Q2 2023 TE Connectivity Ltd Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the <unk> 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.
I'd like to ask a question. During this time simply press Star then the number one on your telephone keypad.
As a reminder, today's call is being recorded.
I'd now like to turn the conference over to our host Vice President Investor Relations Suzhou Shah. Please go ahead.
Good morning, and thank you for joining our conference call to discuss <unk> connectivity second quarter 2023 results with me today are Chief Executive Officer.
Chief Financial Officer Heath Mitts.
During this call we will be providing certain forward looking information. We ask you to review the forward looking cautionary statements included in today's press release.
In addition, we will use certain non-GAAP measures in our discussion. This morning, and we ask you to review the sections of our press release and the accompanying slide presentation that address the use of these items.
The press release and related tables, along with the slide presentation can be found in the investor.
Relations section of our website at <unk> Dot com.
Finally during the Q&A portion of today's call, we're asking everyone to limit themselves to one question and you may rejoin the queue. If you have a second question.
Now, let me turn the call over to tariffs for opening comments.
Thanks Sue.
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.
Yeah.
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 in certain end markets as well as impacts from foreign currency exchange and inflation.
At the same time.
So the strategic positioning of our portfolio.
Key secular trends.
These include global growth in electric vehicle adoption momentum and momentum in renewable energy adoption.
Growth in interventional medical procedures.
Wins in the artificial intelligence space.
Growth from these trends are enabling us to offset the impacts from Sir.
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.
In 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.
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 of capital back to our owners.
So let me now provide some color on markets that were seeing another update.
Okay.
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 better cycling.
And you know this is truly evident as we go through our second quarter results today.
We're all of our businesses in the transportation and industrial segments grew worse.
While both of our business in the communications segment decline.
Okay.
Our view of the transportation end 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 in our elite.
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.
In our energy Bill.
Momentum in renewable applications.
In our communications segment orders and sales remained weak due to both the market weakness and inventory corrections across our customer 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.
Just to get worked off by our customers.
And finally before I get in the slides I do want to highlight the way, we think about long term value creation and that has remained unchanged.
It is built on the pillars of secular growth and increased content around the markets, where we are positioned T.
Strong free cash flow generation.
A disciplined approach.
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.
Let me get into the slides and discuss additional highlights that are on slide three.
Yeah.
Our sales in the second quarter were $4 $2 billion that was head of our guidance driven by the transfer.
Yeah.
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 communications segment.
Decline was in line with our expectations.
On a reported basis sales were up 4% year over year and included approximately 100.
The exchange headwinds.
In the quarter, our orders grew 10% sequentially to $4 billion.
And I will talk more about order trend dynamics ice segment on the next slide.
Adjusted earnings per share was ahead of our guidance at $1 65, and included a 17 cents 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.
Yeah.
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 of 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 time.
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 look world's most admired companies.
This is the sixth consecutive year that <unk> has received this recognition, which measures a number of criteria, including a company's investment value on product quality.
So our responsibility.
So, let's talk about orders and let's move to slide four 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.
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.
Transportation orders grew 12% sequentially and this reinforces the stability I mentioned.
In the industrial segment, we saw so quiet.
Where 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 patterns are indicating moderation in certain industrial equipment end markets.
Yeah.
And segment.
Orders reflect the 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 five through seven and you can see the details on each of these slides.
Starting with transportation sale.
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 electrification trends in the vehicle.
And taxes 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.
It would be approximately 25.
In 2023.
And as you know, we generate two extra 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.
Yeah.
We remain excited about our leading global position in 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.
A thousand volts throughout the vehicle, increasing the speed of battery charging and withstanding the harsh environment, that's expected in our 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.
Yeah.
[noise] level adjusted operating margins were 16, 6% as expected.
While the dynamics of price versus inflation cause 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.
Yes.
Now moving to the industrial segment sales increased 15% organically year over year with organic growth across all businesses.
Our medical business sales in the quarter was a record at $200 million.
And it had 26% organic growth.
The interventional medical market was depressed following COVID-19, but now 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 <unk> renewable applications has a double digit catheter.
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 bolts like we talked about in the car.
And it's very important that the application knowledge, we bring on these higher watches are very important to enable major renewable applications.
And through the through our broad product portfolio, we are helping our customers reduce installation and maintenance costs.
And you can see our strong positioning playing out in the growth of the renewable applications and now in our energy business, it's kind of 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.
Okay.
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 ramp.
