TE Connectivity plc at BAIRD 2026 Global Industrial Conference - TE CONNECTIVITY PLC

Good morning, and thank you for joining us. My name is Luke Young. I'm Baird's Senior Research Analyst covering electrical and AI infrastructure. Very pleased to have T Connectivity with us today, an interconnect leader across industrial markets, including AI, aerospace and defense, energy and automation, as well as automotive and commercial vehicles. With us, we have Terrence Curtin, CEO. If you'd like to take part, you can send an email. That email is session2 at rwbaird.com. And why don't we jump right into the conversation, Terrence? I want to start with the big picture question. Organic growth, nicely outstripping your investor day targets. About a year ago, we were in Philadelphia laying out those targets. If we were back in Philly, would you be thinking about recasting them a little higher maybe? Well, we're in Chicago, so we're not back in the Philly. Good morning, everybody, and certainly, Luke, thank you for hosting. I think some of the key things that when you think about TE, and you did a nice job teeing it up, is where we're positioned about anywhere where you need to have data or power connecting. And I know you're going to jump around probably in questions. We'll get into AI where we play, certainly in the energy infrastructure. But I think one of the things that when we had our investor day, you know, about a year ago now, was one of things we laid out was we felt very good about the breadth of our growth. And clearly what we do in AI and where we have the connectivity that we do with the hyperscalers is a big part of our growth, but what is really nice is the breadth we had across the portfolio. And that resulted in 12% organic growth. We just finished our fiscal year. And then with some of the M&A things we did, we grew 15% last year. So it was above the model we laid out. But I think what's very impressive with that and what we feel very confident about is that breadth we see continuing. You know, we just went out when we had our results and said we expect to grow essentially another 12% this year organically. And that breadth is going to be, you know, we're going to get benefit from AI. We're goingto grow over a billion dollars in AI again this year. But then our other businesses, which I really like what you teed up, are position and energy, really where you get into power connections that are necessary to hook up the grid, as well as grid hardening, you're growing strong double digits. Our position in aerospace for the compute in next-generation equipment as well as the power that you have there Very teed up strongly for another double-digit growth there and these types of trends. We see just continuing So, you know right now, you we're not going to update the range But you know, we're solidly above it and I actually think the breath that we have Across the growth vectors that we I think you can see us being at the high end and achieving it, overachieving it at times. So feel really good about the growth momentum. And we have not been seeing any slowdown. Our backlog has grown. That backlog is really about some of our defense customers as well as our AI customers, where they're giving us more look into their programs and trying to make sure they secure them. So feel very good about momentum. And also we're investing in engineering and capacity make sure we can deliver on that growth so feel good about not only 27 but also how we're going to be teed up beyond that and i'm i know you're going to ask me questions about it yeah uh you mentioned the organic growth in fiscal 26 but there's a little m&a that was wrapped into that as well you've been inquisitive the last couple years including richards which is really what we're seeing in your term and then the astrodine deal that you know it's back in july and those Were those specific opportunities, or did they in any way reflect a change in your approach to M&A, Terrence? No, I would say, you know, the way you ask it, Luke, I wouldn't say it's a change in our approach. I think one of the things that when you look at TE, you know, we have a very strong free cash flow model. And that free cash flow model, you can all see what we did last year, about $3.4 billion. We do return capital through dividends, but one of the things we do share is we want to continue to bring assets in that are creative to where we play and both of those assets do that Richards actually helped strengthen us and was complementary to what we do in our energy business and what we around utilities grid hardening and connectivity in the underground space so that was one that was very much a bolt on like we've always talked about and then Astrodyne which is one that still is yet to close is an area where where we do power connectivity we also have products that do power filtering and when you think about data we always talk about data speeds one of the things that you have in like semiconductor equipment certain aerospace applications is how do you make sure the power quality stays pure and we do products on that Astrodyne actually adds to our product portfolio in that and they're the types of things you're gonna see M&A for us be much more in our industrial segment you know our industrial segment is the larger growth engine for us you know our transportation is probably you know 20-30 percent of our growth engine but when it comes M&A you're gonna see M& A in our industrial segment and we are disciplined when it comes into how we think about from a return perspective and we typically look for mid-teen returns by year five to really make sure we're doing things that help our strong ROIC basis today which is over 20 percent so when I want to Start digging into the segments. I'm going to start with the segment that we get the most questions on which is your DDN or digital data Network segment and you mentioned in your first response They're expecting over a billion dollars of growth in that business walking the fiscal 27 But you've also outlined a billion hours of opportunity over an extended horizon as well What if we look out past fiscal 27? what gives you that visibility and how much of that