Earnings Call Transcript - TEL Q1 2025

Operator, Operator

Everyone, thank you for standing by, and welcome to the TE Connectivity First Quarter Earnings Call for Fiscal Year 2025. At this time, all lines are in a listen-only mode. Later, we will conduct a question-and-answer session. And 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.

Sujal Shah, Vice President of Investor Relations

Good morning, and thank you for joining our conference call to discuss TE Connectivity's first quarter results and outlook for our second quarter of fiscal 2025. With me today are Chief Executive Officer, Terrence Curtin, and Chief Financial Officer, Heath Mitts. During this call, we will be providing certain forward-looking information, and we ask you to review the forward-looking cautionary statements included in today's press release. In addition, we will use certain non-GAAP measures in our discussion this morning. 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 in the Investor Relations portion of our website at te.com. As a reminder, we reorganized into a two-segment structure effective with the start of fiscal 2025. Transportation Solutions, where the end markets remain the same, and Industrial Solutions, which adds the two businesses from communications. As we talk about our results today, they will be discussed in the new segment structure. Please refer to our 8-K filed in December for recast financial information under the new structure. Finally, during the Q&A portion of today's call, due to the number of participants, we're asking everyone to limit themselves to one question. You may rejoin the queue if you have a second question. Now, let me turn the call over to Terrence for opening comments.