So I did 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 in 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 in the low end of the range. We gave in closer to the $450 million and we think it's going to be there for the next couple of quarters.
We do think adjusted operating margins at the slower volume, we'll be able to maintain in the mid teens.
As we look beyond the near term I do want to highlight that our <unk> business continues to have strong design win momentum in next generation platforms that serving the cloud data center market.
When you get into the rising complexity in artificial intelligence that 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.
And ramping up in fiscal 'twenty.
So with that as a back our shop of the segment performance, Let me turn it over to Heath will get into more details on the financials and our expectations going forward.
Thank you Terrence and good morning, everyone.
Please turn to slide eight where I will provide more details on the Q2 financials.
Adjusted operating income was $664 million.
Adjusted operating margin of 16%.
GAAP operating income was $537 million and included $62 million of restructuring charges $57 million of other noncash charges related to divestiture activities and $8 million of acquisition related charges.
Year to date, we have taken a 166.
Million of restructuring charges and would expect full year restructuring charges.
The approximately $250 million as we continue to optimize our manufacturing footprint and improve the cost structure of the organization.
Adjusted EPS was $1 65, and GAAP EPS was $1 34 for the quarter and included restructuring and acquisition and other charges of 31.
The adjusted effective tax rate was approximately 20% in Q2.
For the third quarter and for the full year, we now expect our adjusted effective tax rate to be approximately 20%.
Importantly, as always we continue to expect our cash tax rate to stay well below our adjusted ETR for the full year.
Yeah.
Now, let's turn to slide nine.
Sales of nearly $4 2 billion were up 4% reported and up 8% on an organic basis year over year.
Currency exchange rates negatively impacted sales by $155 million and adjusted EPS by 15 cents.
Versus the prior year.
We expect FX to have a modest negative impact for both sales and EPS again in our third quarter on a year over year basis.
Adjusted operating margins were 16% in the second quarter.
Pricing perspective, we saw about 200 basis points of headwind to our adjusted operating margins year over year as a result of lower volumes in our communications segment combined with the impacts from currency currency exchange rates.
As we go forward, we remain confident about margin expansion in the second half and it's important to note that we are not dependent on higher volumes to drive margin expansion.
Successfully implemented pricing actions to offset inflationary impacts in our transportation segment and this will drive margin expansion at the company level as we move through the second half of our fiscal year.
We also expect that industrial margins will modestly expand in the second half from Q2 levels.
Communications should remain in the mid teens at the expected volume levels that Terrence mentioned.
Yeah.
It's a good story here in the quarter, we once again demonstrated our cash generation model of our business with cash from operations of $634 million.
Free cash flow for the quarter was approximately $445 million.
Through the first half of our fiscal year free cash flow was $845 million up 37% year over year with roughly 785 million.
Shareholders through share buybacks and dividends.
As you May recall, a few quarters ago I indicated that we would look to drive our inventory levels lower as we see performance improving in our supply chain and as Terrence mentioned earlier, we reduced inventory again, this past quarter, which contributed to our free cash flow performance.
We continue to remain disciplined in our use of capital and our long term strategy remains consistent.
We would do which is to return two thirds of our free cash flow to shareholders and use one third for acquisitions over time.
I want to stress that our capital structure remains very strong as evidenced by our robust credit profile ample available liquidity and ease of access to the capital markets. We are maintaining a consistent financial policy and a strong balance sheet.
So our business model.
[noise] excuse me before I turn it over to questions. Let me provide a quick recap.
The strategic positioning of our portfolio is enabling us to deliver strong results from secular growth trends. Despite despite cyclicality in certain end markets.
From a market perspective, the transportation and industrial segments are consistent with our view 90 days ago with ongoing cyclical weakness in our communications segment as we expected.
Our focus in the second half is to continue to generate strong free cash flow and expand our adjusted operating margins driving to a higher margin rate as we enter fiscal 'twenty four.
We continue to demonstrate our strong cash generation model with a strong balance sheet that can support investments for growth.
And we remain excited about the opportunity.
Ahead of us to drive long term growth margin expansion and value creation for all of our stakeholders.
So with that let's open it up for questions. Thank you Chris can you. Please give the instructions for the Q&A session.
Sir at this time I would say to remind everyone in order to ask a question with Star then one on your telephone keypad.
We have time for all questions. Please participant is limited to one question if you'd like to ask a follow up question. Please press star one to return to the queue.
The first question is from Mark Delaney with Goldman Sachs. Your line is open.
Yes. Good morning, Thanks for taking the question could you comment mark around here.