depends on existing design wins versus opportunities that are still in front of you yes so one of the things that's important for for those that maybe don't know us is you know our DDM business has doubled over the past couple of years and our position is very strong where we're doing high-speed connectivity and our focus and you know our penetration our larger market share is with the hyperscale customers and you When we look at that growth that we have, even in 27 of over a billion dollars, it's going to continue to be with those hyperscale customers on programs that those programs are one. So when we look a 27, when we go out and we talk a little bit further out, we play in the architecture as they're looking at next generation architecture. Where does copper play? Where does optics play? Where does the power connectivity have to come in as well? And when we look at all of those, we see TAM growth in copper, also where we play in fiber, which is around the connectivity that you would have in a CPO or an NPO, or areas that are expended TAM that we're doing a lot of engineering work on. So I think the assumption is you still have to have spending occurring in that space. But there's areas where we play with our customers. I think you're going to continue to see that build. And with the scenarios we look at, we see that we can continue to add a billion dollars a year in that space, which will be the largest growth driver for TE as we go forward. You mentioned optical. So is the optical portfolio, I think, right now moving through customer validation mainly? what are the key gates to production revenue and you did an acquisition earlier this year of a company called ram photonics how does that strengthen your position within optics specifically you know what it does is it actually complements some of the things we do and you know where we believe we can play is where our customers expect us to get to how does the signal flow and you we do so much in copper and we're more in the rack and copper is still going to be the workhorse in the rag but as you're getting to the switch level you're going to get areas where where you have CPO, NPO coming in and moving off the rack. And there's a connectivity element there that is very hard to get the density that you'll get that fiber interconnect off, and that's called an FAU. So we did do an acquisition to bring some technology in, as well as what we do in our core connectivity. And we're in the middle of engineering and prototype and design validations. They're the steps you sort of have at these types of points. And I'm happy with the engagement that we have with the customers we have. we still have to get to winning programs in it but there are things that we see that TAM growing and we're gonna we're going to play a part in that I mean should we assume you're working with your existing hyperscale or customers on those sorts of developments and maybe give us a little window into how the co-engineering works is we're well towards these optical opportunities one of the things I would always say when you look at it don't assume every customer has the same roadmap you know we have some customers that aren't looking at optics because they say hey I want to continue to push copper as long as I can some are very much hey I want to get it into that switch level as the first step so I think we can't typically name customers and so but I think the thing you could see is those that are actually pushing where CPO is you would assume we could work with them yeah so as optics moves closer to the chip and certainly the FAU would be part of that how do you think about the content opportunity incrementally and certainly there's a trade-off in terms of existing copper sockets and maybe which sockets are most exposed on the flip side you're still going to have a lot of copper in there we have to realize that you know anything that relates to power connectivity in the rack has to be power and as you add more optics into a rack that needs more power generation needs more power connectivity because it does consume more power than copper does so that is something that's 30 percent of our portfolio today and you're going to continue to see that grow faster on the power product. So, you know, it's about 30% of our $3 billion of DDN revenue. On top of that, there's some copper interconnects that are in the rack that will never change. There's also hybrid things that are copper and optics that we do already today. That's content. Where you will see incremental, so you have copper TAM grow, you're going to have incremental around where the FAU and where we would play there. So that's actually incremental TAM versus when we had our investor day a year ago, that does give us confidence around that billion dollars a year as it goes out. There will be some cannibalization at the switch level, but it is a copper and fiber story, not a copper or fiber story. Well, speaking of the copper side, it's not as if innovation has stopped on copper. We've got things going on like ACC, AEC, co-packaged copper, CPC. How much runway remains for innovation, and maybe are there some specific things that we shouldn't think of as TE really working on right now? So all of those are things when you look at it, it's how do you put some active elements of product into a copper package to really extend copper. And when we say people are extending copper, they're the examples. Copper is scaled. Copper is easier to work with. You have less electronic active parts to it, which therefore you need less power going through it. those techniques our customers are all working for and we have products across all of them so those types of things is really when we get into copper and fiber they're going to be some of the gateway and you have some customers lean more into those hybrid solutions than pure one-way completely to fiber with power connectivity a big part of this portfolio like you mentioned it's about 30% of DDN I think it is expected to outgrow the business in fiscal 27 is Is that accurate? Just what's driving more content today versus what maybe still depends on 800-volt adoption really coming in force into the