Thank you for joining us for the TE Connectivity Second Quarter 2022 Earnings Call. This call is being recorded. I will now hand it over to our Vice President of Investor Relations, Sujal Shah. Please continue.

Good morning, and thank you for joining our conference call to discuss TE Connectivity's second quarter 2022 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. 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. Due to the large number of participants on the Q&A portion of today's call, we're asking everyone to limit themselves to one question. We are willing to take follow-up questions but ask that you 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 also, I appreciate everyone joining us today to cover our second quarter results as well as our outlook for the third quarter of fiscal '22. Before Heath and I take you through the slides and details, I want to take a moment to discuss the current environment and frame our performance relative to some of the developments that we've been seeing. Since our last earnings call 3 months ago, we've seen some elements of the macro environment become more volatile. Specifically, we've seen the invasion of Ukraine as well as COVID lockdowns in certain parts of China. While we've seen volatility increase, we continue to see strong end demand trends across the markets that we serve. I'm very pleased that despite the incremental pressures, our teams were able to deliver results in quarter 2 that were ahead of our expectations. Our continued strong performance is a result of how we strategically positioned our portfolio around secular growth trends. Also, the resilience of our global manufacturing strategy, where we have invested to produce in region, and the commitment of the hard work of our employees across the world. I’m very proud of our teams as they continue to overcome broader challenges to effectively serve our customers to both manage the present while also ensuring we're winning programs that will drive future growth for TE. I'd like to put our performance into perspective a little bit. We've made significant progress towards our business model over the past couple of years. We've been driving top line growth despite market headwinds, executing successfully on cost reduction and footprint consolidation plans, and driving margin and earnings per share growth despite the supply chain and inflationary pressures that we faced. And if you look at TE versus a pre-COVID time frame of fiscal 2019, our auto sales have increased nearly 20%, against auto production declines of approximately 10 million units or 15%, and this really illustrates our global strengths in the automotive space as well as the content gains we've been talking to you about. Our industrial equipment and data and device businesses have both grown approximately 50% over the same time frame, and this is significantly above the markets that we serve, showing the benefit of where we strategically position these businesses as well as the strong execution of our teams. I do think it's important to separate signal from noise as you look at TE from an investment perspective. While we are in a very noisy environment near term, the longer-term growth signals across our portfolio remain positive. These signals are secular in nature, giving us confidence that we will continue to perform in line with our business model through cycles as an industrial technology leader. We have all 3 segments contributing to our performance. For example, in our Transportation segment, we are the established global leader for EV connectivity solutions. Over the past year, the value of our design win pipeline grew by over 50%, and we are designed into every major electric vehicle and hybrid platform with customers around the world. This positioning has been driving and will continue to fuel our content growth and enable consistent above-market performance in our Transportation segment. If you turn to our Industrial segment, we are in the heart of the industrial automation trend and have grown our sales at double the rate of capital expenditures as the markets recovered from COVID. We've been working with industry-leading customers to develop engineered solutions targeting higher-growth robotic and safety applications, and this is resulting in the robust growth pipeline that you're seeing. And in our Communications segment, we are expanding content in high-speed cloud applications and gaining share in artificial intelligence deployments as customers implement workload architectures to make data centers more efficient. These are just a few of the secular trends that we have positioned the portfolio around, which will drive future growth, and we remain excited about the long-term growth and margin expansion opportunities we still have in front of us. So now let me highlight a couple of additional takeaways from today's call. Our second quarter results were a record in quarterly sales and adjusted earnings per share with strong results in each segment. On a year-over-year basis in the second quarter, we delivered organic sales growth of 8% and adjusted earnings per share growth of 15%, along with adjusted operating margins of 18.4%. The margins expanded in each segment year-over-year as our teams are effectively managing pricing and cost in an inflationary environment to drive the margin performance across our businesses. The other key highlight is that the demand environment continues to be strong, and we'll talk about it, and it's evidenced in our orders, which were $4.5 billion in the quarter. Our book-to-bill was well above 1 for each segment, reflecting the continued strength across our markets. The other highlight about our organic performance is that in the second quarter, it shows to strengthen the positioning of the portfolio with our Industrial and Communications segments growing over 10% and 20%, respectively, and our Transportation segment growing 5% despite auto production declines in the quarter. We continue to benefit from the ramp of new electric vehicle platforms, which will continue to drive content outperformance for our Transportation segment. The last highlight is that we are expecting our quarter 3 sales to be around $3.9 billion, reflecting continued strong performance. We have a strong demand environment. But coupled with the broader volatility, I do want to stress our ability to produce will remain a key factor in our near-term sales performance. So let me turn now, and I'll provide some additional color on some key end demand trends as well as talk about the supply environment. We are continuing to see broad strength in global capital expenditures that relate to factory automation, cloud and data center efficiency as well as renewable energy sources. End demand for autos remains healthy and is significantly higher than what the OEMs can produce, providing a set for future auto production increases as supply chain bottlenecks begin to resolve. While we see a demand environment that remains positive, the invasion of Ukraine and COVID lockdowns in China are new developments versus 90 days ago. Let's face it, the supply chain challenges and inflationary pressures continue to linger. On the supply chain, the challenges around material availability and flow are about the same as 90 days ago, but we have seen an uptick in inflationary pressures. I am pleased with how our teams are continuing to manage the supply constraints to meet our obligations to customers, and they are also working on additional price increases to partially offset higher costs so that we can maintain margin performance in each segment. We believe that we are differentiated with our global manufacturing strategy and ability to produce in-region, helping us to enable growth and share gains across our business during these volatile times. Now with this as an overview, let me get into the slides and discuss a few additional