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 contact maybe elaborate if you could please on China in particular and how to use content per vehicle and share compares between China domestic auto Oems and then youre content with the multinational Oems.
Alright, Thanks, Mark Let me, let me, let me start with the first part of that.
Which is what are we seeing in the various markets and yes. Some of this will be repetitive, but I'll add a little bit of color clearly, there's unevenness of what we're saying.
I think with what we see in orders as well as the markets. It is.
Most of the industrial space continues to be very strong.
Have stability in transportation and you have communication markets, where you do have inventory correction and some market weakness. So I think you have to keep it in the framing of those big buckets.
If you click down and then I think about transportation.
Transportation is still in automotive is still well below the $90 million.
Ill remind us units and back in 2019, and we've sort of been now for three years in a row around 80 million units. So we're still off 11% or so on the production side, but one of the things that you can say comes through and that's been built up over time.
Our automotive business was up about 1 billion $5 over the same period, while production is down and it is the content trends, we talk about every quarter. It is about.
And it's also about the chunk of that the vast majority comes out of electric vehicles and I think it shows where we positioned the business and also we do expect this year in excess of $2 million of our automotive revenue will be from electric vehicles, and that's helped them.
We're proud of and it also proves content and EBIT with.
Production is staying flat as we've said.
We're going to you're going to continue to add content growth now.
Now the one thing we do have this year in our <unk> content as the benefit from the pricing that we've put in to offset inflation. So that's about 300 basis points more on the growth than we would normally have but I do feel with even the guide we said where margins will be up next quarter implied in our guidance versus this quarter really.
Flex.
Those dynamics.
I think when you get into the industrial businesses.
We have three markets that still remember remains strong and like we talked about last quarter, our industrial equipment market showed some plateauing in some areas and we've seen a little bit more weakness in our orders in certain areas in the industrial equipment market.
Youre going to continue to see strong growth in our energy business due to renewable applications. If you take this quarter, we grew high 20%, but over since 19.
It's high single digit growth on a CAGR basis on a trailing what we've done the positioned te around renewable and turn energy into a growth business.
In medical it's really nice that you see the record revenue I also think that's where we positioned ourselves in interventional procedures and I think that's something that.
As we get supply chain corrected back.
Back there again can be higher single digits, and then comment we're still in a recovery mode.
Our revenue was still below pre COVID-19 levels.
I was not back so I still think there is upside there.
Has that entire space recovers in the supply chain and get better.
And then in communications.
Really what's happening there is well documented cloud spending pause we have throughout everything corrections across the supply chain and inventory whether it be the OEM. The ODM any of the contract manufacturers that are there as well as distributors and we do think thats going to be with us at least the next couple of quarter.
<unk>.
As I said on the call I feel very good that the design wins were gaining on next generation artificial intelligence, which comes on the back of cloud.
Our teams are going to get there with the highest speed interconnects that are required really like where we're positioned there once that does that inventory does get worked off and we move forward.
So clearly some moving pieces, but I do think where we've talked to you about content is coming through and has come through during the cycle that we've been.
Now, let me turn to China Your second question.
I think the first thing we all have to remember is the China just printed its GDP report and that was up four 5%.
Clearly as it comes out recovery it's been.
Been choppy.
For <unk>, what we see in China is the things in the communications segment were very similar to the overall segment not only in China, but globally. So those markets are weak lot of supply chain correction.
When you look at our industrial segment are a bigger play in the industrial segment in China is around our industrial equipment.
That remains weak and we're looking to see if that does get some.
Positive momentum.
And then the automotive and transportation side.
We grew last quarter, we expect to grow year over year. This quarter. So we continue to see growth from the momentum we have there and I think what's important is when you think about China Hayes, the grower of electric vehicles globally.
You see that in our growth we have even share when you look at whether it's a multinational or local our shares very even if something our teams have worked very hard to make sure we get.
And as Evs get adopted whether it's in China or elsewhere in the world. It's got to be something that drives content growth and its part of our four to six.
And we don't see any change in our content momentum.
Related to any OEM change and what's important for T. As we're always agnostic to Oems were trying to win and scale, what we do for to make sure that the auto industry is further adoption of electric vehicles out to the consumer.
Okay. Thank you Mark we have the next question. Please.
The next question is from Chris Snyder with UBS. Your line is open.
Thank you so the auto business was up 16% organically in the first half of the year, so about double digit outgrowth versus production.
Two extra targeted levels, how should we expect this to 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.
