Te Connectivity Stock

All right. Hi, everyone. I think we can get started here. My name is Alex Dwyer. I work with Jefferies. I'm an equity research associate covering machinery and multis, and I work with Steve Volkmann. Today, we're joined by Terrence Curtin, the CEO of TE Connectivity. So -- it's a fireside chat format. We take audience questions. So if anyone has a question, don't be afraid to raise your hand. With that, let's get started. Terrence, thank you for coming.

No. Thanks, Alex, and I appreciate everybody being here to learn more about TE Connectivity. So let's get into it.

Yes. I guess I'll just start out with some Q&A. And so I mean, you've raised your AI sales guidance a couple of times this year, though the growth rate -- the year-on-year growth rate has come down from 70% to that 33% range or something. And I know like the market -- nothing has really changed in the market. I know you're ramping a lot of capacity, and there's been some program timing nuances. Can you just talk about how that kind of unfolds going forward over the next couple of quarters?

Sure. So first off, thank you again. And just to frame where Alex was going, when we look at TE, it's important to understand that we play at the intersection where you need data connectivity as well as power connectivity. And our biggest growth driver, both this year and last year really has to do with where we work with semiconductor companies and hyperscalers on how you connect GPUs and all the connectivity that go into the rack. And it's been a really good growth driver for us. And actually, our expectations are higher than we just thought when we started the year, and the momentum continues to be strong. So yes, we're going to have times when programs change, some programs come in, come out. But what's really good, our position with our hyperscale customers really has set up nice momentum, not only this year but into next year.

So our orders are up about 70% this year in our AI space. That's going to set up a really nice tailwind as we go into '27 and as we continue to help them solve the connectivity needs that happen both on the power and data side. The other thing about this year, just to build on maybe outside of our AI business is our AI business has been maybe about 40% of our growth this year. TE is going to grow about $2.5 billion this year. And that's really driven by our industrial segment, which includes what we do for our AI customers.

But that breadth of growth that we have is really where we bring our connections, whether it be in the energy infrastructure, across aerospace and defense, which are strong secular growth trends that aren't slowing down anytime soon, which contributed incremental growth on top of what we do in AI as well as our legacy position in transportation, where we have a strong position that really our growth is being driven by content performance that's above market. And I know you're going to click down in all of these, Alex. But the element is the breadth of the growth that we have as data proliferates as well as the power that's needed around that proliferation, I really think makes us a little bit unique as you look at opportunities for investment.

Yes. Okay. Got it. And I know like earlier in the year, there was a lot of commotion about the optics and copper transition. I think you framed it as copper and optics. And I think it's become more apparent that copper is here to stay for longer. But I guess when you talk to customers, have you seen them like try to adopt like more optics racks? Or are you seeing them kind of push against that now? How has that played out as the year has gone on?

So we've always seen our customers obviously look at where optics play from a cost, from a power need and really to get to the data speeds that is needed in AI. So it's not a new discussion, but it also sort of became a little bit of a versus discussion versus an end discussion. And that was earlier in the year was a big discussion. But what we see in our DDN business, which serves our AI customers is and our large customers have said it publicly, Copper is going to be continuing to be the workhorse that you see in the rack.

Power connectivity, which is about 1/3 of our DDN business is always going to be copper. When you look at transmitting data and signal, you're going to see areas where optics is used. You're also going to see areas where copper continues to be extended because of its scale, its lower cost as well as lower power consumption. And what's nice about where we play is we get to work with our customers as they look at where do they want to experiment. And in our AI business, it is something that it's not going to be cookie cutter across the architectures.

Some customers are going to push the limit. You will see how that comes into the switch in an optics perspective. You have other customers that say, no, I want to be at a lower cost or a lower cost per token. So we see a lot of experimentation across our customer base. But what we get excited about is that the copper TAM will continue to grow, that it is an 'and' discussion, not a versus discussion. And we've also positioned ourselves where we would play sort of optics that comes into the switch because we really play in the scale-up element. We do less in the scale out. And certainly, we're going to be part of that, that will add TAM to us as we look forward. So lots of experimentation going on in any AI architecture, both on the power side and the data side. And they're both things that not only for the growth we've had this year and we expect next year, but also as we look out multiple years and as we work with our customers on those racks and those architectures.

Yes. I guess to stay on the optics piece, you guys made that RAM Photonics acquisition earlier in the year.

Right.

And it didn't seem like there was a lot of revenue attached to that, more like a technology idea. Can you kind of talk about how you see that playing into like the optics adoption? And I know they come with like a fiber array unit. Can you just talk about what that is and how that speeds up the manufacturing issues that the optics supply chain is going through?

So as we look at where optics would play on our road map, we really view from a connectivity perspective in the rack, that happens at the switch and what you would have, whether you have co-packaged optics or near package optics, how do you bring the signal off of that with the density, but also you have to have the scale to manufacture at very high rates. And that's where we've been very focused on our development. To your point, we made a technology acquisition earlier this year called RAM Photonics, which really has some very high density as well as good automation that goes with it. It doesn't have revenue attached with it at all. It's really part of our technology road map from a product perspective. And it really sets us up to where we think we should play in the optical space.

We're not somebody who's going to be doing lasers and active optics. There's a lot of companies that have capabilities in it. But when you think about connectivity and the passive connectivity that we do on the electrical side, which is copper, as you call it, we really feel that the fiber attach unit is an area where there needs to be scaling brought to. It ties in with our road map and also the discussions we have with our customers and as we go through engineering qualification. So I view that as part of that TAM expansion that we talked about. It's something that we didn't have at our Investor Day earlier in this year, but it's something that provides a future growth opportunity no matter where optics comes in, whether it's CPO or NPO.

And what do you think about like time line on revenue generating for that asset? Do you think it's kind of a couple of years away or...

Yes. So the question -- I was at another conference yesterday that was a technology conference, this question I got every minute. But the element that you have is it's really going to come down to where our customers see scalability of where this can be that really doesn't change their road maps. And right now, we're in a lot of engineering qualifications. I don't think you get into meaningful revenue into '28, '29, depending upon where our customers have it in as well as where does the broader ecosystem support optics adoptions in the switch.

Okay. And I guess the power connector opportunity, I think is that 25% of your DDN business?

It's actually larger. So when you think about our DDN business, which is about $3 billion of our $20 billion this year, about 1/3 of it is a little bit higher than what you said, Alex. About 1/3 of it is actually around power connections. And one of the things that creates future growth opportunity is as you bring more compute and more optics and other things in, the power consumption that you need increases the content significantly. Certainly, there are some customers that are looking at 800-volt sidecar power racks that support the GPU racks. That's where the power is going. There are types of things that can create a 50% increase in our content on rack. So when you think about the growth we're delivering this year around $1 billion, those types of architectural changes continue to help us look at a road map on growth that's just going to continue to build as AI architecture evolves.

Yes. So I mean, I guess, can you talk about, like what the last 3 years look like from the power connector, like, growth story and how that can differ from, like, as we think about the next 3 years and whether 800-volt comes or doesn't come, like, is it just denser connectors or more volume or higher pricing?

So when you go into there -- typically, when you think about density, you think about density more in the data side. But on the power side, what you're dealing with is you're dealing with voltages that are much greater to bring over. You're dealing with bigger interconnects, not typically smaller interconnects as well as a lot of the materials and electromechanical elements that go with it. So when you think about probably 3 years ago, power connectivity was probably 25% of our DDN business. It's up to 30%, about 1/3. And I think you're going to continue to see that go up as the power architectures evolve versus the standard architectures we've had historically.

So when we look at this space, I know you asked about optics and copper. There's elements that relate to what's happening on the data side that we're going to benefit from, both in copper and optics. But then there's the power element. And the power element, we have some customers that are looking at 800-volt. Some are looking at 400-volt steps. You're going to see a lot of different architectures that our customers are experimenting with. And we get to work with them, which is a very important part of our moat with our system architects and our customer system architects. And it goes back to anything that TE does.

I know when we're talking right now about our DDN business, but whether it's in our energy business, our automotive business, our factory automation business, it really always starts with you have a semiconductor and you have a power supply and you need connectivity that brings that architecture together. And they're the things that we focus on. And depending upon how hard the technical challenges, that drives the bigger content opportunity. So we always embrace architectural changes. There are things where our customers need our expertise. It's where our engineers excel. And then certainly, we have to make it for a life of any program, but there are things that we get excited about all the time.

Does anyone in the audience have a question or I can keep going if not. All right. I'll keep going. I guess I'm going to move on from DDN segment and go into energy. I guess this -- you've added Richards and you're 70% more -- you're 70% exposed to North America now. The growth rates come up because of that. And I think you even raised it again to mid-teens last quarter. Can you talk about, like, what drove that revision? And, like, what gives you the confidence to think mid-teens organic growth is the right growth rate going forward and talk about that.

Yes. So when we sit there and we talk about our Industrial segment, we talked about our DDN business, which is a chunk of it. But the other big -- other chunk we have, we have a bunch of businesses that are $2 billion. Our DDN business is $3 billion. And once again, it's doing connection, but this is in the power space where we support our utility customers from medium voltage in the grid, all the way down to stepping down to a data center, stepping down to a renewable farm. And it's an area where we spend a lot of time focusing on where do we play from a go-to-market. And we've also done a couple of acquisitions that have helped support where we want to play, including Richards and Harger. But when we look at this space, it's a space that -- these are power connections, 800-volt is low voltage in a utility.

I mean, that's low voltage. But when you think about where we're helping our customers here, it is as the energy capacity has increased this market. This is a market 5 years ago that was a 1% to 2% market. We view it's growing 6% to 7% today. And depending where you play, you have growth rates much higher than that. We excel in medium voltage. We also excel in undergrounding. So when you get into grid hardening, you also get into highly dense areas like we are here in Manhattan. You really get into opportunities as the grid needs to be upgraded, certainly, there's deferred maintenance. We feel where we're playing actually gets us into that double-digit rate that you talked about, and it's why we upgraded it.

We continue to add capacity, both in our facility here in New Jersey, near here in New Jersey as well as out in Ohio. And 70% of our business is U.S. focused. It is an area where we pick to play stronger in the U.S. Clearly, TE, you typically think about TE being very global. Actually, in energy, it's very much U.S. first, a little bit smaller in Europe is really our position. And as we sit there and think about how you get power distribution, where we serve our utility customers, but just as importantly, how we serve what we call industrial power, the EPCs that help do moving the power from the utility to the step down into the data centers, to step down into semiconductor manufacturing sites, there are other areas that we were very strong at and you use our medium voltage products on.

So we get very excited about the growth trends here. I know everybody likes to talk about AI, but there's an element here with where the energy infrastructure is at and the growth rate we see there. We really like where we position ourselves. That's a nice double-digit grower. It's going to be mid-teens this year. I think you can have that expectation as we go forward in the 6% to 7% market. We continue to have opportunities, and it's also an area we'll probably continue to look at across our Industrial segment for places that can have inorganic opportunity.

I was going to ask, are there any -- like as you look at this business over the next 3 to 5 years, are there any like immediate gaps you see in the business that you would like to add organically or inorganically? I assume you probably want to keep building out the North America presence. Are there any regions in the country you're underexposed to -- or -- you mentioned strong in undergrounding. Would you like maybe get like build up capabilities in like the above-the-ground utility? Just how are you thinking about that?

