for Vehicle Tech and Mobility for Baird. We're very pleased to have TE Connectivity with us today. TE is a leading supplier of connectors and sensors serving the transportation, industrial, and communications end markets. Joining us, we have Terrence Curtin, CEO. And, the email address for this session is sessionfive@rwbaird.com. So feel free to send me any questions, and I'll try to work those in. And, with that, Terrence, if you'd like to add anything to that brief introduction-
Sure.
Feel free.
No. Thank you, Luke, for having us, and, you know, thank you for everybody participating today. And I think just I want to add a little bit to what Luke said of what we do, for those of you that aren't familiar with who TE is. You know, we are the leading global supplier of connectors in the world, electronic connectors. We also do sensors, and we're very much focused on three primary areas. First off, in the transportation area, we cover the globe around the automotive industry, benefiting both from what happens in data in the car, as well as electrified powertrains, which I'm sure you'll give me a bunch of questions on that today. Certainly also have a leading position in industrial transportation globally. And then, in industrial spaces, where we play, aerospace, medical, energy, as well as general industrial equipment.
And then the last area that we play, and the third area, is around our Communications Solutions business, which right now, what we do is the connections for the ultimate high speed, which, you know, a few years ago was cloud. Certainly, we're going to benefit from AI. And really, what we've done at TE around our portfolio and where we play is, when you think about an interconnect, where power and data need to come together, which, whether it's an electric vehicle trend, an AI trend, you typically need our product and what we do to bring that technology together. And that's where we position TE around, and I know we'll get into today, but it's really the things that we want to be focused on that drive above-market growth across the globe. You know, we are a very global business.
The majority of our business is outside the United States, and it's something when we think about where things are designed in the world, that's where we place our over 8,000 engineers to start that connection with our customers. And lastly, which I'm sure will also be a question, from Luke, you know, we still have self-improvement opportunity on the margin side. You know, just our earnings last week, we reported about 17.5% OI, and that's low 20s EBITDA, and we think we have a path to get that up closer to 20, through different contributions from our segments, but that's still a journey that's ahead of us. So with that, I'll pause, and I know you'll drill down on questions-
Yeah.
-like always.
Okay, great. Well, thanks for that, Terrence. So, why don't we just start with a couple questions on the macro? This is a conference that's leaning into the next calendar-
Yeah.
-year. You're already into your fiscal 2024. Transportation's the biggest single end-market exposure-
Sure.
-for the company. Can you just talk about key demand and LVP variables or sort of just the range of outcomes that you're looking at next year?
Sure.
Do you take a glass half full or glass half empty approach, given the current rate environment and whatnot?
I think I'll let you all decide whether it's glass half empty or glass half full. How about that? First thing is, what I would tell you, you know, we're in a slowing global economic world. So let's just... You know, that's a backdrop that we've been in, that we expect 2024 to continue to be in that. Now, I think what is unique around TE that gets us excited about 2024, in certain of our businesses, we've been through destocking this past year, where you had inventory correction going on. As global supply chains improve, we do expect that'll be behind us in early 2024. Secondly, that gets into where, you know, you talked about on transportation. You know, auto production is still below pre-pandemic peak, and we expect next year auto production to be sort of just running sideways.
We don't expect a lot out of auto production next year. Really, what we think will drive in our transportation business, where you went, Luke, really is probably 4-6 points of outperformance that we've always been consistent talking about, that really revolves around three trends in the car. Number one, the global penetration of electric vehicles, and let me come back to that. Secondly, Ethernet being put in the car, which is the data in the car. That creates content opportunities for us. And then thirdly, just the ongoing electronification, whether you're an ICE vehicle or an electric vehicle, safety features, infotainment stack, all of that, they're things that actually drive content for us. And that's why we've been able, over the past 4 years, to take our content from $60 a vehicle globally to about $80 a vehicle today.
Now, let me talk about electric vehicle, because there's a lot of questions out there about electric vehicle penetration and things like that. When you think about TE, you have to start with a view of TE is very global, and our biggest position in automotive is in Asia. So 40% of our automotive revenue come out of Asia. You know, certainly, we're big in China, leading position in Japan, as well as in Korea. And when you think about where electric vehicles occur, of the 20 million made last year, about 15 million were made in Asia. And, you know, we don't see that slowing down in Asia, and that's been a big content driver. And our leading position of where we have engineers locally designing with our customers to bring this technology to life is critical.
