Q4 2023 TE Connectivity Ltd Earnings Call
Everyone. Thank you for standing by and welcome to the T E 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. If you would like to ask a question. During this time simply press the star key followed by the number one on your telephone keypad, if you would.
To withdraw your question Press Star one again.
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 Suzhou Shah. Please go ahead.
Good morning, and thank you for joining our conference call to discuss T. Connectivity is fourth quarter and full year results for fiscal 2023 and outlook for our first quarter of fiscal 'twenty four.
With me today are Chief Executive Officer, Terrence Curtin and Chief Financial Officer Heath Mitts.
During this call we will be providing certain forward looking information and we ask you to review the forward looking cautionary statements included in today's press release.
In addition, we will use certain non-GAAP measures in our discussion this morning.
We ask you to review the sections of our press release and the accompanying slide presentation that address the use of these items.
Press release and related tables, along with the slide presentation can be found on the Investor relations portion of our website at <unk> Dot com.
Also wondering you that our Q4 results in fiscal 2022 included an extra week in this call Euro per year income statement and orders comparisons for Q4 and fiscal 2023 are made excluding this extra week.
You will find related reconciliations in the press release and presentation tables.
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.
Thank you.
And we appreciate everyone joining us today.
And to start off I am pleased with what 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 and 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 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.
To 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.
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 work 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 a 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 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 core businesses continue to have growth momentum.
You'll 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.
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 <unk>.
Strong free cash flow generation with discipline around how we deploy capital.
Certainly levers to enable margin expansion as we move forward.
So with that as an overview I'd ask that you turn to slide three and I'll get into the presentation.
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.
Okay.
On 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 record for the company.
And I think this just reinforces the strong execution by our teams I already highlighted.
For the full year sales of $16 billion were flat on a reported basis and.
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.
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.
Sure.
So if you could turn to slide four let me discuss order trends and what we've seen.
We continue to benefit from markets with strong secular growth trends and this was offsetting weakness in markets that are cycling are being impacted by inventory destocking.
At the total company level, we continue to see stability in our order levels.
Transportation orders grew both year over year and sequentially, reflecting ongoing stable global auto production.
Industrial order patterns reflect some seasonality across the 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 five through seven and you can see the details on each one of those slides.
So starting with transportation.
Our sales growth remains 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 electrification trends within the vehicle as well as positive impact from pricing.
In fiscal 2023.
Electric vehicle in 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 <unk> the content and 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 experienced a 7% sales decline, which was in line with what we expected and.
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 some price actions that we've been highlighting to you.
Yes.
Yes.
Now, let me discuss the industrial solutions segment.
And while sales were flat in the fourth quarter I think what's really nice is 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.
And 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 position this business around renewables and Youre 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.
That is similar to what Youre 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 lets 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 benefit of some of 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 NII increases in volume you will see margins expand in this segment as we move through 'twenty four.
So with that let me turn it over to Heath who'll get into more details on the financials as well as our expectations going forward.
Thank you Terrence and good morning, everyone. Please turn to slide eight where I will provide more details on the fourth quarter and fiscal 'twenty three financials.
Sales of $4 billion or flat on a reported basis year over year.
Adjusted operating income was $699 million with an adjusted operating margin of 17, 3%.
GAAP operating income was $635 million and included 57 million of restructuring and other charges and $7 million of acquisition related charges.
For the full year restructuring charges were approximately $260 million, which were in line with expectations. Our restructuring efforts over the last several years have enabled a more efficient operating footprint, while continuing to localize to support our customers in the regions of the world where they operate.
I expect restructuring charges to decline significantly in fiscal 'twenty, four and to be approximately $100 million for the year.
Adjusted EPS was $1 78, and GAAP EPS was $1 75 for the quarter and included a noncash tax noncash tax related benefit of <unk> 16 related to a decrease in the valuation allowance.
Additionally, we had restructuring acquisition and other charges of <unk> 19.
The adjusted effective tax rate was approximately 19% in both Q4 and fiscal 'twenty, three which was as expected.
For Q1 and for fiscal 'twenty, four we expect our adjusted effective tax rate to be roughly 20%.
And as always importantly, we continue to expect our cash tax rate to stay well below our adjusted ETR for the full year.
Turning to slide nine for additional information on our full year performance.