So certainly, we're very focused on medium voltage, and we like that, and it builds on what we've done organically and what we've done inorganically. I think if we could find things that would help in the overhead because a lot of the United States is overhead when you go into the middle of the country. But there'll be opportunities and they have to be on the right returns and growth profiles for us. So I do think the energy space is always a fragmented space. We like the base that we have. We also think there's opportunities to continue to expand it with the relationships we have with our utility customers as well as in the industrial power side. So we'll continue to look at components that could fit into our suite and that we can add value to both for us as well as the customers as well as owners.

Okay. And then I guess on the lower growing parts of the energy business, the traditional Europe business and then the clean energy renewables piece, are you seeing any signs of pickup there? And can you just like kind of refresh on what are the main like renewable clean energy applications you sell into?

So our growth rate, renewables, we typically sell into utility scale solar. So when you look at that here in North America, it's -- we are not as wind exposed. But that's been slower. And even in the growth rate that you talked about in mid-teens, we're absorbing a slower environment and some of that's due to regulation. But that is really where we play in renewables, and that's really here in the United States.

In Europe, Europe is traditionally a slower grower than where I talked about from the growth rate. We are actually seeing step-up from an investment from our European customers. So it also gives us confidence that we'll be able to be in that double digit as those investment levels come in, where they're actually putting in LNG facilities actually has a lot of power that needs to come to it. It's very important to our growth profile.

Yes. Okay. Cool. I think I'll stop there on the energy business and then move over to the ACL segment, which is more of like your traditional general engineering -- industrial business. I mean, the double-digit growth started coming before the PMIs started inflecting in January, and it's been 8 months in a row of expansion there. I know you serve a lot of different end markets in that business. Are there any like 1 to 2 like major geographies that have been driving it or any like specific industry? I know factory automation has been strong.

Yes. So when you look at what we call ACL, it's automation is how you should think about it. And this is a business that I just -- when we say the growth rates, I do have to be transparent. It's been a market that's been very slow for a couple of years. So we're finally seeing a cyclical inflection. And to your geography question, Alex, it's broad. We're seeing it in all 3 regions of the world. And to your point, you look at ISM, PMI, you really see that momentum going because it is so broad. Where we play is very much in discrete manufacturing in the automation space in the factory automation space. And we're seeing our customers probably get back to more of a mid-single digit to higher single-digit growth rate in their business.

A lot of it comes back to the data that you need on the factory floor. When you look at what we do, and I know we started with AI, the data that's actually needed to make things more efficient actually starts with the productivity that you need to collect the data to make the machine more intelligent. And one of the things, yes, we have a cyclical pickup that's early. I would tell you, even when we look at TE, where we're investing and how we think about how we use AI internally, it's on the engineering side and it's in our factories. And that comes with getting the data off the machines, how do you make the machines more intelligent to have that compute using the models. So it's one of the things that not only have the cyclical pickup, we typically have a content above sort of an industrial CapEx number. That's a couple of hundred basis points ahead.

And when I see how we're investing and what we're seeing in the trends, it sort of makes sense that they're dovetailing and it's across our global network. It is not around, hey, growth is good in one region or another. It's really around how we're driving the efficiency that we need to drive the next level of productivity using the tools that we didn't have before that some of the LLMs provide us. So I think we're still early in that cycle, that's just picking up. And it's nice to see the trends our customers are seeing in their businesses, but it once again comes back to data connectivity you need that we connected our machines years ago to really get to this point, and then we're just accelerating it to use the models as they become more relative to drive next level of efficiency.

Yes. And how do you compare this industrial recovery to like different industrial recoveries that have happened over the last decade or so? And I guess there's a debate on how long people think this -- like an industrial recovery could last? And like what would be the biggest risks to kind of derailing this?

It's a really good question. And probably the hardest part is typically, when we think about industrial recoveries, in many cases, it start about automotive cycles. Automotive is a big capital driver and let's face it, automotive is a very flat environment right now. From a production perspective, it's being driven in a different way. And I think in many ways, what makes it very different is that it's an efficiency cycle. Certainly, there's areas that have a lot of investment like semiconductor manufacturing and so forth around some of the localization that's occurred. But it does have a feel of a very different cycle because the drivers are different. And I do think it comes more to a core efficiency cycle in addition to some of those big mega programs that we all read about, but it has a very different feel of a cycle. I hope that helps the duration be longer, but it is a different cycle than what we're used to seeing.

Yes. Okay. And -- is the humanoid robot, is that an opportunity you're seeing or would want to pursue ultimately? Or is that something you would...

No, fair. It's a great question. So with what we do on data and power, they are the types of things we're going to have content opportunities on. I know if I talk to all of you out there, some of you will say, it's not real. Some of you will tell me it will be infinity. What's really cool is when you look at what the architecture will be, it has a compute element. And obviously, you have to move signal and data around as well as it's something you're going to have to recharge and power. We have automotive customers that are actually experimenting very highly using a lot of automotive type product that we'll work with them on. Certainly, we have our robotic customers that are -- have views on what the architecture would look like. It's one of those things that I'm sure we'll be talking more about in 3 to 5 years, but it's the types of things when you think about what TE does from a data and a power connection, we'll be right in the center of it, and we'll help people solve that, but it's still very nascent when you think about the revenue element.

Okay. And then I guess maybe switching over to automation. At your Investor Day in November, you provided a target for 4% to 6% content gains. I think.

You mean automotive.

Sorry, automotive. Did I say automation?

Yes.

Okay. I guess a lot of people -- investors typically associate the content gains with EVs, which I think had double the content versus an ICE. I think you laid out like 3 different content drivers. Can you talk about should we be thinking about content gains in a different lens than historically? And what the main drivers are like that you've seen since that Investor Day?

So first off being -- I know we all know the automotive production environment is flat at best, and it's minus 1. When you think about TE, I think there's a couple of things that are very important that you think about. First off, of how global that we are, and we have content on essentially every vehicle on the planet. The second thing is it goes back to the data and power I talked about a couple of times, 3 to 5 years ago, we would have discussions at this type of conference where we would say, hey, we can grow outside production by 4 to 6 points and probably 60%, 2/3 would be around electric vehicle adoption, driven by Asia, certainly driven by Europe, followed by North America.

Similar to the rest of TE, our growth profile has broadened in automotive, too. So when you think about that 4% to 6%, while that number is the same, the complexion of what drives that content opportunity for TE is very different. There's probably about 40% of the 4% to 6% that gets driven by data connectivity in the vehicle. That is both what happens with ADAS. It's also what happens when you basically have over-the-air software updates. That's about 40% of that 4% to 6%. We still also have a part that's EV, and it's really due to our strong presence in Asia. Asia EV adoption is full steam ahead. It's not stopping. And I know many of us here live in the United States, EV does not give a lot of content opportunity in North America.

The last piece that you have, which is pretty balanced with EV is really what happens in features in the vehicle that we benefit from. And if you're in China, those vehicles have microphones all over them because you talk to the car. The comfort is very different. You have refrigerators that are in those vehicles. Here in North America, you may have cooled seats. All of that creates electronics. Any electronics you get in the car, sometimes they need data, certainly, they're going to need to be powered. And that's the last element of what creates content opportunity for us. So one of the things that we really like is you have this data element. And the other thing around that data element, you have to realize it's the edge compute that's happening. So no different than how I talked about factory automation, where you have data that's needed for efficiency in the car, it's also creating another element of edge that all feeds off the AI trend that you have up top. And it's driving that content, which is very different than if we just talked 3, 4 years ago.

Okay. Got it. That's helpful. And I guess, negative 1 to flat automotive global production. And I think you even gave that like expectation to think about fiscal '27 to next year, the flattish range. Is there anything that you are tracking or like could kind of drive more upside to auto production over the next 3 to 5 years? Like would it be autonomous vehicles? Or is there anything that could happen that could stimulate that to growth?

When we plan and we work with our customers, we basically sit there and say, we're going to assume flat. Now regions can have different things going on. We're also benefiting from our strong China position where our Chinese customers export. So sometimes people view that as a risk. That's actually something our strong position, both with locals as well as multinationals in China. Actually, we don't have any negative exposure to that. That actually -- we're very strong with both.

But when you look at car production, we really don't think that's going to move. You need something economically to make it move. And we really focus on the innovation, how we bring innovation to drive the content growth. So we view it's more in our hands to drive that content growth like we have been doing. And we feel good in that 4% to 6% environment, we're going to continue to drive growth in our business like we've done this year and like you even just saw last quarter where we had outperformance in the content.

Yes. Okay. And then I guess, staying in your transportation segment and shifting over to commercial vehicles. It seems like the growth rates come up a lot this year. I know like the comps are easier, and we're coming off like a trough of a cycle. I guess how much is -- like how much of the growth is the cycle and versus like you've just won a lot more programs recently versus you have a lot more content gains? Like how do we think about that and...

So first off, I think I'm going to sound a little bit like our automation discussion. The heavy truck market in the United States has been weak for a few years. Certainly, outside the United States has actually been constructive. It's actually been growing outside the United States for the United States and the heavy truck market has been tough. And when we say commercial vehicles, that does also -- we not only include Class 8 trucks, we also include ag and construction equipment. We've actually seen United States pick up over the past couple of quarters that is early into a cycle. Now certainly, there's regulation and interest rates that play into this a little bit more than some of the other markets we play into.

But in addition to where the cycle is picking up, we have the same content opportunity in commercial vehicles that we do in a car. In Asia, about 1/3 of commercial vehicles are electrified powertrains. I know that doesn't sound natural here in the U.S., but that's true. Also, you have data, which not only helps the trucker be more efficient and more productive, it comes throughout also from a safety perspective. So some of those trends we talk about in auto and a lot of other features do carry over. Right now, we're growing very strongly as the cycle has picked up, but there is content in there that it will get down to maybe a lower single-digit market at some point, but we'll be able to drive outperformance due to those vectors around content similar to what we have in automotive. And it's -- we're globally balanced in this business. So it's about 1/3 in Asia, 1/3 in Europe, 1/3 in North America. So that element, we also really like that position as we drive innovation around the world.

And I guess, do you have a view on -- I guess, your -- I don't know how your business is split between ag, construction equipment and heavy truck. But I guess do you have a view on like how long the cycle could be for this? And if like interest rates creeping back up could be something to worry about?

Yes. Clearly, this is a big purchase. So interest rates do impact this, and that's probably the one caveat why I said it. To really be honest, where interest rates go could make this a little bit more of a muted cycle. I think we have to see how that plays out. I think it's a little bit different than a cycle than where we see factory automation, like we talked about from that efficiency where you have really efficiency that you can drive off of the predictability we all want in our processes and our manufacturing with certainly the tools we have at us. So I just think it's a watch out as we go into next year, but we will have content outperformance.

Okay. And then I guess you have got like the Investor Day targets are for 30% incremental margins. And I think it's the same for transportation and for industrial. I guess is that the right way to think about that for next year? Are there any like puts and takes on like price cost or any segment where there's been like more footprint optimization done that you could leverage now?

Well, first off, a lot of our footprint optimization is in the rearview mirror. We've invested heavily to be localized. And I think you're seeing that in our margin performance. Both of our segments run around 22% operating income. And you've even seen in a lower production environment, our transportation performance team did a really good job, and it is an inflationary environment. And we've been passing on prices in both segments to really offset whether it's metal inflation, certain areas where we have tariff. I think our teams have done a nice job in working the price lever while staying competitive.

As we look forward, I think the other thing you have to realize, we are adding capacity and investment more in our Industrial segment, whether it's DDN, which we talked about first, our energy business to really make sure we capture the growth opportunities. So I do think you're going to see higher fall-through in higher growing units. but we also are making real-time investments, and you've seen nice margin expansion this year as we're making those. And I think it proves how our operations have improved from an execution perspective. And I think there'll be times that one segment may be a little bit higher due to higher volume, but a lot of the footprint things that we used to talk about are in the rearview mirror.

