TE Connectivity Ltd. Q3 FY2025 earnings call

• TE Connectivity delivered double-digit increases in sales and adjusted earnings per share in Q3, exceeding guidance. Sales grew 14% and adjusted EPS grew 19%, both quarterly records.
• Key drivers include strategic portfolio positioning and investments in Transportation and Industrial segments to benefit from secular growth trends. Achieved record adjusted operating margins (20%) and free cash flow ($1 billion) in Q3.
• Announced Investor Day on November 20 in Philadelphia with a product showcase the evening before.
• Order trends: Transportation orders up 5% year-over-year (Asia up 17%, offset by Europe/North America declines); Industrial orders up 12% year-over-year and sequentially, reflecting momentum in AI, energy, aerospace, and defense businesses.

Transportation Segment

• Auto business: Grew 2% organically in Q3, with 11% growth in Asia offset by 5% decline in Western regions. Adjusted operating margins were 19.4%, and margins expected to be above 20% for the full year.
• Commercial Transportation: Experienced 3% organic growth, driven by Asia and Europe growth, partially offset by North America declines. Orders improved year-over-year and sequentially.
• Sensors: Weakness in Western end markets partially offset by growth in Asia.

Industrial Solutions Segment

• Grew 30% in the quarter with over 20% organic growth. Digital Data Networks grew over 80% organically, Automation and Connected Living grew 5% organically, Energy business grew 70% (including Richards acquisition, organic growth 20%), AD&M grew 6% organically, Medical was roughly flat sequentially. Adjusted operating margins expanded nearly 400 basis points to over 20% due to strong operational performance and higher volume.

• Fourth quarter sales expected to be $4.55 billion, 12% reported growth and 6% organic growth year-over-year. Adjusted earnings per share expected around $2.27, a 16% year-over-year increase.
• Fiscal 2025 expected high single-digit sales growth and double-digit adjusted earnings per share growth year-over-year.
• Adjusted effective tax rate expected to be similar to Q3 (24%) in Q4.

• Tariff impacts: Expected similar impact to Q3 in Q4, with minimal earnings impact. Teams mitigating through sourcing changes and pricing actions.
• Foreign exchange fluctuations: Impact on sales and EPS, with Q4 guidance assuming foreign exchange contribution of $111 million in sales and $0.03 to adjusted EPS.
• Material cost fluctuations: Continuing to watch closely, which could impact pricing in the Industrial segment.

Q: Can you please comment more on your view about the sustainability of the current fundamental strength and if any current demand is due to customers prebuying to mitigate tariff risk?

A: Terrence R. Curtin says no meaningful pull-ins seen, orders show broad-based growth with Asia strong in Transportation and AI momentum in Industrial continuing.

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

A: Terrence R. Curtin talks about growth driven by data speed trends in Transportation and Industrial segments, and Heath Mitts discusses margin improvement due to footprint consolidation, scale, and volume leverage in the Industrial segment.

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

A: Terrence R. Curtin states no meaningful pull-ins seen, orders show broad-based growth with Asia strong in Transportation and AI momentum in Industrial continuing.

Q: Terrence, I was hoping we could maybe touch on the industrial book-to-bill, especially any timing-related impacts we might be seeing there in terms of AI that could be causing some distortion plus or minus? And maybe if you just comment on AI awards, specifically, I'd be especially interested in anything above and beyond this continued acceleration in like-for-like growth that you're seeing maybe relative to both the hyperscaler opportunity and chip makers as we step into '26?

A: Terrence R. Curtin says AI momentum is continuing, orders in Industrial are broad-based improvement with sequential growth across businesses.

Q: I guess just maybe following along those lines, Terrence, I mean, it sounds like everything you think is at least sustainable. I think you and we would all sort of expect sort of continued growth. So I mean, how should we think about a new sort of aspirational target for the company as we think out here a couple of years -- margin target, sorry?

A: Heath Mitts discusses focusing on incremental flow-through on organic revenue growth, targeting businesses for 30% or better margins, with natural impact on total company margin over time.

Q: A question on the Energy segment. I'm wondering the renewable energy and the grid hardening, the degree of codependence of those 2 versus maybe some independent drivers supporting the 2 call-outs there. And if you're starting to see Richards kind of cross-sell or bilateral pull creeping in there and if the run rate you're seeing here are just really structural lift or some particular periodic stream?

A: Terrence R. Curtin explains grid hardening and renewables are independent trends, Richards broadens grid hardening in North America, with potential for repurposing products for renewable applications in the future.

Q: Terrence, maybe I'll go back to something you mentioned in the Q&A earlier, which is you still think we are in the early innings in terms of the AI opportunity. There's also an investor perception that maybe you're a bit early innings in terms of market share opportunity as well in terms of AI, particularly related to your peer company. Maybe if you can sort of highlight where -- how do you think about market share between -- that you have between hyperscalers versus the chip companies? And where do you see more opportunity on that front as we look forward?

A: Terrence R. Curtin says AI opportunity is in early innings, need to play across ecosystem with chip makers, hyperscalers, and contract manufacturers for market share opportunities.

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

A: Terrence R. Curtin says book-to-bill dragged by seasonal sequential decline in auto production, which is normal and included in guidance for double-digit growth.

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

A: Terrence R. Curtin says auto production declined, but TE grew 2 points, with Asia growth offsetting Western declines, still feeling good about 4%-6% long-term target despite current Western production pressure.

Q: Can you talk about price a little bit? And how was that in the quarter end? And just curious how you think about that going forward? Like I believe that most of your price was surcharges related to tariffs. And if we're going into like a de-escalation phase here, can price turn into like a modest headwind maybe on the top line with like better margins coming through?

A: Terrence R. Curtin says tariff impact was about 1.5% of sales, less than expected, with guide assuming similar impact in Q4, material cost being bigger driver of pricing going forward.

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

A: Terrence R. Curtin says strong momentum to continue, with cash conversion over 100% providing optionality, and investments in AI and other trends supporting growth in '26.

Q: Great. Just some early thoughts, if you may, on the passage of this one big beautiful bill and perhaps offsetting some macro pressures that may be a function of tariffs? Like any early thoughts on that? And one, if I may, again, on the cash flow. I mean you guys have talked about optionality here with strong free cash flow generation. Just some thoughts on where you would like to use that optionality as it relates to the acquisition front? And where do you -- and how is the pipeline looking for those acquisitions?

A: Terrence R. Curtin talks about global positioning and benefits from bill, Heath Mitts says pipeline for acquisitions is good, with bolt-on opportunities in Industrial business and strength of balance sheet to deploy capital.

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

A: Terrence R. Curtin says TE has been investing ahead, with CapEx up nearly 30% this year, majority in AI, and continuing to invest in capacity and product set to keep up with demand.

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

A: Heath Mitts says investments are embedded in run rate, balancing growth opportunities with investments, expecting 30% incremental flow-through and balancing trade-offs in margin trajectory