So as we think about electric vehicles, it's going to start with global penetration, and, you know, about 20 million are made today. We think there'll be about 25 million made on the planet next year, driven by Asia, lesser in Europe, and certainly the slowest area of growth will be, in unit growth, will be here in the United States. So I do think that's an important backdrop to have, and we don't see that, those programs slowing down with our customers. You see consumers making choices about what they want, certainly in the United States, but that's part of, any adoption curve. And we never said that auto production was just going to go, EVs going to go up to the right, and it's something that, we get excited about what's happening in EV...
The only other thing that I guess I would talk about when we think about going into 2024 and whether glass half full or empty-
Mm-hmm.
I would tell you, you know, one of the things that's been very consistent is order intake. You know, while we went through a lot of supply chain moves, our order intake is very level. It's been consistent for about three or four quarters, and that is just something that also says, as the world's working through destocking and things like that, that are creating headwinds, we also still have places like commercial aerospace we can't make enough, areas around medical devices where we play in interventional procedures, where we just have close to 20% growth. So we have a lot of nice balance in the portfolio, not just the great automotive business that we have.
What about the supply chain side of things and operations, just in terms-
Sure
... of your internal supply chain right now and your visibility into balancing price and cost-
Sure
as we roll into fiscal 2024 here.
Yeah.
Is the heavy lifting finally over at this point, would you say?
So let me take those in two different pieces for everybody. So let's talk about the supply side, and then let's talk price-
Mm
and inflation, if that's okay.
That'd be great.
So first off, on the supply side, you know, other than the aerospace market, supply chains have normalized some of the availability of material. So what we have seen, and it's why you're seeing destocking in the world, people are hitting the lead times they're publishing. Certainly, in some areas, lead times are coming back in, as supply's gotten better post-COVID. At the same time, because we are global, we continue to make sure we're regionally supplying, within region. We don't like shipping things between regions of the world, and, you know, that also helps as well. So the supply side is good other than aerospace, which is continuing. It feels sort of like where the rest of the industries were a few years ago.
It's still a supply chain that's trying to get back and meet the demand it has, and, you know, let's face it, we have about $1.3 billion of revenue in that space, and that's still an area that we still have supply chain challenges. Now, on the price cost side, you know, this past year, we benefited about 400 basis points on the top line from price, where we recovered inflation. So the whole inflation element we experienced over the past few years, you know, this past year, we, we got caught up on, you know, getting price that covered inflation. Where price goes from here is gonna be a matter of the input cost, and when you think about TE, it's, you know, certain metals, copper, gold, resins that we use actually in our products. You know, you get freight.
You know, resins and metals are still very elevated. So as long as they're elevated, and like we said on our earnings call last week, we sort of expect next year will be ±0 on price because of the input cost environment-
Mm
... that we're dealing with. So I think that'll be a key element we're gonna keep an eye on, on whether there needs to be more pricing done or actually there is, deflation occurring. But other than freight, we don't really see major deflation happening in the material side.
So why don't we switch to Transportation Solutions ?
Sure.
So you already addressed sort of just the EV backdrop.
Yeah
... that we're looking at right now in terms of growth. I'd be curious to talk about sort of the strategic considerations there. If we look at what's been-
Sure
... going on at the likes of Tesla-
Yeah
... there's been an evolution in thinking about data and
Yep
... power in terms of the actual architecture of the car, compute consolidation, part of that as well. Just what's your perspective on how evolving car design impacts connectors specifically?
They're all good for us.
In your-- Yeah.
So we actually get optimistic. So, you know, the EV side, everybody's trying to figure out what is the most optimized, you know, high-power architecture you need, from charger inlet down to the motor, how you switch power, go into a cell pack. And really, you have to realize all those modules need connections in them, but those connections are things that have to survive up to, in some cases, 800 volts in a car, well over 1,000 volts if you're in a van or a truck. So when you sit there, there's a lot of things that our teams do, and in automotive, of our 8,000 engineers, around 3,000 of our engineers are automotive, placed in Munich with BMW, in Tokyo with the Toyotas of the world, certainly in Detroit, and the West Coast with Tesla.