Okay. I guess just to wrap it up, I mean, I feel like we've discussed a lot of things. And I think we hit on most of the segments, hopefully. But like is there something you think that is underappreciated about your stock or your story or your growth drivers or anything you -- like any message on what's underappreciated about TE?

Yes. So first off, let's face it. You're all very bright people. So I'm not going to say what you don't understand. But I do think there's an element when you think about TE, historically, people would say, "Hey, think about TE from an automotive perspective." Currently, over the past few years with the momentum we've had in AI and our DDN business and even how we started the discussion, it was a lot of DDN discussion. I think there's a broadness to our growth around data and power that shouldn't be underappreciated. And I would just ask you all to really make sure when you think about what we talked in our energy business, the secular trends that we also have in aerospace and defense, which we didn't even talk about.

I think that's one...

Which is going to be double-digit growth are very powerful growth drivers. And when we look at this year, and while there's a lot of times automotive and DDN discussion, which are important, we're growing $2.5 billion this year. And a lot of those other businesses, which we worked very hard to broaden that growth, being focused where we add connectivity solutions, both on the data and the power side. I guess that's the one that I think sometimes we all go to the discussion how we did it. And those other ones are driving -- these are $2 billion businesses that are driving double-digit growth are really driving the breadth of growth and also how we execute to pull it through, drive cash flow and certainly, whether we return it to you or we actually add to the portfolio inorganically, I really think the business model is working well.

So I want to thank you for being here this afternoon. I know it's probably the last meeting of the day for many of you. I appreciate you listening.

Thank you all for joining.

Thank you, everybody.

Thanks for coming.

All right. Good afternoon, everyone. Day 2, Citi's Global TMT Conference. Asiya Merchant here. I lead tech hardware, tech supply chain research here at Citi. Really pleased to have Terrence Curtin with us. He is CEO of TE Connectivity.

There's a lot of questions here. I'm going to kick it off. And please come in, there's a bunch of seats in the front here. I'm going to kick it off. It's a fireside. It's interactive. I'm going to leave a few minutes here for folks to ask some questions. Please do raise your hand if you have interest in asking, and we will bring the mic to you. So welcome. Thank you, Terrence.

All right. Let's just start with maybe just the most recent reported quarter. I know September is going to be ending here very shortly, too. But you guys just had a very, very strong fiscal 3Q. Sales were up 14%, 12% organically year-on-year. You had record orders. Your EPS is growing much faster. Your margins are expanding. So -- and you are across a broad variety of end markets. It's not just AI, it's not just DDN, but there's a whole bunch of end markets that you are. As you think today and as with the quarter that's just been reported relative to kind of your through-cycle framework that you shared, 6% to 8%, where are some of the demand drivers that are sustainable as you kind of think about that demand?

No. Thank you for the question. And also thank you all for being here. And let me just -- I'll get to your question, I promise. But first off is I think what's important is when you think about what TE does, we very much focus on where does data need connectivity as well as when you need compute and data, you also need power. And it's areas that I think drive the growth that I'll talk about.

And one of the things that we've been very focused on at TE is how do we continue to broaden our growth profile. It was a big part of what we teed up at Investor Day. And like you said, Asiya, there's a lot of it that I'm sure we'll have questions around AI and our momentum in our DDN business that has had tremendous growth. But I also think when you look at what we're experiencing right now is across our Industrial businesses, anything that's CapEx exposed is really driving growth and faster than we would have even expected when we talked earlier in the year.

So certainly, on the data side, what we see happening, and you've seen a lot of companies here today talk about everything that has to happen around AI and also the hardware around it, we're no different than that. Our DDN orders are up 70%. And while we grew $1 billion this year, that really sets up a very strong backlog for next year with the partnerships we have with our hyperscale customers. But it's just not what's happening in data.

In our Industrial segment, what we're seeing with our -- where we serve connections from an energy infrastructure, which are driven around power, we're seeing double-digit orders there, where you have a market that used to grow 1% or 2%, now it's probably growing 3 to 4x what it used to, and we've really capitalized to make sure we can grow double digits in that business. And then you have those secular areas that we benefit from like aerospace and defense is going to grow double digits due to everything happening there as well as a general industrial uptick that we've seen around the world. This is where we would play with factory automation, where you need connectivity that brings that data out to get to the intelligence to be processed through the LLMs.

So when you think about our Industrial segment, we're going to grow about $2.5 billion this year. About 80% of our growth is in that segment, and it's very broad. And then in the transportation area, that's an area that we're sort of driving content growth in a flat market. And there are areas that are also around data and power, self-driving cars, software-defined vehicles, also electric vehicle, which in Asia is very strong and we're strong.

So when you think about that framework, which we're growing about twice it, we see that momentum going to continue, and it all starts around data and power. And certainly, the CapEx elements of where we play, we just see that motoring along and orders up very strong to record backlog as we enter into our '27 that there's no reason to say that's going to slow down as we go into '28 when you think about all that's happening on the data side and the power side.

Okay. And then on the -- if I may, just as we -- before we get into each of the segments, EPS is growing faster than revenue. So what's driving that? I mean not only do you have top line growth, but you also have nice margin leverage. What's the algo there? Is it pricing? Because your pricing is higher? Or is it other sorts of leverage that you're experiencing that's driving EPS to be faster?

Yes. On our strong growth this year, which will be mid-teens, probably 1 point or 2 is pricing where we're actually managing through inflationary effects, where we're actually getting recovery across the portfolio. So pricing is really a cost recovery tool right now. The rest of it is around volume leverage on what we've done to make the portfolio healthy as well as our footprint healthy. So it's really good operating conversion.

But the other thing that I just want to highlight is we're investing significantly back into the business, especially to those areas that have really strong growth. We're adding engineering in our DDN business. We've added factories in our DDN business. We're adding capacity. So we're driving that earnings leverage to really good conversion on the volume while also making investments for the future to make sure we capitalize on that growth ahead of us. So I feel the levers how the team is operating is very strong. And certainly, our cash element, we have a very strong cash generation model. We've done some acquisitions as well as returning capital also helps the EPS line as well.

All right. Okay. Well, maybe we can just dig into each of the segments, right? I mean, clearly, I'll start with AI DDN because -- or DDN just because it's top of mind here. It's a technology conference.

So DDN sales up in the 30s, orders, obviously significantly higher. You guys did have a target $3 billion in cloud and AI that you kind of shared at your analyst event. You talked about that target continues to shift left, meaning it's being achieved much faster. So when you think about your size now of that DDN AI -- DDN cloud and AI -- sorry, cloud and AI segment and kind of the growth trajectory that one should expect, just given hyperscaler CapEx and that just continues to rise...

So first off being our orders this year with our DDN business, which is where that's housed, is up 70%. So I got a couple of great questions today. Terrence, how do you grow 30-ish percent, but your orders are up 70%. Those orders are really for 2027, right upon us. So there are programs that we've won, certainly with our hyperscaler customers around the copper connectivity that we do for them to really get their infrastructure up on their GPU networks. And that's going to be -- sets up really strong growth for '27.

And as you said, any target we gave out just 9 months ago related to AI, we've been ahead of that and that $3 billion shifted in, and that's going to continue to shift to the left. So I feel very good about the momentum there, and our position is very strong with our hyperscale customers.

And beyond 2027, does the orders look like we are seeing demand very, very strong. I mean I have some component players who were talking about HDDs that are talking about demand further out, just given the supply tightness. So how does it flow through to the connector side, on your side? Like are you seeing orders maybe stretch out beyond just fiscal year?

We're typically into '27. So we don't have that supply tightness that some of your other people that you cover do. Really, when we're looking at it, we'll probably start seeing '28 orders coming into early into '27 when we will see it. But I think the real element that we get excited about as you go into '28 is the engineering activity we have with our customers today on next-generation architecture. One of the things that's important is our customers are going to pick a semiconductor. They're going to pick a power supply. Then you go work the connectivity.

And what's really nice about where we lean in is with our engineers, with our customers is those next gens are being worked on already. So the orders we have today are for things that we have to take into production next year. The engagements that we have about what's the next-generation architecture, who's looking at 800 volt, who's looking at liquid cooling versus air cooling, where does optics come in, in the rack over time? All of those discussions are happening real time. What gets us excited is that the momentum is going to continue...

Talking about optics, that's always a big debate, right? And I mean you guys have talked about it, you're like it's not just copper or optics, it's going to be copper and optics that are going to continue. So just as you're sitting here, you're looking at all the workloads, you're looking at all the AI architectures, I mean, they're changing, right? At OCP Asia, there was a lot of chatter about what's changing, what's not changing. You have scale up, scale out, CPO, NPO.

So when you look at your content opportunity in fiscal '26, increasing in fiscal '27, just help investors think about as you go into fiscal '28 and '29, what sort of -- what are you looking at from a content opportunity?

So a couple of things first, and I appreciate you said it's going to be copper and optics, and it was great at the lunch today, the Marvell CEO actually said that as well. So you hear that a lot, and I do answer it, it isn't a versus because we're really looking at architecture being maximized, and copper is going to play a role. Anything in the power architecture is always going to be copper-based. And even if you go to agentic, where you bring CPUs in and you have much more CPU, that's going to be copper-based.

Where we play, certainly, we play in the scale up. We don't play as much in the scale out. But in the scale up, we do look at where you'll have NPO and CPO coming in more at the switch level is where you're going to first see it. There's a lot of scaling that has to happen there when we look at the architecture we're working on with our customers. And we have solutions that can actually play in that space that I'm pleased with our customer engagement on that would help enable that. And that's an increased TAM that we would have versus our copper portfolio.

So we view copper is going to continue to grow over this period. Certainly, the architectures, as you said, they're very customized. They're changing a lot as people are trying to optimize different parts of the workload. Copper is going to be a key part of it. But what we get excited about is where we can introduce basically a fiber attach unit, which is essentially, we would view it as a fiber connector that would actually help enable CPO or NPO as that comes in...

Right. And there's just a lot of activity going on in that FAU side, just to make it scale, right? Because up to this point, they haven't had to scale. So just as you think about that space evolving, what are some milestones to keep -- that investors should keep in mind to say, okay, now this is starting to gain momentum and can scale to the level -- obviously, it's not fiscal '27, but into '28, '29, but you kind of see some of those...

Certainly, it starts with our customers' architecture. They have to hit their intercept points. Secondly, our customer engagement, where are they seeing it? And certainly, that's where we're focused on right now. Our engineering engagement on that intercept point, getting engineering qualification. And then like everything in the optics space, how it scale to the needs that the units that our AI customers want us to have in our hyperscale customers. So I think they're going to be the things we're looking at the road map. Certainly, we're investing ahead. We made a $200 million acquisition earlier this year to help buffer the portfolio there. And we'll keep investors apprised of our progress as we go through.

All right. And then you talked a little bit about power. 1/3 of the connect -- within the DDN AI space is power, right? And the rest is data connectivity. So obviously, there's a lot happening over there. You're talking about 400-, 800-volt architectures. Like help us understand like as those transitions are happening, again, what's the content opportunity growth that you guys are seeing? What should we be looking out for to say, yes, this is happening and an inflection perhaps for...

The one thing you have to realize is not everybody is going to move to one voltage architecture. So back to the customization. What's really great is as you bring in these sidecars, that brings in a whole different architecture where connectivity becomes more powerful. It's also you're bringing in a lot of different voltages into the rack that actually have very different material science, also have different electromechanical interference elements to them. All of those are things that we excel in.

