TE Connectivity plc (TEL) Earnings Call Transcript & Summary

Good morning, everyone. Thank you for coming. Thank you for getting up early. I'm Stacy Rasgon. I cover the U.S. semiconductor and semi-cap 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 to we'll have time for a Q&A at the end. So 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 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. And Terrence is going to tell us all about it. So thank you so much for coming.

Thanks, Stacy, and thank you, everybody, for learning a little bit more about TE Connectivity this morning.

And 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 overview of it. Like what do you do? What are your segments? What are your -- what kind of products are you actually selling?

So first off, being that I have Stacy here, I want to build off of what Stacy studies every day with the semiconductor space. So 2 key things when you think where you need what we do and connectivity. It's where data is going, and it's also where you have power needs. And 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 does doesn't stay in the semi. And 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. These semiconductors don't generate power by themselves. And we all know what's happening to data. We all know what's happening for the power needs that electronics drives. So when you think about the markets we're in and to your question around segments, we basically organized into 2 segments. A little bit over 50% is in transportation and then the remainder is what's in Industrial. And in Industrial, it is broad. And let me talk about Industrial first. When you think about Industrial, 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. And we are benefiting from AI. Our revenue in AI last year was around $300 million. It will be well over $700 million this year. And 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 are 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 build-out, grid hardening, but also what's happened with renewables around the world. And that's another area where the power element comes in. And then as Stacy said, we also have exposure to aerospace and defense, which is continually growing, continually moving up to the right and 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, our largest business is in automotive. And it's not just what happens in power and the powertrain and electric vehicles, it's also about data in the car. And when you think about autonomy in the car, the safety features in the car, all of that drives content increase for us, increases connectivity. And 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. And it's very important that while we all know what's going on in the Western 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 of. And it just drives content and growth increase for us while we have a slow period here. And then we also do Industrial trucks and things like that. But 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 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 within automotive, within Industrial content like...

Through cycle, we view -- we're about a 4% to 6% grower through cycle now. Many of you are going to say, what's the cycle anymore? It is different by our markets. But we do sort of view when we look at car production is a sub-GDP item. But when you look at it, we do sort of view 4% to 6% in automotive, where you asked specifically, we grow about 4% to 6% above production. So right now, production is slightly negative. We're basically going to grow at the low end of the 4% to 6% range right now this year, but we do think 4% to 6%. And I think at the enterprise, while we have different cycles going on, we think 4% to 6% through cycle. And the big mega drivers are higher speeds everywhere, certainly what happens in automotive powertrains and energy infrastructure.

Got it. What's your typical content like in a car in an EV versus an ICE, China versus U.S.

No. No. Well, it's a great question. So right now, if you look pre-COVID, we had -- used to have about $60 of content per vehicle on average around the world. We're up into the low $80s today. And that's in a world where production is down since pre-COVID. So it really shows the momentum that we've had around EV, especially in Asia because it's 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 1.5x higher than that, so it's in the low hundreds. And a full electric is 2x a gas vehicle because you have 2 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. And 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 the car used to be around 1 meg. That's going to be 10 meg, 25 meg, getting up to 100 meg for all the over-the-top updates you need to do. So we're also seeing a big content growth in data connectivity in the vehicle, which is a whole new architecture.

It sounds like content is growing more than 4% to 6%...

No. I mean, no, content is 4% to 6% above production because it's also realized it's about a $6 billion business. So it's a big number.

Got it. Okay. Got it. Who do you compete with in -- particularly in automotive, 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 have 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 has been picked with the semiconductor, the heart has been picked with the power supply. How do they want to bring that architecture to life from a connectivity perspective as well as how they want to manufacture it. And it's a very important of our sticky business model. So when we design, we're in Toyota City. We're in Shanghai, we're in the West Coast, we're in Detroit. And certainly, we mirror their supply chain. So it's a very local sticky business, and it served us well in places like China, where our China business is almost 3x the size in automotive of our U.S. business, and we're with every OEM in China.

I mean maybe that's a good segue into what we're seeing. So maybe to focus on the footprint for now, like so half of your auto business -- half of you -- half of your footprint, your manufacturing footprint is in Asia and China as well or...

Yes. Let me bring it back up to total TE. So first off, when we think about the tariff news, it's important to understand while TE has about $17 billion in revenue.

Maybe we don't have to worry about them anymore now. I don't know...

Play by play every minute. Give me a break.