Terrence Curtin, CEO

Thank you, Sujal. I want to start by wishing everyone a Happy New Year and expressing gratitude for joining our first quarter earnings call. As we navigate an inconsistent global economy, we see both strengths and weaknesses. Economic uncertainty is present as we look ahead to 2025, but what's important is our positive performance and our commitment to focusing on factors within our control to enhance financial performance as we progress through the year. Against this backdrop, our team's first quarter results are clear. Our sales aligned with expectations, our adjusted operating margin and earnings per share reached record levels and exceeded our guidance, and we achieved a record free cash flow for the quarter, all thanks to our team’s execution. Our orders slightly surpassed our expectations and showed year-over-year and sequential growth, giving us confidence in our guidance for improved sequential top-line performance in the second quarter and steady growth in our Industrial Solutions segment throughout the year. However, one aspect that fell short of our expectations was the impact of a stronger dollar, which will continue to affect us this year. I am proud of our team's performance in delivering earnings and free cash flow that exceeded our expectations. Looking ahead in this dynamic environment, there are four key areas we are concentrating on. First is innovation. Despite the market inconsistencies, our customers are pushing forward with next-generation architectures, and our connectivity and sensing capabilities play a crucial role in that progress. We are helping them ramp up vital programs to boost application growth across various sectors, including high-speed connectivity for AI initiatives and energy infrastructure monitoring. Second, we are committed to executing operational strategies to achieve further adjusted margin growth, as evidenced by our first quarter results and guidance. Third, we've invested significantly in refining our global manufacturing strategy, including localization efforts to meet our customers’ China Plus One strategies. We have a plan in place should tariffs be reinstated, similar to what we executed during the 2017 tariff cycle. Lastly, we are focused on maintaining our robust cash generation model, which allows us to return capital to our shareholders and leverage bolt-on M&A opportunities as they arise. With that overview, let’s proceed to the presentation. In the first quarter, our sales reached $3.84 billion, remaining flat year-over-year. Our adjusted earnings per share of $1.95 surpassed our guidance and marked a 6% increase from the previous year. Our record adjusted operating margins stood at 19.4%, up 30 basis points from last year, and this was reflected across both segments. We recorded orders of $4 billion, which grew both year-over-year and sequentially, slightly surpassing our expectations. This growth is indicative of broader advancements within the Industrial segment, particularly within AI programs. Our first quarter free cash flow reached a record $674 million, an 18% increase year-over-year, showcasing the quality of our earnings. Looking ahead, we anticipate our second quarter sales to rise sequentially to $3.95 billion, although we expect unfavorable currency exchange impacts exceeding $100 million on a year-over-year basis. We estimate adjusted earnings per share for the second quarter to be around $1.96, up 5% year-over-year, including a $0.06 headwind from currency exchange and tax compared to the prior year. Stepping back from the numbers, we are pleased to announce our inclusion in the Dow Jones Sustainability Index for the 13th consecutive year, reflecting our commitment to sustainable business practices valued by our customers and beneficial to our shareholders. Now, let's analyze the order trends as shown on Slide 4. In the quarter, we observed orders grow to $4 billion with a book-to-bill ratio of 1.05. Orders in the Transportation segment met our expectations, while in the Industrial segment, they rose 15% sequentially, reinforcing our expectations for organic sales growth in the second quarter. In the Transportation segment, our auto orders aligned with expectations, buoyed by growth in Asia, despite lower production in Western regions. The decline in overall orders for this segment stemmed from weaknesses in commercial transportation and sensor markets. In the Industrial segment, all our business units reported a book-to-bill over 1, supporting our growth outlook. We continue to see growth in aerospace, defense, and marine markets, along with strengthening demand in energy, as well as signs of stabilization in factory automation end markets. Our momentum in artificial intelligence applications persists, with our digital data networks business seeing total orders surpass $1.5 billion over the past three quarters, setting the stage for the growth we discussed. Moving on to year-over-year segment results, our Transportation segment experienced a 3% organic decline, which we anticipated, with strong growth in Asia offsetting declines in Western regions. Looking ahead, we project global auto production to decline by 1% to 2% in fiscal 2025 but expect content growth to remain in the low end of a 4% to 6% range. Despite a downturn in overall auto production, we anticipate ongoing growth in hybrid and electric vehicle production, predominantly in Asia. Furthermore, we're witnessing increased content driven by software-defined vehicle architectures requiring more data connectivity. Recently, we secured over $1 billion in new design wins with a leading Chinese auto OEM, centered around data connectivity for their next-generation platform. In the commercial transportation sector, we experienced a 12% organic decline, as forecasted, attributed to weak heavy truck production in Europe and North America, though we expect demand to improve later in the year. The sales drop in our sensors business resulted from industrial market weaknesses across Europe and North America. Our adjusted operating margin for this segment was 21.3% for the first quarter, reflecting strong execution by our teams. Now, turning to the Industrial Solutions segment, which grew double digits in the quarter, our digital data networks business surged 50% organically, with design wins reflecting increasing momentum. We project revenue from AI applications to surpass $600 million in fiscal 2025, indicating robust growth in AI platforms across various customers. Sales in automation and connected living declined 5% organically, following ongoing weaknesses in factory automation applications, particularly in Europe, though we have seen signs of stabilization and increased strength in Asia. In the Aerospace, Defense, and Marine sectors, sales rose 15% organically, driven by strong demand trends and a recovering supply chain. Our medical business saw a 25% decline this quarter, as expected, due to inventory normalization among our customers following improvements in the broader medical supply chain. We anticipate sequential growth in our medical business as the year progresses. Lastly, our energy business reported a 7% organic growth, driven by strength in all regions and ongoing investment in utility-scale renewables and infrastructure improvements. Additionally, we acquired Harger, a leader in lightning protection and grounding solutions, which will enhance our offerings in grid reliability and connectivity for renewable and industrial power applications. The adjusted operating margins for the Industrial segment were 16.8%, expanding by 100 basis points year-over-year through higher volume and strong operational performance. We expect sequential organic growth across all businesses in the Industrial segment in the second quarter. With this performance overview, I will now turn the call over to Heath for further details on our financials and future expectations.

