TE Connectivity Ltd

Ladies and gentlemen, good morning and thank you for standing by. Welcome to the TE Connectivity third quarter 2023 earnings call. At this time, all lines are in a listen only mode. Later, we will conduct a question and answer session. If you would like to ask a question during that time, simply press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one a second time. As a reminder, today's call is being recorded, and I would now like to turn the conference over to our host, Vice President of Investor Relations, Sujil Shah. Please go ahead.

Good morning, and thank you for joining our conference call to discuss TE Connectivity's third quarter 2023 results and outlook for our fourth quarter. With me today are Chief Executive Officer Terence Curtin and Chief Financial Officer Heath Mitz. 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, 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 portion of our website at TE.com. I also want to remind you that our Q4 results in fiscal 2022 included an extra week. In this call, year-over-year comparisons for the fourth quarter and fiscal 2023 are made excluding this extra week. 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 Terrance for opening comments.

Thanks, Sujal, and thank you, everyone, for joining us today. Before we get into the slides, and as I typically do, I want to take a moment to discuss our performance this quarter within the backdrop of the market environment along with what we're seeing versus our last call 90 days ago. I am pleased with the execution of our teams in the third quarter with revenues that were in line and EPS that was ahead of our guidance due to strong performance across all three segments. Our transportation and industrial segments grew year over year, which essentially offset the expected declines in our communications segment. Our adjusted operating margins expanded 130 basis points sequentially without the benefit of any volume growth. We delivered on the actions that we've been driving to ensure margin expansion occurred as we move through this fiscal year. Also as important, you're going to continue to see the benefits from the strategic positioning of our portfolio around secular growth trends, including increased global production of electric vehicles, adoption of renewable energy, and applications for cloud and artificial intelligence. In the quarter, our orders of $4 billion are not only indicating stability in transportation and industrial, but also in our communications segment as well. I view the order trends to be a real positive, and they're reflecting the improving supply chains and reinforce our fourth quarter guidance, which I'll get into more details in a moment. As we've been sharing with you, one of the key areas of focus this year has been working capital management as supply chain performance improves. Our strong free cash flow performance reflects our focus both in the quarter as well as you see it here today. Cash generation is an important part of our business model, and year-to-date free cash flow is up 40% versus last year. Also, our capital strategy continues to remain disciplined, and we've returned roughly $1.2 billion of capital to our owners so far this year. Let me now provide some additional color on our markets and other updates since our last call. So on an overall basis, our markets are playing out as we expected. We have most of our key end markets in a growth or recovery trajectory, and we have a few markets that continue to cycle, and these we previously discussed with you. Our view of transportation end markets remain consistent with our prior view, and we continue to expect auto production to remain roughly flat at approximately 20 million units per quarter globally. Our growth in the transportation area will continue to be driven by content outperformance and our leading global position in electric vehicles. Turning to our industrial segment, we have three businesses that continue to have strong growth momentum. You continue to see our strong positioning in renewable energy, with growth from both wind and solar applications. In commercial air, sales continue to grow as this market recovers, and our medical business is benefiting from increases in interventional procedures. In our communication segment, while sales are down significantly this year versus last year's cyclical peak, our order trends are indicating stabilization at the current levels. And finally, I do want to reinforce that the way we think about long-term value creation remains unchanged. It's built on the pillars of secular growth trends that will drive increased content in the markets where we position TE, strong free cash flow generation with discipline around how we deploy capital, and leverage to enable margin expansion as we move forward. While our orders are indicating stability, we continue to see strong opportunities to expand sales, margins, and earnings per share as we move forward. So at this time, I want to get into the slides, and we'll discuss some additional highlights And if you could turn to slide three, I'd appreciate it. Our third quarter sales were $4 billion, and this was in line with our guidance and down slightly year over year on a reported and an organic basis. We saw organic growth of 7% in our transportation segment and 2% in our industrial segment. Our communications segment declined due to the expected market weakness that we've been talking to you about. Adjusted earnings per share was ahead of our guidance at $1.77, with adjusted operating margins of 17.3%. And these margins were up 130 basis points sequentially, as I already mentioned. The margin improvement from quarter two to quarter three was driven by our transportation and industrial segments, as we are delivering on our commitment to expand margins from the first half to the second half of this year. Our earnings per share performance that was ahead of guidance was driven primarily by the stronger margin performance. As we look forward, we are expecting our fourth quarter sales to be approximately $4 billion and adjusted earnings per share to be around $1.75, which are both similar to our quarter three levels. Also similar to our third quarter, we do expect year-over-year sales growth in our transportation and industrial segments and a decline in our communications segment. Just moving away from the financials for a moment, I do want to highlight that we issued our corporate responsibility report, which we call connecting our world. And, you know, we've