TE Connectivity Aktie

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.

Perfect. May be just to start us off. You had your Investor Day recently, and you talked a bit about the 6% to 8% through-cycle growth, could you break that down for us 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, while it was back in November, it seems like a longer time with what's everything going on in the world. But to your point, I think the key thing, like you understand, we laid out a long-term growth plan of 6% to 8% and that's about 50% higher than we had historically and a lot of things it's about where we positioned ourselves about what we do and what we do well, and when you think about TE and you think about connection solutions we have as well as the sensor solutions we have, it's really about where do you have acceleration that's needed in the hardware architecture of what goes on with increased data needs as well as power needs.

And we've always talked about data needs, but power needs the acceleration that we all know about we're benefiting from. So that increase in that growth rate that we talked about first off being when you think about data, and I know you're going to ask questions about it, it starts with AI and what's happening in the data center. But it's also just as important as how data moves out and where it's changing the architecture and other key applications that we focus on. So even in the energy market where we serve utilities, how you're getting more intelligence that helps 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 rack continues to evolve to really make sure it can handle the data needs, whether that's going to 400 volt 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 it's what gives us confidence we'd 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, Varun, 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 in that power connections just continues to build and strong double-digit growth there 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 us march, and we build 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 us, 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 all 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%, 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 one 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 rack. 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 rack. With what we do in optics as well as some technology acquisitions we do, the fiber attached to the CPO out to the fiber backplane, we'll benefit from that growth as that gets introduced. But that's 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 there are trade-offs that we are working with our customers on. We feel the growth in AI is going to continue. I know people view its 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 can get to law of large numbers. I don't -- I'm not sure we're going to grow 70% every year, quite frankly, I wish I could stay up here and 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 is it really a mix of both?

It's very different. So you have to realize when they look at it, some go for 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 optically, 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 bars, you introduce liquid cooling, increases our content.

So there's not just the data side, which is where optics goes in the typical discussion is, it's also what happens 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 want 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 you understand, and we 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 universe, we have a pretty broad position there, and all our customers are growing this year, so 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 whenever we 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 One, do 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 -- we'll probably run 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 intense.

Got it. No, super helpful. I think that's more or less what I have on data centers unless we get more questions coming in.

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 centers, 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 a 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 one 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. 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 to 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 one 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'll have connections in there. You'll also have connections that occur 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 talked about.

Great. 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 there's this narrative about a lot of states pushing back and projects getting delayed. Are you seeing that with any of your orders and 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 in 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 one 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 verticals, right, data centers, energy, how do we think about that? How do we sort of think about the competition pressure 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's made a decision around a semiconductor, somebody's 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 after you 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 and 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-BOM 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 moat. 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 is 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 architectural 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 one place. So you asked a simple question, I gave you a long answer, sorry.

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.

Got it. 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 play into the interconnects that go into factory automation that can be in 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, "Hey, 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 through TE.

It could be an edge opportunity where you need more data in an aircraft; edge opportunity, you need more automation out of a car -- or data 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 it, Varun. And you see it in the PMIs and the ISM things on 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 that 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 have 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 one unit is here and everybody else is down there. So certainly, in 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 improvements, 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 rooftop consolidations. We were very focused on localization, which we're about 80% localized in 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 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 is 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 Asia 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 makes 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 could 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, you need connectivity. 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. No, 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? Because...

It's very different. It's close to 2x. So when you sit there, and I think building on the architecture discussion we had this morning, when you take an ICE vehicle, we don't have anything when somebody puts a fuel -- petrol into the engine. The charger inlet is 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 material.

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 on me, 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-month 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 spinning models. They want innovation in every cycle. And we work actually on 3 generations out. And we know like, hey, if we worry about a 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 happened in EV. They're also doing a great job on the data side. They typically, as they put autonomous rings in there 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 in those that blow it through all. You could have $50 to $70 of content just on data alone in the 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 had 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 essentially...

Probably 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 -- leading 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 -- China has like sub-10% share in Europe. But you've actually seen them come out with vehicles that are much better price points. And you've actually seen for the first time in 3 or 4 years, EV trends pick up.

Alternatively, 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. So -- and North America was always going to be the lowest penetration of EV that we ever thought 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 and 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 will 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 you all understand where do we play in China and 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 the local AI or data center market customers in China.

So they're 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 this 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 this.

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 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 years. And that also creates some value-add ideas between us and our customers that we always look at, and it helps deepen our relationships.

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 it 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 of 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 truck, 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 chains being primed and the builds happening and North America has been getting better. So it's one 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 the $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 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% 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 and we have 2 expansions that are happening here in North America to support the energy market, so 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 to 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 best use, 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.

It's 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 use the word bolt-on. But I know when people also hear the word bolt-on, 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 due 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 there seems to be a system. Can you talk us through that?

It starts with what is the strategy of 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 through our localization. Those types of things come in. Other ones like Richards, 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 as natural for them. So that's where we -- it's a continuum along it, and 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 and 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 growthy? 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 out a 5-year horizon. So we've 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 shareholders through share repurchase.

Sure. That's on the acquisition side, right? And naturally, with that strategy, you'd 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 our 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 offense, improve the financial criteria, drive increased cash flow for compounding that we talked about all day and so from that viewpoint, it isn't like where we were 10 years ago where we had to say, "Oh, what do we want to be in or not?" We feel good with the portfolio, but we would always 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. So first off, 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 the 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 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? Try stuff 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 and 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 you 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. 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.

Everyone, thank you for standing by, and welcome to the TE Connectivity Second Quarter Earnings Call for Fiscal Year 2026. [Operator Instructions] As a reminder, today's call is being recorded. I would now like to turn the conference over to our host, Vice President of Investor Relations, Sujal Shah. Please go ahead.

Good morning, and thank you for joining our conference call to discuss TE Connectivity's Second Quarter Results and Outlook for our Third Quarter of Fiscal 2026. 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 at 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.

Thank you, Sujal. And also, once again, thank you, everyone, for joining us today. And as I normally do, before I jump into the slides, I do want to frame today's call around a few key messages. And I want to go back to November when we did our Investor Day, where we outlined how our strategy and business model are driving a broadening of growth across our portfolio while positioning us to deliver sustained margin expansion and double-digit earnings growth. The strategy we laid out, we believe, will drive ongoing value creation for our owners, and it's based upon the backbone is how we capitalize on the proliferation of data and power by providing leading interconnect products and technologies across our target markets to meet the evolving next-generation architectures of our customers.

The results we're going to get into today and talk about are further evidence that our strategy is working. Last year, we delivered $1.4 billion of growth as a company. And this year, we expect to deliver well over $2 billion of growth with the majority of our businesses growing double digits year-over-year.

As we look at our second quarter results, we delivered strong financial performance with sales growth of 15% year-over-year and continued outperformance versus our key end markets. We also delivered earnings growth of 24% in the quarter. And when you underpin this performance, we continue to see strong order trends. In the second quarter, we had record orders of over $5 billion, which was growth of over $1 billion versus the prior year, with growth across both segments and in every business.

As we expand sales, we continue to invest and scale the business to deliver consistent margin performance and earnings growth. The performance of our teams, combined with our global manufacturing strategy, are providing resiliency within a backdrop of an ongoing dynamic global environment, and this is reflected in the performance of both segments. We expect our strong performance will continue, and Heath will talk more about that when he gets into his section.

So if you could, if you're looking at the slides, I'd ask you to turn to Slide 3, and I'll get into our second quarter results as well as our outlook for the third quarter. Our second quarter sales were over $4.7 billion with performance above guidance driven across our businesses. Sales grew 15% on a reported basis and 7% organically year-over-year. We saw orders increase to $5.3 billion, and I'll provide more color on the order momentum on the next slide.

We delivered record adjusted earnings per share of $2.73, which was above our guidance and increased 24% versus the prior year. Our operating margins on an adjusted basis were 22%, and this was an increase of 130 basis points over last year due to the execution of our teams. We also continue to demonstrate our strong cash generation model with free cash flow of $1.3 billion for the first half of this year. And year-to-date, we returned nearly 100% of our free cash flow to shareholders while continuing to support investments for future growth. Also driven off of this strong free cash flow, in the quarter, we announced that our Board approved a 10% increase to our quarterly cash dividend.

As we look to the third quarter, we are expecting third quarter sales to be $5 billion, which reflects an increase of 10% versus the prior year with year-over-year and sequential growth in both of our segments. We expect adjusted earnings per share to be up 17% year-over-year to around $2.83.

So I'd ask if you could turn to Slide 4, and let me get into more details on the order trend momentum that we're seeing. As I mentioned, orders were $5.3 billion with a book-to-bill of 1.12. We saw orders growth in every business and in all regions on a year-over-year basis, and our order trends support the broadening of growth that I've already talked about.

For the second quarter, over 70% of the company's order growth was in the Industrial segment. Versus the prior year, Industrial segment orders grew 40%, and essentially every business in the segment posted double-digit orders growth. In addition to the ongoing momentum in Digital Data Networks, where our orders grew over 60% in the quarter, we also continue to see continued momentum in energy, aerospace and defense as well as Automation and Connected Living.

Turning to our Transportation segment orders. Our orders increased 13% versus the prior year with year-over-year and sequential growth in all 3 of our businesses. Our order trends are supporting our growth and content outlook for the Automotive business in the second half of the year. And in Commercial Transportation, we're seeing continued recovery in the global market with organic orders that grew year-over-year in every region.

So with that as an overview of orders, let me now discuss quarterly segment results, and I'll start with the Industrial segment on Slide 5. Our sales in the Industrial Solutions segment grew 27% in the quarter and 17% on an organic basis year-over-year. We are benefiting from the secular growth trends that we see in our digital Data Networks Business as well as our Energy business, where we continue to see significant demand tied to AI and energy grid investments, along with continued growth in aerospace and defense and factory automation applications.

In our Digital Data Networks, we had another outstanding quarter where our business grew nearly 50% year-over-year and sales were as we expected. We continue to win new programs with customers, and the orders that we have received are building backlog into 2027. We now expect our AI revenues in fiscal 2026 to be about $150 million higher than our view 90 days ago, and this entire increase will be in the second half of the year and reflects the increased momentum that I talked about in orders.

As we look out to the longer term, we are well positioned to continue to generate strong growth from AI applications. With our broad portfolio of data and power connectivity solutions as well as our engagements with the key architects of this space, we expect the addressable market for our AI products to continue to grow, both near term and long term. We are innovating with our customers on their road maps and architectures, and are making both organic and inorganic investments to strengthen our road map for both copper and the inflection point for optical solutions.

During the quarter, we acquired a leading technology for passive optical connectivity solutions, strengthening our road map to offer customer solution for both copper and optical connectivity in the future. As you would expect, we will continue to support our customers' architectures as they evolve.

Now let me turn to the other businesses in the segment, and turning to Automation and Connected Living. We grew 8% organically year-over-year with growth in each region, and we continue to expect the momentum in the general industrial markets to improve as we move through the year. In Energy, our sales grew 60%, including the Richards acquisition, where we're capitalizing on growth opportunities in the U.S. utility market. Organically, sales increased 11%, driven by year-over-year growth across 3 key application areas. The first being energy grid hardening, second being data center and the third being clean energy applications.

We continue to see increasing investment by our customers in grid hardening as utilities upgrade aging infrastructure and improve resiliency to support more distributed and reliable networks. In the data center, load growth is being driven by the significant build-out of power infrastructure to support AI, where our connectivity solutions enable higher power density as well as reliability. And in clean energy applications, we continue to benefit from ongoing investment in utility-scale solar, along with the supporting grid infrastructure required to integrate these energy sources.

In our Aerospace and Defense business, our sales grew 5% organically, driven by growth across both commercial aerospace and defense applications. In these markets, we continue to see favorable demand trends, coupled with ongoing supply chain improvements. These trends are supported by increased global defense spending and ongoing modernization efforts that require increased data connectivity and greater power requirements, along with ongoing production ramps in the commercial aerospace field.

And lastly, in our Medical business, sales grew sequentially as we expected, driven by the continued investment and growth in key therapy applications such as structural heart and electrophysiology. So turning to margins for this segment. Industrial segment adjusted operating margins expanded 260 basis points to nearly 22%, driven by the strong operational performance by our teams and the benefits of higher volume.

So if you could, let me move over to Slide 6, and I'll get into the Transportation segment. Our sales in the Transportation segment grew 5% in the quarter and were down slightly organically. We are delivering growth over market in both automotive and commercial transportation, reflecting our leading global position and customer co-creation model. And this is resulting in continued content growth across vehicle platforms.

Our auto sales grew 2% on a reported basis and declined 4% organically in the second quarter. Our market outperformance against declining auto production was driven by content growth in Asia and Europe. Year-to-date, we're averaging growth over market at the low end of our 4-6-point range and continue to expect content growth to be in this range for fiscal 2026, driven by our strong position and content opportunities across data connectivity in the vehicle, the electrification of the powertrain as well as electronification of the vehicle.

Turning to Commercial Transportation. We saw 21% growth on a reported basis and 17% organically. We are seeing continued improvement in demand trends across regions with growth in Europe and Asia and stabilization in North America. Against this backdrop, we are delivering growth that is significantly above the market, driven by continued share gains from new program wins and increasing content per vehicle.

In our Sensors business, sales increased 2% on a reported basis and declined 3% organically, which was in line with our expectations. For the Transportation segment, the team delivered adjusted operating margins of nearly 22%, demonstrating our team's operational resiliency.

So with that as an overview of our segment performance, let me hand it over to Heath, who'll give more financial details and expectations going forward.

Thank you, Terrence, and good morning, everyone. Please turn to Slide 7. For the quarter, we achieved adjusted operating income of over $1 billion and adjusted operating margins of 21.7%, driven by strong operational performance by our teams in both segments. GAAP operating income was $954 million and included $8 million of acquisition-related charges, $10 million of restructuring and other charges, and $57 million of amortization expense. I continue to expect restructuring charges in fiscal '26 to be roughly $100 million.

Adjusted EPS was $2.73, and GAAP EPS was $2.90 for the quarter and included a $0.39 tax benefit primarily related to a settlement of prior period tax matters as well as restructuring, acquisition and other charges of $0.06 and amortization expense of $0.15. The adjusted effective tax rate was approximately 21% in Q2. We expect Q3 to be around 23% and the full year tax rate to be approximately 22%. Importantly, as always, we anticipate our cash tax rate to be well below our adjusted ETR.

Now if you turn to Slide 8. This slide shows the growth and broadening that Terrence discussed along with the strength of our operating model with strong margin performance and double-digit earnings growth. Sales of $4.7 billion were up 15% on a reported basis and up 7% on an organic basis year-over-year. Adjusted operating margins were 21.7% in the second quarter, expanding 130 basis points year-over-year. Adjusted earnings per share were $2.73, up 24% year-over-year, driven by sales growth and margin expansion.

We continue to operate in a dynamic environment versus 90 days ago, we are seeing increased inflationary pressures across certain input costs such as oil-based resins and freight charges, driven by higher energy costs and broader geopolitical tensions. We are managing these impacts through our proven playbook, including optimization of our factory footprint, targeted pricing actions and ongoing productivity initiatives. In addition, our localization strategy around supply chain enhances resiliency by positioning us to manufacture close to our customers and respond quickly to changing conditions.

Turning to cash flow. Cash from operations was $947 million and free cash flow was $680 million. Through the first half of the fiscal year, free cash flow was a record $1.3 billion. We continue to expect our free cash flow conversion to be 100% this year.

Before I turn it over to questions, let me reinforce that our performance reflects strong execution in both segments. The strength that we have in orders gives us confidence in the second half, and we expect to have over $2 billion of growth this year, which will be ahead of our through-cycle target. While we remain in a dynamic environment, we have established levers in place to expand operating margins and drive double-digit earnings growth per share.

So with that, let's now open it up for questions.

Thank you, Heath. Ellie, can you please give the instructions for the Q&A session?

[Operator Instructions] Your first question comes from the line of Scott Davis of Melius Research.

Can you talk about -- excuse me, I'm having a serious allergy attack here, but the $150 million bump up? When does that get shipped out?

Yes, sure. So let me talk about that, and I do hope you feel better from your allergies here, Scott. The $150 million, I think one thing -- and you're talking about the AI. When we look at it -- I think let's frame a little bit where our orders are in our DDN business, and we'll talk about that $150 million, because year-to-date in our DDN business, we have $2 billion of orders. And as we talked the past few quarters, some of these orders are being scheduled out. And like you're always going to have when you have these programs, there will be some lumpiness to them as programs ramp up and ramp down.

So with the momentum that we see in orders, Scott, the $150 million that I mentioned about on the statements are things that relate to the second half. Part of it is ramping of programs we have, part of it is new ramps that are coming on, and it continues to show the momentum that we have in the space. So we do think with this additional $150 million of AI revenue in the second half, that will put our DDN AI revenue, which runs about 70% of total DDN, approaching $2.4 billion, just a little bit below that, and the momentum continues. It will ramp in the second half. And like we said about all the businesses, we do expect all of our businesses to grow from the second quarter to third quarter. So just the story continues there where we have good engagement, good program wins and continue to have strong growth in the AI space.

Our next question comes from the line of Mark Delaney of Goldman Sachs.

Orders were strong again this quarter, a record high. You cited strength across all businesses. But I'm hoping you could speak more on whether you think the momentum can be sustained, and also what TE saw with business trends so far in April, especially in light of the geopolitical and supply chain volatility.

Thanks, Mark, for the question. So a couple of things. Yes, you're right. I think when you look at this year, remember, we did $5 billion of orders in the first quarter, $5.3 billion in the second quarter, so we stacked about $10 billion of orders. So we built backlog. And in the first month since quarter end, the order momentum continues to be very strong. We have not seen any demand negative impacts due to orders at all since the conflict broke out.

So continue to see that strong momentum. And I think the broadening that I talked about in the script is it is really across the businesses. When you look at the growth that we put up, which is 25% in this quarter, DDN was very strong at 60% order growth year-on-year. But if you look at the rest of the Industrial segment, essentially every business unit put up double digits. So we're continuing to have the strong momentum that we've had in energy, that I mentioned. Aerospace and defense continues to build backlog. And those -- the lead time on those products are typically further out. So that's another one that's building backlog similar to what I talked about with AI.

And the one that in the Industrial segment is probably a little bit later of an uptick is what we're seeing in factory automation in our Automation and Control business. When you look at that business, and I mentioned it on the script, we had growth in every region. But when you're talking about growth in every region, you're really looking at growth that's high double digits across every region. So we continue to see momentum building up on that CapEx investment and certainly, what we see with ISM being constructive, I also think is a good supporting fact.

And then the other thing, when you get to Transportation, clearly, our view of production hasn't changed. We've told you since the beginning of the year, we expect auto production to be slightly down. We still have that same view, but our Transportation segment orders being up double digit, being led by Commercial Transportation, which is up a very strong double digit. And in Automotive, our orders were up mid-single digit. So showing the confidence we have around the growth and what is a production environment that I would say still isn't a positive production environment, but one that feels like it's just moving sideways and we benefit from our global position.

So the order trends are broad. They are across regions and some of the businesses that a year ago or so we would say might have been still cycling down, have come back in and really driving some of the growth that you see. And we do expect it to continue, and the orders in quarter 3 to date through today, and we're showing that.

Next question comes from the line of Luke Junk with Baird.

Terrence, maybe clicking a little bigger picture, just hoping you could provide some updated perspective from your point of view on the copper versus optical debate in AI. Especially interested in just where you're leaning into any related investments. You made a comment in the script about evolving with customers. And also noticed you did an optical acquisition in March of RAM Photonics, if you could speak to that as well.

Okay. Thanks, Luke, for the question. We've had many discussions about this, but I do want to start just reiterating some things before I click down a little bit to where you asked to go. It's important to be -- where we play, we're very fortunate to have a bird's eye view that we work with our customers on what's happening in both the data chain and the power chain when you look at what's going on the AI architecture. And we work closely with our customers, and we're aligned with their road maps.

The other thing that we talked about at Investor Day, each customer has different architectures and they have different opinions about when things will be introduced, whether it's in the power chain or in the signal data chain. And let's face it. We work very closely to make sure we're going to hit the inflection points that they are telling us.

And I think the other thing that you've all heard very consistently from the broad merchant chip companies is that copper will continue to be the workhorse in the rack in as many applications as possible due to the cost benefit, the power benefit, the reliability as well as where it's scaled to today to be able to meet their needs. And let's face it, we agree with that and we hear it all the time, and we have a view that it's not copper or optical, it's copper and optical, how do they play together in different structures?

So when you sit there and you think about optics coming in, it's going to come in more into the scale-out first. Let's face it, we are bigger in the scale up. What we do in the rack is the bigger driver of what we do and where we focus. So you're going to see more in scale-out. We do think that you're going to continue to have a hybrid solution between copper and optical over time. As I said on the call, we do view the TAM where we play and the product technology we have are going to grow as this occurs, both near term and long term. And that means what happens in data as well as in power connectivity, and I know we get into that with some of you.

You are right, and I mentioned it there, we did make a technology acquisition around what leading-edge optical technology that will be used to strengthen our passive optical connectivity road map. What we acquired is complementary to what we do in our portfolio, and it enables advancements in high-density fiber array connections. And this really would connect an optical fiber to a CPO. And it really helps round out our road map.

The key we have to do is make sure we productionize and scale these technologies to really make sure we support our road map as well as our customers' road map. And we really think with this technology, it's going to fit right in very nicely. And this is something we do all the time organically via partnerships. Sometimes we make technology investments like this.

So we really feel like the trends are only up to the right like we've always told you with what we have. And clearly, I think this is all good news for us, what happens on that trade-off that our customers will make that will continue to drive TAM improvement. So hopefully, that gives you some flavor, Luke.

The next question comes from the line of Amit Daryanani of Evercore ISI.

Maybe I'll step away from the DDN discussion for a bit. You folks are seeing really robust growth in Energy and even in the Commercial Transport segment. So I'm hoping, Terrence, if you could just talk a little bit about on Energy, even ex Richards, organic growth is double digits. What are sort of the big segments you're involved in? And how durable do you think this growth can be longer term? And maybe you can have a comparable discussion on the Commercial Transport side because I think both those segments are growing much faster than most folks would expect.

Thanks, Amit, and I appreciate you calling out some of the other markets. So first off, on Energy, the investments we've made and where we're positioned, it is very important. It is focused around, the majority of it is in the U.S. energy market. So anything we're talking about and benefiting from is things all of you are experiencing every day, increased utility investment related to capacity as well as hardening due to load demand that you're going to get. And probably about 60% or 2/3 of what we do is around utility and grid hardening. So it is around that infrastructure side of it. And let's face it, where we play in undergrounding with our technology and the intelligence we bring, that market is growing high single digits, and we're growing faster than that due to the efforts of our team.

Another important area that we do, what we call Industrial, is about 20% of the business, but this is where we're actually doing where Energy is getting hooked up. Could be a data center, could be into an industrial complex from -- could be a semiconductor fab where you're bringing power in. And that's another area with what we're seeing around the CapEx that many of you write about is very key. We're seeing very strong growth there as well, and we're growing double digits there as well this year.

And then the third area, the balance of it is really where we positioned ourselves around clean energy and renewables. Up until a couple of years ago, that's what we talked to you a lot about. We're still growing high single digit in there. Certainly, there's been some policy elements that have come out that have slowed down some of that market. But with all the levers we have, we get really excited about the growth we have there to grow above market. And it's an area that we continue to get excited about how do we continue to deepen our position there.

Jumping over to Commercial Transportation. I do want to sort of say, this business is one that's unlike what I just talked about, it is truly a global business. We're pretty even between North America, Europe and Asia. And what we've seen this quarter, last year, we were seeing strength that was coming out of Asia. It was coming out of Europe, where you saw whether it was truck and bus, ag, construction improving outside the United States. We're starting to see stabilization here, and we're seeing our orders pick up as people are reacting to the stabilization as well as looking forward to 2027. And the sales growth says it by itself. You see the growth that was very strong in the quarter. The market probably grew globally in the quarter, 4%. So that outperformance was very strong with us growing well into the double digits.

And it really comes into our positioning on next-gen vehicles as well as the trends we talked to you about in automotive all the time. We talked to you about data in the vehicle. We talked to you about powertrain and emissions, that electronification piece, and we're seeing that. And in places like Asia, where electrification of the powertrain is getting deeper and deeper into the various types of vehicles, we get a content uplift. And in some cases, that content uplift, and I know Aaron talked about this back at Investor Day, we could have on some vehicles up to $2,000 when you get to next-generation powertrains versus $400 today.

So we see that strength. It's good to see the market stabilizing. And certainly, we saw it in the orders that were up very strong, as I mentioned. And we just think there are going to be things that are getting back to that broadening of growth that I talked about in the script.

Next question comes from the line of Wamsi Mohan of Bank of America.

You noted content growth in the 4% to 6% range for the year. That indicates a meaningful acceleration from this past quarter. Maybe you can share some color on what you're seeing that's going to drive that acceleration. And if you could just clarify for us the quarter-on-quarter order trends in DDN, I think you noted 60% year-over-year increase in orders. Wondering if you can characterize the sequential change in orders there, too.

Sure. So let me get into auto a little bit. So first off on auto, I do want to start with production because it's not lost. There's headlines out there. And when we think about production, production, how we saw it as we started the year hasn't changed. We expect there to be 88 million to 89 million units. And when we started the year, we thought every market was going to be down slightly. Europe is up a little bit. Asia and China is exactly where we thought. North America is a little worse.

So when you look at it, the production environment is playing out as we want. Certainly, some of the regional pieces are a little bit different, mainly in North America being a little worse, Europe being a little bit stronger. And when you look quarter-to-date -- I mean, year-to-date, and we ask you not to look at quarters, we're running at the 4-point outperformance above production. And really, when you look at that, we were very strong in China, right off the bat. We continue to show that strong presence that we have. Europe had nice growth over market where it isn't where we were within North America due to some of the cancellations you saw. But overall, we're still in the range, and our results and orders continue to say we're going to be at the range.

So as we look forward, those production assumptions and orders continue to be very strong, and it's around the drivers we talked about. In Asia, electric vehicle adoption continues. That's not changing, as well as strong in the data connectivity side. And as you go into North America, we have some EV pressures that we've been dealing with. But net-net, I feel good about where we are in the 4% to 6%, at the lower end, and we expect to be there for the year and do expect on first half versus second half, while production is going to be fairly flattish, if you compare halves that our automotive business will be up.

On DDN, I don't have all the quarters in front of me, but $2 billion is the first half orders that I mentioned. I also want to say we will have bumpiness. These are programs. It goes back to where we've talked to you about. We're very excited that they're across a broad customer base. We're growing across all the customers that are key, but we will have some lumpiness. And Wamsi, we can follow up later to your question. I just don't have it here in front of me.

Your next question comes from the line of Christopher Glynn of Oppenheimer.

I've been around the portfolio pretty thoroughly, so just wanted to talk about capital and portfolio. Did a little bolt-on. Hasn't been much on divestiture for quite a while. I'm not sure how you view sensors, but just that and the weighting of acquisition pipeline versus buyback acceleration potential.

Sure. Let me talk a little bit, and then I'll also ask Heath to jump in. So first of all, similar, I think when you think about what we teed up in November at the Investor Day, nothing's changed. We really like the portfolio. I think what you're going to continue to see is the bolt-on that we talked about, like I mentioned with Richards in the energy space. Certainly, we did something in the DDN space around the technology acquisition. But it's more about playing offense than defense and pruning right now to really make sure we capitalize on the growth trends where we position ourselves. Heath, do you want to click down a little bit...

Chris, I'd say the pipeline is actually for M&A. It's actually -- it's pretty active right now. I mean there's a lot of things that we see either real time or that we anticipate coming to market here in the next few quarters. Some of those, we're taking a very hard look at in terms of how they fit with us and where we can create value for our owners. There's other things that might be interesting, but there might be other people who are better owners for. So there's a level of interest there from our side outside of some of just the technology investments that Terrence mentioned. And I guess I'd just say stay tuned because that strategy is never linear. We have to see when things come to market and when they make sense for us. But yes, it's a reasonable pipeline right now.

Your next question comes from the line of Joe Spak from UBS.

Just wanted to touch on margins for a second. I mean you mentioned some of the inflationary costs. And just given the velocity with how fast things moved, I wonder if that weighed at all in the quarter. But more importantly, for the next quarter outlook, you mentioned how in the past you always do a good job internally and passing stuff on. But is that -- so I think that protects EBIT, but should we expect a little bit of margin pressure just on the math next quarter? And could you quantify that at all?

