TE Connectivity plc ($TEL)

Perfect. Thank you, everyone, for joining us. My name is Varun Govindaraj, I'm the senior analyst at Bernstein, covering multi-industrials. We have with us today, Terrence Curtin, CEO of TE Connectivity. Terrence, thanks so much for being here today.

Yes. Thank you, and thank you all for joining us this morning to learn a little bit more about TE.

May be just to start us off. You had your investor day recently, talked a bit about the 6% to 8% through-cycle growth, could you break us down a little bit more, tell us the pieces and where all that's coming from?

Yes. So a couple of things. Back in November, we did an Investor Day and what's intriguing about that investor day [indiscernible] pull data out. Clearly, what happens in connected vehicles around the world, big growth driver for us. And then on the power side, what we do around energy connections as well as how power in the AI RAC continues to evolve to really make sure it can handle the data needs, whether that's going to 400 or 800 volt, we benefit from that. And certainly, in electric vehicles where we have a great position in Asia. So when we think about growth, it is about where those power -- data acceleration, power acceleration goes and what gives us confidence we'll grow 6% to 8% through a 5-year cycle, that's going to have some of this like we always have because of the markets we play, but it sort of shows really good outperformance due to where we position ourselves on content related to the end markets we serve. Now when you think about the markets we serve and we go back to Investor Day, things are playing out pretty much as we expected, which is pretty amazing considering really what's happened in the world over the past 6, 7 months. First off, when you think about our big markets, and I know you'll probably click down on. full steam ahead in AI and data center. And actually, our revenue momentum this year, which we thought 6 months ago would be $2 billion is closer to $2.4 billion and some of the growth targets we put out for next year, just keep on sliding to the left. So traction is just full-steam ahead, and we're going to grow about 70% in AI applications this year. Other key markets that benefit from CapEx cycle, not only AI, but what we see in the energy infrastructure. Our energy business is about 10% of the company this year. The CapEx trends that we see in North America and that power connections just continues to build and strong double-digit growth here that we really believe is going to continue. Then we have some other markets that have been strong and continue to stay strong. Clearly, defense and also what we do in commercial air, or aerospace and defense, another $2 billion of revenue, roughly, continues as March, and we built backlog. We continue to see that in our orders. And then when you get into some markets that have been weak that are picking up what's happening in automation in the factory floor and also commercial transportation, what we do in heavy truck connectivity. These 2 markets have been very weak for a couple of years. We're getting more of a cyclical pickup and you're seeing the content outperformance in those. And then lastly, an important business for automotive, the production market is the same as we said back at Investor Day. We thought it would be down slightly this year. It's down slightly this year, pretty much down slightly over the world. But an important thing we said at Investor Day is we don't expect anything magical about auto production, we don't over this 5-year period. We expect it to be flattish. But where we benefit from what happens in data getting built out in the car, EV adoption in Asia, let's be honest, that's where the driver is and we have a very strong position. And then lastly, what just happens in the electronification within the car, which is all the features we rely on, and it's going to drive content outperformance above market in a sideways auto world, which we just have to accept that's what it is. So when we go back to Investor Day, go back up to that 6% to 8% in content outperformance about what do we do versus our underlying markets drive it due to power and data. And certainly, this year, we're going to grow about $2 billion this year. And I think 1 thing that's important about that $2 billion. Yes, there's a big chunk due to where we're winning in AI, and that's going to continue to drive nice growth. But it's only about half of our $2 billion of growth this year. The other $1 billion is much broader than that, and we're going to benefit from those trends.

Got it. Super helpful. And thanks for laying that out by segment. Maybe we can dive into the one that everyone is most interested in, the data center side.

Really? Okay. I want to make sure.

Yes. I guess first question there is just a debate around copper versus optical. Could you tell us a bit about how you're thinking about that and positioning?