highlights that are on Slide 3. Our quarter 2 sales of $4 billion were up 7% on a reported basis and 8% on an organic basis, and adjusted earnings per share was $1.81, which is up 15% year-over-year, with both being records, as I mentioned. From a free cash flow perspective, we generated approximately $615 million in the first half and returned approximately $670 million to shareholders in the second quarter, increasing the pace of our buybacks during the quarter. If I turn from financials for a minute, I'm also impressed that we continue to be recognized for our ESG initiatives with TE being named among the World’s Most Ethical Companies by Ethisphere for the eighth consecutive year. I am pleased with our commitment and continued progress along our ESG initiatives, and our employees are really leaning in and being engaged on these important initiatives across TE. So let me again touch upon our guidance for the third quarter. We do expect sales of approximately $3.9 billion, which will be up 1% on a reported basis and 3% on an organic basis versus the prior year. This guidance includes approximately 300 basis points of year-over-year headwinds from the expected COVID-related shutdowns in China that we expect in the quarter. We expect adjusted EPS to be approximately $1.75 in the third quarter. So if you could, I'd like you to turn to Slide 4, and I'll get into the order trends and markets a little bit further. At an overall level, our second quarter orders were $4.5 billion, with a book-to-bill of 1.13, highlighting the strong demand that I mentioned. While TE is not typically a backlog business, we are in an environment where you need to look at both bookings and backlog to get a full picture of demand. Our backlog is up 40% year-over-year and is up significantly in every segment. Importantly, we continue to see stability in our backlog in each segment, and our customers continue to provide order visibility beyond the current quarter to ensure supply certainty in these ongoing volatile markets. In our Transportation segment, we saw order levels increase sequentially, influenced by concerns around the recent developments in Ukraine and China. Global auto production was in line with our expectations in the second quarter at approximately 19 million units, and we expect auto production to decline slightly in the third quarter on a sequential basis. The trends around our content remain robust as we continue to benefit from increased electronification and higher production of electric vehicles, and we expect electric vehicles to be up approximately 30% this year in production. Given the volatility we're seeing in global auto production and the comparisons that can result as we move through the second half, it is important to look at content per vehicle as an additional long-term metric. Our content per vehicle has expanded from the low $60s range in pre-COVID times to roughly $80 in fiscal 2021. As we look forward, we expect continued expansion in our content per vehicle from the first half to the second half of this year. When you look beyond the near-term noise in the auto supply chain, we continue to see a favorable setup for our longer-term auto production growth with healthy end demand and dealer inventories that remain extremely low. Looking at our Industrial segment orders, we saw another quarter of strong orders with a book-to-bill of 1.22. We continue to see an improving backdrop with increased capital expenditures for factory automation, manufacturing capacity, and renewable energy. These trends benefit both our industrial equipment and energy businesses. We're also continuing to see improving order trends in the communications air as well as favorable conditions in our medical business, and we expect to see favorable year-over-year revenue comparisons in those businesses later in this fiscal year. Lastly, in Communications, orders continue to reflect strong demand as well. We had a book-to-bill of 1.07. In data and devices, we're seeing a robust outlook for cloud capital expenditures, and we continue to gain share. As we mentioned last quarter, we continue to expect softening in our appliance business from the first half to the second half of this year. Just to add some color on what we're seeing geographically, I'll do this on an organic basis sequentially. In North America, our orders were up 12%. In Europe, they were up 16%. In China, our orders were down 4%. So with that overview about orders and markets, let me get into the segment results that you can see on Slides 5 through 7, and I'll hit on some of the highlights in each of the segments. In our Transportation segment, our sales were up 5% organically year-over-year. Our auto business grew 5% organically versus auto production declines in the mid-single digits. This continues to show the separation of our sales performance versus the market, which is being driven by our leading position in electric vehicles and their increased adoption. In commercial transportation, we saw 5% organic growth driven by North America and Europe, even though the market in China is still going to be down this year. We continue to see significant outperformance in all regions, driven by content growth and share gains. In our sensors business, we were roughly flat organically, and we continue to see strong design win momentum in transportation applications. If you look at earnings in the segment, adjusted operating margins were 18.2% as our teams continue to execute well and implement price increases to partially offset the inflationary pressures. Let me turn to the Industrial segment, where our sales increased 11% organically year-over-year. In the industrial equipment business, our sales were up 27% organically with double-digit growth in all regions and continued benefits from increased capital spending and factory automation. In energy, we saw 5% organic growth driven by increased penetration in renewable applications. In our AD&M and medical business, our sales were both roughly flat. As I said earlier, we expect improvement in both markets and more favorable comparisons as we go forward. At the segment level, adjusted operating margins expanded year-over-year by 280 basis points to 15.3%, driven by higher volume, price actions, and strong operational performance. So let me move to the Communications segment. Our teams continue to execute well while capitalizing on the growth trends in the markets that we serve. Sales grew 23% organically year-over-year for this segment, with growth in each business, as you can see on the slide. In our data and devices business, we saw a market outperformance driven by content growth in high-speed cloud and share gains in artificial intelligence applications aimed at improving energy efficiency in data centers. This continues to illustrate how we are enabling a positive impact in carbon emissions across our portfolio through our products and technologies. In our appliance business, we performed ahead of our expectations, despite the expected declines we saw in the China market. We saw growth in North America and in Europe with continued share gains enabled by our manufacturing strategy to produce close to our customers. This resiliency has proven to be a differentiator as customers navigate the challenges in the macro environment. From an earnings perspective, our communications team continues to deliver outstanding performance with adjusted operating margins of 24%, up 330 basis points versus a strong quarter in the prior year. Because of the heavy lifting we've done in the segment around cost reduction and footprint consolidation, we expect segment adjusted operating margins to remain above 20% through the second half even as the appliance market moderates. So with that as an overview of the segments and the markets, let me turn it over to Heath to go into more details on the financials and our expectations going forward.