Joe, I mean, we've been dealing with different types of inflationary pressures, whether those are tariff related or certainly the metals that we've seen some pretty significant inflation on here for a while. Within the quarter that we just reported here, the second quarter, certainly, we've seen the oil-based derivatives increase. For us, that means resins, and we do buy a lot of resins. So we've seen those go up. We've seen freight and logistics costs go up as we move things around to our customers.

So we do have a playbook. The team is pretty well conditioned right now that we don't get caught flat-footed when we see these things happening. We're able to largely pass that through in terms of price or maybe some other things we can do with our customers logistically in terms of where they take receipt of things. But there is a little bit of noise in our absolute margins for sure on that. Now as we talked about at the Investor Day, we're still committed to our -- to getting at least 30% flow-through on the operating income side year-over-year. We were able to do that in both segments. And obviously, for the company, I think if you kind of think about what our guide implies, you'll still see that level of consistency as we work forward.

So when you're getting 30% flow-through, it does have -- and you're sitting at 22% margins, it does have that ability to move margins up. But I'd say both segments are operating well in this environment. But in terms of the headwind towards margins, there's a little bit of noise in there. And some of that's just the timing of when we feel those costs come in versus when the price is realized. But again, in absolute terms, I think that we're managing through it.

Next question comes from the line of Joe Giordano of TD Cowen.

Just curious, I guess this is somewhat data center, but it could be more broad, and I think you just touched on it a little bit. But when you see orders up as much as we're seeing and price/cost still kind of lagging, like how do we think about the price inherent in the orders versus the price that's coming through in P&L? Like is there a real lag there? Like are you kind of covered already in the kind of in the backlog? And Heath, just if there's any update on CapEx expectations for the year in light of the orders?

Yes. Joe, let me hit -- I mean, I'm not -- we haven't seen -- from an order perspective, we haven't seen people in any real activity or motivation to get ahead or pull things in. And we're pretty tied in with both where we sell direct as well as with our distributor base on that front. So we haven't really seen any noise there in terms of people trying to get in ahead of a price increase. The orders that we're seeing are really project-based and things that we've had in the pipeline that are coming and then where we see it come in from -- it's a little bit more hand-to-mouth from distribution, it's pretty consistent. So that has not been highlighted to us from our businesses as a major concern in terms of matching up when they're seeing the inflation versus when the price is going in. But there is always a little bit of natural timing there.

On CapEx, we have taken our CapEx up this year. We talked a little bit about it in prior calls. You should expect CapEx this year to run about 6% of revenue. That increase that we've had over the past couple of years is almost entirely due to ramping the AI programs within our DDN business. And those are tied to very specific programs. When we make capital investments, we have been awarded programs at that pace, at those spots. So we have some protection on that. We're not just out speculating where we need to make those big CapEx investments. So in some ways, that's a good indicator, if I'm sitting in your shoes, of what's to come in that space.

Your next question comes from the line of Guy Hardwick of Barclays.

I think you said the AI business will be running at $2.4 billion this year. I assume that includes the cloud business, which I think was running like a $500 million last year. But my question is actually on the 30%, which is AI or cloud related, and that's enterprise telecom, which potentially could be squeezed for or competing for dollars for AI -- because of AI investments. So maybe you could talk about the trends in enterprise telecom and other IT.

No. Actually -- thanks, Guy, for the question. What we've seen, and we talked a little bit last time, what we're seeing is we're actually not to the level of growth that we see in the AI side, but that spending is constructive. On the enterprise, telecom and wireless space as a collective, we are seeing nice growth there. It's not at the rates, like I talked about, 60%. But I would say how people are prioritizing that between those spends, I'm not sure I'm the best person to say for the broader market, but in our order trends, we are seeing nice growth, and it is growth in those other product categories or end market segments.

Next question comes from the line of Asiya Merchant of Citigroup.

My question is around just tightness in components, whether it's memory or CPUs and even GPU and allocation. Maybe you could help us understand, hyperscalers, were they providing much better visibility as a result of this, hyperscalers as well as your chip companies that you deal with? If they were just providing better visibility due to these supply chain issues? And if you're forecasting any more complexity as these programs ramp in the back half?

Sure. Thanks for the question. So first off, when you look at the product categories, you're talking about memory, GPUs, CPUs. We don't buy that. So from our procurement, we don't buy that. Certainly, it's well known that memory is tight. And when I think about our business, which is important, what we're seeing for our customers, they are -- and you've heard me talk about in the orders, they are going out in their orders a little bit to make sure capacity is reserved and on the ramps that they have coming. So that's built more backlog for us as we've highlighted in the orders in DDN. But net-net, we're not seeing availability issues on what we procure to make our products.

Certainly, our customers continue to ask us to ramp and ramp quicker. We're not seeing any slowdowns from our builds into our customers or 5 hyperscaler customers at all. If anything, as we've talked about with the $150 million, some of that is they're increasing their ramps. So clearly, memory is tight. You can go to the memory, of course, and see that. But net-net, we're not seeing any impact in any of our businesses yet. And some of our customers are trying to do planning and they build buffer stock to make sure their supply is secure on those components, but we're not the closest to it.

Your next question comes from the line of Steven Fox of Fox Advisors.

I just had one on the energy market. So the organic growth has slowed, still double digits. But I was curious, Terrence, you've talked about how energy can sort of be hand-in-hand with the growth you see in some of the data center markets. Are you seeing conversations with customers that there's a lag effect that maybe we see an acceleration in growth, or is 10% type of the number we should think about? Can you just give us a sense for how energy looks maybe going out the next few quarters?

Yes. Steve, I think what's important is please keep the framing of what I talked about, about, hey, 60-plus percent of this energy business is utility grid hardening, what is data center or industrial and then what is renewable. And I do think that the growth rate came down a little bit is due to the clean energy side where you have had some pauses on what's happening in utility, grid hardening and the industrial/data center space. It's full steam ahead. Now there are elements that you come into regulatory elements of when things get built and staged. Feel very good about where we are and feel like we'll be staying around this double digit for a while now with this build that we're seeing, with probably the biggest lumpiness being in the clean energy space.

Your next question comes from the line of Samik Chatterjee of JPMorgan.

Terrence, if I can ask you to go back to the discussion around your capabilities that you're adding related to optical and on copper in terms of scale up. At the Investor Day, you had given us this AI rack representation and copper content, or your content could be as much as $870 per chip. When you're engaging with your customers now and as you think about optical and scale up, is that going to be additive to the content opportunity that you outlined at the Investor Day, or is it going to be part of that overall content that you presented at the Investor Day? And maybe sort of how are you thinking about, in 5 years' time, how does the mix between copper and optical look in that content opportunity in a scale-up domain?

Thank you, Samik. So first off, when you think about the technology acquisition we did, and even what I said, this will help us in the scale-out element where we're not as strong because this is really where you get to where the fiber attached to the CPO for the scale-out. So that would be increased content versus what happens in the rack. And over time, this is going to migrate and what that migration rate is, is going to be very iterative with our customers as they make design constraints between the power chain and the data chain. And we even see that as inferencing is coming in, how the architecture continues to move.

So when you sit there versus what we talked about, it's an increase of content that we have, and it's just the positioning that we're always going to be looking at to do in all of our businesses, not just DDN to say, how do we get deeper with our customers in their architecture? And this is a nice fill of a building block that, we feel with what we can do with it and integrate it with what we do already, we'll be able to hit the inflection point that they're working on.

Your next question comes from the line of Colin Langan of Wells Fargo.

A follow-up actually on the co-packaged optics. I mean if you don't sort of build out the fiber optics capability from where you are today, any way to frame the downside or the content loss if a customer switches from copper to a fiber optic solution?

Colin, the one thing I'm going to say, I'm going to go back to what I said in the script, it's very clear with the work we do with our customers. It's not going to be an or, it's going to be an and between copper and fiber. And that word, while it's a simple word, copper and fiber sounds like more important words, the and is the most important. And even when we think about the copper TAM, even as optics gets introduced into scale-out and how it could be a mix in the rack, our TAM and copper is going to continue to grow due to the power elements that you need, power connectivity goes up, where they will continue to keep copper within the rack as the workhorse. So those types of things, we still see TAM growth in copper. And then we're also going to benefit from the inflection point, when it does occur of optical. We're really nicely positioned for it.

Next question comes from the line of William Stein of Truist Securities.

In the industrial end market, I have sort of two related questions. The DDN piece, there's very clear growth in bookings, and I congratulate you on that. It's clear that you've got growth coming. But it was a bit surprising to have 2 sequential quarters of flattish revenue performance. I wonder if you can explain why the revenue hasn't been growing for the last couple of quarters meaningfully in that part of industrial. And related -- perhaps related to that, this quarter, we saw segment revenue in industrial grow, but op margin decline. And I wonder if it's related to orders maybe ramping later in the year instead of now or maybe it's the recent acquisition you did in Energy. Any help there would be much appreciated.

First off, Will, on your first part of your question, the important thing is we're going to grow this year in DDN and AI by about $1 billion. Looking at things on quarters, and I know I say it in automotive a lot, and you're all probably rolling your eyes right now with me, if you look at a quarter, there's different programs that ramp supply chain impacts. And I think the more important point is we've increased our revenue by another $150 million. We're going to be stepping up here in the second half. And even the number we shared at Investor Day of the $3 billion, it continues to shift towards the left due to the momentum that we have. Heath, do you want to cover the margin side?

Yes. The year-over-year margins are up significantly, so I assume you're talking about the sequential margins. Listen, it's a similar answer to what Terrence just said. You're going to have -- always have a little bit of noise in any quarter. Sometimes that works in your favor. Sometimes it sequentially evens out. We tend to look at margins on a year-to-date or rolling basis. I'd say if I think about anything that's specific to that -- I mean, we have ramped, no different than I talked about CapEx earlier with Joe's question, we have ramped some investments in our DDN business to support these programs. So there's different times over a 90-day period that you might feel some of that pinch point a little bit more. But when I think about the full year or even where we are year-to-date, I feel good about both the margin performance as well as the flow-through on that organic revenue growth. So there's nothing that I'm, I'll say, dwelling on relative to some kind of sequential growth there.

Next question comes from the line of Shreyas Patil of Wolfe Research.

Maybe just coming back to the discussion on CPO and optical. I'm just curious how big your optical business for AI applications is today, and where you feel the need to further bolster via M&A, maybe on the transceiver side or DCI modules or things like that?

Shreyas, I think that what's important is, and in the pre-remarks, we're going to stay in passives. So when you look at transceivers and things like that, I don't think that's where we add value in the supply chain. And really, when you look at what we're doing here and what TE does is how do you get the signal chain that's moving off the CPO, would be the fiber attach, how do you get out to an optical backplane? And really the technology we did helps our base around the fiber attach.

Also, we are stronger within the rack, so that's more -- that's going to be further out, but we do think this will get us into some scale-out options versus just scale-up, which is more limited. But we will continue to look at via partnerships versus organic development, as well as what we just did, to say how do we build it out? We really like how we're positioned with this building block we got in to really make sure we can help our customers as they evolve their architecture. So thanks for the question.

All right. I want to thank everyone for joining us this morning. And if you have further questions, please contact Investor Relations at TE. Thank you, and have a nice day.

Today's conference call will be available for replay beginning at 11:30 a.m. Eastern Time today on the Investor Relations portion of the TE Connectivity's website. That will conclude the conference today. Thank you, and goodbye.

Everyone, thank you for standing by, and welcome to the TE Connectivity First Quarter Earnings Call for Fiscal Year 2026. [Operator Instructions] As a reminder, today's call is being recorded.

I would now like to turn the conference over to our host, Vice President of Investor Relations, Sujal Shah. Please go ahead.

Good morning, and thank you for joining our conference call to discuss TE Connectivity's First Quarter results and our outlook for the Second Quarter of Fiscal 2026. 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, 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 at te.com. [Operator Instructions]

Let me now turn the call over to Terrence for opening comments.

Thank you, Sujal. And I also want to thank everyone for joining us today, and I also want to thank those of you who attended our Investor Day last quarter.

Before I get into details on the slide, I do want to frame today's call around the key messages that we shared at the event in November and are reinforced by our first quarter results as well as our outlook. And briefly, we conveyed several key tenets of our strategy and business model.

First, that we have been investing and have broadened our growth drivers to benefit from secular trends that are driven by the increased needs by our customers around data and power connectivity.

Second, our co-creation engineering models ensures product innovation. And that, coupled with our global supply chain investments will drive value for our customers.

And lastly, that we will capitalize on the growth and the investments to drive margin expansion with double-digit earnings per share growth and a continued strong cash generation model.

Our first quarter results and our expectations going forward to reinforce these key messages that we convey. We delivered over 20% sales growth in the first quarter with growth in both segments by driving content growth above market. We had record orders of over $5 billion, and this was a growth of more than $1 billion versus the prior year, and this order growth was across our businesses. This growth is being driven by new program awards from our customers, demonstrating the operations and engineering moat that we outlined. Our sales growth and order momentum reinforces the broadening that we talked about at our Investor Day.

We also have improved our operating resilience through localization of our supply chain. Our teams continue to execute well despite ongoing macro unevenness to deliver record adjusted operating margins and earnings per share in the first quarter, along with strong cash generation. And lastly, we outlined a long-term through-cycle target of 6 to 8 points of annual average growth. With the momentum that we're seeing, we expect to deliver growth in fiscal 2026 that is ahead of this target.

So with that as a backdrop, let's get into the slides that we sent out, starting with Slide 3, and I'll discuss first quarter results and our guidance for the second quarter of fiscal 2026.

Our first quarter sales were $4.7 billion, growing 22% on a reported basis and 15% organically year-over-year with growth in both segments, and both segments contributed to our sales being above guidance. As I mentioned, we saw orders increase to a record level of over $5 billion, and our book-to-bill was 1.1, reinforcing our momentum, and I'll provide more color on orders as I get into the next slide.

We delivered record adjusted earnings per share of $2.72, which was above guidance and increased over 30% versus the prior year due to strong execution by our teams. Adjusted operating margins were 22%, and this was an increase of 180 basis points over last year.

We also continue to demonstrate our strong cash generation model with free cash flow above $600 million, and we returned 100% of our free cash flow to shareholders in the quarter, while continuing to support investments for future growth.

As we look forward, we are expecting our second quarter sales to be $4.7 billion, reflecting an increase of 13% year-over-year on a reported basis and 6% organically. We expect adjusted earnings per share to be around $2.65, and this is 20% growth year-over-year. Sequentially, we expect our Industrial Solutions segment to grow, and this will be partially offset by transportation's typical auto seasonality trends that we see globally.

So with that as a quick overview of results, let's turn to Slide 4, so I can get into more detail on our order trends.

In the quarter, we saw orders increase by over $1 billion versus the prior year to $5.1 billion. By geography, we saw double-digit organic order growth in all regions on a year-over-year basis. At our Investor Day, we discussed our engineering-centric design model and focus on the need for more data and power connectivity to create value for our customers that will also translate into value for our owners. Our momentum in the key applications continue, whether that is secular growth in AI, the positioning of TE for power connectivity in the utility space, or the data connectivity needed for next-generation vehicles as a key driver of content growth for our transportation businesses.

Getting into orders by segment. In the Industrial segment, orders grew over 40% versus the prior year with essentially every business posting double-digit growth versus the prior year. We see ongoing momentum in digital data networks, energy as well as AD&M. In our automation and connected living business, we are seeing recovery in the factory automation applications with organic sales growth in all regions, both year-over-year and sequentially, and I meant orders growth, not sales growth.

Transportation orders increased 11% versus the prior year and grew in all businesses. In our automotive business, orders grew year-over-year and sequentially from the fourth quarter to the first quarter, we saw our normal seasonal trends that follow auto production. Commercial transportation organic orders grew both year-over-year and sequentially, indicating ongoing market improvements in both Asia and in Europe.

So with that as an overview of the orders, let's get into the quarterly segment results, and I'll start with our Industrial segment, which is on Slide 5.

Our sales in the Industrial Solutions segment grew 38% in the quarter and 26% on an organic basis year-over-year, reinforcing the broadening of growth within the segment. Digital data networks had another outstanding quarter, where the business grew 70% year-over-year, and our AI revenue was higher than our expectations. Our customers continue to award us new programs and the orders that we've received are creating backlog for the second half of this year and into 2027. We now expect our AI revenues in fiscal 2026 to be a couple of hundred million dollars higher than our view 90 days ago, with growth expected across every hyperscale customer. To support this acceleration, we continue to increase our investment in our digital data networks business, and Heath will talk more about this in his section.

Turning to automation and connected living. The business grew 12% organically year-over-year with growth in each region, and we continue to expect recovery in the general industrial markets as we move through the year.

In our energy business, our sales grew 88%, including the Richards acquisition, which enables us to capitalize on strong growth opportunities in the U.S. utility market. Organically, sales increased 15% driven by continued increased investments by customers in grid hardening and renewable applications. And what was nice this quarter is we saw strong growth both in the United States as well as in Europe.

In our AD&M business, sales grew 11% organically, driven by growth across both commercial aerospace and defense applications. In these markets, we continue to see favorable demand trends coupled with ongoing supply chain improvements that are helping to support the growth.

And in our medical business, we grew 5% organically, which was in line with what we expected. At the segment level, if you look at margins, the Industrial segment adjusted operating margins expanded by over 500 basis points to 23%, driven by strong operational performance and the benefits of higher volume.

So with that as a summary of Industrial Solutions, please turn to Slide 6, and I'll get into Transportation Solutions.

Our sales in the Transportation segment grew 10% in the quarter as well as 7% organically year-over-year. Our auto sales grew 7% organically in the first quarter, driven by content growth in Asia and in Europe. Our growth over market was at the high end of our 4- to 6-point range in the first quarter and as we shared with you at Investor Day, we expect our content growth to be balanced between data connectivity, e-mobility as well as electronification trends in the car. Our current quarter results show the contributions from data connectivity applications in our results, which are growing across all powertrain platforms.

We continue to benefit from our strong global position and localization strategy, and our growth over market in this quarter was driven by China and Europe. As we look forward, our view of auto production in fiscal 2026 remains consistent at roughly 88 million units, which is down slightly versus the last year.

Turning to commercial transportation. We saw strong organic growth of 16% year-over-year, and this growth was driven by Asia and in Europe. After 2 years of cyclical declines in the commercial transportation market, we're now seeing recovery in the end markets outside the United States and expect to benefit from our leading global position and content growth driven by architectural changes.

In our sensors business, sales were essentially flat, which was in line with our expectations. And on the margin side, for the Transportation segment, the team delivered adjusted operating margins above 21%, which was in line with our expectations.

With that overview, let me hand it off to Heath, who will get into more details on the financials and our expectations going forward.

Thank you, Terrence, and good morning, everyone.

Please turn to Slide 7. For the quarter, we achieved record adjusted operating income of over $1 billion with an adjusted operating margin of 22% driven by strong operational performance by our teams. GAAP operating income was $963 million and included $6 million of acquisition-related charges, $10 million of restructuring and other charges, and $57 million of amortization expense. As I said last quarter, I continue to expect restructuring charges in fiscal '26 to be roughly $100 million. Adjusted EPS was $2.72, and GAAP EPS was $2.53 for the quarter and included restructuring, acquisition and other charges of $0.04 and amortization expense of $0.15. The adjusted effective tax rate was approximately 22% in Q1, and we expect Q2 to be at this level as well. We continue to expect the full year tax rate to be approximately 23%, which is similar to last year. Importantly, as always, we anticipate our cash tax rate to be well below our adjusted ETR.

Now if we turn to Slide 8. Our results reflect the business model performance that I shared with you a couple of months ago at our Investor Day event. We are seeing broadening of growth that Terrence mentioned, 30% plus incremental margins on that sales growth, double-digit EPS growth and a strong cash generation model with balanced capital returns. Sales of $4.7 billion were up 22% on a reported basis and 15% on an organic basis year-over-year. Adjusted operating margins were 22.2% in the first quarter, expanding 180 basis points year-over-year. Adjusted earnings per share were $2.72, up 33% year-over-year driven by sales growth and margin expansion.

Turning to cash flow. Cash from operations was $865 million and free cash flow was $608 million, with roughly 100% return to shareholders through share buybacks and dividends. Our cash generation and healthy balance sheet give us continued optionality with uses of capital to support investments for future growth, both organically and through M&A. With the order momentum Terrence mentioned, we are increasing our capital expenditure this year to support the growth -- growing pipeline of customer awards for AI programs. We now expect CapEx to be closer to 6% of our sales this year, we feel strong about our cash generation model and continue to expect at least 100% free cash flow conversion for fiscal '26.

Now before I turn it over to questions, let me reinforce that we continue to execute well in both segments, and our Q1 results reflect a strong start to fiscal '26. For the full year, we are set up to deliver sales growth that is ahead of our through-cycle growth target, while expanding operating margins and very strong earnings per share growth.

And with that, let's open it up for questions.

Thank you. Tiffany, can you please give the instructions for the Q&A session?

[Operator Instructions] Your first question comes from the line of Scott Davis with Melius Research.

Everything was pretty positive. And when you guys are spending more money, that's usually a good sign as well. But I just wanted to lead off with the AI stuff because again, it still is the elephant in the room. I mean it sounds like, if I heard you right, which I think I did, you're taking up your forecast by a couple of hundred million from where you were at Analyst Day. I just wanted to confirm that. But more importantly, I just wanted to address the scaling of those revenues. How is -- can you walk us through the kind of linkage between the capacity adds and the scaling and how you expect that to improve margins as that capacity seasons if you can't give specific numbers, just some reference points and historically when you've added capacity for growth like...

Yes. Sure, Scott, and Happy New Year, and I appreciate the question. And just so we're all aligned about what we said at Investor Day, we did talk about getting to a $3 billion of AI revenue out a couple of years. And we're certainly on track to achieve this and -- versus 90 days ago, when we shared the number, we do think the number for this year will be $200 million more than what we just shared. And what's nice is this year, we're going to have growth across all hyperscaler customers. And that's something that we all know with the CapEx trend that's happening in cloud CapEx to make that happen.

The other thing is as we continue to build the momentum, the orders that we just talked about were very strong. And certainly, DDN played a part of that strength. And as I said in the comments, some of that is layered out later in the year.

On the scaling, let's face it. We have been scaling. So when you look at the growth that we've had around where we positioned ourselves with our hyperscale customers, we've been scaling very nicely. Let's face it, these programs are big programs and that's the time base to scale. Some of the awards we got in the first quarter are for later this year into 2027, I feel that the teams will have it and continuing to be coming in with good margins on it like we have been doing. We have been improving the margins in IS across all the businesses. So it's not just AI, but certainly, we're benefiting from the volumes as we bring these in, and that's why you see some of the margin improvement that we're getting both from the benefit of the ramp of the AI volumes as well as all the businesses improving their margin going forward. And that you saw that strong growth that we talked about in the pre-read comments.

Your next question comes from the line of Mark Delaney with Goldman Sachs.

I was hoping you could double-click on order trends, both sequentially and year-over-year and what that implies for revenue by end market going forward? And I ask in part to better understand the 2Q revenue guidance of about $4.7 billion compared to orders that were over $5.1 billion at a record high. And maybe if you can speak to the duration of orders and if that's changing at all?

Sure. Thanks, Mark. And like I said in the comments, our orders were a record at over $5 billion and that it was $1 billion of order growth. The one thing that's important is it was very broad-based. While we had very strong orders in DDN, if you exclude the DDN orders, our orders were up double digit across TE. So that's the broadened growth we talked about.

And in Industrial, our orders were up in 4 of the 5 businesses, double digits as well. So we have seen strengthening of orders here. Now that is continued momentum in DDN for AI applications and also energy, which let's face it, they were big growth drivers for us last year. We're also continuing to see AD&M orders accelerate. And they are typically in aerospace and defense, a little bit longer lead time. And what was nice in the Industrial segment, and I know we've talked to all of you about it is we're continuing to see market improvement in our ACL business, and that was across all regions. Certainly, we're seeing more in factory automation applications, and we're going to continue to see growth as we go through the year in ACL.

When you look at Transportation, and this comes into a little bit to the second part of your question, in Transportation, our orders are reflecting what we see in production patterns. So year-over-year orders were very strong. Clearly, our first quarter is the strongest auto production quarter of the year. But then we do have a 3 million unit production decline quarter 1 to quarter 2. And when we look at that, that's really when you look at the guide, you see that we're going to be up double digits in Industrial as we go quarter 1 to quarter 2, but there will be partially offset by auto production in the world, which will be down about 3 million units.

So that's really when you look at the order momentum, which is very strong. We do have some automotive production changes that happen here that normally happen that you'll see reflected in our guide.

Your next question comes from the line of Amit Daryanani with Evercore.

I just want to go back to the AI discussion for a bit. And I'm hoping you folks can provide some color on what is driving the uptick in AI revenue expectations for the year. Is it just more that the existing programs are doing better? Or you see a better narrative around share gains. Love to just understand kind of what's driving the uptick here? And then maybe if I can just extend that, can you elaborate on what investments TE needs to make to meet this growing demand, both from a CapEx and OpEx perspective?

Sure, Amit, and Happy New Year. So I'll take the first half and I'll let Heath take the second half.

I think the first thing you have to be is, we have and the orders reflect that, new program awards and with the hyperscalers is the way you should think about it. And even on some of that backlog, those programs will ramp here over the next couple of quarters and really be bigger in quarter 3 and quarter 4 than what's happening now. So they do extend out a little bit. And what's nice, and I said it to Scott's question is it's across the hyperscalers. So we're going to have growth across the hyperscalers this year. It is a mix of some programs continuing to ramp, but also new programs with the customers that will ramp in the second half.

Heath, why don't you talk about the investments that you commented on.

Sure. Amit, the -- as you can imagine, as we're winning these programs, the ramps are fairly aggressive in terms of the time window to get up to speed and deliver on their production schedule. So we are -- when we talk about increasing our CapEx investments, we're really talking about specific program wins. And the timing of those, we're going to have to spend money over the next couple of quarters to support the production of those in the later part or the second half of our fiscal year and certainly into '27. So as we're stacking up these programs, we're just trying to be transparent that the fact that they are -- there is a specific tooling involved and most of that's going into existing production facilities that we have throughout Asia and a little bit in North America.

So we feel good about our ability to ramp, our teams have shown the ability to ramp quickly, but it's -- we're just continuing the acceleration of that, and that's going to require us to take up our CapEx number for this year, but all is feeling good. As you would know, we would not be spending that money if we didn't have revenue and profits tied to it.

Your next question comes from the line of Wamsi Mohan with Bank of America.

Just to stay on the AI topic, I guess, maybe Terrence, could you share some granularity if these programs are NVIDIA-centric, or are they TPU- or other ASIC-centric? And any color on signal versus power? Just to give us some sense of like what the content may be split is across those and what you're seeing in your orders?

No, first off being, as we've talked with many of you, if not all of you, we aren't going to talk at the customer level. Like I said, Wamsi, to the earlier question, these are hyperscaler programs. And it's where -- that has driven our growth to date. And I think you can assume it's a continuation of that growth with those customers. And it is across power and data and signal, like you spent time with us in November, it is broad across both spectrums as we move to next-generation architectures that we're working on. And what's really good is the momentum that we've had with our hyperscale customers is just continuing, and you see it in the orders.

Your next question comes from the line of Luke Junk with Baird.

Terrence, hoping we could just double-click on the trends you're seeing within ACL, especially in the industrial trends. It sounds like you're feeling a bit better or maybe quite a bit better than 90 days ago. And Heath, in terms of the incremental margin story in Industrial Solutions, is this strength something that we should think about just as an incremental margin driver as well?

No. First off, your comments are fair. We've been very much in the mode of -- and I would say there's two businesses I would put in there, not only ACL, but our industrial transportation business, both of them were in a multiyear downturn. And we continue to see and we started to see it last year, improvement in orders. It's nice to see them broaden out across all regions in ACL. Certainly, in ICT, industrial transportation, it's really in Asia and Europe still. But with the momentum we're seeing with what we're hearing from our customers, we do view more momentum is there. You saw on the slide, we grew 12%. Orders were strong.

The one thing I would say when we look at ACL for us, it is around the factory automation and the CapEx side of our Industrial business. Places around residential HVAC, where we play in as well as appliances continue to be soft, but we're seeing the CapEx side of it, and we're seeing it broadly across all regions. So that's -- whether that's Asia, China, Europe, North America. And it's nice to see some of the cyclical pain we had for a couple of years behind us. And as these businesses come up, let's face it, we've talked to you about, hey, they are better profit pools naturally. So they will also benefit our margin as they recover.

And Luke, on your incremental margins, as we talked about in our business model, in terms of our flow-through. I mean certainly, both segments, I'm confident, will be at their 30% plus flow-through on their growth for FY '26. For the Industrial segment, certainly, the volume growth at these levels is helping a lot. We are able to get volume leverage on this kind of scale. So I would still tune into the 30% plus, but there'll be quarters when we're well out ahead of that for sure.

