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. .

I would now like to turn the conference over to our host, Vice President of Investor Relations, Sujal Shah. Please go ahead. .

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. [Operator Instructions].

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 3 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 to you 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 6 months. We see 3 out of our 4 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 3 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 3 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 1.5 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 1.5x higher on a hybrid and 2x 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 -- increase our investment 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 3 of our 4 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 3 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 2/3 of free cash flow to shareholders and use 1/3 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?.

[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. .

So first of all, on auto production, what's interesting, even though there's been a lot of moves by various players around the world, if we went back to you back in October and said, where do we think auto production would be, we still think it's slightly up this year. It's going to be around 86 million vehicles made on the planet this year.

And we have seen increases in Asia production, both in China as well as outside of China, because we do have a strong position in Japan and Korea as well that have offset some of the weakness that you've seen here in North America as you have some of these consumer preference shift. .

The other thing that is when you think about what we've always called the e-mobility category, which includes hybrids, plug-in hybrids and EVs because we get very nice content uplift on all of them, we expect it to be about 25 million units this year still.

And versus where we were earlier in the year, that's probably only off about 300,000 units when you look at it at a global basis. So net-net, on a global basis, EV production and adoption is still happening. And EVs and plug-in hybrids and hybrids are about 30% of all the vehicles on the planet today that are coming out.

And I said it on the call, both categories are going to grow about 24% this year. .

Now by region, the trends in China are full steam ahead, EV production, EV adoption across all types, whether it's plug-in hybrids, hybrids, and we have a very strong position there. We've talked to you about what we do with the locals. We have a strong position with the multinationals.

And as I said on the call, our content per vehicle, as EV adoption continues in China, is just going up. .

In the Western world, you do have the adapting that I talked about, and it's really creating more of a shift from EVs to PHEVs and hybrids. And we got to realize that shift is important for us because that does help as you move from a nice vehicle to any of the EV categories, we get content increase.

And all the regions are expected to see double-digit EV growth this year. So while there's been some things that have shifted around, certainly, as people make choices about what models they like versus they don't like, it's really been driving content growth. .

Now the last thing is we remain to be confident around our 4 to 6 points of outperformance. And we're always going to caution you like we do every call, please don't look at it on a quarter basis because there's always swings that can occur. But we expect content growth to be in that 4 to 6 points.

And it's also important to say content in the 4 to 6 points above production, EV is the biggest driver, but it's not the only driver. .

Electronification of the vehicle, the data -- Ethernet that goes in for autonomy for -- that's unique for software-defined vehicles, that's a driver as well as all the other electronics that go in. So all of them drive the content increase.

And while there may be some shifts between EVs and hybrids, the content growth that we get on either of those categories, whether it's 1.5x or 2, are going to drive content growth for us and why we feel so constructive about the 4 to 6 points of outperformance, and we expect we'll be there this year.

So I know it's probably more than you wanted, Mark, but I appreciate the question. .

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. .

Not only from the order activity we see, but I would also say the things where we go through our channel partners, and we've seen orders improve year-over-year there as well as the revenue trends of where they're selling through.

So I would say destocking in the Communications segment is over, and you're going to see that segment return to growth next quarter, as I talked about. .

The one area that we continue to see destocking is in the Industrial Equipment. I think it was evident in our results and the commentary. And that's going to be with us for a couple more quarters. That started later. We're still seeing areas where I do think we're in a bottoming cycle there, both what we see and what our channel partners see.

We're starting to see some lights in China and also the Americas, but there's other areas in that industrial space, and Europe has remained weak. So I do think that's very important to keep in front of us, but I do think there's -- we're starting to see some light at the end of the tunnel. .

And outside those areas, I think you see stability and growth. And I think those sequential order momentums that we see that you can see on the chart really prove that. And that's what we get excited about that destocking is over. Destocking has masked some of our content growth as we work through it.

But I do also think as we work through this year and get to '25, it will be a nice tailwind that that's finally behind us. .

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. .

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 [ math ]. .

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 [ LLMs ]. .

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. .

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?.

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?.

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. .

When you look at 2025, I guess the first thing is it will be nice not to talk about destocking. So that has been a headwind. I know we're not the only one that dealt with it. But that will be something that turns, and you're starting to see it in CS, and that will help IS.

So I do think that will turn to a headwind to be -- honestly, to a tailwind as we get rid of that. And what's nice is we're going to start seeing that in Communications already here later this year. And I do think we have to wait towards the end of our fiscal year to get there with the Industrial Equipment business. .

The other thing as we look at 2025, there's going to be -- if you just start with Transportation, you're going to continue to have electric vehicles, the broad category that we put everything in, continue to grow in the world. And I think you can continue to look at 4% to 6% growth on top of that.

