Good morning, and thank you for joining our conference call to discuss TE Connectivity's Q1 2024 results and outlook for our second quarter. 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, 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 te.com. Finally, during the Q&A portion of today's call, due to the number of participants, 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 Terrence for opening comments.

Thank you, Sujal, and we appreciate everybody joining us today. And I do also want to wish everybody a Happy New Year.

As I normally like to do before we get into the slides, I do want to take a moment to discuss our performance this quarter along with what we're seeing in our markets versus our last call 90 days ago. We continue to be in a slow global economic environment.

Against this backdrop, the performance of our markets is largely consistent with our expectations and it resulted in our first quarter sales being in-line with our guidance of flat revenue growth. Our Transportation segment once again grew year-over-year driven by content growth, and this offset the declines that we saw in our Industrial and Communications segments.

Our team’s execution was strong in the quarter with 20% year-over-year adjusted earnings per share growth, and this was driven entirely by adjusted operating margin expansion to 19%, and this was on flat sales. This margin performance demonstrates we're successfully executing on a number of structural margin improvement levers across our segments.

Those levers drove margin expansion through the second half of last year and are resulting in the further step-up of margin performance, particularly in our Transportation segment. We expect to deliver strong margin expansion this year that will be driven by our Transportation and Communication segments based on what we're currently seeing in our markets.

And just as important is the quality of our earnings and you see this in our record first quarter free cash flow of $570 million which builds on the strong cash performance from last year and that we expect will continue. During the quarter, we deployed approximately $1 billion of capital that included returning $600 million to shareholders as well as $350 million to acquire Schaffner.

And Schaffner expands our product portfolio and factory automation. Our cash generation model continues to give us both confidence and opportunities to return capital to shareholders, while supporting ongoing bolt-on M&A activities.

So, let me now share what we're seeing in our market since our call 90 days ago. As I mentioned already, on an overall basis, markets are playing out as we expected, and we also had orders growth of 4% year-over-year and this was across all three segments.

We are seeing sales growth across the majority of our businesses, but we do have a few business units that are continuing to be impacted by inventory destocking by our customers and we'll highlight these during the call. Our view of the Transportation end markets remain unchanged from our prior view with global auto production expected to grow slightly this year.

And while we're seeing some puts and takes in production by region, China production and EV adoption is stronger, and this is offsetting some weakness in Europe and in North America. In our Industrial Solutions segment, three out of our four businesses continue to have growth momentum, and we expect to continue to see sequential growth in each of these three businesses as we go forward.

You see our strong positioning in renewable energy in both solar and wind applications. Commercial air sales continue to grow as production increases for both single and twin aisle platforms, and our medical business is benefiting from increases in interventional procedures.

When you compare versus 90 days ago, the one market where we've seen incremental weakness is in our Industrial Equipment business. Destocking began a few quarters ago in this business and we now expect it to continue into the second half of this fiscal year.

And lastly in our Communication segment, we continue to see destocking but what's really nice it's now just occurring in pockets. And we do expect to see growth in the second half of this year in our Communications segment driven by our wins in artificial intelligence programs.

As we look forward, our long-term value creation model remains unchanged and is centered around three pillars. The first is our portfolio is strategically positioned around secular growth trends including growth in electric vehicles, adoption of renewable energy and applications for cloud and artificial intelligence, just to name a few.

Second, we have operational levers to enable margin expansion despite a slow economic environment. The drivers encompass strong operational execution including footprint consolidation, portfolio optimization benefits and price actions that we implemented to offset higher input costs.

And third, we've established a strong cash generation model to return capital to shareholders while investing in bolt-on M&A opportunities. So with that as an overview, let me get into the slides and I'd ask you to turn to slide three, and I'll discuss some of the additional highlights for the first quarter and our outlook for the second quarter and then Heath will provide more details in his section.

Our first quarter sales were 3.83 billion, which was in-line with our guidance as I mentioned. In Transportation, we saw 5% organic growth driven by content expansion in our auto business.

In Industrial, we saw growth in Aerospace, Defense and Marine, Medical and Energy, which was more than offset by weakness I talked about in industrial equipment. And finally, in Communications, it was down as we expected, but we are well-positioned for growth in the second half driven by AI applications.

Adjusted earnings per share was ahead of our guidance at a $1.84 and this was up 20% versus the prior year. Adjusted operating margins were 19% and these were up 290 basis points year-over-year driven by strong operational performance, and the margin performance was the driver of our EPS being ahead of guidance.

As we look forward to the second quarter, we're expecting our second quarter sales to increase over the first quarter to $3.95 billion with the sequential growth being driven by the Industrial segment partially offset by a slight decline in Transportation. Adjusted earnings per share is expected to be around a $1.82 and this will be up 10% year-over-year in the second quarter with approximately 200 basis points of adjusted operating margin expansion versus the prior year.

