Good morning, everyone. Thank you for coming. Thank you for getting up early. I'm Stacey Rasgon. I cover the U.S. semiconductor and semicap space here at Bernstein, and it's my honor to introduce our guest today, the Chief Executive Officer of TE Connectivity, Mr. Terrence Curtin. Before I start, I want to mention, if you have questions you'd like to ask or you'd like me to ask during the presentation, there should be a link to the pigeonhole form where you can submit those. I've got an iPad up here where they'll come through. We'll have time for a Q& A at the end. TE Connectivity, I don't know if some of you may not be familiar with the company. Hundreds of thousands of different products, a pervasive spot in nearly any end market that you can imagine.
They contribute tech connection technology to a huge number of products and services that you probably interact with on your own basis every single day. They span across automotive and industrial and defense and consumer and networking and medical. Hundreds of different manufacturing sites across the world, thousands of people and billions of dollars in sales spread across a global network. Terrence is going to tell us all about it. Thank you so much for, for.
Thanks, Stacey, and thank you, everybody, for learning a little bit more about TE Connectivity this morning.
Maybe just to start there, maybe for some of the folks in the audience who might be less familiar with it, just give us a brief, brief overview of it, you know, like what, what do you do? What are your segments? What are your, what, what kind of products are you actually selling?
First off, being that I have Stacey here, I want to build off of what Stacey studies every day, with the semiconductor space. Two key things when you think where you need what we do and connectivity. It's where data's going, and it's also where you have power needs. Certainly when we talk about everything you do in semiconductor, that's creating the brain around the data, but guess what? It has to go through the whole architecture. It doesn't stay in the semi. That's where you need connectors. It's where you need the sensing technologies that we have, and we're a world leader in that, as well as where you need that electronics. You also need power coming in. You know, these semiconductors don't generate power by themselves. We all know what's happening to data.
We all know what's happening for the power needs that electronics drives. When you think about the markets we're in, and to your question around segments, we basically organized into two segments. A little bit over 50% is in transportation, and then the remainder is what's in industrial. In industrial, it is broad. You know, let me talk about industrial first. You know, when you think about industrial, you know, our largest business in our industrial business, and we have about $17 billion in revenue in total, is what we do in high speed, what does with the cloud providers. We are benefiting from AI. Our revenue in AI last year was around $300 million. It'll be well over $700 million this year. This is where we do the connections that connect GPUs together.
It is the connectivity when you think about that whole cloud network and artificial intelligence cluster. You need to have GPU to GPU connections, also things coming off the racks. They're the types of things we do to really make sure that signal integrity and that data flow really gets to where the models need to go to. Another big area that we have in our industrial segment is also energy connections. That's another business where we're benefiting from not only grid buildout, grid hardening, but also what's happened with renewables around the world. That's another area where the power element comes in. Then, as Stacey said, we also have exposure to aerospace and defense, which is continually growing, you know, continually moving up to the right. Also industrial end markets, sort of broad industrial equipment where you need connections on the factory floor and factory warehouses.
That's one that's been slow, and I'm sure you'll ask me about that. In our other segment in transportation, you know, our largest business is in automotive. It's not just what happens in power and the powertrain and electric vehicles. It's also about data in the car. When you think about autonomy in the car, the safety features in the car, all of that drives content increase for us, increases connectivity. I know when I use the word automotive, one thing that I think is critical when you leave this room is our largest business in automotive is in Asia. About 50% of our revenue in automotive is in Asia. It's very important that, you know, while we all know what's going on in the West in automotive, just last quarter, we grew 16% in Asia because we're with every OEM benefiting from EV adoption.
That is full steam ahead in Asia and also on software-defined vehicles, certainly full steam ahead of what that comes out at. It just drives content and growth increase for us while we have a slow period here. We also do industrial trucks and things like that. When you look at what we do, it really comes down to where data keeps going. AI only pushes it more out to the edge. You need connectivity. You certainly need power connections, and that's what we excel at, and then we're a world leader in them.
Do you guys have like a, like a growth algorithm or something as you—and we'll put the near term aside for a moment. I will come back to it, but like maybe more fun for you, the longer term, like how do we just think about the growth of this stuff? Like within automotive, within industrial content?
Through cycle, we view we're about a 4-6 grower through cycle now. Many of you are gonna say, "What's a cycle anymore?" It is different by our markets, but we do sort of view when we look at, you know, car production's a sub-GDP item. When you look at it, we do sort of view 4-6. In automotive, where you ask specifically, we grow about 4-6 above production.
Okay.
Right now, production's slightly negative. You know, we're basically gonna grow at the low end of the four-six range right now this year, but we do think four-six. I think at the enterprise, while we have different cycles going on, we think four-six through cycle. The big megagen drivers are higher speeds everywhere. Certainly what happens in automotive powertrains and energy infrastructure.
Yeah. Got it. What's your typical content like in a car, in an EV versus an ICE, China versus U.S.?