Your next question comes from the line of Joe Spak with UBS.

Just within DDN, two quick questions. I guess you're talking about continued sort of AI growth. So with the total revenue flattish quarter-over-quarter would suggest the [indiscernible] kind of slowed or it's even really down, I guess, quarter-over-quarter. Maybe you could help us understand what's going on there. And then even with the AI portion raise, it seems like you might actually be at a run rate higher than [ the level ] you just raised to. So I'm just wondering, is that sort of constrained by some of the capacity? Or would you classify that as just some conservatism?

No, Joe, a couple of things. We grew AI programs from quarter 4 to quarter 1 sequentially. So that -- there was growth sequentially there. And also we expect our Industrial Solutions segment to grow sequentially quarter 4 -- quarter 1 to quarter 2. And certainly, we have the production decline in automotive. So I feel very good about the momentum. And like I said, the orders that we have set up for quarter 3 and quarter 4, which is where the bulk of the increase that I talked about, the $200 million is really will come as these programs ramp and into '27.

So we feel very good about the momentum. The orders reflect it. The DDN orders were up 70% year-over-year in the quarter, which is very strong and continue to feel that the momentum we have is strong. I don't think it has anything to do with capacity constraints.

Your next question comes from the line of Samik Chatterjee with JPMorgan.

Maybe just staying with the AI theme, but more a question on the supply chain and what you're seeing on that front in terms of either tightness on the components or inflation thereof. I'm just wondering what you're seeing overall from that perspective in the supply chain? And if that is the driver of why the hyperscalers are giving you a bit more forward visibility with the orders for the new programs? Or do you think it's just the complexity? Is it more the complexity of the new programs that's driving these sort of longer-dated orders? Any color there would be helpful.

Well, first off, our customers are expecting ramps that are very fast. So when you look at this, you're really talking about program launches that will happen later in the year. In our supply chain, honestly, what do we feel and what we procure, we are able to procure what we need to procure. There is inflation around things that are metal related and that's not just the AI supply chain, that's everywhere around us. And our teams are doing the appropriate pricing to make sure we get recovery on that. And from that viewpoint, that inflation is being passed through.

And just that they're looking out, they're reserving capacity for the programs. These are very specific programs to a customer. These are not generic components that we're making here. This is very specific to a program. And what's nice is our team continues with the momentum to get these wins with our hyperscale customers and they're just giving us some visibility to make sure the ramps occur.

Your next question comes from the line of Colin Langan with Wells Fargo.

Just DRAM prices have really skyrocketed, do you have any direct impact to that? And if not, do you also see any risk to auto production because of the potential supply issues there. Any thoughts on that risk and issue?

Yes, for the memory that obviously is out there that you talk about. We don't buy significant memory that impacts our supply chain. And that's what we're very much focused on. When we talk to our customers right now, there is nothing related to memory that we see slowdowns that are happening that are impacting our customers and our discussions. And I think what's really important is how we continue to service our customers and what's been really nice and you see the growth over market that we delivered is across all three of the levers. So the memory situation is not impacting us at all, and our teams are doing a really good job doing the growth above market in Transportation.

Your next question comes from the line of Guy Hardwick with Barclays.

Congrats on the excellent results. The commercial transportation business was probably stronger than people expected. Was that down to easy comparatives? I know in the slide deck, you said that's growth driven by Asia and Europe. But in terms of order momentum, what would you say the outlook is for commercial transportation for the rest of the year?

No, Guy, I mean, let's face it, but last year's first quarter was an easier compare. So that is -- when you look at that growth rate, it is benefiting from that. But what I would tell you, when we look at the first quarter, and we even look at the year, and we talked about it a little bit last year towards the end of the year, we continue to see in places like China and Europe and India, whether it's truck builds, construction equipment builds, have improved. And when you look at it, the growth over market you sit there has been strong.

When we look at the year, we think global truck build will be up 200 basis points, and we feel very confident we'll outgrow that for the year. The real wildcard we still have to watch is North America. North America truck market is still negative. And I think that's probably the one toggle switch that we have to continue to keep an eye on because we aren't seeing as much order improvement there yet. But outside the United States, it has actually shown a pickup around the world. And certainly, we're hoping as we move through the year, that we can get some of that uptick in the North American production environment as well.

Your next question comes from the line of Asiya Merchant with Citi.

Just wanted to just double-click on the EPS guide, slightly down versus sales, which were flat. So are these some below the operating income items that we should consider here? And just related to that, the incremental operating margins, I think you guys are guiding to continue to be strong here. Just given the momentum in the business, looking -- just trying to understand what could be drivers for further expansion in those incrementals.

Yes, Asiya, the -- I'd say, Q1 to Q2 in terms of just -- I mean, I think there's $0.04 or $0.05 of higher -- of tax and higher interest expense between the 2 quarters. So that's probably your major bridging item if you're just thinking about that.

In terms of the incrementals, we feel good about being at 30% or better. And as we work our way through the quarters this year, I don't see anything that would derail that. Certainly, volume is important. And there's no doubt that we've done a pretty good job. There's always more to do, but we've done a pretty good job of reducing our operating footprint, which has the effect of reducing some of our fixed costs, particularly in Western Europe. And as that's come, and you throw volume on top of that, that is certainly lending itself to the incremental flow-throughs.

And that has the effect, as we talked about in the Analyst Day, of improving our operating margins. And we've seen that happen. If you look at it consistently over the last several years in most quarters, that's the effect. So yes, we feel good about where we're going to land for this full year, even with some of the incremental investments that we need to make.

Your next question comes from the line of Joe Giordano with TD Cowen.

Can you touch on -- like we've just seen like metal price is exploding here, copper, gold, silver. Can you talk about implications for you guys in terms of procurement, in terms of needing to pass cost on and what the customer acceptance of that has been?

Yes. Joe, this is Heath. You are absolutely correct. I mean we are seeing pressure -- inflationary pressure on the metals specifically. That category is our largest purchase category. So the team is hyper focused. We've made investments as we talked about at the Analyst Day with some of the supply chain investments that we've made to get more scale and leverage purchases. So that has helped. And that team has a very strong pipeline of opportunities to find ways to reduce those costs.

But there's no doubt that as the spot market goes up, we feel that. Now it has the effect of us very quickly in passing that on through price or through other mechanisms that we can use to source. So we're not going to use it as an excuse on our margins or our flow-through math. But yes, we're feeling it right now, and it will factor into some of the elements we do with pricing.

Your next question comes from the line of Steven Fox with Fox Advisors.

Just to follow up on some of the supply chain questions from two aspects. Just to clarify, when you're passing them through, are you able to pass the higher cost of metals through on a similar time line as you have in the past? And from -- the real question is, when you think about supply chain and your capacity, the good news is you're seeing, like you said, a broadening of demand, while AI is still growing really fast. How do you feel about just being able to keep up from a capacity standpoint as we go through this year and into next fiscal year?

Why don't you take the first half, I'll take the second.

Yes. Steve, I'll take the first half. On the -- we have improved over the years in terms of our ability or let's say, our agility or nimbleness to pass on pricing on these inflationary measures more quickly. So I would say there are certain things that go through distributors and channel that are a little bit easier to pass on prices more quickly. There's other things that we reopened discussions with when we have OE direct discussions. So yes, I mean it's front and center to the team, and we don't expect any significant time lapse as those discussions commence with the inflationary pressures that we're feeling.

Yes. And on the capacity, Steve, first off, being at Investor Day, we highlighted areas where we had added capacity. The AI ramps are really program ramps that are very specific to those programs with those customers because we do that direct. I would tell you, elsewhere, we're in a good spot with capacity. We have some areas that are recovering like we talked about to the earlier question of ACL and ICT, that we have capacity. And we continue to add in areas like energy and aerospace. So even when we did Richards, Richards is doing very well to its original plan, but we're adding capacity there to expand for our energy business as well as making sure we can continue to increase capacity for our aerospace and defense customers, which that market has been -- continues to be strong. We expect it to be strong as the airframers continue to increase their builds as well as what's happening in the defense complex, where that -- those numbers just keep moving up.

Your next question comes from the line of Christopher Glynn with Oppenheimer.

A question on energy. The organic comps are pretty notably steeper in the second half. I'm wondering how orders new applications, maybe even are kind of phasing into that. Would there be a kind of a growth adjustment period as you normalize into the kind of long-term Investor Day outlook? Or would you settle kind of right into that, would you expect?

No, the momentum continues to be very strong, Chris. It hasn't slowed down at all. And as I said on my comments, we've also started to see an uptick in Europe, which is an area that we've had historical presence in, and our focus has been more in the U.S. But we continue to see nice growth across the businesses, including the ones we bought. And remember, it comes into grid hardening and capacity as the energy network plays out.

So as we said at Investor Day, we thought organically, we'd be double digit, I feel like that's where we'll be this year on top of the benefit we get on the inorganic piece in the early part of the year. And it's nice to see the momentum continue. And as I said to Steve, how do we continue to make sure the capacity that we're putting in place supports the growth, and I feel we're on track on that.

Your next question comes from the line of William Stein with Truist Securities.

I'm hoping to just try to further reconcile the outlook with the bookings. The business trends overall sounds like they're good, they're broadening into industrial, as you highlighted. You had a record bookings quarter, very strong book-to-bill. I fully recognize that in some end markets, the bookings duration is a little longer than typical. So the read into the out quarter might not be as immediate as it usually is. But still, I'm looking at March quarter guidance that looks a few points below normal seasonality. My guess is that this is related to auto production in China, which is weaker, specifically for EVs, but can you sort of verify and maybe linger on that for a moment for us, please?

Sure. Will, and Happy New Year. When you look at it, there is an element in our second quarter guide that our segments are moving in two different ways. And IS is going to be up double digits year-on-year. And I think everything related to orders other than some of the AI orders being further out completely aligned. We do have a 3 million unit auto production downtick from quarter 1 to quarter 2 in automotive, typically runs around 2 million units in an average year, it's a little bit worse this year, but it all ties in with the 88 million units that we see for the year.

So we do expect transportation to be down sequentially. That's very -- just the reality of auto production. And our first quarter was higher than seasonal. There is a little bit of, I think, as you're looking at compared to seasonal models, our first quarter, which came in well above guidance was higher than seasonal due to some of the industrial trends. But net-net, we feel very good to where we guided. And certainly, the momentum that the orders show are not only just for quarter 2, but also as we exit through the year, which gives us a lot of confidence around the momentum not only for quarter 2, but for the year.

Your next question comes from the line of Shreyas Patil with Wolfe Research.

Maybe if we could just double-click on the discussion earlier on incremental margins. When I look at the quarter, overall, if I strip out M&A and FX, it looks like incrementals were at 31% in Q1. But between the segments, Industrial might have been closer to 40% plus and Transportation Solutions was in the teens. So I'm just curious, do you expect both segments to converge towards that 30% plus figure that you've talked about previously? Or should we continue to see Industrial running a little bit hotter than that.

Yes, Shreyas. Well, as I stated earlier, I expect, as we're sitting here at the end of our fiscal year that both segments will be at or better than their incremental flow-through math here, the 30% for the full year. In a given quarter, you can have some noise. I think Transportation this quarter was hit with some foreign exchange noise in terms of what some of that is. But in terms of how it impacted their flow-through math. But it's nothing that I'm overly worried about.

So I don't know the second half of your question, which is does the higher running Industrial segment come back down. We'll see. I mean there are some investments that we're making, but as I said earlier on a prior question, at these volume levels, we would expect a little bit more outsized flow through. So we feel good about where both segments are and how they're -- what their trajectory is for the year.

All right. Thanks, Shreyas. I want to thank everybody for joining us this morning for the call. If you have further questions, please contact Investor Relations at TE. Thanks again, and have a nice day.

Today's conference call will be available for replay beginning at 11:30 a.m. Eastern Time today, January 21, on the Investor Relations portion of TE Connectivity's website. That will conclude the conference for today.

Ladies and gentleman, TE Connectivity Vice President of Investor Relations, Sujal Shah.

Good morning. On behalf of the leadership team of TE, I'm happy to welcome you to our 2025 Investor Day. We're excited to have you here in Philadelphia, whether you arrived early and got to enjoy the product showcase or whether you came in this morning, we're pleased to have you with us. I also want to welcome all of those joining via our live webcast. So we're glad you're tuning in, and we hope you find today's presentation to be insightful.

You see the agenda up on the screen. And what we're going to have is about 2 hours of prepared remarks, so you'll hear from our CEO, our segment presidents and our CFO, we'll take a short break, and then we're going to do Q&A. And we just ask that you hold your questions off until the formal Q&A session at the end. We're also going to have the product showcase that you enjoyed yesterday evening. We're going to run it again after the event. So that you have a chance to talk to our subject-matter experts and enjoy some of the products and technologies that are really going to be the basis of what you're going to hear today.

And finally, I want to mention that we're going to be providing certain forward-looking information and using certain non-GAAP measures in our discussion today. We ask you to review the sections of our slide presentation on our website, that address the use of these items. Also, as a reminder, beginning this fiscal year, we're excluding amortization expense on intangible assets from certain of our non-GAAP financial measures. And this change is reflected in the slides that you see today.

Thank you again for being here. We're proud of what we've built. We're excited about where we're headed and grateful to have you with us today. So let's get started with a short video.

[Presentation]

And now TE Connectivity, Chief Executive Officer, Terrence Curtin.

Good morning, everybody, and we truly appreciate you coming into Pennsylvania. And for those that are here in the room, I really hope you liked the product showcase last night. It's going to bring out the innovation that we talk about in some of our bigger drivers. And certainly, I think you got a front-edge view with our general managers and our technical leaders around some of them of where you see where we take innovation and how we're going to benefit from it.

I also want to welcome all of you online again. So thank you for joining us and making the commitment here to learn more about TE and where we're taking TE in the future. So thank you as well for being with us. And then one last thing just before I get started, I do want to make sure you all -- and highlight that we have 5 of our Board members here, including our Chairman, which I think also just shows the support our Board has and also to give you access to the Board for questions that you've had. And I know some of you talked to them this morning. So please take advantage of our Board members that are over here to the right.

Now in getting started, I just want to start with, you all know we don't do Investor Days every day. We've always had a view at TE. We do Investor Days when there's a change or an inflection point. And honestly, what we're going to convey to you today is we do believe that there's a change in an inflection point. Inflection point about -- you all know over the past 5 years, it's not been a straight-line world, but we've accomplished a lot, and we've accomplished what we told you we were going to do. On top of that, we've invested in TE to build on the foundation that you saw -- for those of you here that saw the product showcase.

And I'm going to talk about in the front where we've invested and why we feel the foundation around both what we do technically and operations is ready for this next stage of growth. And certainly, it doesn't go back to our customers where we have to create value for them every day. But guess what, when we get it right with them, we also get it right for you. And that's what we're going to talk about today when we think about this next chapter of value creation at TE that we're excited about, but we're also very confident about. And they are the things we're going to build on as we go through our next couple of hours together.

Now how will we shape the next 2 hours? Sujal told you how we were going to present. I'm going to start with really talking about our co-creation model. And when you sit there, it can't be underestimated how sticky this is and also how focused we've been about how we make sure where we play and the broadening of the bets we've made that give us the confidence that we can grow TE over the next 5 years, 6% to 8%. And that's a significant step-up from where we've been running, and I'll talk about that.

Then you're going to hear from Shad, our Industrial Solutions President. Our Industrial Solutions is going to be the larger of our growth drivers, and that's a big change from when we talked in the past. And he's going to get into product examples, case studies, no different than Aaron will do in transportation, but really to say where do we continue to build on where we've placed our bets to where to be from foundation, but also capitalize on the trends, which are very broad and in many ways, only going up to the right.

Aaron will come up after Shad and talk about our Transportation segment and what's going to continue to be a 4% to 6% content outperformance that we believe in, in what -- in our automotive business is an absolutely unmatched position we have globally. And we can't lose sight of that global position that we get to build on the trends that are happening in next-generation vehicles that Aaron is going to take us through. And we're going to reinforce the 4% to 6% that we've continued to talk to you about.

And then Heath will get up at the end and bring it all together from a financial perspective. Where does the growth come? How do we think about margin from here? Also, how do we think about the strong cash generation and the capital deployment from here. And then we'll get into Q&A, as Sujal said. So this is what we're going to work through today, and I hope you get excited about it, no different than we're really excited about it.

So I know the people in the room go to investor presentations all the time, and we all have to have our company on a page for you all. And this is it. And I'm going to go through the numbers quickly because I want to spend more time, not on the numbers, the things I really want you to keep in front of your mind as we go through today. So yes, last year, we had over $17 billion of revenue, 21% operating income that's 25% EBITDA, really good cash flow performance, well over 100%, and that's where we believe we can keep it well over 100%. And these hit a lot of records, and you know that from the earnings.

But the thing that's more important that I want you to get out of this page is, and it goes across the bottom, we're very focused in what we do. We only do connectivity. We don't do anything else. And we're also very focused in the markets where we play in. And I'm going to talk about the trends that transcend all the markets a little bit later. But it's very important when you sit there, we continue to think there's a lot of opportunity in the markets that we're in today. The other thing is, this is still a big market where we play those -- that row at the bottom is about $130 billion market where we pick the play.

It still has fragmentation in it. It's what creates the organic and the inorganic opportunities we get excited about. And the last thing I want you to remember when you look at this slide, many times we get questions from investors of why is an interconnect important? Why is connectivity important? And I know you're all in your room with your PCs plugged in, and that's the connector you think about.

But as we go through today, the connector you can't see is typically the one we're working on. It's in an absolutely an environment that's critical. It could be the connector that connects your airbag system into your analog brake system. It could be something in an interventional device that actually has a camera that one of your family members is actually having a procedure to help them have a better quality of life. And certainly, I know there's lots of joy around AI, and you're going to give us a lot of questions. But every one of those signals needs to move and not one connection can be off or brings down things like large language models.

So this is a very technical business. We pick very hard problems that we're only going to work on. And I want you to remember that because I'm going to spend time on building why we believe this business is very sticky, it's a great business to be in and certainly a business that some of you have invested in for a long time. Also, we hope more of you invest in it. So I want to talk about -- we call it our moat, and it's something we think about every day when we think about where we place bets, where we create value for our customers.

And at the end of the day, when you think about what we do, it's what's on the top of this slide. That's what we talk about in TE all the time. We create a more safe, sustainable, productive and connected world. But the important word in that phrase is the first word. It's we create. We engineer close to our customers, and I'm going to come back to that. But you have to realize when we engineer close to our customers, we bring that innovation, our customers' architectures are very different because they're trying to win versus each other.

And you saw that for those of you that were here, you got to see it when you saw the product showcase. While we showed you probably 1,000 to 1,500 parts last night, we make over 0.5 million that we sell. And guess what, what we design and engineer, we got to bring to life in the back end at the quality and the service levels that our customers expect that never bring their manufacturing or their architecture down. That's the stickiness that we get and it's where we pick to play, and we get excited about.

Now I want to talk about the top part here from an engineering, and then I'll get into the back-end operations side. First off is, I want to start with the middle box, which is co-creation. A lot of companies say this, but the element is in TE, this is not a business where you build it centrally and customers come to you. Our customers expect us next to them as they're working on their architecture. They've made a semiconductor choice, a power supply choice, something to get their architecture or application to life.

And we're helping them get there and work with them to say, how do you bring all the architecture together with the connectivity we do. We've earned it. It's positioned where our customers expect us to be next to them generation after generation, continuing to solve as they evolve their architecture. And when you look at the upper left, TE today has 10,000. It's actually 10,700 engineers. We've increased that 2,000 over the past 5 years. So we've increased our engineering capabilities by about 25% from the front end where we touch the customer all the way back through the process engineers that actually have to make things launch.

And they're focused on those areas and those markets that we showed you last night for those of you here, but also focused on the areas that we're going to talk about that drive the outsized growth. The other thing I want to bring to life is this is not one program or project, this business. Those 10,000 engineers today are working on 5,000 projects around the architectures of our customers. We'll probably launch a 1,000 of them this year. That shows you the stickiness, the scaling as well as how deep we have to be in to solve the problems that our customers expect us to show up and help them with.

And not to be lost, which is the far right-hand side of this slide, please realize all our systems -- our customer systems' architecture are getting more complex. And guess what, they're all designing them at a faster rate. So like our hyperscaled customers always tell us, we need you to continue to shift left in the design process. It needs to be shorter. And every one of our customers' markets that we're in continue to get shorter. And we need to arm our engineers with state-of-the-art simulation tools, things that allow AI to help them pick up as they're planning to really make sure we show up at the pace our customers expect, and that creates further stickiness in how we compete.

Now I do want to jump to the bottom of the slide. Bottom of the slide is, it's great to say you can design a product and get it, but now you have to launch it at scale. And you've seen just this past year how some of our units have really ramped at scale at paces that other industries can't ramp at right now. And it does start with the investments we've made around where we've deployed our footprint. In this world, you need to be global. Our customers still expect us to be global.

Not every customer we have is in the United States. But they also want local options in region so that they see the flexibility of their supply base. And we've invested in this. I know we've talked to this audience a lot about the footprint investment we need to do to take things offline and get into the right parts of the world. I'm happy to report we're 76% localized in region. But just as important, we're 90% with our supply chain in region. So where we get materials from is 90% in region.

The other thing from an investment that we've done over the past 5 years, we have 20 more factories that we've added over the past 5 years, mainly organically. We've had some that come in with like the energy acquisitions we've done this year, but they really have flown into 3 buckets. One, places like the United States, where in aerospace and energy, there is an absolute buy American. We strengthened that here. In places where our customers want China plus one, which could be along Mexico, Southeast Asia, we've added a lot there. And certainly, our DDM business benefits from it.

And then there's other markets where we've also added, where we said it is very important. We are local to win in the market directly with our customers. And that's places like Aaron is going to talk to you about in automotive in China as well as what we've done in India to expand our manufacturing footprint in that exciting market. So while we've made a lot of progress on where our footprint should be, I also want to make sure you're aware, both on the engineering and the footprint, we've also added capacity to really take advantage of the growth. And what's impressive is we've done it while we've improved margin over this time.

So not only the financial foundation, but also the operation and innovation foundation that we're going to talk to you about today and bring to life, both are a lot stronger. Now the last thing I want to talk about here when I deal with operations is just talking about factories, they're buildings, but what happens in the buildings to get to the scale that you saw outside. We embrace customization because our customers need it in their architecture. TE has over 3,000 molding presses, over 1,200 stamping presses and 60,000 assembly cells.

Let's be honest. We have a scale advantage, not just because of machines, but the process excellence we drive through our TEOA program. That is really a continuous improvement program that we measure every plan on, but also our COEs to really make sure we're coming out with the best practices that we can really deploy throughout our network, knowing we accept this customization. And you've seen the benefit of that. And like anybody who manufactures, there's always more opportunity to really continue to drive further improvement from here, and we're completely signed up for it and embraced in it.

The last thing when you think about operations, not only from the innovation side, are you delivering at the quality and the service levels your customers expect? We do make 500,000 different salable parts. That's a lot. But when we do customer surveys, we are viewed as a quality leader in the world. We've improved quality 50% over the last 5 years. We're going to improve it again 50% over the next 5 years. And guess what, customers want it to be 0. So we're not done yet, but we have a great advantage here that really helps make sure our customers never worry about that.

And on the service side, at TE, whether you want to say ship to request or ship to schedule, we're 90% plus on both metrics when we accept this complexity. And it's a real advantage to create stickiness as we win with our customers and continue to work on their projects over and over again, which creates the growth that we're going to talk to you about throughout today. So we are excited about the foundation we have. I do want to go back to the financial foundation, though.

And let's face it, we have to win at the customer with the innovation and the operations. And I know many of you in this room are clearly aware of the slide, but we're going to talk a lot today about going back to 2019. And 2019, we believe, is the right way you should measure us through cycle because we think about the business through cycle. And we can also be very honest, there are some of our businesses are still -- production levels are below 2019 due to what we've all been through together.

The key is if you look at the left, our sales growth was 4% over this period. It was all organic. And really, that's against a GDP backdrop of 2.5% is what really what GDP did even though it was up and down. We expect GDP as we talk today, to be sort of in that rate going forward. So we don't expect some economic pickup. We sort of expect it's going to stay the way it is. But we're taking our growth rate up to that 6% to 8%. That really is a different inflection point due to the broadening of the growth drivers and where we position TE, and that is a big change.

In the middle, you see the margin. It's gone up 250 basis points. It's happened at the gross margin line, and it's been done with all these investments I've talked to you about. We've absorbed them. And it's really something we feel good about the foundation. And while we talked to you many times about 20% for a long time, we never view 20% to be a destination. With what we've done with operations, we sort of view that can continue to build from here, and Heath will talk about that.

And then on the right, you see free cash flow. Being a former finance people, this is the one I always think should be first. But the thing that shows the quality of the earnings we've delivered for you is we doubled our free cash flow. And that shows the operational improvement we've had in TE that went from $1.6 billion to $3.2 billion, and it gives a lot of options. And certainly, we've done that with all of you as we've returned the bulk of it back to you over the past 5 years, and we'll talk about how we think about that going forward in a little bit.

Now I've talked about the financial foundation. I've talked about what we've done around where we create value with the customers. This is a slide where I have an asset what we hope we get out of today. So being a transparent person, I also laid down how I think you thought about TE historically. But we're going to talk more about the right. And it's not lost on me when we talked about TE in the past, I'll acknowledge some of those things are the ways we ask you to think about us. But we're asking you to think about us more on how we think about the right as we go through today and we leave today.

First thing comes into, I want you to be absolutely convinced that how important our products are and the innovation we bring to our customers. The moat, and I wish you all could be here for the product showcase, and I know that Shad and Aaron will bring it more to life in some of their case studies. But when you see the value we have to create and what gets relied on our products, this is a super sticky business that is engineering intense and is absolutely critical to our customers to bring their innovations to life.

The growth has broadened. This is just not about where does electric vehicles go and what's the content growth there. You're going to see examples around where data speeds increase, where power is needed that have driven the growth rate up that we're talking to you about today. And also in transportation, it's not just about electrified powertrains. It's what's happening in data in the car. It's what happened to all the other features in the car that Aaron are going to talk about.

Clearly, we expect to have fall-through in the volume from here, 30-plus percent based upon what we've done, and we're going to continue to drive a strong free cash flow engine, one that's going to be over 100% cash flow conversion. And then from a capital deployment, I want to make sure things are clear. Two things that will not change, and our Board is here, so you can ask some questions as well. First off being our absolute commitment to increase the dividend as we grow free cash flow. We've always done that. We're going to continue to do that, and that will be approximately 1/3 and absolutely committed to remain focused on ROIC.

We do have an ROIC mindset in TE when we think about deployment of capital, whether it's organic, inorganic, we'll return to you. And that's going to continue. But there is an element with where we are. We do think it needs to be, hey, excess capital after the dividend after our organic investment, we're looking for the best use of cash. And while we've always done that, we probably haven't always articulated that to you. And clearly, we want to articulate that to you today. So I've talked to you about how I ask you to think about us. I also want to spend a little bit of time on why we have such conviction of taking our growth rate up.

And one of the things I don't want to be lost as part of this conversation, yes, we're going to talk about AI today. We're going to talk about energy today. We're going to talk about next-generation vehicles today. But we have other areas where these trends that what we do in connectivity continue to proliferate through. And we really just don't have the time to talk about every market today. We're going to talk about the bigger growth opportunities.

But I want us all from what you saw last night, there were some common themes that happened when you think about connectivity that we all have to realize are foundational when you think about our business. When you think about connectivity, you're typically thinking about connecting 3 things: trying to get data to move from point A to point B, trying to get power to move from point A to point B or a simple signal. That could just be a simple signal if something is on or off. But when you look at that, you have a compute some place that you're trying to move things through.

And really, when you think about connectivity, the 3 blood lines of what you're thinking about really are data, power and signal. This is what we benefit from the natural trends. And it's not only the examples we have today, it's also our other units that we won't be diving deep in today. But this creates the stickiness. And I want to just dive into data and power a little bit because how it continues to proliferate, there will always be more applications coming that we're going to benefit from, not just the ones we talk about today.

So let's talk about data for a little bit. A lot of people have a number of backgrounds in the room. So will share a quick fact with you. Every day, 3.5 quintillion bytes of data is created, not used, created. And I know people got excited with the AI rack that's outside, but let's face it. That technology that the silicon providers and the hyperscalers are driving is creating that trend. And guess what, it needs to move. It needs to move away from the GPU. It needs to go through a switch. It needs to get over to storage with no latency. And then are the things that our teams work on.