No. Well, a couple of things. Let's face it. The copper versus optical discussion, for those of you that are familiar with, what we do, is not a new discussion. And one of the things that we believe and we work with our customers on their next-generation architectures is you have to realize, it's going to be copper and optical. It's not a one or the other. You're going to continue to use copper as long as you can, and you will use copper when necessary. So there's an element as we work with our customers, we see those inflection points. And the other thing is not every customer has the same view. Every customer's application is different. Their architectures are different. So you see some that are pushing copper longer. You see some experimenting with optics more. The other thing that's important when you think about copper versus optics is you're going to continually see scale out when you go from switch out is very much optics already. TE does not play much in that. We play in the rack. And you're going to see much more copper being the workhorse in the RAC. You have some of the large players actually talk to that very openly. But we're also well positioned when optics does come into the RAC. With what we do in optics as well as some technology acquisitions we do, the fiber attached to the CPO out to the fiber back play, we'll benefit from that growth as that gets introduced, but that still scaling needs to be figured out. Certainly, cost point needs to be figured out. And the trade-offs our customers make all the time because optics does require more power than copper. So they're trade-offs that we are working with our customers on. We feel the growth in AI is going to continue. I know people view it's copper or optics, it's copper and optics. And you're going to see hybrid systems that do that. So it's something we feel the growth is going to continue. Certainly, you're going to get to law of large numbers. I'm not sure we're going to grow 70% every year, quite frankly, I wish I could say -- up here to say that. But there's an element is it will be $2.4 billion this year, have a really nice growth rate and be a key contributor as we go forward.

Got it. Super helpful. Any color on how different kinds of customers are sort of viewing the debate? Are you seeing certain groups leaning more copper, leaning more optical or both?

It's very different. So you have to realize when they look at it, some go through lowest cost, some are making other trade-off decisions in the architecture. And the other thing that's important for those that are moving more optical, you're probably going to need more power in the rack. About 25% of our connections that we do in our DDM business, which -- where we do AI work is power connectivity. So as you move up to an 800-volt rack, we can have 30-plus percent content increase in an 800-volt rack versus today because you're creating separate power architecture going from the board, whole new bus fares. You introduce liquid cooling, increases our content. So there's not just the data side, which is where optics goes and the typical discussion is, it's also what happened to the power architecture. And you have some customers that say, I'm not interested in 800-volt at all. You have other ones that are experimenting. And it's all how they're thinking about how they compete against each other and also some are, "Hey, I'm going to get to the lowest cost point." Some are, "I want to get to the fastest architecture." And it's very different by customer. So it's core to what we do. And it's also why it's important to understand, and we've covered this a lot at our Investor Day, the engineering intensity of how we're serving our customers to those architectural decisions, we're right next to them as they're doing it. And the other thing I would say is we're very broad across the hyperscalers. So the other thing is while that's a small unit first, we have a pretty broad position there and all our customers are growing this year, which is another positive point.

Got it. I mean, and it is a small universe that spends a lot on CapEx, so...

Definitely does.

No, no, makes sense. The other question that comes up when I talk about data centers is just supply and backlog and the ability to service that backlog. How do you sort of view that for TE. Especially with 70% order growth, it's tough to delivered, right?

Well, that was sales growth. Order growth is greater than that 70%. And one of the things our customers are doing, they are -- because these are custom programs. I guess the one thing I want to -- because of some of the memory discussion that's going on. With what we do with our customers, as they think through their architecture, these are pretty custom programs we do. So this isn't just making something that sits on a shelf we make a custom connection solution that then we actually ship into their supply chain. So from a supply side, we don't worry about that material availability of what we need to do that. We don't worry about that. Certainly, every one of these are new ramps. Something is ramping down, something is ramping up, and we've been investing ahead in both manufacturing capacity, certainly, where we've done it historically as well as China plus 1 to Southeast Asia and Mexico. And those ramps have very high expectations on them. So I don't view it as much of supply. It's just really making sure we're keeping clip to the intercept points that our customers expect us to have. And our teams are doing a good job on it. But every program, every next generation is a new ramp that we're doing.

Got it. And how do you think about the product development side of this? When you look at R&D, when you look at investment, any programs happening there on essentially these growth verticals that you're seeing?

No. When you look at it and we have invested significantly both in the manufacturing side as well as the engineering side. At TE, we very much invest by the verticals I talked to you about. We've been increasing engineering to make sure we can support the growth. Increasing capacity in the manufacturing. We've even talked to our investors about how our CapEx and probably around about 6% of sales this year and that's really to make sure we're getting ahead for the programs. And we're also doing similarly in the AI investment for our engineering teams to make sure we're supporting what was a couple of hundred million dollars of revenue years back, it's going to be well over $3 billion of revenue. And I think our team has been doing a nice job keeping up with the ramps because they're intents.

Got it. Super helpful. I think that's more or less what I have on data centers unless we get more questions...

I'm sure, it won't be my last question on AI.

Maybe we shift to the energy side and the power side. So obviously, there's so much demand right now and a lot of that is again to support data center, but more broadly, power intensity is going up -- how do you think about your market position in that space and the plan for growth going ahead?