No, no. It is a great question. Right now, if you look pre-COVID, we used to have about $60 of content per vehicle on average around the world. We are up into the low eighties today. That is in a world where production is down since pre-COVID. It really shows the momentum that we have had around EV, especially in Asia, because it is stalled in the West. We all know that. When you take a gas vehicle up to a hybrid, up to a full EV, a gas vehicle is probably around $60 of content on average. Hybrid is one and a half times higher than that, so it is in the low hundreds. A full electric is 2x a gas vehicle because you have two powertrains.
You have the traditional architecture, you would have a 12 or 48 volt, then you're adding the electrical powertrain and totally different voltages where you have different needs. Now, as we look forward, one of the things that really has helped buffer the content is what's happening on software-defined vehicles. The data connectivity in a car used to be around one meg. That's gonna be 10 meg, 25 meg, getting up to 100 meg for all the over-the-top, updates you need to do. We are also seeing a big content growth in data connectivity in the vehicle, which is a whole new architecture.
Sounds like content's growing more than four-six. Like what?
No, I mean, no. Content is four to six above production because it's also realized it's about a $6 billion business.
Okay.
It's a big number.
Got it. Okay. Got it. Who do you compete with in, in particularly in automotive? Maybe we focus there for now.
In automotive, when you look around the world, we typically will compete against regional players. People like Yazaki will compete against companies like Aptiv, their connector division. And there's also some other local regionals, but it is very different. You need to be very local, which I know may come back to some of your current questions, but it's very important. We have to design in what we do at the engineering centers of the world. Somebody has made a decision around a semiconductor element, a power supply element, then what they do is they work on the architecture, and that's where we really excel. So the brain's been picked with the semiconductor, the heart's been picked with the power supply. How do they wanna bring that architecture to life from a connectivity perspective, as well as how they wanna manufacture it?
It is a very important part of our sticky business model. When we design, we are in Toyota City, we are in Shanghai, we are on the West Coast, we are in Detroit, and certainly we mirror their supply chain. It is a very local sticky business, and it has served us well in places like China, where, you know, our China business is almost 3x the size in automotive of our U.S. business. We are with every OEM in China.
I mean, maybe that's a good segue into what we're seeing here. Maybe to focus on the footprint for now, like half of your auto business, half of your footprint, your manufacturing footprint is in Asia and China as well, or?
Yeah. Let me bring it back up to total TE.
Yeah.
First off, when we think about the tariff news, it's important to understand, you know, while TE has about $17 billion in revenue.
Maybe we don't have to worry about them anymore now. I don't know.
Hey.
I, yeah, play by play every minute. Give me a break.
Can't keep track.
But when you look at it for TE overall, 70% of what we do is outside the United States. So it's important to realize when you think about the tariffs that have been put into place, what impacts and what relates to the United States. Globally, 70%+ of what we do is manufactured locally in region.
We have always been very focused on when we engineer things, how do we make sure we are near the supply chains of our customers, not just engineering? We are very local from a manufacturing perspective.
How many manufacturing sites do you have?
We have about 120.
Wow. Okay.
It's about 40 in every region. You know, they are lined up for the industries we serve in region. When you get into the tariffs, you really gotta look at what's happened on our U.S. element of business, which is about $4+ billion, which serves automotive, aerospace, medical. In that, you know, there's elements we do bring in more from Europe and other parts of the world. It's not much, we do not bring much in from China. They're the things right now we're working on. We said on our last earnings call, it's about $130 million a quarter of cost we had to do to offset. About a third of that, we already were working mitigation strategies on sourcing 'cause we have supply and working with our customers. The other two thirds, we would mitigate through pricing.
Hey, tariffs every day, it seems to change a little bit. We do not view it as kind of a material impact to our earnings at all.
Have you put any of those pricing activities into place yet?
We have surcharges in areas, similar to what we did in 2017 where we had impact from this. It's a surcharge.
Yeah.
You know, whatever the dollar amount is, we basically pass along dollar for dollar, so it has a little bit of a margin dilution impact. The key is working with our customers to say, how are they working their supply chain long -term, and how do we help them to get to the right answer so they can be cost competitive?
Got it. Those are sort of direct impacts. Does not seem like it is that big. Any thoughts on indirect impacts? I mean, because I, at least in semis, like that is kind of where the bulk of it is. Like that, like it is, there is not a lot of direct, but I mean, the indirect is like anywhere from zero to who knows. I am in the who knows camp, by the way. It is like, I do not know.
That makes two of us. I do not, I do not think when you say, how does it impact somebody's car purchasing decision, you know, somebody's capital budget, I am not sure I am the best person to do that. We are running to what we see in front of us. The programs we need to win, where they are taking their architectures, also where do we help them real time on the supply chain side to say, hey, there are areas we can manufacture this different part in the world and help you get around it.
Got it. Okay. What are you seeing just in general, like in the near term environment right now, beyond just the tariff noise?
No, it's, it's interesting right now. What we see, and certainly I can only talk to what we said a month ago when we did earnings.
Maybe you wanna remind people what you did say.