Thanks, Thanks for the question and you know what I'm, probably going to say first is please be careful looking at content in any quarter or short period of time, because you do get into system supply chain elements.
As you get in there I do think to your comment around price and a 300 basis points youre going to is going to be the benefit as we continue and as price Rosen.
And that will continue to take for the year drive us above the four to six range.
That we normally talk about price will be a part of that when we look at this year.
I think the other thing and I know it will be a little bit.
Probably redundant Hawaii, just said, we continue to expect that electric vehicles will be 25% of global production. So I do think youre going to continue to see that set up a very good and I think overall content per vehicle and how it trends over time is the most important factor to look at so we talked about this a lot.
And these calls few years ago back in 2018, we were in the low <unk>. We're in the low eighties today that just proves that studio electric vehicle content.
Yes.
Supply chains continue to improve our service levels go up.
Youre going to have some of these inter quarter impacts at times, but net net feel very good about where we're positioned on content growth.
Okay. Thank you Chris we have the next question. Please.
The next question is from <unk> Mohan with Bank of America. Your line is open.
Yes. Thank you good morning.
Was hoping to get some incremental color on the margins in Q2, where we made progress in transport, but industrial has turned a bit lower also the decremental margins on a year on year basis was much higher than normal what what drove that and how should we think about the overall margin and conversion.
Arjun trajectory through the course of this year.
Obviously this is heath I'll take this one.
Well listen I think the single biggest impact.
K margins on a year over year basis is the the pretty significant decline in the in the communications segment, but you have to remember.
I'll go back a year ago.
We've kind of framed up the communications segment margins is a bit overheated and it kind of showed how much volume leverage you can get those types of volumes youre getting.
And we have a business that goes from roughly quarterly.
Quarterly run rate of between 6% to $650 million down to 450 to 500 that deleveraging is deep.
<unk>.
You get you get brought back to reality pretty quickly. So we expected. This we were certainly.
Didn't expand our cost structure or anything when our revenue higher knowing that it would cycle down.
And then if you if you add in the impact of FX those together over 200 basis points of impact year over year to <unk> two the company margins and quite honestly. If you go back and look at our third quarter, which is our June quarter that we're guiding to now and you look at that from last year.
We're going to have similar kind of impact.
And that impacts both whether you want to say the year over year margins.
That's going to have that same impact so that's and that's implied in our guidance as you can see.
If you if you take a broader picture and say where does it look like going forward from here right. We're kind of running in this four $4 billion range of revenue.
Plus or minus.
I'm not guiding out beyond the quarter that we just gave the let's just assume we're kind of in that range.
And this two four to $2 5 billion quarterly in our back half of our fiscal year industrial running between one one and $1 2 billion.
And then you get into the communications business, which as Terrence said is going to be closer to $450 million quarterly run rate for the next few quarters.
When you look at that and you say, okay, well, what's that going to do for margins.
Within the transportation the price that we've discussed so far in this call on tariffs just walk through in a prior question.
The price that we have been successful implementing that was a long time coming and was negotiated contract by contract with OEM by OEM is largely an effect and we will get the full benefit of that as we work our way through the second half of the year and it gives us confidence in our margins.
In addition to.
Growth versus market that we get from content. So we feel on more more confident around the transportation margins as we look forward. The industrial side is a bit more challenged right. We've got a business in here that the industrial equipment business, which just feeling the pressure on the order front and certainly as it translates.
Its into the revenue side of things and that is our highest margin business within this segment saw that as well.
Fiscal Q1, and our fiscal Q2 that while industrial equipment grew albeit modestly 3% the rest of the segment far outgrew it and if you look at the how that impacted the mix within the industrial equipment I'm sorry within the industrial segment. It did have an impact and will have an impact as we work our way through.
The rest of the year now the good news is as we're seeing revenue increase.
Transportation within Aerospace and Defense parents also mentioned medical and then obviously, our energy business, which we've highlighted on this call.
Albeit they have structurally lower margins than the industrial equipment business.
Volumes do help and commercial transportation or I'm, sorry, our commercial air business is not back to pre pandemic levels yet.
And so we are still catching up on the margin front.
There are some things trending in the right direction. So theres also some things cycling down with our industrial equipment business that is putting pressure on those margins, but we do expect from a modeling perspective <unk> Z. If you wanted to assume a modest improvement as we move from our Q2 levels through the rest of the year within the segment.
And then communications is pretty straightforward listen at this roughly $450 million quarterly level mid teens is a good.