rack? Well, number one, as the racks get tighter, you need more power. So these chips are power hogs. So you have that happening naturally. And then when you get into things like 800-volts, our content goes up by about 1.5 because you have different interconnects. You're certainly dealing with different materials. And then in some cases, you have the sidecar element. So you're actually jumpering power back and forth. So all of those are good things for our business. And, you know, power interconnects, which were something that were always very good and steady-eddy products, really have become a lot more critical as you're trying to get to the speeds and the powers that these next-generation chips need. And then you also get into how when you go to inference, you get into CPUs and how that whole architecture changes. So all of that is a positive for us, which gives us the confidence around that billion dollars in those years out. How are you thinking, just timing-wise, about 800 volts and maybe how much opportunity you can get after in the near versus the medium term? So the element is certainly there's people that are pushing 800 volt. There's also people that Are in between. So one of the things, and I know I said it earlier, not every architecture is exactly the same. Some are going lower cost. Some are looking at, hey, lowest token. Some of our customers look at, I want state-of-the-art highest speed. So when you look at the 800-volt, you're going to continue to have increased voltages coming in. Will it be all happening at once? No. You're goingto see some that are coming in this year, but it won't be widespread this year. We touched on Astrodyn earlier. I want to circle back to it relative to DDN. One of the areas that you mentioned there is it has a good opportunity within Semicap. How do you see that relative to the DDN franchise in terms of really filling out the offering or maybe providing a little bit of diversity in terms where you said cyclically? Let me add some color here because really when we think about Astrodyn, while they're doing power filtering, it's really a play in our industrial business where we actually serve the equipment makers of the world. This type of product would be in semi-capital equipment, but it would not be for DDN units, so it's not. But it is an adjacent, so when you sit there, anytime you have semiconductor equipment, it could be an aerospace application where you need to have pure power quality. When you're getting that power signal, that's what the filtering helps with and the power supply. So when we look at it, it is something around power that's going to create an increased content uptick in our ACL business, automated and connected living in our industrial segment. You know, this business, you know, it's pushing $300 million. So we're expecting to close it here in the end of this calendar quarter here in December. I'll probably add a little bit over $200 million to our revenue this year. But it's a space we like that we're in because it gets us into semiconductor equipment, which we're in but not as strong, and we'll continue to be able to add to it. Yeah. You mentioned inference, and maybe you want to double-click on that because oftentimes when we have investor conversations, I think it's through the lens of scaling and really thinking about the leading edge of compute. We were at the Open Compute Project's Global Summit a month or so ago, and inference was really the theme of the show totally when you think about the rise of inference you know does it create incremental opportunities versus you know changing the mix of your opportunities in this sense you know things like compute becoming more important at the margin so when you think about inference inference is typically you're going to be leveraging the gpu back to a cpu sort of support base and when we think about that that's good for us you know that's all copper that does have existing products in it and it's where you're gonna continue to see the architecture go as they figure out what gets to the lowest cost per token so that is a positive now a content per rack in an inference situation versus a full GPU training we're going to have more content in the GPU training rack than we're gonna have in the inference cluster but it is more incremental content for us overall that that's happening it's just it's almost like if we were talking about our auto business one's an electric vehicle one's a gas vehicle we have higher content on one for the other but it's good for us yeah operationally what would you say is the single biggest constraint to just growing faster in DDN right now is it supply chain is it your capacity is it something else well a couple of things first first off we have to realize we doubled the business and we have another billion dollars so we are ramping a lot of capacity and we've been investing a lot so when I sit there and I think about it you know last year we invested about 200 million more in engineering. We're probably going to do a similar amount this year to really make sure the engineering resources are there. You know, these are customers that do demand speed and, you know, their ramps are their ramp. They're fast. So the ramping of, you know, new launches into new factories is always a stressful situation. I think our team has done a nice job on it, but I don't think there's a constraint by any means. That's the thing that I think our team has proven, whether it was in the cloud period or what we've seen in, you know, what we have been dealing with the past three years, and, you know, we've continued to lever our strength with the hyperscale customers have been our big revenue driver. What about incremental margin dynamics? Maybe last business specific question to DDN relative to, you know, bringing in investment spending in R&D, bringing in capacity obviously we're in an inflationary environment for some of these components and commodities as well well if I could break those down a little bit first off being you know we've been in an afflictionary world whether it's tariffs whether it copper other inputs oil as we do things around our team has done a great job recovering and passing