Heath Mitts, CFO

Thank you, Terrence, and good morning, everyone. Please turn to Slide 7. For the quarter, adjusted operating income was $745 million, with an adjusted operating margin of 19.4%. This was a record performance with year-over-year expansion in both segments, reflecting strong execution by our teams to deliver on operational levers, including savings from past restructuring initiatives. GAAP operating income was $690 million and included $5 million of acquisition-related charges and $50 million of restructuring and other charges. Q1 restructuring charges specifically were $43 million, reflecting continued footprint optimization efforts. I expect restructuring charges in fiscal '25 to be around $100 million level, consistent with what we said 90 days ago. Adjusted EPS was $1.95 and GAAP EPS was $1.75 for the quarter, which included a tax charge of $0.04 from restructuring and acquisition-related charges of $0.16. As we guided 90 days ago, the adjusted effective tax rate was 23% in Q1, and we expect Q2 to be at this same level. We continue to anticipate the full year tax rate to be in the 23% to 24% range. The increased effective tax rate compared to the prior year is primarily due to the impact of Pillar 2 global minimum tax. However, we expect our cash tax rate to be significantly below our adjusted effective tax rate. Moving to Slide 8, we achieved strong adjusted margin and EPS expansion along with record first quarter free cash flow, despite sales being effectively flat year-over-year. Sales of $3.84 billion were negatively impacted by increased currency exchange challenges in the quarter, costing us roughly $50 million against our expectations. Due to the strengthening of the U.S. dollar, we now expect year-over-year currency exchange headwinds to exceed $300 million for fiscal '25, with approximately $100 million of impact anticipated in each of the next three quarters. Adjusted operating margins were 19.4% in the first quarter, expanding by 30 basis points year-over-year. Adjusted earnings per share were $1.95, a 6% increase year-over-year, driven by margin expansion, notwithstanding $0.04 in headwinds from the higher tax rate. On cash flow, cash from operations was $878 million and free cash flow was $674 million. In this quarter, we returned roughly $500 million to shareholders through share buybacks and dividends, and we allocated $325 million for bolt-on acquisitions in the Industrial segment, including the earlier mentioned Harger acquisition. Our strong cash generation and healthy balance sheet provide us more flexibility with capital use. We will maintain a robust return of capital to shareholders, but as mentioned last quarter, we are also looking to pursue more bolt-on acquisition opportunities at attractive valuations. Before I open the floor to questions, let me emphasize that we expect to build on our past performance to deliver strong financial results in 2025. While we can't control market dynamics, we are well positioned to leverage the secular growth trends in the markets we serve, while continuing to deliver solid operational performance to expand margins and generate strong cash flow this year. So, with that, let's open it up for questions, Sujal.

Sujal Shah, Vice President of Investor Relations

Okay. Christa, can you please give the instructions for the Q&A session?

Operator, Operator

Your first question comes from the line of Mark Delaney. Your line is open.

Mark Delaney, Analyst

Yes, good morning. Thanks very much for taking the question. I was hoping to better understand order trends and if you could speak a bit more around orders by end market and the linearity of orders you saw this last quarter and perhaps how that's informing your 2Q guidance? And just while you're talking on orders by end market and recognizing the full year AI outlook is now for over $600 million and that's strengthened, but just here in the shorter term, as you look at the order patterns, have you seen any volatility either positively or negatively as the industry is starting to transition to Blackwell? Thank you.

Terrence Curtin, CEO

Thank you, Mark, for your question. As I mentioned earlier, our orders exceeded our expectations, and while we faced an FX impact, the stronger incoming orders give us confidence in the sequential improvement we're anticipating. There's ongoing momentum across our Industrial businesses, particularly in AI, which I'll elaborate on. Regionally, we are seeing solid order strength in Asia, with accelerating growth there. However, Europe continues to show weakness, especially in the automotive and industrial sectors, including heavy trucks. In the U.S. and the Americas, the situation is more balanced. Regarding the Industrial segments, it's important to note that all our businesses had a book-to-bill ratio above 1. AI orders showed good growth this quarter, but excluding AI, orders in the Industrial segment still increased by 10% year-over-year and 7% sequentially. In aerospace, we're seeing continued growth, particularly in the recovering commercial air sector, while defense remains robust. The space applications, although smaller, are the fastest-growing segment for us. In energy, we've been investing significantly, and the order momentum for utility applications is strong due to rising CapEx in that sector. Even though the automation and control market has seen orders moving sideways, we are starting to see some stabilization there, which could lead to improvements later this year, despite ongoing weaknesses in Europe. In Transportation, while we expect overall auto production to decline this year, orders are aligning with that trend, and we still anticipate growth at the lower end of our 4% to 6% target for that market, with particular weakness in the heavy truck sector. I hope this provides the clarity you were looking for, and thank you for your question, Mark.

