The operator welcomes everyone to the TE Connectivity Third Quarter Results Call for Fiscal Year 2024. The call is being recorded and will include a question-and-answer session. The host, Vice President of Investor Relations, introduces the CEO and CFO. The call will include forward-looking information and the use of non-GAAP measures. Participants are asked to limit themselves to one question during the Q&A portion. The CEO provides an update on the company's performance and the global economic environment.

TE is positioned well in their largest market, Automotive, with stability globally. They are also seeing growth in their Industrial Solutions and Communications segments, offset by weakness in general industrial markets. Sales were in line with guidance and adjusted margin and EPS exceeded expectations. The company has delivered record margins and earnings, despite a slow demand environment, and has a strong cash generation model with record free cash flow.

The speaker briefly discusses the current state of their markets and order patterns, highlighting consistent growth in China and continued weakness in Europe. They also reiterate their long-term value creation model, centered around strategic positioning, operational levers for margin performance, and a strong cash generation model. They expect to deliver double-digit earnings growth this fiscal year and are set up for strong performance in the future.

The company expects to benefit from various growth drivers, such as commercial airspace and industrial equipment, leading to improved growth and operating earnings. In the third quarter, sales were in line with guidance and orders were up, with adjusted earnings per share exceeding expectations. The company projects fourth quarter sales of $4 billion, with strong year-over-year expansion in margins and a 9% increase in adjusted earnings per share. Despite a flat sales outlook, the company's performance is expected to show a 12% increase in adjusted earnings per share for the full year.

The company's orders increased by 4% year-over-year and 3% sequentially to over $4.1 billion with a book-to-bill of 1.04. The Communications segment saw the highest growth, driven by orders for AI applications. The Transportation segment had a slight sequential decline due to weakness in commercial transportation and sensors end markets tied to the general industrial market. However, the auto business grew by 4% organically, with strong sales growth in China offsetting declines in Europe and North America. The company expects continued growth in the second half and long-term, driven by increased electric vehicle and hybrid production and greater electronification of vehicles. The Commercial Transportation business saw an 8% organic decline due to weakness in Europe.

In the fourth quarter, we expect our business to be down due to market declines in the West. Our Sensors business has seen a decline in sales due to market weakness and efforts to exit lower margin products. The Transportation segment has shown improved margins due to strong execution and investments in next generation vehicles. In the Industrial Solutions segment, sales were down slightly, with growth in aerospace, defense, marine, medical, and energy, but a decline in the Industrial Equipment business. We expect this trend to continue in the fourth quarter as our customers and partners reduce inventory levels.

The industrial segment's adjusted operating margins were as expected, but are expected to improve once the Industrial Equipment business returns to growth. The Communications segment saw year-over-year growth and strong margin performance, with data and devices growing 32% and design wins accelerating. The Appliances business also saw growth, with adjusted margins of 20%. The focus for the year has been on improving margins and earnings, and the company has set records for quarterly adjusted operating margins and earnings per share in the third quarter.

In the third quarter, the company's adjusted operating income was $766 million with a margin of 19.3%, while GAAP operating income was $755 million. Year-to-date restructuring charges were $57 million, and the company expects them to reach $100 million for the full year. Adjusted EPS was $1.91 and GAAP EPS was $1.86. The adjusted effective tax rate was 23% in the third quarter, slightly higher than expected, but the company expects it to be around 22% for the fourth quarter and full year. Sales were flat with a 2% organic growth, but were impacted by a stronger dollar. Adjusted operating margins expanded by 200 basis points and adjusted EPS increased by 8%, despite currency headwinds and a higher tax rate. The company delivered strong free cash flow of $867 million in the third quarter and expects another year of strong free cash flow.

The company has strong free cash generation and has deployed over $2.2 billion this year for acquisitions and returning capital to shareholders. Their long-term capital strategy remains unchanged, with two-thirds of free cash flow being returned to shareholders and one-third being used for acquisitions. The company is well positioned to benefit from secular growth trends and drive further earnings growth. They remain excited about opportunities to create value for stakeholders. During the Q&A session, the CEO discusses the impressive momentum in the IS side, specifically with AI centric business, and explains the drivers for higher growth expectations for this year and next year compared to 90 days ago.

Terrence Curtin discusses the customer mix on the AI side and the momentum coming from it. He mentions that the hyperscalers and cloud CapEx are accelerating and being put towards AI applications. The company has a strong position with the cloud customers, which is translating into a strong position with AI. The design wins are across customers, not just one, and there is a breadth of engagement with the hyperscale customers. The company is also working with semiconductor companies to ensure high-speed, low-latency applications. The growth is seen across the entire ecosystem, not just one customer.

The company is optimistic about the potential for growth and profitability in the engineering and manufacturing space, and expects to see continued momentum in the coming years. They are focused on margin expansion and have been successful in managing costs and optimizing their portfolio. They are also taking steps to offset inflationary pressures and ensure that price increases are sustainable.

The company is currently running at a 19% margin and expects to maintain high teens margins in the industrial segment. The industrial equipment business is currently underperforming, but as it returns to growth, margins are expected to improve. In the Communications segment, margins are closely correlated with revenue and have been impacted by outside factors in recent years. The company has raised the floor for variability in margins and is now generating target margins at a lower revenue level than originally planned. However, there will be some required investment for future AI programs.