Yeah. What we did say in our last earnings was we continue to see, you know, stepping off the last quarter, continued growth into this quarter. We are probably gonna grow about 8% year -on -year organically, our total, with about half of that being organic. And, you know, what we were seeing is continued improvement in our order book. I know the question you'll probably ask is, hey, how much of that was pulling? I would tell you in what we do, because where lead times are in our space, we did not have a material impact from pullings.
Where are your lead times now?
Our lead times typically run eight to 12 weeks.
Okay.
They're much less than something you would have in a semiconductor. While we talked to customers and some customers were thinking about it, with the uncertainty in the environment, we did not see people pulling triggers. We continued to see across the industrial complex a strengthening. You know, AI, we talk about our AI guidance, and it was not new program wins. It was really about ramping more, ramping faster. We are across a broad customer base. We, aerospace and energy continued very strong trends we already had. The area where we actually saw an inflection of improvement, which has been an area that has been weak for a long time, had been our industrials.
Sure.
The general industrial inventory was being worked out. A whole bunch of things were happening. We started to see orders inflect up. We did guide, we thought it'd stay flat, but we started to see orders pick up. In the first three, four weeks before we guided of our month after quarter, we were seeing those same trends. In auto, auto is Asia strong, Western world sideways and sort of on a low base.
Yeah.
Those trends, I do not see them changing. It is nice to see in Europe, you are seeing more hybrids being picked up again. You are seeing a little bit more bump there. Certainly a sideways environment in auto.
Got it. Yeah. It does feel like at least in, in semis, like the industrial down cycle was eight quarters, 10 quarters, right? Something like that. Usually the longer it is, hopefully the bigger the upswing.
You know, there should be an upswing.
I guess we'll see. I was wondering if you talked about, like, growth, like long-term growth targets, like for the business overall. Can we talk a little bit of, like, margin outlook and margin targets, like in the different segments and what I, I'm actually, I should know, but I gotta actually know where the margins are sitting these days and where are you versus target?
You know, our margins right now are a little bit, from an operating margin perspective, above 19%. When we looked at it, one of the things that was important is even in a difficult auto production environment, you know, we've been running our automotive business at 20%. We always have said we had margin improvement opportunities in our industrial segment because that's where we typically bring in M & A. We had some rooftop consolidations. One of the things that you saw last quarter, if you watch us, is, you know, our industrial margins were up almost 200 basis points.
Was that just on revenue scale or?
It's revenue as well as the cost action. Really, when we look forward, we still have margin improvement opportunities in this environment. You know, we think both businesses should be running 20% +. I think to your point around industrial, even auto, as volume comebacks with the whole level of where we're running the business to, you know, we'll get nice fall through that can go up from there. 20% + is where we think with what we do and what we should earn is where we should be at. You know, over the past couple of years, while there's been different moving parts of cycles, I think the team's really done a nice job executing on the cost out actions as well as what we've been doing on delivering when the volume is there to really get good flow through on it.
Got it. Got it. Do you guys ever think about, like, incremental gross margin? This is something that semiconductor companies, incremental gross margins and fall through as a percentage of revenue?
It is different by segment. You know, our industrial segment will be higher because of the cost actions. You know, in our automotive business, it should be about 30%, you know, sort of north of 25%. You know, certainly it depends on where the volume is. If volume comes cranking, we're not as fixed cost as a semiconductor and their fabs. You know, we're more of a discreet manufacturer.
Yeah. Got it. Got it. That makes sense. You mentioned M & A. There's been a fair amount of M & A. There's also been a fair amount of, I guess, divestitures. You used to have more than two segments, right? I mean, we used to sit up here and talk about that subsea business all the time. It's no longer there. Maybe you want to talk a little bit about how M & A has actually sort of driven the strategy and, you know, there's been quite a bit of transformation over the last.
No, it's, it's been a lot. I guess it also makes me realize how many years I've been doing this with you that you brought up subsea. A couple of things.
Subsea.
TE today versus 10 years ago. 50% of the businesses we are in today we were not in 10 years ago. There is a whole bunch of other businesses that we divested that really were not going to drive the value we think we can drive with our interconnect and sensors businesses. You know, I think we will always be an active portfolio manager, but the heavy lift around the outs is primarily behind us. It is really about, you know, how do we improve the margin of this franchise and also the cash generation of this franchise that we can really play offense around this portfolio. One of the things that was important as we went through the portfolio is, hey, cash conversion above 100%. You know, we have doubled our free cash flow essentially over the past 10 years while we did all this. It is improving the portfolio.
You know, we view from a capital perspective, you know, we're gonna have a balanced capital strategy. On that free cash flow, we always target about a third out to a dividend. You know, we would like to do bolt-ons into what we do. Most of those will go more in our industrial segment than our transportation segment. It's an area where there's, you know, lower share, more fragmentation. Even this year, we've done two in the energy space where, you know, bulked up our presence in connectivity that we do in energy infrastructure and hardening of the grid entirely in the United States. You know, that's gonna double our position here in the United States and take our energy business up to about $1.5 billion total globally.
