Operator:

Everyone, thank you for standing by and welcome to the TE Connectivity Third Quarter Results Call for Fiscal Year 2024. At this time, all lines are in a listen-only mode. Later, we will conduct a question-and-answer session. [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.

Terrence Curtin :

Thank you, Sujal. And I also appreciate everybody joining us today for the call. As I'd like to do before we get into the slides and the details, I do want to take a moment to provide some performance highlights, along with what we're seeing versus our call just 90 days ago. As we've shared in our calls throughout this year, we continued to be in a dynamic global economic environment. I just want to take a few minutes of explaining what that means when you think about where TE is positioned. First off, in our largest market Automotive, we're seeing stability on a global basis. In our Industrial Solutions segment, we continue to see growth in three out of our core businesses, and those businesses are focused on aerospace and defense, energy, as well as medical applications. In our Communications segment, like we talked last quarter, we have returned to growth, and we are benefiting from acceleration in Artificial Intelligence applications. Now, against these growth areas, we are still being offset by ongoing weakness in just the general industrial markets, and we'll highlight where they are throughout the call and the Q&A. Within this backdrop, our sales in the third quarter were in line with our guidance and roughly flat year-over-year. I am pleased that we delivered strong adjusted margin expansion of 200 basis points year-over-year and adjusted EPS that exceeded our guidance. As we look at our performance year-to-date, our teams have delivered record adjusted operating margins and earnings per share, even in a dynamic market environment, which demonstrates our strong operational performance. Our results continue to reflect successful execution against the key initiatives we committed to coming into this fiscal year. We anticipated a slow demand environment overall in our markets, so our focus has been on driving margin and earnings improvement this year. Our teams have driven strong margin expansion year-over-year, and this is most evident in our Transportation and Communications segments. The high quality of our earnings continues to be reflected also in our strong cash generation model, and I'm pleased with the record free cash flow of $2 billion through the first three quarters of this year, and we do expect this to continue into our fourth quarter. Now, let me briefly share what we're seeing in our markets since our call 90 days ago, and what we're seeing in our order patterns, and I'll get into order patterns in more detail a little bit later. First off, in Transportation, our outlook for global auto production is consistent with our view 90 days ago. We continue to see growth in China, and that's offsetting incremental weakness in Europe. In our Industrial Solutions segment, our view remains unchanged. We continue to see three out of our core businesses with growth momentum and continued weakness in industrial equipment end markets. As I said earlier in our Communications segment, our markets are back to growth, and that's in both businesses. Finally, before we get into the slides, I do want to reiterate that our long-term value creation model remains unchanged, and it's centered around three pillars. First off, is our portfolio is strategically positioned around secular growth trends, including adoption of renewable energy, applications for artificial intelligence, and growth in the global hybrid and electric vehicle production, along with further electronification of the vehicle. The second pillar of value creation is that we have operational levers to drive strong margin performance through economic cycles, and you're seeing the results in this quarter, and we have more opportunity as we go forward. Thirdly, we have established a strong cash generation model to return capital to shareholders while investing on bolt-on M&A opportunities as the opportunities present themselves. By executing on these pillars, we expect to deliver double-digit earnings growth this fiscal year, driven by a couple hundred basis points of adjusted operating margin expansion. As we look beyond this year, we are set up for strong performance. We expect to continue to benefit from the secular growth drivers, as well as also expect continued growth in areas like commercial airspace, along with normalization of destocking and industrial equipment. This sets us up for an improved growth trajectory, leading to further operating earnings growth going forward. Now, with that as an overview, I'd like to get into the slides, and if you could look at Slid 3, I'll discuss some of the additional highlights for the third quarter and our outlook for the fourth quarter. Then Heath will get into more detail as he gets into his section. Our third quarter sales were $4 billion, which was in line with our guidance and up 2% organically year-over-year. Orders of $4.1 billion were up year-over-year, and sequentially driven by momentum in artificial intelligence design wins. Adjusted earnings per share was ahead of our guidance at $1.91, and this was up 8% versus the prior year. Adjusted operating margins were 19.3%, up 200 basis points year-over-year, driven by the strong operational performance of our teams. We are expecting fourth quarter sales of approximately $4 billion, including approximately $60 million of year-over-year currency exchange headwinds. On the margin front, quarter four will be another quarter of strong year-over-year expansion, and we expect adjusted earnings per share to be approximately $1.94, which will be up 9% year-over-year, and which includes a $0.10 headwind from both currency exchange rates and a higher tax rate. I talked to you earlier about the performance we've been driving in this market environment, and when you think about what's implied for the full year given our fourth quarter guidance, you really get to see the strong performance. With adjusted earnings per share expected to be up 12% year-over-year, with sales that are essentially flat. So, with that as a brief overview, let me get into some more details on order trends, and they are on Slide 4 of the presentation we posted. Our orders were up 4% year-over-year, and 3% sequentially to over $4.1 billion, and we had a book-to-bill of 1.04. As I talk about orders by segment, I will be talking about orders sequentially, as we believe this reflects business trends better. At the company level, order growth was driven by the Communications segment, which grew over 50% sequentially. Growth was driven primarily by orders for AI applications with multiple customers, and reflects that destocking in both data and devices, and appliance are behind us. In Transportation, you see a slight sequential order decline, but this was really driven by weakness in commercial transportation and our sensors end markets that are tied really to the general industrial market. Our orders in auto were relatively flat sequentially. In Industrial, order patterns continue to reflect ongoing destocking in industrial equipment end-markets. Now, let me get into year-over-year segment results, and I'll start with our Transportation segment on Slide 5. Our auto business grew 4% organically against our global auto production decline of 1%. Our content growth over production was 5 points in the third quarter, with strong double-digit organic sales growth in China, more than offsetting declines in Europe and North America. While we continue to see different production dynamics by region, as well as some shifts in production of different powertrains, we continue to expect content growth in our second half and longer term to be in the 4 point to 6 point. Our growth of our market will continue to be driven both by increased electric vehicle and hybrid production and greater electronification of the vehicle. Turning to our Commercial Transportation business, the 8% organic decline that you see was driven primarily by weakness in Europe. We expect this business to be again down sequentially in the fourth quarter and expect the markets we serve to be down in the mid to high single digits this fiscal year, due to market declines that are happening in the West. In our Sensors business, the sales decline continued to be driven by market weakness and industrial applications, as well as portfolio optimization efforts that we've discussed with you, where we're continuing to organically exit lower margin and lower growth products. For the Transportation segment overall, adjusted operating margins were up to over 200 basis points to 21%, driven by continued strong execution on operational levers. We also continue to invest to support next generation vehicles, whether they're around electrification of the powertrain, high speed Ethernet for data applications in the vehicle, or miniaturized power and signal products to leverage next generation architectural shifts by our global customers. Now, let's get into the Industrial Solutions segment, and that's on Slide 6. In this segment, we continue to see the same trends we've been discussing all year. Sales were down slightly 2% organically. Our aerospace, defense and marine business sales were up 19% organically, driven by growth both in commercial airspace as well as defense markets. In medical, sales in the quarter were up 7% organically, driven by ongoing increases in interventional procedures, and in energy sales were up 3% organically, driven by strength in the Americas and Europe, with continued strong momentum in renewable applications. As you can see on the slide, the pocket of weakness for the segment is in the Industrial Equipment business, where our sales are down 24% organically. While we are starting to see some signs of order patterns flattening, we still expect to see year-over-year declines in this business in the fourth quarter, as our OEM customers and channel partners continue to reduce inventory levels. Industrial segment adjusted operating margins were 15.1%, which was in line with our expectations given current volume levels and business mix. We continue to expect the segment margins to run into mid-teens until the Industrial Equipment business returns to growth. Now, if you could turn to Slide 7 and I'll get into the discussion around the Communications segment. First of all, and you can see it on the slide, I am excited about the return to year-over-year growth and our strong margin performance. In data and devices, we grew 32% organically, and our design wins are reflecting accelerating momentum. I discussed our order momentum earlier, and based upon these wins, we are increasing our near-term expectations of AI revenue to over $250 million this year, and we expect this to more than double as we get into 2025. In our Appliances business, we grew 12% organically, driven by both the Americas and China. From an operating margin perspective, the segment had adjusted margins of 20%. This was up over 600 basis points over the last year, driven by the higher volumes coupled with stronger operational performance. So, with this as a quick summary of our segment performance, let me turn it over to Heath, who's going to get into more details on the financials and our expectations going forward.

Sujal Shah:

Thanks, Heath. Brianna, could you please give the instructions for the Q&A session?

Amit Daryanani :

Good morning. Thanks for taking my question. I guess, Terrence, really impressive momentum on the IS side, especially with AI centric business. This is clearly a big topic for investors that are focused on. So, I was wondering if you could just talk about what is driving the expectation for higher growth, both for this year and next year, versus what you had talked about 90 days ago. And perhaps if you could also just touch on what does your customer mix look like on the AI side and where is the momentum coming from?

Sujal Shah :

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

Wamsi Mohan :

Yes, thank you so much. Clearly this was very outstanding margin performance in the quarter. I’m just wondering, maybe if you could talk about the margin outlook, both in terms of what you are expecting for the segment and how incremental margin should trend in communications in light of this AI momentum. Maybe you could just wrap the rising commodity pricing environment in that. I know you guys hedge, but if you could share some color of how we can think about the impact from that as we look over the next three to four quarters. Thank you so much.

Sujal Shah :

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

Joe Spak :

Good morning. Thanks for taking the question.

Joe Spak :

I was wondering, back to AI, we've been hearing a little bit more about some cross licensing deals between interconnect players for AI. I'm just wondering what you can tell us there. How common is that in other areas of the business? Mechanically, like how would this actually work if it does occur? If you manufacture some of your license, is that a lower margin profile business or is it relatively even?

Sujal Shah :

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

Joe Giordano :

Hey, good morning guys.

Joe Giordano :

Apologies if you went through some of this. I had to join a couple minutes late from another call. But Terrence I'm just curious to hear like your updated thoughts, like maybe over the kind of very near term and maybe over like the next 12 to 18 months around hybrid versus EVs. GM's talking about not building a plant, but they were talking about building. So where do you think that fits and what do you do from a CE standpoint to like adapt and adjust to the changing end market?

Terrence Curtin:

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

Mark Delaney :

Yes. Good morning and thanks for taking my question. Following-up on the auto end market, hoping to better understand the ability for TE to see revenue benefit in 4Q and into next year from that content growth you were just describing Terrence. I understand the theoretical content increase TE has on hybrids and BEVs, but at times, companies in the supply chain are affected by new vehicle launch delays, maybe their own key customers aren't selling as many cars, or there's inventory corrections. And so, as you think about all of those cross-currents, I'm hoping to better understand, do you think TE can actually see the 4 to 6 points of targeted outgrowth in automotive show up in its revenue when you think about your own customer exposure and that content potential? Thanks.

Sujal Shah:

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

Samik Chatterjee:

Yep. Hi. Thanks for taking my question. I guess I was going to ask this more on a company sort of aggregate revenue level. All through the year, your revenues have been in the sort of $3.8 billion to $4 billion range, even as sort of AI revenues have ramped. I mean, as we go into next year, when we put AI aside, where do you think we are in the cyclical recovery where you should see growth? What drives that confidence? Because when we look at the sort of revenue track record this year, it's been fairly sequentially flat. Outside of AI, how should we think about growth really sort of from a cyclical perspective in some of these end markets? What kind of magnitude of growth should we be thinking about? What drives that confidence? Thank you.

Sujal Shah:

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

Asiya Merchant:

Great. Thank you for taking my call, my question. On the cash flow, obviously a great quarter here. As you guys think about revenues ramping here and especially in the AI segment, maybe if you could talk to us about your CapEx commitment as you look into fiscal ’25, and I think you're talking about AI revenues more than doubling now. Thank you.

Sujal Shah:

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

Christopher Glynn:

Thanks. Good morning, everyone.

Christopher Glynn:

I wanted to ask generally about order patterns and any particular insights into markets under the quarter or under the book-to-bills. In particular, I think you have the positive book-to-bill at Industrial Solutions with still industrial equipment destocking. So it seems like the persistence at the other markets is pretty high visibility, but maybe take that question where you will.

Sujal Shah:

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

Saree Boroditsky:

Hi. Thanks for taking my question.

Saree Boroditsky:

Going back to the AI conversation you previously talked about $400 million in sales next year. I think you just increased that to $500 million. Given this increase, could you just give us an update on the $1 billion sales estimate and what's the timeframe for that? Thank you so much.

Sujal Shah:

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

Luke Junk:

Good morning. Thanks for taking the questions. Terrence, one of the things you highlighted in your remarks that I thought was interesting around auto investment specifically was miniaturized products for next-gen architectural shifts. Can you just double-click on that trend with respect to potential impacts to content? And it sounds like its more engineering-intensive and maybe margins as well. You know this is an area, of course, that's gotten a lot of attention, architecture that is, in the [inaudible] review of EV’s. So maybe we could just revisit that overall trend for TE as well. Thank you.

Sujal Shah:

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

Colin Langan:

Oh, great. Thanks for taking my question. I'm actually just going to follow-up on the zonal architecture question. I know there's been talk that if you go to zonal, there's actually less wires and connectors. I think that's when you put in these big domains. It sounds like you don't see an impact there. Is it really just the wiring that's impacted as you go to zonal, and you are actually still seeing the same or higher content connectors, or is there a little bit of a content loss as you shift from a traditional architecture to the future zonal?

Sujal Shah:

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

William Stein:

Great. Thank you for taking my question.

William Stein:

Hey. In the prepared remarks, I think it was Heath who mentioned the potential for bolt-on M&A a couple of times. We've seen one of your competitors really accelerate M&A investments recently, and in a number of years you guys haven't been very visible. I'll say there may have been tuck-ins that perhaps you didn't announce, or maybe I didn’t get them, but I wonder if you can just remind us of your strategy and tactics when it relates to just your perhaps in-market focus or technology focus, returns, metrics, hurdles, anything that you can help us understand and maybe did you mention is the opportunity for. Thank you.

Sujal Shah:

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

Shreyas Patil:

Hey, thanks so much for taking my question.

Shreyas Patil:

Hey Heath, you talked about the strengths you are seeing in transportation, particularly on the profitability side. Just trying to think about the puts and takes from here. I mean, typically incremental margins are in the low 30’s. Commercial transportation volumes should improve at some point next year, and there are additional restructuring savings in the pipeline coming in 2025 and 2026. So what are we missing as we think about the puts and takes and how margins could actually go from here? And then maybe just to put a finer point on the earlier question on the new automotive architectures, are you seeing wins today in this area? There are a few OEMs that are ahead of the curve, so just curious what you are seeing with them as well.

A - Heath Mitts:

Yeah, listen Shreyas. When I think about the margin journey that transportation has been on, a lot of it has been self-helped around restructuring. And we have moved, over the last several years, a fair amount of activity in terms of production environments out of Western markets, in terms of where production is, and into places where we can take advantage of our scale, in places like Eastern Europe, Morocco, Mexico, and in parts of Asia. So that has had a nice uplift, and it has not been cheap or painless. The team has executed well, and we appreciate our owners' patience as we've spent some of their money to do some of this restructuring. Now, you do see some of that reflected in the margins. The other piece is around price, and price is something that historically we’ve kind of been – kind of, I don't know what normal is anymore, but if you go pre-pandemic years, we would have said price is kind of minus 1%, minus 1% to 2% a year, particularly in automotive. Certainly, we've tightened that up. Price is not a tailwind, but it's not as much of a headwind, and as we think about where that will track very closely to where we see input costs and inflations there, both on the labor and on the material side. And the team, is new in last couple of years. There's a much tighter discipline there around our thinking. Now, having said all that, you have to remember, it wasn't but this time last year when people were asking the same question you are, but they were asking, when do you get from the high teams up to 20%. And we put a lot of legwork in, and the team has executed really well this year to put us to the point we are. We will continue to evaluate that. I think your 30% incremental is probably a good number. The recovery of the commercial transportation market as you mentioned, is a nice help for us. But you also have to remember that even though commercial transportation has been down from a top line, they've held their head internally on the margin front. And so there's opportunity there, and quite honestly, there's opportunity in our centers business to continue to improve margins as we've exited some lower margin net programs. So when you add all that up, yes, your math would suggest that we are going to move above 20. But give us the opportunity to work through there and contemplate everything before we start issuing new targets. So I do appreciate your questions Shreyas.

Operator:

Today's conference call will be available for replay beginning at 11:30 a.m. Eastern Time today, July 24th, on the Investor Relations portion of TE Connectivity's website. That will conclude the conference for today. Thank you for your participation. You may now disconnect.

Operator:

Everyone, thank you for standing by, and welcome to the TE Connectivity Second Quarter Results Call for Fiscal Year 2024. [Operator Instructions] As a reminder, today's call is being recorded.

Sujal Shah:

Good morning, and thank you for joining our conference call to discuss TE Connectivity's second quarter 2024 results and outlook for our third quarter. With me today are Chief Executive Officer, Terrence Curtin; and Chief Financial Officer, Heath Mitts.

Terrence Curtin:

Thanks, Sujal, and we appreciate everyone joining us today.

Operator:

[Operator Instructions] Your first question comes from the line of Mark Delaney with Goldman Sachs.

Terrence Curtin:

No, thanks, Mark, and I appreciate the question. And I know one of the things that's important when we do this is I always have to remind everybody our great global position, and we got to keep that in front of us.

Luke Junk:

Terrence, hoping you could just double-click on what order [ patterns ] are telling you right now about market health and especially destocking. I'd be most interested in what it says about the trajectory of Communications from here, especially legacy applications in addition to what you already spoke to with respect to AI as well as we look for that bottom in Industrial Equipment.

Amit Daryanani:

I guess, Terrence, I'd love to kind of get your perspective, AI is still a very big focus for everyone. You just talked about some fairly strong revenue trajectory as you go forward that you expect to see. Can you maybe spend some time talking to us about what exactly are you really providing when it comes to AI solutions? And any sense on where the opportunities right now across processor companies like NVIDIA versus cloud providers that might be running their own infrastructure? And what does the conversion to revenue look like as you go forward from here?

Wamsi Mohan:

Terrence, I appreciate all the comments here on the prior question around AI. If I could just ask a quick clarification on that. How are you thinking about your share in these high-speed, low-latency applications?