So when they're trying to figure out their design, our engineers are with them to say: How does this come together? Where do the connection that you need to bring this architecture together? And also, how do they make sure they manufacture it efficiently? You know, in automotive, there is a big element around the manufacturing and assembly side. So we play in all those elements. Now, as architecture changes, that creates opportunities for our engineers to lean in.
Mm-hmm.
So a lot of people talk about, hey, the power architecture of electric vehicle, but the other element is you get the data network in the vehicle, and, you know, you take companies like Tesla, they look for simplified architecture. You see other people looking at zonal architectures. What that means is you need more complex interconnects to occur. While you may simplify a harness, and we don't--we're not a harness maker, we're, we're a connector and sensor maker, you have more complex headers, and actually, what that typically means for us, our content goes up versus a simplified architecture. And even if you take a Model S Tesla is an old architecture, a Model three is a simplified architecture, and our content per vehicle is higher on a Model three than on a Model S, and that's really due to that architecture change.
Mm.
It's due to how do they help maximize the design? Certainly, they take costs out, but then the interconnects get more complex.
How should we think about TE leaning into these trends? You mentioned just the closeness to your-
Sure
... customers, you know, being on the engineering desks in Asia, in Europe-
Yep
... in Detroit. You know, how can TE benefit relative to peers and take, you know, change and make it something that, you know, one plus one equals more than two?
Well, I think a unique thing that we bring to that space and other spaces are, you know, we are a Tier Two. You know, we are not a Tier One supplier in any of the industries we serve, and therefore, when we bring interconnect solutions, we're completely agnostic to the Tier One. Our design and it is with the OEM. And, you know, in those things, when we sit there, we get to work with all these different car companies. There's elements we do a lot of customization for the car companies. There's also elements we build standard building blocks that allow scale, and that's true in every industry we serve.
When we look at it, when we have a leading position like we have in most of our businesses, that provides us an advantage where not only the customers that we get to touch every day, but other companies that are coming into the space, like you had in EVs.
Mm-hmm.
Of course, they wanna make sure they get our expertise. And, you know, we don't try to pick a winner, we try to make sure we design with everybody, and that's one of the things, especially in automotive, we aren't tied to any one OEM. You know, some platforms have a little bit more content than another. We care that cars get made, and electric vehicles continue to get penetrated, and the architectures you talked about.
Mm-hmm.
-that's what we went from. So we're pretty agnostic, when it comes to that.
Why don't we talk about the Chinese market?
Sure.
That, of course, has been a focus area recently, and you've said you're similarly exposed to both the local and multinationals there.
Sure.
Can you just expand on that dynamic, especially how you position TE to be perceived as a local company in China, and how, how that competitive backdrop is developing?
So when you sit there, you know, and you take China today, about 60% of cars that are on the road in China are Chinese-produced. You know, forty percent are multinationals anymore, and for those who've been to China, you went back, you would see, you know, very much the opposite of that 10 years ago. And what really our team has focused on, and it comes back to the resources again-
Mm-hmm.
We have 1,000 automotive engineers that are in Shanghai and Suzhou, and that we actually use to cover the whole country. So once again, we don't try to pick winners, and what we have done is our market share on a local Chinese vehicle is the same as a multinational vehicle. And certainly, when we talk about EV, with China being the largest EV market, any of the content things I've said already, if we weren't winning there, you wouldn't see the growth that we've had, and you wouldn't see that content expand.
Mm-hmm.
So in addition to the engineering touch, also, how do we manufacture? We have 5 dedicated automotive facilities in China. We're actually building a sixth in Nantong, and it's really around how do you cover them? How do you do the engineering like we do anywhere in the world? And then, that team completely focuses on the Chinese market. So it's a substantial team. It is led by Chinese. It's a business that, when I started with the company, it was $50 million. You know, this year it'll be well over $2 billion, and about 2 times the size of our North American automotive business, just in China alone. And it's from the penetration we do, and really to make sure we help bring their innovations to life, and we work with all the OEMs.