Fiscal 'twenty three sales were 16 billion, while sales were flat year over year, we had 9% organic growth in transportation segment and the industrial segment grew 5% organically. Despite the softening in the industrial equipment business. However, the growth in these two segments was offset by roughly $1 billion of headwinds from the sick.
Click a weakness in the communications segment that we've discussed combined with the impacts from the stronger dollar.
The stronger dollar negatively impacted sales by approximately $430 million versus prior year.
And due to the further strengthening of the dollar against other currencies, we expect year over year currency exchange headwinds of approximately $250 million in fiscal 'twenty four.
Adjusted operating margins were 16, 7% for the full year with margin expansion of 120 basis points from the second half of the year I am sorry, 120 basis points from the first half to the second half of the year driven by both cost reduction initiatives and price increases and this was.
Most evident in our transportation segment, our margins expanded over 200 basis points from the first half to the second half exiting the year in the mid 18% range.
At the company level, we exited the year with adjusted operating margins of 17, 3% and we expect to expand from this level in fiscal 'twenty four.
Adjusted EPS was $6 74 and included a 45 <unk>.
<unk> headwind from currency exchange rates.
Turning to cash we generated record free cash flow of approximately $242 4 billion in fiscal 'twenty, three with roughly $1 7 billion returned to shareholders through share buybacks and dividends.
Free cash flow was up 35% year over year with over 100% conversion to adjusted net income and we expect to generate approximately 100% free cash flow conversion going forward.
I am pleased with the progress our teams made in reducing inventory levels through the year, which contributed to our strong free cash flow our cash generation model, coupled with our strong balance sheet will enable us to continue to be aggressive with capital returned to shareholders, while pursuing bolt on acquisitions, including the schaffner acquisition that.
We expect to close at the end of this quarter.
Before I turn it over to questions. Let me reinforce some of the key points that we discussed today.
While markets remain dynamic we are continuing to take action on the things, we can control to improve our financial performance.
We worked hard to get to a better exit rate on margins at the end of the year, but we still have work to do to get to our business model op margin targets we.
We do expect to make progress on further margin expansion and EPS expansion this year.
Most of our end markets have a growth or recovery trajectory and we expect the destocking that we've seen to improve as we go forward. Our balance sheet is solid we are demonstrating our strong cash generation model and we remain excited about the opportunities. We have ahead of us to drive value creation for all stakeholders.
So with that let's open it up for questions.
Roger can you please give the instructions for the Q&A session.
Thank you at this time I would like to remind everyone to ask a question press star one on your telephone keypad in order to have time for all questions in markets.
If you would like to ask a follow up question. Please press star one again.
We'll take our first question from Mark Delaney with Goldman Sachs.
Yes, good morning, and thanks for taking my question Theres been so many cross currents in various end markets, including the UAW strike inventory destocking in industrial and content opportunities like AI and electrification. So I'm, hoping you could help us better understand it a bit more detail key trends by end market and what you expect going forward, including your assumptions by end market and <unk> guidance.
<unk>.
Sure. Thanks Mark.
So let's talk about quarter four first a little bit because we went through a lot there and I think when you look at on the top line.
It came in exactly as we expected what was a little bit better than we would have expected certainly automotive where we had growth in all three regions of the world.
As well as in our DNA and our communications segment was a little bit stronger due to the ramps of artificial intelligence that I mentioned in my comments. The area that was weaker was industrial equipment and we highlighted for you last quarter. We were seeing some inventory destocking around channel partners I would say that was a little bit worse.
And we think thats going to be with us for a little bit.
And then certainly we were ahead on EPS and that was really driven on the conversion side in all operational.
When you look at quarter, one and our guide in many ways, it's going to look a lot like quarter four.
We're going to continue to have growth in transportation three strong markets in industrial with the inventory stocking and industrial equipment.
And then you still have some tough compares that we have in the communications segment, but net net it's going to be flat on the top line year over year.
And youre going to see margin that looks like the fourth quarter and you're going to see really nice EPS growth year over year, that's 10% so.
Orders had been coming in as we expected this quarter to three nine had been stable even with some of the Destocking. We're seeing orders are staying stable and I think that just shows the trends.
That you highlighted as we go into 'twenty four.