What was, what was the name of that one? It was a.
It was Richards as well as Harger was a smaller one we did. I think they're the types of acquisitions you should expect out of us. You know, we do expect to get mid-teen returns, from a cash on cash return in year three. Both of those do that. I think with the cash generation model, you'll see us add on inorganically as well as the four - six we talk about organically.
Are there other areas in industrial that you're looking like to be focused on?
Absolutely. Absolutely. You look across industrial, I think anywhere across the markets we play in, we look at, you know, in something like Digital Data Networks, it might be more technology related. Places like energy, it's, you know, that's a stickier, you know, very fragmented business, be a little bit different. Clearly aerospace as well as the industrial market, all of them, we would look at how do we add to it.
Got it. The different pieces of industrial, like how do they, at least like if you were to just like rank them by size, like what's the biggest piece? Like what's growing fastest?
Biggest of what we do in the industrial segment, which is about $8 billion. You know, the biggest.
Within industrial, yeah.
You have our DDN business, which does AI. That's about $2 billion.
Okay.
you would come after that would be sort of general industrial. You would get into our energy business. Sort of medical would be after that.
Medical. Okay. Got it. Did you do sensors or?
We do sensors. That's in our transportation segment.
Got it. Okay. Got it. Got it. Let's talk about, about AI. I mean, you gave some of the numbers in terms of the size.
I was wondering when you were gonna get to.
We gotta get. Especially after last night, like we gotta get there. You talked about some of the numbers and it looks like, I mean, it's growing hugely, right? $700 million. Presumably it'd be bigger.
We've said it's on a run rate to be a billion next year.
Yeah. Yeah. I mean, just what exactly do you do there? You talked at the high level, but I mean, more specifically, what are the kinds? You know, I cover NVIDIA and everybody's always, you know, this is a supply chain that everybody's just like laser focused on it. Like anybody that's in this supply chain, any little single data point just gets pulled out, blown up. Maybe you can give us a little bit of color about specifically what you guys are doing in this space.
Let us explain how we touch the customers. Because when you think about what we do, you know, it is not just what the GPU and TPU players do. It is also what the whole ecosystem does. And, you know, not only do we cover the chip makers, we are also covering the DSP providers on the side from the signal chain perspective, and then also the ODMs and the CMs. You know, when you think about how do you cover this space, while there are certainly companies that get a lot of noise in the middle, you gotta cover everybody. You are covering that architecture or how it evolves. What we do there is things that we have done traditionally. It could be interconnects on the face plate. It could be interconnects on the board.
When you get to AI, the element that has supersized the growth for the connector industry is also the direct connections that you have that go GPU to GPU. These are connector cartridges that can be, you know, five feet tall that are doing direct connection GPU to GPU, where in the past you would go through a board and the board would come out and then you would have a connectorization on it. And there are things, those architectures are driven by the hyperscalers. Architectures are different. Certainly some of the hyperscalers do their own GPUs, TPUs. And from that standpoint, we engage with all of them. So our breadth is across the whole ecosystem. That is the thing that is nice about what we are driving. Like you said, we are in that supply chain.
It's because what we do in the high speed, how did it jump from 112 to 224, how they're figuring out getting to 448. We're part of that discussion on the architecture side, dealing with their system architects.
Got it. Do you do anything on the power side there as well or?
We also do power side. Certainly the bigger opportunity for us is on the data interconnects or the signal interconnects, but also the power interconnects are important. Then certainly how you make that more efficient. Where does cooling come in? Things we do with liquid cool bus bars from a connection perspective we do. We are also part of the power interconnects. We are not into the complete cooling side though. That is not where we go.
Got it. Got it. You know, everybody in semis has always been worried about CapEx peaks and everything. Doesn't sound like you guys are terribly worried about AI CapEx peaking anytime soon given the growth targets that you have.
No, we're not. Actually, our customers are telling us to ramp faster. I know there's always news out there that somebody might've paused. I would tell you with the wins we have, it's how do you put in more capacity? How do you ramp faster? Working on the next gen, which is always a very important thing. We are not worried about it. You know, we're investing along with them. You know, our CapEx this year, we're going up from $700 million to $900 million within our cash generation model. A lot of that growth is to make sure for the ramps and the capacity for AI as we build it around the world to support their supply chain.
Got it. Do you play in traditional data center as well?
Absolutely. Absolutely. I have not even gotten a traditional data center
question
in a while, but certainly what is what we call non-cloud and the data center side. While early in the AI run, that was sort of slow, we have seen that pick up nicely. We have seen that pick up. We have seen the enterprise also pick up. There are areas, you know, we always view AI is going to drive a lot of bump effects all the way out to the edge, which we will benefit from. From that standpoint, we have seen data center pick up.
Okay. Interesting. Any, any trends there by geography? Like everybody wonders about, again, we'll, we'll talk more about China, but China versus the rest of the world is a highly siloed enterprise.
Similar to most, we cannot serve the China piece because it not only comes where you have IP, where you manufacture, it's also where the IP is from. So we.