Terrence Curtin:

Yes. So when you think about share in the AI application, it would be similar to the share we had in cloud applications. So I think when you look at that, and we talked about that a lot, the momentum we had when we went through the cloud during COVID and the momentum we had across a broad set of customers, I think you can expect similar share-type thoughts on that for the AI applications and once again being broad.

Samik Chatterjee:

I'll ask on Communications, if you don't mind. You mentioned the capacity investments you're making in the Communications segment, particularly around the AI demand you're seeing. If you can sort of give us some more color about what's the typical lead time between you investing -- starting to invest in capacity now? Is that for revenue in fiscal '25? Or is that sort of beyond fiscal '25? What's the typical lead time between starting the manufacturing and getting back to a revenue point?

Terrence Curtin:

Thanks, Samik, for the question. A couple of things, I think, that's important. As we've been seeing this, we have been investing, and we've expanded operations in Mexico as well as the Philippines as well as the existing locations we've had. So from that viewpoint, there was existing. And also the sites that we have, I think, position us well for the geopolitical options that some of our customers want to have.

Joseph Giordano:

So on the AI side, as you kind of build out and invest to support the growth plans of your customers in this space, how do you weigh -- like obviously, very robust demand and on the near term with like, can we -- is this -- are these growth outlooks on a multiyear period even feasible? Like can the grid handle building all these things? Like how do you weigh what you need to invest in now because of what your customers are saying versus like your view on is this even achievable for a market over like a short, couple-of-year period?

Asiya Merchant:

Just if you could drill down a little bit on pricing. I think comments in the past have talked about maybe normalization of pricing and especially as we look at auto production moving towards, at least this year, being a little bit more weighted towards Asia versus North America and Western Europe. How do you guys think about pricing and the margin impact from pricing normalizing, say, as we go into fiscal '25?

Saree Boroditsky:

You talked a lot about maybe a line of sight to the end of Industrial Equipment destocking by year-end. Could you just talk through the underlying demand environment there? And then how do you think about the tailwind from destocking then as we get into 2025?

Operator:

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

Terrence Curtin:

Well, I do think there's an element that one of the things that we do that even starts before the product is how we work with our customers when they are trying to sit down and do value engineer of how do you get a sub application to a lower cost point. That's very important, Steve, as we move through generations in every part of TE. And that's just not on where does our product cost come in, how do you assemble a car, how do you put the car together, how does that make sure it has the quality?

Colin Langan:

Just want to ask, on the auto side, growth was 1%. I think the target is 4 -- and I think the market is fairly flat in the quarter. The long-term target is 4% to 6% outperformance. Why the underperformance versus the target in the last couple of quarters?

Operator:

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

Terrence Curtin:

Yes. So to your point, I'm going to -- I might go down here a little bit on how we look about the commercial transportation because, obviously, that market has 3 major drivers to it. Certainly, the on-road truck and bus, what's happening in agriculture equipment and also construction equipment, they're the 3 big levers. And when you think about that globally and production and our revenue, about half of our revenue is truck and bus.

Matthew Sheerin:

I had a question, Terrence, on the energy markets within your Industrial group. You've had strong growth there over the last few quarters, but it looks like it slowed in the March quarter, and you're hearing of some pockets of weakness from other parts of the supply chain. What's your outlook there, both near term and in terms of long-term position?

Shreyas Patil:

As we look out past this year and we think about some of the growth drivers in electrification, AI renewables, you've also got typical recoveries in parts of communication and eventually industrial equipment, how do we think about the sustained organic growth for TE overall? In the past, you've talked about 4% to 6% organic growth over time. I'm just curious how to think about what the reasonable framework for the company should be at this point.

Operator:

Today's final question will come from the line of William Stein with Truist Securities.

Terrence Curtin:

No, thanks, Will. So first off being I think there's an element here when you deal with high speed, the 3 of us all have a very good capability. And when you sit there, we're all different. I mean some of us have different scale than others, but I do think that is the uniqueness. When you're getting to the speed levels of where these chips are going to, GPUs are going to, TPUs are going to, you're dealing with speeds that are very unique. That is a very technical innovation that I think we all do well.

Operator:

Today's conference call will be available for replay beginning at 11:30 a.m. Eastern time today, April 24, on the Investor Relations portion of TE Connectivity's website. That will conclude the conference for today.

Operator:

Ladies and gentlemen, thank you for standing by, and welcome to the TE Connectivity First Quarter Results Call for Fiscal Year 2024. At this time, all lines are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to our host, Vice President of Investor Relations, Sujal Shah. Please go ahead.

Terrence R. Curtin:

Thank you, Sujal, and we appreciate everybody joining us today. And I do also want to wish everybody a Happy New Year. As I normally like to do before we get into the slides, I do want to take a moment to discuss our performance this quarter along with what we're seeing in our markets versus our last call 90 days ago. We continue to be in a slow global economic environment. Against this backdrop, the performance of our markets is largely consistent with our expectations and it resulted in our first quarter sales being in-line with our guidance of flat revenue growth. Our Transportation segment once again grew year-over-year driven by content growth, and this offset the declines that we saw in our Industrial and Communications segments. Our team’s execution was strong in the quarter with 20% year-over-year adjusted earnings per share growth, and this was driven entirely by adjusted operating margin expansion to 19%, and this was on flat sales. This margin performance demonstrates we're successfully executing on a number of structural margin improvement levers across our segments. Those levers drove margin expansion through the second half of last year and are resulting in the further step-up of margin performance, particularly in our Transportation segment. We expect to deliver strong margin expansion this year that will be driven by our Transportation and Communication segments based on what we're currently seeing in our markets. And just as important is the quality of our earnings and you see this in our record first quarter free cash flow of $570 million which builds on the strong cash performance from last year and that we expect will continue. During the quarter, we deployed approximately $1 billion of capital that included returning $600 million to shareholders as well as $350 million to acquire Schaffner. And Schaffner expands our product portfolio and factory automation. Our cash generation model continues to give us both confidence and opportunities to return capital to shareholders, while supporting ongoing bolt-on M&A activities. So, let me now share what we're seeing in our market since our call 90 days ago. As I mentioned already, on an overall basis, markets are playing out as we expected, and we also had orders growth of 4% year-over-year and this was across all three segments. We are seeing sales growth across the majority of our businesses, but we do have a few business units that are continuing to be impacted by inventory destocking by our customers and we'll highlight these during the call. Our view of the Transportation end markets remain unchanged from our prior view with global auto production expected to grow slightly this year. And while we're seeing some puts and takes in production by region, China production and EV adoption is stronger, and this is offsetting some weakness in Europe and in North America. In our Industrial Solutions segment, three out of our four businesses continue to have growth momentum, and we expect to continue to see sequential growth in each of these three businesses as we go forward. You see our strong positioning in renewable energy in both solar and wind applications. Commercial air sales continue to grow as production increases for both single and twin aisle platforms, and our medical business is benefiting from increases in interventional procedures. When you compare versus 90 days ago, the one market where we've seen incremental weakness is in our Industrial Equipment business. Destocking began a few quarters ago in this business and we now expect it to continue into the second half of this fiscal year. And lastly in our Communication segment, we continue to see destocking but what's really nice it's now just occurring in pockets. And we do expect to see growth in the second half of this year in our Communications segment driven by our wins in artificial intelligence programs. As we look forward, our long-term value creation model remains unchanged and is centered around three pillars. The first is our portfolio is strategically positioned around secular growth trends including growth in electric vehicles, adoption of renewable energy and applications for cloud and artificial intelligence, just to name a few. Second, we have operational levers to enable margin expansion despite a slow economic environment. The drivers encompass strong operational execution including footprint consolidation, portfolio optimization benefits and price actions that we implemented to offset higher input costs. And third, we've established a strong cash generation model to return capital to shareholders while investing in bolt-on M&A opportunities. So with that as an overview, let me get into the slides and I'd ask you to turn to slide three, and I'll discuss some of the additional highlights for the first quarter and our outlook for the second quarter and then Heath will provide more details in his section. Our first quarter sales were 3.83 billion, which was in-line with our guidance as I mentioned. In Transportation, we saw 5% organic growth driven by content expansion in our auto business. In Industrial, we saw growth in Aerospace, Defense and Marine, Medical and Energy, which was more than offset by weakness I talked about in industrial equipment. And finally, in Communications, it was down as we expected, but we are well-positioned for growth in the second half driven by AI applications. Adjusted earnings per share was ahead of our guidance at a $1.84 and this was up 20% versus the prior year. Adjusted operating margins were 19% and these were up 290 basis points year-over-year driven by strong operational performance, and the margin performance was the driver of our EPS being ahead of guidance. As we look forward to the second quarter, we're expecting our second quarter sales to increase over the first quarter to $3.95 billion with the sequential growth being driven by the Industrial segment partially offset by a slight decline in Transportation. Adjusted earnings per share is expected to be around a $1.82 and this will be up 10% year-over-year in the second quarter with approximately 200 basis points of adjusted operating margin expansion versus the prior year. So to move away from the financials for a second, and before I get into orders, I do want to highlight that we were pleased to be included in the Dow Jones Sustainability Index this quarter for the 12th consecutive year. This designation continues to demonstrate TE's dedication to sustainable business practices that do provide value to our customers and that they expect and are aligned with our commitment to our owners. So now let's talk about orders and I'd ask you to turn to slide four. At the total company level, we had orders of $3.8 billion and this was up 4% year-over-year and consistent with our expectations. And what was really nice, this is the first time since after the COVID crisis in 2001 we've seen all three segments have year-over-year order growth. We continue to see stability in our overall order levels with year-over-year growth in each of the segments, and with backlog remaining at near record levels, and this gives us confidence in our second quarter outlook. Transportation orders grew 4% year-over-year and reflects stability in overall global vehicle production. In the first quarter auto production came in a little bit over 22 million units and we saw stronger production in China that offset some of the weakness in Europe and North America. Going forward we expect global auto production to be roughly 21 million units per quarter as we move through this fiscal year. In our Industrial segment, we saw growth in orders both year-over-year as well as sequentially. The order strength is driven by our AD&M Medical and Energy businesses, and we saw the weakness in Industrial Equipment end markets and this was across all regions of the world. And in our Communication segment, our orders grew 3% year-over-year, and like I said earlier, we do see destocking by our customers now only occurring in pockets in certain applications. So with that as an orders overview, let me now get into the year-over-year segment results that we saw in the quarter and that's on slides five through seven of your slide deck, and you can see the details on those slides. So starting with Transportation, overall the segment had sales growth and it was up 5% organically year-over-year driven by our auto business. Our auto business grew 8% organically with 13% growth in Asia and 7% growth in Europe and this more than offset a decline in North America. Our performance continues to be driven by content growth from our leading global position in electric vehicles as well as electronification trends within the vehicle. Our global outlook for electric vehicle growth is unchanged, and it's important to note that over two-thirds of EV production will occur in Asia. We are very well-positioned to capitalize on this growth due to our strong content and share in local Chinese OEM platforms that is driven by our innovation. Overall, our growth will continue to be driven by content outperformance that leverages our leading global position in the auto market. In the Commercial, Transportation business, we saw 1% organic sales growth and this was driven by Asia and it was partially offset by declines here in North America. And in our Sensors business about half of the sales decline that you see on the slide was driven by the portfolio optimization efforts we've been talking to you about, where we're continually to organically exit lower margin and lower growth products. The rest of the decline in Sensors was driven by weakness in sensor applications and industrial markets, partially offset by growth in automotive applications. For the Transportation segment, adjusted operating margins were nearly 21%. We expect Transportation segment margins to run approximately at our 20% target margins for the rest of this year. As you know, we've been driving several improvement and in our operations. We have been able to optimize our factory footprint through our restructuring programs and are getting cost savings from these actions. We are also seeing improvement in our EV product margins as volumes increase and in our Sensors business we have been driving margin expansion improvement through portfolio optimization which I mentioned earlier. Also I'd like to highlight that our teams are continuing to effectively manage pricing to offset higher input cost. We've been talking to you about all these actions and I'm pleased with you that the team successfully executing on them and delivering the strong results that you see. So that is a backdrop of Transportation. Let's move to the Industrial segment. And in the segment sales were down 5% organically in the first quarter, but we did see growth in three of our four businesses and we expect to see continued sequential growth in AD&M, Medical and Energy as we go into quarter two. In the first quarter our AD&M sales were up 13% organically with increased production of both single and twin aisle platforms in the commercial air market. In Medical, sales in the quarter were up 16% organically, driven by ongoing increases in interventional procedures. And in our Energy business, we saw growth in renewable applications and these were partially offset by slower utility demand in Europe. And finally, you can see on the slide, in the Industrial Equipment business, our sales were down 26% organically. And in this business, we're seeing the destocking that began a little bit later in the cycle. So we expect this inventory digestion to continue. And this is a trend that is similar to what you've been hearing from other companies. From a margin perspective, for the Industrial segment, adjusted operating margins were 15% with the impact from the volume decline in Industrial Equipment. And we expect to continue to see segment margins running in the mid-teens until this destocking environment improves. So let me turn to Communications. Organic sales were down 17% year-over-year and we expect the second quarter sales to be similar to the first quarter level. Starting in our third quarter, you will begin to see favorable year-on-year growth in this segment. We are well-positioned to grow in our artificial intelligence programs and now expecting $200 million of contribution in fiscal '24 from AI applications. And in these applications for artificial intelligence, let's face it, we're focused on providing high speed, low latency connectivity to meet the needs of the artificial intelligence workloads. And as we've mentioned to you before, we generate 50% more content in an accelerated compute AI platform versus traditional compute servers. Also we continue to work closely with cloud customers as well as leading semiconductor companies to ensure reference designs that call out all our solutions. On the margin front for the segment, adjusted operating margins were 18.7% and they were up 170 basis points despite the decline in sales. Our teams are executing extremely well and we now believe we'll be able to maintain the high-teen margin in this segment as we move through this year. So with that as an overview of performance, let me turn it over to Heath, to get into more details on the financials and our expectations going forward.

Sujal Shah:

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

Mark Delaney:

Yes. Good morning, and thanks very much for taking the question. Can you speak in more detail about what is better or worse than you'd previously been anticipating with respect to the quarter and outlook? And on the broader topic of what areas are changing versus your prior views, do you still think your auto business can outgrow auto production by mid-single digit percent or shifting EV production plans from auto OEMs impact that?

Sujal Shah:

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

Wamsi Mohan:

Yes. Thank you. Good morning. Terrence, maybe just a follow-up on your point about very strong margins, right, you really had very standout margins both at gross margin level and at operating margin level. Can you maybe parse a little bit about the impact that you saw from these actions you have taken, I think you alluded to a series of those restructuring footprint, EV mix and so on. And what do you think is sustainability of that and how that translates into segment margins for the rest of the year? Thank you so much.

Heath Mitts:

Sure. Wamsi, listen, there's we've talked here for a while about some of the journey that we've been on and we've taken some outsized restructuring charges over the past few years. Many of you have pointed out, it's not lost on us, but we're starting to see in a more meaningful way some of that footprint consolidation come into, to the benefit of our margins and obviously translates into earnings and most of that you do see in gross margins. So, Terrence, in the call, he mentioned execution, which we include footprint in there. There's also portfolio optimization moves that we've made in terms of Jettison low margin product lines and you'll continue to see a little bit of that as we move forward. Last year, we talked a lot about the price actions that we've put in place and those have stuck, and we continue to be very diligent on that. And then quite candidly in some of our businesses where we see stability versus where we've been running in the last few years that really creates an operating environment where you can take advantage of lower cost structures. And I think it's important as we think about the volatility that we've had over the last several years that has started to stabilize and where we play as part of many supply chains out there when we start seeing order patterns that are a little bit more consistent with our suppliers performing more consistently. It allows us to run our factories more consistently and you certainly saw that. The first quarter was probably a little overheated in Transportation because of the tick up in auto production north of 22 million units, but even as we bring down that to closer to the 21 million unit a quarter level, we still feel confident that we can run at the target margins for that segment Transportation being target margins of roughly 20%. So, we are making that statement on this call here today. For the Communications segment, we have been able to, I'll say improve the margins on a little bit lower revenue. We're not committing that we're going to be at 20% here yet which is the target margins for Communications at these revenue levels. This thing tick up, you should continue to see us in the high-teens from an operating margin perspective. And then Industrial, Industrial is right in the mid-teens and we would expect it to run in the mid-teens throughout the rest of this year. There's a couple of things at play there. Obviously, the elongated destocking situation in our Industrial Equipment business which is not just the largest piece of that segment, but also most profitable piece, does have the impact and we've talked about that in the last couple of quarters. And then we start layering in acquisitions that does have a dilutive impact. And the acquisitions are terrific opportunity for the growth of that business and opportunity that it presents for our stakeholders at the same time bringing the deal in generally comes in with diluted margins that we have to absorb and that's no different than what the Schaffner acquisition that we bring into it. So when you add all that up, Wamsi, we feel good that as we move through the year our operating margins at the TE level will have an eighteen handle in front of it, plus or minus will be humming better than we did in 2023 and feel good about the opportunities to move forward from that as we continue our journey.

Operator:

Thank you. Our next question comes from the line of Amit Daryanani from Evercore. Please go ahead with your question.

Terrence R. Curtin:

Yes, sure, Amit. Thank you for the question and couple of things. First off being our orders were up in all the segments year-over-year by 4%. And I think you also not only have to look at orders, but we continue to have a backlog that's about $6 billion. So, I think we've communicated pretty consistently. We expect as the environment gets better that backlog will work down. I'll tell you we aren't seeing cancellations. So, I know some of the semi companies talk about that, but we have to realize, our products are very different than semiconductors. Lead times are a lot shorter and really the element during COVID, was we couldn't hit or lead times consistently we did not really extend lead times. So, when we look at the orders in the quarter like I said on the call they came in where we expected except for, Industrial Equipment was a little weaker. Otherwise, they came in where we thought they would be coupling the orders with the backlog. And I think you can continue to expect, we're probably going to backlog below one as the backlog continues to work down to get a little bit more normalized with service levels improving. I think from the backdrop when we think about Transportation. We do expect global auto production to come down from a little bit over 22 million units in the first quarter to 21 million units, and we think it will run at 21 million units for the year per quarter for the rest of this year to get to about 85 million units in total. In Industrial, you see sequential order increase which really is being driven by AD&M, Medical and Energy. So, you're continuing to see that and that supports why we believe we're going to have Industrial Solutions segment revenue increase. And in Communications, what's nice is we are seeing stability even though there are some pockets around enterprise applications, pure telecom applications. We aren't seeing a slowdown in artificial intelligence and cloud, but there are some pockets out there in the telecom and the enterprise that are still working some things off, but it feels like there's light at the end of that tunnel. So, I think the last thing is our guide for the second quarter is going up to $3.95 billion of revenue and it's really based upon both the orders of $3.8 billion plus the backlog that we see. And I think we've laid out how we're thinking about the world for the rest of the year.