Thanks for the question Mark Okay. Thank you Mark can we have the next question. Please.
We will go to <unk> Mohan at Bank of America.
Yes. Thank you good morning, Terrence can you sort out some of the puts and takes in autos.
Given all the recent news around 93 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 thank you. So much.
Thanks, <unk> for the question and you really have two very different questions. There. So let me take the latter part first.
Around the UAW.
UAW impact on Tes negligible.
And what in the fourth quarter as well as the first quarter.
And just to remind everybody.
Our global position as what's special about our automotive business, 80% of our business is outside the United States and let's face it that has no impact from the UAW.
Now, let's move on to your EV question, and probably similarly, I'm going to remind everybody that we need to make sure when we think about evs.
<unk> got up to 20 million units produced globally. This year with two thirds of those Evs made in Asia and once again reinforcing our global position.
And EBIT adoption is never going to be a complete straight line up to the right, but what's really nice is youll see with 20 million units made and on the road. The technology is working it is being adopted and the other thing you have is you certainly have consumers have choices and some evs consumers are going to like so maybe they're not.
And the like.
And I think when you think about our opportunity is to build upon how our content opportunity that goes out that you saw this year and when Suvs grow next year, we're going to continue to get that and in a full electric vehicle, we get two X. The content of a combustion engine. If it's a hybrid vehicles about one five.
We expect Youre going to continue to see electric vehicles to grow globally again next year, maybe it won't be a 40% clip like this year, but it will increase next year.
And.
Let's face it in Asia, the biggest market is China.
And China EV sales this year are up over 30%.
On top of that I'll remind you that China local Oems have over 50% market share they've continued to gain share versus western Oems and what's really nice for te or content on a local EBIT by China OEM is strong and our market share is strong. So we don't have the phenomena of we only are with the <unk>.
T nationals and not the local Oems so.
And as demand flow and so forth began to stabilize and then our supply chain with our vendors began to stabilize some it allows us the opportunity to get really focused on driving working capital down in spite of this spread some of the market conditions. So pleased with how we did how we finish the year that also.
Provide some confidence as we'd go into F Y 24, which we're in right now starting to hear their here in October that.
We're going to be able to maintain that momentum.
112% conversion that we did in FY twenty-three was a little rich if I'm being honest, it's a little bit richer than I would've thought we would've finished but I'm proud of our performance as we think about 24 I'm confident we can hover around 100 per cent mark on in terms of cash conversion, which is a bit of a step up from where we historically have trended and it does.
Does avail, a lot of Optionality for us.
You mentioned, Steve that are capital allocation strategy is untrained unchanged and that is absolutely true.
You should expect that we will continue to be diligent with the cash flow that's available to us we will get.
Get back to our shareholders as appropriate and step up repurchase activity, where it makes sense and when there's dislocations in the market relative to the evaluations and and so I don't think there's anything there. That's different you mentioned the acquisition, we have coming up at the end of this.
December that's about 300 million dollar use of cash that will come off the balance sheet, but we also expect.
To be generating cash as we go along here in the first quarter as well so.
Yes, it's very very positive momentum along those lines hopefully I answered your question.
Okay. Thank you Steve <unk>. The next question please.
Yes.
Thank you I wanted to ask on supply chain inventory levels, you guys have been pretty consistent.
Around your stock headwind for.
For data appliance and industrial equipment.
So I guess, maybe for those three sub verticals can you just talk about where are we in their respective destock cycles and beyond those three is there anywhere else, maybe where you're starting with the more risks around destock relative to three to six months ago. Thank you.
No. Thanks for the question, Chris on I think let's let's talk about this talking a little bit. So first off as as you all know being a tier two that this is not a phenomenon that is an uncommon and after you get strong cycle. She will have this but I do think there is when you think about these three.
<unk> there is one thing they have in common which is close to 50% of their sales go through our distribution partners and let's face it.
Some of these are fragmented markets that they help us cover.
So when you think about the three.
That's about violets big for their business units total tae he's only about 20 per cent goes through the channel and the one thing I want to highlight maybe the last part of your question is where else are we seeing it actually for the 80% of our business at we touch customers directly.
It's very stable and we're growing.
So when you think about the 80% that we aren't highlighting it's really that's where we touched the customers most directly and we.