issued this report for over a decade. There are a number of initiatives that we're driving internally, and our goals are in line with our purpose as well as expectations from our customers. Key highlights in the report versus prior year includes an over 30% reduction in our absolute Scope 1 and 2 greenhouse gas emissions. And currently, I want to highlight that 50% of the electricity in TE comes from renewable sources. I also want to note that we communicated our commitment to the Science-Based Target Initiative, which enhanced targets for greenhouse gas reductions by 2030 that are inclusive of Scope 3 emissions. So with that as a quick background on slide three, let's move to slide four, and I want to talk about our order trends. On the slide, you can see the details and the moving pieces, but I do think the key takeaway is that our orders are reflecting stability in all three of our segments. And this is nice to say after some of the order patterns we've had over the past couple of years. And these orders reflect and reinforce our guides for the fourth quarter. When you look at our transportation and industrial orders, they're both roughly flat from the second to third quarter. The real highlight and where you see the changes in our communication segment, where our orders increase 5% sequentially. And this is the first sequential increase in our communication segment orders since the first quarter of fiscal 2022. So with that quick overview of orders, let me now discuss the year-over-year segment results that are laid out on slides five through seven, and you can see the details, and I'll just talk about the high points. In our transportation segment, sales growth remained strong, and it was up 7% organically year over year with organic growth across all of our businesses. Our auto business grew 9% organically, and we had growth in all the regions of the world. The strong performance continues to be driven by our leading position in electric vehicles, as well as electronification trends in cars and positive impacts from pricing. While auto production is staying flat at about 20 million units per quarter, production of hybrid and electric vehicles are continuing to grow and right now reflect about 25% of total global auto production in our fiscal 23. As you know, We generate approximately two times the content in electric vehicle platforms versus a combustion vehicle. So we expect our content per vehicle to continue to expand as we move forward and the increased adoption of electric vehicles. Elsewhere in this segment, our commercial transportation business, we saw 2% organic growth in the third quarter. And in our sensors business, Our 4% organic growth was driven by automotive applications, as we see increased volumes from new design ones. At the margin level, in this segment, adjusted operating margins were 18.6% in the quarter. And this was up 130 basis points year over year and 200 basis points sequentially as a result of operational performance, including the benefit of price increases. Now let me move over to the industrial segment. At the segment level, sales increased 2% organically year over year, but we had strong organic growth in three out of the four businesses in the third quarter. Our AD&M business, our sales were up 13% organically, and we're benefiting from the ongoing improvement in the commercial air market. In medical, sales in the quarter were up 11% organically, driven by ongoing increases in interventional procedures. Turning to our energy business, we continue to see momentum with 8% organic growth driven by renewable applications. The addressable market for TE and renewable applications has a double-digit CAGR, and we're helping to enable utility-scale solar and wind farm deployments. Through our broad product portfolio, we are helping our customers reduce installation as well as maintenance costs And we expect our sales from renewable applications to be up double digits again this year. What's really nice in this business is that the current quarter continues to demonstrate the growth momentum that we've been delivering in this business, which has had an organic sales category of 8% since 2019. And finally, in the industrial segment, in our industrial equipment business, our sales were down 10% organically. And this sales decline was driven by inventory digestion in the distribution channel. And it's being driven by improvements in the broader supply chain that we're all feeling. In the industrial segment, adjusted operating margins were 15.8%. And these margins reflect the impact of the expected volume declines in the industrial equipment business. And I want to highlight that we remain committed to achieving our high team margins target for this segment. Now let me turn to the communication segment. And in this segment, our sales were down 37% organically to $424 million. And it was slightly lower than we expected. Versus last year's cyclical peak, appliances and our data and device businesses are being impacted by market weakness and the ongoing consumption of inventory across our customer supply chain that we previously discussed with you. Despite this weakness in sales, we maintained adjusted operating margins in the mid-teens range at 14.2%. Based upon the order trends I talked about earlier, we believe communications revenue will be roughly flat to quarter three levels in the fourth quarter, with adjusted operating margins remaining in the mid-teens. Now, with the communications segments, I do want to look beyond the near term for a moment. and really talk about what we get excited about, especially in our D&D business, as it continues to have strong design win momentum in next-generation AI platforms. When you think about where we play, we focus on providing the high-speed, low-latency connectivity to meet the needs of these next-generation data centers. Last quarter, we mentioned that we secured $1 billion in design wins for AI and certainly related server applications. And I just want to highlight for you this number continues to grow. We expect meaningful ramps of AI programs as we move through fiscal 24 with 50% more content in an accelerated compute AI platform versus a traditional compute server. The other key highlight is we're working closely with cloud customers as well as leading semiconductor companies with reference design to call out RTE connectivity solutions. So with that, As a wrap-up, let me turn it over to Heath, who will get more details on the financials, as well as our expectations going forward.