TE Connectivity Pricing Spineometer: 5 of 5 Vertebrae

TE Connectivity, a global electrical and electronics components company, had a relatively flat Q3 2023. Revenue fell slightly by 2.4% to $4.0 billion and earnings before interest and taxes fell 12.4% to $630 million over the same period last year.

A review of TE Connectivity July 26^th earnings call and financial report clarifies the drivers to this performance and the importance of pricing capability.

Executives at TE Connectivity have a lot on their plates.

TE Connectivity engages in a wide variety of industrial segments each going through their own secular trends.  (1) In automotive, there has been a growing secular growth in the number and value of electrical components per vehicle related recently to the explosion of electric vehicles and the interest in sensors for self-driving cars.  (2) In energy the secular trend towards renewables with solar and wind has been driving new source of demand.  (3) In computing, the cloud revolution has driven demand for electrical components to connect high-end CPUs and GPUs.  And (4) TE Connectivity also works in sectors such as aerospace, medical, communications, and appliances.  Some sectors were down (communications and industrial equipment) while others were up (energy, medical, transportation).

The net sum of the many individual segment growths and declines yielded relatively flat revenues.  A slight increase in overhead somewhat driven by the booking of restructuring costs led to a decline in operating profits.

Many other business issues challenge TE Connectivity as is common with global businesses headquartered in Europe.  (1) TE Connectivity is highly exposed to China demand fluctuations due to their engagement with electric vehicles.  Terrence R. Curtin, CEO of TE Connectivity stated, “If you want to really participate in EV adoption globally, you have to participate in China … 70% of global truly battery-electric vehicles that are adopted on the planet produced this past year are basically in China.  (2) Distribution partners in some segments wound down inventory as they returned to “normal” pre-Covid stocking levels.  (3) Currency fluctuations impaired revenue slightly.  And (4) then there are the numerous issues surrounding greenhouse gas emissions and corporate responsibility.

When it comes to value capture and price, executives at TE Connectivity are engaged.  Heath Mitts, CFO of TE Connectivity stated, “[We] have implemented our price increases that we discussed in prior calls.  Our pricing is now fully offsetting the impact of higher input costs.”   And later added “[the] catching up on inflation with some of the price increases that we’ve done over the past couple of quarters has certainly benefited us.”

These comments and business issues point to the value of a robust pricing capability.  Industry benchmarks indicate TE Connectivity should have between 33 and 165 professionals engaged in pricing globally. We would expect them to come in at the top of these benchmarks due to the business complexity:  (1) numerous business segments, (2) global geographic footprint, (3) direct and indirect channel sales, (4) both long-term contractual sales benefiting from the use of indices and short-term spot sales, (5) vagaries of commercial policy, (6) value of sales negotiation support, (7) usefulness of Deal Quality Scores in mix management and sales incentives, (8) large number of new offering developments and price setting, and (9) the sheer value of assigning segment volume fluctuations to endogenous decisions such as price and product from exogenous factors such as macroeconomic and industrial trends.

Research uncovered a capability at the upper end of this spectrum.  At least 80 professionals at TE Connectivity were engaged in customer facing pricing (this does not include those engaged in transfer pricing or supply chain costs).  Titles ranged from analyst, specialist, and manager to director.  A Vice President of pricing was not identified.  Responsibilities ranged from product, commercial, operations, customer agreements, analytics, strategic relationships, and global functions.  Geographic assignments we found from the U.S. and Switzerland to China, Singapore, Netherland, India, Belgium, Germany, and elsewhere.

(Full disclosure: many of the TE Connectivity professionals have been students of mine through my role as the Academic Advisor to the Certified Pricing Professional accreditation of the Professional Pricing Society.)

Given the importance and capability of pricing at TE Connectivity as indicated in financial reports, management statements, and our pricing team research, and given their performance, we have come to the following conclusion as of August ‘23.

TE Connectivity Pricing Spineometer: 5 out of 5 Vertebrae.

TEL (TE Connectivity Ltd.) remained roughly flat at 141 the day prior to their earnings call to one week later. FY 2022 revenue of $16 billion with a 17% operating margin and P/E ratio near 22.

For FY 2022, a 1% improvement in price would yield a 5.9% improvement in EBIT holding all else constant at TE Connectivity.

P.S. If TE Connectivity would commit professionals to a Pricing and Profit Management Luncheon in Pennsylvania in February, I will host it.