And if you look here, and I'm not going to go through everything on the slide, we're at 224 gig today. We're working on 440 gig, and it's just going to keep on going and kind of drive that growth trend through a cycle. I also want to be honest, that drives things that happen out on the edge. So I know we've had lots of discussions around automotive and electrified powertrain. Think about what happens in the car when you get into zonal architecture, software-defined vehicles, autonomy, where all these cameras and that integration comes together. You need data and you need Ethernet in the car.

And for when I was young, and I'm a lot older than most people in this room, we didn't have that, but these are trends that benefit growth that we're going to talk about today, and you're going from 10 meg to 20 meg, it's going to keep moving. And you're also in a different environment. You're not in an air conditioned environment like you have in a data center. You're in an environment that some of this has to be vibration, salt, other tests that really make what we do special and our customers rely on it.

And other areas like you saw last night was factory automation, that goes out to the edge. So whether that's an AGV, a robot, anything that else happens on the factory floor, you need that data to come in to be more predictive, better quality, and that creates more need for what we do. So data is not going to end and -- just say, well, data plateaus, and we don't need any more data. We're going to benefit for it. It's going to be up to the right over and over again. And what's really nice, we're right in the middle of it across the applications we play in.

Let's talk power a little bit. I know some of you got to see some of our DDN team last night. I know there's this big recollection recently about, hey, data needs power. We've always known that. But where the power -- the data is accelerating to is creating power needs that we all know every day, and we're going to benefit from it. You saw that example on the sidecar power rack. That's going from 132 kilowatts today in Iraq going to be up to 1 meg in the next 5 years. It's an increase in power consumption in Iraq that we're going to be dealing with to really keep up with the data here. We're going to benefit from that. And as that data goes out to the edge, you're going to have other power needs.

E-mobility, you saw examples where we have to get up to 1,000 volts to get to the range, to get to the fast charging to really make sure electric vehicles continue to increase. And we believe they're going to be up to about 50 million units at the end of year 5 coming out. It's going to be driven by Asia. We have a great position there, but it's not going to stop. And let's face it, power needs to come from some place. It's why we made our bets where we benefit from what we do in our energy business around where it comes from the generation into the transmission, into the distribution.

And that's another area where the trends only go up from the CapEx that's going to be there that supports all the applications that we focus ourselves around. And I don't want to stop just there because when you think about aerospace, same trends in defense, aerospace, eVTOL, space applications, clearly, what happens in the interventional devices as they get more powered and more intelligence in them and certainly in next-gen heavy truck vehicles. When you have agriculture that actually has cameras out on the beam that's actually doing predictive software and bringing it back to a compute to say, how much should I apply into this field in an agricultural application.

We benefit from all of that, and it's all due to data and power and where we put ourselves. So I wanted to make sure we were completely aligned around the trends that are important to us as we're going to drive and take our growth rate up to the 6% to 8% that we talked about. Now I also want to share where they provided benefits already. So if you look, you can see in certain of the categories we're going to talk today where our revenue was from a product and an application perspective back in 2019 and content has driven about $2.8 billion of our $4 billion of growth over the past 5 years.

It's going to be well above that to get to our 6% to 8%, well above the $4 billion. And it's going to be in these categories as well as what we have in our other units that really drive it on the backbone of that data and power element. And these are the things that it isn't like we need to start getting traction today on these things. We have traction already. And these are just going to accelerate. And it's why Aaron and Shad, as I talk to you today, are going to click down on use case examples on these to really bring them to life to hope you get the same confidence as we think about looking forward.

The other thing I would just really highlight here for you, this gives us the confidence that we will continue to scale and build upon the foundational investments we made in engineering and operations. And not all of this growth is driven in an up cycle. Automotive has not been in a production up cycle. Factory automation has not been in a production up cycle, and we'll get cycle benefits, but we think through our 6A through cycle.

So let's take this a step further on how we think about growth. And when you look up on this chart and you look at the left-hand side, yes, that's for the analysts in the room, every one of you have this in your reports. Every one of you. So if you want to yell at me that I stole it from you, you can yell at me, I stole it from you. But this is really our industry breakout today. But when we think there, and we think about the discussion and the broadening of growth, where our growth drivers are going to come from over the next 5 years are on the right.

Over 60% of our growth over the next 5 years will come out of our Industrial segment. That's going to be the bigger driver because of the broadening we've had and the trends that we've seen and the bets we've made. And so that we click it down to you, so as you work your models and think about it, we've laid out in the bottom how we think about growth through the different businesses. Now I want to make sure we're clear on how we've laid this out. This is really market growth and content. We're not trying to get into cycles here. We view -- we deliver through cycle.

But clearly, in DDN and energy, we're going to see outsized growth. And you're going to hear that from Shad. He's going to talk about it. We continue to see outsized growth in aerospace, defense and what we do in space, but that also benefits from what's happening in data needed in these applications as well as high power needed in these applications. So it's another area you're going to continue to see outside growth. In automotive and commercial transportation, it's all about content. Aaron will talk about the markets there, but it's going to be about the content position, it is really going to drive the growth.

In ACL, while we benefit from really good growth in automation, there are some other markets there that are general industrial that grows below GDP. And then as you know, we have 2 units, Medical and Sensors that we've been doing some self-help work on, they're going to return to growth. And we really -- when we think about our 6% to 8% that's how we think about how they fit in and how we invest. But all of them will grow, all of them will be contributors to TE, and it's why we feel so confident, and we hope you're as excited as we are about where we're going in this next phase of TE.

So that I don't take up too much more time. I do want to get over to Shad and Aaron. This is going to be the slide Heath comes back in the end to talk about. We do believe this drives 6% to 8% growth. Double-digit EPS, good ROIC going to drive that cash model. But it's just as important of -- we're really excited about where we play. We're excited about what we accomplished, but we're more excited about the foundation we have and how we build from here. We've been investing in that front-end stickiness around that innovation we have to bring in our customer, also how the back end shows up to deliver what our front-end innovates.

But also, you've seen increased accountability out of our teams as well, and we're also very confident in that as well. So what we want to do is to continue to click down on this. We're going to get into the segments, talk about the segments, but then we're also going to get into real use cases about problem solving of the bigger growth areas, and we're going to get started here with Shad from the Industrial Solutions segment. Come on up, Shad.

Thank you, Terrence. Good morning, everyone. Again, my name is Shad Kroeger. I'm President of Industrial Solutions. I've been with TE for 30 years. I started my career as an engineer. I've worked in most of our businesses. And for the last 5 years, I've been leading Industrial Solutions. Traditionally, as Terrence said, we positioned Industrial Solutions to grow at 4% to 6% in our portfolio. Last year, we grew the business $1 billion. 3 out of 5 of the businesses grew more than 10%.

So I'm excited to be here with you today to explain how we're going to accelerate growth to 6% to 8%. The source of our growth and our momentum is really rooted in our customer relationships, and our broad product portfolio with durable content drivers, where TE is uniquely positioned in markets with secular growth trends. It's the combination of those factors that gives me high confidence in our growth. Now I know in the product portfolio or the product showcases yesterday and today, you got to see a lot of the exciting work we're doing. I'm going to build on that today.

So let me dive in to talk more about Industrial Solutions. I'll start with performance. As I said, we grew $1 billion that was 24% growth to nearly $8 billion. We expanded margins 300 basis points last year to 21%. Our diverse portfolio of businesses has durable competitive advantage, and Terrence touched on those, but I want to go a little bit deeper. It really does start with customer intimacy. We create customer intimacy through engineer-to-engineer relationships at the architecture level with our customers. That allows us to leverage our deep technical expertise to co-create with our customers.

And because we manufacture most everything that we build, as Terrence was talking about, that gives us the ability to simultaneously innovate our manufacturing processes, while we're engineering the new designs with our customers. That gives us the capacity to build quality into our manufacturing process and our product, which is critical for our customers. And if you think about that value proposition, that's been our value proposition for years with our customers. It's earned us the strong reputation that Terrence talked about, a strong reputation for quality and innovation.

Now if you look at the 5 businesses within IS, these are all important to our growth over the next 5 years. And each of these are uniquely positioned in the markets that they serve. We have been on a margin journey in IS over the last few years. And in that margin journey, we've addressed structural cost. We've addressed our product portfolio, and we've deployed a lean culture of continuous improvement across our organization. And while doing that, we have positioned our businesses in the highest growth parts of the markets that they serve.

Again, this is a very broad portfolio. It's important that we focus on applications that have content growth opportunities where we will be differentiated with our customers. I want to dive into each of these businesses for you on this slide. I want to start with ACL, automation and connected living. This is a broad product portfolio, probably one of our broadest, certainly in my business. This business is focused on factory automation and building automation. Applications like robotics, you saw the robot arm in the showcase -- so certainly, robotics is important, but also things like machine connectivity, connecting machines together on the factory floor to move the data that Terrence talked about.

It's also controlling those machines. They need high power, they need precise control and they have their own computing needs, and we're making the products that support that. And it's also about building control. So there's a wide range of applications here that offer opportunities for organic growth. But in this fragmented market, there's also opportunities for inorganic growth, like you saw us do adding ERNI and Schaffner into our portfolio to bolster our position with our customers and be more relevant and strategic for them.

Next, I want to talk about Medical. Our Medical business is focused on minimally invasive procedures. We partner with the leading device makers to create and build for them complex steerable shafts that improve patient outcomes. These complex steerable shafts are focused on applications like structural heart and electrophysiology. Next, I want to talk about aerospace and defense. That business is almost split equally for us between defense and commercial air. We literally work on applications from the ocean floor to land, to air, to space.

And the common thing about those applications, our customers need incredibly ruggedized solutions. They need us to move data flawlessly in those applications, and they need power to be uninterrupted. And they need to count on the signal when it's required at the right place for decades in some of these applications. That's how we differentiate with our customers in this market. And as Terrence said, it's an exciting market for us. So each of these 3 businesses is positioned to grow above the market through cycle because of the content opportunities that we have.

The businesses on the right is where I'm going to spend my time talking to you today. These 2 businesses, Digital Data Networks and Energy are benefiting from massive CapEx spending. In addition to that, we have opportunities to drive content growth. And it's a combination of those factors that will drive outsized growth in these 2 businesses. And I will talk more about that as we go through my presentation. I want to start, though, with electronification of everything. It's a term you hear us talk about electronification. Here, everything, as Terrence said, is being electronified.

And TE is uniquely positioned to really capitalize on this powerful trend. Just think about in Energy. But let me go back here a second. This whole -- I want to explain electronification maybe a bit more. We think about this as an always-on interconnected and intelligent systems. And that's something that's pervasive across most of our applications. And it's benefiting all of our businesses in different ways, but it is benefiting all of them. And they're at different stages of their cycles, as you see on the graph here at the bottom.

But electronification is driving content. 2/3 of our growth will come from Energy and from Digital Data Networks from AI. In Energy, there is -- the demand today in energy is so different than where we've been, and it's being driven by some really unique factors. If you think about demand in Energy, it's coming from new sources. It's coming from sources like electric vehicles, from factory automation, from AI. Those things are straining our grid in ways like we've never seen before. And those innovations are outpacing our infrastructure.

And we are at the cusp of decades-long of spending and capital in energy to keep up. And I'll come back to that later in my presentation. And AI is certainly unleashing a new era of computing, one that is fundamentally transforming our economy. And this is really a winner-take-all race with our customers. And they need to optimize compute power, and that's driving needs for data, speeds and for power, as Terrence said, and I'm going to explain that to you today. But I want to share this video with you to better illustrate what this looks like with our customers.

[Presentation]

As you saw in that video, our customers are solving some incredibly hard problems. For them to win, -- they need to maximize the power, the compute power in the rack. The rack you see in that picture are the one that you saw in our product display. That's their mission, and that's the mission that we are on with them. In doing so, they need to increase the density of the compute, and that means they need to increase the speed of the data that's moving and increase the power to feed that and address complicated problems with thermal management.

AI workloads require densely packed compute elements to get arranged in mesh-like configurations with ultra-low latency. Power and signal are now limiters. These are causing design trade-offs with our customers. Connectivity solutions like our connectors and cables are a forethought in this design cycle and are an integral part of the AI architecture. This architecture is becoming incredibly complicated, and it varies between our different customers. And because of that, they're coming to us early in this design cycle, and we touch every part of the modern AI architecture.

We are working with the hyperscalers and the silicon providers to address their issues with density, speed, heat, and power. And our solutions touch every part of that architecture. That's what's driving content growth for us in this business. If you think about the need to win and what our customers are driving to win, they're spending a massive amount of CapEx to make that happen. This year, well over $400 billion will be invested in AI that's a 3x increase from where we were 3 years ago.

Over that period, we've seen an increase in the available connectivity per chip go up 5x. That's the content that has fueled our growth to $1.4 billion in AI and cloud. And it's the combination of the pace of CapEx spending with our unique ability to innovate and scale. With that, I'm confident we're going to more than double this business in the next 2 years. And I know you came to hear what were we going to say about AI and how are we going to grow? That's it. We will double this business, more than double this business in the next 2 years with the pace that we're on.

And I'm going to tell you more how we're doing that with customers. Let me tell you what winning looks like for TE and AI. Our customers are transforming the way they build, design and operate. They need partners that can move with them. They need partners that can innovate and are agile at the pace that they are, and we are adjusting with them. We've evolved to anticipate their needs and move at their pace so we can help them win the AI race together. And I'm going to give you 3 examples of how we do that because these are the things that make us really stand out with our customer.

The first vector is design complexity. Our customers are building AI clusters with unique architectures. These unique architectures have different GPU configured counts. They have different network configurations. They have specialized power needs. Their needs are driving different problems, and they need to partner with us early in the cycle to address those. Earlier, I said co-creation was a competitive advantage for TE. Here, it's next level. And I'll tell you why. Our customers don't come to us with the design spec because they don't have them. They only know how they need their system to operate.

So they need a partner that can collaborate with them, and that's the adjustment that we've made. We collaborate with them. We offer design options. We offer them product options, and we help them architect their new solutions. And we work across their entire ecosystem to help them optimize their system performance. And we optimize that value chain in real time with them. The more uncertainty that they have about their architecture, the more we are iterating with them, and we're doing this faster than ever. And one really important part of what we do with our customers is that our partnership spans design, prototyping and manufacturing. This is a key differentiator for us in this market.

Next, I want to talk about pace. Pace has shifted down, as Terrence said, to left by probably more than 50%. Things that used to be 3 years are now a year to 18 months in terms of these cycles with our customers. And the complexity has increased because of the need for higher speeds, faster compute. This means more connections, and this means more precision and tighter tolerances. And we have responded to that by doubling our engineering capacity in AI. That allows us to provide around-the-clock support to iterate with our customers.

And we've also put tools in place to improve our efficiency and accelerate our responsiveness for our customers. The result of those investments that we've made is last year, we delivered 4x our product innovation velocity. Next, I want to talk about manufacturing. This is no longer an afterthought for our customers. They think about manufacturing at the beginning of their design cycle because their ramps are near vertical and their peaks are always changing. And they need partners that can move with them.

To respond to their needs, we've doubled our manufacturing capacity. We placed it near where they need it to give them supply chain resiliency, whether that's in China, China Plus One in Southeast Asia or whether that's near where they need it in North America. We've deployed that scale and that capability. So we have proven this ability to simultaneously scale and adjust for our customers. And when you look at these 3 vectors, it's hard for a supplier to do any one of these, but we do all 3. And we are one of the very few in the entire world that's able to do all 3 of these in this market for these customers.

And this is driving real impact for us. These aren't just words on Shad's slide. These have a financial impact. We delivered $900 million of growth from products that we didn't produce 2 years ago. That's the speed and pace that we ramp with our customers to support their needs. I want to wrap this up for you on AI by talking about a case study with a customer to bring this to life. We worked with the U.S. hyperscaler to redesign their rack to support an AI module. We won this program with them by working as an extension of their team. We helped them co-create this solution, and it was a connectorized solution for them.

As they went down the road, they figured out that the solution wouldn't meet their compute performance needs that we're going to allow them to win. This meant they had to go -- they had to change their architecture and it reset the whole design process. Now in this market, customer-led iterations are quite common because I told you they don't really have specs. They know how they need their system to operate. So new architecture, completely changed the design, and that set off a cycle of 11 different customer iterations over 10 months.

Just think about that, 11 iterations in 10 months of complete design changes that we're keeping up with this customer and working in partnership with them. And we were with them every step of the way through this process. And at the end, we helped them create a new unique cabled solution that allowed them to simultaneously connect and communicate between every one of their GPUs and TPUs in their system and gave them the performance that they needed. This system that we designed for them had a mesh network.

The unique thing about that mesh network, it needs a high degree of precision. One single connection error in that mesh network can disrupt their model. And now I'm going to use a customer term that they use with us. They call that blast radius. This has a big blast radius if that doesn't work because it disrupts their model, it costs them weeks or months of compute time. So this precision is absolutely critical. And over the last 2 years, we have delivered over 60 million of those precise connections flawlessly for this customer.

I think this example helps explain the kind of value that we bring to customers. It's delivered over $500 million in revenue for us, and it highlights our ability to co-architect with them, to be agile to adjust to their needs and then to scale when they're ready to go. So as I said, this race in AI is intense. And to win, customers can't win without suppliers that can do all 3 of those things. And that's why they're coming to TE for their solutions. So as you can tell, we are very excited about AI, and we're excited by the opportunities that AI presents for us, but there's more, okay? There's more. I want to talk about Energy.

Just as we're in this new era of compute, we are fundamentally entering a new era for power. The first energy revolution was really probably kicked off more than 70 years ago with the invention of the transistor. Fast forward to where we are today, we're in the second energy revolution, and it's happening now. And it's happening because of electronification of everything that I talked about earlier and because of AI. In the next 3 decades, the world will need to replicate the energy capacity that we spent the last 70 years putting in place.

And while doing so, we'll need to replace half of the aging energy assets. That is driving a multi-decade investment in energy capital. That's what's fueling the growth for grid hardening, the products that we support, the markets that we support. And in North America, energy CapEx is expected to grow more than 7% annually. And during that time, we expect our business will grow at double digits during that same period.

Our innovative products improve grid reliability, they increase power generation efficiency and they simplify installation, reducing complexity for our technicians to install products, and these technicians are in short supply. And utility companies though don't just come to us for our innovative products. They come to us because of our -- the service we provide them and because of our partnership to work across their entire ecosystem of suppliers and their network. And we have bolstered this position with strategic acquisitions, like the Richards portfolio that provides -- that has a leading position in underground connectivity and network protection.

These are allowing our customers to efficiently upgrade their networks. And then increase, we get smart grid monitoring capability that detects faults before they occur, allows our customers to pinpoint the exact location to reduce fault downtime. So as you can see, we have the solutions in energy, we have the scale, and we have the trust with our customers to lead in this energy transformation. And I'm going to close this out with another case study. I want to show you or tell you about an example here with Con Edison.

Con Edison faced the challenge of needing to protect their grid against storms, against increases in power demand, and also just an aging infrastructure that they need to replace. And as they were doing that, what they found was they were having errors in those installations. They were taking a lot of time, and they were more complicated than they wanted. So we're looking at a way to simplify and improve this process. And they had worked with a competitive product that led to some high-profile outages.

And after that, they came to us and asked us to help them engineer a different solution. We worked with them to engineer a new connectivity solution that's a cold shrink technology product that you saw in the product showcase if you were there last night or this morning. That product greatly increases their reliability. But most importantly, it reduces their installation time by 50%. And if you saw that connector, that's a big connector. This has to go underground in a cabinet, has to get connected with big cables together. This is not an easy installation. Reducing that by 50% is a game changer for our customers.

And the result of that one product innovation has created a portfolio of products that are now the top choice at 8 out of 10 independent U.S. utilities. It's created $125 million of revenue for us. More importantly, it's unlocked a $1.5 billion market for us. So with our differentiated portfolio and innovations like this that deliver significant customer value, we're the trusted partner for our customers, enabling the second energy revolution.

So as I wrap up, I want to reinforce a couple of points. Certainly, this is an exciting time for Industrial Solutions, and I want to remind you why. And if there's one thing that you take from today from what I told you, that one thing is that TE is uniquely positioned -- absolutely uniquely positioned to benefit from what's happening in AI and Energy. We are winning today, and we're going to continue to win because of our strong customer relationships. And across our portfolio, we have a broad portfolio across Industrial Solutions. In that portfolio, we have durable content drivers to drive growth above markets that we serve.

So we are uniquely positioned across this portfolio. That gives me confidence in our ability to deliver mid- to high single-digit growth, drive the 30% fall-through margins that Terrence talked about, and we will bolster this position with strategic acquisitions. So I'm excited by what's to come. This isn't the end. This is the start for us. So stay tuned. This is really the start for growth for Industrial Solutions, and I'm really excited to be here with you today.

So thank you. And with that, I want to introduce Aaron Stucki, President of Transportation Solutions.

Good morning. So as we heard from Terrence, we're talking about really this next chapter of value creation. And Transportation Solutions, we play an important part in that next chapter. When we think about this new phase of growth for transportation, we're talking about a solid foundation, managing market cycle resiliency that we've built across our business. We expect our segment to grow mid-single digits, and we expect our Automotive business to grow 4% to 6% faster than vehicle production, as Terrence highlighted.

We're confident in this. We have key megatrends -- sorry, we have key megatrends that are positioned -- that we're very well positioned to take advantage of. And when we think about this outsized content opportunities, we're going to talk through some of those. We're advantaged in our markets with a broad differentiated set of solutions. And really, when we think about these customer relationships that we've created in all of our major markets, these are opportunities to capitalize on these key megatrends.

So today, you're going to hear about our performance, and you're going to hear about what we're looking forward to over the next 5 years. Our segment delivered solid results, actually strong results in fiscal year '25, generating more than $9 billion of revenue and 21% operating margins. This combination of both revenue growth as well as a strong margin performance, this really shows just how resilient our portfolio has become. Now clearly, our automotive business is our largest business within the segment.

But what stands out and what I want to highlight is the regional balance that we've created. So if you look, Asia Pacific now makes up more than 50% of our revenue. So 50% in Asia, the other half in the West. And this isn't by accident. Over the last decade, we've been very deliberate in where we invest and how we focused our growth efforts. Now what this means for us is that we are strong and a market leader in every major region around the world. And this is important.

I'll give you an example. Take China, this is a fast-growing competitive market, but China sets the pace for global scale and global innovation. So being embedded deep with our Chinese customers actually gives us a front row seat to what's next in mobility. Now in all of our regions, there are 3 megatrends that are shaping the next phase of transportation's growth: data connectivity, electronification and e-mobility. All 3 of these megatrends are creating more content for us. We're seeing more content, more electronics, more sensors, more high-voltage content in every vehicle.

Collectively, it's providing us $2 billion of new content growth over the next 5 years. Now we're going to spend the rest of this session walking through how each of these trends play out for TE and why we're confident about what's coming up. Now before we do that, let's step back. Over the past decade, we've outpaced the market. Since 2015, we've grown $3 billion, and this is on flat auto production. Now along the way, we've had to make some tough but smart decisions and smart choices as we've trimmed some of our lower-margin portfolio and reinvested in higher-growth platforms.

And the reason we did this is to improve our margin profile, to get us healthier. And that's positioned us very well for today to be ready for this next phase of growth. Now as we look forward, we do expect mid-single-digit growth for this segment. We expect this 4% to 6% growth over market in our Automotive business. And this creates really for us a $25 increase in our content per vehicle in our Automotive business, and it creates a $75 content per vehicle increase in our Industrial and Commercial Transportation business. This performance gives us the confidence. It also gives us the resources and it sets us up nicely to keep investing where the industry is heading.

Now let me take a moment to talk about how is this industry evolving. Technology is accelerating. This is driving vehicle evolution. What we're seeing is the vehicle is shifting to a software-defined set of platforms where software is both enabling and controlling almost every major function of the vehicle. We're -- really can think about this vehicle as more like a smartphone on wheels, except with apps that say, drive the car, adjust the AC or alert the owner that it's time for an oil change.

This results in really a high velocity of features that are sent and introduced to the vehicle over the air through software updates and ultimately provide a technological shift in what we've seen previously. What we're also seeing is that the vehicle is becoming a connected node. It's connected and interacting with the cloud. It's interacting with infrastructure. It's interacting with other vehicles. And this is increasing the requirements for power delivery, for data throughput as well as for safety functionality.

Now underlying all of these technological improvements are these 3 megatrends. These are very important to us as we think about content, data connectivity, electronification and e-mobility. Now I do think it's important that we take a little bit of time and maybe I share my definition of how we're thinking about these 3 megatrends. What do they mean and why are they important? And how do we capitalize on them for TE. First, data connectivity. Demand for infotainment and advanced driver assistance systems is increasing. It's driving an exponential increase in data volumes.

And what this really does for us is that it's causing demand for this high-bandwidth connectivity within a vehicle and throughout the vehicle, where you need to transmit data from one controller to another, for example, from an ADAS control unit to a high-resolution camera or a LiDAR or a radar system. Even today, there are compelling content opportunities up to 20 gigabits per second as we think about this, 20,000x what we would traditionally see in a vehicle. Our high bandwidth, broad portfolio of data connectivity sets us up very nicely to capitalize on this.

An example, when we think about -- and Terrence showed this, when we think about Level 2+ autonomy, we expect this to be deployed in about 70% of all vehicles by 2030. So that's pretty exciting for us. The second megatrend, electronification. Shad talked about this, Terrence talked about this, but I want to provide it in a little more of the context of what it means for Transportation because you're going to hear us talk about electrification and you're going to hear us talk about electronification. And I want to make sure we understand the difference.

When we talk about electrification, we are talking about the electrified powertrain. This is e-mobility. Electronification refers to our low-voltage signal and power portfolio. It's powertrain agnostic. So if you have an ICE or an EV, what we're seeing is that electronics and software are becoming the muscles and the senses of the vehicle. This is replacing those traditional mechanical systems like braking and steering and some of the safety functions. So when we think what really comes next beyond that when we think of this electronification, there's a network of connections that happens and expands sort of like the nervous system of the vehicle.

And this requires a central or zonal architecture with a central compute that manages the entire system like a brain. Our low-voltage power and signal portfolio connects these networks. They connect all these extra network points that need electrical power or signal control. Zonal architecture, we're going to continue to see that evolve. We expect 12 million -- or 15 million vehicles to be deployed with zonal architecture by 2030.

And then finally, we have e-mobility. Here's the electrified powertrain. Following about 30% annual growth every year since 2019, xEV is anticipated to transition into a more steady expansion phase of about mid-single digit -- mid-teens rather. And this drives about a 60% adoption rate over the next 5 years. This is driven by policy support, it's driven by OEMs that provide improved model availability, it's driven by infrastructure improvements on charging stations, and it's driven by higher adoption in China.

This means 4 million to 6 million additional electric vehicles every year will be on the streets, primarily driven by Asia and Europe. Now it won't be that evident if you're walking around the streets of Philadelphia. But if you're in Asia or certain parts of Europe, it's eye-opening to see how many of these electric vehicles are sort of silently creeping through those streets. So the high-voltage portfolio that TE has built over the last decade puts us in a very, very strong position to take advantage of this megatrend.

So now I'd like to talk about how do each of these -- all 3 of these megatrends come together to really drive growth for TE and drive value creation. As we look ahead to 2030, we're excited about the balanced growth that we see. And not just balanced like I talked about relative to the regional balance, but also from a megatrend point of view. Each one of these megatrends is driving about 1/3 of our content growth over the next 5 years. Historically, we've talked primarily about e-mobility being that value driver.

This is due to our strategic focus as we've invested in higher and accelerated growth areas such as data connectivity. We've also continued to invest in areas of traditional growth. This is our low-voltage portfolio. Together, we expect a 30% increase in content per vehicle in both Auto and ICT. For data connectivity and for e-mobility, in automotive, we expect 2x content growth. For our more mature low-voltage portfolio, we expect about 10% increase in content from electronification. We're fully harnessing these megatrends.

When you add our innovation engine, our strong customer relationships, our global footprint, this is why we're confident about the growth that we've outlined. So let's take a deeper look in each of these megatrends and how does TE differentiate ourselves to create value? So the first megatrend we want to dive into is data connectivity. So we're hearing more and getting more requests for ADAS and infotainment solutions and data connectors that can reliably manage these data volumes. The examples of the applications that you see here, they're part of the broader infotainment and ADAS ecosystem.

Each need data connectivity that meets leading-edge technology requirements where TE is the leader. The first of these requirements is ultrafast. Now historically, we would have said that 1 gigabit per second in a vehicle is fast. With the use of high-resolution cameras, with displays and sensors, this has increased to 10 to 20 gigabit per second. As autonomy becomes more deployed, 8K resolution cameras, in-vehicle computer networks, this shifts the speeds up to 50 gigabits per second. In addition to being fast, data connectors need to fit and fit physically into this vehicle where we're seeing increasingly more crowded content.