Even in traditional data center, you can't serve China?
It depends who the customer is. I would tell you it is, on the high speed interconnects. We were, during the first administration, blocked from selling. From that viewpoint, you know, when we look at it, it's very much driven by the Western trends for our business. Anything we're seeing.
Got it. Do you have a point of view just long term on whether or not traditional data center is impaired by the growth? And by the, I'm asking for selfish reasons because like I cover some of the stocks that sell into those markets as well.
Because we always play as the speeds move up, you know, we do not think it is impaired in how you have bump downs. Now, do you have cannibalization? Yeah. Impaired, I think, is a strong word. There is definitely cannibalization, but then also as the AI infrastructures evolve is going to be a key question.
Got it. Okay. Let's use it as a segue into China. Maybe if you could just start, just give us an overview. We've had sort of rolling waves of export controls and things over the last several administrations, not just from Trump 1.0, but also from Biden and everything. How is just the general, your ability to do business in China, how has that evolved over the last several years in the wake of all of the regulatory headwinds and geopolitics? Yeah. You got time?
First off, seriously, TE's been in China for three decades. We have 17,000 employees. We design locally.
In China.
In China. We have close to 20 factories. And, you know, when you sit there, we've always been an element of we design locally, we're gonna manufacture locally. While what started as supporting Western companies, we, a long time ago said we have to win with the locals. Winning with the locals is not designing elsewhere in the world and saying, here's a product. When you look at it, we've always had Chinese competition. I want to stress that. That's always been true. When we look at it, we've gotten more focused on what are the applications we play in. To your question around data center and high speed and cloud and AI, that's not an area we play in. That's an area that we don't think the risk profile's right on. Certainly there were also limitations.
When you look at where we do play and you think about TE in China, number one is in automotive. And, you know, that is really making sure we capitalize on what is the biggest car producing country in the world. You know, they are exporting 4 million units out of their 24 million units that they produce. And that's gonna go to places like Southeast Asia. It's gonna go to other parts of the world, even if it is not here. And, you know, how do we support them as they do that? No different than we supported our Western companies. So that's a very important part. And that's probably over 50% of what we do in China is into the automotive industry. Also, the heavy truck side is similar.
What we do in the heavy truck side, whether that is on-road truck, ag, and so forth, we do that as well. We are very strong there, very local. It really gets into the industrial space where we are serving local robotic manufacturers from a connectivity perspective, designing with them on the factory automation side. We also support the appliance makers that are there, since that is the largest appliance there. You know, not a high tech business, but a real sticky business, which we have always had Chinese competition and we have 40%-50% share. There are areas that we are very targeted in that we have always been. You know, if we went back pre all of this, we would have been broader.
As we think through risk profile as well as where do we wanna place our bets, that's where we play there. And, you know, it's been growing nicely for us, across all four.
How much business do you think you've, if you've quantified it or not, but how much business do you think you might've lost given all of the regulatory headwinds that we've had?
In specifically the data center side, we've actually told us it was, you know, back in 2017, 2018, 2019, it was $300 million-$400 million we walked away from, not only regulation, but also proactive things to really make sure, hey, where we were gonna place our bets going forward.
Presumably that'd be a lot bigger now too, probably.
That would be a lot bigger now.
Yeah. I mean, you talked about Chinese competition and I hear you, you compete very well. Do you think that Chinese competition has gotten more robust in the wake of all of these? Like, I worry again for my space, you know, and Jensen last night on the NVIDIA call kind of talked about this. Like, it might be we're sort of forcing the Chinese to be creative, you know, and engineers tend to do their best work when they're under constraints. And, you know, we're developing local ecosystems that they probably would not have developed otherwise. What does the Chinese competition look like in five years or in 10 years, when they're, after being forced to exist and live and try to thrive under these kinds of new rules?
First off, I would say I'm not a semiconductor guy, so I'm not, I can't talk to their Chinese competition. Chinese competition has been good for a long time. You know, we've had that. We've had to compete against them. They make good quality. Cost point's important. Speed is important. If you're gonna win in China, you need to hit all of those elements. It isn't just speed and low cost. It is very good quality. From that viewpoint, I think that only continues to accelerate. They do have very good scale. We take advantage of that scale as well when we use certain Chinese suppliers as sub-suppliers to serve our Chinese customers. You know, honestly, we gotta provide value to our customers. We typically go out multi-generational roadmaps to make sure we're staying ahead from an innovation.
When you look there, you should not have an attitude about China that is, oh, they are decades behind, at least in what we do. No, they are good. And honestly, our team's very good. We have over 2,000 engineers in China that are designing locally. So it is scale. This is not five design engineers. This is real scale. It is an investment we have continued to make in those markets we want to be deep in, want to be local in. And, you know, from that economy standpoint, it has been good for us and important to our strategy.
Got it. Got it. I guess, could you talk a little bit about what you do in healthcare? This is, do I have this wrong? I seem to remember you used to talk about this. You used to talk about a broader, like push toward harsh environments. Was that a while?