The company is seeing positive results in their revenue and margins in their engineering and transportation segments. They expect to continue to see growth and improvement in these areas, and are prepared to adjust pricing if necessary due to inflation.

The speaker discusses how the company's operational muscle memory has improved during the process. They mention that there will be more updates in 2025 and then take a question from Joe Spak about cross licensing deals for AI. The speaker explains that this is common in the industry and due to the ramping and volume of the business. They also mention that this is not a new phenomenon in their data and devices space. The next question comes from Joe Giordano about a topic that may have been discussed earlier.

Terrence Curtin, CEO of a company, is asked about his thoughts on the future of hybrid and electric vehicles. He responds by stating that while global auto production may be flat, production of electrified powertrains (including battery electric, plug-in hybrid, and hybrid vehicles) is up 20% this year. He also mentions that 70% of electric vehicles are made in Asia, which is where his company's global position benefits from this trend. In Asia, battery electric, hybrid, and plug-in hybrid vehicles are all seeing growth, with China driving the market. Other non-Chinese OEM customers, such as Japanese and Korean companies, also benefit from the growth in hybrids.

The speaker discusses the increasing trend of consumers choosing hybrid and electric vehicles in the Americas and Europe, which is beneficial for TE's content. They also mention that global perspective is important and that TE expects auto production to remain flat, but EV production to continue increasing. The question then asks if TE will see revenue growth from this trend, considering potential delays and inventory corrections.

Terrence Curtin, the CEO of TE Connectivity, confidently states that the company will continue to perform well in the automotive industry due to the increasing demand for powertrain and data connectivity in vehicles. This demand benefits TE Connectivity's content and they have already seen 5 points of outperformance in a declining auto production environment. Curtin also mentions that the company's global position allows them to avoid being impacted by specific customers or platform changes. He feels confident about their 4-6% growth projection and the design wins they continue to receive in the automotive sector.

The analyst asks about the company's revenue growth and where it will come from, given the flat revenue track record this year. The CEO mentions the expected growth from AI and the automotive industry, as well as potential growth from the end of stocking in the industrial segment. He also notes that some industrial cycles may see growth later in the year and that stocking has had a negative impact on revenue this year.

The speaker discusses the growth momentum of the company and clarifies a previous statement about production and content. They also mention that their CapEx runs at about 5% of revenue and supports all growth areas, including AI applications in Asia.

The speaker discusses the tradeoffs and changes in their company's CapEx due to various factors such as support for AI applications and completed expansions. They also mention positive order patterns in the Industrial Solutions and Communications markets, as well as strong backlog and improved service levels to customers. These factors have contributed to a positive book-to-bill ratio and the end of industrial equipment destocking.

The company is seeing positive effects in areas with strong service levels, such as the auto industry. However, there is ongoing weakness in the general industrial space, which is expected to improve but the exact date is unknown. The company has increased its estimate for AI sales next year to $500 million, and the $1 billion sales estimate may also change as the company continues to update with design wins.

The speaker discusses the potential impact of miniaturized products for next-generation architectural shifts on TE's content and margins in the automotive industry. These trends, including high-voltage architectures and increased demand for features and functionality, create opportunities for content growth in both electric and non-electric vehicles.

The speaker discusses the importance of connectivity in modern vehicles and how it drives content growth. They mention the hard architectural problems that need to be solved for power, signal, and data to be transmitted in cars. They also mention the role of engineers in designing for OEM customers and the impact of electrification and electronification on content. The speaker is confident about the future of content growth and addresses a question about the potential impact of zonal architecture on wiring and connectors. They clarify that while there may be some wire reduction and harness simplification, there is no expected loss in content as a result of transitioning to zonal architecture.

In the paragraph, the speaker discusses the potential for bolt-on M&A (mergers and acquisitions) in the company's future. They mention that there has been a recent increase in M&A investments by a competitor, but that their own focus on bolt-on M&A is not new and has been discussed for a couple of years. They also mention that their strategy for M&A includes in-market and technology focus, as well as considering returns and metrics.

The company's definition of "bolt-on" acquisitions includes those that are similar to their current operations and can provide operational and sales synergies. These acquisitions do not necessarily have to be small, but they must be within the company's expertise. The company is currently focused on internal improvements but is also actively seeking M&A opportunities in the industrial sector. The company prioritizes good financial returns for their shareholders rather than simply buying for the sake of growth.

The company has been cautious about elevated acquisition prices but is confident in their ability to drive value in the industrial space. They expect to see increased profitability in the transportation sector due to restructuring savings and improved volumes. They are also seeing wins in new automotive architectures and have been working on these designs for decades.

The transportation industry has seen a shift towards new architectures and restructuring in order to increase margins. Some OEMs have already made this move, resulting in an increase in content and profitability. The company has also focused on improving margins through restructuring and managing price increases. The team has been successful in executing these changes and is closely monitoring input costs and inflation.

The speaker addresses a question about when the company will reach a 30% incremental growth and mentions that the team has worked hard to reach the current level. They also mention the recovery of the commercial transportation market and potential for improvement in margins. The speaker asks for patience before setting new targets and thanks the questioner for their inquiry. The call will be available for replay on the company's website.

This summary was generated with AI and may contain some inaccuracies.