We have growth now we have these destocking pockets that certainly very much with our distribution partners that they feel the need when maybe we weren't delivering as consistently as we should have during the supply chain challenges he talked about.
So when you look at those three what I would tell you where we are what hitting we're in and.
This is the best guess stuff.
What's nice is in both the Indian appliances, you shoal are orders of increase sequentially. So it feels like.
[noise] stable at the bottom and what's nice and Dandy you see the driver of AI as those move up.
In regards to the industrial equipment that started later, we started to highlight that to you over the past couple of quarters I would say, we're more in the middle of innings of that and I think both of them will be around in the first part of next year, but then I also view they'll they'll turn into a tailwind once they get behind us and we don't expect.
<unk> major destocking elsewhere, just due to how we have our direct relationship with our customers.
Okay. Thank you. Thank you Chris can we have the next question. Please.
Mhm.
Great. Thanks for taking my question.
I understand you're only getting per 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 at 24 in terms of revenue growth and margin expansion. Thank you.
Thanks, Thanks, swollen I guess, one part of it let me talk about it may be how we think about some of the trends we position ourselves out knowing that we aren't cutting beyond the first quarter and I'll, let heath, maybe talk about margin.
So the first one is similar to this year, where we have the secular growth trends. They really were the things that helped us cover some of that as a stocking things that we dealt with and I think there'll be evident again next year. So first of all if if you start with our largest segment transportation, we're sort of viewing auto production.
Is going to be around 21 million units a quarter, so mid $80 million production.
And I think what you're going to see is our business model that we've shared with you and once again demonstrated this year. We continue to expect four to six points of outgrowth versus the market due to the content, we're going to get and that's going to be driven by our leading position to Navy also ongoing electronic vacation trends in the vehicle that will benefit from.
And.
So that's where we sort of see transportation.
And our industrial segment and I know I mentioned in a call we have free markets have really good growth momentum.
We expect them to continue you'll get places like Comair, we're still in recovery mode.
<unk>, we have more content on that so that's good.
And then in communications I would tell you the growth will really be driven by these AI ramps.
We've highlighted to Ya.
We think they'll build up as we go through the year and they can be well over $100 million of incremental revenue contribution through the year.
Now one thing I just talked about back to Chris This question on Destocking <unk>.
Stockings affecting three of our businesses, that's going to be with us in the early part of the year that will come to an end.
You can probably make as good of a judgment as I can to one that will end so that certainly there.
And then only last two pieces of probably I would highlight.
The first one being and he talked about it.
Dollar shrank thing is going to be a headwind into next year, we had a big headwind this you're probably going to be about $250 million next year.
And then the last thing I would just say is right now with where input costs are in the world. We would expect pricing at total <unk> net neutral next year.
There are elements were metals and things like that are still elevated there are some places where you have to deflationary impact and no different than what inflation drove us to do on pricing.
Input costs will be the driver of price going forward, so with that I guess at some of the ways that you can think about it.
Okay. Thank you. Thank you will can we get to this next question. Please.
At Evercore.
Good morning, Thanks for taking my question I guess I'll have one in <unk>.
Accounts and heat either one of you you've talked to meet some really good progress in terms of expanding your operating margins in the back half of fiscal twenty-three.
Here's what you think about the exit right off operating margins across the three segments in September quarter could you maybe talk about what does it take for <unk> to get to your target margins across those three segments.
The Delta familiar you wanted was targeted to me is it volume is it cost optimizations would love to get a sense of.
Pop from your towards this target margins. Thank you.
Okay.
Ethan I'll I'll I'll certainly take this.
We highlighted on the call.
And you just referenced it as well.
We exited the year in a better position over the second half of fiscal twenty-three than our first half performance and just candidly we were not pleased with our margin performance in the first half of the year and there was a lot of work involved to get those up as we exited however, we are still well below our target or.
Margins.
At the company and at the segment level Jasper.
Transportation made good strides.
We feel good about the momentum there but the.
The business model target for transportation is still 20%. So we're still trendy below that and we know there are some things that we still need to do this is still a little bit of self-help left there.
But.
Some volume support coming out of auto production would be would be healthy and then the other thing that's a drag on transportation margins is.
Commercial transportation business as in.
The downside of a cycle and that's obviously a very.
<unk> business for us so as we think about that.