So as our customers are experimenting with that, that we have such a large portfolio of power products to begin with, it's very essential that as we move through that journey with our customers, some will not go full 100 to 800 volt, but that will create increased content just due to the connectivity in there. Also, as you move to optics, you're going to need more power in the rack.

And I believe when you think through the AI discussion, a lot of our discussion with TE is around the data side. I actually think the discussion needs to be as much about the power side because all of those inflection points create engineering trade-offs that our engineers do great with our customers as they're figuring out the architectures and constraints they're working through. And what that will create is an increased inflection point on the content. It won't be cookie-cutter by rack, but it will be something that will increase revenue content for us as we move to...

Okay. And then just stepping away from it, like where is TE's moat? When you think about all these changes, whether it's on the power side or on the optics coming into the rack, like where would you say is TE's moat and why you think that content continues to stay with TE, potentially even expand while you guys are providing the solution?

I think when you look at connector manufacturers, there's 4 moats -- 4 pieces to our moat. The first one is we need to be engineering close with our customers. Connector business is not we design a connector and bring it to a customer and just pick it off the shelf. That's not what a connector manufacturer does. It is they're trying to work right at the design center with our customers, and it's a very engineering-intense business. And we're part of that architectural design. And it's why when you look at connector manufacturers, we all don't play in the same markets. Now building up engineering and all the design centers around the world are -- is hard, significant investment in different markets, and you typically see us play in certain markets.

The second thing is we need to be deep in the technology. Whether it's AI and you're dealing with 448-gig speeds and signal integrity or voltages going up to rates with 448, you need to actually understand that architecture to get deep. And that you could hold that true into an AI domain. You could say it could be utility infrastructure where we're doing power connections or even into a car.

The third element is you need to basically have the science expertise that comes with it. In some cases, we're dealing with space, we're dealing with different materials because we're in different applications than you would have on earth. And then the fourth one is we have to have the supply chain that executes at the rate at the supply chain of our customers. It isn't cookie cutter around where we make. We have to be very close to our customers. If you take us in AI, we've added 3 new facilities in Southeast Asia to really make sure we support our China's Plus One over the past 3 years. We're adding more right now, and it needs to be able to execute at the pace our customers want, and it's something that continually evolves.

So the moat that you sit there, which each one by themselves may not say, well, is that, that special? When you put them all together and the amount of SKUs that we cover for our customers from an execution perspective is very important from the design all the way through in an area where cycles just get tighter. In every one of our markets, our innovation cycles are tighter than they need to be. And our customers expect it, and that's how we...

Yes, that's execution definitely. Energy, the energy segment, that -- it's nice. You had an acquisition, Richards, and you've also added to that. But it did grow 33% organically, I think, in the last quarter, last fiscal Q. You have grid hardening there. You have aging utility infrastructure. Obviously, you have the data center power build-outs. So is this -- like how should investors think about it? Is this a mid-teens growth business that we should think about for energy and -- yes.

I actually do think it is. And I think when you sit there, this is -- we're doing connections for energy utilities. And really what you have, and I mentioned it earlier, a market that used to be a 1% to 2% market that I would have described to investors 5, 10 years ago as a cash cow, and we would be using to fund other things is really a market that's probably growing 3x what it used to.

Where we position ourselves both organically and inorganically is here in North America is our strongest position around grid hardening. It's also around making sure we get the power to the data centers. We benefit from that. About 30% of our business does come from that, which does drive the growth you've talked about as well as what's happening with undergrounding and just protecting the network where there's deferred maintenance.

So it's an area where no different than the data side, the power side has very long tailwinds on it. I know it's probably not a discussion as much here today in a tech conference as elsewhere, but it's something where we built a $2 billion business. We're wrapping up this year that's going to be growing double digits. And I actually think there's a lot more opportunity because I think we're very unique, not only what we do at the rack, but also getting the power to the data center actually creates both growth vectors on the data and the power side.

And then you recently acquired Astrodyne, right? And then how does that accelerate sort of the momentum you're seeing in energy?

Actually, on the Astrodyne, while it does relate to the power infrastructure. It's not really in our energy business. It's really going into power and power filtering that actually goes into specialized equipment for semiconductor manufacturing, goes into aerospace applications. And it's just another one of the things around the power theme we like. We've always done power filters to really make sure you get power quality going through. Astrodyne does some of that as well as niche power supplies that we brought in, but it plays right into the power theme, but it doesn't go to the utility side like our energy business. Adjacent to it.

Right. So it's more on -- okay. Same theme, but just a different end market.

Exactly.

Okay. Which brings me to ACL, which also did grow double digits in Q3. You said now factory automation possibly it has hit an inflection point here? Yes. So what's been behind that? And when you just think about AI and as it's kind of impacting various industries, including perhaps manufacturing and how do you think about that demand there for factory automation in ACL?

One we get very excited about because I know when we talk about AI, we always talk about the data center. But let's realize, when you're in a factory and you're trying to drive productivity, it's the data on the factory floor that makes that happen. So when you think about what we do here, this is where we're getting more devices connected and that's actually bringing that data that the central AI can do.

And we've seen the inflection point be all around the world. This is a space where general automation was slow for a couple of years post-COVID. We've really seen every region in the world pick up. It is around the connectivity. For us, it's very much a data play on the hardware that we support the major automation players of the world. And it's something back to the CapEx trend I talked early on. We're seeing that accelerate. And we get content on top of that due to what's happening with data and the connectivity solutions we provide our partners. So it's something that not only getting a content play, I would also say we're getting a cycle uplift now after a couple of years of doldrums post-COVID.

And then the acquisition that you talked about, just how does that -- the acquired assets from Astrodyne fill up that portfolio for ACL?

It rounds out our portfolio from a -- power filters globally. We had more of a European and Asia presence. They were in North America. So it helps round it out. And it also gives us an entry way more into semiconductor manufacturing equipment where we were not as strong. They were strong there. And it's just something where we see the trends around data and what our semiconductor customers have to do from an equipment side. It's something that's going to give us a new market entry. The business that's going to grow double digits. It's accretive to our earnings, certainly will fit into our cash model as we go forward.

Okay. Let me just ask the audience any questions? Okay. Let's talk about automotive, Transportation. I mean, that's a big -- within Transportation, automotive is one of the segments. That's a pretty meaningful portion of your portfolio and the unit production in autos is kind of more or less flattish, maybe slightly down. You're still talking about content growth outperformance relative to that. Any -- in any given quarter, though, sometimes it undershoots some of what your target model is. So just help us understand like when you talk about 4% to 6%, what gives you confidence that you should be able to grow at that rate organically?

Yes. I mean you said it well. Production environment in automotive globally is down a little bit all around the world, but we're growing 4 to 6 points above that. That is how we think about it in TE. We are very global. So what we're very fortunate about is we're not out of weight in any region and our strength in Asia really has been helping offset some weakness in the Western world in prior years.

When you think about how we drive content performance greater than production, it does come back to data and power again. What used to be, the electrified vehicle was a bigger driver has absolutely flipped over to the data in the vehicle. So things that are around autonomy in the vehicle, things that are software-defined, there are things that are driving a bigger part of the 4% to 6% than we would have had 3 years ago, which we would have talked more electric vehicle. In addition, we continue to benefit from our strong position in Asia, which is still very high penetration of electrified.

And then the last element is the other things that happened in the car architecture, zonal architectures, you come into any comfort or safety features that bring electronics, which just comes into what you need when you have a connectivity supplier. So all of that creates the 4% to 6%. And with some of the EV element behind us now, like North America was a tough EV environment this year, actually we feel very good about the 4% to 6%. We've been hanging at the low end of that range, hopefully being able to move it up here as we move forward in a flattish auto environment.

All right. Defense. I think we heard from one of your peers as well that defense is a very, very strong market.

Very strong.

Yes. What's going on there? I mean, obviously, there's a lot of spending that's being directed to defense. But as it relates to your content, what's driving? And how should we think about that growth in that end market?

So a couple of things. In aerospace and defense, which is a couple of billion dollars for us, first off being it's the same themes elsewhere. How are you getting compute more distributed? Certainly, it's in drones. You're also getting into power in them. So you get that across all the applications that, unfortunately, we see every day. But that is just continuing to build momentum. And once again, a market that was probably a 3%-ish market has inflected up in Europe as well as the United States.

So we're across a broad base of programs, which is very good. And you're going to continue to see not only in defense, but also what we're seeing from space applications. Anything around a low-orb satellite, certainly, the things that SpaceX does, Blue Origin does, we also have content on those, which once again comes into data, compute and power connectivity that you need in those applications that is also an increased content provider. And then we have the traditional commercial aerospace that has actually gotten healthy again from a stability perspective.

So our aerospace and defense, we expect to be double digit as we move forward. We're trying to add capacity to make sure we can keep up with the needs of our customers, and that's what we're in the middle of now. But that's another one that, back to your first question, what continues to have stronger momentum, certainly the aerospace and defense.

Are there aspects of -- like defense is like pretty broad.

Very broad.

Yes, exactly. So are there aspects of that, that maybe TE is more over-indexed to?

We're very broad-based...

Very broad-based. Okay. All right. Okay. Margins. I know Heath is not here, but I'm sure he'd love to talk about margin expansion.

I typically hand it off to him.

Yes, exactly. So just on margin expansion, right, I mean what -- you're thinking about content growth, which generally should...

Totally.

Yes, that just given if units are not growing but content, that should hopefully drive margin expansion here. At the same time, you're also investing in capacity that also takes a hit on your cost through higher depreciation. Just help us understand when you think about the margin expansion and you guys have already expanded margins, what's the runway there? Should investors be expecting more margin expansion opportunity?

I think they should with the volume that we're seeing as well as the levels we're running at with both of our segments being around 22% margin, we do expect that we're able to expand margin from here while investing. We did a lot of structural work a handful of years ago that we're really seeing the benefit of today. Our footprint is in really good shape globally while it's localized. And you're going to see that we continue to move the margin up 30, 50 basis points a year, probably about 30% flow-through on the revenue while we continue to invest in the programs we talked about in those growth areas. But net-net, I think you can continue to see the margin move up because of the level we're executing.

Right. And if you were to double-click on those margin expansion drivers, you already talked about volume. But is there pricing that plays through? Is there higher cost declines that are coming into play as well?

Productivity programs and executing on the volume. Pricing, I would say you will see pricing as we do it to offset inflationary cost. But then we do have efficiency and productivity programs that we have to drive to make sure we continue to invest in the business while expanding the margins. And I think the momentum we have there has been very strong and proven in the past few years, and we'll keep that up, which will continue to expand while we can also reinvest.

Anything on the mix side between the various segments that investors should think about from a margin?

Well, first off, I do think you're going to see greater margin expansion in our Industrial segment than our Transportation segment. We sort of say 30% plus overall. But with the volume that we'll see in the Industrial segment, I think that is one that you'll see faster expansion there. Otherwise, it would just be intra-unit mix, which turns, like you said, one quarter to another -- anything else structural.

Right. But the industrial market is pretty big, right, your industrial segment. I mean, obviously, it has DDN in there as well, and then you have...

Segments are pretty -- our Industrial segment is just as big, our Transportation...

Transportation, right. So within that, anything on mix that we should think about if aerospace is stronger or ACL is stronger...

They're all very healthy. All very healthy.

All right. We talked a little bit about competitive dynamics, but just like you -- there's -- your competitors are chasing sort of the growth that they're seeing in all these end markets, right? So how do you prioritize? Do you love all your children here or some children much nicer, so they get a little bit more spending here?