it on so I think you've seen that in our results you know actually been priced positive here as we go through that and I wouldn't expect that to change when it comes to fall through we are investing ahead you know we've launched numerous new facilities in our DDN business you know, we still think at the company level we have around 30% but there will be sometimes investments are coming in and you know that those organic investments are the best return investments we have so you've seen our capex go up you know about 200 million dollars last year I I think you can expect it to go up a similar amount this year as we continue to make sure we put the capacity in to support our customers and the growth we're signing up for. So there may be some lumpiness, but it doesn't change how we think about the 30% that we've talked about. Let's move to industrial solutions writ large and some of the other key franchises in there. Energy maybe is a good place to start. So I think there's two components to that business, you know, grid hardening, the bigger component, but some data center opportunities as well. Is the data center piece growing faster than the rest of energy, and are those complementary growth drivers in a sense? And let me frame a little bit. When you think about $20 billion of TE, you Know, last year, DDM was a little over $3 billion. Our energy business is about $2 billion. dollars. And when you look about our energy business, these are connections that are going to the utilities in the grid. And we're really benefiting from a couple trends. First trend is grid hardening. How do you keep that power reliability? And we are benefiting from that. We are also stronger in underground networks. So in major cities, that's where our strength is. Secondly, what we call industrial power, this is where you would have data center power getting hooked up to a data center. That's about, grid hardening is about 60%. Industrial, which will include data center, about 20% of our portfolio. And that is the fastest growing. That is the fastest growing and then the third element is where we would play in like solar utility scale solar farms. You know, we do have where we help with our EPC customers, how we get content there and it's totally on utility scale. So when you look last year, we grew 18% organically without acquisitions there. We see that's going to continue to be a double-digit grower. It is what's happening with the energy trends, the investment trends, which are those are plus 7%, plus 8%. We feel where we're positioned, we'll be growing ahead of that into the teens. It is about 60% here in the United States and feel really good about the momentum that we have, and we've been adding capacity to really make sure we keep up with it because we see another strong year just stacking up and we're seeing what our customers are looking for us and what they need as they do their grid investments. Yeah. AD&M, certainly an area of the business that's been demonstrating steady, strong growth by single digit to low double digit kind of growth. How do you think about the opportunities going into fiscal 27 and can munitions repunishment be a driver or is it maybe too soon to say that that's an obvious one next year? No, I mean, our aerospace and defense, you know, connectivity preferably around data and power, you know it's similar to a lot of the others. It's about $2 billion and we're actually seeing the defense side had been stronger this year, not surprisingly what's going on in the world, but we see a backlog that's laid out that another double-digit year again this year. We also see the commercial airspace, which is slightly below 50%. The supply chain is getting healthier, that you're seeing flow come in, that you will have builds occur. So the combination is you have both coming up at the same time. It is an area where, with our backlog, we have gotten increased orders that build backlog, and it's just another one of those things. When you look at next generation defense weapons, you're going to have higher level of compute, certainly higher level of power, certainly they're going to be more autonomous. They're all things that need what we do. And it's another area where supply is probably holding it back a little bit. And we've been making investments in certain product categories to make sure how do we get ahead from a capacity perspective. And then the last business in industrial would be your ACL business. Or within that, I want to click on the old industrial equipment business. So you've been delivering consistent growth against cops that are getting tougher. I think people typically look at that as more of a cyclical trend. What if we separate the cyclical from the secular and maybe click on some of the secular opportunities in that business from here? I think you're right. So we call it ACL. It's automation and connected living. And this is really where we get into factory automation, factory robots, motors and drives. And after COVID, it was a rough market for a couple of years. I mean, it wasn't a down cycle. And I would say probably similar to some of the other people that you have here at the conference, you know, two or three quarters ago, it started to show signs of life. And i would tell you those signs of life just keep on accelerating up. Now we do have a little bit of inventory refresh where things were taken too low. But what we get excited about on the secular side, what we're seeing in battery electric storage applications, where our customers are increasing automation. In some cases, it's due to what's going on in AI because the computer is getting cheaper. How do I get better visual inspection to make sure real-time decisions are making? That's the element that we see that continuing to grow. And honestly, it's been pretty consistent around the world. You know, we see it in Japan. We see it in China. We See it as India continues to build out its infrastructure. We even improvement in Europe and clearly here in North America. So the trends that we have, certainly we are getting a cyclical pickup, but the secular trends that are there are very important because it's also a market that's not being helped