And 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 what relates to the United States. Globally, 70-plus percent of what we do is manufactured locally in region. So we've always been very focused on when we engineer things, how do we make sure we're near the supply chains of our customers, not just engineering. So we are very local from a manufacturing perspective.

How many manufacturing sites do you have by the way?

We have about 120 and it's about 40 in every region. And they are lined up for the industries we serve in region. And so when you get into the tariffs, you really got to look at what's happened on our U.S. element of business, which is about $4-plus billion, which serves automotive, aerospace, medical. And in that, there's elements we do bring in more from Europe and other parts of the world. It's not much -- we don't bring much in from China. And they are the things right now we're working on, we said on our last earnings call. It's about $130 million a quarter of costs we had to do to offset. About 1/3 of that, we already were working mitigation strategies on sourcing because we have supply and working with our customers. And the other 2/3 we would mitigate through pricing. So hey, tariffs every day, it seems to change a little bit. We don't view it's kind of a material impact to our earnings at all.

Have you put any of those pricing activities into place yet or...

We have. So surcharges in areas, similar to what we did in 2017, where we had impact from this. It's a surcharge. And whatever the dollar amount is, we basically pass along dollar for dollar. So it has a little bit of margin dilution impact. But 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. So those are sort of direct impacts. It doesn't seem like it's that big. Any thoughts on indirect impacts? I mean because at least in semis, like that's kind of where the bulk of it is, like there's not a lot of direct, but I mean the indirect is like anywhere from 0 to who knows. I'm in the who knows camp, by the way, I don't know...

That makes 2 of us. I don't think when you say, how does it impact somebody's car purchasing decision, somebody's capital budget, I'm not sure I'm the best person to do that. We're running into what we see in front of us. The programs we need to win, where they're taking their architectures, also where do we help them real time on the supply chain side to say, hey, there's areas we can manufacture this different part of 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 interesting right now. What we see -- and certainly, I can only talk to what we said a month ago when we had the earnings.

Maybe you want to remind people what you did...

Yes. So what we did say in our last earnings was we continue to see stepping off last quarter, continued growth into this quarter. We're probably going to grow about 8% year-on-year organically or total with about half of that being organic. And what we were seeing is continued improvement in our order book. And I know the question you'll probably ask is, hey, how much of that was pull-in? I would tell you in what we do because where lead times are in our space, we didn't have a material impact from pull-ins.

Where are your lead times now?

Our lead times typically run 8 to 12 weeks. So they're much less than something you would have in a semiconductor. And while we talk to customers and some customers were thinking about it, with the uncertainty in the environment, we didn't see people pulling triggers. But we continue to see across the Industrial complex, a strengthening. AI, we talk about our AI guidance, and it wasn't new program wins. It was really about ramping more, ramping faster, and we're across a broad customer base. We -- aerospace and energy, continued very strong trends we already had. And the area where we actually saw an inflection of improvement, which has been an area that's been weak for a long time had been our Industrial. Because the general Industrial inventory was being worked out, a whole bunch of things were happening, and we started to see orders inflect up. We did guide, we thought it'd stay flat, but we started to see orders pick up. And in the first 3, 4 weeks before we guided of our month after quarter, we were seeing those same trends. And in auto, auto is -- Asia is strong. Western world sideways and sort of on a low base. And those trends, I don't see them changing. It's nice to see in Europe, you're seeing more hybrids being picked up again. You're seeing a little bit more bump there, but certainly a sideways environment in auto.

Yes, it does feel like at least in semis, like the Industrial down cycle was 8 quarters, 10 quarters, right, something like that. So usually, the longer it is, hopefully, the bigger the upswing, but...

Yes, there should be an upswing.

I guess we'll see. I was wondering if -- you talked about like growth -- long-term growth targets for the business overall. Can we talk a little bit like margin outlook and margin targets like in the different segments? And like what -- I'm actually -- I should know, but I actually don't know where the margins are sitting these days, and where are you versus target?

So our margins right now are a little bit from an operating margin perspective is above 19%. When we looked at it, one of the things that was important is even in a difficult auto production environment, we've been running our automotive business at 20%. And 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. And one of the things that you saw last quarter, if you watch us is our Industrial margins were up almost 200 basis points.

Was that just on revenue scale or...