Yes, it's a much more transitioning from AI and data center to energy. We're sort of going from concentrated customers to utility landscape that is very much trying to catch up to what was always a sub-GDP electricity growth. And we've been in the business for a long time. And 1 of the things I get really excited about is we did a lot of work to make sure how do we get focused in that business. How do we also get focused on the North American market. And really, when you look at our Energy business today, it will be about 10% of TE and 2/3 of that is around North America. It's really a North American business, and we positioned ourselves around grid hardening, certainly, grid connections. We're stronger in underground networks, and you've seen the growth, which has been pretty consistent double-digit organic growth, and then we've done some acquisitions to really bolster the portfolio. So what I feel really good about is as we go forward, I think with the energy trends where we positioned ourselves and to turn from a geography to more of a market application, about 20% of what we do in our energy business, is focused on the power connections that come into the data center.

Interesting.

So I know we talked a lot about data center and we said, "Hey, TE plays in the rack, in the data center." This actually brings us -- we get exposed to the power connections that are happening as data centers get moved and you're bringing high voltage and stepping down the medium voltage into the building. And that's something that we're benefiting from as well. So we did a great job in solar and renewables. Certainly, that's moderated with some of the policies, but we feel very good about what we've done around grid hardening with utilities, which is about 2/3 of our business and then also the 20% that we have that brings the energy into the data center, those 2 will make sure we can keep a good strong growth rate going. And it's a business that clearly I appreciate you asking about because sometimes it's sort of with the AI discussion, it sort of gets pushed to the back.

Got it. No, no, I mean, the thing is power itself is growing low double digits, right? So it's a large business and sometimes it's overshadowed by 70% growth, but totally worth talking about. I wanted to go a bit deeper into 1 of the things you said, which was bringing power into the data center. So is that components in like a solid-state transformer for 800-volt DC or...

No, what it would be, and it's a great question. There's a lot of ways that power comes in and then how power moves through a data center. When you have and you're getting into a step down, you'll have an industrial substation, you have connections in there. You also have connections that our inside, especially as data center designs are being done differently than industrial designs that you would have in a factory because the hyperscalers are saying, "Hey, what do I need for this power that's happening in the data center?" So there are typically more connections that are happening, medium-voltage connections that occur that we talk high voltage in auto. Voltage is not high voltage. This is medium voltage, much higher you're talking about kilovolts. So from that viewpoint, it's going to be the things that you would have in a traditional utility setting as you would step down. Now you're bringing it into a data center. We do not do switches and things like that, like you've talked about.

Got it. Are you seeing any pushback on the energy side -- or sorry, I'm bringing back the data centers on the data center side, just from -- I mean this this narrative about a lot of states pushing back and projects getting delayed. Are you seeing that with any of your orders in any of your customers?

We do not. We would be working when it's being designed and then we would also be getting orders after it was approved. So when you think where we play and typically, whether it's in where we serve an OEM or in the utility space, we're sort of going to be a step down. We would work with them on capacity planning, but if they don't get it approved, we'll never get an order. And you look at the orders in our business, last quarter, our orders were up 25%. You see in energy, you see in aerospace/defense, certainly in AI, you see orders getting placed out because they need the capacity getting put into place.

Got it. And the good thing there is there's no risk of orders getting canceled just because...

No. I don't believe that.

Got it. Understood. The other big question I had was, we're in this environment where a bunch of players who had capacity and had supply have done really, really well over the last couple of years just because no 1 else was able to produce products. But now we're at a point where new capacity is coming in because people are looking at the returns and they like it. When I think about TE's moat, specifically in these high-growth vertical right data centers, energy, how do we think about that? How do we sort of think about the competition per share that's inevitably going to happen over the next few weeks?