You are. We have been doing this a long time, so yeah. So one.
I think healthcare is part of that, I think is.
One of the things to your point on harsh environments was as we were going through the portfolio, you know, harsh environments was where are you dealing with connections that are really dealing with the harshest environments possible? It may be, you know, in, in an AI application, you're getting things up to a signal rate, a temperature rate that these things, you know, are dealing in a harsh environment. It could be a space application. It could be something going into a body. You know, we do have a medical business. Part of our industrial is right at $800 million. It is where we do things that are really around things that go into the body. It serves the major device manufacturers. We only do things with from a device side. We also like things that also have, you know, you're taking pictures inside the body.
You're also doing EP type procedures from an interventional perspective. There are things that we bring our know-how around fine wire termination sensing together. It's a business that, you know, we would've thought never cycled during COVID. It did. We think that'll be a high single digit growth rate long term. We had sort of a weird cycle during COVID that we would've never thought we'd have. Everybody's had those.
Yeah. Have we, by the way, have we kind of worked through all of the COVID boom bust? It feels like we have. I've never quite seen a cycle like that before.
You're right. I agree with you. We haven't seen a cycle like this. Medical was the last one I would tell you we've worked through and we just got through. Otherwise, it does feel inventory levels feel good around the world for us. Distributors got them down. Our customers have got them down. Industrial was one of those areas. Things were lingering. Net, net, it feels like all those excesses in the interconnect world have been through. It's where places like industrial have been weak for a couple of years. You sort of sit there and go, it feels like it can only go up.
Yeah. Yeah. That's, it's, you know, again, I, I don't wanna talk about pull forward or anything anymore, but it does feel like I, again, apps and anything else, I could certainly start to believe that we're at that point after 10 quarters. I mean, I hope so. You mentioned sensors in your automotive or your transportation business. Can you talk a little bit more about that business?
No, it's a business that honestly, you know, we did M & A probably a decade ago, and it's one where strategically we got it a little wrong. You know, we were trying to take it more into transportation. It was a business we bought that wasn't. We've been into an area of doing some pruning work on the portfolio, improving the profitability. The profitability has been improving, but we're in the last stages of our pruning that we'll run in through the end of this year. That's one of the reasons it hasn't been growing, but it's an area that the stickiness of it and what we do there and where we focused on and, excuse me, industrial applications, medical applications, selective automotive applications, they're the areas where we're focused on in that. I think in 2026, you'll see that return to growth.
You have the whole segment. It's still embedded within the.
It's embedded within transportation 'cause some of the processes and plants are intertwined.
What's the typical like sensor content that you have in a car? I mean, you talked to like $80, $80 bucks like a.
Sensor content in a car is more like $4 - $5. And that's not included in, and that is not included in the $80.
Got it. I feel like you had targets once in there that was higher than that. That number seems low to me.
Just trying to get up to $10.
$10. Okay.
It, it's not $80 though.
Okay.
We will not be abroad to that scale like we are in the connector side. I mean, the connector side, I can honestly tell you, except where we're not allowed to sell to, we're on every car on the planet, whether it be a traditional interconnect in a low voltage environment, high voltage environment, or in a data environment. It's a pretty unique position.
I guess to build on that even, like, in an EV where like a lot of the content, exactly what is it that's driving the content? Is it, is it, it sounded like it was data. Is it power? I mean.
In an EV specifically, you know, we all know the cars we had when we grew up. Crank a window, very mechanical. What you have is a normal car just has a 12 volt or 48 volt overlay from an architecture. Whether it's an ICE engine or an electric vehicle, that carries over. When you put in an electric vehicle powertrain, you're going up to 400, 800 volts starting at a charging inlet that then goes down to a motor. There's connections all along there. Also, the electronics around the charging inlet, the charging inlet to connector. You go through and you do switching, how power switches back from the battery. There's connections there as well as there's contactors that we do.
You really have, when you take the engine out, you're putting in a completely electrical flow of power, very high voltage, completely different technology. 'Cause what you're dealing with, different safety features on top of it, because if somebody works on it, you know, it could hurt them. There is material science, there is connection, and then there is also the element of how do you get to fast charging. That creates more challenges from an engineering perspective. That whole electrical overlay for the EV, or if you have a hybrid, creates a whole new electrical overlay that benefits us from a connectivity perspective.
How many like physical parts do you have in an EV?
A lot.
It's like hundreds? Is that what we're talking about?
In some cases, it could be up to a thousand.
Wow. Okay. Got it. I wanna come back to the pricing that you talked about. So I get that is there's a surcharge. What are your typical pricing trends on this stuff? Does pricing go up for you? Is there cost downs like built into this?
At the TE level, a price X, let's take tariffs out 'cause that'll be a surcharge. Pricing's been pretty flat. You know, in our industrial businesses, you typically have, you know, areas 'cause of fragmentation, it's slightly up, maybe plus one, plus two. In automotive, depending upon where material costs are, you can get productivity, maybe a point give back on that side. Net, net at the total level, it's pretty neutral. A little bit give back on the more concentrated businesses, but in the fragmented, it's typically slightly priced up to be zero at the company level.