It's revenue as well as the cost actions. So really, when we look forward, we still have margin improvement opportunities in this environment. We think both businesses should be running 20% plus. And I think to your point around Industrial, even auto, as volume come back with the whole level where we're running the business to, we'll get nice fall-through that, that can go up from there. So 20% plus is where we think with what we do and what we should earn is where we should be at. And over the past couple of years, while there's been different moving parts of cycles, I think the team has 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 -- the semiconductor companies, incremental gross margins and fall-through as a percentage of revenue?

It is different by segment. Our Industrial segment will be higher because of the cost actions. In our automotive business, it should be about 30%, sort of north of 25%. And certainly, it depends on where the volume is. If volume comes cranking, we're not as fixed cost as the semiconductor in their fabs. We're more of a discrete manufacturer. Yes.

Got it. That makes sense. You mentioned M&A. So there's been a fair amount of M&A. There's also been a fair amount of, I guess, divestitures and you used to have more than 2 segments, right? I mean we used to sit up here and talk about that subsea business all the time. It's no longer there. But maybe you want to talk a little bit about how M&A has actually sort of driven the strategy. And there's been quite a bit of transformation over the last.

No, it's been a lot. And I guess it also makes me realize how many years I've been doing this since you brought up Subsea. A couple of things, TE today versus 10 years ago, 50% of the businesses we're in today, we weren't in 10 years ago. And there's a whole bunch of other businesses that we divested that really weren't going to drive the value we think we can drive with our interconnect and sensors businesses. And I think we'll always be an active portfolio manager, but the heavy lift around the outs is primarily behind us. It's really about 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. And one of the things that was important as we went through the portfolio is cash conversion above 100%. We've doubled our free cash flow essentially over the past 10 years while we did all this is improving the portfolio. And we view from a capital perspective, we're going to have a balanced capital strategy. So on that free cash flow, we always target about 1/3 out to a dividend. And then we would like to do bolt-ons into what we do. Now most of those will go more into our Industrial segment than our Transportation segment. It's an area where there's lower share, more fragmentation. And even this year, we've done 2 in the energy space where bulked up our presence and connectivity that we do in energy infrastructure and hardening of the grid. entirely in the United States. And that's going to double our position here in the United States where -- and take our energy business up to about $1.5 billion total globally.

What was the name of that one?

It was Richards as well as Harger was a smaller one we did. And I think they are the types of acquisitions you should expect out of us. And we do expect to get mid-teen returns from a cash-on-cash return in year 3, and both of those do that. So I think with the cash generation model, you'll see us add on inorganically as well as the 4% to 6% we talked about organically.

Are there other areas in Industrial that you're looking like to be?

Absolutely. Absolutely. You look across Industrial, I think anywhere across the markets we play in, we look at something like DDN, it might be more technology related. Places like energy, that's a stickier, very fragmented business, be a little bit different and 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, what's the biggest piece, like what's growing fastest?

The biggest of what we do in the Industrial segment, which is about $8 billion, the big.

Within Industrial, yes.

You have our DDN business, which does AI, that's about $2 billion. Then you would come after that would be sort of general Industrial, then you would get into our Energy business and then 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 AI. So I mean, you gave some of the numbers in terms of the size.

I was wondering when you were going to get to...

Got to get to -- especially after last night, like we got to get there. So you talked about some of the numbers, and it looks like, I mean, it's growing hugely, right? $700 million. Presumably, it would be bigger...

We've said it's on a run rate to be $1 billion next year.

Yes. Yes. So I mean just what exactly do you do there? You talked at a high level, but I mean more specifically, what -- I cover NVIDIA, and everybody is always -- this is a supply chain that everybody is just like laser-focused on it. And like anybody that's in the supply chain, any little single data point just gets pulled out, blown up. And so like maybe you can give us a little bit of color about specifically what you guys are doing in this space.

Well, let's explain how we touch the customers because when you think about what we do, it's not just what the GPU and TPU players do, it's also what the whole ecosystem does. And not only do we cover the chip makers, we're also covering the DSP providers on the side from the signal chain perspective and then also the ODMs and the CM. So 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 got to cover everybody so you're covering that architecture and how it evolves. What we do there is things that we've done traditionally. It could be interconnects on the faceplate, 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 5 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'd 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, CPUs. And from that standpoint, we engage with all of them. So our breadth is across the whole ecosystem. And that's the thing that's nice about what we're driving. And 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. So certainly, the bigger opportunity for us is on the data interconnects or the signal interconnects, but also the power interconnects are important and then certainly how you make that more efficient, where does cooling come in, things we do with liquid cool busbars from a connection perspective, we do. So we're also part of the power interconnects. We're not into the complete cooling side, though. That's not where we go.