So one thing that is important that when you all think about TE, and we spent a lot of time on Investor Day, it all starts with how our engineers are co-located at the design centers. So we are not a business that creates something centrally, makes a widget and say, "Hey, world come get to us." That is not our moat. Our moat is somebody has made a decision around a semiconductor, somebody has made a decision around the power supply. Okay, how do I bring this together in the architecture, and that creates more customization than you can imagine. So I ask you when you think about interconnects, I don't want you to think about the interconnects around your devices. We don't do that. We don't do anything in consumer. I want you to think about the interconnect that's happening with a GPU trying to connect to a GPU. Somebody trying to take an architecture, saying, "Hey, I'm going to go for a low-cost version of that because I might be a hyperscaler versus somebody doing high speed." There are different trade-offs that occur. And you're not going to make change your interconnect, they have to make those -- I mean, you're not going to change your semi or your power supply. So in many ways, you get the semi is the brain, the power supply is the heart. That's where we come in to say, "How does this all come together," not only from a technology perspective, but also ramping a supply chain. And when you think about interconnects are typically things that are low-bound elements and you even think about some of these ramps we've done, it shows the scaling capability that's also on the supply chain. So you have to be technical. You have to be at their design center. And so that's a really big mode. And it's why interconnect companies, whether they're public or private, we don't all play in the same markets because our capabilities where we make those choices around design centers are very important and then how do you scale it. And that's the stickiness that really comes in. As you do that, honestly, it's a pretty -- somebody's not looking to change out an interconnect supplier when you're doing that right. It's -- there's other bigger problems that they would want to focus on than actually tinkering with that. So you could have capacity, but if you don't have that engineering at the architecture level, nobody is going to use you because you need to have that engineering touch that it's why we have 10,000 engineers. We increased them 25% over the past 5 years. It is where we've invested in, and it's all over the world at those design centers. So it's not sitting in 1 place. So -- you asked a simple question, I gave you a long answer.

No, no, I appreciate it. And I mean it's essentially a trust-heavy business, right? And the engineering matters...

Yes. Engineering definitely matters, totally matters.

Super helpful. You touched upon ACL and factory automation as well. Obviously, that's probably not been doing as well recently. Can you tell us what your outlook is and how you're thinking about it?

Yes. So this is our automation group, where the biggest part of what we do is we actually plan to the interconnects that go into factory automation that can be motors, drive. We're typically stronger in discrete applications. And it's an area, quite frankly, the past 2 years have been really malaise. Coming out of COVID, there was extra inventory. Certainly, our customers, the automation players of the world were sort of just say, I hope in 3 months, it's going to be better. And 3 months never came. But I would tell you, it clicked into a real inflection point in the past 3 to 6 months. And it's also all over the world. One of the things about TE is we do play all over the world. And in the automation side, we're seeing it in China, U.S., Europe, everywhere, you're seeing that step-up occur. And it does come back into -- these are things that drive productivity. It also goes back to things that are needed to really drive data at the edge to really get it back that the algorithms use. So one of the things when we talk data, we can't underestimate the edge opportunity we have. Let's face it. It's spread throughout TE. It can be an edge opportunity where you need more data in an aircraft. Edge opportunity, you need more automation out of the car Automation is a great one. So it's just areas that really when we think about the whole AI element how does data that you need from the edge continue to come up, and we're going to benefit from that. And it's really nice to see the momentum broadly. And you also see that in our customers that they've seen a pickup in their order books. And that's just getting started, and we're well below peak. Well below peak in that business.

I mean it's early inflection, right?

Totally. I totally agree with you. And you see it in the PMIs and the ISM things for the broader industrial.

Yes, the numbers are coming in strong...

Yes, sorry. I'm sorry.

No, no, all good, all good. So we talked about data centers. We talked about power, and we've talked about ACL now on the industrial side. When we look at margin and price cost, for those 3 segments. How does it vary? Like are you seeing more profitability driven by certain segments versus others?

Well, a couple of things. Let's talk price cost overall at TE. One of the things I think is very important because let's face it, we're in a new inflationary bump due to what's going on in the Middle East. We've dealt with tariffs. We've dealt with things that really created material inflation we're in a new material inflation, we're going out to all our customers right now to be, hey, when it comes to material, we're going to get reimbursed for it. So we're actually in the middle of price increases. So net-net, we're in a new inflation wave. We'll protect that. We typically get that as a cost recovery. There may be a little bit of timing a quarter here or there, but the teams are full-steam ahead across every business in TE, not just the industrial businesses because these are types of things that honestly, when it comes to material inflation, when you have these events, TE will not absorb. And you've even seen our prices gone positive. Our businesses overall have some variation, but it's not like 1 unit is here and everybody else is down there. So certainly, industrial, our DDM business is a little bit higher. Aerospace is always a nice profitable element. ACL has been down. So that's working its way back up. But we feel one of the things I said earlier is every one of our units, we've improved margin over the past year. So you shouldn't view there's one doing better than the other. And also in our transportation segment, that's been in a sort of sideways environment, we've been running it very well at 22% margin. So -- and both businesses are sort of equal and we feel we can continue to get good volume flow through at 30-plus percent as we go forward.

Got it. And on the margin expansion story, how much of that is your operating leverage versus structural improvements to the cost?