Sujal Shah, Vice President of Investor Relations

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

Operator, Operator

Your next question comes from the line of Scott Davis with Melius Research. Please go ahead. Your line is open.

Scott Davis, Analyst

Hey, good morning, guys.

Terrence Curtin, CEO

Hey, good morning, Scott.

Scott Davis, Analyst

Thank you for the insight on the orders; that's really helpful. I wanted to discuss margins, as operating leverage was one of your four key priorities. It seems like you've done a great job managing and even improving margins in a low-growth environment. How do you view incremental leverage in TS, especially when we see a recovery? Will costs rise in proportion to that recovery, or do you anticipate significant incremental improvements, even if the volume recovery doesn’t happen until 2026 or later?

Heath Mitts, CFO

Scott, this is Heath. I appreciate your question. We have made significant progress with our TS margins. A few years ago, we were targeting a margin of 20%, and we are comfortable that we have reached that level. Q1 was particularly strong, which is typical given our seasonality; our factories in China perform very well in the first quarter, as we saw last year. We are confident that we will maintain or exceed our 20% target as we move through the year. We feel positive about the automotive segment. Additionally, as we look to this year and prepare for next year, other aspects of TS, specifically in the commercial transportation sector, which is a profitable part of our portfolio, have faced challenges due to low production in heavy trucks, construction, mining, and agricultural equipment. As those markets rebound, we expect to gain leverage from that. We are making progress on this front, and we anticipate more leverage as we approach 2026. From a cost standpoint, our Transportation segment, especially in automotive and Europe, has seen focus on reducing fixed costs over the past few years. This has helped us manage through periods of low or even negative growth, especially in Western Europe, where we were overly reliant in the past. This effort continues, but we can already see results; while our automotive growth has decreased by 3% year-over-year, the overall Transportation margins remain strong. We are pleased with this outcome. I hope that answers your question, Scott.

Sujal Shah, Vice President of Investor Relations

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

Operator, Operator

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

Amit Daryanani, Analyst

Thanks a lot. Good morning, everyone. Terrence, you folks talked about AI revenues exceeding the $600 million target for the year that you had actually given last quarter. I was just wondering if you could talk about what is driving the strength here. Is it better demand from hyperscalers or silicon companies? And is this more broad-based? Are you seeing more share gains that's helping you? Just anything that can provide some clarity in the levers of the upside you're seeing on that $600 million target would be helpful. And then, Heath, maybe just related to this, as AI ramps, how should we think about the margin profile of AI versus the broader Industrial segment average? Thank you.

Terrence Curtin, CEO

Yeah, sure. Thanks, Amit. Appreciate the question. First off being when you look at it, our AI revenue in the quarter doubled already in the quarter. And we did $300 million last year. We told you we're going to be above $600 million. And what is nice, it is a broad group of the hyperscalers. When we think about where we positioned ourselves and it is about how you play in that ecosystem with the other semiconductor players that are in there and the hyperscalers, it isn't just one program, it is pretty broad and it's consistent with what we told you. Now, what is nice the orders keep on layering in. The momentum that we've talked to you about as we started talking about this a year and a half ago continues. Our teams are very focused on the ramp. The ramping of these programs that we have across the customer pace is really a key focus. And I think in many ways upside to the number we talked about will really be driven by how do we execute on the ramps, which is what we like. The other thing, you sort of talk about share, our share has not changed. It sort of stays in that 30%, 35% range and that's at the level of the programs that we're winning. But it also shows how big the opportunity is when you think about the benefit that our industry has from bringing the connectivity to this technology and the major connector companies are going to have the share because of the complex technology requirements that we have. On the margin, it's similar to our cloud margin products that we talked about a few years ago. We are in ramp, so these are early ramps. But margin you're going to see the volume benefit as we move forward and you see it in the IS margin as well as we continue to move it up, feel that we can continue to scale it, and it's going to continue to drive momentum not just this year but into next year.

Sujal Shah, Vice President of Investor Relations

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

Operator, Operator

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

Wamsi Mohan, Analyst

Yes, thank you so much. I was wondering, Terrence, if you could talk a little bit about some of the levers that you can use if tariffs do get implemented? I think you noted some of the advantages you have around your manufacturing strategy and localization in your prepared remarks. And secondarily, your cash flow has been very strong. We're entering kind of what is at least broadly perceived to be a market that's more favorable for M&A. Would be curious to get your thoughts around, I heard you say bolt-on, but how open is TE to doing larger deals as well? Thank you so much.