Like as we think about -- I'm sure like it's capital allocation, right, where do I invest R&D, where do I invest factories. When you think about all these growth drivers, like where should investors see TE's moat getting stronger perhaps in some of these end markets because they all seem to be growing quite nicely.

Not every child gets treated the same. And even as you went back 5 years ago, we would have said, hey, we're going to invest in EV in Asia to really take advantage of that. Right now, you're seeing us take that the returns we're getting out of our automotive business and investing it in DDN, into energy, both organically and inorganically. So it really comes to the return profile that we see as well as strengthening ourselves competitively.

And you have seen us move up our investment rates, both in engineering as well as CapEx, and that's been really in our Industrial segment. We've also seen our acquisitions. They're in the Industrial segment. And you're going to continue to see increased investment there versus other areas as we talked about the growth today. So you're going to see that, follow that growth as we build out that moat and make it stronger. In some cases, that may be engineering. In some cases, it may be footprint. In some cases, it may be an acquisition that helps strengthen it. But I think you'll continue to see that overinvestment in the Industrial.

And does that -- when you talk about engineering capacity because you talked a lot about customer co-creation, right, being right there with the customers, deep in design, any areas, geographic areas or regions that we should see, "okay, these were investments that TE is making ahead of the growth that they see?"

Actually, we're making -- we already have a good foundation. At Investor Day, we talked about we've increased our engineering by about 2,500 people. We went from 7,500 to about 10,000 over the past 3 years. I actually feel the actually geographic footprint is good, especially with the geopolitics we have, really deepening them. And certainly, as our customers get deeper, we need to be there with them from an engineering perspective.

Any questions from the audience? One there. Can you just...

On an annual basis, how do you think about price and [indiscernible] to Class 8 truck exposure, which on your industrial business?

Sure. So two very different questions. Thank you. First off, on price. Price in our world is slight positive. Certainly, our Industrial business is a little bit more positive on that than our Transportation business. But our Transportation business has been relatively flat. So when you sit there, that's where it's been. And any of that price has been very much offsetting inflation we felt. So that's how I think you should think about it. If we have inflation on tariffs, if we have inflation on material, we're going to get it back on price, and that's how we've been managing it.

So on your second question on Class 8 trucks, we do, do a little bit shy of $2 billion globally in heavy truck, Class 8, ag as well as construction. Honestly, it's finally hit an inflection point of a pickup. We've been seeing a lot of strength in Europe and Asia the past few years, North America being very weak. Starting to see that inflection point in the past 3, 6 months here. It feels like it's a cyclical pickup.

And not only on top of the cyclical pickup, the other element that we get, we get about 4 to 6 points of content outperformance in Class 8 trucks, not only due to emissions, we're strong in Asia as well, where, believe it or not, electric trucks are a real deal. I know it's far for us to think about here in the United States, but it is big in Asia as well as what's happening in data connectivity in a truck. They create the same content opportunities that we would have in a car. You see those coming into a truck.

So just this last quarter, we grew double digits in our industrial and commercial transportation business. But it's nice to see North America finally showing back up here and getting a little bit of a cyclical pickup with content pickup. So thank you for your question.

A little bit on the sort of the growth algorithm as you think about free cash flow conversion, right? How much -- how should we think about -- or how should investors think about allocation towards acquisitions from that free cash flow conversion because you guys obviously have very strong free cash flow there from earnings. But how should we think about acquisitions versus how you prioritize buybacks or dividends?

So first off being free cash flow conversion, one of the things that I also think to the operating execution, our free cash flow conversion, even with the increased investments running about 100% of net income. And that's where it all starts. You have to do that first. We think about 30% free cash flow yield on the dividend is how we think about it, and we take our dividend up for that.

The other 70% is really best used with where the stock is trading or M&A opportunities. And I do think we have the opportunity to do both certainly, with the strong cash flow we have. Clearly, with where the stock is trading now, we are buying back stock. We did that last quarter even with the Astrodyne deal, and you would expect us to do it as well. But we have choices with the strong free cash flow that we have.

Okay. At the Analyst Day, you talked about 6% to 8% sort of kind of your long -- I mean, I guess, through-cycle framework that we should be clearly seeing a lot of momentum, right? I mean you talked about double-digit growth across bunch of segments. Maybe just as we round up here, what part of the TE story maybe investors don't fully appreciate?

I think to your question, first off, investors are the ones that are the judge at the end of the day. So just things I would stress personally is I know I'm at a tech conference and everybody wants to talk about AI, but I also think the broadness of the growth we have and the fundamentals that we've driven to improve them, I do think is a little bit underappreciated right now.

I think when you think about both data and power across our portfolio, certainly, AI is the area to think about. Data, but when I think about our $2.5 billion of growth this year, we would have been in our target growth range even without AI. And I think that shows where we position the portfolio as we move forward. I also believe with the margin improvement that you've seen, it's pretty broad. It's not one unit that's driving the margin, and it's not one unit that's driving the growth. It's pretty broad that's delivered 15% plus growth this year.

And the cash flow model always gives us options, options of whether we return to you, and we always will give the dividend, but certainly how we add to it and like we've been doing the past couple of years of adding to the portfolio in the power side, certainly what we've added in the optics side that creates future growth momentum as we go forward. So there are just some things I would highlight that I would stress to you all as you look at us.

Great. I'm going to wrap it here. Thank you very much.

Yes. I also thank you all for being here. Appreciate it.

Thank you.

Everyone, thank you for standing by, and welcome to the TE Connectivity Third 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 third quarter results and outlook for our fourth quarter of fiscal 2026. With me today are Chief Executive Officer, Terrence Curtin; and Chief Financial Officer, Heath Mitts.

During this call, we'll 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 [Audio Gap]. You may rejoin the queue if you have a second question.

Now let me turn the call over to Terrence for opening comments.

Good morning, everyone, and thank you for joining us. And before I get into the details on the slides, I do want to frame today's call around a couple of key takeaways. Our strategic positioning around the accelerating data and power trend continues to drive broad-based outperformance. And we are at the intersection of the largest technology and infrastructure investment cycle that's taking place around the world. We also continue to benefit from continued market momentum, driven by both secular growth trends as well as positive cyclical market inflections and we'll click down on these during today's call.

As we outlined at our Investor Day earlier this year, we expect our strategy to deliver broad-based growth while driving sustained margin expansion and double-digit earnings growth. As we progress through this year, we have continued to execute against this strategy and our third quarter results and outlook provide further evidence that our strategy is working. Our positioning is creating opportunities across multiple long-term growth drivers as increasing data and power requirements are reshaping our customers' architectures and this is where our interconnect technologies are essential.

Investments in AI infrastructure continue to drive strong growth in both our digital data networks and energy businesses. Further secular trends, including electrification, automation and increase in compute at the edge applications are driving growth across our aerospace and defense, automation and connected living, automotive and commercial transportation businesses. These investments are expanding our opportunities across both our segments and reinforce our confidence in TE's long-term growth outlook.

The strength of these trends is reflected in our record order performance with double-digit order growth in every business across both segments. For the full fiscal year, we now expect sales to grow approximately 15% representing more than $2.5 billion of incremental revenue in 2026, while delivering margin expansion and earnings per share growth above 20%.

Importantly, our record order momentum and growing backlog provides increasing visibility into continued broad-based growth as we move into next year, reinforcing our strategy and our ability to compound earnings that create long-term value for our owners.

So with that as a quick overview, I'd ask you to turn to Slide 3 to review our third quarter results and our outlook for the fourth quarter. In the third quarter, sales were $5.2 billion, and they increased 14% on a reported basis and 12% organically over last year. Our order momentum continues to increase, which resulted in record order levels of $5.7 billion, growing 27% versus the prior year as well as 7% on a sequential basis. And as I normally provide more details on sales and orders in the next few slides.

We delivered 22% earnings per share growth to a record adjusted earnings per share of $2.94 and adjusted margins expanded 90 basis points, reflecting the continued execution of our teams while also delivering for our customers. In this growth environment, the other thing that we're proud of, we continue to demonstrate the strength of our cash generation model. Year-to-date, we've generated approximately $2.2 billion of free cash flow while continuing to make investments to support future growth in both engineering as well as manufacturing capacity.

In addition to the organic investments, Today, we signed an agreement to acquire Astrodyne TDI, which is a bolt-on acquisition that broadens our portfolio of power and filter products for mission-critical applications that will be part of our Industrial segment. And Heath will click down with some additional details about this acquisition that we're excited about in his section.

Looking forward, we expect our fourth quarter sales of approximately $5.25 billion, which will increase 11% versus the prior year, and we expect to deliver adjusted earnings per share of approximately $3.05. For the full year, we expect to deliver growth of 15% in sales and 23% in adjusted EPS year-over-year.

So let's get into orders. And if you could please turn to Slide 4, I'll click down into the order trends we're seeing. Orders increased over $1 billion year-over-year to a record of $5.7 billion in the quarter, and the order momentum was in both segments, which reinforces the breadth of our growth. The Industrial segment continues its strong momentum with orders increasing 36% versus the prior year. These record industrial orders were driven by increasing momentum in AI along with strong growth in every business. And just to give you the flavor of the momentum in our digital data networks business, year-to-date, our orders are up over 70% versus last year. And in our Energy, Aerospace and Defense and Automation & Connected Living, all have 20% order growth year-to-date.

Turning to Transportation. Segment orders increased 19% versus the prior year, reflecting continued content growth in both automotive and commercial transportation. We saw double-digit year-over-year order growth across all 3 of the transportation businesses, supporting our confidence in continued market outperformance driven by where we positioned ourselves on content. We are running a book-to-bill of 1.1, both in the quarter as well as year-to-date. Our orders have not only translated into strong growth this year, but also have resulted in a record backlog position. And this backlog position is a strong growth indicator as we move into our fiscal 2027.

Now let me click down into the segment results, and I'll start with the Industrial segment. That is on your Slide 5. In the third quarter, our Industrial Solutions sales grew 22% on a reported basis and 21% organically year-over-year. With broad-based growth, as you see on the slide, across the segment, led by over 30% organic growth in both our DDN and Energy businesses. We are uniquely positioned at the intersection of the accelerating data and power investment cycle. What differentiates our industrial segment is the breadth of our participation across the AI infrastructure with AI driving demand, not only for high speed and power connectivity in and around the rack, but also for the energy infrastructure required to bring power to the data center.

This positions both our DDN and Energy businesses to benefit as AI infrastructure continues to scale, while the rest of our industrial portfolio continues to benefit from broader secular growth trends.

In digital data networks, our teams delivered another very strong quarter ago, with sales increasing 34% year-over-year and up $100 million sequentially, which was in line with our expectations, and we expect DDN to deliver the full year growth we talked about last quarter.

In data connectivity, we continue to see increasing demand as AI architectures evolve towards ingenic workloads driving greater deployment of CPUs and networking, which increases the addressable market for high-speed copper connectivity. In optical, we see additional long-term growth opportunities beyond what we have outlined at Investor Day. Through the Ram Photonics acquisition, we strengthened our optical road map with fiber attached connectivity, and we are encouraged by our customer engagements around this future growth opportunity.

In our DDN business, we also see growing opportunities in power connectivity as our customers evolve their architecture. We have deep expertise in material science, thermal management, safety and reliability challenges associated moving to higher voltage connectivity. As the industry moves towards higher-voltage architectures, we are well positioned to support our customers' evolving connectivity requirements.