Well, currently, right now, it's more volume leverage. Structural improvement, yes, we have structural improvements in certain businesses, but it's a different discussion around TE than it was 3 years ago. We were doing very big roof consolidations. We were very focused on localization, which we're about 80% localized and manufacturing through supply chain around the world within regions of the world. And that's what you're seeing the benefit of today that you're getting it through the fall through. And I think we're always going to have cost opportunities. That's what a continuous improvement culture does. But the element is it's less structural other than when we do acquisitions, you'll see us have some things where we say, "Hey, part of it's a cost plan." But net-net, it's much more how we're running the company today from a volume perspective, that is what you're seeing.

Got it. Super helpful. And we will get to M&A a little bit further down. Maybe shifting gears to your transportation segment, right? You started off by saying that your forecast for auto have more or less been in line with what you talked about at Investor Day. How do you look at it going ahead from here?

So the first thing is, I think when you think about auto, we sort of view auto is going to be a flat world production-wise. But coming out here, I think there's 2 things that are very important. One thing when you think about TE and you think about auto, you have to realize over 50% of our business is in Asia. Asia is the largest volume producer in the world. I will tell you they're the technology leader in the world. And guess what, when you think about what drives content for us, whether it's an electric vehicle, certainly autonomy in a car, they're the leaders in that, too. So we feel very well positioned when you think about auto, and I know we all read Wall Street Journal and read about U.S. auto. We really feel we have a very differentiated position because our customers, and maybe we won't see them in the United States, they're moving elsewhere in the world. And when they move, we're going to benefit from that Asian position. So it is something that's very important our Asia position and the innovation they bring that also when we learn from that, we also make us more competitive in Europe and North America because of our scale there. The second thing is we don't assume much about production. And I know you mentioned it, I mentioned it. But when you think about how we drive growth above production, it's into 3 pillars that are very evenly balanced. It's electric vehicle penetration in the world, but most of that's going to be in Asia, and that's really, hey, Asia is going to drive 3 million or 4 million units of EV increased penetration this year. It's also around the data and the autonomy Ethernet rings you need in a car as you move up different levels, Level 3, Level 4 in a car, that's a completely different architecture. And then the third element is what happens as you change the electronification in the car. That can be a 48-volt architecture; safety systems, any comfort systems that happen. Any time you're adding that, you're adding electronics -- when you add electronics unique activity. And that can even be zonal architecture, which increases content for us. So I'd like to talk more about those things in auto production because auto production is lackluster, it's sideways, and we expect it to be.

Got it. But essentially, multiple trends that sit on top of that auto production...

And that's why we think the 4% to 6% that it's one thing we didn't change during Investor Day as we increased our growth rate, really that growth rate increase was out of our Industrial segment, but we feel very confident we can drive the 4% to 6% due to those trends.

Got it. It makes a ton of sense. When we look at content for TE in internal combustion engine vehicle versus an electric vehicle, how different is it?

It's very different. It's close to 2x. When you sit there and I think building on the architecture discussion we had this morning, when you take ICE vehicle, we don't have anything when somebody puts a fuel -- petrol into the engine. A charger inlets a connector. It has electronics in it, how that works in the whole system. You take that power down. Certainly, you're going to the motors. You're actually switching back powers to go to the battery pack. All of that creates content opportunity for us that otherwise you don't really have a lot other than some ECUs that are lower content in a combustion engine. So as that moves, you get like a 2x increase over a combustion engine on the ICE side -- I mean EV versus ICE, sorry.

Got it. Wow, that's quite...

And that's what drives it. And certainly, Asia is the driver of it and our customers, it's really good the momentum we have with them in China.

And maybe a double click on China, in particular, Obviously, a fast-growing market, EV penetration is super high. How do you think about local competition there? Are you seeing any trends? And frankly, local customers as well, just because you have so many people coming in.

Well, the first thing I think is also important, and I'm glad you asked the question was when you think about China, our market share with the locals is the same as the multinationals. And I know it's not lost so many those of you that have some coverage where people have auto, people typically say, "Oh, it's hard to do business with." We're very localized there. Are you running at their pace? You're talking 6, 12 months car design cycles. If you want to live in a Western world of car design cycles, you're not going to win in China. Are you bringing them innovation? They're spending models. They want innovation in every cycle. And we work actually on 3 generations out. And we know like, hey, if we worry about competitor, we drop the next generation down and work with our customers on how do we get that in. So we always say we're pretty much on every car in the world that we're allowed to be on. The same holds true in China. The other thing that you would -- I would also be very honest, our content in China is higher than our content at TE overall. So it's actually proof there between what happens in EV. They are also doing a great job on the data side. They typically, as they put autonomous rings in, they're actually or Ethernet connectivity in, they're putting it into all vehicles. They're not just putting it in the high-end, and we shared that during Investor Day a little bit of, hey, how much content we have and those that blow it through all, you could have $50 to $70 of content just on data alone a vehicle of what we do if that goes through all the platforms.

