The operator welcomes everyone to the TE Connectivity Fourth Quarter and Final Year Results Call. The call will be recorded and there will be a question-and-answer session. The host, Sujal Shah, introduces the CEO, Terrence Curtin, and the CFO, Heath Mitts. They will be providing forward-looking information and using non-GAAP measures. The Q4 results for fiscal 2023 will be compared to the same period in the previous year, excluding an extra week. During the Q&A, participants are asked to limit themselves to one question. Terrence thanks everyone for joining the call.

In the second paragraph, the speaker discusses their satisfaction with the company's performance in terms of revenue and earnings per share. They also highlight their three key initiatives for the year, which included demonstrating the strategic positioning of their portfolio, generating strong free cash flow, and improving margin performance. The speaker then goes on to discuss how the company successfully executed on these initiatives, resulting in growth in their Transportation and Industrial Solutions segments and record free cash flow. They also mention returning money to shareholders and improving service levels to customers.

The company's cash generation model allows for both returning capital to shareholders and supporting M&A activities. They have successfully increased margins despite challenges in the Communications segment. Most key end markets are on a growth or recovery trajectory, with Transportation driven by content outperformance and Industrial seeing growth in renewable energy, commercial air, and medical sectors. While Communications sales are down, there was sequential growth in orders in the fourth quarter and the company expects continued growth from AI applications. The company's focus on long-term value creation remains unchanged.

In summary, the company's success is based on secular growth trends, strong cash flow generation, and margin expansion. The fourth quarter sales were in line with guidance and the adjusted earnings per share increased by 2%. The company also achieved record quarterly cash flow and free cash flow. For the full year, sales were flat but organic growth was 3%, driven by the Transportation and Industrial segments. Adjusted operating margins improved by 120 basis points in the second half of the year. Looking ahead, the company expects flat sales with organic growth in the Transportation and Industrial segments in the first quarter of fiscal 2024.

The company expects adjusted EPS expansion of over 10% in the first quarter and strong margin expansion. Order levels remain stable, with transportation orders growing due to stable global auto production. Industrial orders reflect some seasonality and ongoing destocking, particularly in the distribution channel. In the Communications segment, there has been sequential order growth due to new orders for artificial intelligence applications. Sales in the Transportation segment grew by 5% organically, driven by the automotive business and its leading position in electric vehicles, electronification trends, and positive pricing impact.

In fiscal 2023, electric and hybrid vehicle production increased globally by 40%, with Asia being the main driver of growth. The company expects this trend to continue and their content per vehicle to expand. Auto production for next year is projected to be 21 million units per quarter, with a focus on hybrid and electric vehicles. The Commercial Transportation business saw a 7% decline in sales due to market weakness in North America and China. The Sensors business experienced growth in automotive applications but weakness in industrial applications. In the Industrial Solutions segment, three businesses (Aerospace, Defense and Marine, Medical, and Energy) showed strong organic growth, with ongoing improvements in the commercial air market and interventional procedures, as well as a focus on renewable energy.

The Industrial Equipment business saw a 21% decline in sales due to inventory digestion in the distribution channel, similar to other companies. Adjusted operating margins were 15.9% in the quarter. In the Communications segment, organic sales were down 27% year-over-year but up 9% sequentially. Adjusted operating margins were 15.3%, with an increase of over 100 basis points sequentially. As destocking and AI increases in volume, margins are expected to expand. In the fourth quarter, sales were flat at $4 billion, with adjusted operating income of $699 million and a margin of 17.3%. GAAP operating income included restructuring and acquisition-related charges. For the full year, restructuring charges were approximately $260 million, expected to decrease to around $100 million in fiscal 2024.

In the fourth quarter, the company's adjusted EPS was $1.78 and GAAP EPS was $1.75, including a noncash tax-related benefit and restructuring and acquisition charges. The adjusted effective tax rate was 19% and is expected to be 20% in the first quarter of fiscal 2024. For the full year, sales were flat at $16 billion, with organic growth in the Transportation and Industrial segments offset by headwinds in the Communications segment and the impact of a stronger dollar. Adjusted operating margins were 16.7% for the year, with a 120 basis point increase in the second half due to cost reduction initiatives and price increases. The company expects to continue expanding margins in fiscal 2024.