So to move away from the financials for a second, and before I get into orders, I do want to highlight that we were pleased to be included in the Dow Jones Sustainability Index this quarter for the 12th consecutive year. This designation continues to demonstrate TE's dedication to sustainable business practices that do provide value to our customers and that they expect and are aligned with our commitment to our owners.

So now let's talk about orders and I'd ask you to turn to slide four. At the total company level, we had orders of $3.8 billion and this was up 4% year-over-year and consistent with our expectations.

And what was really nice, this is the first time since after the COVID crisis in 2001 we've seen all three segments have year-over-year order growth. We continue to see stability in our overall order levels with year-over-year growth in each of the segments, and with backlog remaining at near record levels, and this gives us confidence in our second quarter outlook.

Transportation orders grew 4% year-over-year and reflects stability in overall global vehicle production. In the first quarter auto production came in a little bit over 22 million units and we saw stronger production in China that offset some of the weakness in Europe and North America.

Going forward we expect global auto production to be roughly 21 million units per quarter as we move through this fiscal year. In our Industrial segment, we saw growth in orders both year-over-year as well as sequentially.

The order strength is driven by our AD&M Medical and Energy businesses, and we saw the weakness in Industrial Equipment end markets and this was across all regions of the world. And in our Communication segment, our orders grew 3% year-over-year, and like I said earlier, we do see destocking by our customers now only occurring in pockets in certain applications.

So with that as an orders overview, let me now get into the year-over-year segment results that we saw in the quarter and that's on slides five through seven of your slide deck, and you can see the details on those slides. So starting with Transportation, overall the segment had sales growth and it was up 5% organically year-over-year driven by our auto business.

Our auto business grew 8% organically with 13% growth in Asia and 7% growth in Europe and this more than offset a decline in North America. Our performance continues to be driven by content growth from our leading global position in electric vehicles as well as electronification trends within the vehicle.

Our global outlook for electric vehicle growth is unchanged, and it's important to note that over two-thirds of EV production will occur in Asia. We are very well-positioned to capitalize on this growth due to our strong content and share in local Chinese OEM platforms that is driven by our innovation.

Overall, our growth will continue to be driven by content outperformance that leverages our leading global position in the auto market. In the Commercial, Transportation business, we saw 1% organic sales growth and this was driven by Asia and it was partially offset by declines here in North America.

And in our Sensors business about half of the sales decline that you see on the slide was driven by the portfolio optimization efforts we've been talking to you about, where we're continually to organically exit lower margin and lower growth products. The rest of the decline in Sensors was driven by weakness in sensor applications and industrial markets, partially offset by growth in automotive applications.

For the Transportation segment, adjusted operating margins were nearly 21%. We expect Transportation segment margins to run approximately at our 20% target margins for the rest of this year.

As you know, we've been driving several improvement and in our operations. We have been able to optimize our factory footprint through our restructuring programs and are getting cost savings from these actions.

We are also seeing improvement in our EV product margins as volumes increase and in our Sensors business we have been driving margin expansion improvement through portfolio optimization which I mentioned earlier. Also I'd like to highlight that our teams are continuing to effectively manage pricing to offset higher input cost.

We've been talking to you about all these actions and I'm pleased with you that the team successfully executing on them and delivering the strong results that you see. So that is a backdrop of Transportation.

Let's move to the Industrial segment. And in the segment sales were down 5% organically in the first quarter, but we did see growth in three of our four businesses and we expect to see continued sequential growth in AD&M, Medical and Energy as we go into quarter two.

In the first quarter our AD&M sales were up 13% organically with increased production of both single and twin aisle platforms in the commercial air market. In Medical, sales in the quarter were up 16% organically, driven by ongoing increases in interventional procedures.

And in our Energy business, we saw growth in renewable applications and these were partially offset by slower utility demand in Europe. And finally, you can see on the slide, in the Industrial Equipment business, our sales were down 26% organically.

And in this business, we're seeing the destocking that began a little bit later in the cycle. So we expect this inventory digestion to continue.

And this is a trend that is similar to what you've been hearing from other companies. From a margin perspective, for the Industrial segment, adjusted operating margins were 15% with the impact from the volume decline in Industrial Equipment.

And we expect to continue to see segment margins running in the mid-teens until this destocking environment improves. So let me turn to Communications.

Organic sales were down 17% year-over-year and we expect the second quarter sales to be similar to the first quarter level. Starting in our third quarter, you will begin to see favorable year-on-year growth in this segment.

We are well-positioned to grow in our artificial intelligence programs and now expecting $200 million of contribution in fiscal '24 from AI applications. And in these applications for artificial intelligence, let's face it, we're focused on providing high speed, low latency connectivity to meet the needs of the artificial intelligence workloads.

And as we've mentioned to you before, we generate 50% more content in an accelerated compute AI platform versus traditional compute servers. Also we continue to work closely with cloud customers as well as leading semiconductor companies to ensure reference designs that call out all our solutions.