Terrence Curtin, CEO

Sure. I'll start with the first part and then hand it over to Heath for the cash flow discussion. First, let's establish a baseline regarding our footprint, which we've discussed previously in terms of how we've repositioned. Heath mentioned some initiatives we've undertaken in Transportation. Our focus has been significantly on localization within regions. Our business model is not centered on manufacturing in a single area and shipping products elsewhere; instead, our operations are closely aligned with our customers' supply chains. We strive to ensure that 80% of what we produce is done within the region, prioritizing our customers' needs. As we engage with them, we believe we're in a strong position, though each customer's supply chain has unique aspects. We continue to communicate with them about adapting to any potential tariff impacts, leveraging our existing resources effectively. It's worth noting that we've already navigated tariff challenges back in 2017, managing about $300 million in tariff costs. Our experience then involved working with customers on logistical solutions, tooling transitions, and in situations where alternatives weren't viable, we passed on those costs through pricing adjustments. This established approach is one we are prepared to implement again, regardless of what new challenges may arise. Maintaining close relationships with our customers enabled us to recover costs previously, and we are ready to do the same this time around. Now, Heath, would you like to address the cash flow and M&A topics?

Heath Mitts, CFO

Our cash flow has reached record levels over the past few years, providing us with significant options. We've returned a considerable amount to our shareholders through dividends and share buybacks, but we remain active in mergers and acquisitions. When we mention "bolt-on" acquisitions, we mean targets that are related to our existing areas of expertise rather than entering entirely new markets. It's important to note that bolt-ons can vary in size, from small to mid-sized companies to larger opportunities. Currently, we have seen an increase in our acquisition pipeline, and we have allocated additional resources to pursue these opportunities in specific areas where we see fragmentation. The M&A landscape has become more active in the past six months, with more discussions and deals emerging than we experienced previously. We believe there are promising opportunities on the horizon, and you can expect us to continue being active in this space as we move forward.

Sujal Shah, Vice President of Investor Relations

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

Operator, Operator

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

Steven Fox, Analyst

Hi, good morning. Terrence, I was wondering if you could just maybe talk a little bit more about the industrial markets, not away from the cloud business, but traditional automation and controls. You've mentioned it sideways stabilization. Is that much different from what you've seen 90 days ago? How encouraged are you that some of these trends can improve as you go through the year in any particular region? Thank you.

Terrence Curtin, CEO

Yeah. Thanks, Steve, for the question. The stabilization, I would say, is good that we're seeing. I would tell you last time we were together, I would say we're probably a little bit more in the mode of hoping for stabilization, but we were still seeing not as many strong spots in the orders as we would like and also in discussions with our customers. When we sit here, we truly have stabilization in our orders. I also would tell you as we look through a lot of this market goes to our distribution partners, it does look like the inventory elements are more behind us than in front of us and we've all been trying to get our arms around that. And the other thing is what are those inflection points that are upward that we're seeing. I would tell you when you look at our customers in Japan and in China, the larger automation where we serve them directly, I would tell you for the past couple of quarters, you're seeing upward order momentum. So, that is a positive in Asia. I would say, the U.S. customers we have here are probably more sideways, but that's a positive versus where it's been. And our European customers are continuing to show weakness. So, overall it's stable. I think it's not surprising when you think about the geographic mix what we're seeing in different economies and investment levels, but stabilization is a first step. And certainly, when we think about what is needed when you think about productivity, if people do things that are needed around tariffs, about reshoring, these are all areas that we think are positive drivers where we play which is mainly in the discrete. And let's face it, we've been a company that's been investing CapEx and investing ahead and we think other companies are going to have to do it. So, net-net, I think it's more positive than it was, but certainly, it's not a full upward tilt in every region on the order book by any means, it's more sideways globally with unevenness like I talked in the early part. So, Steve, I hope that adds color, but I think that's an area that we can build off of as we move through this year.