So we're having to miniaturize. We're having to create solutions that can both be fast and fit. We've developed hybrid connectors that have both power and data in order to improve the form factor. Our holistic system expertise across all of our portfolio, along with our data performance in Asia, this gives us really the opportunity to tailor solutions for our customers to where we're meeting and even exceeding their expectations.

To make this more real, let me show you an example of a recent program win that we had with BYD, one of the top OEMs in China. Before I talk about the value creation and the impact to TE, let's hear from the Chief Procurement Officer of BYD in this short video.

[Presentation]

So as you heard from Mr. Wang, BYD's Chief Procurement Officer, the dedication of our China team and their close partnership with this customer really enabled us to reduce their sourcing complexity, but also solved their technical challenges. We were able to provide both a holistic solution, but also in just 4 months, ramp manufacturing, which when you think about China speeds, that's even impressive under their definition. The results are a tremendous CPV growth of 10x with BYD to $50 per vehicle.

And not only did we demonstrate this capability and generate over almost $1 billion of revenue from this program, we've also created a stronger partnership. They trust us. They understand the capabilities of TE. And that sets us -- as Mr. Wang talked about, that positions us for the next phase of growth opportunities with BYD.

Now let's talk about electronification. So this is which grows those intelligent -- number of intelligent electronic systems that need connectivity. OEMs are pushing for innovation in architecture in the electronification of systems because it enables a variety of updates or additions to features, functions or business models that circumvent the 6-plus year development cycle. This proliferates low-voltage signal and power contact points throughout the vehicle, makes them more complex.

It requires innovations to -- for weight and size reductions for more functionality and even to improve how the automated assembly process is for our OEMs. TE has an industry-leading portfolio in this low-voltage space, and we've developed new products, 48-volt that improves energy efficiency, hybrid connectors that provide both low power and low-signal connectivity, again, to consolidate and be able to fit inside the vehicle. Signal and Power is our most mature business. This is where we do about 70% of our revenue.

It's an established market where we lead share, but it's still growing. This is where we do expect about 10% increase in content per vehicle. Let me show you how we've materialized this or improved -- provided an opportunity to demonstrate a win with a key customer on their next-generation vehicle. So let's talk about zonal architecture in this context because this is where the win came from. The zonal architecture, the OEMs are using this because they're looking to fit more into a smaller space. These connections in these smaller spaces become more complex.

Each connector needs to perform more activities. They need to have and meet higher requirements and they need to do it in a compact solution. Customers value suppliers that have the design expertise across the entire system. They have a comprehensive portfolio that can provide signal integrity throughout the vehicle, and they have a global footprint that can support regional demand. TE offers signal, power, hybrid and a press-fit pin portfolio as a single supplier. And this is unique. Not many other competitors have this opportunity and this breadth of this portfolio.

In one specific instance, the comprehensive offering of our 48-volt connectors, our mixed and hybrid connectors as well as a high pin board connector allowed us to win an entire platform of connectivity that drove our bill of material on the connectivity platform from 40% to 90%. And working with this OEM that innovates, it's given us the opportunity to work with other OEMs and provide support to their architectural development. This is the real opportunity for us to proliferate our electronification of connections throughout these vehicles, leveraging our Power and Signal portfolio.

Now the last trend I want to talk about is e-mobility, specifically EVs, plug-in hybrids, standard hybrids. These continue to be a real growth opportunity for us. Each of the applications in the vehicle from e-drive propulsion, the battery, the fast charging and the auxiliaries, they require high-voltage transfer of power protection and control. Our holistic solutions for our customers help them manage safely, reliably and efficiently this electronic path -- this electrical path through the powertrain.

We will continue to retain our market leadership in e-mobility, leveraging a very strong and broad portfolio of high-voltage connectors. We expect to see robust content per vehicle growth here, 2x in our Automotive business and 7x for our ICT business. Let me give you an example of a European OEM where we were able to provide solutions for them to extract growth. So there's a major OEM that they were looking to upgrade their entire platform of vehicles. They needed high-voltage connectivity that supported the e-powertrain that supported every end-to-end high-voltage connectivity requirement.

Our broad portfolio allowed us to participate across all of these, provide them that high-voltage solution that they needed and ultimately gain share on every high-voltage piece of their platform. And this was across their entire portfolio of electric vehicles. That allowed us to grow content with this customer by 3.5x. It's a significant program lifetime revenue. It's a significant opportunity to demonstrate the strength of our EV portfolio and the opportunities that we have in front of us.

Now before wrapping up, I want to highlight some points that I talked about kind of throughout this. When we think about China, this is an extremely important market for us. This is the market that's been growing. As I talked about earlier, they set the pace for global innovation, and we're deeply embedded here. They do -- about 1/3 of our revenue comes out of China. Our CPV has grown from $50 in 2019 to $87 today. And we see further opportunities here. We are considered a local competitor in China. We have local manufacturing. We have local innovation. We have local sales office. We have our team embedded at the customer around the customer. And this allows us to not just be a supplier, but be the supplier of choice.

And what excites us as we look forward beyond the continued growth that we see in China and the competitive position that we have there, these Chinese OEMs are starting to expand outside of China. And when you think of our unique position globally, we're able to take advantage of our global scale to support that growth. We expect outside China vehicles to be sold -- to grow from 3 million to 9 million vehicles. Outside China market share for the Chinese OEMs to grow from 3% to 13%. We have an absolutely unique opportunity to participate with that growth, even enable it.

So China continues to be an exciting opportunity for us, and we expect to continue to be able to grow as we continue to strengthen our relationships with these customers. Now as I conclude, let me remind you of a few things. We are excited about what's next in our chapter of connectivity and of value creation. We have 3 key megatrends that are going to drive growth for us, 4% to 6% growth over market in our automotive business, mid-single digits for our segment, data connectivity, electronification and e-mobility. Three vectors not just the one that we used to have with e-mobility. This is a big deal for us. It allows us to differentiate ourselves in our market and continue to deliver this growth that I've outlined.

So thank you for listening to me today. And with that, I'm going to turn the time over to Chief Financial Officer, Heath Mitts.

First of all, thank you for allowing me to help wrap up this session today. I'm sure when you guys have got your books, when you hand them out, you guys all flip to the back to see how many slides I had, right? Well, the answer is 6 slides. So I'm not going to keep you waiting too long, and Terrence will come up and then we'll get into some Q&A.

But there are a few things I do want to hit on, and I think it's important that as we thought about putting this day together, the last one we had was 8 years ago, 2017. I've been here for about a year, and we had a lot of interesting things to talk about. And as part of this process over the last several months, we actually pulled out that investor presentation from 2017, and Terrence even went further back into his desk and found some presentations from early days of the spin of TE out of Tyco back in 2007 and so forth.

And my has our message changed as the world has changed, our customers have changed, the opportunity sets in front of us have changed. But there is a reason we don't do this every year and that we have had a journey that we've been on, and I'll show you some numbers here in a moment. You have them in front of you. But we have been on this journey. And this journey is around getting the portfolio where we wanted, getting certain financial metrics where we wanted, certain return horizons where we wanted and be able to talk confidently about the growth looking forward and how we're going to also use levers that we have available to us, inclusive of our cash flows.

So as we sit here and think about it, we highlighted just a few of the exciting platforms today, but ones that we know are top of mind for people around AI, around the grid hardening with Energy, certainly what's going on in Aaron's business with the different mechanisms he has for growth within Automotive and its close cousin Commercial Transportation. And we thought it was a good idea to get into that today to be able to talk about kind of our pivot forward around growth and our ability to commit to a 6% to 8% growth rate moving forward, which is a tick up from where we historically have been.

But we talk about this word, and Terrence used it earlier, through cycle. And I think that's important. We talk about things through cycle because we do have businesses that cycle at different times for different reasons. As we sit here today, there's a lot of things in the portfolio we didn't talk about. Our aerospace and defense business can ship everything it can get out the door, cycle good. Our industrial equipment business, Vish's business that you met last night, he's still kind of waiting for that inflection point to come back up. That's an important around factory automation and some of those things.

Same with heavy truck, still waiting for a little bit of inflection. And those are global cycles that change in different regions at different times. So we're always going to have things that cycle in different form and fashion. But we feel confident when you add all that up and you layer in where we have some of the super cycles, things around AI and all the great things we're seeing in Energy that we can commit to these types of numbers going forward and the levers we have to enhance it. So we're excited about this pivot more towards growth.

We have done some things in the portfolio from a cost perspective. You've seen that and many of you have been along that journey with us for a long time around some of the things we've done to harmonize our footprint out there. A lot of that has been done to shift where our resources -- where we produce and where our resources are closer to our customers as they have shifted to lower-cost regions and so forth. We will continue that, but a lot of that heavy lifting, particularly in Western Europe, is behind us, and we've been able to hit certain margin targets for both segments, and we're confident to be able to talk about the incremental margins moving forward and very importantly, consistent double-digit earnings growth through cycle.

We've shown that the last few years, but even through when we see some things coming the other direction with the -- cyclical wise, which we won't be immune to, we're confident to be able to put that forward in front of you today. The balance sheet gives us a lot of flexibility. Our cash flow, we've had 3 or 4 years in a row of record free cash flow for the corporation. I would expect that to continue. We've got a good handle on what we do with working capital. We invest in the business through CapEx. We know what our other levers are in terms of generation of cash flow.

And that's an important lever that we have, not just to return capital back to this crew, the owners of the company who are sitting in front of us today or who are watching on video, but also to give us optionality around what we want to do to deploy it, and I'll talk a little bit about that. So let's do a little bit of rearview looking in the mirror, right?

I joined in 2016, so right kind of between those left 2 bars. This was well underway when I started, Terrence, Tom and some of the others, Shad and Aaron were both there -- ahead of me working through this journey, okay? We've tripled what we've done -- a significant increase in margins. We've tripled our EPS over this time horizon, which is about 12 years. We've almost tripled our cash flow and certainly our dividends are returning capital back to our owners. So I think there's a lot there, but I know that's not why you guys all showed up today because you already had that baked into your models.

Let's look forward. Looking forward, we are investing for growth. So while we talk about 30% plus, and that plus is important on incremental margins, we are investing for growth. It's not lost on us that some of the things that our customers are asking us to do, whether it's everything that Shad and Aaron just talked about or some of their other businesses, there are investments that we need to make or trade-offs is probably a better term. And we do make those active trade-offs. We do that on a very regular basis in the businesses that we don't see as much growth potential in aren't getting fed quite as much, whereas the ones that are growing much higher are getting fed a lot higher.

So I would say those trade-offs are happening, but we are investing net-net, and you also see it in our capital and some of our CapEx investments where we've shifted where that's going. But the absolute number, we've had to keep up with some of these major programs with very good returns. Some of the shift in our operating footprint has been getting our manufacturing in the right place. We don't move things across the globe nearly as often as we did 10 years ago. So we make largely manufactured, Terrence rattled up 76% in region.

And where we don't, it's generally something that is higher mix, lower volume where it doesn't make sense to do it in multiple factories. But for the most part, our high-running products, we manufacture in region for our customers, and we source material in region for those things. And that has grown of significant importance with everything that we've dealt with in the last 9 months around tariffs. I don't know where they're going. I'm guessing nobody in this room really knows where the long-term story is on that.

But there is a geopolitical world that we live in where there's rules put into place. Sometimes they're more shortsighted. Sometimes you see that they're going to have longer legs. We've had to react to that. And having the nimbleness of where we operate and where we can source things in different parts of the world to keep our customers happy has been critical. You've heard us talk about, we've kind of quantified what the impact is to us, but you haven't heard us say it's impacting our EPS. You haven't said it, it's got a tremendous amount of leakage to us.

And that's because of our footprint, and our team's ability to react. Now while we are local for local with a lot of our manufacturing and sourcing, we have invested a significant amount internally on our global planning and logistics teams. And a lot of that is teams that we've built over in Southeast Asia. And those teams are bringing world-class expertise together, things that we can scale locally. And that's driving -- although we source locally, that's driving a lot of material cost savings in our material productivity model and a lot more efficiencies in terms of how we move goods even within regions by having those experts rather than having a more decentralized model.

We're driven and are compensated the entire 80-plus thousand people at TE on our productivity model and what's going through with our flow-through math, and that's what we really look at for businesses. So there's a lot of good things -- a lot of things I'm pleased with here. I would say we talk a lot about consistency and maintaining the nimbleness and agility that even as a large organization, one of the things we need to be able to do is react quickly.

And we've thrown a lot of curveballs just like a lot of other companies over the last year on how do we operate and where do we make things. And I suspect that will continue. I think we're very well positioned for that through cycle resiliency. Now I'm going to get into a little bit around how we deploy some of the capital. And this is largely unchanged, okay? I think I showed a similar slide to this actually back in 2017. But it's a pretty simple -- we get thrown a lot of ideas, and some of them are better ideas than others.

But we get brought a lot of opportunities and to acquire and add to the TE portfolio. And it's a pretty simple process. And Terrence, and I sit next door to each other, and we're in regular contact with our Board as well. And we try to keep it simple, which is do we even like this market? Are we buying something because we can? Or do we even like this market? Is it adding to our addressable end markets, meaning does it open up a market that we can either sell the potential acquired businesses, but also our existing products into.

So pretty simple questions that we have to ask is do we even like the market meaningful enough? Is it just a GDP kind of market grower trenching along? That's less exciting to us. However, if we said, yes, we like that market, we know that market well. We already play in that market, then we look at the actual target itself. And it's a very simple question we ask, which is, are we good owners for this business? Is TE the right owner for this particular asset? And sometimes we look at that and go, wow, we really like this business, but you know what, there's 5 other companies where it fits in their portfolio better.

And so let's be realistic about what we can really afford to pay versus what somebody else could pay. And in some cases, this says, do we waste our time on this process? Or no, you know what, we are the best owner for it. And there's a reason we're the best owner for it is because it fits really nicely. It fills in a niche, it fills in a regional gap, and it certainly starts to bring things home in terms of strategically what we can do with the broader TE environment. But are we the right owner for it? And do we have the talent to run the business?

Sometimes we inherit great talent. Some of you met Zach Bier last night. He came in with the Richards acquisition, tremendous talent, helping us with that business. Not every deal that we get to inherit a lot of great talent. Sometimes we do, sometimes we don't. Most cases, we have to have TE people ready to go run those businesses, either in general management form or certainly certain functions and the technical skills. So you have to be realistic about that is if we're going to buy this, particularly if it comes out of private equity, which most deals do, do we have the talent to run this business?

If we answer those questions is we like the markets, we like this. We think we're a good owner. We have the right people to run this business. Now let's talk about financial returns. Our financial return horizon has not changed. It's a cash-on-cash return. We do take advantage of tax attribute savings and some of the things that save our actual cash, but we expect to be in the mid-teens ROIC by year 5. and it can't all come in year 5. It needs to have kind of a linear approach to that. So we look at that. We stress test it. We do a fair amount of keeping ourselves honest in that process.

We don't give ourselves a lot of credit for revenue synergies out of the gate because they take longer, cost synergies, which we get our hands around quickly, let's talk about. And we look at other things we can do, particularly on the tax cash side. So there are some things, but this is really the process we go through. And after 30 years of doing this, I can tell you, we can identify things pretty quickly or things that are going -- this is going to require a lot of work or this is going to trade somewhere that's going to be well north of our return horizons. And you pretty quickly can filter where your focus is.

Now I'm going to give you a couple of examples. Richards, which you're all familiar with, which we just acquired in last spring. It was a large transaction for us. We -- Shad talked a lot about the underground grid hardening business that this brings into us. You have to keep in mind, we already had going into this -- as part of our Energy business, which is about $1 billion before Richards, we had already had half of that business was in North America. So we were servicing some of these same customers. We knew some of the same people, even if our products played a little bit different place.

So we know we like the grid hardening business for all the reasons that it's been underinvested in, needs a lot of capital. I think most of you, particularly those who are in the -- from the Northeast here, understand the aging infrastructure. And then obviously, with the data center coming online and the need to expand overall energy consumption, that is a sweet spot for us. And we really like the space. We're benefiting from our own business, and we've seen that business go up well -- CAGRs well over double digits. You bring Richards into the fold, now you can double down, and there was a lot of things that we liked with it.

The Target aligned well. We were good owners for it. We hope we continue to be good owners for it, right? We've had good talent that came in with the business. How do we then add value without slowing the business down. And I think that is something that we have to be honest about. There were also some tax savings with this business. So there are some things that we're fortunate to be able to take advantage of. And the financial returns, I'm very confident we're already well ahead of our expectations on that. And although we're only 7, 8 months into this transaction, I feel very good about it.

I'm going to pivot to another business, ERNI. ERNI reports into our Industrial Equipment business. You probably saw Vish and Thomas presenting last night. This fits in with their business. And so we bought this a few years ago, it was about a USD 400 million transaction, a German-based business that sold a product to fit a product -- filled a product gap for us. So in this case, it was a proprietary relationship we had with the sellers. We knew we liked this business. We really liked the product and the technology and the customers liked it.

But man, when we looked at that, we said, we liked the market, we liked this target. What's going on with their financials. They don't make any money. So that's a big red flag, right? Well, instead of peeling it apart, you start doing things in connectors. There's some core processes. You do molding, you do plating -- I'm sorry, you do molding, stamping, plating, assembling. In this case, they were subbing out all their plating. They weren't doing any plating in-house. So they were basically having a third party do their plating. In that case, you were giving away all your margins.

And we do plating. We know how to do it. We have some of the best plating people in the world. It's a very hard-to-do process. But the day we bought this business, we announced a $20 million investment in this business to build out a plating line right there on site. We brought in experts to how to do this. And all of a sudden, the margins in this business start to do this in a market that we liked. So there were some real operational synergies there. So we took it from a very low-margin business back and it's heading towards where we need it to be from a segment average and the returns are off the charts.

So there's different form and fashion for opportunity to create value in all of these things. The other thing I would say, in both of these cases, Richards is in the energy business, ERNI in our Industrial Equipment business, some of the other things you heard last night when we had some of our All-Star team out talking to you last night, right, Vishwas and Ganesh, and I mentioned [indiscernible] and Zach and Vish and Thomas and Jean-Michel and Isaac and I got them all. Those obviously were very impressive presentations, and I commend the team for doing that. We bet on our teams as well.

And you only saw a small group of our teams. We have a lot of talent just like that, that is around our organization. And we're fortunate that those are the teams we bet on. So when you buy an acquisition, it's not just these 3 things we look at. We look at, is this business in a position to absorb an acquisition? Or does it have operational challenge that it's already working through. Some of our businesses are dealing with different types of supply chain challenges or different type of customer challenges, right, at different given times.

Are they fully ready to absorb this and the work involved not just to figure out what level of integration it gets. Some are get heavily integrated. Like in ERNI, we had to be hands on very quickly. Richards is more of a hands off. But there's still elements of things that we have to figure out where we can play, and we have to bet on our teams. If I'm being honest, Terrence and I, Shad and Aaron, our job is to enable them. If we start getting into their trousers every day on what they're working on, we're going to grind them to a halt. So we're betting on those teams.

And I'm very proud when I was walking through last night to be able to see the quality and you saw -- you got to see firsthand what I get to see every day. And we're fortunate to have that across many of our businesses. So these are a couple of examples of things that I wanted to highlight. My last slide. It's a slide that Terrence showed as well, but let's talk about it for a second. 6% to 8% growth, that's through-cycle growth. There will be years where we're going to be above that. So I know you guys are all going to run off and try to work your models and figure out what the next 5 years look like.

This is a step up from the 4% to 6% that we historically have said in our business model. We're up a couple of points. It's not dependent upon price or anything. This is because we're very confident in the high single-digit growth coming out of industrial and the mid-single-digit growth we're going to be able to see through cycle through transportation. There will be times when industrial as we've run this year, will be higher than high single digits, but I feel good about being able to say, high single digits.

Our operating margins, 30-plus percent flow-through margins. You can do the math on whatever you assume the growth rate is going to be, and it equates to 50, 60 basis points of your margin improvement. I think it's what's important here is what's allowing us opportunity to invest back into the businesses. And that's important, but where they're making the trade-offs, not every business has fed the same rate. The double-digit earnings expansion is very important to us. You've seen us do that consistency over the last few years.

Consistency is something we talk a lot about internally. Are we consistently doing these things? Have we earned the right to come to our owners, people in this room largely and to say, we've done what we've said we're going to do. Can you rely on us to continue to do that? That consistency of message is something that's really pounded on for us. And then you get into capital strategy, the 1/3, 2/3 kind of conversation. Now this isn't really a pivot. I think it's just how we're articulating it. We've always kind of said about 1/3 of our free cash flow is going to go to dividends, and we've grown that over time. I think you saw it over the last 12 years, it's tripled.

About 2/3 of our free cash flow, we've always looked at as kind of fungible between excess cash towards share repurchases or towards M&A. And M&A is not linear. There are times when the M&A markets kind of sink they're up a little bit, and there's not very much attractive assets coming. And there are times when it's -- there's a flood of activity. And so -- but again, we have to go through our own filter. And there's times when we know we're going to be more active because we see more things. And there's times when we say cash is building up, it's time to up our share repurchase.

So we're in the market every day doing share repurchases, and we adjust that every quarter. But this isn't really a pivot away from that to think, well, you're going to go full on an M&A. This is just really more coming -- formalizing what we actually do. And then the mid-teens, we are an ROIC-focused company. We are a cyclical company, right? So we don't play the game of covering acquisitions, just trying to get above WACC or something. We really focus in on how do we extend mid-teens. So we, as a company, have an ROIC clearly in the mid-teens, if not higher right now. We want to stay there.

And so when we do acquisitions, we are looking at things, how do you get to the mid-teens by year 5. Internally, I'd tell you, it also has a little hurdle of how do you get to 10% by year 3, okay? So we're not cheating and saying, well, all this miracle is going to happen towards the end. So how do we do that? How do we bring it all together? And I'm confident that we can stand here today after 8 -- you guys have been waiting anxiously for 8 years for our next Analyst Day.

I know we've been calling and bugging Sujal about it. Every year, you having when you having one? No. I mean, you got like 6 of them out there this week, right? So we're confident. If we wouldn't, we wouldn't be inviting you to Philadelphia today.

So with that, I'm going to turn it over to Terrence, and then he'll wrap up some slides, and then we'll get into some Q&A. Thank you.

So as we promised you, I know we've had you sitting here for 2 hours. We are going to give you a break, but I just want to do a couple of comments around what you heard to reinforce what we talked about. Heath talked to you about the numbers. But it is important what we've talked about today is the broadening of the growth and the confidence that we have in that 6% to 8%. And it is important, it's through cycle.

He said it very well. There'll be times we'll be above. There'll be times we're below. But what's really nice, that confidence around it is driven by the content of where we positioned ourselves. And I'm sure you have a lot of questions on different parts of the applications as we get into questions. The other thing I hope that came through today, both from what I talked about and what Shad and Aaron talked about, why do we win, why when we do the right things with customers that those of you who are fortunate enough here to see, not only creates value for the customer and where they're going, but also creates value for you, and it's going to continue to do.

It's a very sticky business, and we've invested both in the engineering and the manufacturing that our customers expect to drive the model we talked about today. And honestly, we're going to continue to drive that value as we go forward. It is about driving earnings growth, driving the free cash flow growth, and that creates the optionality around how we deploy capital that we believe creates the value creation from here for you.

So with that, I'm going to stop. I'm going to let you take a 10-minute break. And then we get to hear from you with questions that we can drill into with the questions that you have. So if we could try to stay on time, especially for the people that are online, we're going to have a 10-minute break. Thank you, everybody.

[Break]

Can we ask everyone to please take their seats so we can begin the Q&A portion. Thank you.

So we've got different folks with microphones, whoever would like to be the brave one and start. Go ahead, Jake.

Jake Levinson from Melius Research. You would be glad to know I'm not going to ask about data center. We'll just leave that to the others. But you mentioned you've got 20 new factories. You've been doing a lot of restructuring in your footprint. Can you just help us understand is the bulk of their work done today? Do you feel like you have that footprint where you want it and you're able to maximize the operating leverage that's coming with this growth for one? And just relatedly, does it allow you to -- does it open possibilities with M&A and actually being able to plug in assets into your infrastructure more easily?

So let me take that, and I think you had two questions there. The first one is, yes, there was an element we did a lot of self-help around our footprint, really things that were out of balance. That work is, like Heath said, essentially behind us. We'll always challenge ourselves how to improve the cost base. It is really around process optimization, scale optimization in our plants and really making sure our plants can keep up with the speed of the end markets we're in.

Those design cycles, those launch cycles are really -- you've heard example over example today. And we had about 1,000 launches this year. So how do we make sure the technical scale and that launch scale comes together? When it comes to M&A, I think Heath said it right. It's never linear, and it really depends upon the asset. Some could be a consolidation play. Some are, hey, it's different. And I think with the example you actually gave between Richards and ERNI, it's going to depend upon the opportunity, where do we get scale advantage.

And we do look for scale advantage every time when it comes to the ROIC model when it comes to M&A. So I think you'll continue to see that be a mix on the M&A. I think it's always been that way. But the footprint, I feel very good about. It will continue to evolve, especially as we grow. But I really wanted to share what we did over the past 5 years because we talked a lot about how we moved it. We didn't always talk much about what do we put in place to support the growth we talked about today, and our teams have done a really good job on it.

Wamsi, go ahead.

Wamsi Mohan, Bank of America. Great to see you again, and thanks for putting this together. It feels a little over to you 8 years. But great messaging here, so appreciate it and all the details from outside as well. Maybe to clarify on the industrial growth rate side. It seems as though the growth rate looks awfully conservative in what you've baked into your model. For example, you're saying, in 2 years, your AI business can double that alone gets you to close to 10% growth in 2 years out.

So how should we think about these industrial growth rate numbers when you have such strong secular tailwinds, both in the two fastest growing pieces of the industrial DDN and energy, maybe that first. And if I could, I'd like to ask about cap allocation, too. In terms of the DDN side, it seems like the innovation cycle is extremely fast. And so as you're allocating capital to support some of these hyperscaler projects, what safeguards are you putting in place as you're deploying capital for maybe large projects that might have very short duration and how fungible is the equipment that goes with that.

So let me take the first, and I'll ask Heath to take the second. So on the first one, the growth rate we're talking about is through cycle. It's not just everything goes up to the right forever. And when you look at -- we like the trends we position ourselves around. But when I really think about the 6% to 8% and even when we think about both segments, we think of that as through cycle. And yes, I think Heath said it well when it's, hey, there'll be times we're ahead. And certainly, in the AI cycle, we're ahead.

But those growth rates just also law of large numbers are going to be reality. The other thing is when I think about the slide I showed that was about -- we showed two pie charts. We do expect that right side of that pie chart is the growth contribution that we're going to have going forward. So over 60% of our growth will come out of Shad's businesses, and it's going to be around those momentum drivers we talked about and what you saw at the bottom of that chart.

So we're planning on what we see real time. You can see when Shad presented, he went out a couple of years and then sort of showed an NOL. We view it's up to the right, but it is a through cycle number. And our teams are trying to win share every day on programs, and we hope we overachieve. Why don't you take the return on capital?

Obviously, you are correct. The programs, particularly in the AI space with the hyperscalers. They tend to be shorter duration because the product cycle is shorter duration than anything else we have in our portfolio. They require a lot of capital -- custom capital fit up quickly. There are a lot of protections for us in that. Now there are certain volume and commitments that are made.

There are certain capital outlays that we have, in some cases, depending upon the commercial arrangement. We might share some of that capital cost with the customer. In other cases, we absorbed the capital cost, but then we had specific pricing recovery for the first however many thousand units. So that we're protected. And if they pivot direction, we were fortunate that most of their volume pivots have been shipped more.

But if there was a pivot to the way down, there's a make they -- they're required to take their inventory. So we're -- it's less to us around the risk of asset deployment -- and it's really the team ramping quickly to quality level, the specs that the customers need that is driving that more than us having to put a lot of risk from our balance sheet out there.

Go ahead, Mark.

Mark Delaney with Goldman Sachs. Really appreciate you guys putting this event on and also all the product showcases it was really insightful to see it all in-person. So thanks very much. I had a question that I think is on the mind of a lot of investors. How are you guys thinking about the outlook for your AI and cloud revenue? You talked about that doubling over the course of 2 years.

Can you talk a little bit more of what's feeding into that forecast? What are you seeing in terms of end market trends? Because some of the numbers in terms of AI infrastructure build-outs, hyperscale CapEx might suggest you'd get there faster. And then just the exit rate that you guys are coming out of fiscal '25 is already annualizing at a pretty robust level. So just talk a little bit more about why you think doubling in a couple of years and why it couldn't be somewhat faster than that.