by our automotive industry friends that typically put in a lot of capex and drive it. So that's something that we get excited about. I do think, you know, we'll get to some tougher comps, but it'll be a double-digit grower this year. Yeah, the time we got left we definitely should talk about transportation solutions ts i want to start with the automotive portfolio china probably the star of the show there just what's the next layer of growing with chinese oems and you know clearly market with a lot of upheaval in terms of the domestic market versus exports just how te maps to that yeah the one thing that i would just say for everybody if you're new to te when you think about our transportation business you need to sort to think about, it is led by our Asian business. Asia is our largest position in TE, followed by Europe, what we have put India in there, and then followed by North America. And let's face it, the China local market last year was weak, but we grew significantly above it because we are penetrated with the locals and the multinationals, and as a export, we benefit from that, and our content on a local Chinese vehicle is similar to a Western vehicle. So, you know, China production was down slightly last year. We grew about 6% last year, sort of at the higher end of our growth over market, even in a weak environment. And we expect it'll be a similar environment this year. And that's being really driven by, you have electric vehicle, you also have data proliferation in the vehicle. We benefit from both of those. And then the other thing that we're benefiting from right now is as Europe, Europe EB adoption is increasing again. You know, we expect EB growth in Europe to be stronger than it is in Asia this year. Doesn't mean the saturation's at the same. And you've seen in our last quarter results, our content performance over production was very strong. And you know, going into this year, I think you're gonna see some of those same drivers. And certainly China will be very important based upon the great position we have there and how we continue to win next generation programs. Yeah, so data connectivity, certainly been part of the China story. Are you seeing opportunities to push that outside of China in a bigger way right now? So when we think about our content in TS, it really comes into three buckets. Data connectivity in the vehicle. This is all the data connections you need to have ethernet, software-defined upgrades, autonomy. It's really to make sure the data flows in the car. That has just continued to accelerate. benefit from it not only in China that's been throughout the world certainly China a little bit stronger the second lever has been electric vehicle very Asian driven but you start to see at the end of last year as Europe starting to pick up you know even in a flat auto production environment we're benefiting from that of content outperformance and then the third area is just core electronification of the car your safety features your comfort features anything else that's needed as you turn more electronics 48 volt there are things where you need connectivity excuse me and you know we're very happy where we ended content last year we were at about four points above production we think this year will be more in the middle of our four to six will probably be closer to five you know in the of it as we go into this year I'll auto production beat down a point or so so wrapping up here a couple minutes left You know, as we back out and look at the company in total, you know, clearly we've touched on this in a couple of ways already. You know we're still in an inflationary backdrop. It's a, you, know, consistent, I think, muscle of the company to go out and recover those higher prices. From a customer standpoint, are you seeing any signs of pricing fatigue out there or, you know, is there still good receptivity to work with Tel through these things? Well, first of all, I, I thank every one of our customers understand in places like where we have metals and stuff and terrors. That's inflation. And we've been very clear with our customers about, you know, we're feeling these inflations. We put riders in, and like our automotive business, there's metal riders. They pass through. You know, so it's more mechanical. I wouldn't say it's fatigue. But it's pretty chronic across, and you've got to think, you mean, we are a component player. There's other components that have much more inflation problems than we have. You see it in memory and so forth. So, you Know, pricing discussions are never easy, but I've been pretty proud of what the team's done. And you've seen the resiliency and the margin as we've worked through this. You know, it isn't like inflation just started. You know. We continue to do price increases with our customers to make sure we protect our investment. And you have seen it in the flow through. Has been protected. So I think we're going to continue to be doing that with our customer as they expect it. Do they like it? No. You know? Is it, you know, there's hand-to-hand combat at times. But I think our team has done a good job on it. Yeah. A minute left. I think I have to ask this. Sure. the term's pretty big reaction in the stock market relative to potential regulatory changes impacting AI or whatnot. I know it's only been a week, but have you seen any change in posture at customers or change in attitude, Terrence? No, from our customers, I would tell you both our AI customers and where we deal with them in the energy grid, it's full steam ahead. I mean, we've not seen anything where people are saying, I'm going to change my architecture or I'm slowing down. We've not seen it at all. So, hey, I think you said, well, we're only a week in, but we're continuing to see, hey I need more, I need it quicker. Some areas where there's shortages, how do we take advantage of it? So, we don't see anything at this point. Okay, well that's all the time we've got on stage, but Terrence will be available at a breakout in Salon A down the hall here, and Heath Mitz CFO will be there as well. Super. Thank you everybody for listening. Hopefully you'll join this in the breakout room. Appreciate it.