On the margin front for the segment, adjusted operating margins were 18.7% and they were up 170 basis points despite the decline in sales. Our teams are executing extremely well and we now believe we'll be able to maintain the high-teen margin in this segment as we move through this year.

So with that as an overview of performance, let me turn it over to Heath, to get into more details on the financials and our expectations going forward.

Well, thank you, Terrence, and good morning, everyone. Please turn to slide eight, where I will provide more details on the first quarter financials.

Adjusted operating income was $731 million with an adjusted operating margin of 19.1%. GAAP operating income was $698 million and included $8 million of acquisition related charges and $25 million of restructuring and other charges.

For the full year, our expectations are unchanged and we continue to expect fiscal '24 restructuring charges to be approximately $100 million which is well below the levels we've been running in prior years. Going forward, we expect that restructuring charges will be driven by actions to improve efficiency around future bolt-on acquisitions.

Adjusted EPS was $1.84 and GAAP EPS was $5.76 for the quarter, which included a benefit of nearly $4 related to a one-time non-cash non-U.S. tax benefit, a change in the Swiss tax rate and the impact of intercompany transactions.

Additionally, we had restructuring, acquisition and other charges of $0.07. The adjusted effective tax rate was 21.2% in Q1, slightly higher than our guidance due to an increase in the Swiss tax rate that I just mentioned.

For the second quarter and for the full year, we now expect our adjusted effective tax rate to be approximately 21%. And importantly, as always, we continue to expect our cash tax rate to stay well below our adjusted ETR for the full year.

Now let's turn to slide nine. Sales of $3.83 billion were flat on a reported basis and down 1% on an organic basis year-over-year.

Adjusted operating margins were 19.1% in the first quarter, expanding 290 basis points year-over-year despite flat sales. And as Terrence mentioned earlier, this was driven by margin expansion in our Transportation and Communications segments.

Adjusted earnings per share was $1.84 up roughly 20% year-over-year driven by the strong margin expansion. Turning to cash flow.

Cash from operations was $719 million. Free cash was a first quarter record of $570 million.

Also in the quarter, we deployed roughly $600 million to shareholders through share buybacks and dividends and also utilized roughly $350 million for the Schaffner acquisition. Our long-term capital strategy remains unchanged, which is to return approximately two-thirds of free cash flow to shareholders and use one-third for acquisitions over time.

Before I turn it over to questions, let me reinforce some of the key points that we discussed today and share how we are thinking about our performance and what we expect to be a slow macro environment. We are continuing to take action on the things we can control to improve our financial performance and you see this reflected in our strong results for Q1 as well as our expectations going forward.

On the topline we continue to benefit from secular growth trends and you see this in the outperformance we are delivering versus some of our key markets we serve. You have been seeing the benefits of our global leadership position in electric vehicles, but other growth applications like artificial intelligence are just getting started.

Below the topline we are successfully executing on multiple operational levers, which have been discussed earlier on this call. As we move forward, our focus continues to be on margin expansion and earnings growth despite the slow macro environment.

Finally, we remain excited about the opportunities we have ahead of us to drive value creation for all stakeholders. And with that, let's open up the call for questions.

Thank you. Can you please give the instructions for the Q&A session?

Yes. Good morning, and thanks very much for taking the question.

Can you speak in more detail about what is better or worse than you'd previously been anticipating with respect to the quarter and outlook? And on the broader topic of what areas are changing versus your prior views, do you still think your auto business can outgrow auto production by mid-single digit percent or shifting EV production plans from auto OEMs impact that?

Hi, Mark, thanks for the question. Let me start with the first part.

As we said on the call, things overall pretty much came in as we expected here in the first quarter. And when you think of the topline, I think really the two moving parts we saw, one was that was better and one was that was a little worse.

And the one that was better was we saw actually auto production was a little stronger, it was little bit over 22 million units and that's really driven out of China. And you all know the great China position we have and certainly capitalize on it.

So that was a little bit better. The area that was a little bit worse is, our Industrial Equipment business.

We highlighted back in our September quarter that we started to see some destocking, I would say that got incrementally worse both through our channel partners. We saw that which is where we indirectly touch customers and we also saw that to get a little bit deeper in Europe probably to call out a region a little bit.

So they were on the topline, what was a little bit better or worse. On the bottom line and I know Heath, talked about and I talked about it, margin performance by our team was better and it was both in Transportation and Communications and that drove the EPS fee, and we had a little bit of a higher tax rate that the margin covered that.

The second part of your question around auto content outperformance, I said on the pre-remarks that we do believe EV production is going to be up about 25% this year. It's really going to be driven, two-thirds of EVs are made in Asia.

That's our largest region in automotive for our revenue and we're going to continue to capitalize on it. So while there are some places in North America and Europe you hear maybe the growth rates won't be as high, Asia had been making up for it and you will get the 4% to 6% outperformance that we always talked to you about.