Got it. And outside of China for the auto space, are you seeing any other growth levers? Any other parts of the world that are interesting?

Well, those trends are different. So when you think about electrification of the powertrain, certainly Asia drives that. data is across all 3 regions. Data connectivity happens in all 3, and we're seeing really nice growth there. And it's actually helped cover some of -- where you have softness in EV in North America and then electronification is across the world, which is where that electronics suite in the car just continues to get bigger.

Got it. So great. It sounds like it's a great TAM and see on TAM and essentially...

TAM that's growing. And automotive is a scaled business. So -- and we have the scale, which is what we like.

Yes, yes. There we go. Oil prices have been super elevated for a while now. Are you seeing any of that trickle into the EV outlook for the U.S. I know it's a much longer development cycle, but just curious to see if you see any leading investors, people -- lading indicators or people willing to invest?

So twofold. Let's take it from -- let's just take it from a Western view. We've actually seen EV production actually pick up in Europe. So we've actually seen that happen. You actually have seen the European OEMs. Certainly, they have the China has like sub-10% share in Europe. But you've actually seen them come out with vehicles that are at much better price points and you've actually seen for the first time in 3 or 4 years, EV trends pick up. Alternately, North America, North America is still in that churn. You've seen the big announcements by the big 3. They're trying to get old programs they were invested in. You've seen the write-offs. I think they're still trying to get their sea legs of where they play. And North America was always going to be the lowest penetration of EV that we ever in the world. It actually being 1 million to 2 million units out of 16 million. It could help growth. It's not going to be the primary growth for TE. There's a lot of things around structurals, incentives and so forth that would need to be worked out to really get it to kick in high.

Got it. So the expectation that this is not necessarily a growth market is largely baked into guidance baked into everything that you've talked about?

Our 4% to 6%, it's global. Certainly, Asia is going to be at the high end of the 4% to 6%, if not ahead. And then you sort of have Europe and North America be sort of at the lower end of that 4% to 6% that comes up to the big 4% to 6% at TE.

Got it. No, no, super helpful. And then when you think about geopolitics and U.S.-China relations, has that played any impact on your China business outlook or has it all been okay?

No, it hasn't. And one of the things is it's also important to all understand where do we play in China, while we're a global business? When we're in China, it's really automotive and heavy truck is our leading positions in China. Where we play in factory automation is very important. So you get those 3. And then the last part of where we play in China is really where our hyperscale customers still have supply chain there. Our customers for that business is really the hyperscalers, but they still use the Taiwanese Chinese supply chains as they bring their equipment together. So that's the last element, but it's more of a back-end support of our customers. We don't service local AI or data center market customers in China. So they are the markets when you look at TE, that's how we play to win, and we're very localized. In China, we're probably 90% localized around all the supply chain that we need to serve that market. It's been a conscious choice. So geopolitics, we watch, we monitor. There are some markets we aren't in because of geopolitics because we don't want the risk. But the markets we're in, we feel we can fully compete in and we're winning locally.

Got it. And I mean, clearly, the localization strategy is working, right? It insulates you from a lot of it.

It's key. It's absolutely essential in the world that we're in where nationalism pops up.

Got it. A bit more on auto. So the sector is notorious for just being very, very hard negotiators. You talked about price cost for the overall business. Is the commentary any different for the auto sector?

No, it's not. I mean we're having price discussions in auto. Now the one thing I would say is different in auto. In auto, around metals and stuff, we typically have automatic riders already. But when you get into resins and plastics, that's where we're having price discussions. Certainly, they're hard negotiators. I don't think any of our customers are just charge me whatever you want, but they're also feeling it all around them. So net-net, we're talking to our auto customers about pricing and what's going on from the oil complex. They understand what it is to move things around the planet. And there's also opportunity to say, how do we solve this together from, is there a better way that this should be positioned for the next 5 years versus how we did it for the past 10. And that also creates some value-add ideas between us and our customers that we always look at, and it helps deepen our relationship.

Sure. And I will say just the fact that oil has been so high for so long, longer than people expected, there does seem to be like a willingness even from the customer side to negotiate because they're negotiating with their customers as well, right, so it kind of flows down the tier.