I think we're going to make good progress in transportation margins in FY 2004.
As we move forward, but we've got some work to do industrial segments.
Martel target as high teens operating margin, obviously, we're trending right now in the mid teens, there's some reasons for that the biggest of which is our industrial equipment business, which is our highest margin business is obviously at the bottom of the cycle and tears just talked about that we do believe as we work our way through FY.
24 that will see those segment margins improve as some of this destocking gets behind us.
Assuming.
Overthrew the first half of our year.
Communications listen can we were all.
All written the rollercoaster of communications for the last several years and when the business was was growing outsized volume an outsized margins.
We're on the other side of that now and this is a very volume dependent business, but when we're running kind of in this.
$450 million ish quarterly run rate of revenue for the segment, we're going to be hovering in mid teens when.
There's not as much activity here in terms of right sizing our footprint within communications that has.
Largely behind us.
But there are some volume dependency within that and then the other thing to keep in mind. This just builds up what cash has talked about the three businesses that are hitting the destocking, which is our data devices and appliances, which are within the communications segment as well as our industrial equipment business, where that Destocking has happened is not with our direct.
Customers just with our.
Distribution channel partners. That's also some of our most profitable business.
And so as you start to see in your modeling out the year as you start to see some of those things normalized and some of the Destocking go away you would expect that mixed profitability to help us as we work our way through the second half of the year as well.
Okay. Thank you on that can we have the next question. Please.
J P Morgan.
Good morning, and thanks for the question this is <unk>.
As it relates to your AI opportunity and maybe this is a more of a medium term question in nature, but there has been increasing discussions or debates around the various architecture disease cop providers can take beyond gpus or underlying switch fabrics. So I guess as it relates to tells business. The same way you participate in the day I deployments I was <unk>.
Hoping if you could just touch on that topic and discuss the breath of the company's portfolio and whether you see yourself agnostic to whatever route your customers decided to take on their future architectural decisions there and if there is any areas that the portfolio that you think you could bolster are you looking to bolster going forward. Thank you.
No. Thanks for the question then.
One of the things that's great about the space, we play in as well.
When somebody makes an architectural decision as our building an AI cluster.
That's where connectivity comes in and is very important depending upon what is that architectural decision and that creates a lot of customization.
So has everybody's trying to figure out how to get the compute power also the thermal elements and maximize the design really the things you. Just highlighted are thinking we really get excited about and it's where companies like ourselves, we really need to be playing with both the semi players as well as the <unk>.
Cloud architects as well to really say as the make these happen and certainly bring them to market. It pays so when you think about all the accelerators that you hear on every semiconductor call really they are the things that we get excited about and even in our quarter. We just had you saw earlier ramps and even we expected.
And I think if anything we're probably going to be more pleasantly surprised and negatively surprised as we go for.
The other thing that's nice like even that we see on that I know last quarter, we talked about $1 billion, a pipeline winds, even and just where we've gone to up to 1 billion three and just three months and you know there are programs are going to be out over three four years and that will ramp.
Everything when you think about how are you moving in these clusters data around that has a need for connectivity and that connected can activity and what we do is very high speed because if you have latency around that connectivity.
That is a problem for an AI cluster, so I feel really good with attraction, where our teams are playing to get these wins and I think it's going to be one of the drivers as we move off from the stocking as we get back on the growth here will be something that we're going to continue to talk to you about.
Okay. Thank you Joe <unk> next question please.
Okay.
<unk>.
Hey, good morning, guys.
Good morning, Joe.
Good.
I just want to follow up on the AI discussion there.
One can you just let us know how revenue in this quarter and AI, specifically looked relative to last quarter and then just more broadly how do you think about.
Cannibalization of business you otherwise would have had on a more standard offering like if there's I'm guessing. This is mixed positive for you like on that content standpoint, but if your customers have a finite dollar spend available to them. How much does this like a transition of spending rather than like an increase in total spending.
Well certainly.
You're gonna have you know there's only so many dollars when you were in Capex budget, it's pointed here and what's really nice is the content elements incremental.
You still need a lot of servers and stuff to make an AI closer to work from a computer side. So yes. There is some cannibalization, but as a net net positive Joe when you look at it and you really when you look at you know I.
