Q1 2024 Summary
Published Jan 10, 2025, 5:10 PM UTC- Strong Margin Expansion and Operational Efficiency: TE Connectivity achieved adjusted operating margins of 19% in Q1, up 290 basis points year-over-year . Operational improvements, including footprint consolidation and portfolio optimization, are driving sustainable margin expansion. The company expects to maintain target margins even at lower production volumes, demonstrating effective cost management and operational efficiency .
- Leadership in Electric Vehicles with Growth in Asia: TE Connectivity is well-positioned to capitalize on EV growth, with EV production expected to be up about 25% this year. Over two-thirds of EVs are produced in Asia, TE's strongest region. The content per EV is about 2x higher than on internal combustion engine vehicles, enhancing revenue potential . The company remains confident in achieving 4% to 6% content growth outperformance over global auto production .
- Growing Opportunities in Artificial Intelligence Applications: TE Connectivity expects $200 million in revenue from AI applications in fiscal 2024. The AI orders pipeline has expanded to over $1.3 billion, indicating strong ongoing demand. This growth contributes to maintaining high-teens operating margins in the Communications segment as AI revenues increase.
- The Industrial Equipment business experienced a significant 26% organic sales decline due to ongoing customer inventory destocking, which is expected to continue into the second half of the fiscal year. This weakness may negatively impact overall revenue growth and profitability.
- Potential margin dilution in the Industrial segment due to recent acquisitions, such as Schaffner. These acquisitions generally come with lower margins, which TE Connectivity has to absorb, potentially affecting segment profitability.
- The company's adjusted effective tax rate has increased from 20% to 21% due to an unexpected rise in the Swiss tax rate. Additionally, upcoming global minimum tax regulations introduce uncertainties and potential pressures on TE Connectivity's tax rate and profitability.
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Margin Outlook
Q: How sustainable are your strong margins?
A: We've improved margins through footprint consolidation and price actions. In transportation, even as auto production normalizes to 21 million units per quarter, we expect to maintain target margins of roughly 20%. Communications segment margins are improving and should be in the high teens. Industrial margins are in the mid-teens, but destocking and acquisitions like Schaffner may dilute margins initially. -
EV Growth and Profitability
Q: Can you elaborate on EV growth and its impact on profitability?
A: EV production is expected to increase by 25% this year, mainly driven by Asia, where 2/3 of EVs are made. We aim for 4% to 6% auto content outperformance. Half of our content on EVs is the same as on ICE vehicles, so profitability is similar. We're scaling up high-power products specific to EVs, moving their profitability up to segment averages. -
Order Trends and Destocking
Q: Are declining orders and destocking a concern?
A: Orders were up 4% year-over-year, with backlog around $6 billion. We're not seeing cancellations, and our shorter lead times differentiate us from semiconductor companies. Destocking is occurring mainly through channel partners, affecting industrial equipment, appliances, and data and devices. Direct sales, comprising 80% of our business, saw low single-digit organic growth. -
AI Revenue Growth
Q: What's driving growth in AI-related revenues?
A: We've increased our AI revenue estimate to $200 million this year. Our AI order book has grown to over $1.3 billion. As AI programs launch, we expect Communications segment margins to be in the high teens. -
Input Costs and Pricing Strategy
Q: How are input costs affecting pricing and margins?
A: Input costs are net neutral; copper prices remain up year-over-year. We recover costs from customers to maintain margins. Our approach is consistent across businesses. -
Acquisitions Impact
Q: How does the Schaffner acquisition affect margins and growth?
A: Schaffner adds about $40 million per quarter in revenue, enhancing our industrial portfolio, particularly in factory automation. While it may dilute margins initially, we see opportunities to improve profitability to target levels. -
Tax Rate Increase
Q: Is the higher tax rate of 21% permanent?
A: The increase to 21% is due to the Swiss tax rate rising sooner than anticipated. We're engaged in tax planning to mitigate future impacts, but for now, 21% is a good rate to work with.