Last thing I want to touch on in transportation solutions is the margin trajectory-
Yeah
in the business. We've seen improvement and moved into sort of the mid-18 range in the back half of fiscal 2023. Is it on schedule from your point of view, from a margin standpoint, and a little ahead of schedule? And what are sort of the key levers we should be looking at into fiscal 2024 here?
So I think the first thing that you have for everybody, you know, our entitled margin, we view in transportation to be with our size and scale, to be a 20% OI, 25% EBITDA, and we're at 18.5% in that segment. I think there's a couple things that when you think about the drivers, how do we go from 18.5% to 20%? First one is, there's probably a little bit of volume we're gonna need.
Mm-hmm.
You know, probably more into the mid-80s from where we are today. Secondly, that you're gonna see is, you know, as EV scales, you know, our EV products, the high-voltage products that actually go in the powertrain, you know, are below the segment average. We've been marching that up because they were subscale, and it was an investment we put in. So as that scales, we've been moving that margin up, is important, as well. And then the last thing that you really have when we look at transportation is, you know, our commercial transportation business, you know, that market has slowed. You know, that 18.5 had that business, you know, in it. It was down 7% this past quarter due to a slowing in the global commercial transportation business.
That's something we probably need to see getting closer to neutral and troughing than being negative.
Mm-hmm.
That's a little bit of a headwind we have right now from a market mix.
Okay. Well, why don't we shift the conversation to communication solutions?
Sure.
AI has been the theme, you know, 2023.
Sure.
We're thinking about added devices. You've said TE's booked well more than $1 billion-
Yeah
in future sales at this point. Can you just talk about where you're winning? It seems like spending there has been, at least in these earlier innings, somewhat consolidated.
Yeah.
Just what's reflected in your backlog?
So a couple of things. Let's make sure we understand where TE plays here, before we get in the AI discussion, because everybody gets AI thrown at them. Let's realize, when you start with the chipset, the GPU, you typically need a socket. A socket is an interconnect. So right there, where you sort of get into the mating into-
Mm-hmm
... whether it's a board or it's a cable backplane, you have to have an interconnect there. Then, as you build out an AI cluster, all the modules and things that come together in that cluster, for that to come together, you need connectivity to make that happen, and this connectivity is very different than what we talk about data in the car. So when you talk about the connectivity we're doing today with the cloud providers, as well as how we design with the leading semi companies, it's things that can pass signals at 112 gig with no latency. If you take a car Ethernet, it's 10 meg.
Mm-hmm.
So when we talk about data, there's different things you have to solve for in this environment than you would have to do with just putting data in the car. So there's really a technical advantage. In this, we have to work with the semiconductor companies. We would get put on their reference design. Certainly, that gets built as they come out with their AI solution for those that want to adopt. But then we also work with the cloud providers, the big four of them, also to make sure as they build out their infrastructure. And when we look at TE, a few years ago, we really benefited from the cloud build-out. AI is going to be the next leg to that. So as we look into what we're already shipping, as well as our program win that you mentioned.
Mm-hmm.
-it, you know, just in the past quarter, it's up to $1.3 billion. You're going to continue to see, as we work through some destocking in our communication segment that related to COVID, you're going to see that end, then you have AI go on top of it, and I feel really good about where we position ourselves, that you're going to see that being a bigger growth driver next year.
What about the foundation for, you know, so the next leg of growth in Data and Devices in terms of-
Sure
... high-speed interconnect
Sure
As a product line? My understanding that that's really the backbone of-
That is the
What is going to drive AI? Can you just talk about the-
Sure
the franchise there?
When you look at it, you know, and it's one of the things our team did a nice job, and I'll go back to, for those of you that follow us, that you saw it in the cloud revenue. Really, what it comes into, how do you make sure you're bringing the products that to make these clusters go from the chip and build out? And that starts with the interconnect. Now, what happens is, in some cases, technology is hitting some physics points that say a printed circuit board and the copper trace on the printed circuit board will only slow it down. So you'd have interconnects. That actually gets into a cabled backplane, where you have an interconnect with a cable that's acting more like a printed circuit board, and that's the things that we do. But it starts with that interconnect-
Mm-hmm
... because in an AI application, if you have any latency or signal loss through, it's going to be the whole AI cluster will be problematic. So that's why we have to work and design with, to make sure that latency element doesn't exist. And, you know, we're working with our customers already on the next generation, which would be obviously 224 gig, is what's going to be down the road. So that is a speed bump that creates a technology difference, and certainly how our teams ramp are just as important to the people that build out these AI infrastructures.