We feel good about that.

Okay. Thank you, Mark.

Can we have the next question, please?

Yes. Thank you.

Good morning. Terrence, maybe just a follow-up on your point about very strong margins, right, you really had very standout margins both at gross margin level and at operating margin level.

Can you maybe parse a little bit about the impact that you saw from these actions you have taken, I think you alluded to a series of those restructuring footprint, EV mix and so on. And what do you think is sustainability of that and how that translates into segment margins for the rest of the year?

Thank you so much.

Hi, Wamsi, thanks for the question. I'm going to let Heath take that.

Sure. Wamsi, listen, there's we've talked here for a while about some of the journey that we've been on and we've taken some outsized restructuring charges over the past few years.

Many of you have pointed out, it's not lost on us, but we're starting to see in a more meaningful way some of that footprint consolidation come into, to the benefit of our margins and obviously translates into earnings and most of that you do see in gross margins. So, Terrence, in the call, he mentioned execution, which we include footprint in there.

There's also portfolio optimization moves that we've made in terms of Jettison low margin product lines and you'll continue to see a little bit of that as we move forward. Last year, we talked a lot about the price actions that we've put in place and those have stuck, and we continue to be very diligent on that.

And then quite candidly in some of our businesses where we see stability versus where we've been running in the last few years that really creates an operating environment where you can take advantage of lower cost structures. And I think it's important as we think about the volatility that we've had over the last several years that has started to stabilize and where we play as part of many supply chains out there when we start seeing order patterns that are a little bit more consistent with our suppliers performing more consistently.

It allows us to run our factories more consistently and you certainly saw that. The first quarter was probably a little overheated in Transportation because of the tick up in auto production north of 22 million units, but even as we bring down that to closer to the 21 million unit a quarter level, we still feel confident that we can run at the target margins for that segment Transportation being target margins of roughly 20%.

So, we are making that statement on this call here today. For the Communications segment, we have been able to, I'll say improve the margins on a little bit lower revenue.

We're not committing that we're going to be at 20% here yet which is the target margins for Communications at these revenue levels. This thing tick up, you should continue to see us in the high-teens from an operating margin perspective.

And then Industrial, Industrial is right in the mid-teens and we would expect it to run in the mid-teens throughout the rest of this year. There's a couple of things at play there.

Obviously, the elongated destocking situation in our Industrial Equipment business which is not just the largest piece of that segment, but also most profitable piece, does have the impact and we've talked about that in the last couple of quarters. And then we start layering in acquisitions that does have a dilutive impact.

And the acquisitions are terrific opportunity for the growth of that business and opportunity that it presents for our stakeholders at the same time bringing the deal in generally comes in with diluted margins that we have to absorb and that's no different than what the Schaffner acquisition that we bring into it. So when you add all that up, Wamsi, we feel good that as we move through the year our operating margins at the TE level will have an eighteen handle in front of it, plus or minus will be humming better than we did in 2023 and feel good about the opportunities to move forward from that as we continue our journey.

All right. Thank you, Wamsi.

Can we have the next question, please?

Thanks a lot. Good morning, everyone.

I guess my question really is around there's been a fair bit of worry around what end demand trends look like on a broader level. And I understand your commentary and what you're seeing is very stable compared to a lot of the semiconductor companies I think right now.

But I'm hoping you can talk and help us understand, orders in December quarter are down sequentially in aggregate has been flat for [CIS] (ph). Is that a concern that perhaps that second derivative is starting to shift negatively?

I'd love to understand how do you think about orders being down sequentially versus your broader commentary that things are fairly stable? Thank you.

Yes, sure, Amit. Thank you for the question and couple of things.

First off being our orders were up in all the segments year-over-year by 4%. And I think you also not only have to look at orders, but we continue to have a backlog that's about $6 billion.

So, I think we've communicated pretty consistently. We expect as the environment gets better that backlog will work down.

I'll tell you we aren't seeing cancellations. So, I know some of the semi companies talk about that, but we have to realize, our products are very different than semiconductors.

Lead times are a lot shorter and really the element during COVID, was we couldn't hit or lead times consistently we did not really extend lead times. So, when we look at the orders in the quarter like I said on the call they came in where we expected except for, Industrial Equipment was a little weaker.

Otherwise, they came in where we thought they would be coupling the orders with the backlog. And I think you can continue to expect, we're probably going to backlog below one as the backlog continues to work down to get a little bit more normalized with service levels improving.

I think from the backdrop when we think about Transportation. We do expect global auto production to come down from a little bit over 22 million units in the first quarter to 21 million units, and we think it will run at 21 million units for the year per quarter for the rest of this year to get to about 85 million units in total.

In Industrial, you see sequential order increase which really is being driven by AD&M, Medical and Energy. So, you're continuing to see that and that supports why we believe we're going to have Industrial Solutions segment revenue increase.