Thank you, Terrence, and good morning, everyone. Please turn to Slide 8, where I will provide more details on the Q2 financials. Adjusted operating income was $736 million with an adjusted operating margin of 18.4%. GAAP operating income was $705 million and included $21 million of restructuring and other charges and $10 million of acquisition-related charges. We continue to expect restructuring charges of approximately $150 million for the full year as we continue to optimize our manufacturing footprint and improve the cost structure of the organization. Adjusted EPS was $1.81, and GAAP EPS was $1.71 for the quarter and included tax-related items of $0.02. Additionally, we had restructuring, acquisition, and other charges of approximately $0.08. The adjusted effective tax rate in Q2 was approximately 19%. For the third quarter, we expect our adjusted effective tax rate to be roughly 20%, and we continue to expect an adjusted effective tax rate around 20% for the full year. Importantly, we expect our cash tax rate to stay well above our adjusted ETR for the full year. So let's turn to Slide 9. Our results that you see on this slide reflect the strong execution of our teams and how we have strategically positioned our portfolio. As Terrence mentioned, we delivered strong results in each segment. Sales of $4 billion, a company record, were up 7% reported and 8% on an organic basis year-over-year. To provide some color on our organic growth, approximately 1/3 of our organic growth was driven by the price increases. Currency exchange rates negatively impacted sales by $116 million versus the prior year. As we look forward into Q3, we expect currency exchange rates to be a sequential headwind of approximately $50 million and a year-over-year headwind of approximately $150 million due to the strength in the U.S. dollar. As you may recall, last quarter, we discussed the impacts of currency exchange rates for our fiscal year, and we now expect fiscal '22 to have a $400 million to $500 million headwind from FX. This is about $100 million worse than we were 90 days ago, with the majority of that additional impact occurring in the second half of our fiscal year. Adjusted EPS of $1.81 was up 15% year-over-year and represents a company record as mentioned earlier. Adjusted operating margins were 18.4%, and I'm pleased with the performance of our team given the incremental inflationary pressures we are seeing. We are pulling price levers across the business to help partially offset these pressures. While we are not able to offset these costs dollar for dollar, we are able to recover approximately 2/3 through price and the remainder through productivity initiatives. As you would assume, we will continue to respond with pricing levers to mitigate the impacts in this environment. Turning to cash flow in the quarter, cash from operating activities was $413 million. Free cash for the quarter was $242 million. As we mentioned last quarter, the year-over-year trend in free cash flow reflects strategic inventory builds. We expect free cash flow to increase significantly in the second half of the year versus the first half and expect inventory levels to stabilize as we move through the year. We increased the pace of our share buyback in the quarter and returned approximately $670 million to shareholders through share repurchases and dividends. Through the first half, we have returned over $1 billion to shareholders. We remain committed to our disciplined use of capital. Over time, we still expect 2/3 of our free cash flow to be returned to shareholders and 1/3 to be used for bolt-on acquisitions. So before we go to questions, I want to reiterate some key points that we covered today. We are continuing to execute well in a volatile environment, demonstrating sales growth, margin resiliency, and EPS expansion. We remain in a strong demand environment, as evidenced by our orders and backlog, and the ability to produce will be a key factor of our near-term revenue performance. We have strategically positioned TE around well-recognized secular growth trends, and we continue to generate performance ahead of the markets we serve. Our teams continue to prove their ability to execute in this volatile environment, effectively serving our customers while managing price and cost dynamics, and we continue to demonstrate resilience through our global manufacturing strategy. So with that, let's now turn it up for questions. Audrey, can you please give the instructions for the Q&A session?