Exactly. Yes. And they're feeling in a lot of sides. The other points in the electronic supply chain. Certainly, people are doing price increases due to supply and demand. But net-net, there are things that we feel very good we'll be able to offset the increased inflation.

Got it. Super helpful. Last question on the auto side. So we've talked a lot about passenger. Thoughts on commercial. I mean, obviously, it's not been that great business recently.

No. First off, it's a great business. It's a great business. And it's -- for us, it's our highest market share business in all the TE. So it is a great business. And the other thing that we really like about our industrial transportation business is, it's even in all 3 regions. It is strong in Asia, it's strong in Europe, it's strong in North America. And while it's been a tougher market globally, honestly, our strength outside the United States has been covering real weakness here in the United States. And when we talk heavy drug, it's on-road heavy truck, it's ag equipment, it's mining equipment. So anything sort of heavy off-road. And ironically, similarly to how I talked about our automation business, this is another business that is turning, you're seeing actually supply chain to be in prime and the build happening in North America has been getting better. So it's 1 of those points we've been waiting for -- that has actually been picking up and we're getting the benefit of our position. And you can see the content outperformance. Globally, we're probably at a 2% truck build in that definition of how I laid out. We grew double digits. And I think you're going to continue to see that outperformance as that's moving forward. And the trends are the same. When we talk auto, we talk electrification. Just to be honest with you, in China, if you get the last mile delivery, it's all electric vehicles. Europe is up to 3% to 4% of their truck fleet being electrified. Data in a truck is very important. And then certainly, all the other electronics that are needed for logging efficiency. If it's saying diesel all the EPA electronics that are needed for emissions, all benefit us. So it's a business close to $2 billion. I know I've used a $2 billion a lot, but it's a business that actually is starting to get the cyclical uptick.

Got it. And I guess maybe shifting gears a little bit to the -- so we talked about industrial, we've talked about automotive, the next big chunk was just financial strategy and capital return. Maybe a quick overview of how you're thinking about it? I know 2/3 of cash was essentially designated for deployment, buybacks, M&A. Has the story changed there from Investor Day, any commentary?

I think the first thing before we talk about capital deployment is how do we feel about the capital we generate? So I know your question was a little bit different. One of the things that I think you can expect out of TE is that we're going to be running around 100% of free cash flow even with the conversion, even with some of the increased investments we're making primarily into DDN as well as in energy because we are expanding capacity in our energy business, we have 2 expansions that are happening here in North America to support the energy market, which is extremely strong free cash flow. And then how do we think about using it? The first one, I'm going to go the reverse order of you. When we think about after first investments in the business, but then it comes back to about 1/3 of free cash flow, comes back to our owners as dividends. We just took our dividend up 10% a few months ago, and that will continue to build as we build free cash flow. And then the other 2/3 is really whether that's return of capital through share buyback or do we see bolt-on opportunities. And when we think about opportunities, those opportunities are primarily going to be in our Industrial segment. I mean, on Investor Day, we do view our Industrial segment is going to be the growth segment for all the things we talked about today. And net-net, that's where I think you'll see the M&A. Still a space that's very fragmented. It's a space that we actually see opportunities to deploy capital in. You've seen us do that in the energy business. You've seen us do it in the ACL business. I think it will always be things that are core to what we do. I don't see us adding a new leg, and that's why we used the word bolt-on. But I don't want people to also hear the word bolt-on and they say, well, is that small? That doesn't mean it's small. Like Richards last year we did was $2.3 billion, and it's what we did. So -- and we have a very strong cash model that we can support that if we're doing $2 billion deals every once in a while. Most of them will be smaller than that just to the fragmentation, but we see that M&A will continue to be an accent to our growth rate on the organic engine that we laid out at Investor Day.

Got it. And to go a bit deeper into the M&A piece. How do you think about integration? A lot of times, people buy a company and then the integration gets botched and it's really hard. But you clearly are doing this regularly and it seems to be a system. Can you talk us through that?

It starts with what is the strategy and how you create value. Sometimes, if it's a pure margin play, it gets consolidated in. It is a cost play, and we've had some of those in ACL, which it is, we're taking out factories, taking out excess capacity, we may be actually helping them get global to our localization. Those types of things come in. Other ones like Richard we were very much of, hey, we want to keep that on the side because they're in the middle of massive ramps. We can't distract them or we could impact their growth. So we keep that a little bit to the side, and we actually are helping them on the capacity expansion, which being a family-owned business, that probably wasn't natural reform. So that's where we -- it's a continuum along. It starts with where your strategy is to create value and return for the owners as well as how do we touch the customers and don't screw up customer touch. So we have a couple of arc types that we go through. But it's on the whole continuum based upon the strategy.