Got it. Got it. Everybody in semis has always been worried about CapEx peaks and everything. It 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. And actually, our customers are telling us to ramp faster. So I know there's always news out there that somebody might have 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. So we are not worried about it. We're investing along with them. Our CapEx this year, we're going up from $700 million to $900 million within our cash generation model, and a lot of that growth is doing 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. You play in traditional data center as well?

Absolutely. Absolutely. So I haven't even gotten a traditional data center question in a while. But certainly, what is -- what we call non-cloud and the data center side. And while early in the AI run, that was sort of slow, we've seen that pick up nicely. We have seen that pick up. We've seen the enterprise also pick up. So there are areas -- we always view AI is going to drive a lot of bump effects all the way out to the edge, which we'll benefit from. But from that standpoint, we have seen data center pick up.

Okay. Interesting. Any trends there by geography? Like everybody wonders about -- again, we'll talk more about China, but China versus rest of the world is we...

Similar to most, we cannot serve the China piece because it not only comes where you have -- where you manufacture, it's also where the IP is from. So...

Even in traditional data center, you can't serve China?

It depends who the customer is. So I would tell you it is on the high-speed interconnects, we were during the first administration blocked from selling. So from that viewpoint, 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 I'm asking for selfish reasons because I cover some of the stocks that sell into those markets as well.

Because we always play as the speeds move up, we don't think it's impaired in how you have bump downs now. Do you have cannibalization? Yes. So impaired, I think, is a strong word. There's definitely cannibalization, but then also as the AI infrastructures evolve, is going to be a key question.

Got it. Okay. Let's use that as a segue into China. And so maybe if you could just give us an overview. We've had sort of rolling waves of export controls and things over the last several, not just from Trump 1.0, but also from Biden and -- 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.

So first off, seriously, TE has been in China for 3 decades. We have 17,000 employees. We design locally...

In China?

In China. We have close to 20 factories. And when you sit there, we've always been an element of -- we design locally, we're going to manufacture locally. And while what started as supporting Western companies, we, a long time ago, said we have to win with the locals. And winning with the locals is not designing elsewhere in the world and saying, here's a product. So when you look at -- we've always had Chinese competition. I want to stress that. And so that's always been true. When we look at it, we've gotten more focused on what are the applications we play in. So 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 is right on. And certainly, there were also limitations. When you look at where we do play, and you think about TE in China, #1 is in automotive. And that is really making sure we capitalize on what is the biggest car producing country in the world. They are exporting 4 million units out of their 24 million units that they produce. And that's going to go to places like Southeast Asia. It's going to go to other parts of the world, even if it is not here. And 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. So what we do in the heavy truck side, whether that's on-road truck, ag and so forth, we do that as well. We're very strong there, very local. And then you really get into the Industrial space, where we're serving local robotic manufacturers from a connectivity perspective, designing with them on the factory automation side. And then we also support the appliance makers that are there. Since that is the largest appliance there, not a high-tech business, but a real sticky business, which we've always had Chinese competition, and we have 40% to 50% share. So there are areas that we're very targeted in that we've always been. And if we went back pre all of this, we would have been broader. But as we think through risk profile as well as where do we want to place our bets, that's where we play there. And it's been growing nicely for us across all 4.

How much business do you think you've -- I don't know if you quantified it, but how much business do you think you might have lost given all of the regulatory headwinds that we have.

In specifically the data center side, we've actually told it was back in '17, '18, '19, 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 going to place our bets going for?

So would that be a lot bigger now, too, probably.

That would be a lot bigger now.

Yes. I mean, so you talked about Chinese competition, and I hear you compete very well. Do you think the Chinese competition has gotten more robust in the wake of all of these? I worry, again, for my space, in [indiscernible] last night on the NVIDIA call, I kind of talked about this, like it might view we're sort of forcing the Chinese to be creative and engineers tend to do their best work when they're under constraints, and we're developing local ecosystems that they probably would not have developed like otherwise. Like what does the Chinese competition look like in 5 years or in 10 years when they're -- after being forced to like to exist and live and try to thrive under these kinds of new rules?