Got it. And now you talked a little bit about cash return targets and capital allocation. Do you have like a model for cash generation, like targets? What, what is that?
Totally. One of the things, you know, we've worked hard on is to get the cash conversion of 100% for TE.
Okay. Is it net income to free cash flow?
It's net income. It's just a very simple net income, free cash flow ratio. You know, this year we'll be above that. Even that's with the investment I talked about with AI.
Why is that? Do you have inventory flushing out or like?
No, inventory has come down, but it is just how we run the business is much more efficient than we did. It also is the portfolio that we have. We continue to believe that that 100% free cash flow conversion is the right element to it. It is improvements we have made across all working capital elements, capital deployment elements. Having a cash generation model like that just gives a lot of choices. I mean, our balance sheet is about, even with the deal we did with Richards where we took our leverage up, we are still only about 1.5 x leverage.
Oh, okay.
Very comfortable from a leverage perspective.
Any thoughts about it taking that higher or is that?
We would, if you know, like from an M&A perspective. When we did our Richards deal that we just announced, that was about $2 billion, about $1.4 billion of that we put on permanent leverage. We took it up to $1.5 billion. We will take it up if we see strategic opportunities to do that. Let's face it, we generate a lot of cash to begin with. That's a good problem to have.
So your free cash, free cash conversions must be what, high teens or?
It's high teens. Yeah. It's about 18%.
How big was Richards Manufacturing, by the way? Just revenue, revenue.
Revenue's about $400 million. It's about a 35% EBITDA business growing, you know, low double digits.
Okay. Cool. And we got about 10 minutes left. Do you wanna move to the lightning round? And again, if anybody else has questions, you can feel free to submit them and we'll get 'em up here. So if EV releases shift toward cheaper price points, more mass market, how does that change your content increase math? Originally 2x that of gas vehicles.
Actually, it stays the same. You know, it may come down a little bit, but even with what we see with what we do in China, which, let's face it, the cost point there.
Would that be comparing like sort of like, I guess, tier to tier, like same?
It is tier to tier. Sorry. No, great thing. Tier to tier. When you look there, that still comes into you have that separate powertrain. Even though there's been, we have to realize of the world's 85 million cars, about 25 million of those are electrified, whether it's EV or hybrid. You know, we see another 4 million units this year. You're gonna continue to have that go up there. Like we've always said, an element to have EV adoption is that cars need to be affordable to the average person. It can't be $100,000 EVs that will make it a very niche product. That's what we like coming out and certain OEMs have, you know, they have A and B class cars that are coming out that are electrified. Content does go up on those because you have this extra powertrain.
Got it. Have you guys ever given a target for like what, what you think EV penetration is in five years or in 10 years or?
We've said this year we think it's gonna be another 4 million units. We sort of think you're gonna continue to have a 4 million unit step up, certainly driven by Asia. When we say that, it's not just EV, we include hybrids in it because we benefit from both.
It's not a question here, but like to, to strike something else with you. Do you guys benefit from like autonomous vehicles?
Autonomous vehicle is when I talk about data in the car, you're basically putting a whole data network, ethernet network in the car so that anything can hang on it, software updates. When you look at it, you know, historically we might've had $5 due to data connectivity in the car. As we look going forward, we're seeing much more penetration options as that's coming in. You also have cars going from ECU to zonal architecture. That drives content up because that drives more complex interconnects while it simplifies the harness. All of that benefits us. That's what we, we call it data, but it's autonomy and any software-defined vehicle gets tied into that bucket. Thanks for that.
Got it. What part of your business competes with Amphenol? Is your profitability similar where you overlap?
Twofold. We compete with them on the AI side and primarily in the AD& M side. They are our bigger areas where we compete. I would say our profitability is similar in those markets as them.
Got it. So there's a question of evaluation. Evaluation between the two companies remains very wide, perhaps given your exposure to industrial. I don't know if you have a point of view on that or not. It says the valuation between the two companies remains very wide, perhaps given your exposure to industrial.
I think it's more due to exposure to automotive personally, but certainly that's for you all to decide.
Got it. What's the competitive advantage you have required to win in, to win your part in? What is the competitive advantage required to win in your part of the AI supply chain? Why is that not replicable by competitors?
First off being, it starts with the technology of what you can do on high-speed connectivity. And, you know, certainly one competitor we talked about and another US competitor, there are three of us that excel in how do you move up to the speeds we're at. And, you know, going from 112 meg - 224 meg, trying to figure out 448, that innovation path to make sure what we do does not slow down the semiconductor, that is very hard innovation work. On top of it, you need to be embedded in the ecosystem that we talked about earlier. You have to touch all the parts in that ecosystem to really make sure it happens. We do that. And then the third element that is imperative, it is not just about innovation. The hyperscalers want you to ramp at a pace that is like no other.