Sujal Shah, Vice President of Investor Relations

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

Operator, Operator

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

Kosta Tasoulis, Analyst

Hey, guys. This is Kosta Tasoulis filling in for Colin. I just wanted to double-click on your LVP assumption down negative 1% to 1.5% growth over market, low end of the 4% to 6% range. Can you just double-click on North America, Europe and China?

Terrence Curtin, CEO

Sure. Thank you for the question. And first off, being as we said on the call, we do expect auto production this year to be down 1 point or 2 points. It was down 3% in the first quarter. And the first quarter, we saw very strong production growth in Asia. We saw Europe was down 10% in auto production. And we saw North America being down a little bit in auto production. So, you see the unevenness in the production. When we think about the 4% to 6% range, we have said we're going to be at the low end of that range. I do want to remind everybody when it comes to Europe, Europe is our highest content per vehicle we have. So, we still believe we can be at the low end of that range. The 4% to 6% growth over market really driven out of Asia. And the other thing is I know the discussion around electric vehicles in the West is one where there's lots of questions, but on the planet, there's going to be about 4 million more electrified vehicles made and 80% of those are going to be in Asia where we have a very strong position. So, we still will benefit from that content increase in Asia as the Western OEMs do their transitions. The other thing I would say, electronification, which we've always talked about and that includes what happens around 48-volt introduction into a vehicle, all the safety features, autonomy features, zonal compute designs that get put in and certainly how software defined architectures occur. All of that creates need for connectivity and certainly we're seeing an acceleration on that. That also gives us confidence to be at the low end of that range. And I mentioned the design win that we had just recently with the large China OEM that sort of shows the level of that content increase. So, this year we do expect the production environment to be weak in Europe. We do expect the EV environment to be weak in Europe. North America slightly down. The growth of vehicle production and then the electrified trends will driven out of Asia where we have a great position.

Sujal Shah, Vice President of Investor Relations

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

Operator, Operator

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

William Stein, Analyst

Great. Thanks for taking my question.

Terrence Curtin, CEO

Hey, Will.

William Stein, Analyst

Hey, thanks. I'd like you to maybe comment a little bit on the opportunity around cross licensing technology in this area. I don't think that's new to the connector industry. So, maybe you can confirm that or put it in context and maybe also help us understand the effect on revenue and margins when there's cross licensing of IP going on in that space? Thanks so much.

Terrence Curtin, CEO

Yeah, sure, Will. A couple of things, when we do have cross-licensing, and you have seen it over time in the telecom and datacom space, so you're right, this is not new, and it's an area that as you have ramps, our customers ask for, hey, I want to make sure I have security of supply, and we have cross-license with competitors over time to really make sure we help the customers with these ramps. So, when you sit there, you have a sharing of share obviously. It is a collaborative, but it's also, let's face it, we have to cross-license each other's technology to really make sure we help the customer get to the solution. And so, I actually view it as something that's about an exciting growth trend, and let's face it, as we cross-license to each other we have to make sure we have partners that can meet the ramps of the volumes that are coming and it's really something that's been very traditional in the interconnect space and the datacom space for a long time.

Sujal Shah, Vice President of Investor Relations

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

Operator, Operator

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

Asiya Merchant, Analyst

Great. Thank you for the question. We got some questions recently about the co-packaged opportunity that some of the semiconductor players are participating in. How do you guys think about this AI opportunity? I think you've outlined it as $1 billion, perhaps, in a few years. Clearly, that's accelerating or seems to be accelerating here just given what you guys are forecasting for fiscal '25. But longer-term, how do you think about co-packaged optics and how TE plays in that space? Thank you.

Terrence Curtin, CEO

First off being while we do play in optics, we don't play in co-packaged optics. That is a capability we do not bring. But even when you get into that, you have connectivity you're going to need that will still be on copper, and let's face it, that is our strength. And when you look at the architectures, you do have customers, how they're going to experience, what happens close to the chip, what happens further away, and over time, it will be a hybrid approach. So, when we think about what we've gone out with the guide that includes that you will have evolution of the architecture and when you get into things like that it just means you're going to have harder problems you have to solve, which typically means that's where engineers do their best work and we get excited as the architecture gets evolved.