Operator:

Thank you. Our next question comes from the line of Christopher Glynn from Oppenheimer. Please go ahead with your question.

Terrence R. Curtin:

Thanks, Chris and good morning. So, let's break this apart because, yes, in the comments we do talk about destocking. We do not see destocking of our product in the automotive space at all. Our service levels are 90% plus on the ship to request, supply chain is flowing and honestly I think you see it in our results. So, in automotive we do not see destocking of our products. When you come to the destocking that we talk about and Chris you said it right, I think you have to think about TE's world and there's the world where we service our customers directly and then there's the world that we use our distribution partners to cover where we can't do directly. And in TE at the total company level, 80% of what we do, we cover directly. And honestly our revenue on that 80% in this quarter we just closed was up low-single-digit. So, that is where our supply chain is completely tied into our customers. And that's an indicator we look at around destocking. Now the piece that goes through our channel partners, and they are working down inventory that was down 14% in the quarter. And that's where you truly see that you see the biggest impacts in Industrial Equipment, you see it in appliances, you see it also in our data devices business where those business have upward to 50% of their revenue that go through distribution partners to get to their customers. So, that is really where we see the destocking occurring. One of the things that was nice this quarter, we saw that that inventory did not go up, leveled off, we do see in appliances, it has improved. I talked about D&D, it's in pockets, and Industrials later to the party of destocking, and I think that will take a little bit longer. But it's also the element ties back to Amit's question, when we're looking at our direct business levels with our customers, where we touch them directly, we have low-single-digit organic growth you exclude what goes through the channel partners. And I think, we'll continue to have destocking with us here especially in the Industrial Equipment business and that drives that big decline of organic growth, but that will get behind us at some point. And I think it also shows those areas that Heath, talked about where we're benefiting from electric vehicle, where we benefit from other content drivers is really allowing us to basically absorb the destocking we're doing and stay relatively flat.

Operator:

Thank you. Our next question comes from the line of Chris Snyder from UBS. Please go ahead with your question.

Terrence R. Curtin:

Yes, so a couple of things, Chris. First off on the content outperformance, I appreciate you saying what I'm going to say. Please don't look at it on an individual quarter basis. You will see times when it's way ahead. You'll see times when it's behind and I really think you have to look at it over a period of time because there is interplays between where we are and certainly getting to the OE. So, net-net you will see it, it does get into being on every platform in the world. Those are types of things you're going to get on a quarter a little bit off. We were about 300 basis points of outperformance in the quarter. So, it was a little bit below what we said, but also what I said on the call was we expect to be in that 4% to 6% range for this year is important. On your other part of, hey there's been a lot of noise around EV adoption and production. Our view of it's the same. And I just, I am going to stress as always, I know sometimes because we hear about U.S. car companies and European car companies. I'm going to ask us to really take it up a level and remember global car production is what matters to TE. There's going to be about 85 million cars made in the planet this year. The majority of them will be made in Asia. And I would also tell you when you look at EV adoption two-thirds of EVs are driven in Asia. And this is where our strongest region is, when you also think about those 20 million electric vehicles, whether that's a full battery electric, a plug-in hybrid, hybrids like a Prius that don't need to plug. You really got to sit there and go. Those 20 million units are bigger than USR and automotive production in the United States. So, I really ask us when we think about EV trend that need to be a global lens. And I was just in China last week, and when you're in China, you see EVs all around you, you can tell by their license plate color, they're green, they're different color than a normal license plate. And you see that where that adoption is going and you see it not only full battery electric, you see it in plug-in hybrids. And what's great is, we have share that is similar with the local OEMs as you do with the multinationals, and you see that in our growth and you also see when China production goes up, our revenues are a little bit stronger. So, the content of 4% to 6% hasn't changed. Our view of what EV adoption does for our content on a full battery electric it's about 2x, on a plug-in hybrid or hybrid is about 1.5 times are normal $70 that we would have on a nice vehicle, hasn't changed. And I think what's really great is our global business is really making sure we're bringing the innovation to life, and also serving our customers with their innovation to make it happen.

Operator:

Thank you. Our next question comes from the line of Steven Fox from Fox Advisors. Please go ahead with your question.

Terrence R. Curtin:

Yes. Thanks Steven, good morning. And Heath and I'll hamming, this one. So, first off Schaffner, when we talk about bolt-on M&A for us is where areas that around areas we really want to be focused on from an application, we can drive value for our customers, but also can we acquire things that drive value for you as owners? And Schaffner is a great example of it. It is going to be in the factory automation space. Schaffner was a Swiss company and one of the things they do there, one of the global leaders in electromagnetic filter solutions and to keep it simple, it really is how do you have filters that when you're bringing power into factory automation application through the motors and the drives, you really keep that pure from interference. We already had a product line that did this. It was very much a U.S. product line with Schaffner, they were shown in Europe had a nice Asia presence and it really brings it together and that gets us deeper into factory automation. The revenue of it is about $40 million a quarter. It is something that we will improve the profitability up to the levels that we say. And Heath, I don't know if you want to add more to it.

Sujal Shah:

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

Joe Giordano:

Hi, guys. Good morning.

Joe Giordano:

Hi, I just want to ask on the AI side within Communications. So you mentioned you have like a 50% content lift in these AI type applications now. I'm just curious how much of what's being built for AI is simply replacing stuff that otherwise would have been built before AI? So it’s like, if you're doing $200 million of AI related content in 2024, is that essentially like replacing what would have been like $133 million of content of older type stuff and like the more of than last year?

Sujal Shah:

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

Samik Chatterjee:

Hi, thanks for taking my question and Happy New Year as well. I was actually going to follow-up on the previous question on Communication and AI. You're now indicating a $200 million contribution from the AI piece of the business, you raising that, I mean, now from $150 million. What’s the driver of the raise? Is it more capacity or demand? And then you've talked about a $1 billion order booked in the past. How has that pipeline continued to expand? And as you see that revenue come through, what are the implications on margins for the Communications segment? Thank you.

Sujal Shah:

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

Sujal Shah:

Sorry, Luke, are you there? Why don't we go to the next question and we'll have Luke rejoin.

Matt Sheerin:

Yes, thanks. Good morning. Terrence, I wanted to circle back on the Industrial sub segments. You really just called out the factory automation, industrial automation area, it's being weak on the destocking, other markets growing. But we are hearing from other suppliers and EMS companies have some slowing demand and inventory issues across pockets of medical and even some of the renewable energy areas. Could you give us a read on what you're seeing in terms of inventory and is that more of a direct to OEM sales so there's not as much noise in the channel?

Sujal Shah:

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

William Stein:

Great. Thanks for taking my question. I think you all have done a very good job on the margins this quarter, posting some pretty solid upside. You've explained it a little bit, but I'm hoping you can linger on this a little bit more. We know you had these aspirational goals. You had this significantly better than expected or better than guided quarter. And maybe that's sort of the question that I have. Is this a matter of having achieved some goals earlier than you expected, some things you thought might take several quarters, wind up being realized earlier? Or are we just looking at a higher level of profitability and we'll continue to see some improvement from this point? And what changed, you've been pursuing these, all the things you talked about, you've been pursuing them for a while, suddenly we get this upside. Did something change in this regard in the quarter? Thank you.

Sujal Shah:

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

Luke Junk:

Great. Can you hear me now?

Terrence R. Curtin:

Yes, we can Luke. Thanks for coming back on.

Terrence R. Curtin:

Hi, Luke, thanks for the question. I think when you look at it, I think one of the things we got to start with is what's happening with input cost and certainly we are not seeing a massive inflationary environment, but we're also not seeing a massive deflationary environment. Copper very important from a conductor and important connector and important moving both data and power around vehicle or any application, it's still up year-over-year. Certainly other things, we have freight down, but net-net, we're still seeing a pretty net neutral world. When it comes to input cost and you know how hard we worked to recover the inflationary costs and some of the things that help the margin that we're talking about today. But very honestly, we're talking to our customers about where the costs are and as we went through this our strategy has always been with our customers to recover the cost and that's what we did. So, I think there will be an element, we’ll be very driven on where the input costs at will dictate pricing. And that's been our approach and we've been very consistent as we communicate that to you across all our businesses.

Operator:

And the next question comes from the line of Shreyas Patil from Wolfe Research. Please go ahead with your question.

Terrence R. Curtin:

Sure. Couple of things. Yes, no, First off being, in whatever our normal environment is assuming there's deflation we can drive certainly there would be productivity we would want to get back to our customers to make sure they're competitive. That was the environment we always articulate when we said we would be around 20% margin. So we never said when we've always talked to you about this, we need price increase to get to our 20% margin. The pricing we've done is to recover cost in a pretty dramatic inflationary environment over the past two to three years and we did it on a lag. So, it did impact our margin early on when we saw the acceleration. So, I don't think that we start seeing deflation again materials, you could see a little bit of price back, but we're not there yet. And I'm sure we'll continue to talk about it. On ICE vehicles versus EV vehicles, I think there's two elements we have to be honest about. Half of our content that is on an electric vehicle is the same content that is on ICE vehicle. So, the profitability of those products are same whether it's an ICE vehicle or an electric vehicle because that's a low voltage architecture that carries over and doesn't drive the powertrain. For the element that is the high power products, we've been scaling that up and what we've said is we're going to continue to move the profitability of those product lines up to the segment average. We've made tremendous progress. It's still at lower scale than the ones that go over 85 million vehicles. But the progress that the team made has also been the contributor to where our margin is in Transportation. So, the team has done a nice job as we scale that versus when we were just investing and there were very few electric vehicles made. So, we saw the opportunity to increase there but the gap is closed significantly.

Operator:

Thank you. Our next question comes from the line of Asiya Merchant from Citigroup. Please go ahead with your question.

Heath Mitts:

Sure. First of all, thank you for the question on cash flows, always near and dear to my heart. We did have a good start to the year with our free cash flow which was further momentum from the strong free cash flow we had in FY2023 and sets us up well on the balance sheet side. As we -- our guidance for the year which is really not a specific number for cash but it's really unchanged which is that we feel good about the 100% cash conversion to net income that we had achieved largely in FY2023 and how we maintain that momentum moving forward. So, we've done some things and sometimes we had flat working capital at different periods of time but the rigor is there and our ability to maintain particularly payables receivables inventory levels in addition to our CapEx spending and then what we have to fund for restructuring tends to be the different levers that we that we pull. But we feel good with where the momentum is relative to that and where we're going to land for the first half of our fiscal year. In terms of the M&A environment, that's again largely unchanged. There's things that are active out there. Some things are more interesting than others. The Schaffner deal because it was a Swiss public company it was announced early on and we got that across the finish line here in December. But there's a lot of other things that are more private in nature that are going through various processes that you know again things that we have to make sure that it's the right strategic fit for us that we're the right owner for it even if it fits our strategy and then that the numbers work. And at any given time, you probably expect us to be looking at about a half a dozen deals. Not all of those get close to the finish line. So but it is an active environment we have seen as we've moved through the count, moved across the threshold in the calendar year that activity is starting to pick up some. So, I'd like to be able to think that we can get another deal or two done in our fiscal year. But as always, you have to stay tuned.

Operator:

We have no further questions at this time.

Operator:

I do apologize. We do have one final question from Mr. Colin Langan from Wells Fargo. Please go ahead with your question.

Heath Mitts:

Well, Colin thanks for the question. The change from our original guided rate last quarter was went into our fiscal year of 20%. We've increased that to 21% and that was very specific to the Swiss tax rate going up sooner than what we had anticipated. And so we have to absorb that and put it through our financials as well. As we move forward there's a lot of moving parts relative to the global minimum tax that different jurisdictions will be enacting at different time periods. Some of those are more meaningful than others. There's tax planning that you would expect us to have underway that we would think about not just from how things that we can do to work down our ETR but also probably more importantly how do we protect ourselves from the cash tax rate. And so there's nothing to report there today because there's a lot of unknowns out there. But there's a lot of activity underway to try to anticipate and look around the corner there. So, to answer your question I think 21% is a good rate to work on going forward and we'll continue to work to mitigate any pressures.

Operator:

Thank you. Today's conference will be available for replay beginning at 11:30 A.M. Eastern Time today, January 24th, on the Investor Relations portion of TE Connectivity's website. That will conclude the conference for today. You may now disconnect.

Operator:

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

Terrence Curtin:

Thank you, Sujal and we appreciate everyone joining us today. And to start off, I am pleased with what -- that we delivered revenue in line with our guidance and earnings per share that was ahead of guidance, driven by strong execution by our teams across our segments in what continues to be a dynamic market environment. Before we get into the slides, I do want to take a moment to discuss our performance for the full year, along with what we're seeing in the markets versus our last call. When we look back on fiscal 2023, we set out to accomplish three key initiatives that we shared with you. First was to continue to demonstrate the strategic positioning of our portfolio through alignment to secular growth trends. Second was to deliver strong free cash flow with a focus to drive down inventory levels. And lastly, to improve our margin performance through both cost reduction and pricing actions to offset inflation. As Heath and I will discuss on today's call, our teams executed successfully on all of these initiatives during the year, and it sets up for a good jumping off-point as we enter 2024. When we think about the performance of the portfolio, our results demonstrated continued growth in the Transportation and Industrial Solutions segments, which offset market weakness in Communications and headwinds from a stronger dollar. We generated growth above the market and a number of our businesses as we continue to benefit from secular trends, including increased global production of electric vehicles, adoption of renewable energy, and applications for cloud as well as artificial intelligence. We delivered record free cash flow of $2.4 billion for the year which represents over 110% conversion, and we also returned $1.7 billion to shareholders for the year. We drove down our inventory levels in response to improvements in our supply chain. And at the same time, we improved our service levels to our customers. Our cash generation model gives us both confidence as well as opportunities to return capital to shareholders and support bolt-on M&A activities which is aligned with our use of capital strategy. We also worked to drive margin expansion in the second half of 2023, and we delivered on this commitment. We improved our exit rate on adjusted operating margins to above 17% as we close the year, despite our Communications segment being in the bottom of the cycle. Now, let me share what we're seeing in our market since our last call 90 days ago. And on an overall basis, markets are playing out as we expected. We have most of our key end markets on a growth or recovery trajectory with a few markets continuing to cycle as we previously discussed with you. Our view of Transportation end markets remains consistent with our prior view with global auto production remaining stable. Our growth will continue to be driven in Transportation by content outperformance that leverages our leading global position in this market. In our Industrial segment, three out of our four businesses continue to have growth momentum. You see our strong positioning in renewable energy with growth from both wind and solar applications. Commercial air sales continue to grow as this market recovers, and our medical business is benefiting from increases in interventional procedures. And in our Communications segment, while sales are down significantly versus last year's cyclical peak, we saw a sequential growth in orders in our fiscal fourth quarter due to early ramps of artificial intelligence programs and we continue to expect volume growth from AI applications as we move through 2024. And finally, I do want to reinforce that the way that we think about long-term value creation remains unchanged. It is built on the pillars of secular growth trends that will drive increased content in the markets where we position TE, strong free cash flow generation with discipline around how we deploy capital and certainly levers up to enable margin expansion as we move forward. So, with that as an overview, I'd answer that you turn to Slide 3, and I'll get into the presentation and I'll discuss some additional highlights for the fiscal fourth quarter as well as the full year, and Heath will get into more details during his section. Our fourth quarter sales were $4 billion, which was in line with our guidance. Transportation segment organic growth of 5% was offset by declines in Communications due to the ongoing market weakness that we've been discussing. Adjusted earnings per share was ahead of our guidance and up 2% versus the prior year at $1.78 with adjusted operating margins of 17.3%. Cash flow from operations was a very strong $1.1 billion and free cash flow was $945 million in the fourth quarter, and both of these were quarterly records for the company and I think this just reinforces a strong execution by our teams, I already highlighted. For the full year, sales of $16 billion were flat on a reported basis, and we had organic sales that were up 3%, and this 3% organic growth was driven by our Transportation and Industrial segments. Adjusted operating margins were 16.7% for the full year. But on the margin side, the real highlight was that we expanded adjusted operating margins by 120 basis points from the first half to the second half of the year due to our team's execution. As we look forward into the first quarter of fiscal 2024, we are expecting that first quarter sales will be $3.85 billion and adjusted earnings per share to be around $1.70. On a year-over-year basis, we expect sales to be flat with organic growth in our Transportation and Industrial segments. We do expect adjusted EPS expansion of over 10% in the first quarter and strong margin expansion as well year-over-year. So, if you could turn to Slide 4, let me discuss order trends and what we've seen. We continue to benefit from markets with strong secular growth trends, and this is offsetting weakness in markets that are cycling or being impacted by inventory destocking. At the total company level, we continue to see stability in our order levels. Orders of $3.9 billion in the fourth quarter were consistent with order levels for the past several quarters, and our backlog remains near record levels. Transportation orders grew both year-over-year and sequentially, reflecting ongoing stable global auto production. Industrial order patterns reflect some seasonality across this segment as well as ongoing destocking in the Industrial Equipment end markets And I ask you to keep in mind that 50% of our Industrial Equipment business does go through the distribution channel, and we expect that destocking here to continue for the next couple of quarters. In the Communications segment, while we continue to see our customers work down inventory in their supply chain, we had our second consecutive quarter of sequential order growth which is being driven by new orders for artificial intelligence applications. So, with that as an overview of orders, let me now get into year-over-year segment results in the quarter. that are shown on Slides 5 through 7, and you can see the details on each one of those slides. So, starting with Transportation. Our sales growth remained strong. It was up 5% organically year-over-year, and it was driven by our automotive business. In our automotive business, we grew 9% organically with growth in all regions. Our performance continues to be driven by our leading global position in electric vehicles, electronification trends within the vehicle as well as positive impact from pricing. In fiscal 2023, electric vehicle and hybrid-electric vehicle production grew globally by approximately 40%. Most of this growth was driven by Asia, and we expect this region to continue to be the growth driver for electric vehicles. As you know, we generate approximately 2x the content in electric vehicle platforms versus combustion engine vehicles. So, we expect our content per vehicle to continue to expand as we move forward. Overall, we expect auto production next year to be about 21 million units per quarter with continued growth in hybrid and electric vehicle production. In our Commercial Transportation business, we did experience a 7% sales decline, which was in line with what we expected and was driven by market weakness in both North America as well as China. And in our Sensors business, we saw growth in automotive applications that was offset by weakness in industrial applications. At the margin level for the Transportation segment, adjusted operating margins were 18.4% as we expected and up 170 basis points year-over-year as our teams executed on the cost and price actions that we've been highlighting to you. Now, let me discuss the Industrial Solutions segment. And while sales were flat in the fourth quarter, I think what's really nice as you look at the slide is that we have three businesses that are continuing on a very good growth trajectory. Our Aerospace, Defense and Marine sales were up 14% organically, with ongoing improvement in the commercial air market. In Medical, sales in the quarter were up 19% organically, driven by ongoing increases in interventional procedures. And in our Energy business, as you know, we positioned this business around renewables, and you're seeing the benefit of this again this quarter with 6% organic growth. Finally, in the Industrial Equipment business, our sales were down 21% organically driven by the continued inventory digestion in the distribution channel, a trend that is similar to what you're hearing from other companies. Adjusted operating margins were 15.9% in the quarter, reflecting the impact of expected volume declines in the Industrial Equipment business. So, let's turn to Communications, and while our organic sales were down 27% year-over-year, they were up 9% sequentially to $463 million. We are seeing the benefits from the early ramps of artificial intelligence programs, which will strengthen as we move through 2024 and beyond. Adjusted operating margins were 15.3% for the segment and an increase of over 100 basis points sequentially. And as we see destocking and AI increases in volume, you'll see margins expand in this segment as we move through 2024. So, with that, let me turn it over to Heath, who will get into more details on the financials as well as our expectations going forward.