Okay.
So I think we've discussed that already.
So hopefully that answers your question and happy to take anything else.
We have next question please.
The next question is from Amit <unk> with Evercore. Your line is open.
Perfect. Thanks.
I was hoping if you could spend a bit of time, just talking about from a supply chain perspective, what are you seeing from a component availability and then also the inflation side and.
And really on the basis I would love to understand if you think the price increases so far are adequately offsetting this or do you think that more that needs to be done here and then just secondly, if I forget the clarification.
Remind me what are you estimating from a auto production perspective in the June quarter, I think that 21 5 million units. So let me get a sense of what are you kind of baking into the guide for the auto production side. Thank you.
Yeah sure Amit Let me, let me do the last one first.
All year, we've sort of said, we're going to be around 20 million units on.
<unk> production to $80 million in total.
And it's just going to be a flat environment and that hasnt changed from the beginning of the year. So that's that's pretty much how we think about it.
And I know Theres some differences of heavy vehicles that are in the IHS number that we put in our commercial transportation, but we viewed flat.
On your part.
It's about supply chain inflation in price.
I want to give a little bit before I get into supply chain is service levels of how we're servicing our customers because I do think whether it is supply chain, whether it is the orders that I talked about earlier as they're all interrelated.
It's why when we talk about some markets being stronger stable. It does come into how we're servicing our customers and what I would tell you at the overall <unk> level. Our service levels are back to 2019 at the overall <unk> level.
Some people are higher some people were servicing better as supply chain is approved there are markets like commercial air and medical which were late in the recovery I would tell you our service levels still need to improve and the main reason the service levels need to improve as we are still seeing supply chain impacts.
But the big picture, what I would tell you is the availability across the global supply chain has improved.
Our customers are feeling it from us.
And.
I think that's a key element that also explain why we see some stabilization in backlog and I think our orders going up.
Sequentially is a positive factor.
Now from an inflationary impact.
I can tell you is places like trade and logistics, we have seen deflationary impacts I would tell you elsewhere, it's sort of just moving sideways I wouldn't say, it's getting worse I wouldn't say, it's getting better and it's why when we feel with the things that we've done on pricing, especially in transportation, where we're lagging we do.
Think we're really in a mode of recovering the inflation that we've incurred over the past two years and Thats why we feel good about the margin impact and we do expect that the pricing will stick.
Okay. Thank you Amit can we have the next question. Please.
The next question is from Joe Giordano with Cowen Your line is open.
Hey, guys good morning.
Hi, James.
One just a quick clarification and then a question on industrial.
Some of your other markets Youre just in China on E. D. Do you have a big spread between like a high end Tesla type vehicle and a low end kind of a local manufacturer in terms of content and then bigger picture if I look at something like industrial equipment right.
Obviously those are moderating here, but even with moderation there is still up a lot.
Even adjusted for inflation relation or M&A from Michael pre Covid levels. So if those markets.
How much of a real reset should we think is reasonable in like an economic downtime downturn for something like that that's moderating now, but still up a lot over.
Fairly short period.
Yes, let me, let me take both of those.
So first off when you think about content per vehicle.
I think what you have to start with especially with China is any time you move from an electric vehicles from a combustion engine.
Thats a content growth element.
Because we're on both multinationals and local so I do think the bigger thing is to be thinking about not comparing content between its really about it drives content growth because we have a good good position on that and depending upon classic car, you're always going to have whether it's a combustion hybrid electric vehicles.
Coming to the features and what's in the vehicle. So I think the real thing is is I think China is over 20% of new cardholder electric vehicles, all that is good for us.
It's really.
A key driver of our growth and we've always said.
Overall as the growth driver of electric vehicles. So the 25% of the 80 million units that we've always and we say we think it's going to be at this year.
70% of those units are going to be in Asia, and certainly China, China is a large so it's.
It's only positive for us.
On industrial equipment, I think the element that you come into and let me add a little bit of color to your question is industrial.
Industrial equipment is a very broad space.
Factory automation.
Building automation things that go into construction, there's process automation there is a number of different buckets and what I would tell you in areas around factory automation that supports consumer electronics.
Yes.
There will be some element of where that will that downdraft areas around building automation.
So we've seen weakening there where you get into the commercial construction side. So I don't expect that will be what we see in our communications segment, but you will see it come down a little bit as some of those markets moderate. There's also the element of our service levels have improved across that market as well he knows it.