Sujal Shah, Vice President of Investor Relations

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

Operator, Operator

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

Luke Junk, Analyst

Good morning. Thank you for the question. Terrence, could you elaborate on your comment regarding the opportunities for TE related to data in vehicles, especially in light of software-defined architectures? You mentioned a significant award in China, but could you give us a broader view of the pipeline, particularly in Asia where this trend seems to be advancing faster than in the West? Additionally, could you provide some clarity on the content terms and highlight the focus on electrification as a potential underappreciated driver? Thank you.

Terrence Curtin, CEO

Luke, no, a couple of things. When we've always talked to everybody about content, we've always sort of said as the electrified powertrain moves that plays a big chunk of the content, but there's this other bucket that's electronification that is just as important. And as you said when you think about software-defined, our Asian customers are clearly leading the way here and we continue to see that momentum. And it's an area that we've always been excited about. You're really looking here how do you get data connectivity, Ethernet in a car that really allows all the software definitions as mechanical buttons move and so forth get eliminated, you need to have that software-defined architecture that allows that configuration to occur. And let's face it, there needs to be connections that go into all the modules to make sure this comes to life. And what's been nice is our product set here has continued to grow, it's up to about $600 million this year, which doesn't even include the win, and you can get a feel of what that does already on a content per vehicle. And we only expect that that's going to accelerate. And even when you think about that $1 billion of wins we've got recently from one customer, those wins are accelerating, and it's adding another content lever that supports our 4% to 6%, and it's one of the things that we get excited about and we'll continue to share thoughts about how those wins continue to impact us as that acceleration continues to occur.

Sujal Shah, Vice President of Investor Relations

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

Operator, Operator

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

Joe Giordano, Analyst

Hey, guys. I think we've talked a lot on the major subjects. So maybe, if I can just ask quickly on industrial equipment. I know you've mentioned orders suggest stabilization. Are you seeing any evidence of, like, that orders need to kind of ramp from here, or we kind of just had a level that seems consistent with end demand? And then, similarly on medical, the pretty substantial kind of decline there in the quarter and much different than the last couple that we've been seeing here. So, is that the beginning of something that you're seeing there, or is that kind of a one-time correction and we're kind of back to a normal rate? How do you kind of view that market?

Terrence Curtin, CEO

Sure, Joe. Two very different questions. Joe, on industrial equipment, I think what we're seeing is stabilization and we would like to see other regions strengthening more to call it broader on that inflection point like I talked earlier, but I think from a modeling perspective right now, we'll get a little bit of sequential improvement, and then hopefully that accelerates, but I would say have a view of stabilization right now. On the medical, I would say, that's a one-time event. We did expect this. We had some customers that over-inventoried, and across the medical device, we did see them take it down. And then, we think that as we move forward, you're going to see sequential improvement off the first quarter. You shouldn't assume it stays there and we've seen orders already improve book to bill well above 1, but it really was a pocket here in the supply chain that will build sequentially back up as we move through the year. So, thanks for the question, Joe.

Sujal Shah, Vice President of Investor Relations

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

Operator, Operator

Your next question comes from the line of Saree Boroditsky with Jefferies. Your line is open.

Saree Boroditsky, Analyst

Hi, good morning. So, maybe just building on some of the margin commentary that you've made, you spoke about some of the restructuring charges related to footprint consolidation this year. Maybe talk a little bit about the benefit of that restructuring for margins for 2025 and maybe 2026? Thank you so much.