We'll take our first question from Chris Snyder at UBS.

So my question is on order trends. When we see transportation orders up 18% sequentially, how should we think about the drivers here? Between improving demand, but also, likely longer duration ordering as supply chain fears are picking back up. And then from a higher level, the company talked a lot in the prepared remarks about the secular transformation of the business. So when we look at the $4.5 billion of orders, are there any metrics or color you could provide around how much of this is coming from the secular growth business lines, whether it be EVs, medical, automation, or data centers, just to help get more comfortable around the ability to drive continued growth in the macro slowdown?

No, sure. Thanks, Chris. And there are two questions there. So let's start with the first one. As I said in the comments right now, the demand environment remains strong. You can look across all three segments, certainly, you saw Transportation pick back up. I do think some of that was a reflection of people trying to make sure they had supply chain certainty with what was going on in Eastern Europe and Ukraine, where a number of our customers have operations in Ukraine and Tier 1 customers, and people really working hard to make sure we get continuity of supply. The other thing that you certainly add was also with some of the China lockdowns. We’ve been dealing with those since even in the second quarter—certainly in Southern China, but what we're experiencing in Shanghai is obviously more widespread than what we've been dealing with today. I think the other key thing when you look at these orders, in addition to what I said, is I want to go back to a point which I think is very important. The amount we can produce will be the driver of our revenue. Even when we look at our performance in the second quarter, it was more about our teams executing well to be able to get more out, and I would say it was more incremental demand, and we’re still in a supply chain constrained environment. The other thing about your question on that I mentioned in the pre-remarks, I think it's important to also look at backlog. I know that's not something we like to talk about a lot, but it is something as we continue to see customers try to get more certainty also knowing what's going on around the world, we do see customers placing orders out to make sure they are securing supply certainty. Let's face it, over what we do, you don't want to be shutting down the line over what our content is in any application. So we continue to see customers place orders out. It is across all our businesses, and the other element that we always look for is are we seeing pushouts or cancellations in the backlog. We are not seeing meaningful pushouts or cancellations anywhere, so it really is an indicator that the demand is strong. We feel good that you see things like the industrial businesses continue to improve from the industrial recovery we've been talking about. Places like appliances, we do see moderating, and that started in China. We expect that to moderate through the remainder of the year. But net-net, it is a constructive demand environment. As you get down to your second part of your question about orders and those secular trends, I think you see that in how we talk about our guidance and some of the things I've mentioned. The orders that we're seeing reflect those secular trends. I don't have numbers here in front of me to tell you the order by each one of them. But when we talk about our guide and our content outperformance, let me tell you, with the program wins as well as the orders as they’re coming in, these are typically newer custom programs. It is things that are coming in and driving the orders as well.

And next, we'll go to David Kelley with Jefferies.

I was hoping to dig into the auto content per vehicle drivers. I believe you've referenced an expected uptick from first half to second half. I think we have content tracking in the low 80s trailing 12 months, whereas you referenced that low 60s numbers in 2020. Can you walk us through the EV impact on content over the last two years and how we should think about EV momentum and contribution into the second half? Any color on the expectations of broader mix and inventory dynamics, first half to second half, would be helpful as well?

Okay. Thanks for the question, David. Let me reiterate what I said in my prepared remarks. When we talk about automotive content and what EV has done, one of the things that I always think is important in TE is we have content increase due to electronification, which has happened on both combustion and electric vehicles. We also get the kicker as EV adoption occurs. I think it comes through when you think about our auto went to being up 20% versus 2019, while auto production of 10 million units. It really shows where we positioned our portfolio and the investments we've been making for a quarter of a decade. The $60 I referenced in the comments is 2019. In 2019, our content was around $60, low $60s. In 2021, we were at $80, and we're running above that as we continue to grow content. If you look over this period, certainly, the number of ICE vehicles made on the planet went down significantly, while the number of EV vehicles are up significantly. If you look at content going from $60 to $80, about 60% of that content increase is due to electric vehicles, their increased adoption, as well as our content; both of those items. But the other 40% is content growth due to electronification across vehicles, which includes ICE cars. We have content increase on both types of platforms over this period. Certainly, you get the kicker that we've always talked to you about around EVs growing faster, our content is bigger on it. You're going to continue to see that because let's face it, EV adoption is up to about 12 million units this year from $9 million last year, and that's why we get so excited. The other thing I want to highlight is our products are really differentiated. We were in a business review, and right now, we're up to about 1,000 patents that we generated around the EV technology globally. We don't typically talk patents a lot, but when you think about the innovation we bring, I talked about the number of programs and dollar-value programs in the prepared comments. This is happening, whether it's a charger inlet, a connectivity that happens close to the motor, what's happening on the cells, the connectivity you need there, as well as some of the power conversion that you need to incur between the battery and the motor. There are things that we benefit from all of that, and then where we get sensor elements around current sensing also creates a kicker. I really think you're going to continue to see as EVs continue to get adopted, that is the content, and our teams are scaling. That's something we also have to do, not only how do we innovate but also how do we get the manufacturing done. You’re going to continue to see that content per vehicle grow. I also believe there’s a good setup as production gets better, that auto production will get into a growth mode again at some point in time, which will be an additional kicker.