And in Communications, what's nice is we are seeing stability even though there are some pockets around enterprise applications, pure telecom applications. We aren't seeing a slowdown in artificial intelligence and cloud, but there are some pockets out there in the telecom and the enterprise that are still working some things off, but it feels like there's light at the end of that tunnel.

So, I think the last thing is our guide for the second quarter is going up to $3.95 billion of revenue and it's really based upon both the orders of $3.8 billion plus the backlog that we see. And I think we've laid out how we're thinking about the world for the rest of the year.

Okay. Thank you, Amit.

Can we have the next question, please?

Thank you. Good morning.

I had a tuning question about some of the channels. So, with the Industrial Equipment organics pretty steep.

You seem to reference just the channel partners, really they are curious if you could juxtapose the actual end market on that specifically. And then in auto, any excess inventories in certain regions of the world, so curious?

Thanks, Chris and good morning. So, let's break this apart because, yes, in the comments we do talk about destocking.

We do not see destocking of our product in the automotive space at all. Our service levels are 90% plus on the ship to request, supply chain is flowing and honestly I think you see it in our results.

So, in automotive we do not see destocking of our products. When you come to the destocking that we talk about and Chris you said it right, I think you have to think about TE's world and there's the world where we service our customers directly and then there's the world that we use our distribution partners to cover where we can't do directly.

And in TE at the total company level, 80% of what we do, we cover directly. And honestly our revenue on that 80% in this quarter we just closed was up low-single-digit.

So, that is where our supply chain is completely tied into our customers. And that's an indicator we look at around destocking.

Now the piece that goes through our channel partners, and they are working down inventory that was down 14% in the quarter. And that's where you truly see that you see the biggest impacts in Industrial Equipment, you see it in appliances, you see it also in our data devices business where those business have upward to 50% of their revenue that go through distribution partners to get to their customers.

So, that is really where we see the destocking occurring. One of the things that was nice this quarter, we saw that that inventory did not go up, leveled off, we do see in appliances, it has improved.

I talked about D&D, it's in pockets, and Industrials later to the party of destocking, and I think that will take a little bit longer. But it's also the element ties back to Amit's question, when we're looking at our direct business levels with our customers, where we touch them directly, we have low-single-digit organic growth you exclude what goes through the channel partners.

And I think, we'll continue to have destocking with us here especially in the Industrial Equipment business and that drives that big decline of organic growth, but that will get behind us at some point. And I think it also shows those areas that Heath, talked about where we're benefiting from electric vehicle, where we benefit from other content drivers is really allowing us to basically absorb the destocking we're doing and stay relatively flat.

Okay. Thank you, Chris.

Can we have the next question, please?

Thank you. I wanted to follow-up on some of the earlier questions around EV penetration and auto outgrowth.

The Q1 outgrowth came in below target levels despite still supportive price is what we would consider normalized. It sounds like there's not much destocking headwinds in there.

So, is there -- is this just some pressure from softer EV penetration? Are there mix headwinds?

Is it just that we shouldn't think about this on a one quarter basis? And then lastly, if China took share of global auto production in the quarter, is it fair to think that that's a headwind to outlook because I know it's a lower content than the U.S.

and Europe? Thank you.

Yes, so a couple of things, Chris. First off on the content outperformance, I appreciate you saying what I'm going to say.

Please don't look at it on an individual quarter basis. You will see times when it's way ahead.

You'll see times when it's behind and I really think you have to look at it over a period of time because there is interplays between where we are and certainly getting to the OE. So, net-net you will see it, it does get into being on every platform in the world.

Those are types of things you're going to get on a quarter a little bit off. We were about 300 basis points of outperformance in the quarter.

So, it was a little bit below what we said, but also what I said on the call was we expect to be in that 4% to 6% range for this year is important. On your other part of, hey there's been a lot of noise around EV adoption and production.

Our view of it's the same. And I just, I am going to stress as always, I know sometimes because we hear about U.S.

car companies and European car companies. I'm going to ask us to really take it up a level and remember global car production is what matters to TE.

There's going to be about 85 million cars made in the planet this year. The majority of them will be made in Asia.

And I would also tell you when you look at EV adoption two-thirds of EVs are driven in Asia. And this is where our strongest region is, when you also think about those 20 million electric vehicles, whether that's a full battery electric, a plug-in hybrid, hybrids like a Prius that don't need to plug.

You really got to sit there and go. Those 20 million units are bigger than USR and automotive production in the United States.

So, I really ask us when we think about EV trend that need to be a global lens. And I was just in China last week, and when you're in China, you see EVs all around you, you can tell by their license plate color, they're green, they're different color than a normal license plate.

And you see that where that adoption is going and you see it not only full battery electric, you see it in plug-in hybrids. And what's great is, we have share that is similar with the local OEMs as you do with the multinationals, and you see that in our growth and you also see when China production goes up, our revenues are a little bit stronger.

