TE Connectivity Ltd. (NYSE:TEL) Q1 2024 Earnings Call Transcript
TE Connectivity Ltd. (NYSE:TEL) Q1 2024 Earnings Call Transcript January 24, 2024
TE Connectivity Ltd. beats earnings expectations. Reported EPS is $5.76, expectations were $1.72. TE Connectivity Ltd. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the TE Connectivity First Quarter Results Call for Fiscal Year 2024. At this time, all lines are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to our host, Vice President of Investor Relations, Sujal Shah. Please go ahead.
Sujal Shah: Good morning, and thank you for joining our conference call to discuss TE Connectivity's Q1 2024 results and outlook for our second quarter. With me today are Chief Executive Officer, Terrence Curtin; and Chief Financial Officer, Heath Mitts. During this call, we will be providing certain forward-looking information, and we ask you to review the forward-looking cautionary statements included in today's press release. In addition, we will use certain non-GAAP measures in our discussion this morning, and we ask you to review the sections of our press release and the accompanying slide presentation that address the use of these items. The press release and related tables, along with the slide presentation, can be found on the Investor Relations portion of our website te.com.
Finally, during the Q&A portion of today's call, due to the number of participants, we're asking everyone to limit themselves to one question and you may rejoin the queue if you have a second question. Now let me turn the call over to Terrence for opening comments.
Terrence R. Curtin: Thank you, Sujal, and we appreciate everybody joining us today. And I do also want to wish everybody a Happy New Year. As I normally like to do before we get into the slides, I do want to take a moment to discuss our performance this quarter along with what we're seeing in our markets versus our last call 90 days ago. We continue to be in a slow global economic environment. Against this backdrop, the performance of our markets is largely consistent with our expectations and it resulted in our first quarter sales being in-line with our guidance of flat revenue growth. Our Transportation segment once again grew year-over-year driven by content growth, and this offset the declines that we saw in our Industrial and Communications segments.
Our team’s execution was strong in the quarter with 20% year-over-year adjusted earnings per share growth, and this was driven entirely by adjusted operating margin expansion to 19%, and this was on flat sales. This margin performance demonstrates we're successfully executing on a number of structural margin improvement levers across our segments. Those levers drove margin expansion through the second half of last year and are resulting in the further step-up of margin performance, particularly in our Transportation segment. We expect to deliver strong margin expansion this year that will be driven by our Transportation and Communication segments based on what we're currently seeing in our markets. And just as important is the quality of our earnings and you see this in our record first quarter free cash flow of $570 million which builds on the strong cash performance from last year and that we expect will continue.
During the quarter, we deployed approximately $1 billion of capital that included returning $600 million to shareholders as well as $350 million to acquire Schaffner. And Schaffner expands our product portfolio and factory automation. Our cash generation model continues to give us both confidence and opportunities to return capital to shareholders, while supporting ongoing bolt-on M&A activities. So, let me now share what we're seeing in our market since our call 90 days ago. As I mentioned already, on an overall basis, markets are playing out as we expected, and we also had orders growth of 4% year-over-year and this was across all three segments. We are seeing sales growth across the majority of our businesses, but we do have a few business units that are continuing to be impacted by inventory destocking by our customers and we'll highlight these during the call.
Our view of the Transportation end markets remain unchanged from our prior view with global auto production expected to grow slightly this year. And while we're seeing some puts and takes in production by region, China production and EV adoption is stronger, and this is offsetting some weakness in Europe and in North America. In our Industrial Solutions segment, three out of our four businesses continue to have growth momentum, and we expect to continue to see sequential growth in each of these three businesses as we go forward. You see our strong positioning in renewable energy in both solar and wind applications. Commercial air sales continue to grow as production increases for both single and twin aisle platforms, and our medical business is benefiting from increases in interventional procedures.
When you compare versus 90 days ago, the one market where we've seen incremental weakness is in our Industrial Equipment business. Destocking began a few quarters ago in this business and we now expect it to continue into the second half of this fiscal year. And lastly in our Communication segment, we continue to see destocking but what's really nice it's now just occurring in pockets. And we do expect to see growth in the second half of this year in our Communications segment driven by our wins in artificial intelligence programs. As we look forward, our long-term value creation model remains unchanged and is centered around three pillars. The first is our portfolio is strategically positioned around secular growth trends including growth in electric vehicles, adoption of renewable energy and applications for cloud and artificial intelligence, just to name a few.