Next, we'll go to Mark Delaney with Goldman Sachs.

Question which is on margins. You mentioned costs are going up. You spoke about being able to recover about 2/3 with pricing and the remainder with productivity. Could you give more details in terms of the timing to fully execute on those mitigation measures? Is there going to be some period of time where margins are going to be temporarily depressed? If so, by how much as you work through some of those offsets to the cost pressure?

Mark, this is Heath. I'll take the question on margins. Certainly, we're holding our head in this environment. As you mentioned, this is a very heavy inflationary environment for us that impacts metals and resins and freight and utility energy prices. We feel pretty good about our ability to hold our head in the mid-18s range of operating margins. I would tell you, as you mentioned, we recovered about 2/3 of that through price, and that will be the story as we continue to work our way through the fiscal year. And you have to remember, and I know, Mark, you know us well. In a normal environment, our business model contemplates more of a negative price environment based on volume commitments. It was not uncommon for us, before we get outside of this inflation environment, to be down 1 point, 1.5 points on price a year. We've moved that up into positive territory. As I mentioned on the call, it represented about 1/3 of our overall organic growth. You can kind of frame up a little bit what that looks like from a price. That still only covered about 2/3 of the inflationary pressures, which are significant. Our business model contemplates certain things, and in this environment, we're happy we're able to pass on the amount of price that we can. Our footprint—we've done a lot of work on that over the last few years, as you know, and especially, you see that come through on the communications footprint where we have optimized that. At these volume levels, we continue to print margins in the mid-20s in terms of operating margins. We've been going through a similar type of activity, as you know, within transportation and industrial over the last few years. In some cases, we're getting close to where we need to be, and that regional footprint is important to be close to the supply chains of our customers, and I feel good about that impact. In terms of going forward, I'd say we're kind of in the same range. I don't anticipate calling out a temporary depressed margin relative to timing. We will continue to pound through this and take advantage of the opportunities where we have and continue to optimize the cost structure.

We'll go next to Wamsi Mohan at Bank of America.

Terrence, can you share some more color on the China lockdowns? I know you quantified the impact at about $100 million. But how much of that is supply versus demand? What is happening with the demand trajectory in China, and how much impact do you expect through the rest of the year? On pricing, I know Heath said that about 1/3 of the growth benefited from pricing. I was wondering if you could put a lens on what percent of your portfolio you've been able to change pricing on, and as it pertains to auto, is there more to come?

Sure, Wamsi. Thanks for the question. Let me start with the China element first. To base everybody, China is an important market for us. It's about 20% of our sales. We do not see what's going on in China as a demand issue. Our orders in China have been above $900 million for 5 to 6 quarters now, and even in the last quarter, our book-to-bill was 1.07. So from a demand perspective, we don't see there being a demand problem. When you think about the lockdowns, as I said earlier, we've been dealing with lockdowns because not all our factories are in the Shanghai area. We have factories in the north, up in Qingdao. We have factories down in Southern China around Shenzhen, Guangzhou, and Shantou. What we're seeing is that you have to break it into pieces. Where the customer is located? We have customers that are in shutdown. Where are some of our suppliers? How do we move things around China? Our China business is really to serve the China manufacturing market; it's not an export business to the world. What we're dealing with is we have factories that are running, but they aren't running full. We have customers that are trying to get back up and running. The number that we laid out here is what we know from a bottoms-up analysis. If the lockdown would end, I would hope we could recover the amount that we're missing in quarter 3, but it is more of logistics and supply getting to the customer than it is actually our ability or demand destruction in any way. Demand is strong, but it's certainly a very fluid situation and a very important market for us. On pricing, your second part of your question. When you look at pricing, we're getting pricing across all businesses and all segments. So when you talk about what element of the portfolio are we getting pricing on, it's all of that. It is different degrees, depending upon the customer. Certainly in areas like distribution, we'll be putting another price increase into effect in July. With the increased inflation, in those with direct customers, we're having direct contractual discussions that started last year and they're continuing. I think it's proven, between the pricing and the productivity that we've been able to drive. It shows up in the margin. That shows the breadth of it. We have to get it because of the breadth of the inflation that we've seen and we continue to experience.

Next, we'll go to Amit Daryanani at Evercore.

I realize TE doesn't provide a formal full year guide, but Terrence, you spoke about the signal versus noise, and there really is a lot of noise out there. I'm hoping to just get your perspective on what are you seeing in the back half of the year. There are multiple crosscurrents in terms of how things will play out. I'd love to just get a sense of what are the puts and takes if you can tell from a revenue and cost perspective for the back half of the year that you're contemplating?