Sujal Shah:

Audra, can you please give the instructions for the Q&A session.

Mark Delaney:

Yes, good morning and thanks for taking my question. There's been so many crosscurrents and various end markets including in the UAW strike, inventory destocking in industrial and content opportunities like AI and electrification. So, I'm hoping you could help us better understand in a bit more detail key trends by end market and what you expect going forward, including your assumptions by end market in 1Q guidance?

Sujal Shah:

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

Wamsi Mohan:

Yes, thank you. Good morning. Terrence, can you sort out some of the puts and takes in autos, given all the recent news around the D3 companies paring back on EV ambitions and potentially slower adoption rates of EVs? And also, you didn't explicitly call out the UAW strike. Did you not see any impact? Or is it yet to come in terms of any impact from that? Thanks so much.

Sujal Shah:

Okay. Thank you. Wamsi -- thanks Wamsi. Can we have the next question, please?

Steven Fox:

Hi, good morning. I was just wondering if you could dig in a little bit more into free cash flows. Obviously, you guys overperformed over 10%. Can you just talk about some of the dynamics that went into that? And then the expectations for cash flow this year, any of the dynamics and maybe talk a little bit about use of excess cash. It seems like it's -- the strategy is the capital allocation is consistent, but you did do an acquisition during the quarter. So, maybe that was [indiscernible]. Thanks.

Sujal Shah:

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

Chris Snyder:

Thank you. I wanted to ask on supply chain inventory levels. You guys have been pretty consistent around destock headwinds for data appliance and industrial equipment. So, I guess maybe for those three sub verticals, can you just talk about where are we in the respective destock cycles. And beyond those three, is there anywhere else maybe where you're starting to see more risk around destock relative to three or six months ago? Thank you.

Sujal Shah:

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

William Stein:

Hey thanks for taking my question. I understand you're only guiding for a quarter, but I'd like to sort of give you an opportunity to help us sensitize our models as we consider what the trajectory will be in 2024 in terms of revenue growth and margin expansion? Thank you.

Sujal Shah:

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

Amit Daryanani:

Good morning. Thanks for taking my question. I guess I have one and, I guess, Terrence and Heath, either one of you. You've also made some really good progress in terms of expanding your operating margins in the back half of fiscal 2023. But I'm curious, as you think about the exit rate of operating margins across the three segments. Can you maybe talk about what does it take for TEL to get to your target margins across those three segments -- the delta from where you are to targeted you made. Is it volume? Is it cost optimization? Would love to get a sense on the path from here towards those target margins. Thank you.

Sujal Shah:

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

Joe Cardoso:

Hey, good morning and thanks for the question. This is Joe Cardoso on for Samik Chatterjee. As it relates to your AI opportunity, and maybe this is more of a medium-term question in nature, but there has been increasing discussions or debates around the various architectures these cloud providers can take beyond just GPUs or underlying switch fabrics as it relates to TEL's business and where you participate in these AI deployments I was hoping if you could just touch on that topic and discuss the breadth of the company's portfolio? And whether you see yourself agnostic to whatever route your customers decide to take on their future architectural decisions there? And if there's any areas of the portfolio that you think you could bolster or are you looking to bolster going forward? Thank you.

Sujal Shah:

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

Joe Giordano:

Hey, good morning guys.

Joe Giordano:

Yes, I just want to follow-up on the AI discussion there. One, can you just let us know how revenue in this quarter in AI specifically looked relative to last quarter? And then just more broadly, how do you think about AI cannibalization of business you otherwise would have had on a more standard offering? Like if there's -- I'm guessing this is a mix positive for you like on a content standpoint, but if your customers have a finite dollar spend available to them? How much -- is this like a transition of spending rather than like an increase in total spending?

Sujal Shah:

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

Luke Junk:

Good morning. Thanks for taking the question. Terrence, just wondering if you could put a finer point on how you're thinking about our growth potential in auto in 2024. I guess I'm especially thinking about EV-related impacts amid maybe some flattening overall in adoption but set against what has been generally rising content for you, maybe even a little upside versus that 2x multiple? And maybe more importantly, just your overall breadth and auto and EV that could limit your impact to any one customer? Thank you.

Sujal Shah:

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

Terrence Curtin:

Hey Scott.

Heath Mitts:

Well, it's a good question, Scott. And there's a lot of buckets there that I can think about no different than everybody else in the globe. You mentioned labor inflation, which is real and it's always going to be part of our equation. So, that has a little bit of variability to it. But when I think about kind of our fixed cost base, we're obviously going in with a little bit lower based on some of the restructuring that we have done, and that's around rooftop consolidations, particularly in Europe. As we've continued to move more of our operating activities out of Western Europe and into places where the supply chain has migrated for our customers, that could be Eastern Europe, that could be Northern Africa and Morocco, certainly some more activity in parts of Asia. And then within North America, it's a little bit more focused to Mexico. So, that has that element and gives us more confidence as we jump into it. And then you kind of get into the inflationary pressures for everything else. And I would say not getting worse but not dramatically coming down. There's buckets of areas like freight spend that have come back in line as certain capacity on certain types of freight have increased and allowed for some pricing competition. So, that's been healthy. But when I think about the input cost around metals and resins, it really depends on where the world is and what we're buying. We're still dealing with a fairly inflated environment there for a lot of the things that we have to buy. And so when I think about it versus 2023, I'd say it's stable. But I wouldn't say that, that's our biggest driver in 2024 in terms of margin expansion. We've got a lot of material productivity activity underway that we have a lot of confidence about. But that's not pricing coming down. That's just the efforts of our team to source different ways in different parts of the world. So, there's a lot of buckets there, Scott, net-net, if I just trying to sum it up, I'd say we're in a better position in 2024 than we were this time last year, staring at our overall cost structure. But we've got work to do, and we still need to offset the inflation around labor and so forth.

Operator:

We'll go next to Christopher Glynn at Oppenheimer.

Terrence Curtin:

So, let me break those into two pieces there. So, let's talk about what we've seen this year in Industrial Transportation. And really -- and then I'll talk about probably how we're thinking into next year. First off, in commercial transportation this year, both in North America and Europe and commercial transportation is -- I want to remind everybody, it's heavy truck, construction equipment, ag equipment, for TE globally. It's in all those applications, which we have a leading share. And we saw Europe and North America actually have nice production growth this past year and certainly drove our growth but China was very weak. And China was very weak in 2023, especially around construction equipment. So net-net, while we would say, if you took the number of units made on the planet of all those different types of vehicles, it was flat. China was very weak and really Western World offset that. And let's face it, when we think about China into next year, we expect construction to be flat again or weak next year, maybe some recovery in the truck and bus side. We do expect in the early half of this year, we do expect Europe and North America to slow, and we've seen that. You see that in our organic growth here. So, we do expect at least for the first half, that's going to be a market that is slower going into next year. And we will have content outperformance, I will buffer some of that. But it's also nice that China, we probably have the weakness of China is more behind us than in front of us.

Terrence Curtin:

I am sorry, you also asked about Sensors. I apologize. On Sensors, there is pruning that we're doing. I know when I made my prepared comments, we talked about growth and automotive and declines in industrial, next year, there will be about a $50 million exit rate of where we're really getting that focus as we improve the margin there and make sure that the wins that we get in automotive and industrial applications, really where we're positioning that business longer term as we've been talking to you about. So sorry, I didn't touch the Sensors piece in my first comments.

Operator:

We will go next to Shreyas Patil at Wolfe Research.

Terrence Curtin:

So, let me take the Industrial Equipment piece because there is, hey, as supply chains improved, I do think you see throughout the industrial equipment, and that's a very broad and fragmented space, as we've always talked to you about. You see everybody tightening up their buffer stocks. And we're in the middle of that. You also see areas where you see CapEx continuing to roll. You see EV battery plants. You just sold Toyota, their expansion to their North Carolina campus. So, you see pockets like that. But certainly, you see warehousing certainly around consumer electronics remains weak in Asia. There is a lot of automation that goes in there. So, I do think it's a very mixed picture depending upon where your focus on in Industrial Equipment, I do think you see strong backlogs by our customers. And I do think we have to work through the destocking and see what the CapEx levels are running once we get through the destocking. Heath, why don't you talk about the restructuring?

Sujal Shah:

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

Wamsi Mohan:

Hi, thanks for taking the follow-up. I think you mentioned in your remarks, you're expecting $250 million headwind for revenues for fiscal 2024 from FX movements. What should we think about the EPS impact commensurate with that? And Terrence, I think you mentioned a very strong 10% EPS growth in the first quarter. price actions will ramp year-over-year in the second half. So just curious how you're thinking about stockability growth first half versus second half next year?

Wamsi Mohan:

I'm sorry. So, first question was around the headwind from FX on revenue. It was $250 million for the year. Wondering what the EPS impact is. And then just the first half versus second half profit growth for next year, you noted 10% in 1Q, but you wrap on some of your price initiatives in the second half.

Heath Mitts:

And Wamsi the $250 million of FX, the way we're looking at is about $0.20 of EPS headwind that we have and from an earnings per share perspective related to that foreign exchange. And of course, that's as snapping the line in the sand where rates are more or less today. And as rates change throughout the year, we'll continue to update you on those assumptions. In terms of first half to second half, the second half of -- and we're going to -- I'm referring to fiscal 2023, the second half certainly did benefit from some of the pricing catch up that we needed to do, particularly in the Transportation business and the team did execute on that well. As we pivot into the first half versus second half of I think we're not guiding out that far, but you should expect our margin performance to -- as we've implied in our guidance for the first quarter to be somewhere in the mid-17 similar to the last quarter, the Q4 quarter, you should expect us to continue to grow from there in the first half to the second half, some of that related to some of the destocking normalizing, as I mentioned earlier on the call and then some of the other initiatives otherwise.

Operator:

Today's conference call will be available for replay beginning at 11:30 A.M. Eastern Time today, November 1, on the Investor Relations portion of TE Connectivity's website. That will conclude the conference for today. You may now disconnect.

Operator:

Ladies and gentlemen good morning, and thank you for standing by. Welcome to the TE Connectivity Third Quarter 2023 Earnings Call. At this time, all lines are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, today’s call is being recorded. And I would now like to turn the conference over to our host, Vice President of Investor Relations, Sujal Shah. Please go ahead.

Terrence Curtin:

Thanks, Sujal, and thank you everyone for joining us today. Before we get into the slides and as I typically do, I want to take a moment to discuss our performance this quarter, within the backdrop of the market environment, along with what we're seeing versus our last call, 90 days ago. I am pleased with the execution of our teams in the third quarter, with revenues that were in line and EPS that was ahead of our guidance, due to strong performance across all three segments. Our Transportation and Industrial segments grew year-over-year, which essentially offset the expected declines in our Communications segment. Our adjusted operating margins expanded 130 basis points sequentially, without the benefit of any volume growth. We delivered on the actions that we've been driving to ensure margin expansion occurred, as we move through this fiscal year. Also, as important, you're going to continue to see the benefits from the strategic positioning of our portfolio around secular growth trends, including increased global production of electric vehicles, adoption of renewable energy and applications for cloud and artificial intelligence. In the quarter, our orders of $4 billion are not only indicating stability in transportation and industrial, but also in our Communications segment as well. I view the older trends to be a real positive and they're reflecting the improving supply chains and reinforce our fourth quarter guidance, which I'll get into more details in a moment. As we've been sharing with you, one of the key areas of focus this year has been working capital management as supply chain performance improves. Our strong free cash flow performance reflects our focus, both in the quarter as well as you see it year-to-date. Cash generation is an important part of our business model and year-to-date free cash flow was up 40% versus last year. Also, our capital strategy continues to remain disciplined and we've returned roughly $1.2 billion of capital to our owners so far this year. Let me now provide some additional color on our markets and other updates since our last call. So, on an overall basis, our markets are playing out as we expected. We have most of our key end markets in a growth or recovery trajectory and we have a few markets that continue to cycle and these we previously discussed with you. Our view of transportation end markets remain consistent with our prior view and we continue to expect auto production to remain roughly flat at approximately 20 million units per quarter globally. Our growth in the transportation area will continue to be driven by content outperformance and our leading global position in electric vehicles. Turning to our Industrial segment. We have three businesses that continue to have strong growth momentum. You continue to see our strong positioning in renewable energy with growth from both wind and solar applications. In commercial air, sales continue to grow as this market recovers and our medical business is benefiting from increases in interventional procedures. In our communications segment, while sales are down significantly this year versus last year's cyclical peak, our order trends are indicating stabilization at the current levels. And finally, I do want to reinforce that the way we think about long-term value creation remains unchanged. It's built on the pillars of secular growth trends that will drive increased content in the markets where we position TE, strong free cash flow generation with discipline around how we deploy capital and leverage to enable margin expansion as we move forward. While our orders are indicating stability, we continue to see strong opportunities to expand sales, margins and earnings per share as we move forward. So at this time I want to get into slides and we'll discuss some additional highlights. And if you could turn to slide 3, I'd appreciate it. Our third quarter sales were $4 billion and this was in line with our guidance and down slightly year-over-year on a reported and an organic basis. We saw organic growth of 7% in our Transportation segment and 2% in our Industrial segment. Our communications segment declined due to the expected market weakness that we've been talking to you about. Adjusted earnings per share was ahead of our guidance at $1.77 with adjusted operating margins of 17.3% and these margins were up 130 basis points sequentially as I already mentioned. The margin improvement from quarter two to quarter three was driven by our Transportation and Industrial segments as we are delivering on our commitment to expand margins from the first half to the second half of this year. Our earnings per share performance that was ahead of guidance was driven primarily by the stronger margin performance. As we look forward, we are expecting our fourth quarter sales to be approximately $4 billion and adjusted earnings per share to be around $1.75, which are both similar to our quarter three levels. Also similar to our third quarter we do expect year-over-year sales growth in our Transportation and Industrial segments and a decline in our Communications segment. Just moving away from the financials for a moment. I do want to highlight that we issued our corporate responsibility report, which we call connecting our world and we've issued this report for over a decade. There are a number of initiatives that we're driving internally and our goals are in line with our purpose as well as expectations from our customers. Key highlights in the report versus prior year includes an over 30% reduction in our absolute Scope 1 and 2 greenhouse gas emissions and currently I want to highlight that 50% of the electricity in TE comes from renewable sources. I also want to note that we communicated our commitment to the science-based target initiative, which enhanced targets for greenhouse gas reduction by 2030 that are inclusive of Scope 3 emissions. So with that as a quick background on slide 3 let's move to slide 4 and I want to talk about our order trends. On the slide you can see the details on the moving pieces, but I do think the key takeaway is that our orders are reflecting stability in all three of our segments. And this is nice to say after some of the order patterns we've had over the past couple of years. And these orders reflect and reinforce our guidance for the fourth quarter. When you look at our transportation and industrial orders they're both roughly flat from the second to third quarter. The real highlight in where you see the changes in our communications segment where orders increased 5% sequentially. And this is the first sequential increase in our Communications segment orders since the first quarter of fiscal 2022. So with that quick overview of orders, let me now discuss the year-over-year segment results that are laid out on slides 6 through 7 and you can see the details and I'll just talk about the high points. In our Transportation segment, sales growth remained strong and it was up 7% organically year-over-year with organic growth across all of our businesses. Our auto business grew 9% organically and we had growth in all the regions of the world. The strong performance continues to be driven by our leading position in electric vehicles as well as electronification trends in cars and positive impact from pricing. While auto production is staying flat at about 20 million units per quarter production of hybrid and electric vehicles are continuing to grow and right now reflect about 25% of total global auto production in our fiscal 2023. As you know we generate approximately two times the content in electric vehicle platforms versus a combustion vehicle. So, we expect our content per vehicle to continue to expand as we move forward and the increased adoption of electric vehicles. Elsewhere in this segment, our Commercial Transportation business we saw 2% organic growth in the third quarter and in our Sensors business our 4% organic growth was driven by automotive applications as we see increased volumes from new design wins. At the margin level, in the segment, adjusted operating margins were 18.6% in the quarter and this was up 130 basis points year-over-year and 200 basis points sequentially as a result of operational performance including the benefit of price increases. Now, let me move over to the Industrial segment. At the segment level sales increased 2% organically year-over-year, where we had strong organic growth in three out of the four businesses in the third quarter. In our AD&M business, our sales were up 13% organically and we're benefiting from the ongoing improvement in the commercial air market. In Medical, sales in the quarter were up 11% organically, driven by ongoing increases in interventional procedures. Turning to our Energy business. We continue to see momentum with 8% organic growth driven by renewable applications. The addressable market for TE and renewable applications has a double-digit CAGR and we're helping to enable utility scale solar and wind farm deployments. Through our broad product portfolio, we are helping our customers reduce installation as well as maintenance costs and we expect our sales from renewable applications to be up double-digits again this year. What's really nice in this business is that the current quarter continues to demonstrate the growth momentum that we've been delivering in this business, which has had an organic sales CAGR of 8% since 2019. And finally in the Industrial segment. In our Industrial Equipment business, our sales were down 10% organically and this sales decline was driven by inventory digestion in the distribution channel and is being driven by improvements in the broader supply chain that we're all feeling. In the Industrial segment adjusted operating margins were 15.8% and these margins reflect the impact of the expected volume declines in the Industrial Equipment business. And I want to highlight that we remain committed to achieving our high-teen margin target for this segment. Now, let me turn to the Communications segment and in this segment, our sales were down 37% organically to $424 million and it was slightly lower than we expected. Versus last year's cyclical peak, Appliances and our Data and Device businesses are being impacted by market weakness and the ongoing consumption of inventory across our customer supply chain that we previously discussed with you. Despite this weakness in sales we maintained adjusted operating margins in the mid-teens range at 14.2%. Based upon the order trends I talked about earlier we believe communications revenue will be roughly flat to quarter three levels in the fourth quarter with adjusted operating margins remaining in the mid-teens. Now, with the Communications segment, I do want to look beyond the near term for a moment and really talk about what we get excited about especially in our D&D business as it continues to have strong design win momentum in next-generation AI platforms. When you think about where we play we focus on providing the high-speed low latency connectivity to meet the needs of these next-generation data centers. Last quarter we mentioned that we secured $1 billion in wins for AI and certainly related server applications. And I just want to highlight for you this number continues to grow. We expect meaningful ramps of AI programs, as we move through fiscal 2024 with 50% more content in an accelerated compute AI platform versus a traditional compute server. The other key highlight is, we're working closely with cloud customers as well as leading semiconductor companies with reference design to call out our TE Connectivity solutions. So with that, as a wrap-up, let me turn it over to Heath, who will get more details on the financials as well as our expectations going forward.

