reflect that there's really about 3 companies that have meaningful content here, and TE is 1 of those 3. There's a couple or 2 others. Can you talk about the competitive dynamics among these 3, maybe your defensibility and your opportunity to push into their spaces? And also what makes the 3 of you more capable than others that sort of protects -- that maybe protect you against new entrants into this very attractive category?
No, thanks, Will. So first off being I think there's an element here when you deal with high speed, the 3 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.
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.
Today's conference call will be available for replay beginning at 11:30 a.m. Eastern time today, April 24, on the Investor Relations portion of TE Connectivity's website. That will conclude the conference for today.