I wouldn't say we view it's going to be auto production is going to boom in '25, but I think you're going to continue to see an area where auto is below peak where we are today. And then we're going to get the content benefit on top of it that I think we've proven to you. The AI element is a big driver as we go into next year.

So we quantified that for you. .

And then the other area that I just think has been masked a little bit by what's been going on in Industrial Equipment is, remember, our 3 businesses that are in Industrial, they continue to have growth momentum, whether it's renewables, whether it's what we're doing in medical around interventional procedures, whether it is the recovery in commercial aerospace as well as what's going on in defense.

So those types of growth that we're seeing this year, we do think they're going to remain in the growth into '25. So I do think '25 does set up nicely. .

Heath, I don't know if you want to talk from a margin perspective at all. .

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. .

The auto side of that, that is driving most of that. But even our Commercial Transportation business within that, which is, as you know, a high-margin business, is holding its head even in a negative growth environment. So we feel good about where we are achieving in FY '24 and where our jumping off point is for end of '25. .

Communications is really -- the margin side of Communications is really a volume story. And again, if you had asked me 6 or 9 months ago where we'd be running margin-wise at roughly $440 million of quarterly revenue, I would tell you we'd probably be in the mid-teens. And as I sit here today, we've been consistently in the high teens this year.

So we've effectively raised the floor, and our team has done a nice job within that segment of raising the floor so we get to a more of a high-teen type of look. .

And once we budge up over the $2 billion annual revenue rate for that segment, I think we're going to be pushing towards that target margin of 20% for the segment. So we feel good as we think about that. And as a reminder, Terrence alluded to this, we are hiring to support some of the high-growth areas, and that's embedded in our run rate.

We're not going to call that out as a headwind to us, but we're not starving these businesses, and that's been an exciting area to see. .

The Industrial business, we're hovering in the mid-teens. I expect improvement of significance next year as we go in, but a lot of that is tied to the destocking within the Industrial Equipment business going away. And Terrence has talked a fair amount already on this call about the time frame of that towards the end of fiscal '24.

So I do think there's good opportunity as we go into '25. The other 3 business units within the Industrial segment have been performing well, but it's hard to make up for the drag on the Industrial Equipment business that's been down double digits this year. .

So if you add all that all up, we're going to exit this year in [ 18 ] and change of operating margins up a couple of hundred basis points year-over-year. And we expect to be able to start making normalized improvement on that as we move forward.

We talk to The Street about in our operating model of somewhere between 30 and 80 basis points of margin improvement each year. Certainly, we feel good about that as we start planning for FY '25. .

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?.

And then just a side question in terms of like what do you see customers ask you for in terms of where this manufacturing footprint is? Given the geopolitical situation, is there a preference that customers are expressing about where you invest in capacity, [ granted ] whether it's the Western world or somewhere else?.

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. .

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. .

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. .

So from that viewpoint, I think that's always been our mindset. And it's one of the nice things about our model that we get the benefit of working with our customers as they understand the opportunity and the ramps that they expect to hit and how do we need to support that. .

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. .

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. .

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. .

I would say when we look at the end-demand environment, there are pockets where you continue to see strength, that wouldn't surprise you, certainly in the process side.

But there's other areas that right now, it is still foggy because we have customers that are working off buffer stock that they built up when they were worried about being able to get component supply as well as our channel partners are doing the same. .

So right now, we're in the middle of that destock period. But what we are seeing is we're seeing order patterns start to move sideways. They aren't decelerating. We're seeing that both direct and with our channel partners. And we're also seeing certain regions where we see that work-off occurring.

So I think what you're going to have probably for the next couple of quarters, we're still going to have those impacts as that works off. And then as we get into '25, you'll actually see that business get back more in line, growing a little bit above the underlying market of factory automation. .

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?.

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. .

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. .

What we're seeing on truck and bus right now is Americas and Europe, weak. Actually, China and Asia is recovering. So they were weak last year. So what we're actually seeing is very much a China-positive market that we expect will continue; certainly Western World down.

And we even said in the call, we expect next quarter will be down a little bit sequentially due to some of these dynamics. .

On the ag and the construction side around the world, that is slow everywhere around the world. Certainly, you get into financing rates and things like that, that's a little bit different. And we expect that, that will run through this year.

And we are thinking that early next year, we'll get into a more constructive environment than we're in right now. But right now, we think, if you take all of them together, the global market is probably a minus 5% this year, plus or minus a little, and we would think that will get more constructive into '25. .

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. .

The one pocket where I say we see a little bit of softness is around the utilities in Europe. I do think that's an element of the business that I talked about on my prepared comments that we've been a little bit of where I think utilities are bringing down inventory a little bit.

But certainly, with the grid maintenance that everybody is investing in around the world, I think that will return to growth. So we're still constructive on global energy. And our business is very much -- Europe and the United States are the bigger elements of where we play. .

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. .

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. .

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..