It could be faster than that. Let's just be honest. This is what we see out of the programs we're working on, no different than we have. We're going to continue to keep you updated, no different than we have been doing. But it is an element of when we think about the curve that we have. It's a curve that's going up. And the program ramps are existing. We've been investing, no different than the example Shad said, but you're going to continue to have program ramps that are supporting where we are. And if it's sooner, it's sooner. But net-net, the position that we have is really good with our customers. We're doing the co-creation that we expect, and we'll keep you updated.

Asiya, go ahead.

Thank you, and thank you for doing all the subject matter experts outside, I've learned a lot. If I could just ask about the incremental operating margins that you talked about. And I think the comment that was made was -- it's not dependent on pricing. It's really just driven by volume growth. Just help us understand why pricing doesn't play -- pricing power doesn't play. All I heard was there was a lot of complexity you guys are co-creating.

And so one would think that there is some pricing power built into that especially as you continue to strengthen your moat. So just help us understand that 30% plus incremental operating margins, how we should think about perhaps pricing power playing into that? And what could those incremental margins then look like?

Maybe I'll clarify my comments. Our pricing, it doesn't suggest it's any different than our current model. So we currently operate in environments where we do get price -- positive price, particularly on most of the Shad's businesses. There's a little bit more pressure in the automotive side through contractual volume price declines.

But -- and then anything that's tariff related is just passed through at cost, not with a markup. So that plays into some of that as well. So you might get some revenue, but you're not getting margin on any of the tariff piece of it. So my point wasn't we're not propping up our -- this is because we're gouging price. It's really similar to how we've always run the business.

And where we have areas that we can pass along price increases, we do, particularly in areas that go through distribution channels and so forth. And then when you get into discussions with OEM direct conversations, those are a bit more of an arm wrestling match, and they're tied more to volume commitments and so forth. So my comment was more intended for us not to be, hey, we're -- this is something that's all pricing related that we're getting disproportionate amount. It's consistent with our model.

Will, why don't we go to you?

It's Will Stein from Truist Securities. Thanks for hosting this, informative. Two, about AI, the topic that we'll keep hanging on. One is, I think the company -- there's an expectation. I don't know if it's exactly from TE or if it's from the market that eventually you track to about a 30% share in that market. I believe you're below that currently. Can you talk about the pacing to close that and to potentially reach 30%. And then...

We're actually at 30% right now today, we are. So from that viewpoint, when we view share, that's where it is today.

Great. The other question is about a couple of technical changes that I understand are happening at least among some of the chip suppliers in that market. One is the elimination of these overboard or Flyover cables in NVIDIA's next-gen platform. And the other is the incremental adoption of optical connections. And I wonder how each of these might affect your position in that market.

You want to take that?

Yes. Listen, I think as you saw in our -- that we laid out in the way we work with customers, every one of these customers have a different architecture, depending on their GPU configuration, what they're trying to get done, the speeds that they're trying to drive, they all have unique architectures. So this is a changing topic for us on a pretty regular occurrence with our customers. We're typically working out 2 to 3 generations with those customers on co-creating what that architecture looks like and being able to respond to that.

So yes, there will be changes in the architecture on the next gen and the next one after that will be different as well. What I feel good about is the way we're positioned with our portfolio of products, both at the signal side, at the power side and what we're doing around the thermals that give us a lot of opportunity to add content in that rack. When you think about the optics piece, we're playing -- we're working with them today on optics solutions.

So I think no matter which way it goes, we will be there with them. One of the drivers with our customers that you should realize staying with copper is more advantageous for them because it's more cost effective. We're working really hard with them to continue to extend the life of copper through a lot of mechanisms around the architecture and making it more efficient.

So I would say this is an architecture from an optics that feels like it's moving more to the right than it's -- while other things are moving more to the left to optimize their solution. But either way it goes, I'm confident we have our teams positioned and working with them to capture that share and maintain or grow our share from there.

Go ahead, Joe.

Joe Spak from UBS. Two questions. One, maybe just some housekeeping. Any material difference in the incremental margin guidance between the two segments? And then the second is just on the M&A front. You just mentioned, for instance, on the IR front, working with customers two, three generations out. How does that inform what you look for from either build versus buy decision on things maybe like optical or liquid cooling?

How do you think about that? And I guess also in the Investor Day, 8 years ago, you were generous enough to sort of say, over time, M&A would add about a point to the top line. Is that still roughly the same framework you think about it? Or does that get a little bit tougher given the size?

Well, let me tackle question 1 and question 3. And then you think about future technologies as available through M&A, how about that. Flow-through math is quite simple. It's very similar between the two. So no material difference between the two. Obviously, volumes are going to impact. You've got much higher organic out of one versus the other in different quarters, you're going to have much more scale flow-through.

So you might -- in a different quarter, you might say, well, why is industrial 35% and transportation is at 29% or something, but not in a meaningful way when we look at it in total, both are about from the same starting point. When we talk about what M&A is going to add and your memory does serve you correct, so I congratulate you because it was 8 years ago. M&A is just not linear. So when you start to try to lay out to a broader audience what you think the total growth is going to be, it's hard to say, add 1 point a year to this.

And we've kind of learned our lesson that way. This year, because of the addition of Harger and the addition of Richards, we add an annualized revenue of about $500 million. So okay, that adds a couple of points. But I can't tell you exactly what next year is going to be. So I would just tell you that we feel good about the 6% to 8%.

We think about that more in an organic model. There's going to be times where we stretch above that because where we are with maybe inflection points in the next couple of years with where AI is or we do an acquisition, then all of a sudden you say, well, we're at 10% or 11%. Well, that could be. But we're trying to just kind of give some -- people some baseline numbers. Hopefully, that helps. And then your question...

Yes, I will tackle this right now. I would say in pretty much all of our businesses within IS. We have a robust scanning that we're looking out at what future TAM we want, how we want to add to our portfolio strategically for our customers. I gave you examples of how we've done that. In the AI space, we're scanning there as well along really several vectors that you heard from the team last night as they were describing it in the showcase, is around the signal chain and driving speeds faster there.

It's also around the power cycle, and it's around thermals. So we are looking at all of those to understand how technologies are out there that we don't have, that we would need to add. I would say probably in our businesses are more fragmented. It's probably a richer opportunity space for us. Inorganically, it doesn't mean that we're not looking in at all.

Why don't we go to Steve?

Thanks for having me in some great detail today. Steve Fox, Fox Advisors. I guess, I was curious about some of these really quick ramps that you described during the presentation. Can you just maybe give us a little more view under the covers on how much was related to just increasing your automation in the factories, how you got through some of these iterations so quickly. And then how much does that automation play into sort of like incremental margins that maybe are more on the plus side of the 30% going forward?

I would say in these ramps, this was not, hey, we made a product today, and we just automated it and that's what drove the volumes. We didn't make these products 2 years ago. These were new inventions, new product, complete designs think about a 250,000 square foot factory completely outfitted with new equipment to ramp these volumes to deliver the volumes that we laid out. We do have a strong capacity for developing highly automated manufacturing cells across all of our businesses, and this one being no different.

And it was the only way to ramp to support the volume that was needed. There was -- you couldn't have done this manually or semiautomatically. It had to be highly automated systems to put those in. So that's really the moat behind our ability to do that. And let's lay that out. There's really -- there's a small number of players that can do all three of those things. And we feel really strongly about our ability to scale and ramp and support our customers, and we have a great technology lens as well that gets us architecting with our customers. Combination of those two things are giving us our growth and fuel and content for us.

I'd say the flow-through element to your question, Steve, is it's a scale thing. So -- when we're at full -- when you go to the Philippines or one of the sites in Thailand or Malaysia, where we're manufacturing or China, it's -- when there's full scale, you're blowing past your fixed costs and you start to get better flow-through. When you're at a point where you're doing changeovers and you've got fixed assets who are waiting to come online because you're changing programs and so forth. You go through periods that you suffer. The team has done a tremendous job of showing the agility there.

Shreyas, why don't you go ahead.

Maybe two questions. One, if we look at the industrial business and if we just put the AI part to the side. It looks like the rest of it, you guys are kind of indicating could be maybe low single-digit growth for the next few years. And I'm curious if you could break that down a bit.

I mean, I think there's like $400 million of factory automation, which sounded like there's some real growth opportunities there. So maybe curious there. And then also, are there hurdles to consider for divestitures? Because there's a number of businesses that are, as you're talking about kind of low growth for the next few years, sensors, maybe even medical. So I'm just curious what would be the considerations that you would apply towards maybe even thinking about divestitures there?

So let me take the second one first. And Shad, I'll ask you to take the growth one on industrial. First of all, portfolio action we take is, is it going to create value for you? So I think a lot of the things that Heath talked about on the M&A front, are we the best owner? Would it create value for you? And we always have that lens. And I think if you look at what we've done over our history, we've always had that lens.

So that hasn't changed. When you look at the business that we have, just because some are in a down cycle, like you take our ACL business, it's been in a down cycle. Our sensors business, we did a lot of self-help work on it. We think these are things that are going to continue to contribute. So we feel good about the portfolio. But if there's another avenue to create value for you, we would have to consider it, and we will always do that. But I don't think it's different than how Heath laid out the M&A model. Are we the right owner?

Does it create value for you? And where we think we are with the portfolio, we feel very good about the portfolio. And it's more about playing offense and figuring out what pieces come out. That was 15, 20 years ago when I had his job. So -- and why don't you take the growth...

So if you look across the 5 businesses and you take out the AI piece, I think I laid out for you, we had 3 businesses that grew double digits last year, right? So Energy and Aerospace and Defense grew double digits. I'd say both of those are outgrowing the markets that they're in. And if you think about that spread of that mosaic, you had sort of medical at a point where, hey, as Terrence said, we've gone through self-help. We feel like we're positioned to grow at that market as we're going forward. ACL coming through a cycle with a broad portfolio, nearly half that portfolio is uniquely positioned to be a leader -- have leader products that are going to outgrow the market. So I think it's just, hey, how do you think about the markets that we're in, but your takeaway should be, hey, TE is positioned to drive content growth that will outgrow each of these markets through the cycle that they're in. That gets you to mid-single digits or high, that's what you should be thinking about it.

And I would ask the through cycle, I know I said it Shad said it, Heath has said it, it's a through cycle over 5 years. And we're not talking about 1 year. We're talking about, hey, what is it over 5 years from a through cycle when you do your models.

Colin Langan, Wells Fargo. What are the differences between you and your top AI competitors? It sounds from the displays that it has to do with the speed and the scale that you have. What makes sort of -- as those sort of top 3, I believe there are in the AI space, what is the differentiator in your tech? And where do you think you're stronger? And then also, as you look at the other segments, I know you mentioned in the slides like Auto is seeing more sort of data speed needs. Is that an edge? Does that sort of beyond the capability sets of other competitors in those spaces and that maybe?

So let me take the second question first, and I'll ask you to take the first question. So on the second question, it's an absolute edge because we have some competitors that only do power. And when you're thinking about a signal chain, and I know a lot of people spend time on the AI rack, the signal chain, the signal chain and the power chain are different, and we have customers that expect them both to be together. And that's really hard engineering problems to come work out. Aaron talked about it a lot about hybrid connectors. It's when you're bringing all that together really close in electronics environment or electrical environment, there's a bunch of things that don't like being near each other.

And that's where our subject matter experts did a great job explaining it. Some of our competitors don't play in data. They might be only signal, they may be only power in different applications. So one of the things that we always do to the trends I laid out, and I don't want to go through that slide because we would have spent an hour on it, is really about we get to serve both of those problems. And that is something that is advantaged.

And even in a place like energy, where we showed you examples of what do we do around power connectivity, some of the examples we showed you around distribution line monitoring outside, that has a data element to it. Most of our competitors don't do as much there. So it does create content uplift as we look forward. There are some areas might be an inorganic opportunity that we need to say how we bring more capability in to scale it in a certain area or another. But when you think about what we do, it's data and power coming together is very special. And each one of our markets, our competitors are different. I can't stress that enough.

So our competitive set in automotive is different than DDN, is different than AD&M, different than medical. And when you sit there, it's how do we compete and also get that customer mind share. We can solve more problems for that customer in those markets that we say we really like, that's what's special. And so I think that is a competitive advantage in some markets, but it's also the way we think about the portfolio all the time, and it's what the innovation we bring in.

Yes. If you think about high speed and maybe to add on what Terrence said, in aerospace and defense, our capabilities that we have invented in the DDM business have translated for us into aerospace business. We're absolutely a leader in high-speed backplane connectivity for applications like low earth orbit satellites or even the whole infrastructure of thinking about inside of a plane or inside of a shift inside of a mobile vehicle that needs data to communicate between different machines. And there's a standard there, and we've been inventing that standard.

So we're leading that space. If you think about on the AI side, again, I think there's 3 factors that you have to have to differentiate in this space. When you think about the competitive set, and it's a narrow competitive set. You have to have the technology, you have to have the agility to adjust with your customer and you have to have the ability to scale. I actually think those last 2 are becoming more important for our customers than just the technology. I think technology was the leader.

But if you can't do all 3 of those, you're not going to grow with these customers. And I think we're still early days in AI with the invention of what's happening. There's a pretty narrow customer set that is leading the way. That is getting broader. And when I talked about working across the ecosystem, working with the hyperscalers and the silicon providers on all their unique designs, one thing that they are really gravitating towards with TE is our demonstrated ability to scale and work with them on their architecture and be agile. So I think it continues -- it's a differentiator. It has been. It will continue to be a differentiator as we're going forward.

Guy Hardwick from Barclays Capital. You certainly sound more confident on incremental margins than I can remember historically. Not to flog the dead horse too much, but on the Transportation Solutions side, are you saying that you're pretty confident of 30% incrementals there, assuming you're doing the 4% to 6% outgrowth?

We are. We are. I mean it's going to -- we're not expecting a ton of market support in terms of the number of vehicles built globally every year. So it really comes to our outgrowth and our content kicking in, which we have a lot of confidence in. You heard Aaron talk about the 3 drivers of that today. But from an incremental margin perspective, we're confident in that. And we've built our business model internally around that, our compensation structures around that and so forth, and that's consistent across both segments.

And just a follow-up on DDN, it looks like if you double the revenues in AI and cloud, assuming enterprise and telecom grows kind of maybe low double digits, it could be at least a $4 billion business in 2027. Is my math roughly correct?

I didn't bring my calculator, but it's a fast-growing business, and it has grown a lot. I'm not going to sit here and tell you exactly what all the different components of DDN are expected to grow. But there's some -- there's not very much left in that business that's slow growth. There's a piece that's telecom equipment and so forth that's not as growthy as the others.

But I would say the business has a fighting chance to get to those types of numbers over -- I think I would ask you to appreciate, and I've had this conversation with a few others last night and even today that the things from the time that we put this presentation together a couple of weeks ago, put pencils down more or less to even conversations we're having yesterday on opportunity sets that are coming at us, it's dynamic, and it's going in the right direction. So I know that doesn't help you put your model together as well, but I hope you can appreciate that there is a lot of moving parts very quickly, and it's all trending the right way.

This is [ MP ] on behalf of Samik Chatterjee from JPMorgan. I just wanted to double-click on the energy business. You highlighted 12% growth outlook for North America. Can you please give us some color around growth across -- growth outlook across other regions?

Yes. So you think about the energy business, one of the reasons we highlight the America region is it's our biggest part of our business. That's well over $1 billion business today. And certainly, the investment growing in the U.S. is outpacing what we see investment going in elsewhere around the globe. So we do consider that to be our biggest opportunity, and our biggest driver of growth. I will remind you though, we have a really strong position in Europe in underground connectivity, and you saw some of that underground here for North America. And on top of that, we have opportunity in wind and offshore wind, which is another strong growth driver for us. And we've been performing well in those markets through this cycle that's helped contribute to the growth that you saw over the last couple of quarters. It was nearly 20%. You should really think about that as being pretty well balanced across those markets that we're serving.

[ Ravi Singh ] from Clearbridge Investments. I have 2, one for Heath and one for Aaron, who's been a little quiet over there. For Heath, I wanted to ask about the bear case modeling. So essentially decremental margins. Should we be assuming those are also roughly 30% or some of the footprint actions you've done maybe allowed you guys to potentially protect a little bit more in the downturns? And then for Aaron, on China, you guys have done an amazing job of being really strongly positioned in that market with the local OEMs. That's not true for a lot of other auto exposed suppliers. N+ 2 strategy has worked really well. But as innovation cycles accelerate there, is that enough? Do you have to go to N+ 3?

I'll take the decremental margins. And I think -- I didn't think you're going to take the second one. I'll give Aaron a chance to wake up over there. The decremental margins, a lot of it depends on the severity of what we're talking about here. If you're down 1 point versus down 10 points, right? And that has a big difference in how you -- where the assets, the fixed costs obviously get levered the other direction. But in general, the footprint consolidation has created some nimbleness there. Now I think the thing that you have to keep in mind is we do take a long view.

And one of the things I want to talk about because sometimes we say, why aren't your incrementals a little bit higher than 30% is we are reinvesting in the businesses. We are investing in some of these business to enable some of the good growth rates in some of the other places. So those investments, we make trade-offs every day. But those investments are long-term investments that we make over -- that we're committed to. So we have to be careful that we're not going to just pull back on every little -- every investment every time we see a cyclical downturn in the business, we just make a little bit different trade-offs. So that could put a little bit more pressure on a higher decremental. But for the most part, getting our fixed cost footprint better, it's not perfect, but getting that better has helped us a lot, a little more variable on our workforce as well.

Yes, let me help you out, Heath. So here's what's happening in China. No, the innovation cycle there is going fast. What I'd say is the N+ 2, and this effectively says that we're -- we've got a current generation. We've got an optimized generation, and then we're strategizing on what comes after that. I think what happens is it just compresses a little bit more. We have 1,100 engineers in China that are focused on this all day every day.

We have our engineers embedded with these Chinese OEMs. They're close. And so they're following along this innovation, even influencing it in some places. So I think the speed might go, but I don't know what comes after strategizing for that, that open one but it's an element of maybe a compression. But I think the team, if anybody is going to be able to do that, it's that team in China that has demonstrated over this past decade, this growth from a $50 million business 20 years ago to $2.5 billion.

It's Michael Anastasiou from TD Cowen on for Joe Giordano. I just wanted to, I guess, triple-click now on the digital data network side. It seems some of your peers have focused on building these high-density fiber management platforms, committed significant capital towards that. How do these fiber capabilities compared to what you have internally today? And then do you need to gain content in these areas to get other content opportunities in the white space of the data center?

The technology you're talking about is at a different part of the interconnect in the data center than where we highlighted inside the rack. But when we look forward, our ability to drive 30% content share and grow from here doesn't require us to have to step into that white space. We feel like within the rack today with what's there, the opportunities that we laid out around the power chain, what's happening on the signal to make it faster and more -- and lower latency. And then with what's happened around the thermal, there's plenty of opportunities to continue to increase content, and that's where the team is focused.

I have a couple more for Aaron. So thanks for the details you did. I wanted to double-click on Slide 35, you have the case study with BYD. You talked about your content going from $5 to $50. I wanted to clarify, is that $50, is that entirely from data connectivity? Or is there some contribution from things like signal and power and other connector types?

Small contributions. I would say our -- the primary content comes from data, but we're working with BYD on multiple programs.

Okay. And as you think about -- I mean, that was a very significant step-up that you detailed. What's the potential to take that sort of result and do that with other customers? You talk about the ability to sell these high-speed data connectivity into other customers, including Western customers, where do you stand? If you could talk about traction, market share, any more details on that would be very helpful.

Yes. So if we think about the content growth overall from data, you can anticipate about 1/3 of that content comes from data globally. So that's going to be across multiple customers. We're going to see it in the West. We're going to see it in the Americas. So I would say what it's doing is demonstrating our capabilities. It's creating also with BYD as they expand more confidence in Chinese solutions. So as we think about the strength of our data business that's coming out of Asia, that's certainly influenced in a very positive way the rest of the world.

I mean are you already getting the design wins and engagements with the Western OEMs...

Absolutely. So when we use one example of an important opportunity, recognizing the size. But again, when we think about that, you're going to see design wins across all regions for sure.

Luke Junk from Baird. Just a couple of questions. Shad, on the energy side of the portfolio, I guess we've commonly understood TE's position there historically being more leveraged to grid hardening. There's an obvious opportunity on a go-forward basis as we just add more capacity to the system. Can you just talk about the relative opportunity as we add new capacity? Is that similar to grid hardening? Or is there some nuance there? And then, Aaron, in terms of automotive outgrowth, if we look backwards, it's been at that 4-ish kind of level over the last 6 or 7 years or so. Just as you look into the backlog and that 4% to 6% commitment going forward, sort of how much of that mid-single-digit sort of level is already in the backlog versus being contingent on additional wins from here?

I think on the energy side, think about the grid connect -- the grid hardening piece, I would say new generation, if it's coming from renewable sources is an incremental gain for us above just what other power generation would be. Some of the growth that you've seen in the last couple of quarters from us have been because of our solar in North America, where we have a differentiated position that is making installations faster and cheaper for customers to do. And you have to remember, solar energy is the cheapest energy in the world to produce, and it's also energy that can get online the fastest. So there's a tremendous push still in North America here around solar, and it's happened in other places in the world. So we're continuing to be very active on the renewable side. And then on the grid, certainly, as they have to expand the network that I described to get more power online, that can be, hey, they just have to run completely new lines or they're reconductoring lines to bring larger wires in that can handle more power.

Those are going to require all new connectivity when they do that. So if they reconductor it or put new, it doesn't really matter to us. It sort of ends up being net new for us. So that's how we think about how this CapEx translates into the growth that I described.

I think on the auto side, what's important for us to understand is thinking about all 3 of these vectors and all contributing directionally equally. And this gives us certainly more opportunities within each of these to find additional growth elements within it. Take electronification, for example. This is one -- as that proliferates connectivity throughout the vehicle, there's identified areas for growth and there's new opportunities. Take, for example, prior to the need to connect a headlight to a camera, that was a more commoditized opportunity for us, not exciting. Today, that's a new opportunity that creates content is an exciting profitable element for us.

And those are the things that we're starting to see as this proliferates. So when you talk about the 4% versus 6%, it's really thinking about what comes on top of what we've identified today within the architecture. And as these architectures evolve, remember, we're assuming 15 million zonal in 5 years. We're assuming 70% autonomous in 5 years.

As those adjust and quite frankly, potentially accelerate, you're going to see the upper end of that 6%. I think we've been recognizing on the e-mobility side, we assume 60% adoption. As those opportunities continue to evolve also, that's a mid-teens growth rate. That's opportunity above that. So when I think about this, it's an element of each of these have potential upside, quite frankly, to them as I think about the next 5 years.

Any other questions? All right. Well, we certainly want to thank everybody for joining us today. We're going to run the product showcase for another hour after this event. And we want to thank all the folks that tuned in on the live webcast. And thanks, any other questions, please contact Investor Relations at TE. We hope you enjoyed the event and look forward to talking with you soon.

Super. Thank you, everybody.

Everyone, thank you for standing by, and welcome to the TE Connectivity Fourth Quarter and Final Results Earnings Call for fiscal year 2025. [Operator Instructions] As a reminder, today's call is being recorded.

I would now like to turn the conference over to our host, Vice President of Investor Relations, Sujal Shah. Please go ahead.

Good morning, and thank you for joining our conference call to discuss TE Connectivity's fourth quarter and full year results and outlook for our first quarter of fiscal 2026. 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 at te.com.

Now please note that we are making a change in our non-GAAP reporting with the start of our fiscal 2026 year. The fourth quarter and full year fiscal 2025 financial results that we will discuss in today's call do not reflect this change. However, beginning in fiscal 2026, we will exclude amortization expense on intangible assets from certain of our non-GAAP financial measures, and this change is reflected in our Q1 guidance. We have recast the financial information of the quarters of 2025 and 2024 to ensure an apples-to-apples comparison of our results going forward, and this is provided in the slide appendix and in an 8-K that was filed this morning.

Also, as a reminder, we will hold our Investor Day event on November 20 in Philadelphia with a product showcase the evening before. We're excited to convey opportunities for growth and further value creation for our owners and are looking forward to seeing many of you at the event. Note that we will also have a live webcast for those who are unable to attend in person.

And 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.

Thanks, Sujal, and thank you, everyone, for joining us today. Before I get into the details on the slides, I do want to reinforce a few key takeaways upfront. First off is that our strong momentum is continuing with quarterly and full year records for sales, earnings and free cash flow in what continues to be an uneven macro environment. We also continue to demonstrate the strategic positioning of our portfolio, benefiting from the secular growth trends in a number of our businesses, and we'll talk about these as we go through the discussion of our results today.

We also continue to demonstrate operational resilience with our global manufacturing strategy where we've invested heavily to ensure in-region support of our customers, and we are set up for this strong performance to continue into fiscal 2026. We expect to continue executing on our long-term value creation model, and we'll click down and provide more details at our Investor Day next month.

So with that as a backdrop, I would like to get into the presentation, starting with Slide 3, and I'll discuss fiscal 2025 results and our guidance for the first quarter of fiscal 2026. Our fourth quarter sales were above our guidance at $4.75 billion, growing 17% on a reported basis and 11% organically year-over-year. Both segments contributed to our sales being above guidance.

We also saw orders increase in both segments to $4.7 billion, and this was an increase of 22% year-over-year, and it was up 5% sequentially. We delivered adjusted earnings per share of $2.44 that was above our guidance due to the strong execution by our teams and increased 25% versus the prior year. Adjusted operating margins were 20%, increasing 130 basis points year-over-year. And lastly, in the quarter, free cash flow performance continued the strong momentum that we've seen throughout the year and was $1.2 billion in the fourth quarter.

So let me transition to full year results. Full year sales were a record at $17.3 billion, growing 9% on a reported basis and 6% on an organic basis. In our Industrial segment, we saw 24% reported growth, benefiting from bolt-on acquisitions that we made this year. On an organic basis, segment growth was 18% and capitalized on the strong demand for artificial intelligence and energy infrastructure applications.

In Transportation, we continue to demonstrate our strong global position with strength in Asia that drove content growth from increased data connectivity and growth of the electrified powertrain in that region. We achieved record earnings in fiscal 2025. Adjusted operating margins were essentially 20%, expanding 80 basis points year-over-year and adjusted earnings per share was $8.76, increasing 16% versus the prior year, driven entirely by the strong sales and margin performance.

We continue to demonstrate the strength of our cash generation model. We delivered free cash flow of over $3 billion with conversion levels of well over 100%. This strong cash generation gave us the flexibility for record capital deployment with over $2 billion returned to shareholders and $2.6 billion used for bolt-on acquisitions during the year.

As we look forward, order levels support our outlook for double-digit growth in the first quarter. We are expecting our first quarter sales to be $4.5 billion, reflecting sequential seasonality that we typically see and increasing 17% year-over-year on a reported basis and up 11% organically. We expect adjusted earnings per share to be around $2.53 in the first quarter, and this will represent growth of 23% year-over-year.

Now if you could turn to Slide 4, let me get into order details. In the quarter, we saw orders of $4.7 billion with growth year-over-year and sequentially in both segments. On a year-over-year basis, we saw organic order growth across all regions. And on a sequential basis, growth was driven by automotive, digital data networks and energy.

Touching on the segment. Transportation orders increased 9% versus the prior year, driven by order growth in all regions. In the Industrial segment, orders increased 39% year-over-year, reflecting ongoing momentum in DDN as well as our energy and AD&M businesses. Also one thing to highlight in our orders, we did see order rates improve in the general industrial end markets, and we believe this indicates stability.

Now let me get into the segment quarterly results. And if you could turn to Slide 5, I'll start with Transportation. Our auto sales grew 2% organically in the fourth quarter, with growth in Asia of 11% being offset by declines in Western regions of 4%. Our growth over market reflects the ongoing regional dynamics that we've seen all year and have impacted our growth over market.

As we look forward, we expect global auto production to be 87 million to 88 million units in fiscal 2026, with content growth being driven by key wins for our leading-edge products and technology around data connectivity and electrification of the powertrain. We continue to benefit from our strong global position and localization strategy, which enables us to serve our global customer base.

Turning to commercial transportation. We reported 5% organic growth, and this was driven entirely by growth in Europe and in Asia, which was offset by ongoing weakness that we see in North America. And in our sensors business, we saw weakness in end markets in Western regions that were partially offset by growth in Asia. For the Transportation segment, the team delivered 20% adjusted operating margins for the full year as we expected, and the team did a good job of navigating an uneven global production environment.