So, the content of 4% to 6% hasn't changed. Our view of what EV adoption does for our content on a full battery electric it's about 2x, on a plug-in hybrid or hybrid is about 1.5 times are normal $70 that we would have on a nice vehicle, hasn't changed.

And I think what's really great is our global business is really making sure we're bringing the innovation to life, and also serving our customers with their innovation to make it happen.

Okay. Thank you, Chris.

Can we have the next question, please?

Hi, good morning. I was wondering if you could just dig into the Schaffner acquisition a little bit more in terms of what it adds to the industrial portfolio and what kind of sales and margin profile we should expect going forward from it?

Thanks.

Yes. Thanks Steven, good morning.

And Heath and I'll hamming, this one. So, first off Schaffner, when we talk about bolt-on M&A for us is where areas that around areas we really want to be focused on from an application, we can drive value for our customers, but also can we acquire things that drive value for you as owners?

And Schaffner is a great example of it. It is going to be in the factory automation space.

Schaffner was a Swiss company and one of the things they do there, one of the global leaders in electromagnetic filter solutions and to keep it simple, it really is how do you have filters that when you're bringing power into factory automation application through the motors and the drives, you really keep that pure from interference. We already had a product line that did this.

It was very much a U.S. product line with Schaffner, they were shown in Europe had a nice Asia presence and it really brings it together and that gets us deeper into factory automation.

The revenue of it is about $40 million a quarter. It is something that we will improve the profitability up to the levels that we say.

And Heath, I don't know if you want to add more to it.

No. I think Steve this is right down the middle of the fairway in terms of how we look at bolt-on deals and I kind of compare it and similar to the ERNI acquisition that we did in 2022 which was another industrial -- another business that rolled through our Industrial Equipment business unit within that segment.

From a -- although it's going to contribute $40 million a quarter or so out of the gate, our focus is obviously driving where the value creation opportunity is and that's on getting the cost structure in-line with where we would think about things in a TE world as well as really focusing on the cash on cash return here. It's not going to be contributing much to EPS in the first year, no different than ERNI did, but following a similar trajectory to ERNI, it does really fit well within our margin expansion strategy and our ability to create cash on cash returns for our shareholders.

So, I'd say in general it's, these are the nice size of deals we’d like to do and it's a fragmented space still, so there's still opportunity to add things in this space, even if we have absorb some dilution in the margins at the segment level.

Okay. Thank you, Steve.

Can we have the next question, please?

Hi, guys. Good morning.

Hi, Joe. Good morning.

Hi, I just want to ask on the AI side within Communications. So you mentioned you have like a 50% content lift in these AI type applications now.

I'm just curious how much of what's being built for AI is simply replacing stuff that otherwise would have been built before AI? So it’s like, if you're doing $200 million of AI related content in 2024, is that essentially like replacing what would have been like $133 million of content of older type stuff and like the more of than last year?

So couple of things, Joe. What you're talking about is more cannibalization that goes into where capital gets deployed.

I would say you're still going to see servers deployed that will support AI. What we're trying to really get out there is, what is the increased content to support the workload?

So when you sit there, I won't assume that it completely cannibalizes everything, but what's really nice with the innovation that we bring and how these workloads are set up on the GPUs and the TPUs, it really creates a higher revenue level that we expect as AI continues to ramp. And when you think about our year and I said it on the call early on, we think we're about $200 million this year of AI revenue.

It will continue as program launches occur, build throughout the year and probably 60% plus will be in the second half versus what's in the first half. And we'll get the growth in our Communications segment in the second half of our year.

Okay. Thank you, Joe.

Can we have the next question, please?

Hi, thanks for taking my question and Happy New Year as well. I was actually going to follow-up on the previous question on Communication and AI.

You're now indicating a $200 million contribution from the AI piece of the business, you raising that, I mean, now from $150 million. What’s the driver of the raise?

Is it more capacity or demand? And then you've talked about a $1 billion order booked in the past.

How has that pipeline continued to expand? And as you see that revenue come through, what are the implications on margins for the Communications segment?

Thank you.

So, hi, Samik, thanks for the question. First off being when you look at that it is the increased element is demand and wins.

To the second part of your question the $1 billion is in excess of $1.3 billion. So, we continue to have momentum on that.

And as Heath, sort of said, when we think about margins as that comes in, we're going to be in the high-teens for that segment. So, even on a little bit lower revenue than we said before, we're going to be in the high-teens this year in the Communication segment as that comes in.

Okay. Thank you, Samik.

Can we have the next question, please?

Sorry, Luke, are you there? Why don't we go to the next question and we'll have Luke rejoin.

Yes, thanks. Good morning.

Terrence, I wanted to circle back on the Industrial sub segments. You really just called out the factory automation, industrial automation area, it's being weak on the destocking, other markets growing.