Turning to energy. We saw a very strong sales growth and our organic sales increased a very strong 33% and driven by continued investment across grid hardening, where utilities continue to modernize aging infrastructure for increased power needs as well as data center build-outs. Our AI opportunity extends beyond the rack data center build-outs are driving significant investment across the power infrastructure, and we provide the connectivity solution that enable generation, transmission and distribution infrastructure which gives us the unique position I highlighted earlier.

Turning to our Automation and Connected Living business. Sales increased 16% and 14% on an organic basis with growth across every region. Versus 90 days ago, we are seeing additional indicators of both cyclical growth as well as content outperformance. We now expect this market to grow high single digits this year and with our strong position in automation, we expect to outperform the end market.

In Aerospace and Defense, our business grew 12% and which reflects the continued strength in both the commercial aerospace as well as what we're seeing in the defense markets, where our data connectivity and power products are essential to next-generation platforms.

In our medical business, our team delivered sales as we expected and at the segment level, turning to margins. Industrial segment adjusted operating margins expanded 70 basis points to nearly 23% and reflecting continued strong execution by our teams.

Now let me turn to our Transportation Solutions segment, and that will be on Slide 6. In the third quarter, our Transportation Solutions segment grew 7% on a reported basis and 5% organically year-over-year. Growth was driven by content outperformance in our end markets, particularly in Asia our leading global position as well as our customer co-creation model. In Automotive, sales increased 5% on a reported basis and 3% organically. We continue to deliver growth above the market due to content drivers despite a decline in vehicle production.

Data connectivity in the vehicle continues to be a significant driver along with electrification of the powertrain where we benefit largely in Asia and software-defined vehicle architectures. We expect our full year content outperformance to be in our 4- to 6-point range for both this year as well as longer term.

Turning to our commercial transportation business. Sales increased 20% on a reported base as well as 18% on an organic basis. We continue to see improving cycle trends across regions and market verticals while delivering significant growth above the market through new program wins, further electrification of trucks in Asia and strong execution across all regions.

In our Sensors business, our performance was as we expected. And at the segment level and looking at margins, the transportation team delivered adjusted operating margins of 21%, demonstrating the resiliency of the execution by our transportation team.

So with that as a click down on the segment performance, let me turn it over 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 adjusted operating income of over $1.1 billion and adjusted operating margins of 21.9%. The GAAP operating income was $981 million and included $9 million of acquisition-related charges, $83 million of restructuring and other charges and $56 million of amortization expense. I continue to expect restructuring charges in fiscal '26 to be roughly $100 million.

Adjusted EPS was $2.94. GAAP EPS was $2.55 for the quarter. and included restructuring, acquisition and other charges of $0.23 and amortization expense of $0.15. The adjusted effective tax rate was 23% in Q3 and we expect Q4's rate to be between 22% and 23%. Importantly, as always, we expect our cash tax rate to remain well below our adjusted effective tax rate.

Please turn to Slide 8. This slide reinforces the themes Terrence discussed, which are ongoing broad-based growth across the segments, strong operational execution by our teams and continued earnings growth. Sales of $5.2 billion were evenly split between the Industrial and Transportation segments. Given the order strength that Terrence mentioned earlier, we will exit this year with a strong backlog position in both segments. Certainly, this is influenced by AI program wins within the DDN business.

The order momentum and backlog growth give us confidence that our strong performance will continue into next year. Adjusted operating margins were 21.9%, expanding 90 basis points year-over-year. Adjusted earnings per share were $2.94, up 22% year-over-year, driven by sales growth and margin expansion. The teams are doing a very good job of meeting customer demands while continuing to manage inflationary pressures through both price as well as cost actions.

Turning to cash flow. Cash from operations was $1.2 billion and free cash flow was $883 million during the quarter. Year-to-date, free cash flow was roughly $2.2 billion and we returned approximately $2 billion to shareholders through dividends and share buybacks so far this year. We continue to expect our free cash flow conversion to be roughly 100% this year.

Now let me talk about the acquisition that Terrence mentioned earlier. Astrodyne TDI will generate more than $250 million in annual sales and had a purchase price of approximately $1.4 billion. We expect to close the transaction by the end of this calendar year, subject to customary closing conditions. Our cash generation model, coupled with our strong balance sheet supports our capital deployment strategy and Astrodyne is a good example of a strategic bolt-on acquisition while we're still returning capital to our shareholders.

And before I turn it over to questions, let me reinforce that our performance reflects our positioning to benefit from the largest technology and infrastructure investments taking place globally. We are delivering well ahead of our through-cycle business model generating strong margins, earnings growth and cash flow. And just as important, our record order momentum provides heightened confidence as we ramp up fiscal '26 and jump into fiscal '27 which starts in October.

With that, let's open it up for questions.

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

We will now begin the Q&A portion of the call.

[Operator Instructions]

Your first question comes from the line of Scott Davis from Melius Research.

Terrence and Heath and Sujal. I'm going to switch directions a little bit. And can you talk a little bit about the ramp you expect in your FAU optical business. I mean, my understanding is it's a hard business to scale up and scale out, but you guys seem to have some capabilities here. It could be pretty important to kind of comment that debate of copper versus optical. So just kind of curious to see where you're at there.

No. Thanks, Scott. Let me start with the second half, and then I'll talk about the FAU. I think the first thing is that, as we said, it's copper and optical. I'm going to come back to that again because you're going to have different needs, and we see in the architectures where within the rack, in what you're doing in the rack, it's going to be copper is going to be the heavy workload. But with what we've done with the RAM Photonics acquisition, it really is something that we opened up incremental market access to as optics come into the things that are going to be the scale out and also probably moving off the switch in the architecture.

And as you know, there's a lot of customers that are working on this. What really makes this exciting for us is the engagement that we have with our customers. on the FAU technology. It's early days. I think this is the type of thing. You won't really see revenue until -- meaningful revenue until we get to '28 and beyond that. But it's an incremental TAM, Scott. And it builds on the copper position, and it's going to add incremental revenue in TAM for us as we go forward.

So near term, we're investing in it. Certainly, you all know the acquisition that we did. Certainly, we are investing in the scale -- scaling of the manufacturing as well as the engineering teams of that acquisition to really make sure we can meet the intercept point that our customers expect us to meet, which will be more in the '28 and beyond time frame. And that's what we get excited about and how we rounded out the portfolio with that, and we'll continue to look for opportunities that strengthen it based upon where we're co-creating with our customers.

Next question, please?

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

I'm hoping you can give more color on how the record orders in backlog are setting the company up for revenue growth, not only for this year, but any early thoughts on 2027. And as a part of the order commentary, can you speak specifically the DDN orders relative to your outlook for sales growth? Because you said it -- improving momentum in AI orders, but then you also said that revenue is tracking in line with your prior expectation within the DDN segment. So I'm trying to reconcile the comments on why DDN revenue for this year isn't tracking to be better than you previously thought and with the AI order momentum.

Yes. Sure, Mark. Thanks for the question. And like you said, the orders I talked about in the call are up about $1.2 billion and the bigger jump was in our Industrial segment. So about $800 million increase in Industrial. And half of that order growth came from DDN. So it ties right into the trends that you see that relate to AI and that's going to just continue AI as a percentage of that, it's just going to continue to increase.

And I did mention that we had 70% order growth year-over-year or year-to-date in DDN. And let's face it. That's building backlog as we're ramping programs. So just with where we are in the year with 3 months left these are program ramps and we have multiple program ramps going on at any time. So really, this momentum is really going to deliver more into next year than increases to this year. And we do expect DDN to be up in our fourth quarter sequentially over the third quarter.

But just as importantly, when you think about that industrial segment order, and I know I mentioned some of these energy business, AD&M business as well as the ACL business are all up 20% year-to-date. And when you look at Energy and AD&M, they're really, really strong secular growth trends that we don't see that momentum slowing down. It's broad-based. It's certainly -- you can look at the investments that are happening that, that traction is going to continue and carry into '27 to your '27 question.

And then the last piece that I think is the big piece in our Industrial segment is ACL is a little bit more -- have more cyclicality to it. And it's nice that we're having that cyclical uptick, but those orders are up. And then in transportation, our orders were up $400 million year-over-year. And we're seeing benefit of ICT. But the orders that we're seeing are really just reinforcing our content position in automotive. And vehicle production is down slightly. It really hasn't moved from when we talked to you back early in the year, and we think it will stay around this, slightly decline, but our team is doing a great job delivering the performance of content above production. And that's what our orders are reinforcing. The programs that are coming in to really make sure continues to have that 4 to 6 points outperformance.

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

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

It's Ruplu filling in for Wamsi. Terrence, the question is on the transport segment. You said global vehicle production is expected to be slightly down this year. There's some concern on the China market. How do you see the China domestic market evolving versus the export market? And how do you see TE positioned here?

Ruplu, thanks for the question, and thanks for coming for Wamsi. It's a great question. So let me frame it a little bit because when you think about TE, we need to think of production. And production is slightly down. And certainly, there's headlines that are out there that, hey, what's happening in China, domestically. But China auto production is down similar to the global picture. And our Asian China position is very strong, and we had 8 points of outperformance over production in China or actually, our China business grew 6% against 2% down in production. So and exports are the element that I think people miss in that narrative.

So right now, the exports are sort of out of our China OEMs are offsetting a weak China local market. But you have to think about those exports that's really driving it, what they're doing in Southeast Asia, Central and South America where they have 100% exports to Africa as well as Europe. So I do think some of the narrative is around the car sales in China, but the exports are clearly benefiting from that and offsetting that.

The other thing I would just highlight, while production hasn't changed, our European business had 4 points of outperformance in the quarter. Their square back in there after last year was sluggish due to some of the EVs. And really Asia and Europe are offsetting a weak North American market still. So net-net, we feel very good about the 4% to 6%. Production is staying exactly where we thought, and we would expect production to be similar next year, maybe down a little bit. So feel good about the team momentum and also the content outperformance that we have this year and then into the fourth quarter, that will roll into '27.

All right. Thank you, Ruplu. Can we have the next question, please.

Your next question is from Christopher Glynn at Oppenheimer.

Just wanted to go a little more into the energy segment. So the organic had pretty meaningful acceleration in organic growth versus a tougher comp that spell exceptional sequential to. Are you seeing a particular build in just kind of baseline run rates there? In other words, is that new key program and design-ins layering in? Or was there something peculiar about the growth in this quarter for energy?

No. Chris, thanks for the question. And let me frame it a little bit for you. One of the things that was really nice, and we've been talking about energy and how we get excited about it, certainly ties into the power trends, but it was well over $100 million of growth this quarter of our $600 million of total growth. So it's very meaningful. And when you look at it, we think of our energy business in 3 basic verticals below it that you should think about it.

About 60% of it or 2/3 is really around where we source the utilities. And we talked to you about grid hardening, there's the investment that's happening around the aging infrastructure. Clearly, that is on an upward inflection point that you all know about. There's about 20% of it that we call industrial, but this is also where you could power into a data center, you bring power into buildings. And that is clearly growing very fast, and we're benefiting from it and even reflected in some of this quarter's numbers. And then the remainder is around clean energy. That had been and is a growth driver, been stronger in the past. But certainly, what we're seeing in the data center as well as the grid hardening is just accelerating.

And if you look at energy, this year, we're probably expecting it -- you should think about it more as a mid-teens type grower this quarter. There is a project nature to some of our programs because you're selling into infrastructure. But I really think, as you look at it this year and into next year, think about it more of a mid-teens grower is the right way to think about it.

