TE Connectivity Ltd

Ladies and gentlemen, thank you for standing by and welcome to the TE Connectivity second quarter 2023 earnings call. At this time, all lines are in 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 star, then the number one on your telephone keypad. 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, Sujil Shah. Please go ahead.

Good morning and thank you for joining our conference call to discuss TE Connectivity's second quarter 2023 results. 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 gap 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 on the investor relations section of our website at te.com. Finally, during the Q&A portion of today's call, we are 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 Terrence for opening comments.

Thanks, Sujal, and I do appreciate everyone joining us today to cover our results for our second fiscal quarter, along with our outlook for our third quarter. Through the details on the slides, I want to take a moment to discuss our performance this quarter within the backdrop of what remains a dynamic market environment, along with what we're seeing versus our last call 90 days ago. We continue to operate in a world with cyclicality in certain end markets, as well as impacts from foreign currency exchange and inflation. At the same time, strategic positioning of our portfolio around key secular trends. These include global growth in electric vehicle adoption, momentum in renewable energy adoption, growth in interventional medical procedures, and wins in the artificial intelligence space. Growth from these trends are enabling us to offset the impacts from . We delivered 8% organic sales growth that was above our guidance and adjusted earnings per share that was ahead of our guidance as well. We remain on our journey to expand margins through a combination of growth, price increases, and cost reduction actions. As we discussed back in the first quarter, our plan was to drive margin improvement from the beginning of this year as we enter next year. We are executing to this plan, and you see this in the sequential margin progression in our transportation segment in the second quarter and the sequential margin expansion at the company level that's implied in our third quarter guidance. You all know that an important part of our business model is strong cash generation. With supply chain 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 continue strong return of capital back to our owners. So let me now provide some color on markets that we're seeing in other updates. With the macro environment we're experiencing, it is driving uneven impacts across our portfolio. We have some markets that are growing, some that are remaining very stable, and some that are cycling. And, you know, this is truly evident as we go through our second quarter results today. where all our businesses in the transportation and industrial segments grew while both of our business in the communication segment declined. Our view of the transportation and markets remain consistent with our prior view, and we continue to expect auto production to remain roughly flat at approximately 20 million units per quarter as we move through the second half of our year. Our growth will continue to be driven by content outperformance and our electric vehicles. In our industrial segment, when we spoke to you last quarter, all of our businesses were strong, and our second quarter sales results reflect this. We continue to see strength in three out of our four businesses. Our commercial air business continues to recover. Our medical business had record quarterly sales. and our energy business momentum in renewable applications. In our communications segment, orders and sales remain weak due to both the market weakness and inventory corrections across our customer supply chain. Last quarter we talked about being in a $450 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 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 it's remained unchanged. It is built on the pillars of secular growth and increased content around the markets where we have positioned TE, strong free cash flow generation, a disciplined 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 me get into the slides and discuss additional highlights that are on slide three. Our sales in the second quarter were $4.2 billion and it was head of our guidance driven by the transfer 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, the decline was in line with our expectations. On a reported basis, sales were up 4% year over year and included approximately 100 exchange headwinds. In the quarter, our orders grew 10% sequentially to $4 billion, and I will talk more about order trend dynamics by segment on the next slide. Adjusted earnings per share was ahead of our guidance at $1.65 and included a 17 cents of currency exchange and tax headwinds versus the prior. Adjusted operating margins came in at 16%. Free cash flow for the first half of the year was very strong at approximately $850 million, with nearly $800 million being returned back to our owners. And we do expect continued strong cash generation in the second half, along with strong free cash flow conversion this year. We are expecting our third fiscal quarter sales to be approximately $4 billion and adjusted earnings per share to be around $1.65. Our guidance represents a sequential decline in sales 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 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 World's most admired companies. This is the sixth consecutive year that TE has received this recognition, which measures a number of criteria, including a company's investment value and product quality 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, Our transportation orders grew 12% sequentially, and this reinforces the stability I mentioned. In the industrial segment, we saw 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. In 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-in-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, sales growth was strong, up 12% organically year over year, with organic growth across all businesses. Our auto business grew 14% organically versus auto production that was up low single digits versus the prior year. The outperformance was driven by our leading position in electric vehicles, electronification trends in the vehicle from pricing. As we previously discussed, we were lagging in the recovery of inflationary pressures, but we've implemented price increases, which help us enable margin expansion as we go forward. While overall auto production is expected to remain flat for this fiscal year, We continue to expect production of hybrid and electric vehicles to be approximately 25% in 2023. And as you know, we generate 2x the content in EV platforms versus ICE vehicles. So we expect our content per vehicle to continue to expand as we move through this year. In commercial transportation, we saw 7% organic growth driven by North America and Europe. partially offset by declines in China. We remain excited about our leading global position 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 thousand volts throughout the vehicle, increasing the speed of battery charging, and withstanding the harsh environment that's expected in a heavy truck application. Turning to our sensors business, we had 9% organic growth, which was driven by automotive applications, as we see increased volumes from our new design ones. 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 teams in the second half of the year. Now moving to the industrial segment, sales increased 15% organically year over year with organic growth across all businesses. Our medical business sales in a quarter was a record at $200 million, and it had 26% organic growth. The interventional medical market was depressed following COVID, but now it's back up to pre-pandemic levels, and it's nice to be talking about growth in medical again. In our energy business, we continue to see the growth momentum with 28% organic growth, and this is entirely driven by renewable applications. We continue to drive growth both from wind and solar applications, and the addressable market for TE and renewable applications has a double-digit capture. We're helping enable utility-scale solar and wind farm deployments around the world. When you get into these renewable applications, we provide switchgear and high voltage connectivity products. And just to give you a little bit of perspective, when we talk about high voltage and energy, these are mentioned in kilowatts, not volts like we talk about in the car. And it's very important that the application knowledge we bring on these higher voltages are very important to enable these renewable applications. And 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 going to represent nearly 25% of our total revenue. Turning to our aerospace defensive 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 Now let me turn to the communications segment, where our sales were down as expected at 20% organically, but within the $450 to $500 million range provided last quarter. The appliance market is down as we expected and declined across all regions. In data and devices, we were down due to market weakness and supply chain inventory digestion, as I discussed earlier. Communications adjusted operating margins were 16.3% as we expected. As I mentioned earlier, we expect quarterly segment sales to be at the low end of the range we gave and closer to the $450 million. And we think it's going to be there for the next couple of quarters. And we do think adjusted operating margins at this lower volume will be able to maintain in the mid-teens. As we look beyond the near term, I do want to highlight that our D&D business continues to have strong design wind momentum and next-generation platforms that are serving the cloud data center market. When you get into the rising complexity in artificial intelligence, it drives low-latency architectures that need both high-performance processing as well as interconnect. I'm pleased that we're engaged with the key ecosystem providers, including leading semiconductor and cloud companies. We have already generated over a billion dollars of new design wins in AI and server applications and expect new programs to begin ramping up in fiscal 24. So with that as a backer drop of the segment performance, let me turn it over to Heath who will give us more details on the financials and our expectations going forward.