And we are seeing some of our OEM customers pull out some buffer stock. So we do think there can be some moderation right. Now you can probably think about it the growth and the other three businesses can offset some of that moderation.
But we got to continue to watch it and make sure. It stays contained in some of the submarkets in the industrial space.
Okay.
Okay. Thank you Joe Great next question. Please.
And the next question is from Scott Davis with Melius Research. Your line is open.
Hey, good morning, guys Hi.
Hi, Scott.
I wanted to switch gears a little bit.
And you mentioned a couple of times in the.
Prepared remarks, but how material is this upgrade cycle is this is this kind of a nice to have or is this is this something that could be kind of a multiyear pretty powerful demand driver for you guys.
Super Scott So Scott, we talked about it and then we talked about some of the design wins, because it's truly just the next extension.
What when you get into high speed. So one of the things. That's nice is where we positioned ourselves in cloud that will be a multi year cycle as you get into those higher speeds and also the importance of like I said, the low latency you need so those design wins that we're getting today will start in 2024, and I think it could be very soon.
Over to the cloud cycle that we saw over the past three to four years. So I think as we work through the whole communications in the telecom and the cloud inventory work off.
Once that settles I think youre going to continue to see contact growth that will be both from reinvigorate cloud investment plus the AI element that will really drive our A&D business.
As you get into 'twenty, four 'twenty five and beyond.
Okay. Thank you Scott we have the next question please.
The next question is from Christopher Glynn with Oppenheimer. Your line is open.
Yes. Thanks, Good morning, just wanted to dig into transportation revenues, a little bit more.
It looks like it was well above your guidance.
Production, maybe in line with guidance, but theres always some timing around supply chain and EV launches pull forward or more likely push out a little bit. So it sounds like you expect consistent revenue in the back half so.
Just curious what really changed there with the volumes that came through versus expectations.
Yes, so when you look at it.
One of the things we saw is that a lot of our over performance.
Last quarter, it was really out of Europe .
And Europe was an area that coming into this year and I don't think we were atypical if anybody else between what was going on from a utility perspective in energy costs as well as the war and I would tell you in our transportation business and our OEM customers.
They've been building more aggressively than we would've thought when we came into it China's a little bit slower, which sort of gets you to the flattish and really not a change in your view.
What's really nice is we were able to service them when they wanted it here.
On the back half the back half isn't that much different when you go first half second half and when you think about we're going to be down sequentially, a little and transportation. That's really just due to the choppiness I talked about in China.
Okay. Thank you Chris can we have next question. Please.
The next question is from Matt Sheerin with Stifel. Your line is open.
Thanks, Nathan and good morning, everyone.
Hey, Matt a question regarding your distribution channels.
I know that you've got a big concentration of distribution within your industrial markets and I imagine this is Keith.
Stocking at the industrial equipment market, whether you're seeing that play out anywhere else or especially since you know that said that the distributors are going to start to cut inventories, particularly as lead times continue to come in.
Sure. So couple of things, Matt just the frame everything when you really look at where we play in the distribution channel certainly in our communications segment, a big chunk goes through our channel partners and Youre exactly right a big chunk goes through in our industrial business and our aerospace business.
Now what I would tell you is in our aerospace business as that continues to ramp orders continue to grow backlog builds and certainly we need to continue to increase our output to service the backlog and get service levels, where they were before the pandemic.
So what you see as you sort of see trends in the distribution channel that do mirror what.
What we talk about in our different business verticals, so we'd been seeing already and it started a few quarters back with our distribution partners those that were around our communications segment units.
Quarter levels have come down they have been trying to manage their inventories probably at.
At the higher end of their range.
And that's something that when we talk about what we're going to be at a $450 million in the next couple of quarters that includes.
Oems, bringing down inventory odm's, bringing down inventory in certain of our distribution partners.
Two a better inventory level.
I would tell you in the industrial space, we have seen some impact, but I would also say part of it comes to service levels. So.
During COVID-19 when we could not meet service levels due to supply chain certainly our customers would go to our distribution partners.
Get product, which is part of the role. They play we have seen is our service levels improve <unk> seen buffer stocks taken out and we have seen quarter levels weaken in certain of those industrial markets. It's not even it's not even across all of them like we say communications to around the markets that we talked about that can.
B building automation and things like that.
And we do see that the inventory levels are at the higher end of the range that our distribution partners would want to be and so that's why their inventory levels are a little bit down.
But not to the extent that we see in the communications segment.
Okay. Thank you Matt can we have the next question. Please.