Sujal Shah:

Avi, can you please give the instructions for the Q&A session?

Chris Snyder:

Thank you. So our Q3 top line only met the guide, but despite a higher level of auto production, so can you even just talk about some of the offsetting headwinds there? And then also what some more color on what really drove the strong step up in margins. Obviously, a step up was inspected, but this was much more significant. And then just lastly, any clicks and takes into Q4 at the segment or end market level. Thank you.

Sujal Shah:

Thank you. Chris, can we have the next question please?

Wamsi Mohan:

Yes, thank you. It's really nice to see the operating margin improvement here in transportation that you guys alluded to earlier. But I was wondering if you could Terrence maybe double click on some of your inventory comments. How much more inventory digestion do you think is ahead of us, especially in industrial equipment and how much more correction do you think is also left in in data devices? Thank you.

Sujal Shah:

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

Steven Fox:

Hi. Good morning. I was wondering if you could dig in a little bit more into the cash flow numbers. Like you said, you're up a lot. How sustainable you see cash flow going forward? And maybe what does it mean in terms of your capital allocation? It seems like it's not changing right now, but how does it influence you in a rising rate environment? And then within that, if you could touch on just the M&A environment, that would be helpful also.

Sujal Shah:

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

Matt Sheerin:

Yes. Thank you, and good morning. Terence, I wanted to drill down a little bit more on the opportunities in AI in your comments. It sounds like you've got a strong relationships with key customers and the semiconductor suppliers. But could you talk about the competitive landscape and the edge you have over competitors? And could you also size up the market opportunities for us perhaps as a percentage of your overall cloud revenue?

Sujal Shah:

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

Mark Delaney:

Yes, good morning. Thank you very much for taking my question. I realize the company only formally guides one quarter at a time, but given that we're now in your fiscal fourth quarter, I'm hoping you can provide some early thoughts on fiscal 2024 and how you're currently thinking about trends by end market for next year.

Sujal Shah:

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

William Stein:

Great. Thanks for taking my question. First sort of a supply chain question. You've given us a pretty good bit of information already about where you're seeing destocking and such. But like to draw the comparison to some of the semiconductor suppliers who in this cycle was very effective at taking that extended lead time situation as an opportunity to constrain what they were delivering into the channel so that they didn't run into this problem. And I wonder if there are any lessons learned from that? I know every cycle is a little bit different. But as you think about this going forward, is that a potential opportunity to improve the business to constrain what you ship into those guys so you don't wind up in the situation.

Sujal Shah:

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

Christopher Glynn:

Thanks. Good morning guys. I had a question about the TS margins. So you have the price fully realize some wraparound into next year. And you also have called out some operational improvements as well. I'm curious, if you could talk about a view of fundamental incremental margin expectations over the next year or two for the TS segment?

Sujal Shah:

Okay. Thank you, Chris. We have the next question, please.

Joe Giordano:

Hi guys, good morning. I appreciate all the color on the AI stuff today, but I did have one kind of follow-up there. How do I think about that business replacement for a business that you would have been doing in the absence of AI, like, if I think about your whole data and device business where -- what does that business look like on a normalized basis now? Like it was a $1.5 billion business higher now it's run rating at $1 billion where is like the right pedaling?

Terrence Curtin:

Thank you, Joe. Clear. Next question, please.

Unidentified Analyst:

Hi.

Unidentified Analyst:

This is Abdullah speaking for Amit. And I just wanted to focus on industrial. I think last call you mentioned industrial to be - 150 margin expansion in the second half and you saw a really nice expansion I think of 130 this quarter despite revenues being down I think in the segment $50 million or so. So I was just curious what could be here and what the varies puts and takes on?

Terrence Curtin:

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

Samik Chatterjee:

Yes. Hi. Thanks for taking my question, I guess I had a question on Industrial Solutions as well but more sort of looking at it from a mix perspective just wondering how you think about what this business mix looks like in four years to five years, or how do you want it to look like in four years, five years because from the outside it does look like you have secular drivers in ADM, Energy and Medical whereas industrial equipment I understand sort of the better margin on it but doesn't appear from the outside to have the same drivers in terms of secular growth. So is there a way we should think about how this mix transitions in this business by subsegment of time or where your focus of investment will be as you look at this business?

Sujal Shah:

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

Luke Junk:

Good morning. Thanks for taking my question. Just wondering if you could comment on the pace of AI-related awards that you're seeing. Just wondering how quickly the billion plus in awards that you've referenced have come together how quickly that could get $1.5 billion or $2 billion? And then related to that in terms of book-to-bill, could you just give us some additional color on overall communications book-to-bill of 0.96, just how that splits between data and devices and appliances and to what extent AI is impacting the data and devices side? Thank you.

Sujal Shah:

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

Shreyas Patil :

Hey, thanks so much. So maybe just coming back to Transportation Solutions. If I think about where we are now you mentioned the price increases are fully offsetting material inflation. So you're generating and you're generating about an 18.5% margin, there is going to be some additional outflow potentially some benefits from restructuring. So how do we think about that bridge to the 20% margin target? Are there other headwinds we should be considering as it does seem that is something that could be achieved potentially at some point next year?

Sujal Shah:

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

Guy Hardwick:

Hi, good morning. Just wondered, if you could differentiate in industrial equipment between sales into distribution sales to original equipment manufacturers. How sharply different are the trends or maybe they're not at all? And I had a follow-up question as well.

Guy Hardwick:

Thank you. Could you give us an update on your Chinese auto business particularly in electric vehicles? I mean, potentially this market could be 40% NEVs by the end of the year. If there's enough then how TE's position particularly versus local competitors and whether you're fully participating in the growth, particularly one or two very strong domestic players who've done very well of late?

Sujal Shah:

Okay. Thank you, Guy. And I'd like to thank everybody for joining us on the call this morning. If you have any additional questions, please reach out to Investor Relations at TE. Thank you, and have a nice morning.

Operator:

Ladies and gentlemen, thank you for standing by, and welcome to the TE Connectivity Second Quarter 2023 Earnings Call. At this time, all lines are in a listen-only mode. Later, we will conduct a question-and-answer session. [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.

Terrence Curtin:

Thanks, Sujal. And I do appreciate everyone joining us today to cover our results for our second fiscal quarter along with our outlook for our third quarter. Through the details on the slides, I want to take a moment to discuss our performance this quarter within the backdrop of what remains a dynamic market environment along with what we’re seeing versus our last call 90 days ago. We continue to operate in a world with cyclicality and certain end markets as well as impacts from foreign currency exchange and inflation. At the same time, [Technical Difficulty] so the strategic positioning of our portfolio around key secular trends, these include global growth in electric vehicle adoption, momentum and renewable energy adoption, growth in interventional medical procedures and wins in the artificial intelligence space. Growth from these trends are enabling us to offset the impacts from [Technical Difficulty] we delivered 8% organic sales growth that was above our guidance and adjusted earnings per share that was ahead of our guidance as well. We remain on our journey to expand margins through a combination of growth, price increases and cost reduction actions. As we discussed back in the first quarter, our plan was to drive margin improvement from the beginning of this year as we enter next year. We are executing to this plan and you see this in the sequential margin progression in our Transportation segment in the second quarter and the sequential margin expansion at the company level that’s implied in our third quarter guidance. You all know that an important part of our business model is strong cash generation. With supply chain [Technical Difficulty] driving our inventory levels down and along with our team’s strong operational performance, inventory reduction helped to drive free cash flow improvement of over 35% year-over-year in the first half and enabled us to continued strong return to capital back to our owners. So let me now provide some color on markets that we’re seeing and other updates [Technical Difficulty] with the macro environment we’re experiencing, it is driving uneven impacts across our portfolio. We have some markets that are growing, some that are remaining very stable and some that are cycling. And this is truly evident as we go through our second quarter results today where all our businesses in the Transportation and Industrial segments grew [Technical Difficulty], while both of our business in the Communication segment declined. Our view of the transportation and markets remained consistent with our prior view and we continue to expect auto production to remain roughly flat at approximately 20 million units per quarter as we move through the second half of our year. Our growth will continue to be driven by content outperformance and our lead [Technical Difficulty] electric vehicles. In our Industrial segment, when we spoke to you last quarter, all of our businesses were strong and our second quarter sales results reflect this. We continue to see strength in three out of our four businesses. Our commercial air business continues to recover. Our medical business had record quarterly sales and our energy business [Technical Difficulty] momentum in renewable applications. In our Communications segment, orders and sales remain weak due to both the market weakness and inventory corrections across our customers’ supply chain. Last quarter, we talked about being in a $450 million to $500 million quarterly revenue range and we now believe we will be at the lower end of this range for the next couple of quarters [Technical Difficulty] is to get worked off by our customers. And finally, before I get into slides, I do want to highlight the way we think about long-term value creation and that it’s remained unchanged. It is built on the pillars of secular growth and increased content around the markets where we have positioned TE. Strong free cash flow generation, a disciplined [Technical Difficulty] and levers, which will enable margin expansion as we move through this year as well as longer-term. So with that as a quick overview, let me get into the slides and discuss additional highlights that are on Slide 3. Our sales in the second quarter were $4.2 billion and it was head of our guidance driven by the [Technical Difficulty] we saw organic growth of 12% in the Transportation segment and 15% in the Industrial Solutions segment with organic growth in all businesses in these two segments. In our Communication segment, the decline was in line with our expectations. On a reported basis, sales were up 4% year-over-year and included approximately [Technical Difficulty] exchange headwinds. In the quarter, our orders grew 10% sequentially to $4 billion and I will talk more about order trend dynamics by segment on the next slide. Adjusted earnings per share was ahead of our guidance at $1.65 and included a $0.17 of currency exchange and tax headwinds versus the prior year. Adjusted operating margins came in at 16%. Free cash flow for the first half of the year was very strong at approximately $850 million with nearly $800 million being returned back to our owners. And we do expect continued strong cash generation in the second half along with strong free cash flow conversion this year. We are expecting our third fiscal quarter sales to be approximately $4 billion and adjusted earnings per share to be around $1.65. Our guidance represents a sequential decline in sales, a flat earnings per share, which implies margin expansion from the second to third quarter. We continue to be confident in margin expansion as we move from the first half,largely driven by our Transportation segment. And just moving away from the financials for a second, we are pleased that we were named among Fortune’s World’s Most Admired Companies. This is the sixth consecutive year that TE has received this recognition, which measures a number of criteria including a company’s investment value and product quality [Technical Difficulty] responsibility. So let’s talk about orders and let’s move to Slide 4 and we’ll talk about order trends as well as what we’re seeing in the markets. The sequential growth of our orders to $4 billion reflects increased stability in the supply chain as well as our team’s ability to improve the service levels to our customers. I think the key [Technical Difficulty] is that we’re continuing to see stability in Transportation, overall strength in the Industrial market and continued weakness in Communications. Looking at orders by segment, our Transportation orders grew 12% sequentially and this reinforces the stability I mentioned. In the Industrial segment, we saw sequential [Technical Difficulty] businesses with continued momentum around renewable applications in our energy business, improving trends in commercial air and as well as our medical business where we continue to see recovery. One change that we’ve seen since last quarter is that order patent are indicating moderation in certain industrial equipment end markets. In segment, orders reflect a continued weakness in the data and devices that we’ve talked about for a few quarters now as well as the expected moderation of the appliances market. So with that brief overview around orders, let’s get into the year-on-year segment results that are highlighted on Slides 5 through 7 and you can see the details on each of these slides. Starting with Transportation, sales growth was strong up 12% organically year-over-year with organic growth across all businesses. Our auto business grew 14% organically versus auto production that was up low-single digits versus the prior year. The outperformance was driven by our leading position in electric vehicles, electronification trends in the vehicle [Technical Difficulty] from pricing. As we previously discussed, we were lagging in the recovery of inflationary pressures, but we’ve implemented price increases, which help us enable margin expansion as we go forward. While overall auto production is expected to remain flat for this fiscal year, we continue to expect production of hybrid and electric vehicles to be approximately [Technical Difficulty] in 2023. And as you know, we generate 2x to content and EV platforms versus ICE vehicles. So we expect our content per vehicle to continue to expand as we move through this year. In commercial transportation, we saw 7% organic growth driven by North America and Europe, partially offset by declines in China. We remain excited about our leading global position at electric vehicles for commercial transportation market. We continue to make significant progress with design wins at all the key truck, bus and specialty vehicle OEMs. We are providing a broad range of high voltage connectivity products, which are enabling our customers to solve fundamental challenges that they face in the EV space. These [Technical Difficulty] 1,000 volts throughout the vehicle, increasing the speed of battery charging and withstanding the harsh environment that’s expected in a heavy truck application. Turning to our Sensors business, we had 9% organic growth, which was driven by automotive applications as we see increased volumes from our new design wins. [Technical Difficulty] adjusted operating margins were 16.6% as expected. While the dynamics of price versus inflation caused year-over-year impacts to margin, we saw an 80 basis point sequential improvement in the quarter reflecting the progress that I mentioned. We expect adjusted operating margins to improve sequentially again in the third quarter in the Transportation segment to get back into the high teens in the second half of the year. Now moving to the Industrial segment, sales increased 15% organically year-over-year with organic growth across all businesses. Our Medical business sales in a quarter was a record at $200 million and it had 26% organic growth. The interventional medical market was depressed following COVID, but now’s back up to pre-pandemic levels and it’s nice to be talking about growth in medical again. In our energy business, we continue to see the growth momentum with 28% organic growth and this is entirely driven by renewable applications. We continue to drive growth both from wind and solar applications and the addressable market for TE and renewable applications has a double-digit CAGR and we’re helping enable utility scale solar and wind farm deployments around the world. When you get into these renewable applications, we provide switch gear and high voltage connectivity products and just to give you a little bit perspective, when we talk about high voltage and energy, these are mentioned in kilowatts, kilowatts, not volts like we talk about in the car. And it’s very important that the application knowledge we bring on these higher wattages are very important to enable these renewable applications. And through the – through our broad product portfolio, we are helping our customers reduce installation and maintenance cost. And you can see our strong positioning playing out in the growth of the renewable applications. And now in our energy business, it’s going to represent nearly 25% of our total revenue. Turning to our aerospace, defense, and marine, our sales were up 19% organically with ongoing improvement in the commercial air market. And finally, in the industrial equipment business, our sales were up 3% organically with growth in Europe, partially offset by weakness in the Americas and China. Adjusted operating margins for the segment came in at 14.6% and this reflects an impact from business mix as well as the impact from acquisitions and divestitures. We expect margins to expand sequentially into the third quarter and continue to target high teens margin for our industrial segment. Now let me turn to the Communications segment, where our sales were down as expected at 20% organically, but within the $450 million to $500 million range provided last quarter. The appliance market is down as we expected and declined across all regions. In data and devices, we were down due to market weakness and supply chain inventory digestion as I discussed earlier. Communications adjusted operating margins were 16.3% as we expected. As I mentioned earlier, we expect quarterly segment sales to be at the low end of the range we gave and closer to the $450 million and we think it’s going to be there for the next couple of quarters. And we do think adjusted operating margins at this lower volume will be able to maintain in the mid-teens. As we look beyond the near-term, I do want to highlight that our D&D business continues to have strong design win momentum and next generation platforms that’s serving the cloud data center market. When you get into the rising complexity and artificial intelligence, it drives low latency architectures that need both high performance processing as well as interconnect. I’m pleased that we’re engaged with the key ecosystem providers, including leading semiconductor and cloud companies. We have already generated over $1 billion of new design wins in AI and server applications and expect new programs to begin ramping up in fiscal 2024. So with that as a backdrop of the segment performance, let me turn it over to Heath, he’ll get into more details on the financials and our expectations going forward.

Sujal Shah:

Thank you, Heath. Chris, can you please get the instructions for the Q&A session?

Mark Delaney:

Yes. Good morning. Thanks for taking the question. Could you comment more detail on…

Mark Delaney:

Good morning. Could you comment in more detail on your end market expectations for the balance of the year and how that’s being impacted by the various cyclical cross currents and content drivers? And then on the topic of content, maybe elaborate if you could please on China in particular and how TE’s content per vehicle and share compares between China domestic auto OEMs and then your content with the multinational OEMs.

Sujal Shah:

Okay. Thank you, Mark. We have the next question, please.