Yes, and then you're right. I'll give you some tidbits here, Amit. But certainly, you're right. We're only guiding for the third quarter due to the volatility. I think you have to start with demand is strong. While we have a little impact here due to China, our second half revenue is going to be driven by what we can get out of our factories. We still believe that—how do we get material, how do we produce, and how do we ship? That is crucial to continuing to support our customers with the supply situation. If you look at it by business, we expect to see improvements in industrial. I've talked about communications, air and medical improving, certainly, industrial staying strong in energy. We'll see our CS segment moderate due to appliances, and that's not new. That has nothing to do with the recent market; that's really what we've expected and what we've talked about. Transportation is probably going to be moving sideways more due to auto production demand and content. We would have thought about 90 days ago that auto production would improve in the second half. With the things going on, we expect it will likely run around 19 million units a quarter. We have, as Heath talked about, the currency, and I'd ask you all to make sure you're aware of the currency impact. That's an incremental headwind of about $100 million in our second half. The wildcard would be around China. If the lockdowns can get resolved, and how we can recover, the customers recover that demand could bring back some recovery in the second half of this 300 basis points that we estimate today. But overall, it remains constructive, and we'll continue to carry out the productivity and pricing actions that Heath and I have talked about. So net-net, I think you could see us getting back more to the quarter 2 level plus as we get later in the year.

We'll go next to Samik Chatterjee at JPMorgan.

I just wanted to ask you on data and devices. We often get asked this by investors about how long can this sort of trend that you're seeing in data and devices continue? If you can flesh out, I know you spoke about the higher-speed cloud applications, but can you flesh out the content growth story there between more number of connectors going into some of these applications over time versus where are you seeing sort of more appetite to supply higher feature or higher content connectors over time? How much of the content growth is purely more volume versus higher feature or higher specification connectors?

Yes. Samik, thanks for the question. When you look at our Data and Devices business, the important metric to watch is really what's happening in cloud CapEx. Cloud CapEx is the key driver because as our cloud customers look at it, they're not only trying to address the consumer and enterprise demand for cloud infrastructure, but they're also trying to solve operating efficiency. One of the biggest drivers they have is not just the need for speed and compute but also how to reduce their economic footprint. Cloud CapEx continues to be strong; it actually increased a little bit, and we continue to see that be strong. The other thing that’s benefiting our content is not only just from cloud CapEx, but we are also winning on the speed side and how we help our customers solve some energy efficiency operating cost issues they're tackling because data centers use so much energy. I know Aaron has shared some insights regarding our thermal bridge product, but as they move to streamline operations, they're trying to increase computational power with their workload architectures, which benefits us from a content perspective. With our share gain happening, the content element is just as significant across all facets of compute, store, and move elements of cloud. You’re going to continue to see that based on the cloud CapEx trends, and that's the key driver to watch as we track our outperformance versus that cloud CapEx due to how our engineers collaborate with our cloud customers.

We'll go next to Matt Sheerin at Stifel.

Terrence, I wanted to get your take on the inventory environment. Your inventory was up like your peers, but we're also seeing inventory climb within EMS, OEMs, and even the auto guys. What is your sense of customer inventories? Did you see any pull in your March quarter due to anticipation of lockdowns, etc.?

I wouldn't say we saw a pull in that because in many cases, what we can produce people are taking. It comes back to what I've been saying throughout the call about, hey, what we can produce, our customers want. The one area where we always have the most visibility is in our distribution partners. One of the things we've been seeing with them is that they're still light on a day's perspective versus pre-COVID and what they would normally target. Across our partner network, which is about 20% of our sales, they typically target about 180 days of inventory; they're still running in the 150, 160 overall. That's something we look at because they can be a concentrated proxy to assess if inventory is getting too flush out there. I would tell you, we did see orders increase due to some of the certainty with increased volatility. We did not see pull-ins, and really how we produce will be the dictator of revenue.

Next, we'll go to Joe Giordano at Cowen.

There was a comment that I believe GM made, and not to get specific about one customer or anything, but just more of an overarching theme. But on ICE vehicles, they're going to use 1/3 fewer unique parts. I have no idea if they're talking about where in the car that's going. But I'm just curious if that's like a risk going forward to legacy platforms where like maybe products where you can have more pricing power and leverage because they're custom engineered, become less prevalent?

Joe, could you repeat what GM said? I missed you regarding what you said there on the 1/3 of what?

So they said that they're going to use 1/3 less unique parts in like ICE platforms going forward?

Okay. If you look at that, certainly, you see innovation around ICE platforms. There has been less innovation put into them. Engine development has scaled back. What you’re getting on the ICE vehicles is the auto companies are focusing their efforts on EV first, so you also get into data and autonomy type trends. Really, on the ICE vehicle, it has become a little bit more of a maintenance-oriented model. That being said, you do need to think about what TE does—we also play into features, safety features, and that really drives, whether it's safety features, infotainment features, emission features, those types of things really are where we get scale. Even getting more standardized, we have many parts that are standardized in a car that create tremendous scale for us. So going less unique in an ICE vehicle is not necessarily bad for us. It provides us the scale, and in some cases, we're seeing them look to us to be that partner to help get that standardization. I would go back to what I said on the call. Our content growth in an ICE vehicle is still strong, even though you have the innovation turning towards next-generation electric vehicles. We also continue to see that electronification trend. Just ask you to think about your cores of what you feel from a feature; how features change. Each time you're doing that, you're typically getting into more data in the car, things that will want more processing to get to more fuel efficiency in an ICE vehicle, and that could be safety features, and all of those create content for TE because you're integrating into the electrical architecture of a vehicle, whether it's low voltage in an ICE engine or high voltage in an electric vehicle.