Well, first off, I would say, I'm not a semiconductor guy, so I can't talk to their -- Chinese competition has been good for a long time. We've had that. We've had to compete against them. They make good quality. Cost point is important. Speed is important. So when you sit there, if you're going to win in China, you need to hit all of those elements. And it isn't just speed and low cost. It is very good quality. And from that viewpoint, I think that only continues to accelerate. They do have very good scale. We take advantage of that scale as well from a when we use certain Chinese suppliers as sub-suppliers to serve our Chinese customers. And honestly, we got to provide value to our customers. We typically go out multigenerational road maps to make sure we're staying ahead from an innovation. But when you look there, you shouldn't have an attitude about China that is, they are decades behind, at least in what we do. They are good. And honestly, our team is very good. We have over 2,000 engineers in China that are designing locally. So it is scale. This isn't 5 design engineers. This is real scale. It's an investment we've continued to make in those markets we want to be deep and want to be local in. And from that economy standpoint, it's 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 health care? This is -- do I have this right? 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 yes.

Health care is part of that, I think...

One of the things, to your point on harsh environments was as we were going through the portfolio, harsh environments was where are you dealing with connections that are really dealing with the harshest environments possible. It may be in an AI application, you're getting things up to a signal rate, a temperature rate that these things are dealing in a harsh environment. It could be a space application. It could be something going into a body. So we do have a medical business, part of our Industrial, is about $800 million. It's where we do things that are really around things that go into the body. It serves the major device manufacturers. We only do things from a device side. We also like things that also have -- you're taking pictures inside the body, you're also doing EP type procedures from an interventional perspective. And there are things that we bring our know-how around fine wire termination sensing together. And it's a business that we would have thought never cycled during COVID, it did. We think that will be a high single-digit growth rate long term, but we had sort of a weird cycle during COVID that we would have never thought we'd have, but everybody's had those.

Yes. 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. So...

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. But otherwise, it does feel -- inventory levels feel good around the world for us. Distributors got them down. Our customers have got down. Industrial was one of those areas, things were lingering. But net-net, it feels like all those excesses in the interconnect world have been through. And 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.

Yes, yes. It's -- again, I don't want to talk about pull forward or anything anywhere. But it does feel like -- again, absent 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 and your Transportation. Can you talk a little bit more about that business?

No, it's a business that honestly, we did M&A probably a decade ago, and it's one where strategically, we got it a little wrong. We were trying to take it more into Transportation. It was a business we bought that wasn't. And 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 will run in through the end of this year. And 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 focus on in Industrial application, medical applications, selective automotive applications, they are the areas where we're focused on in that. And I think in 2026, you'll see that return to growth.

But you have the whole segment, it is still embedded within the...

Embedded within Transportation because 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 like $80 -- $80 like.

Sensor content in the car is more like $4 to $5. And that is not included in the $80.

Got it. I feel like you had targets like what went in there that was higher than that. That number seems low to me...

Just trying to get up to $10.

$10.

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 in 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 -- it sounds like it was data? Is it power? I mean...

So in an EV specifically, 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. It then goes down to a motor. There's connections all along there, also the electronics around the charging inlet. The charging inlet to a connector. Then 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. And so 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 because what you're dealing with different safety features on top of it because if somebody works on it, it could hurt them. So there's material science, there's connection. And then there's also the element of how you get to fast charging, and that creates more challenges from an engineering perspective. So 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.

Is like 100?

In some cases, it could be up to 1,000.

Wow. Okay, got it. I want to 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?

So at the TE level, price X , let's take tariffs out because that will be a surcharge. Pricing has been pretty flat. In our Industrial businesses, you typically have areas because of fragmentation, it's slightly up, maybe plus 1, plus 2. And in automotive, depending upon where material costs are, you can get productivity maybe 1 point give back on that side. So 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 0 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 is that?

Totally. So one of the things we've worked hard on is to get to cash conversion of 100% for TE.

Net income to free cash flow.

It's net income. That's just a very simple net income, free cash flow ratio. And this year, we'll be above that. And even that's with the investment I talked about with AI.

Why is that you have inventory flushing out or like?

No, inventory has come down, but it's just how we run the business is much more efficient than we did also is the portfolio that we have, and we continue to believe that, that 100% free cash flow conversion is the right element to it. And its improvements we've made across all working capital elements, capital deployment elements and 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're still only about 1.5x levered. So very comfortable from a leverage perspective.

Any thoughts about taking that higher? Or is that...

We would like from an M&A perspective. So 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. So 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. So that's a good problem to have.

So your free cash flow margins must be, what, high teens or...

It's high teens. Yes, it's about 18%.

How big was Richards, by the way, just -- revenue.

Revenue is about $400 million. It's about a 35% EBITDA business, growing low double digits.