So if you could, let me turn to Industrial Solutions segment, which is on Slide 6. And the segment grew 34% in the quarter overall as well as 24% organically. Digital data networks had another outstanding quarter where the business grew 80% year-over-year. We continue to benefit from increasing ramps from hyperscaler platforms. And for the full year, we generated over $900 million in AI revenue, tripling our AI sales versus the prior year, and this reflects our increased momentum.

In our automation and connected living business, sales grew 11% organically year-over-year with 3% sequential improvement that we believe reflects stability in general industrial markets. In our energy business, sales grew 83% and included the Richards acquisition, which enables us to capitalize on strong growth opportunities in the North American utility market. On an organic basis, our sales increased a strong 24%, driven by continued increased investments by our customers in grid hardening as well as renewable applications.

In our aerospace, defense and marine business, sales grew 7% organically, driven by growth across commercial aerospace as well as defense applications. And in these markets, we continue to see favorable demand trends, coupled with ongoing supply chain improvement. And in our medical business, sales were roughly flat sequentially as we expected.

Turning to margins for the Industrial segment. Our adjusted operating margins expanded by nearly 300 basis points to over 20%, driven by the strong operational performance and benefits of higher volume. I am pleased with the progress our team has made this year, supporting the strong growth that we have in this segment.

Now let me turn it over to Heath to get into more details on the financials and our expectations going forward.

Thank you, Terrence, and good morning, everyone. Please turn to Slide 7. For the quarter, adjusted operating income was $943 million with an adjusted operating margin of approximately 20%. GAAP operating income was $916 million and included $10 million of acquisition-related charges and $17 million of restructuring and other charges.

For the full year 2025, fiscal -- I'm sorry, for the fiscal '25, restructuring charges were $113 million, and I expect restructuring charges in fiscal '26 to be roughly at the $100 million level. Adjusted EPS was $2.44 and GAAP EPS was $2.23 for the quarter and included a tax charge of $0.10 related primarily to the increase in the valuation allowance for deferred tax assets. Additionally, we had restructuring, acquisition and other charges of $0.11. The adjusted effective tax rate was 21.4% in our fourth quarter and approximately 23% for the full year 2025. Moving to fiscal '26, we expect our adjusted effective tax rate in the first quarter to be approximately 22%, with the full year being similar to last year at approximately 23%. And importantly, as always, we anticipate our cash tax rate to be well below our adjusted ETR.

Now if you can turn to Slide 8 for fiscal '25 performance. We set records in sales, adjusted operating margins, adjusted earnings per share and free cash flow. Relative to our business model, we are delivering on our targets for sales growth, margin performance, EPS growth and cash generation. Sales of $17.3 billion were up 9% on a reported basis and 6% on an organic basis year-over-year with both organic and inorganic growth, driven by our Industrial segment.

Adjusted operating margins were essentially 20% for fiscal '25 with margin expansion of 80 basis points year-over-year, driven by strong operational performance. Both of our segments are running at the 20% level for adjusted operating margins, and we would expect further margin expansion as volumes continue to grow. Adjusted earnings per share were $8.76, up 16% year-over-year, driven by sales growth and margin expansion.

Now turning to cash. We increased our free cash flow to $3.2 billion in fiscal '25, which was up 14% or $400 million year-over-year. Our free cash flow reflects over 100% conversion to adjusted net income, and we remain committed to this going forward. And keep in mind that our strong cash flow generation and cash conversion in fiscal '25 also included us investing a couple of hundred million of increased capital investments to support the growth in our Industrial segment. So a very good story there.

In fiscal '25, we returned roughly $2.2 billion to shareholders through share buybacks and dividends, and we deployed approximately $2.6 billion, aligned with our bolt-on acquisition strategy. Our cash generation and healthy balance sheet gives us continued optionality with uses of capital to support investments for future growth, both organically and through M&A.

Now as Sujal mentioned earlier, we are making a change to our non-GAAP reporting. And going forward and beginning with the first quarter of fiscal '26, we will exclude intangible amortization expense from our non-GAAP financial measures, and this change is reflected in our Q1 guidance. You will see the historical impact of the recast materials that we have provided for fiscal '25 and fiscal '24 in the appendix of our materials. And you can assume that amortization impact will be roughly $0.15 per quarter for fiscal '26.

Now before I turn it over to questions, let me reinforce that we continue to execute well in both segments to deliver the record results you see for fiscal '25. We have positioned the company to deliver strong performance and value for our owners, and we expect our momentum to continue into fiscal '26 and beyond. We look forward to sharing more about our growth opportunities and our value creation model at our upcoming Investor Day on November 20.

Now let's open it up for questions.

Thank you, Heath. Kate, could you please give the instructions for the Q&A session?

[Operator Instructions] Your first question comes from the line of Scott Davis with Melius Research.

Congrats on a great year. I got to lead in on the AI stuff because it's just a giant tailwind for you, and you're doing a -- seem to be doing a great job of capturing those revenues. But last quarter, I think you were talking about $800 million. You did $900 million. I think last quarter, you said you thought maybe '26 was $1 billion. Can we mark-to-market that forecast? And just as importantly, where are you on kind of the scale impact there where you can get to or above kind of company average margins?

Yes. So no, great question, Scott. And you're right on with where we've seen the momentum all year. And in many cases, our customers, on the programs that we win, continue to want more and they want it faster, which is a key element of how you win in this market. And so you are right, we generated over $900 million of AI sales in '25. And remember, in '24, that was $300 million. And this is really the products that we do that go into AI with the GPUs and so forth. So we tripled our revenue in this product set, which I actually think shows the job the team has done to ramp to your question.

As we look into '26, the estimates out there is for hyperscale CapEx to grow about 20%. And let's face it, we have strong orders. We have the momentum and we have the design win traction. So we grew $600 million this year alone in AI in dollars. I think that's probably the baseline you have going into next year from a level of dollar growth that you should be thinking about right now.

The other thing I want to highlight is while we talk about AI, we also have a lot of growth that's happening outside of AI in our DDN business. And there is business we have that is cloud business that is not AI. That business is running about $500 million right now this year. That doubled versus last year. And then we also -- that's also a real momentum. And then outside of that, where we play in enterprise and telecom over the past 6 months, I would tell you, we have seen increased momentum there where those applications are growing double digit for us.

So I know we spent a lot of time on AI and a lot of -- early thing was all the cloud CapEx went to AI. We've seen a broadening out of it. Certainly nice growth in the cloud side as well that is not AI, but also seeing nice growth rates. And all of that comes together to be that nice 80% growth we had this quarter, and we can see that growth momentum continuing.

Your next question comes from the line of Joe Spak with UBS.

Maybe just to follow on, I mean, you talked about some of the high-speed interconnect and data center. I was wondering if there's also a power element related to AI that's going to help you in '26. And then just for CapEx in '26, like you've been close to mid-5 sales this year to help build out that support. Should we expect similar levels next year to help support that continued growth? Or has most of that investment already been made?

No. Thanks, Joe. So first off, let me get into the product sets a little bit that when we talk about our DDN business. Clearly, the bigger driver is what you get around high speed. But we have -- our growth has also been happening around what happens on the power interconnects, certainly, what we do in helping that power be more efficient from liquid busbars and things like that, that we do with our customers. And then also where we do cable connectivity that goes between racks and so forth.

So the numbers I quoted to Scott include all of that in those categories, Joe. And we have momentum across all of them because all of them are key building blocks of how this architecture comes together, where you need lower power, no latency, higher speeds, all happening at once. So all of those products are there.

I don't think one inflects at a higher point than the other as we continue. I think you're just going to continue to get that good momentum that we've had this year with the ramps that we have going and the program wins that we have.

Heath, why don't you take the capital side of it?

Sure. And Joe, just as a point of reference, and you have the material there. Our capital was up a couple of hundred million from FY '24 to FY '25, and that growth was entirely for some of these AI and cloud programs that we've won both in the past as we're expanding and/or, in some cases, adding new capacity altogether for very program-specific reasons. There will be some pressure to increase that a little bit as we move from '25 into fiscal '26. We don't guide that number specifically, but I would expect it to be kind of in line, maybe just a little bit less than the dollar increase we saw in the prior year.

So I still think with the revenue growth and the growth that comes out of these programs, we'd still be at the TE average still in the -- a little over 5% range. And it kind of depends because sometimes with these programs, the revenue that comes out of these programs can lag a fiscal year or lag when you make those investments. So I know where some of the things the team is contemplating for this year is even investments that we'll make in '27 to support programs that we've won for -- I'm sorry, investments in late '26 for programs that will kick into revenue for '27.

So there's a lot of great momentum there. The key is for us to get up, get operationalized things, so we're not the ones holding our customers back.

Your next question comes from the line of Mark Delaney with Goldman Sachs.

I was hoping you can help us better understand trends by end market beyond DDN, including how demand trends have changed over the last 90 days. And any early views you can share for fiscal '26?

No. Thanks, Mark. And like we've done already in the script, there's going to be some of this we're going to say, please come to Investor Day, but I'll tell you what we've seen and changed over the past 90 days. Let's build on the orders that we talked about, and you can see the slide. I think one of the things that is a positive is you saw the order growth both year-over-year and sequentially in both segments. So I do think the environment does feel better than 90 days ago. But let me click down a little bit by the segments.

First of all, just taking Transportation, orders were up both year-over-year and sequentially in auto. And it is one of the things all in 2025, we dealt with a world where Asia production grew, Western production declined. We do actually think what we're seeing is some stability that they're probably going to be more even between regions, even though auto production is going to stay in that 87 million to 88 million unit range, which is flattish.

We also think we're going to continue to deliver content growth over market of 4% to 6% because when you think about what's happening with data needed in the car, what's happening with further comfort things that we all want that drives more electronification in the car as well as just the nonending growth of electrified powertrains in Asia, all of that continue to give us confidence on the 4% to 6%.

When you look at industrial transportation versus 90 days ago, Mark, honestly, there hasn't been much change, unfortunately. We continue to see Europe and Asia have growth and North America still having declines in the truck and bus and the agricultural area. So I would say that's one that continues to be uneven that we're actually really looking for signs when can we get a little bit of a North America pickup, but we are not seeing any trends that see that right now. So that's one, unfortunately, probably still feels muddled.

And then in the Industrial segment, I will jump over DDN like you asked. But you look across our end markets there, we're seeing consistent growth across them. In energy, we have -- you saw the organic growth this quarter of 20% with where we position ourselves in North America and what's happening in grid investment in the T&D side by utilities, the hardening, getting it up to current trends and everything, that continues to be very good order momentum there, and we're also benefiting from utility scale renewables like solar.

AD&M just continues, I would say, the market continues to move along. You've seen airframers talk about where they're getting their build rates to, and it feels the supply chain continuing to show improvement, which is good signs. And then the one that I know we've been pretty hesitant on in our ACL business, which has general industrial, has a little bit of things that touch the consumer, what I could tell you, the factory automation side, which is the bigger piece of it, we are seeing growth in orders across all regions.

The business grew sequentially. The areas where we see weakness is where we have things that go into HVAC, things that go into appliances, that's where we see some weakness there. So it does feel the industrial piece of that, the business side has improved. Certainly, the residential or consumer side has gotten a little weaker. But we did have nice growth. You saw that, and we think the momentum on the more of the industrial side continues to get more traction.

So that's a little bit of going around the horn as we think about entering '26. Certainly, you see that in our guide with 17% overall growth and 11% organic growth here in the first quarter. The Industrial segment is still in very good momentum, and it feels like we're getting some stability across the Transportation segment and a couple of markets with questions.

Your next question comes from the line of Wamsi Mohan with Bank of America.

I was wondering if you could talk a little bit about margins in 2 ways. One is when you look at gross margins, just a few years ago, you were in the low 30s, you're squarely in the mid-30s now. How should we think about the potential for gross margins for you and for this industry to actually expand further from here? And if you could comment just on the new basis of accounting, how should we think about the adjusted operating margins for both your segments? And sorry, if I could, does this change in accounting imply any increased appetite around rate and pace of M&A as well?

Okay. I will tackle -- I think you got 3 questions in one there, Wamsi.

Wamsi, you're ignoring Sujal's instructions.

Yes. But no, I appreciate -- I do appreciate your questions and your interest. So let's talk about margins first. Margins for the year, this is a bit of a journey that we've been on. I think we were very specific with our comments around Transportation going back several years, getting them closer to their margin target of about 20%. Largely, they're there. You're going to have noise in a given quarter that's going to swing you on both sides of that. But for the year, they're at 20%, and we expect good things margin-wise as we go into FY '26.

The Industrial business has been more of a story around more rooftop consolidations and so forth and taking advantage where we have scale opportunities, particularly when we have strong programs, like we have going on in the DDN business. And we're very pleased with their performance and their jump forward in FY '25.

Again, as we go into '26, we're going to be balanced with our investments. We think both of those segments will flow through on revenue growth at 30% or maybe a tad better depending upon the mix. So I think as you do your modeling, depending on what you want to put in there for the growth side, I think 30% is a good flow-through math on that piece of it for the organic growth.

In terms of gross margin, a lot of that flow-through math does come to gross margins, and we do get some leverage on our OpEx expense as well. So we're running this past year at about 35% gross margins. The amortization change largely affects the gross margin line. So when we think about it at the TE level, it's about 100 basis points of margin improvement that flows through at the gross margin line. So at 35% in '25 would be kind of a recasted 36%. And that's where some of that flow-through is going to occur.

If you think about the split by segments, which is another part of your question, it's in the schedule that we have in there for you that recast it, and it shows the segments recasted by quarter going back to prior 8 quarters. So you can see that relative to what our actual results were. But it's heavier weighted towards the Industrial segment because, obviously, the amortization expense load comes from the acquisitions, and we've simply been more acquisitive on the acquisition front in the Industrial segment over the past few years, inclusive of the Richards deal that we completed earlier this year.

In terms of your third or fourth question on M&A, listen, I think we've been trying to be -- we're going to talk more about it in our Investor Day here in about 3 weeks in terms of just overall capital deployment. So I don't want to -- but I'd say it's fair to say that we're excited about our bolt-on opportunities in front of us. Bolt-ons don't always mean small. They come in all shapes and sizes, just as we completed in FY '25. We completed the Harger deal that was a little bit smaller, but then with the Richards deal, which was much larger. And our appetite ranges depending upon the business and the opportunity to create value there.

Certainly, the optionality that I commented on earlier about free cash flow and the optionality that, that provides gives us some confidence that in some ways, we can be a little bit more aggressive, but we're going to be smart with the investments that we make. So stay tuned, and I look forward to seeing you in a few weeks.

Your next question comes from the line of Amit Daryanani with Evercore ISI.

I just had a couple of questions just on the DDN segment broadly. Terrence, on the AI side, it sounds like $1.5 billion revenue run rate is sort of what you're comfortable with. I'd love to understand, do you see this growth coming more from end demand end units? Or is there a share gain narrative as well as some of these programs are starting to mature, perhaps the share is getting more in your favor? I'd love to just kind of understand the levers behind the growth you see.

And then on DDN ex AI, your growth over there actually has been really impressive, north of 40%, I think, in fiscal '25, which is much better than what the end markets are there. So what's driving this growth on DDN ex AI as well?

Yes. So twofold one, Amit, sorry. The one part, I guess, you're adding the AI and the cloud piece together. So I just want to make sure where that comes from. And honestly, that's program ramp wins. Like we've always told you, we have a nice position with the hyperscalers. We have to play everywhere there, and these are ramps there. And I think our share has been pretty stable, but really benefiting from the technology and where we're co-designing with our hyperscale customers that, in some cases, have their own GPUs.

Outside of AI and cloud, what I would tell you, what we saw and just if you take this past quarter, in enterprise and cloud, we grew about 15%. And on things around the edge and IoT, it was a similar number in the double digits. And what you see is I do think it's the bump down effect that's happening in CapEx. Our product set is very broad. When you deal with high-speed things, they do cascade down over time.

So I do think you sort of have -- lines do blur between AI and non-AI. And the key thing, this cloud CapEx that the key element is that's a number we keep an eye on, which is growing 20%, I think is taking that bump effect that cascades down. And if you remember, like a year ago, we all just thought all the cloud CapEx was only going to AI. We're seeing that broaden out.

And clearly, as you added some of my numbers together, you have those lines blurring, but it's really created that really strong growth that we've had that not only in the quarter, we grew 80%, but basically, we grew that for the year organically. And it was in the AI, the cloud that's non-AI as well as we're starting to see pickup here in the past couple of quarters on the enterprise, the telco as well as IoT and edge.

Your next question comes from the line of Luke Junk with Baird.

Terrence, I wanted to circle back to Transportation and the orders in particular. You had mentioned that you had seen order growth in all regions this quarter. I'm just wondering relative to auto outgrowth, especially that has been more weighted to Asia and China recently, would you say this might portend to more balanced outgrowth algorithm? And I think you spoke to production being more balanced in the West, but what about some TE-specific dynamics as well?

No. Thanks, Luke. And first off, you are right in my comments. We've had this outbalance of production this year, and that has created a little bit of headwind because our mix -- I mean, our content per vehicle is higher in the West. You all know that. So that has created a little bit of pressure where you've seen our content outperformance be a little bit lighter than our 4% to 6%.

But as we look forward, as we work through these Western declines and they become more flattish, I do view you're going to see content per growth in every region that contributes above that to get to the 4% to 6%. Certainly, there's different opportunities in different regions. The electrified powertrain is driven out of Asia. Data connectivity is in every region. Certainly, feature sets are different that drive electronics in the vehicle, is different by region.

But the key thing you have to realize, in every region, all of them are increasing. It's just the rate of increase. So net-net, we do think you'll see content growth over market be more even this year. But certainly, there'll be a little anomalies just due to the trends are very different in region.

Your next question comes from the line of Samik Chatterjee with JPMorgan.

This is [indiscernible] on for Samik Chatterjee. So I just wanted to ask on implied margin guidance for F 1Q. So based on my calculation, even after adjusting for the change in non-GAAP calculations, the implied margins are close to 21%, which is a robust expansion relative to F 4Q. Can you please highlight the drivers which are driving that margin expansion there?

Yes. Samik, I'm going to have Heath answer that question on where sequential margin goes sequentially Q4 to Q1.

Samik, first of all, as you know, we don't guide a specific margin target. However, I think it's fair to say with the breadcrumbs that we've given you on various things with tax rate and implied what our EPS guide is and our revenue guide, you can assume that we're going to see an increase in margins modestly sequentially, probably more driven by Transportation, which tends to have the highest auto production number in our calendar -- in our fiscal first quarter each year and neutral or maybe flattish in Industrial. But I don't want to get into guiding margin rates, but I think that would be a fair assumption.

Your next question comes from the line of Guy Hardwick with Barclays.

Terrence, I know you kind of answered the question about the growth in DDN ex AI. But I think I heard you say the cloud business doubled to $500 million. Can you tell me what's driving that? I assume it's cloud companies pushing their on-premise customers to the cloud, and they seem to be growing at 20%. So just wondering how much visibility you have in this business because it potentially could be a multiyear runway. What sort of kind of growth assumption should we assume sort of medium term?

Yes. So first off, Guy, you are right. The comments I made in -- to Scott's question really had to do with our cloud revenue, which is in non-AI applications was about $250 million in last year, and it was up to $500 million this year. And I do think it's about the infrastructure being upgraded. And not everything has a GPU, but you do have cloud data center, there's other things going in it that are being upgraded, and we're benefiting from that.

So clearly, you have very high-end compute that's happening on the high-end side, but you're going to have cascade down that we're benefiting from our broad product set. And I do think we're going to continue to benefit from that growth trend going forward. It may not have as much content as we have on AI, but it's going to have a nice growth rate to it because certainly connecting GPU to GPU like we do today, and that's more of the AI element, you don't have that product in there, but certainly, you have the high speeds needed in these next-gen servers that the cloud needs.

Your next question comes from the line of Colin Langan with Wells Fargo.

Just a follow-up on the outlook in auto to grow 4% to 6% over market. I mean any way to frame the challenge from EV adoption slowing down in developed markets? Is that sort of going to keep you at the lower end of that range or even below that range given some of the pushbacks in some of those products? Or is that kind of offset by other factors?

No. When you look at it, I think, clearly, when you have EV adoption, the biggest driver of it is Asia, and that's full steam ahead. You have less adoption elsewhere in the world. Where you have, you're not going to full EVs. You might be going to a hybrid, which gives us a content increase, but not the total content increase you have in the full electric.

The element that you have to remember is I need you to think about what's happened to the content, not only in EV, but outside. Think about the Ethernet connectivity that you need in a car for autonomy, for the sensor suite, for everything else that needs to happen in the car, for software updates over the top. All of that's being put in, and we benefited from that, had really nice growth this year on it, and that's going to be a key driver, almost just as important as what we've gotten out of EV.

And then the other thing that come into, the safety features, the comfort features, everything else that's getting added to the vehicle also adds content. So we actually view it's going to be more balanced. And when we're at Investor Day here just next month, we'll spend more time on this to make sure everybody has a clear picture of how we see the content growth going forward.

Your next question comes from the line of Asiya Merchant with Citigroup.

Can you just talk a little bit about the book-to-bill, specifically, I think, in Industrial, given the strong momentum you have, DDN as well as some of the other segments that you talked about, is book-to-bill below 1 here? I think I calculated it to be 0.96. Is that a metric that investors should focus on? And how we should think about that relative to your guide?

Thanks for the question. I would say you have to look at order levels and the one element you get always this time of year is we do have sequential seasonality that's very normal. And especially in our Industrial segment, you have factories that shut down around holidays in the western part of the world. So in many ways, and if you look back over time, you will always see we have a step down quarter 4 to quarter 1 due to this factor. It's almost like we have 1 less week of business due to how people leverage their production planning.

And the element is $4.7 billion of orders in the fourth quarter against a $4.5 billion guide for the first quarter is very healthy. So I know the book-to-bill takes current quarter, but what's really nice is the trend you see going into a sequentially slower quarter just due to seasonality is really how you should look at it.

Your next question comes from the line of William Stein with Truist Securities.

I want to first recognize very good results on revenue and earnings and the outlook in the same regard. So the question I'm going to ask is maybe is not quite as optimistic, but I do want to recognize the great results and outlook. On the margins, however, I have this lingering question. You're, again, beating on revenue. You're beating in this new -- partly from this new category of AI, which I would expect carries better margins. The conversion margins are not bad, but I think they were a little bit below consensus.

And if you look to the out quarter, if you don't make that amort adjustment, I think it's the same story. Revenue beat and earnings beat, but margins are a little bit disappointing from a [indiscernible] perspective. Is there something dragging on profitability today that you could clarify for us?

Yes. Will, I'm not -- we've kind of been holding this roughly 30% flow-through here for a while. And so I think when you look at our -- and there are some bridges, I think, in the back, when you look at our operational performance and you look at the fourth quarter or the full year '25, our guide for '26 year-over-year or at least our first quarter guide, I think you would come back into a number that has a 3 in front of it. So certainly, amortization change was not done for any reason other than to better represent kind of our cash profitability of the business.

And so you're always going to have a little bit of noise between segments and within a segment, maybe even some mix within a segment, but that noise goes both directions. And so I don't get too hung up on that quarter-to-quarter. But no, from a fundamental perspective, there's nothing that drags on us.

I would say in certain pieces of the business that are passing on a little bit more tariff pricing, that tariff pricing and the revenue that comes from that does not include any margin behind it. So when we do see a spike in some of that tariff pricing, some of those businesses struggle a little bit because you might add revenue with no margin, but that's just more of a recovery mechanism. So that can create noise. But I'd say if you look at the schedules that we provided for the quarter, for the full year and certainly for our guide, you'd see a 30% or so in there.

Your next question comes from the line of Shreyas Patil with Wolfe Research.

On the AI piece, you're growing very rapidly, run rating at about $1.2 billion. You've talked in the past about this being a 3-player market. One of your competitors appears to be quite a bit ahead on revenue, maybe 3x the revenues that you're doing at the moment. So I guess, as we think ahead, how do you think about the market share dynamics in this space? Do you see an -- should we be thinking over the long run that this will eventually become a more balanced market share across the 3 big players? Or do you see TEL as sort of a firm #2 over time?

I think what you have here, and you said it well that when you look at the players, it is a concentrated player because what occurs is who can provide this technology. And when you look at how you have to co-design, ramp to the levels that you've seen us do, it doesn't mean it's going to be a concentrated market. I think we have to continue to look for technology inflections, and they are typically going to be the areas where you see opportunities to gain share. But we got to compete on technology, we got to compete on ramp with the customers and we have to compete plan on the ecosystem.

And I think what's really good is that we provide the technology that shows we can provide it, and we're going to compete every day to try to increase share.

Your next question comes from the line of Joseph Giordano with TD Cowen.

This is Michael on for Joe. So previously, you mentioned strong content in busbars and cabling and also previously other quarters, backplane content in particular. Are there any recent order wins you'd like to highlight there specifically? And then what types of customers are you seeing the most order activity with right now between GPUs, custom ASICs, hyperscaleers, stuff of that nature?

So first off being the wins that we have are across the product set. And in some cases, we're stronger with certain customers on one product set versus the other. You shouldn't assume you get one product set or all product sets with one customer. We compete individually on each one of those product sets that you sort of talked about. And that's just reality as we work the architecture real time.

The bulk of our wins that when you see the revenue traction we have in the ramp are mainly with the hyperscalers. We had wins across the hyperscaler group as well as the semi players. But the element as the bigger driver of growth for us is the hyperscalers that have their custom TPUs and GPUs.

Okay. Thank you, Mike. It looks like there's no further questions. So we appreciate all of you joining us this morning for the call. And if you have further questions, please contact Investor Relations at TE. Thanks, everyone, and have a nice day.

Thank you, everybody.

Today's conference call will be available for replay beginning at 11:30 a.m. Eastern Time today, October 29, on the Investor Relations portion of TE Connectivity's website. That will conclude the conference for today.

Everyone, thank you for standing by and welcome to the TE Connectivity Third Quarter Earnings Call for Fiscal Year 2025 [Operator Instructions] As a reminder, today's call is being recorded. I would now like to turn the conference over to our host, Vice President of Investor Relations, Sujal Shah. Please go ahead.

Good morning, and thank you for joining our conference call to discuss TE Connectivity's Third Quarter Results and Outlook for our Fourth Quarter of fiscal 2025. 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 at te.com. I would also like to take this opportunity to announce that we are planning to hold an Investor Day on November 20 in Philadelphia with a product showcase the evening before. We are excited to share more about our opportunities for growth and further value creation for our owners, and we'll be sending out details of the event shortly.

Finally, during the Q&A portion of today's call due to the number of participants, we're asking everyone to limit themselves to 1 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.

Thanks, Sujal, and thank you, everyone, for joining the call today. As I normally like to do, I do want to take a moment before we get into the slides to frame our results for our third quarter as well as our guidance for our fourth fiscal quarter. We are pleased that we delivered double-digit increases in both sales and adjusted earnings per share in the third quarter that exceeded our guidance and demonstrate our team's ability to continue to execute in a dynamic global environment.

We delivered 14% sales growth and 19% adjusted earnings per share growth, and both of these are quarterly records for our company. A key driver of our success has been the strategic positioning of our portfolio and the investments that we've made to broaden our business to benefit from secular growth trends in both the Transportation and Industrial segments. The investments that we made will see that are paying off and are evident in our results as we're capitalizing on the strong demand for artificial intelligence as well as growth in energy applications where our products needed.

We're also benefiting from strength in Asia in our Transportation segment, where we see increased data connectivity trends and ongoing growth of the electrified powertrain. You not only see the benefit of the investments on the growth side, but you also see it in our operations. We achieved record adjusted operating margins of 20% and record free cash flow generation of $1 billion this quarter. This is the result of our global manufacturing strategy, where we've invested heavily to have over 70% of our production localized, and this is providing to be a differentiator with our customers.

And finally, we do expect our strong performance to continue into the fourth quarter with both double-digit sales and double-digit adjusted earnings per share growth again in the fourth quarter. So with that as a backdrop, let's get into the presentation, starting with Slide 3, and I will discuss some additional highlights and the guidance for the fourth quarter of fiscal '25.

Our third quarter sales were above guidance at $4.5 billion, growing 14% on a reported basis and 9% organically year-over-year. We saw acceleration in our Industrial segment with over 20% organic growth that was broad-based and driven by our digital data networks and energy businesses. We delivered record adjusted earnings per share of $2.27 that was well above our guidance and increased 19% versus the prior year.

Our adjusted operating margins were 20%, and they increased 60 basis points over last year, driven by strong operational performance by our teams. As you know, we've been on a journey to expand margins at the company level, and both segments are now essentially running at 20%. Importantly, to highlight, and we'll get into it in more details, the Industrial segment adjusted operating margins expanded nearly 400 basis points year-over-year.