Second, we have operational levers to enable margin expansion despite a slow economic environment. The drivers encompass strong operational execution including footprint consolidation, portfolio optimization benefits and price actions that we implemented to offset higher input costs. And third, we've established a strong cash generation model to return capital to shareholders while investing in bolt-on M&A opportunities. So with that as an overview, let me get into the slides and I'd ask you to turn to slide three, and I'll discuss some of the additional highlights for the first quarter and our outlook for the second quarter and then Heath will provide more details in his section. Our first quarter sales were 3.83 billion, which was in-line with our guidance as I mentioned.
In Transportation, we saw 5% organic growth driven by content expansion in our auto business. In Industrial, we saw growth in Aerospace, Defense and Marine, Medical and Energy, which was more than offset by weakness I talked about in industrial equipment. And finally, in Communications, it was down as we expected, but we are well-positioned for growth in the second half driven by AI applications. Adjusted earnings per share was ahead of our guidance at a $1.84 and this was up 20% versus the prior year. Adjusted operating margins were 19% and these were up 290 basis points year-over-year driven by strong operational performance, and the margin performance was the driver of our EPS being ahead of guidance. As we look forward to the second quarter, we're expecting our second quarter sales to increase over the first quarter to $3.95 billion with the sequential growth being driven by the Industrial segment partially offset by a slight decline in Transportation.
Adjusted earnings per share is expected to be around a $1.82 and this will be up 10% year-over-year in the second quarter with approximately 200 basis points of adjusted operating margin expansion versus the prior year. So to move away from the financials for a second, and before I get into orders, I do want to highlight that we were pleased to be included in the Dow Jones Sustainability Index this quarter for the 12th consecutive year. This designation continues to demonstrate TE's dedication to sustainable business practices that do provide value to our customers and that they expect and are aligned with our commitment to our owners. So now let's talk about orders and I'd ask you to turn to slide four. At the total company level, we had orders of $3.8 billion and this was up 4% year-over-year and consistent with our expectations.
And what was really nice, this is the first time since after the COVID crisis in 2001 we've seen all three segments have year-over-year order growth. We continue to see stability in our overall order levels with year-over-year growth in each of the segments, and with backlog remaining at near record levels, and this gives us confidence in our second quarter outlook. Transportation orders grew 4% year-over-year and reflects stability in overall global vehicle production. In the first quarter auto production came in a little bit over 22 million units and we saw stronger production in China that offset some of the weakness in Europe and North America. Going forward we expect global auto production to be roughly 21 million units per quarter as we move through this fiscal year.
In our Industrial segment, we saw growth in orders both year-over-year as well as sequentially. The order strength is driven by our AD&M Medical and Energy businesses, and we saw the weakness in Industrial Equipment end markets and this was across all regions of the world. And in our Communication segment, our orders grew 3% year-over-year, and like I said earlier, we do see destocking by our customers now only occurring in pockets in certain applications. So with that as an orders overview, let me now get into the year-over-year segment results that we saw in the quarter and that's on slides five through seven of your slide deck, and you can see the details on those slides. So starting with Transportation, overall the segment had sales growth and it was up 5% organically year-over-year driven by our auto business.
Our auto business grew 8% organically with 13% growth in Asia and 7% growth in Europe and this more than offset a decline in North America. Our performance continues to be driven by content growth from our leading global position in electric vehicles as well as electronification trends within the vehicle. Our global outlook for electric vehicle growth is unchanged, and it's important to note that over two-thirds of EV production will occur in Asia. We are very well-positioned to capitalize on this growth due to our strong content and share in local Chinese OEM platforms that is driven by our innovation. Overall, our growth will continue to be driven by content outperformance that leverages our leading global position in the auto market. In the Commercial, Transportation business, we saw 1% organic sales growth and this was driven by Asia and it was partially offset by declines here in North America.
And in our Sensors business about half of the sales decline that you see on the slide was driven by the portfolio optimization efforts we've been talking to you about, where we're continually to organically exit lower margin and lower growth products. The rest of the decline in Sensors was driven by weakness in sensor applications and industrial markets, partially offset by growth in automotive applications. For the Transportation segment, adjusted operating margins were nearly 21%. We expect Transportation segment margins to run approximately at our 20% target margins for the rest of this year. As you know, we've been driving several improvement and in our operations. We have been able to optimize our factory footprint through our restructuring programs and are getting cost savings from these actions.
We are also seeing improvement in our EV product margins as volumes increase and in our Sensors business we have been driving margin expansion improvement through portfolio optimization which I mentioned earlier. Also I'd like to highlight that our teams are continuing to effectively manage pricing to offset higher input cost. We've been talking to you about all these actions and I'm pleased with you that the team successfully executing on them and delivering the strong results that you see. So that is a backdrop of Transportation. Let's move to the Industrial segment. And in the segment sales were down 5% organically in the first quarter, but we did see growth in three of our four businesses and we expect to see continued sequential growth in AD&M, Medical and Energy as we go into quarter two.