I know when we got it we probably said we would've thought the segment and communications would've been flat with the quarter before all the upside in the quarter was due to AI application and ramps. So when you look at that build is very important probably as we start the new year will have a little bit of Lumpiness just due to how the calendar works, but I think through 2004, you're going to continue to see.
That AI number work up and ramp.
As we continue to ramp for our customers.
Okay. Thank you Joe we have the next question please.
Okay.
Good morning, Thanks for taking the question to just wondering if you could put a finer point and how you were thinking about okra with potential an auto in 2024, I guess, I'm, especially thinking about evie related impacts amid maybe some flattening overall, an adoption, but set against what has been generally rising constant for you maybe even a little upset.
Versus that two X multiple and maybe more importantly, just your overall breath and auto and easy that could limit your impact to anyone customer. Thank you.
Yeah. So you have a lot of questions and that question. So [laughter] I'm going to try to do my best to their so thanks for the question I think the first thing is let's talk about 2023 outgrowth I think that's important that we all get aligned about it.
All of our auto business grew over 12% in 2000 twenty-three versus auto production of 3%. So you sold 9.9 hundred basis points of outperformance and I think you've got to take that into two buckets.
Two thirds of that 9% were content.
One third was the pricing that we did.
So I do want to make sure. We're all just baseline on that as we look forward, we feel very good about the four to six over production and I think the the point you said you never hear us talk about one OEM or one platform other over another.
That is something when you look at what we do our view is <unk> are always something that needs to scale automotive as a scale business. There is a lot of customization going on right now, but we really sit there as the agnostic supplier being a tier two of how do we bring the best connectivity solution for the globe to really make sure that <unk>.
Technology gets adopted and I think you continue to see that with the outgrowth we've had.
So I don't think that's going to change.
By any means and that's why you see the growth and that's something we work very hard on to make sure. We're everywhere in the world and that's why we always like to say.
Other than a few exceptions, where we're not allowed to play by governments.
Essentially on every car in the planet and that's a special position that were engineers design with the customers wear their design centers are and we're bringing solutions to really make sure. We continue to help bring eev's the further penetration globally.
Okay. Thank you look we have the next question. Please.
Hey, Scott.
I wanted to dig.
A little bit more into the cost structure. I mean, you guys have a fair amount of heavy lifting on.
I would imagine fixed costs are lower than they were just a couple of years ago, but when you. When you think about the ebb and flow of your cost structure going into 24.
<unk> Apple is kind of fixed costs once you've got some labour inflation or is your cost physician similar in 24 is it wasn't 23 or is it actually lower.
Well that's a good question Scott.
And there's a lot of buckets, there that I can think about.
No different than everybody else on the Globe, you mentioned labor inflation, which is which is real and it was always going to be part of our equation. So that is a little bit of variability to it but when I think about kind of our our fixed cost base. We're obviously going in with a little bit lower based on some of the restructuring that we have done it.
And thats around rooftop consolidations.
Peculiarly 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 can be eastern Europe that can be northern Africa in Morocco, certainly some act more activity in parts of Asia, and then within North America, that's a little bit more focused on Mexico.
So that that has that element and it 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 <unk>.
Not getting worse, but not dramatically coming down there there's buckets some areas like free to spend.
That have come come back in line is certain capacity on certain types of afraid.
Have increased and allowed for some pricing competition. So that's been healthy, but when I think about the input costs around metals and resins. It really depends on where in the world is what we're fine 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 23 I would say it's stable.
But I wouldn't say that that's our biggest driver in 24 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 by just try to sum it up I'd say, we're in a better position in 24 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 inflation around labor and so forth.
Okay. Thank you Scott can we have the next question. Please.
We'll go next to Christopher Oppenheimer.
Thanks, Thanks, good morning.
Uhm.
Curious about the non auto parts of transportation.
Commercial.
What are you seeing in terms of cycle. There what do you expect for next year, maybe first staff second half splits I know, you're very broadly based the cross platform the person, making the application and commercial.
And then just centres I think you have a little bit of attrition ski Rationalisation data play on that please thank you.
On so let me break those into two pieces are so let's 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 in the next year.
First off in commercial transportation this year.
Both in North America, and Europe, and commercial transportation is just as I want to remind everybody hits heavy truck construction equipment Aggro quitman.