And just the last thing I would tie back to is -- and when we look at this market, yes, there is energy CapEx, but we do think about 1/3 of the energy market growth where we're positioned is driven by data center buildouts. So it ties back into yes, we have a great position in DDN, but you also -- where we're going to benefit from the power infrastructure build-out is just as important.

Can we have the next question, please?

Your next question is from Amit Daryanani from Evercore.

There's been a lot of focus on AI revenues and maybe I missed this part, but could you just touch on how are you tracking in the June quarter versus your target? Is it still 70% of DDN, it would be good to get that clarified. And then really more broadly, as I think investors focus in on this copper versus fiber debate, can you just help frame teas opportunity across copper, optical and power? And how do you see these businesses complementing each of them over time. And if the scale-up architectures really migrate more aggressively towards optics. Do you think that's a tailwind, a headwind a neutral thing for your content story?

Yes, fair. So that's -- the first question is pretty straightforward. When you think about what we think about DDN and where AI is we're on track to what we said last quarter for DDN, DDN will be exactly where we thought we were going to be. And when you look at it, because of the AI momentum and the orders that we see, all you're going to continue to see is the percentage of AI of DDN is just continuing to increase. It goes up -- so I know a few quarters ago, we talked about at 70%. Every quarter, it goes up as AI continues to accelerate, and that trend is going to continue. So that's the first part.

On the second part, on copper, and it goes back to Scott's question, on the copper and the inflection point, a couple of things. When you're in the scale up versus scale out, let's say, scale out already is very optical because you have longer lengths and things like that. Optics are [ good ].

When you're getting into -- getting to more ingenic workloads, that's where you're introducing more CPUs. That's all going to be copper on it. So when you look at it, as architectures are evolving and that's why you hear at the global merchant chip makers say, copper is going to be the workhorse within the rack and in that scale up is going to continue. I think where you get the inflection point, which is incremental benefit for us is when you would get opticals like CPU coming in at the switch level, it's sort of in between. And in that regard, that's where I think with what we've done with RAM on the FAU side really plays into the connectivity suite and that's incremental TAM.

And that doesn't even get into. And that's just on the data side when we're talking about it. Like I said in the prepared remarks, power just continues to move up. The power connectivity as they're moving to higher-voltage architectures, you introduce optics that creates more power need. And if you look at that, in some cases, we can get content increases, that will be 1.5 what traditional power content would be.

So all this in collection, we like it. We think it is all positive for us. And we have to realize, when you play with technology and play where we want to play, architectures evolve and you need data, you need power, and we do both. So we get excited about it. We think it's going to continue to benefit us as we move forward. And clearly, our orders also represent that.

We have next question, please.

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

I wanted to touch on the other parts of DDN. So like if you're tracking towards your AI cloud number of like around $2.4 billion, it suggests that like the rest of DDN, that $800 million of more traditional stuff isn't growing that fast this year. And I'm just curious what the -- can you frame that piece for us? And when you talk about the Agentic/CPU-type incremental demand that you see, where would that fall? Would that fall within that billion that you're currently calling AI cloud? Or would that fall into that other like $800-ish million of like more traditional? And how should we think about the kind step up there?

Well, a couple of things. When you see that content step up, this is where in this space, it blurs a lot, and it depends on where the customer is that's doing it, Joe. And I'm not trying to be cute but when you actually sit there, if the hyperscaler is doing it, we would put it more in the AI cloud number. If it was just somebody buying a server, it might be an enterprise type number. So we continue to get clouding on that due to how these architectures evolve. And it's another reason why you're going to hear us talk much more at the DDN level as we go forward.

But when you look at it, I talked about it just on the prior question, the growth in AI and cloud is the big momentum and growth driver. What you look at in the other areas, you do see people prioritizing to the AI workload. So while you do see some increase elsewhere, it's not as big of an increase as AI and cloud. In some cases, we actually see down a little bit as you have a shift of investment. But net-net, long term, both will be benefited as these architectures go forward. I just think we're in really early days to see it outside of the AI and cloud space.

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

Just a little bit, if you can clarify on the sequential order growth that you're seeing within the DDN and AI and cloud. I think the commentary was more year-to-date with orders up 70%. So just if you could clarify that in line with the content growth that you expect or one would expect as you see new architectures coming here, which tend to be more content intensive and should benefit TE.

Yes. So when you look at it, we had very strong organic growth in bookings as you saw on that slide, you'll look at that. If you -- and I'm just trying to get a paper in front of me on a sequential basis, about half of that growth was due to DDN similar to the year-over-year. So we continue to get very strong growth momentum. And as I said, I think the real number is that 70% plus year-to-date bookings growth that we have.

So it's very strong across as you look at it, but DDN played a very big role in that order growth in industrial in the quarter. Which was about half of our overall order growth sequentially.

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

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

I was wondering if you could just go a little bit deeper on the acquisition you just announced. I'm not quite clear what's special about it. And as just as a related subject, does this mean, given what you've done recently in that tower space, does this mean you're more aggressive in that area? It seems like there's a lot of opportunity you guys build an even bigger business.

No, Steve, great question. And let me talk about it a little bit. And to your point, I know we get a lot of discussion around data, especially with DDN and where we do data connectivity in the vehicle, but we get excited about power and data. Because when you think about where we plan the architecture, somebody's making a semi choice, somebody is making a power supply choice and how does the architecture come together is always what we're looking at. So we look at both. Even if you look at this year with RAM that we don't -- which in optical connectivity, that's data, this is a power play.

And I'll ask Heath to talk about it. But when you look at what we announced Astrodyne TDI has a very good position both in power filters, which make sure you have quality power coming to applications as well as some custom power supplies. And we already have a very similar position that Astrodyne has in the power filter side. we've had something from a legacy perspective. We added to it with Schaffner and about 40% Astrodyne is in the filtering -- power filtering side. So this just continues to add to our position, which certainly is a great thing to have.

On top of it, they do some custom power solutions that actually go into applications that we really like, like semiconductor equipment goes into the defense market as well as medical markets that we talk about. So we're going to continue for those customers as they evolve their architecture being able to give a pretty robust power solution piece to them that we've given them, but it's going to expand it. And that really -- the custom piece expands our TAM. And we're very excited for this team to join TE later in our -- later this calendar year.

And Heath, why don't you talk about some of the numbers?

Thanks. And Steve, I mentioned on the call that this business has been growing very nicely with a really nice trajectory going forward. And we calendarize it for our fiscal year, it's about $250 million in sales right now. As I mentioned in my prepared remarks, we paid about $1.4 billion that will be funded through cash. We expect it to close later this year. This business as it comes into TE and our Industrial segment, it will be accretive to our growth rates and our margins at both the TE level and the industrial level. So it's a really attractive business.

On top of that, we do see the operational synergies, both in where they manufacture versus where we manufacture some opportunities there as well as some other things that we bring to the table in terms of the construct of the deal. So pretty excited about getting this one over. We just got to get it through the customer close process towards the end of this calendar year.

Your next question comes from the line of Manmohanpreet Singh from JPMorgan.

I just wanted to ask about the AI-specific revenues. Can you please provide an update on the updated guide for AI revenues relative to the past update of $2.4 billion. And also how to really think about AI linked or AI data center linked revenues within the Energy segment and now potentially also within the Astrodyne acquisition.

So a couple of things. First off being, as we said earlier, we expect DDN to be delivering on what we set 90 days ago. So it's fully as we expected. And it's going to continue, the AI revenues are going to continue to increase as a percentage of DDN based upon the strong backlog we have and the growth momentum going into '27.

On the energy, as I mentioned a little bit earlier, about 20% of our energy business is benefiting from where you get data center build-out. So you do see that. You see that driving really nice growth in the energy business. And when you look at the acquisition we just talked about with Astrodyne on it gets the benefit really from where it plays into semiconductor equipment. Clearly, where you have the increased capacity going in, 4 chips that are all driven by AI. Clearly, that's a really good position they have and we will benefit from that -- through that position that they have, and we're going to build on.

Can we have the next question, please?

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

Terrence, at your Investor Day in late '25, you talked about that AI cloud being $3 billion in 2 years, it should be next year '27. You've raised your -- that number through this year and even in your commentary today that it's sort of in line with prior communications, it suggests like the annualized rate in fourth quarter is already at, if not above $3 billion. So I was wondering if you could help provide an update to that figure or maybe some context and sort of how you're thinking about that business over the coming years.

No. I think the things you said are right on, Joe, and let me give you context. And we said this last quarter, the $3 billion we laid out, we're ahead of. And that has continued to shift left, and that's how you should think about it. Even with the momentum we have in the orders we've laid out, DDN is going to be a very big growth driver into '27 again. And as well as the other units that we have from a growth perspective. So nothing has changed on that. $3 billion continues to shift left, and we'll be above that. And what's really good is the breadth of the growth we have, which includes DDN to really make sure we continue to compound the growth that we've had on top of the 15% we're going to deliver this year.

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

Great. Could you touch on the opportunity on 800-volt data centers, obviously, that sort of came up during the quarter. Does that -- any color on how much content that switch could add. And then any color on the competitive landscape. Does that change opening up some maybe new competitors? Obviously, you have the current data center market fairly locked up. But does that actually allow some new competitors to come in with that technology shift potentially coming in the next few years?

First off being, when you think about power -- and in our AI revenue, probably 1/3 of what we do in AI is power connectivity, whereas 2/3 is data connectivity. And when you sit there, you're going to continue to see as that power in flex up, it's going to create opportunity for us. So we have a very strong position in power we're already architecting with our customers around how does the data and power needs go together and when you were really talking at the rack.

I don't see new entrants coming in because this is a simultaneous equation of trade-offs and constraints between the data and the power equation when you're at the rack. And our customers really like somebody that understands both the power chain and the signal chain. So when we look at it, we feel very fortunate that we can have discussions with them on the power chain that also considers the data chain, and that's an advantaged position. And we feel that you're going to continue to see outgrowth in that area as people move up the high-voltage architectures.

Some people are playing with 800 volts, but there's a whole continuum of where people are making trade-offs. So I don't think it's one end game. And that's what's really great about what DDN is going through. All of our customers are really experimenting in the architecture on different trade-offs to make sure they get to the lowest cost per token. We have to realize that's the ultimate end game that they're going to.

And different customers have different paths that are trying to challenge. So when we look at it, that's going to be part of the growth momentum we have is what's happening on the power chain as you move up. And like I said, already 1/3 of our business is related to the power connectivity side.

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

Believe it or not, I'm going to get off the AI topic for a moment anyway. I'm hoping, Terrence, you can talk to us a little bit more about what's going on in defense. Our channel checks suggest that the strength in that end market has been unusual. And I'm hoping you can talk about new projects and backlog trends and perhaps component pricing as well in that end market?

Sure, Will. Thanks for the question. Yes. And on Defense, I mean, let's face it. It is at a different inflection point due to some of the geopolitics in the world, and you all know that. So I don't need to talk about that. But what we're also seeing -- we are seeing a velocity increase on programs due to what's going on. And it is also both very strong in Europe as well as in the U.S. So it's on both of those vectors that are very much driving the increased backlog. And even when we talk about the backlog position earlier, and we said it a quarter or so ago, backlog that we're having, some of the more significant builds are not only DDN, it's also in aerospace and defense. And especially on the defense side.

So that inflection point and even when you look at what is budgeted for defense spending around the hardware side, which is where we would play is very important. It is also important when you think about when you get into UAVs and applications like that, come back to the data connectivity and the power connectivity is very important. And when you get things that are remotely controlled, that comes into very high-speed elements where the compute has actually happened real time, and we're benefiting from that.