The next question is from semi chatterji with Jpmorgan. Your line is open.
Yes, hi, Thanks for taking my question I guess Hum. Thanks for all the color about the individual end market I was just trying to think of it in more aggregate films. When we take all your outlook for the different end markets.
Most important of activity here or.
Are we comfortable in relation to cycling bus.
Trough in relation to aggregate all of those as you sort of match all those outlooks up by the end market and maybe if you can touch on autos, there, particularly I know you mentioned choppiness in China, but this also has a pretty material step up in production in China, all through the year or is that what you sort of are maintaining more question that at all or are you seeing.
Given the autos yet thank you.
Yes, so a couple of things as I said on our orders and transportation they were actually up 12%.
And I think the other thing we have to realize the China automotive market does a big build in our December quarter. So typically you do have a step down in China, and we sort of view, China auto production for the rest of our fiscal year being pretty flat from where it was in the second quarter. So we don't we don't see an acceleration of billed but I do want a highly.
Typically the December quarter, Chinese auto producers do new a big build to meet production targets.
And as we look forward. It is choppy right now we're watching it certainly the price activity that certain Oems are doing in China, I think is creating a little bit of pause for consumers to say hey, how does this settle out.
The Chinese consumer.
And then tells the consumer when it comes to price.
So there are some things that are creating some near term choppiness, but we view is going to be flat from here. When we look at auto production in China for the rest of our fiscal year.
Okay. Thank you next question please.
The next question is from Steven Fox with Fox Advisors. Your line is open.
Hi, Good morning, I was just curious on the restructuring charges that you've taken year.
Year to date and plan to take two full years.
How those are flowing through the income statement when are you getting the benefits what kind of return on it and it looks like.
More is going into transportation and other segments based on what I saw on the slide.
Any color there would be helpful. Thanks.
Sure and thanks, Steve.
Yes, we did as you recall when we went out.
Early part of the year.
View into 'twenty, three we said the restructuring will be somewhere around $150 million, which was flat from prior year.
And then in the last call 90 days ago, I said, we're reevaluating that and we did and in the discussions with our business and obviously with our board.
We've increased that by about 100 million to $250 million.
Now you are right. There is there is a chunk of it is just the transportation. There is some incremental things we're doing to adjust some cost structure as you can imagine in this more accelerated downturn in both the communications and in the industrial equipment business that is driving some of that in addition to.
Accelerating some of the rooftop consolidations and other parts of <unk> that had been planned that we want to go ahead and pull in and get done sooner.
We've determined.
Yes.
So that's part of it now a bigger chunk of this as it has been the trend over the past couple of years has been a little bit more in Europe base.
And the payback when you start getting into Europe based restructuring activity is a little bit longer than what you would think of another parts of the world and it just has to do with the demographics that you are dealing with.
<unk>.
Trucks and statutory requirements. So if youre looking at it I would say nor in the historically, we've said that the payback on our restructuring.
As Vince just inside of two years Thats been traditionally kind of how it's blended together, it's a little bit longer for that especially for this incremental piece is probably stretching out to two and a half maybe not quite three years on the payback to this but it does give us.
Structural in terms of fixed cost reductions and that's what we're really aiming for to lower the fixed cost side of the thing and give us more nimbleness to flex the business.
Okay. Thank you Steve we have the next question please.
The next question is William Stein with Truth Securities from line is open.
Great. Thanks for taking my question.
You all have done an excellent job highlighting the content growth opportunity.
And in executing against it.
At Teslas recent analyst day showed how in the cyber truck and then also in the next Gen platform.
<unk>.
Okay.
<unk> holds a 48 volt architectures and this looks like it can see them significantly.
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 and at other Oems or if it's brand new and still on the comp and what impact if any do you think this will happen to your business. Thank you.
Thanks will.
So when you get into this I think the first thing is.
Even if you take a model three which has a simplified harness versus the model S. We have more content on it.
So I appreciate.
<unk> is being showed but you really need to look at when you look at our harness not the wire you need to look at the functionality.
And in some cases, what it certainly theyre trying to achieve is how do they approve assembly assembly quality as well as they do over the top updates.
But when you bring in data power and signal together and it's coming together and what May look like it's a simplified harness the interconnection one that harness or a lot more complicated higher pin count and a higher pin count on it.
Individual contact our connection point.
So once you get into while the harness simplifies and yet if we made cable where we were harness maker would probably be bad for us what occurs as you move to <unk>.
A lot more complicated.