Pretty global it's it's an all those applications, which now we have a leading share and we follow Europe and North America actually have nice production growth. This past year, and certainly drove our growth, but China was very weak in China was very weak and twenty-three, especially around contraction 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 in the next year, we expect construction to be flat again next.
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 you at least for the first half that's gonna be a market that is slower going into next year.
And we will have content outperformance at will buffer some of that.
But it's also nice that China, we probably up the weakness of China's more behind US then in front of us.
Okay. Thank you, Chris where the next question I'm Sorry, you were also asked about sensors.
I apologize on centers there is pruning that we're doing I know when I made my prepared comments wee's talking about growth and automotive and declines in industrial next year, there will be about a 50 million dollar exit rate of where we are really getting that focus as we improve the margin there and make sure that the wind.
That we get an automotive and industrial applications really or where we're positioning that business longer term as we've been talk to you about so sorry, I didn't touch the censors piece of my first comments.
Thank you Chris clear the next question please.
Well if research.
Hey, Thanks, a lot.
Within the question.
So looking at the industrial equipment business I mean.
Talked about the Destocking trends.
I'm curious what you are seeing in terms of Capex appointments, we have for some auto makers.
<unk> and I believe that has been an important driver.
Supporting the business and then also if you can talk about the payback on.
Restructuring investments I believe yet sizeable restructuring structuring in 2021 and 2022. So so should we start to see the the payback.
Pay back from that into 24.
Yeah, So let me take the industrial equipment peace because.
There is hey as supply chain.
Improved I do thank you see throughout the industrial equipment, and that's a very broad and fragmented space as we've always talk to you about you see everybody tightened up their buffer stocks and we're in the middle of that.
You will also see areas, where you see capex continuing to roll U C. EV battery plants, you just hold 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.
A very mixed picture.
Depending upon where.
You're focused on an industrial equipment.
Do thank you see strong backlogs by our customers and I do think we have to work through the day Socking and see what the Capex levels are running once we get through that to stocking Keith.
Why don't you talk about the restructuring sure on the restructured front I think a good rule of thumb.
Is about a two year payback on the restructuring charges that we take in terms of when you see those.
Pay for themselves in the P&L so.
It's a little bit longer in Europe, a little bit short or in other parts of the world, but it averages out to about.
About two years on average in terms of the payback and certainly Larry and that in to the P&L as we move forward into 2425 for the charges that we took in twenty-three wood wood wood.
One of the things that gives us confidence here.
Okay. Thank you <unk> can we have the next question. Please.
Okay.
Okay.
Hi, Thanks for taking the follow up I think you mentioned in your remarks, you are expecting 250 million headwind for revenues with physical 44.
FX movement.
What should we think about the EPS impact commensurate with that.
Thank you you mentioned that already strong 10% EPS growth in the first quarter.
Your prize actions will wrap.
The second half so just curious what you were thinking about.
Profitability growth.
Task force of the second half of next year. Thank you so much.
You broke up on that while I'm Z a little bit can you repeat the key questions that you had there I'm sorry, you broke up on our end.
Oh I'm sorry. So first question was around the headwind from FX on revenue was $250 million for the year wondering what the EPS impact is.
And then just the first half versus second half Crawford growth for next year, you'll notice, 10% and one Q, but you wrap on some of your prize initiated isn't that in the second half.
Yeah. Thank you sorry about that thank you for repeating yourself and he's will take them, yeah and <unk> the.
The 250 million of effects. The way we're looking at is about 20 of of EPS headwind.
That we have and and from an earnings per share perspective related to that foreign exchange.
And of course, that's us snapping the line in the sand where rates are more or less today and has reached change throughout the year <unk>.
We will continue to update you on those on those assumptions in terms of first half the second half the second half of them were going on I'm, referring to fiscal twenty-three.
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.
As we pivoted into the first half versus second half of 24.
Think.
We're not guiding out that far we you should expect our margin performance.
Two.
We would apply it in our guidance and for the first quarter to be.
Somewhere in the mid 17 similar to the last quarter.
The Q4 quarter, you should expect us to get you to grow from there in the first half of 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.
Okay. Thank you I'm busy we don't have any further questions. So please contact investor relations at T. E. If you do have additional questions. Thank you for joining us this morning and have a nice day.
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