We'll go next to William Stein at Truist Securities.

I'd like to ask a question about capital allocation. Heath, you reminded us, I think, about 1/3 of cash flow would be targeted towards bolt-on acquisitions. I'm hoping you might just remind us about the end market focus that we should expect to see such transactions? Your propensity today, given somewhat lower valuations—the stock market is going back. I wonder if that's influencing in any way the likely pace or ability to execute a deal.

Thanks, William. I'll take the question. Longer term, which is kind of how we think about the 2/3 back to shareholders via share repurchase and dividends and then 1/3 back via M&A, that is a long-term view over a cycle, right? You're going to have periods, including the ones we're in now, where we see dislocations in our stock price, where we see ourselves as a better opportunity to buy. We are spending accordingly on that, and we haven't been seeing as many deals get done in the spaces that we're focusing on. But there's still a fair amount of fragmentation out there for bolt-on activities across, I'd say, about 2/3 of our end markets. There is a focus on the spaces that you've seen us do deals in, whether that's in industrial or certain aspects of medical and our high-speed data and some activities we've undertaken more recently there. It is pretty broad, the net that we cast to look at transactions. Over time, you can imagine we're looking at half a dozen or so, most of which don't get to the finish line for various reasons, but we're very active in that front. I would say the pullback in the stock price hasn't had a meaningful impact on valuations in the near term. Most of the things we do look at are not public companies, so there tends to still be a decent appetite for deploying capital from us as well as others. That continues to inflate the multiples, so we have to be selective. We have to be smart with what we do with our owners' money and make sure we're getting good financial returns and things that make strategic sense for us, but we're active out there.

We'll go next to Shreyas Patil at Wolfe Research.

I just had two clarifications. It looks like auto outgrowth this year is going to be better than the 6 points. I mean, you're already doing about 10 in the first half. Is that mainly related to favorable pricing? Should we be thinking about the underlying content growth still at that 6 points level? The second one was on the Q3 guidance, Slide 12. It looks like the contribution margin on the $209 million of year-over-year operational performance was pretty low—it’s only about $0.02 of the EPS. I'm curious how much of that is being driven by COVID lockdowns and the cost impact of those?

Yes. Let me take the first half, and I'll ask Heath to touch upon your guidance question. On the first half, we are running well ahead. A lot of that relates to EV production being very strong this year. You will have points where depending upon where EV production is versus ICE production that can drive that outperformance. As I said, we anticipate if you look at content per vehicle, we'll continue to move up in the second half versus the first half. Heath, do you want to take the second part of this question?

Yes, so look, the Q3 contribution margin—I would steer you to really look at how we've been trending sequentially in the mid-18s, 18-plus for operating margins. Recall a year ago, we were upfront that our fiscal Q3 a year ago was over 19%, and why it was trending fairly hot. There were some timing issues between the second and third quarter of last year. If you go back and look at those margin swings, you kind of have to look at those together to get a fair view versus this year's Q2 and Q3, which is a little more consistent. No doubt relative to the lockdowns, some pressure is put on obviously. We quantified the top line of about 300 basis points on the total company due to those China lockdowns. That does come in a region where we make very good margins. It has a mix impact as we think about the roll-up to a degree. We're hammering through, and I don't feel like it's something that's permanent. As you look at our full year, the full year contribution margin should still have a 3 handle in front of it, or maybe a tad better than that as we work our way through the full year.

Next, we'll go to Jim Suva at Citigroup.

Can you just help us bridge the orders and the pricing? If everyone knows pricing is going up, is it not logical that everybody puts in a lot of orders to meet those increased pricing? Or do you put in some type of escalators or variables? If you can talk about those dynamics and how they're at play?

Jim, it's a little bit—I don't want to be elusive to your question, but it is a little different. With our distribution partners, we've also been repricing backlog. Even if they put orders in, we have been repricing backlog due to the broad escalations that we have. When you come into our large customers, that's part of the contract negotiation. We have not been doing surcharges and those matters. It's been more around price increases. Like we've said here today, it's about cost recovery. We're going to continue that, certainly, with the uptick we’ve seen. We have more discussions we need to have on pricing, and there are further pricing increases in the channel coming in July.

We'll go now to Chris Glynn at Oppenheimer.

I wanted to ask about factory automation and industrial, sort of similar to the question about measuring the longevity of the potential data devices cycle. There are capital cycles, of course, but you're discussing robotics, electrification, and safety, and I think people consider maybe some longer-term labor constraints. How would you view the cyclical versus durable components of what you're seeing in industrial growth these days?