Heath Mitts, CFO

Saree, it's Heath. I'll take that. Well, our footprint journey has been going on for several years now, and a lot of it is the continuation of moving legacy Western or more expensive production areas to lower cost regions. And that has continued, that will continue. You see it currently in our certainly as we can leverage modest to negative growth in our Transportation segment yet ability to expand margins. So, that is a global comment, but certainly most of our restructuring there has been a little bit more focused in Europe as we've moved away from Western Europe and into Eastern Europe and in Morocco. For the Industrial segment though, the Industrial segment is obviously a little bit more fragmented with five different business units within that segment that we report on here. We will see more growth there this year. And to Terrence's point, some of that's obviously driven by the AI activity within our DDN business, but it's also more broad-based across other areas like energy and aerospace and defense, and then modest recoveries in things like our ECL business, which is the old industrial equipment and appliances. So, we are expecting not just top-line support there, but pretty significant margin improvement as we work our way through the year. And we feel good about that. We know we're below where we need to be from an entitlement perspective there at that segment level. Certainly, getting some help from the factory automation side of industrial equipment, which is a nice margin business, will help in that journey, but in the meantime, there's some things that we've done on the cost side and otherwise to mitigate some of this as we start to pull ahead margin wise within that segment. I think when you sit back and we're sitting back at the end of the year, you'll see more margin expansion there than you will anywhere else in the company.

Sujal Shah, Vice President of Investor Relations

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

Operator, Operator

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

Samik Chatterjee, Analyst

Hi. Thanks for taking my question. Just a quick one here. I know multiple times in your prepared remarks you mentioned that you expect commercial vehicle to improve during the year and that to drive transportation margins to be better. Can you just sort of highlight what is driving that confidence? What are you seeing in data points to inform that view? I mean, just would help to understand sort of the indications that you're getting there. Thank you.

Heath Mitts, CFO

The ICT business has been a solid margin generator for quite some time and is influenced by heavy truck production cycles. We are well positioned globally, although we occasionally feel the effects of regional cycles. My earlier comments addressed the top-line impact from this segment, but we have managed to maintain our margins. As we anticipate growth in the commercial transportation business unit, likely towards the end of this fiscal year and aligning with customer needs for 2026, we expect to see strong margin support from that segment. While we're not predicting an immediate recovery in the next quarter or two, discussions indicate a more positive long-term outlook, especially with the upcoming changes in emissions standards for heavy trucks.

Terrence Curtin, CEO

Yes, there will be an emissions change in 2027, and typically there is a pull-forward of demand before that. As we look further out in the year and into 2026, we would expect that during that cycle there will likely be some benefits, consistent with Heath's point.

Sujal Shah, Vice President of Investor Relations

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

Operator, Operator

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

Joe Spak, Analyst

Thanks so much. I have two quick questions regarding margins. First, in the automotive sector, we know that during the December quarter, companies usually receive some engineering recoveries from customers. Did this happen at all, and did it benefit the Transportation margins? If so, by how much? From the previous reporting segment, it seems that Digital Data Networks operates with above-average segment margins. You mentioned that you're investing ahead, indicating the necessity to invest. I'm curious if, as you continue to see strong growth in AI, we might experience some variability in margins from that growth based on the investment pace and the timing of when business comes online?

Terrence Curtin, CEO

We have been investing for these ramps. Regarding the second part of your question, Joe, could you please repeat the first part? I didn't catch it clearly. As for DDN, you can see its position in the cloud cycle. We have been proactively investing to ensure we can handle the growth we are experiencing. Doubling our business necessitates significant execution and investment, which we’ve been addressing. The program may experience fluctuations, which is already evident in our orders, and this will affect our margin in this segment. Could you please repeat the Transportation question? I missed that part about December.

Joe Spak, Analyst

Yes, sorry. In auto, typically we see in the December quarter sometimes companies get some engineering recoveries from their customers. I was just wondering whether that occurred or helped the margins at all in the quarter?

Terrence Curtin, CEO

No, we do not have that. When you look at the first quarter margin, Heath said it well earlier, it is the highest production period of the year, mainly out of Asia. Our plants really crank at that time and that we get the volume benefit from it. And if you look back in many years, our first quarter margin is a little bit hotter than other times of the year and it's really due to Asia, has nothing to do with engineering reimbursement, Joe.

Sujal Shah, Vice President of Investor Relations

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

Operator, Operator

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

Christopher Glynn, Analyst

Good morning. I think we're having some trouble with Chris' line. So, Chris, we will circle back with you later. But if there's no further questions, I want to thank everybody for joining us this morning. And if you do have more questions, please contact Investor Relations at TE. Thanks, everyone, and have a nice day.

Operator, Operator

This concludes today's conference call. Thank you for your participation, and you may now disconnect.