But we are hearing from other suppliers and EMS companies have some slowing demand and inventory issues across pockets of medical and even some of the renewable energy areas. Could you give us a read on what you're seeing in terms of inventory and is that more of a direct to OEM sales so there's not as much noise in the channel?

Yes, Matt, thanks for the question. Couple of things, first off being in Medical, and that is a direct sale, it's very similar to how we serve automotive.

There's not much it goes through the channel there, not much it goes to EMS either. So, where we served that’s market is very much the big interventional players of the world and you can see like our growth was double-digit very strong and in-line with where interventional procedures are growing double digits.

So, we don't see that. In the Energy where we play in service in utilities and on the renewables, I would tell you we saw wind can slow a little bit more due to financing and I would say then I would say destocking, but we continue to see acceleration in solar applications and any weakness that we've seen in the energy business has really been around utility spending primarily in Europe.

We did see a little bit of slowness of utility spending on their grids in Europe and that's why you saw the growth rate being a little bit lower than what we expected to be middle and longer term in that middle high-single-digit.

Okay. Thank you, Matt.

Can we have the next question, please?

Great. Thanks for taking my question.

I think you all have done a very good job on the margins this quarter, posting some pretty solid upside. You've explained it a little bit, but I'm hoping you can linger on this a little bit more.

We know you had these aspirational goals. You had this significantly better than expected or better than guided quarter.

And maybe that's sort of the question that I have. Is this a matter of having achieved some goals earlier than you expected, some things you thought might take several quarters, wind up being realized earlier?

Or are we just looking at a higher level of profitability and we'll continue to see some improvement from this point? And what changed, you've been pursuing these, all the things you talked about, you've been pursuing them for a while, suddenly we get this upside.

Did something change in this regard in the quarter? Thank you.

Sure. Well, listen, I think certainly we went into the quarter expecting auto production builds of about 21 million units and we stated that last quarter.

We came in north of 22 million and it shows that when you get the cost structure and the fixed cost base and the number of rooftops in the right location to the right number that you can really leverage that incremental volume. And that's really what we saw on the Transportation side within the, there’ll be auto business there.

So, as we come back down to about 21 million units a quarter production, global production, we do expect to be able to hold to that target margins. But there's a lot of different levers involved there.

It's getting the cost structure right and then obviously having a more stable environment to be able to plan towards and deliver towards. And all of those things came together nicely in the quarter, but I feel good about these volume levels that we'll be able to hold to our target margins.

And I think that's just part of this journey that we've been on. If you go back last several years even coming through the pandemic driven market, we've been running well below 85 million units globally in terms of auto production.

And now that we're starting to get back up to that we're starting to see the benefit. We’ve said that getting to target margins for our Transportation business would require a couple of things one of which was a bit more volume market support there and we're certainly starting to see that.

So, we're able to get there a little faster. Some of that was market support.

Some of it was getting the cost structure in place a little bit faster as we've taken some facilities off in within our auto world offline in Western Europe and seeing the benefit of that. When you get into communications, we're running a little bit hotter there.

But again it's having that structure in the right place and being able to execute. So, I wouldn't call out and give relevant to size of the segment that can swing out around a little bit.

But we feel good about where we are margin wise. And most of this upside that you're referring to is driven out of the Transportation business.

All right. Thank you, Will.

Can we have the next question, please?

Great. Can you hear me now?

Yes.

Yes, we can Luke. Thanks for coming back on.

Okay. Yes, great.

Sorry about the technical issues there. Terrence, just hoping you could comment on your ability to hold the line on neutral pricing in Transportation Solutions, especially in automotive this year.

I guess if we look around the neighborhood, there are some companies talking about getting back to price downs. Just for TEL specifically, if you could talk about some of the factors that are helping me to keep that neutral pricing outlook that you had outlined earlier?

Hi, Luke, thanks for the question. I think when you look at it, I think one of the things we got to start with is what's happening with input cost and certainly we are not seeing a massive inflationary environment, but we're also not seeing a massive deflationary environment.

Copper very important from a conductor and important connector and important moving both data and power around vehicle or any application, it's still up year-over-year. Certainly other things, we have freight down, but net-net, we're still seeing a pretty net neutral world.

When it comes to input cost and you know how hard we worked to recover the inflationary costs and some of the things that help the margin that we're talking about today. But very honestly, we're talking to our customers about where the costs are and as we went through this our strategy has always been with our customers to recover the cost and that's what we did.

So, I think there will be an element, we’ll be very driven on where the input costs at will dictate pricing. And that's been our approach and we've been very consistent as we communicate that to you across all our businesses.

Okay. Thank you, Luke.

Can we have the next question, please?

Hi, thanks so much for taking my question. I guess maybe following up on the last question.

Maybe just to clarify, do you feel that if we were to eventually get to maybe a normalization of pricing, I think typically For TEL, you see price downs of maybe 1% or 2%. At the moment, it appears maybe pricing is up 1%, there's enough restructuring or other cost actions where you can still sustain that 20% margin that you're talking about going forward?