Maybe we could double-click on channel inventories and-
Sure
... data and devices. You mentioned it briefly, but just, your current view of where inventory is in the channel, and once we clear that inventory, kind of what it means for the growth potential more broadly of this business?
Certainly. So for all of you, I think it's important when you think about TE, 80% of what we do goes directly to our customers from TE. So while we may design them with an OEM, they tell us to ship to a Tier Two, but only 20% of our business actually goes through channel partners. And what happened during COVID, if TE could not meet a lead time, channel partners benefited from, hey, filling in for the gap fill. As supply chains got better, you know, the 20% of our business that goes through our distribution partners, the Arrows, the Avnets, et cetera, you know, you've seen their stock...
They're bringing their stock down, and that destocking has been going on most of this year, and it's really, we see it in the D&D space, which is the high-speed space, appliance space, as well as industrial equipment. What we've seen in where you went, in the communication space-
Mm-hmm
... we see that coming to an end here near term. Orders have stabilized. You see inventory being worked down. So as we get into early into our 2024, you're going to get that, shipping back to normal demand to our channel partners, and then you'll get the AI element on top of it. So we feel that the bottom is in there. The only area around our channel partners that we feel there's still probably a longer place to go is where we serve industrial equipment manufacturers of the world. Very fragmented space, probably about half of our sales go through that. That's probably something, you know, probably going to be more middle of next year until that's behind us, and that started later.
And then last thing I wanted to touch on in communications is the margin trajectory-
Sure
... from here. So, you know, this is a business that I think for investors, certainly surprised to the upside.
Sure.
I don't know if it surprised the upside relative to your expectations. You know, they're currently at the lower end of the range-
Sure
this business has operated in.
Sure.
How quickly can that ramp back up to the higher end as you get channel inventory settled, you get some AI layering in, and then those sorts of things?
No, what is nice is, while I talked about margin opportunity, you know, our communication segment, it's not—cost base is really in a great spot.
Mm-hmm.
You saw it during the cloud peak. As this ramps back up, you're going to see good fall through, come down, and, you know, you'll see this segment get up as we get the revenue coming in, back up to 20%.
Let's talk about Industrial Solutions .
Sure
... the third segment. You already spoke a little bit about what we're seeing in the channel for industrial equipment-
Yep
... and that maybe there's a couple more quarters of headwinds there. Can you just talk about, from a point-of-sale standpoint, how you see underlying trends-
Sure
... in that business and what the world looks like-
Yeah
... once we get out of this channel?
Just one thing I want to do before we get there.
Mm-hmm.
Our industrial segment has four businesses in them. Three of them, excellent growth momentum, and then we have the industrial equipment one. Let me just touch on the others quick.
Sure.
Aerospace and Defense , you know, still an area where we're recovering back to pre-COVID levels. We're still sub-pre-COVID levels, especially on dual-aisle aircraft. And, you know, that's an area where you're going to continue to see growth as the airframers continue to build out. And we roughly have, on a single-aisle aircraft, a little bit less than $100,000 of content per plane. On dual-aisle, $500,000 a plane, roughly. So and dual-aisle is still very depressed. So when I think about growth trends in 2024 and beyond, you really have one part of our segment that is still in recovery mode. The other area we play in is medical devices, and in that case, you know, we just posted 20% growth. I think this is a business that you're going to continue to see high single-digit growth.
It did get impacted during COVID, because procedures went down, and we play in interventional procedures in what we do, but that's back to pre-COVID levels and certainly growing from there. Lastly, our Energy business, which really plays in energy, electrical transmission and distribution, has been growing high single digits, really around renewables, utility scale unit renewables, and with the programs we have there, I think you're going to continue to see that growth. Now, in our industrial equipment business, which is where your question went. This is the area where we grew 25% for three years, well, from a CAGR perspective, and really what we're seeing is as the supply chain improved, this is where you're seeing the de-stocking occurring with our channel partners. I think as you look forward, you know, that's gonna be around into the middle of next year.