The company reported adjusted EPS of $6.74, with a $0.45 impact from currency exchange rates. They generated record free cash flow of $2.4 billion, with $1.7 billion returned to shareholders through share buybacks and dividends. The company expects to maintain a high free cash flow conversion and plans to continue returning capital to shareholders while pursuing acquisitions. The company also discussed their progress in reducing inventory levels and emphasized their strong balance sheet. They expect to see further margin and EPS expansion and anticipate improvement in end markets. The Q&A session was opened for questions from analysts.

In the fourth quarter, the company experienced growth in automotive and Communications segments, but weaker performance in Industrial Equipment due to inventory destocking. However, the company expects similar trends in the first quarter, with growth in Transportation and industrial markets, but tough comparisons in the Communications segment. Overall, the company expects flat top-line growth and a 10% increase in EPS. Orders have remained stable despite the destocking in the industrial market.

In response to a question about trends for 2024, the speaker discusses the impact of the UAW strike on TE and the company's global position in the automotive industry. They also address the recent news about D3 companies scaling back on EV ambitions and slower adoption rates of EVs, stating that TE's automotive business is largely unaffected by these factors due to their global presence. The speaker also notes that while EV adoption may not be a straight line, the technology is working and consumers have choices.

The speaker discusses the company's opportunity to build upon the success of their content in electric vehicles this year, with expectations for continued growth next year. They highlight the strong market share and content position in China and anticipate this trend to drive top line growth and cash flow opportunities for the company. The speaker also mentions the recent acquisition and the company's consistent capital allocation strategy.

The company had a strong focus on free cash flow during fiscal year 2023, and despite supply chain issues, they were able to drive working capital down. They are confident in maintaining this momentum in fiscal year 2024 and expect to have a cash conversion rate of around 100%. Their capital allocation strategy remains unchanged, and they plan to continue being diligent with available cash and repurchasing shares when appropriate. They have an upcoming acquisition that will use $300 million in cash, but they also expect to generate cash in the first quarter. Overall, the company is pleased with their performance and confident in their future cash flow.

In response to a question about supply chain inventory levels, Terrence Curtin, CEO of TE Connectivity, explains that destocking is a common phenomenon after strong cycles. He notes that 50% of sales for the data appliance, industrial equipment, and other sub-verticals go through distribution partners, and the remaining 80% of the business is stable and growing. Curtin says that destocking is primarily seen in the 20% of business that goes through distribution partners and that it is difficult to predict when it will end.

The speaker discusses the stability of their company in both the D&D and appliance industries, and mentions that they expect to see an increase in orders in the future. They also mention the potential for growth in the industrial equipment sector, but do not provide specific guidance for the future. The speaker also mentions that they are not providing guidance beyond the first quarter, but expects secular growth trends to continue and help offset any potential destocking issues. They also mention the expected production levels for the auto industry.

The company expects to see four to six points of outgrowth in their business model due to their leading position in EV and ongoing electronification trends. They also anticipate growth in their Industrial and Communications segments, driven by recovery in certain markets and AI ramps. However, they acknowledge that destocking and the strengthening dollar will be challenges in the early part of the year. They also expect pricing to be net neutral due to input costs.

The speaker, Heath Mitts, responds to a question about the company's target margins across its three segments. He acknowledges that while they made progress in the second half of fiscal 2023, the company is still below its target margins and there is work to be done. He specifically mentions the Transportation segment, which has made strides but is still below its 20% target. The commercial transportation business is also currently in a down cycle, which is affecting margins. Overall, there is room for improvement and potential for volume support in the future.