Got it. And then again, right, so there's no one size fits all. You're kind of playing it based on the company and that's why it works.

Totally.

When you're looking at -- so what makes an attractive target? Is it purely synergies? Is it growth? How -- what's the framework to evaluate an opportunity? We talked about the framework to integrate.

Well, the answer is yes. The answer is yes. And we talked about it, our CFO talked about it. First off, is it aligned with our strategy? I think you'll see anything we buy and have bought is completely aligned with what we talked about today. Secondly, how are we going to add value to it? Is it more growth? Is it more cost? Also in our case, we do have specific tax attributes that we can create value with and that we've talked to our investors about. So it is about that. We typically have a mid-teen return, have a 5-year horizon. So we got to create value. We are pretty disciplined on that. But we will do some technology investments at time to really make sure we're building our road maps out that support our organic. But net-net, it's been pretty tried, true to how we think about it, and it starts through those elements and are we going to sit there and have a better business from our business unit focus in front of the customer with financial returns or then we should be giving the money back to the shareholders through share repurchase.

Sure. that's on the acquisition side, right? And naturally, with that strategy, you'll also be looking at parts of the business that may not be core for spin-offs and divestitures. Is there any part of the business that you're sort of viewing right now or are you comfortable with where it sits today?

We always look at, hey, if there's an asset that could create value for owners, we would have to consider it. But we do like our portfolio. We think even with the growth rate we laid out at Investor Day, it's really about, do we have businesses that allow us to play [indiscernible] we'd be evaluating if there's something that creates value for owners.

Got it. Super helpful context. A couple of questions that came in from the audience, I wanted to run by you. One was just how are you using AI in your business, right? Is that playing a role today in terms of R&D, anywhere else?

Yes. First of all, thank you for the question. How we use it internally? It's interesting. We get so many questions on how it's the customer that you did. We do. We've actually built an internal cloud. We actually focus on manufacturing and engineering. We believe we can be a fast follower when it comes to sort of back office things as other people do that, but it's really how does it deepen our moat? So it's mainly in the engineering, and it's not around reducing people. It's around how do we make our engineers be more efficient in regard to speed and more throughput. So -- and that's how we're working it. We create 500,000 different SKUs. How do we help our engineers get more velocity on that and also make sure engineers don't create what we've already created. They like to tinker. And how does that come out in front of the customer? So it's an area that we have targets that actually drive efficiency. And what I'm proud of is how our teams are really experimenting. I think like most companies, we really like what we're working on, which are the ones that we are really going to get to breakthrough scale. I think we're like a lot of others in trying to work through that. But investing in it, both from our internal teams as well as external investment on the tools that are needed to really experiment with to see which ones are going to be our tools for the long term.

Got it. And I mean the interesting thing here is there are just so many tools right now. So you're not just -- you're spoiled for choice at this point, right? Price it up and see what works.

The biggest thing with the tools are every employee wants a different tool. And let's face it, that's -- we have to make choices we pick some tools over others, and every employee wants their own little pet...

Project, right?

Tool.

Yes. There we go. We have about 1.5 minutes left. I just want to hand it over to you, Terrence. Any other last messages you want to leave with folks?

Just the last message that I want to leave, I want to go back to what I started at the beginning. One of the things that we get very excited about is TE's growth vectors are very different than where they were and even to increase the growth rate in a very sideways auto world, we're very confident about, and actually, you see it this year. You see our growth rate being double digit this year, actually above. But the breadth of the growth is really what gets excited around that data and power elements that I ask not to lose sight on. So it's not only the growth element. But certainly, the other element because we talked for a long time about we were self-help on the margin side. We're not done on margin. Now it may not be a restructuring program and structural that way like we talked about in the past. But our margin can continually move up and how we operate the business from a free cash flow is going to create opportunities for return to you or increasing the growth rate from M&A. So I actually feel the model that we've been working on and driving. You're seeing this year in a world that has a lot of moving parts in -- and I think our teams are doing a really good job managing it while also delivering the growth. So I appreciate you all being here this morning. I know it's early, first meeting, and I know I'll see some of you throughout the day today. So thank you for spending time with us and learning more about TE. Thank you, everybody.

Perfect. Thank you so much, Terrence.

Thank you, Varun.