Chris Snyder:

Thank you. So the auto business was up 16% organically in the first half of the year. So about double-digit outgrowth versus production, 2x the targeted levels. How should we expect this trend into the back half of the year? The company in the prior response, you just called out about 300 basis points of price, I believe for auto this year. Is the back half stronger than the first half as the recent price increases are implemented or is that roughly flat throughout the year? Thank you.

Sujal Shah:

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

Wamsi Mohan:

Yes, thank you. Good morning. I was hoping to get some incremental color on the margins in Q2, where you made progress in transport, but industrials turned a bit lower. Also the detrimental margins on a year-on-year basis was much higher than normal. What drove that and how should we think about the overall margin and conversion margin trajectory through the course of this year? Thank you.

Sujal Shah:

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

Amit Daryanani:

Perfect. Thanks. I guess, I was hoping if you folks could spend a better time just talking about from a supply chain perspective, what are you seeing from a component availability and then also the inflation side. And really on the inflation side, I’d love to understand if you think the price increases so far are adequately offsetting this or do you think more that needs to be done here? And then just secondly, if I could get the clarification, could you just remind me what are you estimating from an auto production perspective in the June quarter? I think IHS is that 21.5 million units. So I’d love to get a sense of what are you kind of taking into the guide to auto production side. Thank you.

Sujal Shah:

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

Joe Giordano:

Hey guys, good morning.

Joe Giordano:

One just a quick clarification and then a question on an industrial and some of your other markets here. Just in China on EV, do you have a big spread between like, a high-end Tesla type vehicle and a low end kind of local manufacturer in terms of content. And then bigger picture, if I look at something like industrial equipment or IT obviously those are moderating here, but even with moderations, there’s still up a lot even adjusted for inflation or M&A from like a pre-COVID level. So like if those markets – like how much of a real reset should we think is reasonable in like an economic downturn for something like that, that’s moderating now but still up a lot over a like a fairly short period. Thanks.

Sujal Shah:

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

Scott Davis:

Hey, good morning, guys.

Scott Davis:

I want to switch gears a little bit. And you mentioned AI a couple times in the prepared remarks, but how material is this upgrade cycle? Is this kind of a nice to have or is this something that could be kind of a multi-year pretty powerful demand driver for you guys?

Sujal Shah:

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

Christopher Glynn:

Yes, thanks. Good morning. Just wanted to dig into Transportation revenues a little bit more. Looks like it was well above your guidance production maybe in line with guidance, but there’s always some timing around supply chain and EV launches pull forward or more likely push out a little bit. So sounds like you expect consistent revenue in the back calf. So just curious what really changed there with the volumes that came through versus expectations.

Sujal Shah:

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

Matt Sheerin:

Yes. Thanks, and good morning, everyone.

Matt Sheerin:

I had a question regarding your distribution channels Terrence, I know that you’ve got a big concentration of distribution within your industrial markets and I imagine you’re seeing some feedstocking at the industrial equipment market, but are you seeing that play out anywhere else or expectations that that the distributors are going to start to cut inventories, particularly as lead times continue to come in?

Sujal Shah:

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

Samik Chatterjee:

Yes. Hi, thanks for taking my question. I guess thanks for all the color about the individual end markets. I was just trying to think of it in more aggregate terms when we take all your outlook for the different end markets auto activity here. Are we comfortable that in relation to cycling pass trough in relation to aggregate autos as you sort of match all those outlooks up by the end markets? And maybe if you can touch on autos there particularly, I know you mentioned choppiness in China, but I just also has a pretty material step up in production in China all through the year. Is that what you sort of are maintaining more caution around or are you seeing it in the orders yet? Thank you.

Sujal Shah:

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

Steven Fox:

Hi, good morning. I was just curious on the restructuring charges that you’ve taken year-to-date and plan to date for the full year. How those are flowing through the income statement? When are you getting to benefits? What kind of return on it? It looks like more is going into Transportation and other segments based on what I saw in the slides, any color there would be helpful. Thanks.

Sujal Shah:

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

William Stein:

Great. Thanks for taking my question. You all have done an excellent job of highlighting the content growth opportunity in EV and executing against it. At Tesla’s recent Analyst Day, they showed how in the Cybertruck and then also in the next-gen platform, their transitioning the lower voltage part of the vehicle to a 40 volt architecture. And this looks like it consumes significantly as content in terms of cabling and I suspect connectors as well. Can you talk about the degree to which this might have already become a trend at other OEMs or if it’s brand new and still on the com and what the impact if any you think this will have in your business? Thank you.

Sujal Shah:

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

Luke Junk:

Good morning. Thanks for taking the question. Question for Heath this morning. Heath, as you saw the change in mix developed during the quarter in Industrial. I’m wondering how the margins within the sub segments performed or levered versus your excitation in the areas that are exciting right now, so differently, should we view adverse mixes being more mechanical or are there levers you can pull to get to that better volume leverage out of those higher growth areas that you’re envisioning in the back half? And maybe if you could put a finer point on what you think margins might look like in Industrial in the back half, that’d be great too. Thank you.

Sujal Shah:

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

Shreyas Patil:

Hey, thanks so much. In the past, you’ve talked about typical price downs that you pay customers. I think normally it’s in the 1% to 2% range, especially within your automotive business. You have been taking price over the last couple of years through recoveries. But with the supply chains broadly stabilizing, I’m wondering if you expect that you’ll have to start those price downs with customers again. And if so, are you able to extract productivity from your own supply base or drive restructuring savings to kind of help mitigate that?

Sujal Shah:

Okay. Thank you, Shreyas. Before we wrap up, we have heard from some of you that we had patchiness of audio cutting in and out, so we are going to publish our earnings script on the Investor Relations portion of the website and that should be up shortly. Thank you everyone for joining us today. And if you have any questions, please contact Investor Relations at TE. Have a nice morning. Thank you

Operator:

Ladies and gentlemen, thank you for standing by and welcome to the TE Connectivity First Quarter 2023 Earnings Call. At this time, all lines are in a listen-only mode. Later, we will conduct a question-and-answer session. [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.

Terrence R. Curtin:

Thanks, Sujal and thank you everyone for joining us today to cover our results for our first fiscal quarter along with our outlook for our second quarter. Before Heath and I take you through the details on the slides, I do want to take a moment to discuss our performance within the backdrop of the current environment along with what we're seeing since our call 90 days ago. Clearly, we're all experiencing a lot of moving pieces in the global macro environment. While this volatility is creating cyclicality in specific end markets, we continue to benefit from secular trends leading to outperformance across many of the markets we serve. The strategic positioning of our portfolio and our team’s execution enabled us to deliver sales and adjusted earnings per share that exceeded our guidance and we also delivered strong free cash flow in the quarter. We generated high single-digit organic growth year-over-year with organic growth in all businesses, in our transportation and industrial solutions segments. The growth in these two segments offset incremental weakness in our communication segment. And while we can't control the macro environment or the headwinds from currency exchange effects, we are taking actions on the elements of our business model that we can control. Our industrial segment continues on its journey to expand margins towards its high teens margin target and we'll talk through that in the call. As well as we continue to implement price increases to offset inflation in our transportation segment. In addition, we continue to drive cost reduction and footprint consolidation efforts and are now implementing additional structural reductions in communications to ensure we stay in line with the target margins of that segment as we go forward. So let me provide some additional color on our markets and other updates since our call 90 days ago. Our view of the transportation end markets remain unchanged. Our growth will continue to be driven by content outperformance from our global leading position in electric vehicles and electronification trends even in an environment where auto production we expect to remain flat this year. Our view of the industrial end markets is also consistent with our prior view. We are seeing continued strong recovery in the commercial air and medical markets, as well as continued momentum and renewable applications in our energy business. In our communication segments, this is where we're seeing changes versus our prior review. Last fall, we highlighted that we were expecting moderation in cloud demand in our Data and Devices business and we're now seeing incremental weakness in enterprise and telecom applications along with inventory adjustments across the broader supply chain that serves the Data and Device market. And as typical our expectation is that the inventory [ph] adjustment will last a few quarters. Turning to orders from a company perspective our book-to-bill level remain below one as we expected due to the strong backlog coverage from our customers and increased stability in the broader supply chain. And I do want to highlight that our backlog remains near record levels and is almost 2X higher than we were in pre-COVID. Lastly, I do want to comment on the inflationary environment and just want to stress that we continue to be in an inflationary environment and we've negotiated additional price increases with our customers and transportation, which will take effect as we move through this year. These increases will partially offset these inflationary costs and we expect to have positive contributions to the transportation margins later in 2023 from the price cost dynamic. So with that as a quick overview, let me now get into the slides and discuss additional highlights and we'll start on Slide 3. Our first quarter sales were $3.8 billion and this was up 8% organically year-over-year. We saw market outperformance in transportation and continued growth and recovery in the industrial segment, which offset the sales decline in our Communications segment. Our sales were up 1% year-over-year on a reported basis and was impacted by approximately $300 million of currency exchange headwinds. Order of backlog trends continue to reflect a strong demand environment in both the transportation and industrial segments, and I'll get into more details about order trend dynamics by segment on the next slide. Adjusted earnings per share was ahead of our guidance at $1.53 and included $0.25 of currency exchange and tax headwinds versus our prior year. Adjusted operating margins came in as expected at 16.2%. Our free cash flow was strong at $400 million and we returned approximately $410 million to shareholders, and we'll continue to be aggressive with share buybacks, taking advantage of market dislocations and our share price. As we look forward, we are expecting second quarter sales to be approximately $3.9 billion and adjusted earnings per share to be around $1.57. Our guidance represents sequential growth in sales driven by the Transportation and Industrial Solutions segments and this will offset a sequential decline in our communication segment. Our teams remained focused on how we innovate with customers around the key secular trends that we position TE around, such as electric vehicles, renewable energy and data centers, just to name a few. Now I would like to move away from the financials just for a moment and I'm pleased that TE was named to the Dow Jones Sustainability Index for the 11th consecutive year. This recognizes our positive environmental, social, and governance policy and puts TE in the top 10% of the largest 2500 companies in the S&P Broad Market Index based upon long term ESG criteria. So let me get into the order trends in markets and I would appreciate if you could turn to Slide 4. For the first quarter, our orders were $3.6 billion and I think the key take away by segment is that we're seeing stability in transportation, strength in the industrial solutions segment, and we've seen incremental weakness in communications. I also want to highlight that as you look at this slide and you compare orders versus the prior year, there are some key moving pieces I want to highlight. First off is, while currency impact sales, they also do impact orders. And so to compare we're comparing different currency rates year-on-year. And the prior year also has higher than normal order levels due to the broad supply chain challenges we were all dealing with. I do also want to highlight, as I stressed earlier, that our backlog remains at near record levels. So let me get the orders by segment. Our transportation book-to-bill was 0.95, reflecting ongoing stable environment and strong backlog levels. On an organic basis, our transportation orders grew 9% year-over-year and it reinforces our ongoing strong content growth momentum in what is essentially a flat production environment. In our industrial segment, the book-to-bill of 1.02 reflects strong demand across most of them served end markets were in. We continue to see momentum around renewable applications and energy and are also continuing to see improving order trends in commercial air and medical as those markets continue to recover. Turning to communications, the orders reflect the incremental weakness in Data and Devices that I talked about. And the other thing I want to highlight on the orders is the appliance market is moderating as we expected and we've been talking to you about. As we continue to move through this year and continue to see supply chain improvements and a reduction of backlog levels, we expect book-to-bill levels to remain below 1, which is consistent with what we've been talking to you about. So with that as a brief overview of orders, let me now briefly discuss year-over-year segment results in the quarter that are laid out on Slide 5 through 7 and you can see the details on each of those slides. Starting with transportation, sales growth was strong. It was up 14% organically year-over-year, with organic growth across all businesses. Our auto business grew 20% organically versus auto production that was roughly flat versus the prior year. The outperformance was driven by our global leading position in electric vehicles. We're benefiting from electronification trends in the vehicle as well as some benefits from our pricing actions. While overall auto production is expected to be flat for this fiscal year, we expect production of hybrid and electric vehicles to grow approximately 25% of the total global auto production in 2023. And as you know, we generate 2X the content in EV platforms versus combustion engine vehicles. So we expect our content per vehicle to continue to expand as we move through the year. In the commercial transportation business, we saw a 3% organic growth, driven by growth in North America and Europe. And this growth was partially offset by declines driven by a continued China market that's weak. And in our centers business, we grew 3% organically and that was driven by our growth in automotive applications. At the Transportation segment level, adjusted operating margins were 15.8% as expected, reflecting the lag in the timing of price actions to offset inflation. Over the past three to four months, we took incremental cost actions and are implementing additional price increases to improve margin performance. We expect adjusted operating margins to improve sequentially into quarter two and get back to the high teens in the second-half of this year as we mentioned last quarter. Now let me turn to the industrial segment. In this segment, sales increased 7% organically year-over-year, with organic growth across all businesses. Our industrial equipment business was up 3% organically, driven by continued benefits from automation applications. Our AD&M business was up 14% organically with growth driven primarily by ongoing improvement in the commercial air market. In energy, we saw 8% organic growth with continued momentum in renewable applications. And our medical sales were up 5% organically and we're benefiting from the recovery and interventional procedures. As you can see on the slide, from a margin perspective, we expanded adjusted operating margins by almost 200 basis points and we continue to make progress towards our high teens margin target for this segment. Now let me turn to Communications. And in this segment, our sales were down 11% organic. The appliance market is down as we expected and as you would expect, with the benefit we got during COVID as it turns, we saw declines across all regions in this business. Our Data and Device business was down 6% organically, and this was driven by broad market weakness, which I already discussed. In the Communications segment, adjusted operating margins were 17%, driven by lower volume including declines in higher-margin distribution sales. We are taking additional cost actions to improve margin performance in this segment as we go forward. We will balance these actions with investments for growth as we continue to see strong design win momentum in next-generation platform serving the cloud data center market. So with that as a quick overview of our performance by segment, let me turn it over to Heath, and he'll get into more details on the financials as well as our expectations going forward.

Sujal Shah:

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

Mark Delaney:

Hey, good morning guys. Thank you very much for taking my questions. Could you please provide more detail on orders, specifically the linearity of how orders tracked over the course of the quarter and into January and any differences in order trends by end market?

Sujal Shah:

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

David Kelley:

Hey, good morning and thanks for taking my question. I wanted to follow up on the Communications Solutions segment discussion. I was hoping you could provide a bit more color on the progression of comms demand throughout the quarter? And then can you give us a view or sense into how you're thinking about sequential 2Q sales and margin trajectory for the segment? Thank you.

Sujal Shah:

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

Wamsi Mohan:

Yes, thank you. Good morning. Terence, can you just help us with some color around margins in your other segments as well, particularly, you stressed confidence in moving industrial back to high teens and also recovery in transport margins. How much of that is predicated on some of these restructuring actions versus the pricing initiatives that you've taken in transport and how contractual are those or is there a lot of cyclicality or uncertainty associated with accomplishing those initiatives?

Sujal Shah:

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

Christopher Snyder:

Thank you. I know the company is only guiding for the March quarter, but I wanted to ask a little bit about the outlook for the various end markets into the back half of the year. And then specifically for auto, I know the company said last quarter that there was agreed to price coming into effect in January. Is that not really having an impact until the back half or are you going to start to see that in Q2? Thank you.

Sujal Shah:

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

Matthew Sheerin:

Yes, thanks, and good morning. Heath, I wanted to just ask about your inventory levels. I know last quarter, you talked about some margin headwinds due to reduction in your own inventory within transportation. It looks like your actual inventory dollars were up quarter-on-quarter. So could you walk us through that inventory picture? Thanks.

Sujal Shah:

Thank you Matt. Can we have the next question please.

James Suva:

Thank you. Your transportation content story is very positive and compelling. So congratulations on that. One concern we get though is given a recession or a slowdown and the economy concern, is there any signs of auto unit you mentioned flat outlook, but a potential inventory correction there or a slowdown there as we progress through 2023?

Sujal Shah:

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

Amit Daryanani:

Thanks for taking my question. I guess, [indiscernible] kind of have you spent a bit more time on the price increases that you're expecting on the transportation side, how that flows into the model in 2023, can you just quantify what the size increases are that you expect this year? And then secondly, I think the fear I would have is, can you really raise prices on customers, the auto OEMs were actually lowering the price of their own car size by 15%, 20% at this point or do you end up with more sizable pushback, if not for this a likely for next year? So I'd love to just see your perspective on your confidence that these price increases will flow through and what sort of benefit are you embedding from that into your guide for 2023?

Sujal Shah:

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

Scott Davis:

Okay, good morning guys.

Scott Davis:

There's been a lot of talk already on kind of inventories and price and inflation. But can you disaggregate inflation a little bit for us and help us understand kind of -- are you seeing material moderation in things like labor inflation, I mean we can follow the materials ourselves, but labor is something that I think is a little bit harder to track?

Sujal Shah:

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

Christopher Glynn:

Hey, thanks. Good morning. Just shifting gears a little bit. I was curious about the Industrial segment margins, incrementals were a few hundred percentage points. And you held margins on lower sales versus the second half of last year. So I'm curious if you're hitting more of a culmination of the cost structure program that you've been talking about for a while?

Sujal Shah:

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

William Stein:

Great. Thanks for taking my question. You just answered a bit of this, but I'd like to dig a little bit more into the M&A opportunity. You highlighted that the company plans to spend over time about a third of its free cash flow on acquisitions. I think it's been significantly below that level for several years. So I'm hoping you can maybe refresh our memories as to both the strategic and tactical approach to M&A and whether we might expect that to accelerate in the next couple of years given the spend has been, I think, quite a bit below that third of free cash flow number? Thank you.

Sujal Shah:

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

Unidentified Analyst:

Good morning. This is Michael on for Joe. Earlier, you mentioned elevated restructuring costs in the first half of the year, which are more in line with 2020 levels. Can you disaggregate the drivers behind that, I know you had mentioned a little bit earlier, but any additional color would be super helpful?

Sujal Shah:

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

Samik Chatterjee:

Hi, thanks for taking my question. I guess I wanted to see if I can dig into the industrial equipment sub segment a bit and get some more color there. You talked about the recovery that you're seeing in medical, Comm Air and also the strength in renewables. But when I look at the industrial equipment, the broader sort of industrial group there, how are you -- what are you seeing in terms of the impact of macro, what are the puts and takes there, and any sort of color on book-to-bill, what that sort of sub segment is tracking at?