You have to come and deliver all three. If you have innovation and you do not have ramp speed, you are not going to win a program. If you are not covering the ecosystem and those players as that architecture, you have a gap. There are really three core elements when you deal with that space that is critical. You know, the hyperscalers are very clear on those three. If you cannot meet all those three, they do not have time to work with you.
Got it. You know, I'll add a question on top of that. You know, NVIDIA has this sort of, like, annual cadence, which is quite a bit faster than they used to go. Like, how challenging is that for you to keep up with?
It is. I mean, it is the fastest pace. Let's face it, when you're working on something that's hard and innovation and also helps drive the growth, the teams work on it. You know, it is a pace that, you know, has not been seen in the data side seriously. Our teams did a great job during cloud when the whole cloud with the hyperscalers started. Now you're into the AI and, you know, we've been able to build muscle now over the past eight years to really say, how do we make sure we're ramping at the pace they need? 'Cause everything just shifts left.
How many engineers do you have working on, in the AI space?
In that unit, we have about 500 engineers alone working on high speed, not just AI.
Got it. Got it. Within AI data center, TE does not seem to play in the optical layer. Why?
We do pay in the passive optical layer. I mean, certain elements of the optical we do play in. It's, you know, are we a full optical company? No. What's nice is, as speeds transition, you're gonna see a combination because there's a lot of other constraints that we have to work through: power constraints, cost constraints, ramping constraints. You're gonna have a lot of things. It's an area we'll continue to look at, but it has to be we bring something to it.
Got it. The other part of this was, has that ever gotten in the way of winning orders? Do customers prefer one-stop solutions?
No.
Okay. Full stop. No. Okay. Do you see pressure on your domestic Chinese customers to buy less from you and more from local competitors given rising tensions?
We have not, you know. Where we pick to play and certainly we have to compete every day like we talked about in the earlier China discussion. You know, we have our resources that are local. I do think we show up as a local player. I think it is also proven in the success that we have had.
Got it. How easy is it to swap out parts between competitors anyways, especially in automotive? Can't be that easy.
You typically have platform changes unless there's a quality issue. I mean, it is when, and similar to the automotive industry in China, it is a fast-moving pace industry. It is much faster than we have elsewhere in the world. Why would they change you out if you're doing what you're supposed to do? You'd have to get to a platform change.
Got it. Got it. Is innovation getting harder, particularly in AI? What do you need to do to stay ahead?
I think the one thing around innovation everywhere, it's just pace has accelerated everywhere. And, you know, I don't think it's harder. I think it's the pace is just accepting what the pace it's at. And that's in every industry. It's not just AI. Certainly what the hyperscalers and the AI players do are the fastest, but you see car cycles changing, you see industrial cycles changing. And that's just reality that we help our engineers work through. And, you know, it also is why do you have to be focused? You know, it's why you'll see us prune stuff, exit things, because if it's a distraction, we shouldn't be doing it.
Got it. How long is the typical life cycle of your, your parts? I know it's gonna vary by end market probably, but like, do you still sell stuff today you were selling, you know, 25 years ago?
How old are you?
Too old.
You know, there'll be defense products that are older than us. You know, one of the things, if it meets the need, if it meets the quality and, you know, it's at a cost point, an engineer's not gonna change something. Even when we have a new car platform, and I'll joke, it might be the interconnects that are on the mirrors. If the technology doesn't change, they don't need to change it. They're not gonna change it just for changing it. You get a stickiness in it. It's a real blend where there's things that change constantly. You talked about how many SKUs we sell.
We sell hundreds of thousands of SKUs because there's an element of standardization, but there's also an element of customization that creates a real stickiness that we have that I think is unique. While semiconductor is a higher tech, SKU is much more narrow. Ours is there because it's the customization we do over the semi. You get into some things change and some things never change. It is sticky.
Got it. Love it. Love sticky.
That makes two of us.
Yeah. We have got a couple of minutes left. As always, I will give you your soapbox. Got a whole room full of investors here. Why should they buy your stock?
First off, I do wanna thank you all again for listening today. Number one is I hope what came through is the growth leverage we have. The growth leverage we have today are very different than the growth leverage we had five years ago. How we positioned around the benefit we're getting from AI, certainly next-gen automotive, as well as what happens in energy. All of those are things that are creating new growth factors as some things have slowed. The other thing is, you know, for those of you who've been around us, I know, you know, we've had a margin journey and you may say, well, Terrence, you're close to finishing it. I don't think it's done. You know, we've always said we can be 20% +. We're close to that 20%.
I do think with what we've done and we've proven it over the past couple of years of how the business is operating, this is a much more resilient business than the one if you looked at us five years ago. The last thing is the cash returns and the cash generation power of this business, you know, is very different. You know, 100% cash conversion, what we would return to you all if we do not see strategic options from an M&A perspective is always something you will get from us. You know, I do think the stickiness about our business model is unique. I know you are a semiconductor. We sort of have industrial elements with technology elements. I really think we have an element of the best of both.
I appreciate your time this morning and hopefully I get caught up with y'all in some of the one-on-ones I have today. Thank you, everybody.
Thank you so much.