In the first quarter our AD&M sales were up 13% organically with increased production of both single and twin aisle platforms in the commercial air market. In Medical, sales in the quarter were up 16% organically, driven by ongoing increases in interventional procedures. And in our Energy business, we saw growth in renewable applications and these were partially offset by slower utility demand in Europe. And finally, you can see on the slide, in the Industrial Equipment business, our sales were down 26% organically. And in this business, we're seeing the destocking that began a little bit later in the cycle. So we expect this inventory digestion to continue. And this is a trend that is similar to what you've been hearing from other companies.
From a margin perspective, for the Industrial segment, adjusted operating margins were 15% with the impact from the volume decline in Industrial Equipment. And we expect to continue to see segment margins running in the mid-teens until this destocking environment improves. So let me turn to Communications. Organic sales were down 17% year-over-year and we expect the second quarter sales to be similar to the first quarter level. Starting in our third quarter, you will begin to see favorable year-on-year growth in this segment. We are well-positioned to grow in our artificial intelligence programs and now expecting $200 million of contribution in fiscal '24 from AI applications. And in these applications for artificial intelligence, let's face it, we're focused on providing high speed, low latency connectivity to meet the needs of the artificial intelligence workloads.
And as we've mentioned to you before, we generate 50% more content in an accelerated compute AI platform versus traditional compute servers. Also we continue to work closely with cloud customers as well as leading semiconductor companies to ensure reference designs that call out all our solutions. On the margin front for the segment, adjusted operating margins were 18.7% and they were up 170 basis points despite the decline in sales. Our teams are executing extremely well and we now believe we'll be able to maintain the high-teen margin in this segment as we move through this year. So with that as an overview of performance, let me turn it over to Heath, to get into more details on the financials and our expectations going forward.
Heath Mitts: Well, thank you, Terrence, and good morning, everyone. Please turn to slide eight, where I will provide more details on the first quarter financials. Adjusted operating income was $731 million with an adjusted operating margin of 19.1%. GAAP operating income was $698 million and included $8 million of acquisition related charges and $25 million of restructuring and other charges. For the full year, our expectations are unchanged and we continue to expect fiscal '24 restructuring charges to be approximately $100 million which is well below the levels we've been running in prior years. Going forward, we expect that restructuring charges will be driven by actions to improve efficiency around future bolt-on acquisitions.
Adjusted EPS was $1.84 and GAAP EPS was $5.76 for the quarter, which included a benefit of nearly $4 related to a one-time non-cash non-U.S. tax benefit, a change in the Swiss tax rate and the impact of intercompany transactions. Additionally, we had restructuring, acquisition and other charges of $0.07. The adjusted effective tax rate was 21.2% in Q1, slightly higher than our guidance due to an increase in the Swiss tax rate that I just mentioned. For the second quarter and for the full year, we now expect our adjusted effective tax rate to be approximately 21%. And importantly, as always, we continue to expect our cash tax rate to stay well below our adjusted ETR for the full year. Now let's turn to slide nine. Sales of $3.83 billion were flat on a reported basis and down 1% on an organic basis year-over-year.
Adjusted operating margins were 19.1% in the first quarter, expanding 290 basis points year-over-year despite flat sales. And as Terrence mentioned earlier, this was driven by margin expansion in our Transportation and Communications segments. Adjusted earnings per share was $1.84 up roughly 20% year-over-year driven by the strong margin expansion. Turning to cash flow. Cash from operations was $719 million. Free cash was a first quarter record of $570 million. Also in the quarter, we deployed roughly $600 million to shareholders through share buybacks and dividends and also utilized roughly $350 million for the Schaffner acquisition. Our long-term capital strategy remains unchanged, which is to return approximately two-thirds of free cash flow to shareholders and use one-third for acquisitions over time.
Before I turn it over to questions, let me reinforce some of the key points that we discussed today and share how we are thinking about our performance and what we expect to be a slow macro environment. We are continuing to take action on the things we can control to improve our financial performance and you see this reflected in our strong results for Q1 as well as our expectations going forward. On the topline we continue to benefit from secular growth trends and you see this in the outperformance we are delivering versus some of our key markets we serve. You have been seeing the benefits of our global leadership position in electric vehicles, but other growth applications like artificial intelligence are just getting started. Below the topline we are successfully executing on multiple operational levers, which have been discussed earlier on this call.
As we move forward, our focus continues to be on margin expansion and earnings growth despite the slow macro environment. Finally, we remain excited about the opportunities we have ahead of us to drive value creation for all stakeholders. And with that, let's open up the call for questions.
Sujal Shah: Thank you. Can you please give the instructions for the Q&A session?
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