And then maybe also just curious how to think at a high level about the relative profitability in the auto business between the EV and kind of existing ICE product? Just as we think about if potentially there were to be some kind of slowdown globally in EV adoption?

Thanks so much.

Sure. Couple of things.

Yes, no, First off being, in whatever our normal environment is assuming there's deflation we can drive certainly there would be productivity we would want to get back to our customers to make sure they're competitive. That was the environment we always articulate when we said we would be around 20% margin.

So we never said when we've always talked to you about this, we need price increase to get to our 20% margin. The pricing we've done is to recover cost in a pretty dramatic inflationary environment over the past two to three years and we did it on a lag.

So, it did impact our margin early on when we saw the acceleration. So, I don't think that we start seeing deflation again materials, you could see a little bit of price back, but we're not there yet.

And I'm sure we'll continue to talk about it. On ICE vehicles versus EV vehicles, I think there's two elements we have to be honest about.

Half of our content that is on an electric vehicle is the same content that is on ICE vehicle. So, the profitability of those products are same whether it's an ICE vehicle or an electric vehicle because that's a low voltage architecture that carries over and doesn't drive the powertrain.

For the element that is the high power products, we've been scaling that up and what we've said is we're going to continue to move the profitability of those product lines up to the segment average. We've made tremendous progress.

It's still at lower scale than the ones that go over 85 million vehicles. But the progress that the team made has also been the contributor to where our margin is in Transportation.

So, the team has done a nice job as we scale that versus when we were just investing and there were very few electric vehicles made. So, we saw the opportunity to increase there but the gap is closed significantly.

All right. Thank you, Shreyas.

Can we have the next question, please?

Great. You guys have done a great job on margins.

And most of the questions on that have been answered. If I could just talk about your free cash flow generation, how we should think about that going forward given margins are expected to be here at this level?

And any thoughts you can have on M&A as you guys think about it for the remainder of the fiscal year? Thank you.

Sure. First of all, thank you for the question on cash flows, always near and dear to my heart.

We did have a good start to the year with our free cash flow which was further momentum from the strong free cash flow we had in FY2023 and sets us up well on the balance sheet side. As we -- our guidance for the year which is really not a specific number for cash but it's really unchanged which is that we feel good about the 100% cash conversion to net income that we had achieved largely in FY2023 and how we maintain that momentum moving forward.

So, we've done some things and sometimes we had flat working capital at different periods of time but the rigor is there and our ability to maintain particularly payables receivables inventory levels in addition to our CapEx spending and then what we have to fund for restructuring tends to be the different levers that we that we pull. But we feel good with where the momentum is relative to that and where we're going to land for the first half of our fiscal year.

In terms of the M&A environment, that's again largely unchanged. There's things that are active out there.

Some things are more interesting than others. The Schaffner deal because it was a Swiss public company it was announced early on and we got that across the finish line here in December.

But there's a lot of other things that are more private in nature that are going through various processes that you know again things that we have to make sure that it's the right strategic fit for us that we're the right owner for it even if it fits our strategy and then that the numbers work. And at any given time, you probably expect us to be looking at about a half a dozen deals.

Not all of those get close to the finish line. So but it is an active environment we have seen as we've moved through the count, moved across the threshold in the calendar year that activity is starting to pick up some.

So, I'd like to be able to think that we can get another deal or two done in our fiscal year. But as always, you have to stay tuned.

Okay. Thank you, Asiya.

Can we have next question, please?

Okay.

Great. Thanks for taking my question.

Just one follow-up, you didn't talk about tax. I think you mentioned on the call the rate is about 21% going forward was a bit higher than you've seen historically.

How should we think about that going forward? Is that a permanent rate, is that impacting some of the changes on global minimal tax or can that be kind of brought down over time?

Well, Colin thanks for the question. The change from our original guided rate last quarter was went into our fiscal year of 20%.

We've increased that to 21% and that was very specific to the Swiss tax rate going up sooner than what we had anticipated. And so we have to absorb that and put it through our financials as well.

As we move forward there's a lot of moving parts relative to the global minimum tax that different jurisdictions will be enacting at different time periods. Some of those are more meaningful than others.

There's tax planning that you would expect us to have underway that we would think about not just from how things that we can do to work down our ETR but also probably more importantly how do we protect ourselves from the cash tax rate. And so there's nothing to report there today because there's a lot of unknowns out there.

But there's a lot of activity underway to try to anticipate and look around the corner there. So, to answer your question I think 21% is a good rate to work on going forward and we'll continue to work to mitigate any pressures.

All right. Thank you, Colin.

Thanks, Colin. We appreciate everyone joining us this morning, if you have additional questions, please contact Investor Relations at TE.

Thanks again, and we hope everyone has a nice day.