Which typically have data power and signal running through them, which create a whole bunch of other elements and the architecture that engineers need to solve for.
And what we get excited about that actually while it may lower the amount of interconnect themselves.
More complex interconnection, there are higher content more highly engineered.
And really what you get rid of some of the commodity interconnects.
That are out there so and the same goes through if you jump from not only a simplified harness you're getting a zonal architecture all of that plays into part of the content increase we talk about when we talk about electronic vacation.
So the trend for us we'd like it.
It does get into what we do and what we do well.
Yes.
<unk> dealt with this for decades, and it's going to continue to evolve and I think certainly when you get into an electric vehicle that allows you to look at the architecture with a clean sheet versus an ice vehicle and thats, what we like to do.
So net net it's.
As a positive for us.
I appreciate you, bringing up the question.
Thank you we'll clear the next question please.
The next question is from Luke junk with Baird. Your line is open.
Hey, good morning, Thanks for taking my question a question for you this morning.
Saw that change in mix developed during the quarter in industrial I'm wondering how the margins within the sub segments performed or Levered versus your expectations in the areas that are exciting right. Now said differently should we view adverse mix as being more mechanical or are there levers you can pull to get to that better volume leverage out of those higher growth areas.
Is 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. Thank you.
Sure Luke listen having.
The thing we're coming off of is is a pretty.
Significant.
What were worried about in terms of our worry beads as a mix of the of that of obviously less of the industrial equipment business, which it.
Can run anywhere from five to 800 basis points more profitable.
The other businesses in that segment. If you combine those all up now the challenge then is obviously we've been dual enjoyed a nice part of the cycle and the margins of that has helped drive for the segment overall.
Is to minimize that impact on the way down and some of the restructuring done undertaking that I. Just mentioned is going to help with that the other side is getting more volume leverage out of the pieces as you mentioned that we're growing through.
And.
There's a lot of moving parts in that.
We are in terms of how we've layered in acquisitions and the impact from those acquisitions is also some of the rooftop consolidations and things that don't get captured restructuring, but drive near term margin pressures, but I do feel confident as I think about our aerospace defense business to continue we've seen it although we don't share those margins at the business.
Unit level externally.
<unk> seen that business begin to improve as commercial air has come off of a pretty steep decline and is starting to work its way back, but still not back to pre pandemic levels. Our medical business is not nearly as profitable, but as we've seen the volume get back to pre pandemic levels.
We're starting to see volume leverage there and then the other piece is our energy businesses, which is more of a steady state margin business. So there is.
So we have as we look at it on the near term as I look at it.
And most are below where the growth is coming from and how that mix impacts goes I could see it if I was sort of frame it up.
The industrial equipment business could run another let's say 50 to 100 basis points higher as we work our way through into the second half.
But the ultimate goal here and the team was here to show US I mean, the ultimate.
Yeah.
Margins within this segment and we know that we do a lot of acquisitions in this segment, sometimes there are small from GE, but they are more meaningful for the segment.
That resets it down some but the goal is still to get the operating footprint in the right place, where where it needs to be as well as.
Getting the overall cost structure, where it needs to be so I feel good about where we will get to you on this.
Mix impact in the near term.
As a bit of a pinch point for us.
Okay. Thank you Luke and the next question please.
The next question is from Mr. <unk> until with Wolfe Research. Your line is open.
Hey, thanks, so much.
In the past you've talked about typical price downs that you pay customers I think normally its in the 1% to 2% range, especially within your automotive business Alright, you have been taking price over the last couple of years through recoveries.
But with the supply chain is broadly stabilizing I'm wondering if you expect.
I'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.
Structuring savings to kind of help mitigate that.
So curious thanks for the question I do think there is an element there that and where does price really occur like you sort of say, it's typically in our automotive.
Our A&D business is where you really see those types of impacts like you say that I don't think we're close to that yet and with where Inflations AD for <unk>. So we're in a recovery mode Thats. The discussions that we're having with our customers I think there was.
Deflation real deflation and things like that we may get back to those traditional patterns because it does come into how do we drive productivity that helps our customer and they hit the volumes in places like auto, but thats not going to be something we're seeing in the second half, but as cost comes out around the world that is something.
We could get back into in outer years.
Okay. Thank you <unk> before we wrap up we have heard from some of you that we had patching this 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.
Ladies and gentlemen, todays conference call will be available for replay beginning at 11 30, a M. Eastern time today April 26, 2023 on the Investor Relations portion of <unk> connectivity website that will conclude today's conference for today.
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