We also saw orders improve again this quarter to $4.5 billion, and this was an increase of 8% year-over-year as well as 5% on a sequential basis. And these order levels support our outlook for the double-digit growth in our fourth fiscal quarter. We delivered record year-to-date free cash flow of approximately $2.1 billion, and we returned $1.5 billion to shareholders, and we deployed $2.6 billion of capital for acquisitions in the Industrial segment, which includes the Richards acquisition that we closed this quarter.

As we look forward into the next quarter, we do expect fourth quarter sales to increase to $4.55 billion, and this is growth of 12% on a reported basis and 6% on an organic basis year-over-year. Adjusted earnings per share is expected to be around $2.27, and this will be a 16% increase on a year-over-year basis. Our fourth quarter guidance implies strong performance in fiscal 2025 with high single-digit sales growth and double-digit adjusted earnings per share growth year-over-year.

With that as an overview, now let me get into order trends, and I'd appreciate if you could turn to Slide 4. In the quarter, we saw orders grow to $4.5 billion. In Transportation, orders increased 5% versus the prior year, with growth in Asia of 17%, partially offset by declines in Europe and North America. The global auto market remains uneven by region, and we continue to see strength in our Asia position in both our orders and our sales, which is helping to offset the continued softness that we're seeing in Western markets.

Looking at orders in the Industrial segment, we continue to see strong order momentum with 12% growth both year-over-year as well as sequentially, and this reflects ongoing momentum in artificial intelligence applications and in our energy and aerospace and defense businesses. One key sign that we saw in the quarter, and we're encouraged by is that we have improvement in orders that we're starting to see in the general industrial end markets.

Now let me get into segment results, and I'll start with Transportation that's on Slide 5. Our Auto business grew 2% organically in the third quarter, with growth in Asia of 11% being offset by declines in Western regions of 5%. While Auto production on a global basis was down slightly in the third quarter, it is expected to be roughly flat this year. And we continue to generate growth over market and secure key wins around data connectivity and electrification that will drive future content growth.

In addition to the leading-edge products and technologies, we are also benefiting from our strong global position and localization strategy, which enables us to serve our global customer base in this environment.

Turning to our Commercial Transportation business. We experienced 3% organic growth, and this was driven by growth in Asia and in Europe, partially offset by declines in North America. We did see orders improve both year-over-year and sequentially, indicating that there is some traction in the commercial transportation cycle.

And in our Sensors business, we saw weakness in end markets in Western regions, partially offset by growth in Asia. For the Transportation segment, adjusted operating margins were 19.4%, and we expect margins to be above 20% for the full year.

Now let me turn to the Industrial Solutions segment, and that starts on Slide 6. And at the segment level, we grew 30% in the quarter with over 20% organic growth and the benefit of acquisitions in our Energy business. The Digital Data Networks business grew over 80% organically with increasing ramps from hyperscale platforms across our customer base. You see the strong growth, and I just want to remind you that AI revenues last year was $300 million. We now expect our revenue from artificial intelligence applications to be above $800 million in this fiscal 2025 year and continues to reflect the strong momentum that we've been talking to you about.

In Automation and Connected Living, we grew 5% organically, and we are seeing signs of recovery in factory automation applications as markets have begun to improve. In our Energy business, our sales grew 70%, and this includes the Richards acquisition, which enables us to capitalize on strong growth opportunities in the North American utility market. On an organic basis, our Energy business grew a strong 20%, driven by continued momentum in grid hardening and renewable applications.

In our AD&M business, sales grew 6% organically, driven by growth across commercial aerospace, defense and space applications. And in these markets, we see favorable demand trends that continue to be coupled with ongoing supply chain improvement. And in our Medical business, our sales were roughly flat sequentially as we expected.

Now let me turn to margins for the segment. And for the segment, adjusted operating margins expanded nearly 400 basis points to over 20%, driven by strong operational performance and benefits of higher volume. I am pleased with the progress our team has made of balancing our footprint consolidation efforts with supporting the strong growth that we've had in the segment, and that's clearly evident in the growth as well as in the margins.

So with that as an overview of our segment results and orders, let me turn it over to Heath to get into more details on the financials and expectations going forward.

Well, thank you, Terrence, and good morning, everyone. Please turn to Slide 7. For the quarter, adjusted operating income was $901 million with an adjusted operating margin of 19.9%. GAAP operating income was $857 million and included $30 million of acquisition-related charges and $14 million of restructuring and other charges. For the full year, we continue to expect restructuring charges to be around the $100 million level. Adjusted EPS was $2.27 and GAAP EPS was $2.14 for the quarter and included restructuring, acquisition and other charges of $0.13.

The beat versus our guidance was driven by strong operational performance and higher volumes. The adjusted effective tax rate was 24% in Q3, and we expect a similar tax rate for the fourth quarter. As a reminder, the increase versus the prior year is primarily related to the impact of the Pillar 2 global minimum tax and our jurisdictional mix of earnings.

But as importantly, and as always, we anticipate our cash tax rate to be well below our adjusted ETR. I'll now discuss a couple of housekeeping items. During the quarter, we saw the U.S. dollar weakened against other currencies, resulting in a year-over-year benefit from foreign exchange of $68 million in sales and $0.05 in adjusted EPS.

Our Q4 guidance assumes foreign exchange contribution of $111 million in sales and $0.03 to adjusted EPS year-over-year. And these are part of the bridges in the back of the slide deck. The impact from tariffs in the third quarter was approximately 1.5% of sales with minimal earnings impact. Based upon what is currently enacted, we expect the impact from earnings in Q4 to be similar to Q3 levels.

With our global footprint, we will continue our strategy of mitigating tariff impacts through both our sourcing changes by TE and our customers as well as implementing pricing actions.

Turning to Slide 8. When you look at the graphs on the slide, we have set records in sales, adjusted operating margins and adjusted earnings per share. I do want to focus on cash flow. Cash from operations was nearly $1.2 billion and free cash flow was $962 million in the quarter. Year-to-date, we have delivered free cash flow of roughly $2.1 billion, and we expect to deliver another year of free cash flow conversion well above 100%.

Our cash generation and healthy balance sheet position us well and provides us optionality with uses of capital. So far this year, we have returned approximately $1.5 billion to shareholders and deployed $2.6 billion for acquisitions. Before I turn it over to questions, let me reinforce that we are executing well to deliver record results and have positioned the company to continue to deliver strong performance and value for our owners.

I am pleased with the way our team is performing, the results we are delivering and the opportunities ahead of us. We are well positioned for a strong finish to the year, setting us up for further growth and earnings expansion as we go forward into our next fiscal year. As a reminder, that starts October 1. Now let's open it up for questions.

Okay. Thank you. Can you please give the instructions for the Q&A session?

[Operator Instructions] Your first question comes from Scott Davis with Melius Research.

Terrence and Heath, Sujal. Congrats on positioning the company well this year, particularly around the AI stuff, which I need to ask about because it's topical, obviously. But is that business now when you think about $800 million, which is just a big number really when you think about where you were just a couple of years ago. But is that business now fully ramped and scaled, meaning like profitability at or above company levels? How do you think about that?

Yes. No. Thanks, Scott. And to your point, I said it on the call, last year, we had in just AI application about $300 million of revenue, and it's up -- it will be above $800 million this year. And when you look at where we're even run rating now this quarter, it will be above $1 billion next year. So it has been something from the scaling side. Our teams have done an exceptional job trying to keep up with the demand. When you look at the growth we have, it is on ramps.

And when you look at the margin that we get in this business, it's not surprisingly, it is a little bit above where the Industrial segment plays. And I think you're going to continue to see nice conversion on that as that continues to ramp. And I still think we're sort of middle of the early innings in this and what we're working on with next-generation programs with our customers.

And like we've always said and as we've talked about AI, we're playing a broad slate of the hyperscalers. It isn't one customer here and how our teams are bringing not only the technology that's needed on the product set, but then to your question around the operations side. Our team is executing very well to really make sure we can deliver the technology at the pace that the hyperscalers expect.

So that momentum, we feel good about. Certainly, we see that not only being in '25, we see that continuing into '26.

Okay. Thank you, Scott. Next question please.

Your next question comes from Amit Daryanani with Evercore.

Terrence, in June quarter, something that really stands out. I think everyone is just the broadening in both growth and the margin performance across your portfolio. The double-digit growth in industrials really stands out. So can you just talk on what's driving this diversification and growth that we're seeing in June? And then really related to that, the industrial segment margins achieving 20%, I think, much faster than any one of us expected. Can you spend a little bit of time on kind of what factors contributed to this outperformance? And how sustainable do you this margin levels are?

Yes. No, thanks, Amit. And let me break that into probably 2 pieces. I'll talk about the growth, and I'll ask Heath to talk about the margin journey that you've all been following with us. So first off, when you think about the growth, and let's face it, we have an unbelievable position in transportation that we've always talked about. But really, when we think about -- when we make investments and you think about what we do, which is across these markets is really connectivity is a couple of key trends that we've been investing in is around where do you need data, where do you need higher speed data.

And AI, to Scott's question, is front of mind. But also realize when we deal with things and we talk about software-defined vehicles, it's around where we're strong and where those trends help us. So it does come to a big point of those data speeds. And you see that in Industrial, we benefited from in Transportation, but also in places like factory automation, you have data speeds that are needed. And that's why we like our position there and to your question, broadening out.

The other big trend is its connectivity around power. And in Energy, we've made investments around our go-to-market and our product set. You see it in the organic growth that we've had now for -- goes back pre-COVID. And in this quarter in energy, it was 20% organic growth. And then we've deployed capital in M&A there. So it does come around power connections and no different than power connections we have where the architecture changes in the car for the electrified powertrain.

So it's things we do good. Yes, we have to be targeted to create value with our customers. But you're seeing that throughout our results, and you see both segments contributing. And that's the broadening that we get excited about because it's things that we have been investing in. And certainly, you see them in this quarter's results. Heath, do you want to talk about the margin side of his question?

Sure. Amit, I appreciate the question. Certainly, we're pleased with the progress that we've made in the Industrial segment margins as it's been a journey to work its way from the mid-teens into the high teens and now cross over the 20% threshold for that business. But we would expect these level of margins at these volumes, right? So we've done a lot of footprint work in the Industrial segment, as you are aware. And we've been pretty transparent that this restructuring journey that the segment has been on to reduce some of the rooftops as we've undertaken.

So as you get that both combination of reduced fixed cost out of those fewer facilities and then the scale that we get and the volume leverage we get when we start to see these volumes, it's not a huge surprise to us, and we would have that level of expectation. Now some of the things we're benefiting from around the Energy sector, particularly in North America and the AI business within our GPN business unit certainly helps. But all pieces of the segment are contributing towards this journey and certainly aligned with what our internal expectations are.

So we're happy to get there sooner, but certainly, it's come as the top line has been supported.

Alright, thank you, Amit. Can we have next question please.

Your next question comes from Mark Delaney with Goldman Sachs.

I'm hoping you can comment more on your view about the sustainability of the current fundamental strength. And if you think any of the current demand is due to customers prebuying in order to mitigate tariff risk?

Yes. No, thanks, Mark, for the question. And we don't see any meaningful impact to pull-ins. In our product set, when we look at things and we talk to our channel partners, we don't see that. Certainly, I think you may see that a little bit more in semiconductors, but we do not see any meaningful pull-ins.

And I think that goes back to the orders that we talked about back when I covered slide, I think it was 4. And when you look at it, both year-over-year and sequentially, we saw nice growth, and we also saw growth year-over-year in both segments. Now it's evident when you look at the slide, you look at the Transportation line that you just sort of see something that looks very stable. But as I said, Asia is strong. Western car production is still weak. It is down mid-single digits in the West between the U.S. and Europe. And then you're also getting into elements of what they're making.

There are less electrified vehicles just due to the trends there. So Asia is an area where we continue to see strength and half of our revenue in Automotive is Asia-driven. We also saw commercial transportation. We continue to see growth outside the United States in commercial transportation. So North America is the one area that continues to be soft in commercial transportation. But one of the things we were encouraged by is we saw sequential improvement in global orders.

So maybe we're seeing some traction there. And then in the Industrial segment, Mark, it is, I think, the continuation of the AI momentum that we already talked about. Energy continues to have strong orders. North America is very strong in orders and the Energy space, so that's going to continue. We'll benefit from what we did with orders in Richards from an M&A perspective. And then the Aerospace business continues to be strong. We do see supply chains improving. And what was nice in the Industrial segment I talked about was in our Automation and Connected Living, we started to see encouraging signs about improvement in orders.

And we're going to continue to watch those to see what shape they are. But it's nice to finally see after a couple of years where it's been down. There's some encouraging signs there. And they're pretty broad around the world. It isn't just one region. It's broader than that. So finally, I think there's more upward potential there than what we've been talking about over the past 2 years. So durability feels good. Clearly, it's reflected in our guide. And some of these are real trends, secular trend driven. When you think about electricity growth, you think about what's happening with AI, which gives us even more confidence because around those trends.

Thank you, Mark. Can we have the next question, please.

Your next question comes from Luke Junk with Baird.

Terrence, I was hoping we could maybe touch on the industrial book-to-bill, especially any timing-related impacts we might be seeing there in terms of AI that could be causing some distortion plus or minus? And maybe if you just comment on AI awards, specifically, I'd be especially interested in anything above and beyond this continued acceleration in like-for-like growth that you're seeing maybe relative to both the hyperscaler opportunity and chip makers as we step into '26?

Yes. So let me take the second part first. When you look at where it at, I would just say it's the momentum is continuing. I don't think there is an incremental platform or an incremental customer. It's really where we have been strong. We continue to see momentum there. And as we've always talked to you, Luke, and everybody else, we have to play across the ecosystem to really win here.

It has to be with the chip makers, with the hyperscalers with obviously the contract manufacturers that put the equipment together that really supports the growth on top of technology. So I think when you look at it, you're going to continue to see those that we've had traction and continue, and it's pretty broad, which gives us the confidence that I've talked about already.

In Industrial, the orders are broad-based improvement, like I just answered to Mark's question. And even if you look sequentially, essentially every business in the industrial business, orders improved sequentially. So it is broad-based momentum. It isn't like there's one AI order in there that's taking the orders up. It's broad-based across the markets. And I think that reflects the tone that I just handled with Mark.

So that's one of the things that's encouraging that in some areas that have been down, we see signs of life in areas that have been strong continue to stay strong.

Thank you, Like. Can we have next question, please.

Your next question comes from Joe Spak with UBS.

I guess just maybe following along those lines, Terrence, I mean, it sounds like everything you think is at least sustainable. I think you and we would all sort of expect sort of continued growth. So I mean, how should we think about a new sort of aspirational target for the company as we think out here a couple of years -- margin target, sorry?

Margin-wise?. I'm going to let Heath take that.

Joe, I appreciate the question. It's something that internally that we work through as well, but looking at where the growth is, certainly, we are focused on a total company margin. But as we look at our businesses, respectively, both at the segment level that we report to here as well as we run the business day-to-day in all of our business units, we really look at incremental flow-through and the incremental flow-through on that organic revenue growth.

And as we do that, we do target businesses to be at 30% or better. There are some that have a little bit of self-help work that we've spent more money on restructuring in. And in those cases, they always a little bit more flow through because we've got to pay for some of those that benefit of that restructuring. But in aggregate, that's kind of how we measure what success looks like as we move forward.

That will have the natural impact as we hit those targets over a cycle, the natural impact of gradually moving that margin up. And then we obviously layer on the inorganic side on top of that, those come in all forms and fashions.

Okay. Thank you, Joe. Can we have the next question, please.

Your next question comes from Christopher Glynn with Oppenheimer.

A question on the Energy segment. I'm wondering the renewable energy and the grid hardening, the degree of codependence of those 2 versus maybe some independent drivers supporting the 2 call-outs there. And if you're starting to see Richards kind of cross-sell or bilateral pull creeping in there and if the run rate you're seeing here are just really structural lift or some particular periodic stream?

No, great question. I think just let me peel that apart a little bit here. First off being, I think when you look at both trends that we position around. It starts with electricity growth is the common trend. When you deal with grid hardening and renewables, they are independent. They don't have to be completely interlap because there can be things you're doing on the infrastructure to secure the infrastructure. That doesn't mean it's a renewable energy source.

So they are separate as you click down. Now that being said, Richards is much more aligned to what we do in grid hardening. It has really broadened what we do in grid hardening in North America. So if you look at our North American business before Richards, which was around $600 million, probably only $1 million of it was in grid hardening. Richard's is all grid hardening. So we get much more exposure to grid hardening with Richards. We do view down line, we could repurpose some of the Richards products for renewable applications, but I would not say that's in the results because we are still in the middle of how do we increase the capacity to serve the current opportunity in the grid hardening side.

But I do think down the road, that will create revenue opportunities. And in the growth that we had this quarter of 20% organically, even without the M&A, North America was much stronger than that. The trend around renewables, we are continuing to see strength there as well as in the grid hardening. So we still think this is an area that will drive nice growth. Certainly, we think we're positioned well, and we'll also look for opportunities where we can strengthen it both organically and inorganically.

Right, thank you, Chris. Can we have next question, please.

Your next question comes from Samik Chatterjee with JPMorgan.

Terrence, maybe I'll go back to something you mentioned in the Q&A earlier, which is you still think we are in the early innings in terms of the AI opportunity. There's also an investor perception that maybe you're a bit early innings in terms of market share opportunity as well in terms of AI, particularly related to your peer company.

Maybe if you can sort of highlight where -- how do you think about market share between -- that you have between hyperscalers versus the chip companies? And where do you see more opportunity on that front as we look forward?

Well, to your question, and I said it earlier, Samik, thanks for that question, is we have to play with everybody here. When you sit there, let's face it, some people design their own chips and TPUs. In other cases, they leverage the leaders chips. And to really win, you have to make sure you're playing with everybody in the ecosystem. I cannot stress that enough. I like our broadness and I think that can create market share opportunities in the future. And we also have to make sure we ramp the programs that we've won.

To Scott's first question, these programs are ramping, and we got to make sure we capitalize on it. So I think from a technology, we're extremely well positioned. I think there can be share opportunities in the future. But right now, it is, hey, we got to capitalize on the growth. And you're seeing that growth went from that $300 million to $800 million, and we expect to grow even more as we go into next year. So thanks for your question.

Thank you, Samik. Can we have the next question, please.

Your next question comes from William Stein with Truist Securities.

Great quarter. I was going to focus on AI, but I feel like that's been covered pretty well already. I'd like to ask about a couple of -- well, at least one weak spot anyway. Book-to-bill was slightly below 1, and it looks like that's driven by Transportation. Can you talk about what's dragging that? And is it even an important metric for us to focus on?

So a couple of things. I think it's a metric to look at. I would say when you look at our guide, I wouldn't over dwell on it. What you do see is in Transportation, the automotive market typically declines sequentially going from our quarter 3 to quarter 4. And we do expect that trend to continue. So that will impact. We did see orders come down, but that's more with a seasonal trend. So auto production, we believe, was 21 million units in the third quarter. We expect it to be closer to 20 million in the fourth quarter. So we do expect a sequential decline in production, Will. And that's really driving the book-to-bill when you have that type of trend, but we would normally see that this time of year.

So it's not concerning to us. And hey, all of it's included in the guide that we just went out with for the double-digit growth at the company level.

Thank you, Will. Can we have the next question, please.

Your next question comes from Colin Langan with Wells Fargo.

Congrats on a good quarter. I just want to ask a little bit about the organic growth in transport and auto. I thought the long-term target was to be 4% to 6% over market. I thought you were trending at the low end. I think S&P is up 2% on light vehicles. So it looks like you're kind of in line with market growth in that segment. Any color there? And how should we think about that? Is that being impacted by all the EV pushouts in the U.S. and Europe?

No, it's a great question. And first off being, we view that auto production declined about 1 point in the third quarter, and we grew 2 points. So we had about 3% outperformance where we are running a little bit below our 4% to 6% really has to do with the unevenness of the world. In Asia, we're growing 11% on a 4% production growth of cars. So we really are seeing that content outperformance with the West being down 5% in production, our content is a little bit higher in the West.

That does pressure the overall calc. I think we're going to be around 400 basis points in the fourth quarter. But the unevenness in production right now is impacting what you see in the overall content. We still feel good about the 4% to 6%. But right now, we're getting a little bit of pressure due to Western production levels being light. And that will correct at some time, but you're seeing that in the growth over market.

Thank you, Colin. Can we have the next question, please.

Your next question comes from Joe Giordano with TD Cowen.

Can you talk about price a little bit? And how was that in the quarter end? And just curious how you think about that going forward? Like I believe that most of your price was surcharges related to tariffs. And if we're going into like a de-escalation phase here, can price turn into like a modest headwind maybe on the top line with like better margins coming through?

Yes. Let me talk about price a little bit, and I'll talk about it. There's the tariff impact versus normal pricing environment. In the tariff side of things, when we guided last quarter, we thought that tariff cost would be about 3% of our sales. Due to all the policy changes, it came in about half that number.

So about 1.5 points and as Heath said in his pre-remarks, we -- it had no earnings impact. So our teams mitigated through the strategy that we talked about last quarter. How can we do things from a supply chain perspective, both ourselves and our customers and where we can't do that. We implemented pricing and the bigger impact in our Industrial segment. So really, where you see where we did do pricing. It's really in the Industrial segment. But it wasn't as big of a number as we talked just due to the policy changes.

And in our guide, we basically assumed with what was enacted, it will be similar to what we just did in quarter 3. So our guide for the fourth quarter sort of assumes that same impact that we had in quarter 3. And as we've talked about just overall pricing without surcharges because they are the tariff surcharges, as we've talked historically, the bigger driver of where pricing goes from here will be material cost. We're continuing to watch that closely. I think you're going to continue to see areas where we have that.

We'll be positive in price in our Industrial segment. And that's just something we're going to keep in front of us because, obviously, some things are jumping around right now. But we feel how we're managing it and continuing to pull the levers we can pull to minimize the impact on earnings, feel the teams are doing a good job.

Alright, thank you Joe, can we have a next question please?

Your next question comes from Wamsi Mohan with Bank of America.

You're going to be exiting this fiscal year with very strong momentum. Any thoughts on early puts and takes on fiscal '26 and sort of this momentum of high teens EPS growth. Is that something that we should be underwriting? And I know you just noted the impact of rising, let's say, copper pricing at least. And so if you could sort of frame that in that thought process around '26, that would be great.

Yes. I think when you look at '26, and I just think some of the things we talked about and let's face, as Sujal talked about Investor Day in November, Wamsi. So we have to make you come to that. So I think what you see is the growth momentum we have, I think, is clear and certainly we'll keep in front of us. And I do think it comes through the fall-through on the volume from here.

We've done a lot of structural work. You've seen the benefits of it certainly with what we put up here. But I think it's going to be the fall-through on the growth that I think we have proven the operations of TE and you see it in many of the businesses and markets that we're in, which does create strong levers for fall-through that gets to double-digit earnings. And the other thing is while that's a P&L view, I don't want to lose sight of what we've done on the cash side.

Cash conversion this year will be over 100% again, and that provides the optionality that Heath talked about, whether it is deployed to owners or as we did with a couple of acquisitions this year to strengthen some of those secular trends that were around. So I do think the levers are there to continue this. Certainly, we need to continue to execute. But I also think, like I said in the pre-comments, the investments we made and how we got deeper into some trends just broadened out some of the growth factors that we had versus historical.

Alright, thank you, Wamsi. Can we have the next question please.

Your next question comes from Asiya Merchant with Citi Group.

Great. Just some early thoughts, if you may, on the passage of this one big beautiful bill and perhaps offsetting some macro pressures that may be a function of tariffs? Like any early thoughts on that? And one, if I may, again, on the cash flow. I mean you guys have talked about optionality here with strong free cash flow generation. Just some thoughts on where you would like to use that optionality as it relates to the acquisition front? And where do you -- and how is the pipeline looking for those acquisitions?

Yes. Let me talk about the first one and then I'll let Heath talk about the pipeline there. First off being -- we're a global company, we play all around the world. And like we sort of said, some of the things where we've invested to make sure we strengthen ourselves from a localization are things that I think are evident in our results.

And there are some areas like when you think about Energy, that will certainly help us and continue to help us. But we're going to be focused more on our customers to really make sure how do we bring the innovation to them around the world where we can play. And do we have the supply chain to capitalize it to make sure we can win our fair share and then gain share. So the bill itself touches a lot of things but let's also realize TE is a global company and how we deploy our innovation and our manufacturing is all over the world.

So there'll be some things that I think we position ourselves well for that's in the bill. But net-net, we also have to realize the trends we have are global, and that's just sort of factor of electronics. And Heath, why don't you talk about the capital side of things?

Sure. We have been obviously more active this year with a couple of deals, particularly in the Energy space, one, a sizable deal with Richards. As we look forward, not just for the remainder of our fiscal year, the next couple of months, but certainly into FY '26. The pipeline does look good. Now it's bolt-on in nature.

So the types of things, that doesn't mean they're small, just like Richards was a sizable check we wrote, but was a bolt-on for our Energy business. And so we see things coming kind of in all shapes and sizes that are out there. Some are more interesting than others. But the beauty, particularly of our Industrial business is that it's a fairly fragmented landscape of things out there where there, in some cases, has not been a ton of consolidation. And in those opportunities where it makes sense, we think we're in a good position to deploy capital to do that.

So we're pleased with what we've done to date. We always work in the pipeline and the cultivation efforts. It's nice to have the strength of the balance sheet behind us and the cash flow that we generate to be able to look at things of all different sizes and be able to make multiple bets. And that should be what you'll continue to see us do as we move through the near and medium-term future.

Okay, thank you Asiya. Can we have the next question, please.

Your next question comes from Steven Fox with Fox Advisors.

I was just wondering on the AI growth that you talked about, the 80% growth, how successful you feel you are in just keeping up with demand? And what kind of investments do you see yourselves making into next year, whether it's capacity or maybe you're being pushed to expand your product set with the customers?

So first off, we have been investing ahead. And even if you look this year, Steve and Heath can probably add more color, our capital this year is up almost 30%, CapEx had been 30%. And the vast majority of that has gone into AI. So we have been investing ahead. And that's something that goes back to the first question of how are you making sure you have the capacity in place that can absorb the volume what our customers are expecting as we get the program win.

So I feel we have been investing. I feel we're continuing to look at how do we expand for more -- even more flex capacity to make sure we're well positioned to continue to drive the growth. But I feel it's real-time investment that's going there, and you see it in the numbers to scale from $300 million to $800 million. That's massive and these are products that are new-to-world type products. These are not just making things that we've made for 40 years. This is cutting-edge technology on the high speed and it's a real testament to what our DDN team has been ramping.

And in some ways, what we did and learned back when we had the cloud home about 4 years ago. We did it then, and we've just continued to expand to make sure these type of opportunities around high speed, we can capitalize on.

Right. Thank you, Steve. Can we have the next question, please.

Our final question comes from Shreyas Patil with Wolfe Research.

So as we look at the company today, you're delivering 20% EBIT margins in both segments. I believe you have additional restructuring savings coming through in 2026 based on prior actions and some of the higher-margin segments appear to be turning a corner. So how should we think about the trajectory of margins from here? Are there strategic investments you think the organization needs to make that may offset the incremental margins you're getting from just the strong top line growth?

Sure. Listen, we've been making investments. So when you think about the run rate of our existing profile, whether that's on operating expense investments, which are primarily around engineering or the capital investment that Terrence just referenced that help us build out the manufacturing capacity in different parts of the world.

Largely, those are embedded in our run rate. So there will be things that we will have trade-offs on. We may invest certainly in some of these areas like around AI that have shorter cycle times that need quicker ramps and trade those off with other areas, but that's what we do every day in terms of managing to that. At times, we take the total number up or the total expense up. And other times, we absorb it within there. But I don't think you're going to hear us come out and say, well, our margins would have been this if we didn't do this. That's not what we're all about.

I do think as you go into next year, balancing all this though, with the growth opportunities that are in front of us, which are very broad-based. I mentioned earlier, probably a 30% incremental flow through and I think that's probably for a modeling purpose is a fair way. And listen, when you start getting volumes higher, you could see that tick up. And when you start to see volumes in low mid-single digits, that gets pressured a little bit. But in aggregate, relative to our business model, that's kind of how we think about it.

Okay. Thank you, Shreyas. We want to thank everybody for joining us this morning. And if you have further questions, please contact Investor Relations at TE. Thank you and have a nice day.

Today's conference call will be available via replay beginning at 11:30 a.m. Eastern Time today, July 23, on the Investor Relations portion of TE Connectivity's website. That will conclude the conference for today. Thank you for participating. You may now disconnect.