So we're on a breadth of programs the growth that we're having, the defense is growing faster than comm air right now, which is a little bit different than you would have thought about TE maybe 10 years ago. But that trend is a real secular trend that we don't see slowing down, and we continue to invest in capacity to make sure we can deliver for our customers.

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

Terrence, maybe to put a finer point on some earlier questions. How much of the business today is tied optical in AI in areas such as transceivers. And then maybe away from that. I'm curious if you could talk a little bit about the incremental margins in the quarter look pretty strong at even as you're facing input cost inflation. And on my math, a little like the organic flow through next quarter appears pretty strong as well. So I'm just curious what's driving that.

Sure, Shreyas. Let me take the first piece. As I said earlier, when you think about optics today, we do have optical positions today that we have the element is we are not a major player in scale out. So when you think about scale out, which is almost all optical today, we have a limited position there. Where we typically are completely focused in the scale-up in the rack is where our focus has been and continues to be as we make the investments. Do you want to talk about the margin?

Sure. Shreyas, the -- we are running kind of where we would expect at these volume levels. So certainly, the heightened growth in industrial, you would expect to see 30-plus percent flow through for this type of volume. A given quarter, as I've said in the past, is not always the best measuring stick, but I would say the momentum is there, and you see it in our margin rates as those continue to improve both at the industrial segment as well as the Transportation segment that doesn't have quite the same market support that we're seeing in the industrial segment.

But as we finish up the year, your fourth quarter question, as we ramp up the year, certainly, we've maintained that strong momentum. There's nothing that really changes that perspective on things. And quite honestly, as we jump into '27, we would expect the same kind of moment.

Can we have the next question, please?

There are no more questions in the queue. This therefore concludes our Q&A, and I will pass the call back for some closing remarks.

No. Thank you. I want to thank everybody for joining us this morning. And if you have any 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 TE Connectivity's website. That will conclude the conference for today.

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, the 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 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.

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 on 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 our further evidence of 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. 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 reflect 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 I've already talked about. For the second quarter, over 70% of the company's order growth was in 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 Automated 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 standing 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 and 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 metal business, sales grew sequentially as we expected, driven by the continued investment in 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% and 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 to 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 at 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 will get into 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 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. Eli, can you please give the instructions for the Q&A session?

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

Can you talk about the...There is allergy attack here, but the $150 million bump up, when does that get shipped out?

Yes, sure. 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 1 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 DDM business, and we'll talk about that $150 million because year-to-date in our DDM business, we have $2 billion of orders. .

And as we talked in 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'll be some lumpiness to them as programs ramp up and ramp down. So with the momentum that we've seen in order, 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 along, and it continues to show the momentum that we have in the space. So we do think with this additional $150 million -- $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. And 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..

In the AI space.

Thank you, Scott. We have the next question, please.

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

Orders were strong again this quarter, a record high. You said it's 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?

No. 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've stacked about $10 million 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 we 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 probably a little bit later of an uptick is what we're seeing in factory automation in our automation 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 both at 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 be 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 in 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, 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, we're showing that.

All right. Thank you, Mark. We have the next question please.

Next question comes from Luke Junk of 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 especially interested is just where you're leaning in to any related investments. You made the comment in the script about evolving with customers and also noticed you did an optical acquisition in March of RampPhotonics, if you could speak to that as well.

Okay. Thanks, Luke, for the question. And 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 and what's happening in both the data chain and the powertrain when you look at what's going on, 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 and 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 rack is the bigger driver of what we do and where we focus. And so you're going to see more in scale-out, and 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 some 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. And 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.

Thank you Luke. May we have the next question.

Next question comes from the line of Amit Daryanani from Evercore.

Thanks, good morning, everyone. Maybe I'll step away from the Banister a bit. You hope to see really less growth in energy and even the commercial transport segment. So I'm hoping, Terrence, if you could just talk a little bit about on energy, even ex Richard's 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 benefiting from is things all of you are experiencing every day. Increased utility investment related to capacity as well as hardening due to the low 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 plan 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 to be a semiconductor fab by 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. And we're still growing high single digit and there Certainly, there's been some policy elements 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 1 that 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, construct and 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 position 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 talk 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.

All right. Thank you Amit. can we have next question please.

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

The 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 trend 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 start 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 stronger. .

And when you look quarter-to-date, I mean, year-to-date, and we asked 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, continue to show that strong presence that we have. You're a nice growth over market, where it isn't where we were with in 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, we 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 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 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 talked about. We're very excited that they're across a broad customer base. We're growing across all the customers that are key and -- 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.

All right. Thank you, Wamsi. Can we have the next question, please?

Next question comes from Christopher Glynn from Oppenheimer.

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 changed. We really like the portfolio I think what you're going to continue to see is the bolt-ons 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 were we position ourselves. Heath, do you want to put on 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 3 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 investment 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 to comes from Joseph Spak of UBS.

Just wanted to touch on -- just want 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 it 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 in the second quarter, certainly, we've seen the oil-based derivatives increase. For us, that means resins, and we do buy a lot of resin. 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.

Question comes from the line of Joe Giordano of TD Cowen.

Just curious, like 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 like 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. So -- 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 be 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. And 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. enterprise telecom, which potentially could be squeezed for or competing for dollars from -- for AI because of AI investments. So maybe you could talk about the trends in enterprise telecom and other IT.

No. Actually, thanks, Scott, for the question. And 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 if hyperscalers, were they providing much better visibility as a result of the hyperscalers as well as your chip companies that you deal with, if they were just providing better visibility due to the supply chain issues? And if you're forecasting any more complexity as these programs ramp in the back half?

Sure. No, 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 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 DDM. 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. So we're not seeing any slowdowns from our builds into our customer, our 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 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. No, 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 is elements that you come into regulatory elements of when things get built and staged, but 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, Sameer. 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 EDN 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?

So 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 end between copper and fiber. And that word, while it's a simple word, copper and fiber sounds like more important words, the end 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 points 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 2 related questions. The D&N 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. 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 move 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?

Sure, A. 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, 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 our 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 will 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 1 question, and you may rejoin the queue if you have a second question. 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 of our -- 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 has been driven by new program awards from our customers, demonstrating the operations and engineering mode 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 & 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 of 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 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 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 & 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 Richard 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 on 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 you 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 [indiscernible].

Yes. Sure, Scott, and happy new year end. 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 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 position ourselves with our hyperscale customers, we've been scaling very nicely. Let's face it, these programs are big programs and the time base to scale. Some of the awards we got in the first quarter are for later this year into 2027 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-REIT ] 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 and 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, all orders were up double digit across TE. So that's the broadening 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, 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. Let me 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 team 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 [ expand ] 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've commented on.

Sure. At 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 of 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?

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's 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 brought 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. 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 2 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 it 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, we'll 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 not [indiscernible] 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 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. So -- 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 team 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 in 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, 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 3 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 and 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 comparison. 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 build 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 in North America. North America truck market is still negative. And I think that's probably the 1 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, you know, slightly down versus sales, which were flat. So are they 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 common, then you throw volume on top of that, that is certainly lending itself to the incremental flow-throughs. And it 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 consistently or less several years in those 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. Like 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 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 and 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 2 aspects. Just to clarify, when you're passing them through, are you able to pass the higher cost of metals through on a similar timeline 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.

Steve, I'll take the first half. On the we have improved over the years in terms of our ability -- 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 [indiscernible] 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 [indiscernible] 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 [ why ] ACL and ICT, that we have capacity. And we continue to add in areas like energy and aerospace. So even when we did Richard, Richard 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 air-framers 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 with you today.

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, but -- 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 some 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, 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 [indiscernible] 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 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 2 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 in line. 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, if 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 or 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, it was 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. That 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. 3 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, [indiscernible] 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, [indiscernible], and I mentioned Richard 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.

Jale 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 Ernie, 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.

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 the 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 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 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 the 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 of $4.75 billion, growing 17% on a reported basis and 11% organically year-over-year. Both segments contributed to our sales being above of 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 of 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 auto 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 order is 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 reflect 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 and 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, operating -- 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, 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 100% -- 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. Guys, 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 2 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 DDM 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 real momentum. And then outside of that, where we play in enterprise in 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 with 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 those 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 -- or elements 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?

Thanks, Joe. So first off, let me get into the product sets a little bit that when we talk about our DDM 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 bus bars 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 when 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 speed, all happening at once. So all of those products are there.

I don't think one in flex 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 these programs the revenue that comes out of these programs can lag a fiscal year or a lag when you make those investments. So I know where some of the things that 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 of oil 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 can't -- we're not the ones holding our customers back.

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

So could you 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 change 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 the 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 a lot of 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 creature 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 brass 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 modeled.

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% and with where we position ourselves in North America and what's happening in grid investment in the T&D side by utilities is 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 air framers 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 things 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 a 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 1 there, Wamsi.

Wamsi, you're ignoring Sujal's instructions...

But no, I appreciate -- I do appreciate your questions and your interest. So let's talk about margins first. Margins for the year, we -- 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 another -- 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. We're 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 -- from -- 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 of 30% or maybe a tad better dependent upon the mix. So I think as you do your modeling, again, 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 of margin improvement, that flows through at the gross margin line. So at 35% in '25 would be kind of a recast of 36% and that's where some of that flow-through is going to occur.

If you think about the split by segment, 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 at 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 are 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 and FY '25. We completed a Harvard deal that was a little bit smaller than with the Richards deal, which was much larger. And our appetite ranges depend on 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 more aggressive, but we're going to be smart with our -- 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 Mr. Amit Daryanani with Evercore ISI.

I just had a couple of questions just on the DDN segment broadly. There is -- 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. Let me just kind of understand the levers behind the growth you see.

And then on DDN ex AI, your growth over there actually 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 time, 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 the 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 is cloud CapEx, that the key element is that's the number we keep an eye on, which is growing 20%, I think is a 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 to 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 in 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 pretend a more balanced outgrowth algorithm? And I think you spoke to production being more balanced in the West, but what about some PE-specific dynamics as well.

No. Thanks, Luke. And first of all, so you are right in my comments, we've had this out balance of production this year, and that has created a little bit of a 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 on 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 connectivities in every region. Certainly, feature sets are different that drive electronics in the vehicle. But the key thing is -- different by region.

But the key thing you have to realize in every region, all of whom 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 anomaly just due to the trends are very different in region.

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%, like -- which is a robust expansion relative to 4Q. Can you please highlight the drivers that are driving that margin expansion there?

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

Samik, first of all, well, 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 -- so -- and implied what our EPS guide is and our revenue guide, you can 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.

Terence, I know you kind of answer the question about the growth in DDM 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 assumptions 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 IN side, but 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 is 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 to follow up on the outlook in autos 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. Do 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 a full electric.

The element that you have to remember is I need you to think about what's happened to 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 Citi Group.

Can you just talk a little bit about the book-to-bill, specifically, I think in Industrial, given the strong momentum you have, DDN and 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?

I would say you have to look at order levels and the one element you get always this time of the 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 in 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 the $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 to carry 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, [indiscernible] earnings fees, but margins are a little bit disappointing from a 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, and 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 just 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 the 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 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 -- tell 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 a ramp to the level 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 bus bars and cabling and also previously other cores back plane 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, hyperscale or 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 should assume you get one product set or all product sets with one customer. We compete individually on each one of those products that's what you sort of talked about. And that's just reality as we work the architecture real time.

The bulk of our wins when you see the revenue traction we have in the ramp were mainly with the hyperscalers. We have wins across the hyperscaler group as well as the semi players. But the element is 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. Thank you for participating. You may now disconnect.