Sujal Shah:

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

Steven Fox:

Hi, good morning. Just one broad question on China and there's been a lot of news flow out of there and questions around how companies manufacturing footprint should look for the long-term or even shorter term given all the changes in terms of government policies, et cetera. Can you just sort of sum up your current situation in China and then how you look at sort of your global footprint, especially as you do some restructuring down the road here? Thanks.

Sujal Shah:

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

Guy Hardwick:

Hi, good morning. Just want to understand, sorry if this has been covered already, but I want to understand that the transportation margins just a little bit better. So I think you guided to, at the last quarter, at least 100 basis points of impact on the Transportation margins for the inventory reduction. At the same time, you also benefited in this quarter from, I believe, very strong pricing as well as strong outgrowth driven by mix. And even if I take out that 100 basis points of inventory reduction impact, you're still like 100 to 140 basis points decline in the margin despite the pricing. So does the pricing get even stronger as the year progresses, is that kind of what you're communicating, can you help me understand that a little better?

Sujal Shah:

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

Luke Junk:

Good morning, thanks for taking my question. A modeling question for me. Heath, just wondering if you can help us understand the moving pieces around your updated FX guidance, specifically, how that translates from revenue to earnings, wondering what has changed versus 90 days ago in terms of how it works through the plumbing, if you will, especially thinking about the back half of the year and the earnings impact as the top line impact starts to moderate?

Sujal Shah:

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

Shreyas Patil:

Hey, thanks so much for taking my question. Just coming back to communications. So maybe thinking a little bit beyond this year. You've talked about the ability to sustain low 20% margins in that segment. Obviously, we're going to be dipping below that for the next few quarters, but I'm just trying to get a sense of the bridge to get back to that low 20s level, I mean how much of that is really dependent on the end markets versus some of the internal cost actions that you're talking about taking out?

Sujal Shah:

Okay. Thank you. We'd like to thank everybody for joining our call this morning. And if you do have additional questions, please contact Investor Relations at TE. Thank you and have a nice day.

Operator:

Ladies and gentlemen, thank you for standing by, and welcome to the TE Connectivity Fourth Quarter 2022 Earnings Call. At this time, all lines are in a listen-only mode. Later, we will conduct a question-and-answer session. [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.

Terrence Curtin:

Thank you, Sujal and we appreciate everyone for joining us today. As I typically like to do at the beginning of these calls before we get into the slides, I'd like to spend some time discussing our performance, along with some of the developments that we're seeing since our call just 90 days ago. While there are a number of external data points showing crosscurrents from global economic uncertainty, we continue to perform well and you'll see this both in our fourth quarter and fiscal year 2022 results. Our performance came in ahead of our guidance and continues to demonstrate the benefits for how we strategically positioned our portfolio around secular growth trends as we continue to outperform our markets. We also were demonstrating operational performance in serving our customers and delivering strong financial results despite the broader macro challenges. Our backlog remains near all-time high levels and our overall order levels imply solid demand across the majority of the markets we serve. Within this backdrop, we have some markets that are growing, some that are still in recovery mode back to pre-pandemic levels, and others that are showing signs of moderation. At the same time, we're being negatively impacted by a stronger dollar, which will continue to be a significant headwind into 2023. I also want to highlight that our team continue to proactively implement price increases to keep up with ongoing inflationary pressure. I am confident in our ability to execute in the short-term as we navigate these challenges and I am excited about the long-term opportunities as we go forward. And Heath and I will go into more details on these moving pieces as we discuss our performance and outlook on the call. To summarize our financial performance, we delivered strong results again in the fourth quarter with double-digit organic growth and double-digit adjusted earnings per share growth year-over-year. For the full year, our adjusted sales and adjusted EPS were records with sales up 12% organically and adjusted earnings per share up 13% versus the prior year despite headwinds from foreign currency exchange and inflationary pressures. With this quick backdrop, let me give you some details on what we're experiencing. First, on the orders front. We're seeing some putting some tanks across the different end markets we serve and this is reflected in our orders in our backlog. With the higher backlog levels that we have and the stability we're starting to see in our supply chain for the first time since COVID, it is reasonable to see our book-to-bill below one in the quarter. Our backlog remains strong at $6 billion, which is almost two times higher than pre-COVID levels. If you click down on orders by segment, transportation and industrial are continuing to show positive order trends. In transportation, OEM auto production is still constrained by supply chain limitations, and end demand remains above current levels of production. So, we continue to have a favorable outlook for this market long-term on both production as well as the content growth. In the industrial segment, we continue to expect growth in com air and medical markets as reflected in our orders, along with the benefits from wind and solar applications in our energy business. Renewables now represent 20% of our energy sales and the com air market is still recovering to pre-COVID levels. And both of these will be growth areas within the industrial segment in 2023. In our communication segment, we are seeing orders decline in the appliance market. Based upon recent developments, we have seen orders to cloud customers moderate, reflecting lower capital spending, along with inventory adjustments in the data center supply chain. We also continue to experience inflationary pressures and this is particularly true for resins, that we use for molding as well as higher energy costs that impact our manufacturing operations globally. We are continuing to implement additional price increases to offset these inflationary costs and expect to have a positive contribution margin later in 2023 from the price/cost dynamic. And the last thing I want to highlight before we turn to the slides and I think we've consistently demonstrated, we will take actions to ensure our cost structure is in line with what we're seeing in the market environment and Heath will provide additional details on this in his section. So, now let's get into the slides and I'd asked you to turn to slide three and I'll cover some additional highlights for the fourth quarter in the full year as well as get into our first quarter outlook. As Sujal mentioned earlier, our fourth quarter included an extra week. Our fourth quarter sales were $4.4 billion, which are up 14% on a reported basis, our adjusted operating margins were 17.4%, and our adjusted earnings per share was $1.88, and this was up 11% year-over-year. If you include the extra week to get to a better apples-to-apples comparison, our fourth quarter sales were slightly over $4 billion and this was up 12% organically year-over-year, and adjusted earnings per share were $1.75. A key thing to highlight in the fourth quarter is that we delivered record free cash flow of $745 million in the quarter, which demonstrates our strong cash generation model and we returned over $500 million to shareholders. I do want to highlight and we discussed it with you previously, earlier in the year, we did increase inventory levels to deal with supply chain volatility and ensure we can meet the needs of our customers. As we began to see our supply chain improving, we decided to get our inventory more in line and reduce our inventory by approximately $350 million in the quarter and you'll see our days on hand were actually down year-on-year in the fourth quarter. We do believe this was prudent balance sheet management in the current environment and this action improved our free cash flow in the quarter, but does pressure our margin in the short-term. So, now let me touch upon a few additional highlights for full year results. Our fiscal 2022 results were record at $16.3 billion and this was up 9% year-over-year on a reported basis despite currency exchange headwinds of approximately $760 million. Sales were up 12% organically with industrial and communications of double-digits and transportation of high single-digits demonstrating the strategic positioning of our portfolio. Adjusted earnings per share was a record at $7.33, which was up 13% year-over-year and adjusted operating margins were 18.2% with expansion in the industrial and communication segments versus the prior year. For the full year, we returned $2.1 billion to shareholders between share buybacks and dividends, as our focus was on organic investment in the business, as well as return of capital to our owners. Now, with as a wrap-up of the financials for 2022, let me touch upon our first quarter guidance. And I want to frame this out by incorporating some of the moving pieces I already highlighted for you. I do want to make sure we have the right baseline together for guidance. So, when you look at this, the year-over-year comparison would be against $3.8 billion of sales in the first quarter of fiscal 2022 and the sequential comparison would be against the 13-week sales in quarter four of $4 billion. So, if we look at it going back to quarter one of 2022, -- I mean sorry, 2023, we do expect sales of approximately $3.75 billion and this sales in the first quarter of 2023, up 9% organically and down slightly on a reported basis year-over-year, despite approximately $400 million of FX headwinds. Adjusted earnings per share is expected to be approximately $1.50, which includes year-over-year headwinds of approximately $0.25 from currency exchange, and a higher tax rate of 21%, which will be up from a year ago. When you look at our guidance sequentially versus the 13-week $4 billion, we are declining by $300 million in sales and $0.25 in EPS. Roughly half of our topline sequential decline is from foreign currency, with the remaining bounce split between typical seasonality and the decline in the communications volume due to end market moderation. The EPS decline is driven by foreign exchange and volume declines I just mentioned, as well as a temporary impact from the proactive inventory reductions we drove in the fourth quarter. While we have some near-term pressures that are non-structural, we have been making progress on what we can control with our teams driving price increases this past year to partially offset the increasing inflationary pressures. As we've mentioned in the past, in transportation, there is a lag between inflation and our ability to recover through price. We have implemented to do additional price increases which again transportation margins back up into the high teen sometime in the second half of 2023. While we are working through the crosscurrents we're experiencing, one thing that has not changed is the benefit we continue to see from the secular trends in our markets and the outperformance we're generating from content growth. We're benefiting from our position in electric vehicles, smart factory applications, including automation, renewable energy and high speed cloud and artificial intelligence applications. We remain committed to our business model and long-term value creation through growth, margin expansion, as well as driving our strong cash generation model. So, with that, wrapping up the highlight slide, let's turn to slide four and I'll share some more details on orders. For the fourth quarter, orders were $4.3 billion and this reflects resiliency in both transportation and industrial and also demonstrates moderation in our communication segment. Our backlog of $6 billion is up 11% year-over-year and I want to emphasize that we're seeing very little impact from push outs or cancellation from our customers. In transportation, we had a book-to-bill of 1.03, along with a strong backlog position. This reflects favorable demand patterns. End demand for autos continues to be higher than what OEMs can currently produce, providing a favorable backdrop for production increases as our customer supply chain bottlenecks begin to resolve and dealer inventories get back to historical levels. Our content growth remains strong with content per vehicle expanding in fiscal 2022 to over $80 per vehicle from the $60 range of pre-COVID. We do expect further content expansion due to our global leadership position and increased adoption of electric vehicles globally. In our industrial segment, we had a book-to-bill 1.01. Year-over-year order growth was driven by both at AE&M [ph] and our medical businesses, as these businesses continue to recover from pre-pandemic levels. And in our communications segment, orders declined year-over-year and sequentially reflecting expected decline in appliances and moderation in data and devices as the data center supply chain adjust inventory levels for its cloud customers. Despite this market cyclicality, we expect to continue to outgrow the market in the data and devices business due to share gains and benefits from high speed and AI implementations in the data center and cloud. Now, let me provide a little color what we're seeing in orders geographically. On a 13-week organic basis by region, we saw year-over-year growth of 6% in China and Europe, while North America was essentially flat. On a sequential basis, we saw orders growth 18% in China, with single-digit declines in Europe as well as in North America. So, with that as a backdrop of orders and backlog, let me turn it over Heath and he'll get into segment highlights, as well as some information on the financials.

Sujal Shah:

Angela, can you please give the directions for the Q&A session?

David Kelley:

Hi, good morning team. And thanks for taking my question. Number of moving parts in the quarter, the extra weeks and inventory reduction shifting in demand. So, I was just hoping to dig into maybe the earnings trajectory into 2023. So, could you walk us through or give us a sense of exit rate 2022 sales and margin levels?

Sujal Shah:

Thank you, David. Can we have next question, please?

Wamsi Mohan:

Yes, thank you. Good morning. I was wondering if you can talk a little more about the order and backlog trends and comps, if you could share some color on that? And maybe the magnitude of the inventory adjustment, potentially the GRC being at these ODM suppliers to hyperscalers. And if I could, I was also wondering if you could comment on how TE's performance was an outgrowth versus production and in fiscal 2022 for transport and how much of that was inventory adjustments in 2022 as well? Thank you so much.

Sujal Shah:

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

Steven Fox:

Hi, good morning. I was just wondering since you're not providing a full fiscal year guidance for the new fiscal year, if you could maybe walk through what you're thinking about your end markets at this point in time? Thank you.

Sujal Shah:

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

Matt Sheerin:

Yes, thanks. Good morning. I wanted to circle back to the gross margin and specifically, the impact of that inventory reduction, that $350 million. How much -- I mean it looks like in Q4, you were down with 220 basis points in gross margin year-over-year. And it looks like you're guiding roughly 200 basis points down in Q1. So, how much of that is related to that inventory reduction? And is that one quarter issue or does that carry through to Q2 of 2023? Thanks.

Sujal Shah:

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

Amit Daryanani:

Thanks a lot. Terrence, I think there's going to be a lot of focus on operating margin trajectory in fiscal 2023 beyond the mid-16% I think we're going to do in December. I was wondering if you could provide some clarity on how do you think margins stack up in 2023 qualitatively across segments? And really specifically on transport, reviewing the back half, recovery looks better versus the first half. And then CIS, do you think we end up dipping below 20 over there. Just any breakdown on margin trajectory going forward would be really helpful? Thank you.

Sujal Shah:

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

Chris Snyder:

Thank you. So I wanted to talk about more the margin outlook for Transport Solutions, but maybe more so focusing on price cost. Prior commentary from the company has said that you're recovering about two-thirds of cost inflation and it translates to more than $200 million loss at the EBIT line based on my math. Presumably, the high majority of all of that is transport. So I guess, as we look into the back half of next year, and we see pricing going higher in cost maybe flat to down, at least with metal, how should we think about that 200-plus kind of EBIT loss? Could that get to neutral? Is there any scope for that getting beyond neutral? Any color there would be helpful. Thank you.

Sujal Shah:

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

Joe Spak:

Thanks so much. Heath, you mentioned some higher restructuring. I was wondering if you could give a little bit more details on that stepped-up level in the fourth quarter. It looks like it was really in the transportation business. And I think on your guidance, it looks like restructuring is still going to be a healthier level in the first quarter. So maybe just a little bit more on those actions, what you're looking for in terms of a payback. And when can restructuring return to more normalized levels?

Sujal Shah :

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

Mark Delaney :

Yes. Good morning. Thank you very much for taking the question. I want to understand what's making the company take the view that 2023 content growth will be higher than the 4% to 6% target? And do you think there will be any inventory reductions that your customers could be making and that perhaps could offset some of the underlying content growth this coming year? Thank you.

Sujal Shah :

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

Unidentified Analyst:

Hi. This is Sumeet [ph] on for Samik Chatterjee. Thanks for taking my question. I just wanted to ask on transportation relative to the underlying market, like what are your expectations for auto production growth for 2023? Like IHS is currently forecasting a 4% growth, like amounting to nearly 85 million vehicles produced. What's your take on that? Thanks.

Sujal Shah :

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

Jim Suva :

Thank you. Heath and Terrence, at this time of year, you typically give a little bit more on the 2023 or the next year outlook. I know I think I heard Terrence talk a little bit about the end markets. But then with the moving parts of inventory digestion, book-to-bill and all that, I was thinking and restructuring, I was thinking on the company totality level, any preliminary thoughts on either sales or margins or cost structure or cash flow for kind of the full years as we look out because there are a lot of moving parts?

Sujal Shah :

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

Shreyas Patil :

Hey, thanks. I was just maybe on automotive. You talked about content outgrowth this year. It sounds like it was around six points. And I'm just curious what that would be if you stripped out some of the price recoveries just to kind of get a sense of the underlying content growth? And then I think as we look ahead, how are you thinking about the ability to sustain that six points of growth over market or potentially even do better than that? And as you look at your position amongst some of the big OEMs that are poised to be the largest players in EV, what gives you confidence that you're seeing content expansion, especially with those OEMs?

Sujal Shah :

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

Luke Junk :

Great. Thanks for taking the question. Terrence, regarding the outlook for communications normalization, clearly, there's been a lot of data center capacity put into places since COVID hit in 2020, and that's, of course, benefited data in devices. What I'm wondering is, as you look forward, do you think there are opportunities to go back and strengthen the system after what at times has seen like a very frantic piece of investment in the past three years? Any near-term changes in channel inventory side, of course? Thanks.

Sujal Shah :

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

Unidentified Analyst :

Hey, guys. Good morning. This is Tristan in for Joe. Thanks for squeezing me in here. Just wanted to double click on your industrial orders, which I believe was down sequentially despite that extra week? Like any reason for that, anything you can highlight?

Sujal Shah:

Okay. Thank you, Tristan. And I'd like to thank everybody for joining us on the call this morning. If you have any more questions, please contact Investor Relations at TE. Thank you and have a nice morning.

Operator:

Ladies and gentlemen, thank you for standing by, and welcome to the TE Connectivity’s Third Quarter 2022 Earnings Call. [Operator Instructions] I would now like to turn the conference over to our host, Vice President of Investor Relations, Sujal Shah. Please go ahead.