Okay. Cool. We've got about 10 minutes left. Do you want to move to the lightning round? And again, if anybody else has questions, you can feel free to submit them, and we'll get them 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. 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. But when you look there, that still comes into you have that separate powertrain. And 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. We see another 4 million units this year. So you're going to continue to have that go up there. And 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. And that's what we like coming out and certain OEMs have. 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.

Have you guys ever given a target for like what you think EV penetration is in 5 years or in 10 years or...

Well, we've said this year, we think it's going to be another 4 million units. We sort of think you're going to continue to have a 4 million unit step up, certainly driven by Asia. And when we say that, it's not just EV, we include hybrids because we benefit from both.

It's another question here, but like it strikes somebody else -- 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 its software updates. So when you look at it, historically, we might have 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, and that's what we call it data, but it's autonomy and any software-defined vehicle gets tied into that bucket. So thanks for that.

Got it. What part of your business competes with Amphenol? And is your profitability similar where you overlap?

So twofold. We compete with them on the AI side. and primarily in the AD&M side. They are our bigger areas where we compete. And I would say our profitability is similar in those markets to them.

Got it. And there's a question on valuation. The valuation between the 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 2 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 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 certainly, one competitor we talked about and another U.S. competitor, there's 3 of us that excel and how do you move up to the speeds we're at. And going from 112 meg to 224 meg, trying to figure out 448 meg, that innovation path to make sure what we do doesn't slow down the semiconductor, that's 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 is not just about innovation. The hyperscalers want you to ramp at a pace that is like no other. And you have to come and deliver all 3. So if you have innovation and you don't have ramp speed, you're not going to win a program. If you're not covering the ecosystem and those players as that architecture, you have a gap. So there's really 3 core elements when you deal with that space that is critical. And the hyperscalers are very clear on those 3. And if you can't meet all those 3, they don't have time to work with you.

Got it. And then I'll add a question on top of that. So 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, but 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. And it is a pace that 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 we've been able to build muscle now over the past 8 years to really say, how do we make sure we're ramping at the pace they need because 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 play in the passive optical layer. I mean certain elements of the optical, we do play in. It's -- are we a full optical company? No. What's nice as speeds transition, you're going to see a combination because there's a lot of other constraints that we have to work through, power constraints, cost constraints, ramping constraints. So you're going to have a lot of things. And it's an area we'll continue to look at, but it has to be we bring something to it.

Got it. And the other part of this was, has that ever gotten the way of winning orders? Do customers prefer one-stop solutions?

No.

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. So where we pick to play and certainly, we have to compete every day like we talked about in the earlier China discussion, and we have our resources that are local. So I do think we show up as a local player. And I think it's also proven in the success that we've had.

Got it. How easy is it to swap out parts between competitors anyways, especially in automotive? It can't be that easy.

You typically have platform changes unless there's a quality issue. I mean -- so it's -- and similar, the automotive industry in China is a fast-moving pace industry. It's much faster than we have elsewhere in the world. So 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 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 it also is why you have to be focused. 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 parts? I know it's going to vary by end market probably, but like do you still sell stuff today you were selling 25 years ago?

How old are you?

Too old.

So there will be defense products that are older than us. So one of the things, if it meets the need, if it meets the quality and it's at a cost point, an engineer is not going to change something. And 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 going to change it just for changing it. So you get a stickiness in it. So it's a real blend where there's things that change constantly. You talked about how many SKUs we sell. We scale 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, and you get into some things change and some things never change. And it's sticky.

Got it. Love it. Love sticky.

That makes 2 of us.

Yes. Well, we've got a couple of minutes left. As always, I will give you your soapbox. I've got a whole room full of investors here. Why should they buy your stock?

Well, first off, I do want to thank you all again for listening today. Number one is I hope what came through is the growth levers we have. And the growth levers we have today are very different than the growth levers we had 5 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 vectors as some things have slowed. The other thing is, for those of you who have 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. We've always said we can be 20% plus. 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 5 years ago. And the last thing is the cash returns, and the cash generation power of this business is very different. 100% cash conversion, what we would return to you all if we don't see strategic options from an M&A perspective is always something you'll get from us. And I do think the stickiness about our business model is unique. So I know you're a semiconductor. We sort of have Industrial elements with technology elements, and I really think we have an element of the best of both. So I appreciate your time this morning. And hopefully, I get caught up with you all in some of the one-on-ones I have today. So thank you, everybody.

Thank you so much.