The company is projected to make good progress in Transportation margins in FY 2024, but there is still work to be done. The Industrial segments are currently at a mid-teens operating margin, but this is expected to improve as destocking decreases. Communications has been on a rollercoaster ride in recent years, with high margins during periods of growth and now lower margins due to volume dependency. However, as destocking decreases and volume stabilizes, margins are expected to reach the high teens or even 20%. The destocking has primarily affected the Data and Devices, Appliances, and Industrial Equipment businesses, but only with distribution channel partners and not direct customers, which are the most profitable areas.

The speaker responds to a question about the company's AI opportunity and discusses the importance of connectivity in the AI space. They mention the need for customization and collaboration with both semiconductor players and cloud architects in order to maximize design and bring products to market quickly.

The speaker talks about the excitement surrounding accelerators in the semiconductor industry and how they have seen earlier ramps than expected. They mention a pipeline win of $1.3 billion in just three months and how their high-speed connectivity is crucial for AI clusters. They feel confident about the traction and growth potential in this area. In response to a question, they mention that AI revenue has increased in the current quarter compared to the previous one and discuss the potential for cannibalization of standard offerings. They believe that AI spending may be a mix positive for them and could potentially lead to a transition of spending rather than an increase in total spending.

Terrence Curtin discusses the potential growth in the auto industry for the company in 2024. He mentions that there may be some cannibalization, but overall it is a net positive. He also talks about the importance of the AI segment and how it has contributed to the company's growth. Curtin then addresses a question about the company's growth potential in the auto industry in 2024, mentioning the 12% growth in 2023 and the potential impact of EV-related factors. He also emphasizes the importance of diversification in the company's customer base.

The company is content with the 9% of their business that was driven by pricing, and they are confident in their ability to achieve 4-6% growth in the future. They view themselves as an agnostic supplier in the automotive industry, focused on bringing the best connectivity solutions to promote EV adoption. They have a strong global presence and are present on almost every car in the world. The company has worked hard to lower their fixed costs and while they anticipate some labor inflation, they expect their cost position to remain similar in 2024 as it was in 2023.

The company is facing various cost pressures, including labor inflation and fixed costs. However, they have implemented restructuring measures and are shifting their operations to lower-cost regions. While some areas, such as freight spend, have improved, the cost of materials like metals and resins remains high. The company is focused on material productivity and sourcing strategies to mitigate these costs, but they do not expect a significant decrease in pricing in 2024.

The company has seen growth in commercial transportation, particularly in North America and Europe, but China has been weak. Overall, global production has been flat, with the Western World offsetting China's weakness. Next year, they expect construction to remain weak in China, but possibly some recovery in the truck and bus sector.

The speaker discusses the expected slowdown in Europe and North America in the early half of the year, as seen in their organic growth. They also mention the potential for content outperformance to counterbalance this decline. In terms of Sensors, there will be a $50 million exit rate in order to improve margins and focus on automotive and industrial applications. The questioner asks about the Industrial Equipment business and the speaker mentions destocking trends and deferrals of EV investments from automakers. The speaker also talks about the payback from restructuring investments in 2021 and 2022, which should be seen in 2024.

Terrence Curtin, CEO of Industrial Equipment, discusses the current state of the industry, noting that supply chains are improving and buffer stocks are tightening. There is continued investment in areas such as EV battery plants and automation, but warehousing for consumer electronics remains weak in Asia. The company is also undergoing restructuring, with a two-year payback period for charges taken in 2023. In terms of financials, there is expected to be a $250 million headwind for revenues in fiscal 2024 due to FX movements. No specific impact on EPS was mentioned.

Terrence and Heath address questions about EPS growth and FX headwinds for the upcoming fiscal year. Heath estimates a $250 million FX impact on EPS and Terrence mentions a 10% growth in the first quarter, with price initiatives ramping up in the second half. The second half of fiscal 2023 is expected to benefit from pricing catch up in the Transportation business.

TE Connectivity's margin performance is expected to remain consistent in the first quarter, but is expected to grow in the second half of the year due to destocking normalization and other initiatives. The company's Investor Relations team is available for any additional questions. The conference call will be available for replay on the company's website starting at 11:30 A.M. Eastern Time on November 1.

This summary was generated with AI and may contain some inaccuracies.