Terrence Curtin:

Thank you, Sujal. And I also want to thank everyone for joining us today to cover our results for the third quarter along with our outlook for the fourth quarter of fiscal 2022. As I normally do and before Heath and I get into the details on the slide, I want to take a moment to discuss our performance within the backdrop of the current environment. We delivered strong performance again in the third quarter with record sales, and this represents 11% organic growth year-over-year. We had growth in each of our three segments and organic growth across all nine of our business units. Adjusted operating margins were in the mid-18% range and this is at level similar to where we've been running through the year, despite incremental headwinds that we've been experiencing. And we also delivered record adjusted earnings per share that was above our guidance. I feel our performance is a result of how we strategically positioned our portfolio around secular growth trends, as well as the execution of our teams, both from a manufacturing perspective and in our ability to effectively manage pricing in this inflationary environment. I'm also proud of our teams as they continue to overcome broader macro challenges to effectively serve our customers and deliver the strong financial results we're going to talk about today. Now let me provide some color on the supply environment, key end demand trends and the development since our call 90 days ago. When we provided our guidance last quarter, we told you about an anticipated impact from the sales – on our sales due to the COVID lockdown in China. And even during these lockdowns extended further into the third quarter than our original expectation, our teams were able to recover and the sales impact to the quarter was negligible. When you think about the global supply chain challenges and specifically around material availability, I would tell you they are about the same as they were 90 days ago and inflationary pressures continue to linger. One element that I want to highlight that has changed since the last time we spoke is the strengthening of the U.S. dollar. This strengthening has significantly increased the headwind we're facing from foreign currency exchange rates both year-over-year and sequentially and Heath will talk about that a little bit more, later. Returning to the markets, customer demand remains strong as evidence by our order levels and our strong backlog position. And just to highlight our backlog has grown over 20% versus the prior year. And we are seeing some consumer-facing markets like appliance, moderate, but we continue to see broad strength across our industrial segment and we still have a number of markets that we serve that are not yet back to pre-COVID levels. And this includes automotive, commercial air as well as medical devices. And we expect growth in these businesses as supply constraints are alleviated and those markets continue to recover. The other thing that I want to highlight we've consistently talked about, and it has not changed is the benefit we continue to see from the secular trends in our markets and the outperformance that we are generating from content growth and share gains. We are benefiting from our position as an industrial technology leader with growth from electric vehicles, smart factory applications, including automation, renewable energy and high speed cloud and artificial intelligence applications. The other thing that I want to highlight that we – as we continue to navigate through this noisy macro environment is that we remain committed to our business model and long-term value creation by driving further growth, margin expansion and strong cash generation. So with that, as a backdrop, let me get into the slides and discuss additional highlights that are on Slide 3. Our quarter three sales were record at $4.1 billion, and this was up 7% on a reported basis and up 11% organically. As I mentioned, we saw growth across each of our segments and organic growth across all of our businesses. Once again, demonstrating the strength and positioning of the portfolio. We generated double-digit organic growth in the Industrial and Communications segments and 8% organic growth in transportation, despite an auto production environment that was essentially flat year-over-year. Our orders were $4.2 billion in the quarter with a book-to-bill of 1.02. And this shows that the demand environment continues to be strong. And I'll get into more details about order trends by segment, when I get to the next slide. From an earnings perspective, our adjusted earnings per share was a record of $1.86 and that's up 4% year-over-year with adjusted operating margins of 18.6%. From a cash flow generation, our year-to-date free cash flow was approximately $1 billion with approximately $1.6 billion return to shareholders this year. And I will tell you, we've been aggressively shared buybacks as we're taking advantage of the recent market price dislocations with our stock. As we look forward, we are expecting quarter four sales to be approximately $4.2 billion and adjusted earnings per share to be around the $1.85. Our guidance reflects the benefits of an extra week that we have in the fourth quarter, but also factors in the impact of an increased headwind from currency exchange rates. And if you look at the slide, we've provided the details of each of these items and how they impact our fourth quarter. Before I get the orders. One thing I do want to do is move away from the financials for a moment and highlight that I'm pleased that we issue our 12th corporate responsibility report last quarter, which reinforces our One Connected World strategy. When you look at the report, it has many highlights, but one of the keys that I think is important was that we were successful in driving a 30% reduction in absolute greenhouse gas emissions in a single year in fiscal 2021. And this is a very large step towards our goal of achieving a 40% plus absolute reduction in our Scope 1 and Scope 2 greenhouse gas emissions by 2030. So with those being the highlights on Slide 3, let me turn to Slide 4 and I'll discuss order trends as well as what we're seeing in our markets. For the third quarter, our orders were $4.2 billion as we expected. And this reflects the continued strong demand environment from our customers, as well as we continue to see the impacts of ongoing supply chain volatility in the markets. Our backlog is up over 20%, and increased double-digits in each of our segments versus the prior year. It is also important to note that currency exchange headwinds are not only impacting our sales, but also when you look in the year and year compares negatively impacts the value of orders in the third quarter. And this impact when you look at the year and year compare, or orders would be $230 million higher this quarter, if it wasn't for the strengthening of the U.S. dollar. In Transportation, we have a book-to-bill of one in the third quarter, which is in line with where the segment has run historically. And keep in mind that we also have a strong backlog position. And demand for autos remains healthy and is significantly higher than what OEMs can currently produce, providing a potential setup for future auto production increases as supply chain bottlenecks begin to resolve and dealer inventories get back to more normal levels. In our Industrial segment, we saw another quarter of strong orders with a book-to-bill of 1.16 and growth across all businesses year-over-year. We continue to see a favorable backdrop in capital expenditures for factory automation, manufacturing capacity and renewable energy. And these trends benefit both our industrial equipment and our energy businesses. The other thing about our Industrial segment orders are we’re continuing to see improving order trends in the commercial aerospace, as well as medical markets, where we expect growth as those markets continue to recover. In our Communications segment orders reflect a double digit increase in our backlog versus the prior year, along with expected moderation in the appliance market that we’ve been talking about all year. And one thing, when you look at the communications order trends, it is important to note that our backlog in our Communication segment is approximately $1 billion. So with that as a backdrop on orders, let me get into the year-over-year segment results that you can see on Slide 7 through 7 and each one of those slides have the details for each segment. So starting with transportation. Our sales were up 8% organically year-over-year. Our auto business grew 9% organically versus auto production that was roughly flat versus the prior year. Global auto production was 18 million units and this was slightly lower than our expectations due to the lockdowns in China. And we do expect some sequential increase in auto production into the fourth quarter. The trends around our content remain robust as we continue to benefit from increased electronification, as well as higher production of electric vehicles. And we do expect electric vehicles to be up over 30% this year compared to a total auto production environment that is going to be flat. As we look forward, we do expect continued expansion in our content per vehicle and you’ll see that as we move from the first half to the second half of this year. In the commercial transportation market, we saw 10% organic growth driven by North America and Europe with significant market out performance in all regions driven by strong content growth, as well as share gains. In our sensors business, we grew 2% organically and what was nice of that growth was driven by the focus we have on factory automation applications. When you look at earnings for the segment, adjusted operating margins were 17.3% and this was impacted by the inflationary pressures. As you know, there’s a timeline from when we incur higher inflation until price increases become effective with our auto customers. So let’s move to the Industrial segment and in our Industrial segment sales increased 13% organically year-over-year. Industrial equipment was up 19% organically with double digit growth in all regions and continued benefits from increased capital spending and factory automation. In our energy business, we saw 17% organic growth driven by increased penetration in renewable applications. And in our aerospace defense and marine business, this is the first time we’ve seen year-over-year growth since the market was impacted by COVID. And we now expect continued growth as we go forward. Our medical sales in the segment were up 1% organically with a modest increase in interventional procedures, as well as medical device market is continuing to work through supply chain challenges. From a segment margin perspective, our adjusted operating margins expanded year-over-year by 100 basis points to 16.8% driven by higher volume and strong operational performance by our team. We have made significant progress in our margin progression over the past several years. And I’m pleased with how the team continues to drive towards its business model target of consistent high teens operating margin. So let’s turn to the Communication segment. And as you can just see, looking at the slide, our team continues to execute, while capitalizing on the growth trends in the markets they serve. Sales growth was 16% organically year-over-year for the segment with growth in both businesses as highlighted on the slide. In our data and device business, we saw market out performance driven by content growth in high speed cloud, as well as share gains in artificial intelligence applications. And as we highlighted last quarter, these artificial intelligence applications do improve energy efficient in the data center. And it’s just another example of how we enable lower carbon emissions with our customers through our engineering. In our appliance business, it didn’t perform ahead of our expectations, despite the expected declines in the China market. We saw growth both in North America and Europe in our appliance business, and that is driven by continued share gains enabled by our global manufacturing strategy. From a margin perspective, the communications team continues to deliver outstanding performance. The adjusted operating margins were 26.2%, and this was up 270 basis points versus a strong quarter in the prior year. And our teams continue to deliver strong performance, both on sales as well as proving margin resiliency. So with that as a backdrop of our segment results, let me turn it over to Heath who will get into more details on the financials as well as our expectations going forward.

Sujal Shah:

Hey, thank you. Can you please give the instructions for the Q&A session?

Chris Snyder:

Thank you. I wanted to ask about expectations for global auto production over the next couple quarters. Obviously a big debate in the market, consumers are pressured but we've already had production year top levels for the last two years. So just what are you hearing from customers around expectations for production and, and intern connectors over the visible time horizon and would also be interested in any views on auto demand versus production debate? Thank you.

Sujal Shah:

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

David Kelly:

Hey, good morning, Terrence and Heath, and thanks for taking my question. Maybe to follow-up on the order summary page and specifically the transportation and communications orders which pulled back a bit here. Can you talk about demand trends and maybe transportation kind of outside of automotive and then also what you're seeing in communications and maybe also if you could give us a sense of how orders are tracking for both in markets Q4 to date, that would be great? Thank you.

Sujal Shah:

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

Wamsi Mohan:

Yes. Thank you. Terrence, can you talk about the various moving pieces and margins across the segments? Automotive was weaker and I know you experienced a lot of headwinds in the quarter, but comps and industrials were quite strong. How should we think about the trajectory from here? And also if you could address how the incremental margin should track because that that seemed to decelerate someone in the quarter? Thank you.

Sujal Shah:

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

Mark Delaney:

Yes. Good morning and thank you for taking the question. So you would better understand the FX impacts and from a couple dimensions potentially. So first you spoke to some of the translational impacts, but are you seeing any change in actual business conditions and are any of the international companies potentially being more aggressive with quoting activity given some of the changes in currencies and then specifically to the P&L, I was hoping you could maybe speak a little bit more specific to the 4Q sequential EPS. Heath, I think you said its $70 million on revenue quarter-on-quarter; could you speak to the EPS impact? Thanks.

Sujal Shah:

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

Robert Jamieson:

Hey, good morning. This is Robert Jamieson in for Joe. Just wanted to pivot quickly and ask about the buyback activity. It looks like you guys are running about two experts you did last year this time. Just wondering if there is any changes to your capital allocation strategy.

Sujal Shah:

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

Amit Daryanani:

Yes. Good morning, everyone. So I guess I have a question on a clarification. Terrence the questions for you as you think about beyond the September quarter, I think, there is a lot of concern around what 2023 could look like given all the macro worries that are out there. Can you perhaps just maybe talk about the cross curves that you see at TE as it relates to 2023 across the segments would be helpful? I think to just level set things like constant growth and how you see that stacking up next year. And then Heath if you could just clarify, I heard your discussion around margins, maybe I don't appreciate this enough yet. Why are margins going down in September quarter sequentially, when I think some of the headwinds you've talked about, should alleviate? So lead us what the margins puts and takes as well in September. Thank you.

Heath Mitts:

Sure Amit, your question was relative to implied margins for Q4. As you know, we did not guide the margin number. So if you are backing into a margin number relative to the sales and the EPS, I think, one taking consideration of the tax, rate is going to be a point higher as we guided in the fourth quarter. So, we're not seeing a dramatic fall off in margins. But if you are on the fringes, if you will, keep in mind a couple of things as we signaled we do expect our Communications segment to be a little bit lower revenue levels in the fourth quarter, just because of some of the appliance pieces the Terrence just talked about that has a little bit of a mix impact. There is no change in our assumptions around this inflation and price. Go get when we're only covering two thirds. And then again on the fringes, we are going to be working down some inventory in the quarter and that's going to have a little bit of impact as we work through that. But it's not something that we see falling materially at all if any.

Operator:

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

Terrence Curtin:

Well, thanks for the question. And I guess, I know we spoke to many about it. When we think about our business and the lead time for our product, let's put things into perspective about our lead times, for an average product, you might be six to twelve weeks. So I do want to frame, when you look at TE and you think about an average lead time, you are six to twelve weeks, it's not some of lead times you hear from other product categories that you have. So there is an element here of when we were talking about book-to-bills of 1.20, we always said there will come a time that as markets become more normalized, we would expect our book-to-bill, to reflect more normal patterns than a 1.2 book-to-bill. So when I look at it and I think about transportation, getting closer to a one, we are expected to get to. Certainly as we work off backlog, like you saw in communications, we got a lot of backlog. We have over a $1 billion in backlog in communications. Customers they feel good with that backlog, they are not going to place more orders. They're going to want to work that off. And we looked for pushes and cancellations. Are people pushing out orders, are they canceling orders? We are not seeing any major trends in pushes and cancellations. So with the indicators that we're looking at show that hey, while we have some markets in transition like appliance, that we've been highlighting to you we also still have markets that are still trying to catch up like commercial aerospace. So I do think it's an environment where not everything is going up and growing. And we just have to realize if a customer is concerned about the macro, they are probably going to get a little bit more conservative and say, hey, let me work off a little bit of backlog. So I think you are going to continue to see book-to-bills getting more normalized in an environment like we have. But certainly we have some markets where customers are concerned about supply chain volatility. And like we talked about in the Industrial segment, we're still at a 1.16 book-to-bill, which is a very strong book-to-bill. And that means we're still building backlog.

Operator:

Your next question comes from Samik Chatterjee with J.P. Morgan. Your line is open.

Terrence Curtin:

Yes. When I look at our – thank you for the question. When we look at our industrial business unit, it also comes into the backlog of our customers. If you look at our customers that are all the robot manufacturers of the world, certainly the factory automation, and you even go back to semi capacity, be put in electric vehicle battery capacity, being put in, other automation program being put in, they're the drivers of it. So you have to look at the capital spending and the backlog of the projects continues to be very strong. And that's creating backlog for our customers of the world, whether they're in Asia, whether they're in Europe, whether they're here. And what's nice is we're very globally deployed in that business unit. And orders continue to be very strong is people are trying to make sure they can fulfill their backlog. And we've really positioned well in that space. And you've seen that outperformance consistently over the past year and a half.

Operator:

Your next question comes from Matt Sheerin with Stifel. Your line is open.

Terrence Curtin:

Hey, Matt.

Terrence Curtin:

Well, I think the thing is first off being, people have been trying to make sure you're not going to want to hold up manufacturing of an end product for a connector. If you're waiting for a semiconductor, people will want to make sure they have the interconnects with certainly the semiconductor being the brain. And we're a little bit more like the arms and the legs. But when you look at it and you take distribution to what you've said. Distribution inventory is still not back to where we would expect it to be. It's still probably 15 days light on a term perspective of where it was pre-COVID. So we continue to monitor that inventory position. And that's an important thing to watch to make sure that the distribution channel does not get heavy from a day's perspective. So feel good that they're still in a good spot, when you get into where our product goes everywhere in the world, we're not going to know every little pocket inventory. But it's something that if lead times continue to get better and I wouldn't tell you, they have gotten better yet, they're stable, but they're not better. You would expect, there might be a little bit of an air pocket, but we're not at that point yet.

Operator:

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

Terrence Curtin:

Hey, good morning.

Terrence Curtin:

When you look at that and I think you have to start with, we have a very strong position already. And as we say, we're in essentially every car in the planet already. So I think our market share, our strong position we already have that has been in combustion engine as we bring the technology. And I know we've shared content elements of, hey, you look at an electric vehicle, it's about 2x, what we have. But then you also carry over what we do on a low voltage architecture that when you add the high voltage motors in it, basically is additive. So when you look at it from a market share, I feel very good about the programs we're winning. What's in great is it's as global as our current position. We want to sit there and make sure we're globally positioned. And it's pretty similar to what we have and what we had in our historical market share.

Operator:

Your next question comes from Shreyas Patil with Wolfe Research. Your line is open.

Terrence Curtin:

When you look at it, book-to-bill of one basically means you're not building backlog. So I think the one thing, when we look at book-to-bills, please remember there's two numbers in a book-to-bill equation. The order number, and then obviously the revenue number and you have to realize, we have brought up our output by the growth that we talked about. So the bill has also gone up. But when you look at it, similar to what we talked about in communications, if the backlog is so strong, you can have a book-to-bill below one because the customers feel they are scheduled out over a couple quarters, could be up to three quarters in our case where they say, hey, guess what, I feel good, where I'm primed in the system and you could run below one a little bit. So they're just key factors of how it works. And I think you have to keep in the mindset. I'll go back to what I said today. When we have an average lead time of six to 12 weeks, let's say, we aren't somebody that has backlog that goes out years. That is not our business, our backlog typically is within the next nine months.

Operator:

Your next question comes from Jim Suva with Citigroup. Your line is open.

Terrence Curtin:

Thanks, Jim, and good to hear from you. I'll let Heath handle that.

Sujal Shah:

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

Steven Fox:

Thanks. Good morning. I heard all the comments on margins this morning. I was just wondering if you could dig a little deeper into the communications margins. I think you keep telling us not to expect these mid 20 margins to repeat themselves, but they keep repeating. So there must be something going on in terms of products or pricing or execution since you’ve put up 26% and you’re talking about pressure on appliance markets. So any color there would be helpful. Thanks.

Sujal Shah:

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

Joseph Spak:

Thanks so much. Can you give us some color on what your customers are thinking in Europe, in light of the energy issues there? Like ironically, one of the things we’ve heard is in transportation industrial, some of those players may try to produce as much as possible this quarter to get ahead of what they think might be potential larger issues later in the winter, I guess as long as the supply chain allows them to do so. Are you seeing any evidence of that? And then related, I do think you have some facilities in Germany. So how directly impacted would you be by gas shortages?

Sujal Shah:

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

Luke Junk:

Good morning. Heath just hoping you can help us unpack the margin in industrial this quarter. It’s a new high water mark. If we look bigger picture and there was a nice step up sequentially as well. Last time we saw this kind of step up was in the third quarter last year and that margin upside proved to be pretty sticky on a go forward basis. So just hoping you could expand on what’s going on under this surface and that business this quarter, especially as it pertains to the path of industrial margins from here. Thank you.

Sujal Shah:

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

Nikolay Todorov:

Yes. Thanks and good morning. Two clarification questions for me. One is in auto, you posted 9% outgrowth versus production. But I just wonder, was there any inventory build in the June quarter last year that would suggest that your outgrowth was even stronger? And then the second question clarification, I think it was asked, but what is the FX EPS impact sequentially? I think revenue impact $70 million to $75 million sequentially, but what is the FX, the EPS impact sequentially? Thank you.

Heath Mitts:

Yes. Nikolay, I apologize if we didn’t provide that. The sequential impact we are on FX, we are estimating to be it’s around $70 million revenue and about $0.05 of EPS sequentially.

Sujal Shah:

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

William Stein:

Great. Thanks for getting me back in. I apologize if this might have already been asked. But specifically in the transportation end market, you have a target of 20% EBIT margins. And I understand that right now we’re going through this well documented and well discussed on this call inflationary FX that there’s a timing effect of passing that on. Do you all have an expectation as to when you might approach that 20% level again? Is that like something we should think of in the next year or two? Or is that now feeling longer out in time?

Sujal Shah:

Okay. Thank you, Will. I want to thank everybody for joining our call today. If you have further questions, please contact Investor Relations at TE. Thank you and have a nice day.

Operator:

Ladies and gentlemen, thank you for standing by, and welcome to the TE Connectivity Second Quarter 2022 Earnings Call.

Sujal Shah:

Good morning, and thank you for joining our conference call to discuss TE Connectivity's second quarter 2022 results. With me today are Chief Executive Officer, Terrence Curtin; and Chief Financial Officer, Heath Mitts.