POS, you know, their POS is still pressured.
Mm-hmm.
One of the things we look at is, what are our direct sales to the end customers in that market? Nowhere close to what the distribution channel partners are seeing in their POS, because they've got... People went to them when they couldn't get product.
So, big picture, so appreciate the overview.
Sure.
of each of the businesses here.
Yeah.
Energy, I think, is maybe one that sometimes gets forgotten about or thought as the fourth business. Can you just talk about your line of sight in that business? You've been running around double-digit growth-
Sure.
-three years running there. Just what, what's driving that fundamentally?
So, you know, our energy business is just shy of $1 billion, and one of the things, we made a pivot probably about five years ago, where our energy business, the reason it may be underappreciated or underdiscussed, was we didn't even talk about it. It was sort of a good ROIC business, low sub-GDP growth business, really around the maintenance side of T&D world of electrical infrastructure. And, you know, we did some self-help things there and improved the cost base, but then we also pivoted to say: How are we gonna change our go-to-market when it comes to utility-scale wind and solar? And that has been the element that has driven the growth, and actually, about 25% of that business unit today is through renewables.
You know, once again, how does you go from the wind and the solar area, get into the T&D network to get to where people live? You know, that's really where we excel, and that's why you've seen that growth, and that's gonna be continuing a driver of growth as we go forward from the infrastructure side.
Industrial Solutions , you know, probably the biggest opportunity set for restructuring activity-
Yeah.
and rooftops, Western versus Eastern Europe, those sorts of things. Can we just talk about, you know, how much expectation you have in terms of what restructuring can deliver?
Sure
... and maybe on a multiyear view, sort of how much restructuring is still needed versus getting to something that's maybe-
Sure
more maintenance level?
We actually just talked about it last week on our earnings call. We did a lot of heavy lifting to take a number of things offline in Europe that basically were both in our industrial and our automotive business. You know, part of it was to get to better regions of the world to make sure we weren't exporting from Europe to other parts of the world, like we did in China in automotive. Also, we get impacted by restructuring for when we do bolt-on M&A, and one of the things that's part of our capital strategy and our growth strategy is to look on bolt-on opportunities, and a lot of that comes into the industrial segment. Typically, when they come in, they typically have some cost takeout that's part of our return model.
So I think you're gonna continue to see that, but when we look at next year, you know, you're gonna see a pretty significant reduction in our restructuring expenses. You know, we announced it'll be $100 million next year.
Mm-hmm.
As those are at the tail end, you're always gonna have M&A as we bring bolt-ons in-
Right
... that we're gonna do the cost actions, and so the heavy lifting is more behind us than in front of us.
Let's talk about the balance sheet. You know, certainly, there's a perception that we're in a higher-for-longer environment right now.
Mm-hmm.
Just implications to your balance sheet and what... Especially capital allocation, how that influences your thinking around things like tuck-in M&A.
A couple of things. First off, let's start with our free cash flow model. Our free cash flow model is to approximate net income, and last year, we did 112% conversion. You know, we benefited from getting our inventory back in line, but I think the first thing you should take away is, you know, TE has a very good cash generation model. Now, when we think through that, even before we get to the balance sheet, you really have-- We typically think about two-thirds of our free cash flow really goes back to our owners between dividend and share repo, and we sort of think about a third to 40% being on bolt-on M&A.
You know, in the environment we've had, where prices on assets have gone up, I'll be honest with you, we were heavier in return to capital to shareholders because things didn't make economic sense to do. I think you're gonna probably see us get back to that two-thirds, one-third. And then lastly, just really on the balance sheet, our balance sheet is very strong. So when you think about higher for longer, we're very well positioned. We're an A-minus credit, so we have capacity actually on our balance sheet, available. So not something that is a big risk for us.
Mm-hmm. Okay, well, I think we'll go ahead and leave it there. Management, however, will be available-
Thank you
... for a 15-minute breakout session. That's gonna be in the Levante room here on 12. That starts in five minutes, and please join me in thanking Terrence for the presentation.
Thank you, everybody.