A couple of things. Clearly, you got to start with where the capital cycle is. Similar to the D&D comments I made around cloud CapEx, I think there will be an element that we will follow this industrial CapEx, especially where we continue to position our industrial equipment business. When I talk about that business, while I mention some applications we focused on, it's also where we've done acquisitions to deepen our presence in the space. We did the INTERCONTEC acquisition a number of years ago, we did ERNI, we did ENTRELEC, and these acquisitions were really about how we leverage our position to get more into the factory automation and labor evolution. The important thing is how you get data off a machine. You're trying to get that machine to have more intelligence that can perform tasks that humans can do in machine learning as well as preventative functions. That all starts with how you're getting data off the machine. I think the capital spending element is a positive construct. Similar to what we've seen with our data and device business, you're going to continue to see content outperformance above that capital CapEx trend, and you've already seen it.

We move next to Joseph Spak at RBC.

Can you clarify your inventories, which have been higher than planned as you've indicated? But is that the new normal? Or do you think they go back down? With some disruptions in the industry, you've seen some of the auto capacity shift to other parts of the world, specifically out of Ukraine and others. Does that create any strain for TE?

Joe, first of all, thanks for the question. No, our inventory levels are a bit more inflated now, which I would not consider a new norm. Our days on hand are higher than we would normally run, so even at these volume levels, we're carrying a bit more than we would normally. This was intentional, and we've talked pretty openly about that as we worked our way through the year. In this volatile environment, where we've seen pretty aggressive swings, largely higher in demand, the ability to respond quickly to our customers and ensure their needs are met outweighed the pain of carrying more inventory. We did this while certain parts of our business have improved, and as we’ve been able to better predict order patterns, we will begin to start working down modestly from this level through the rest of the fiscal year. You'll see that corresponding impact on our cash flows, but this is not the new norm, and we'll continue to talk about where we should settle in, particularly from a days-on-hand perspective. As for the shift in production, I assume you're talking about—we don’t do production in the Ukraine, but certainly, some of our customers do, particularly on the automotive side. As those customers have had to shift some capacity around, we're really talking about the harness makers within automotive, which is shifting around. It hasn't specifically impacted our inventory as much because it's already sold to them, but as they’re shifting, it’s generally within regions, including EMEA to other parts of Eastern Europe or Morocco. We’re able to respond to the new locations without a major working capital headwind for us.

We'll go next to Luke Junk from Baird.

I wanted to ask a broader question as we get deeper into the call here. Specifically, I hope to get a feel, Terrence, for the ascent of your data and devices franchise over the past couple of years. It was roughly a $1 billion business in fiscal '19 pre-COVID; that's now pushing $1.5 billion on a TM basis. Obviously, the underlying market is growing here, but what really the heart of my question is, to what extent has the overall positioning of the company changed competitively over that time frame, especially as it relates to the impact on future growth and profitability?

It is something that I would tell you goes back to some of the hard work we had to do in the D&D business. It was around—we wanted to be focused on ultimate high speed. Certainly, we bring innovation to it. We have pretty even share across all the cloud providers. One thing that cloud providers look for is not only technology but also speed to ramp. I think our teams have done an exceptional job keeping pace with the demands that a cloud customer has. That has also created share opportunities on top of the innovation. Let’s face it; at times, we had calls about D&D where we would talk about the problems we had in D&D. I really think the D&D story is one where we got focused, repositioned the cost structure, refocused the team, and the team has executed very strongly on what has been a good growth trend. We’ve gained share, and we’re also being a partner that you continue to see our confidence on these calls about the content that is growing. There's still a lot of opportunity, especially while you get into more customizable solutions that cloud providers need for reducing their operating costs. It's not just a CapEx decision; it's an operating cost decision. The innovations we’re working with cloud providers are as unique as when we deal with EV and the auto OEMs. It’s a position we've built; we’re focused on it, and it will continue to drive growth, especially with cloud growth projected to continue.

We’ll go to Nick Todorov at Longbow Research.

Another question on cloud and data center. Terrence, I think this is the first time you highlight the AI architecture impact on teams. Can you talk about the content uplift there in AI architecture versus more traditional server architecture that TE benefit from?

What you have is obviously a more complicated compute as you progress. You get speed and increased thermal dimensions, and that comes into things our team that really works well with and helping customers solve issues. Some of the orders we saw in the first quarter were new AI platforms that came in and will continue to benefit growth. On each application, the content does vary; it's not cookie-cutter because the solutions that cloud providers have are very customized around their chipsets. We’ll try to give you more insight as we conduct our Investor Day to frame it better, but it is very different by the cloud architecture that we go after.

Okay, thank you, Nick. I want to thank everyone for joining us this morning. If you have further questions, please contact Investor Relations at TE. Thank you, and have a nice morning.

Ladies and gentlemen, today's conference call will be available for replay beginning at 11:30 a.m. Eastern Time today, April 27, on the Investor Relations portion of TE Connectivity's website. That will conclude the conference for today.