Ladies and gentlemen, thank you for standing by and welcome to the TE Connectivity First Quarter 2023 Earnings Call. At this time, all lines are in a listen-only mode. Later, we will conduct a question-and-answer session. As a reminder, today's call is being recorded. I would now like to turn the conference over to our host, Vice President of Investor Relations, Sujal Shah. Please go ahead.

Good morning and thank you for joining our conference call to discuss TE Connectivity's first quarter 2023 results. With me today are Chief Executive Officer, Terrence Curtin and Chief Financial Officer, Heath Mitts. During this call, we will be providing certain forward-looking information and we ask you to review the forward-looking cautionary statements included in today's press release. In addition, we will use certain non-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. Finally, during the Q&A portion of today’s call we are asking everyone to limit themselves to one question and you may rejoin the queue if you have a second question. Now let me turn the call over to Terrence for opening comments.

Thanks, Sujal and thank you everyone for joining us today to cover our results for our first fiscal quarter along with our outlook for our second quarter. Before Heath and I take you through the details on the slides, I do want to take a moment to discuss our performance within the backdrop of the current environment along with what we're seeing since our call 90 days ago. Clearly, we're all experiencing a lot of moving pieces in the global macro environment. While this volatility is creating cyclicality in specific end markets, we continue to benefit from secular trends leading to outperformance across many of the markets we serve. The strategic positioning of our portfolio and our team’s execution enabled us to deliver sales and adjusted earnings per share that exceeded our guidance and we also delivered strong free cash flow in the quarter. We generated high single-digit organic growth year-over-year with organic growth in all businesses, in our transportation and industrial solutions segments. The growth in these two segments offset incremental weakness in our communication segment. And while we can't control the macro environment or the headwinds from currency exchange effects, we are taking actions on the elements of our business model that we can control. Our industrial segment continues on its journey to expand margins towards its high teens margin target and we'll talk through that in the call. As well as we continue to implement price increases to offset inflation in our transportation segment. In addition, we continue to drive cost reduction and footprint consolidation efforts and are now implementing additional structural reductions in communications to ensure we stay in line with the target margins of that segment as we go forward. So let me provide some additional color on our markets and other updates since our call 90 days ago. Our view of the transportation end markets remain unchanged. Our growth will continue to be driven by content outperformance from our global leading position in electric vehicles and electronification trends even in an environment where auto production we expect to remain flat this year. Our view of the industrial end markets is also consistent with our prior view. We are seeing continued strong recovery in the commercial air and medical markets, as well as continued momentum and renewable applications in our energy business. In our communication segments, this is where we're seeing changes versus our prior review. Last fall, we highlighted that we were expecting moderation in cloud demand in our Data and Devices business and we're now seeing incremental weakness in enterprise and telecom applications along with inventory adjustments across the broader supply chain that serves the Data and Device market. And as typical our expectation is that the inventory adjustment will last a few quarters. Turning to orders from a company perspective our book-to-bill level remain below one as we expected due to the strong backlog coverage from our customers and increased stability in the broader supply chain. And I do want to highlight that our backlog remains near record levels and is almost 2X higher than we were in pre-COVID. Lastly, I do want to comment on the inflationary environment and just want to stress that we continue to be in an inflationary environment and we've negotiated additional price increases with our customers and transportation, which will take effect as we move through this year. These increases will partially offset these inflationary costs and we expect to have positive contributions to the transportation margins later in 2023 from the price-cost dynamic. So with that as a quick overview, let me now get into the slides and discuss additional highlights and we'll start on Slide 3. Our first quarter sales were $3.8 billion and this was up 8% organically year-over-year. We saw market outperformance in transportation and continued growth and recovery in the industrial segment, which offset the sales decline in our Communications segment. Our sales were up 1% year-over-year on a reported basis and was impacted by approximately $300 million of currency exchange headwinds. Order of backlog trends continue to reflect a strong demand environment in both the transportation and industrial segments, and I'll get into more details about order trend dynamics by segment on the next slide. Adjusted earnings per share was ahead of our guidance at $1.53 and included $0.25 of currency exchange and tax headwinds versus our prior year. Adjusted operating margins came in as expected at 16.2%. Our free cash flow was strong at $400 million and we returned approximately $410 million to shareholders, and we'll continue to be aggressive with share buybacks, taking advantage of market dislocations and our share price. As we look forward, we are expecting second quarter sales to be approximately $3.9 billion and adjusted earnings per share to be around $1.57. Our guidance represents sequential growth in sales driven by the Transportation and Industrial Solutions segments and this will offset a sequential decline in our communication segment. Our teams remain focused on how we innovate with customers around the key secular trends that we position TE around, such as electric vehicles, renewable energy and data centers, just to name a few. Now I would like to move away from the financials just for a moment and I'm pleased that TE was named to the Dow Jones Sustainability Index for the 11th consecutive year. This recognizes our positive environmental, social, and governance policy and puts TE in the top 10% of the largest 2500 companies in the S&P Broad Market Index based upon long-term ESG criteria. So let me get into the order trends in markets and I would appreciate if you could turn to Slide 4. For the first quarter, our orders were $3.6 billion and I think the key takeaway by segment is that we're seeing stability in transportation, strength in the industrial solutions segment, and we've seen incremental weakness in communications. I also want to highlight that as you look at this slide and you compare orders versus the prior year, there are some key moving pieces I want to highlight. First off is, while currency impact sales, they also do impact orders. And so to compare, we're comparing different currency rates year-on-year. And the prior year also has higher than normal order levels due to the broad supply chain challenges we were all dealing with. I do also want to highlight, as I stressed earlier, that our backlog remains at near-record levels. So let me get the orders by segment. Our transportation book-to-bill was 0.95, reflecting ongoing stable environment and strong backlog levels. On an organic basis, our transportation orders grew 9% year-over-year and it reinforces our ongoing strong content growth momentum in what is essentially a flat production environment. In our industrial segment, the book-to-bill of 1.02 reflects strong demand across most of the served end markets we are in. We continue to see momentum around renewable applications and energy and are also continuing to see improving order trends in commercial air and medical as those markets continue to recover. Turning to communications, the orders reflect the incremental weakness in Data and Devices that I talked about. And the other thing I want to highlight on the orders is the appliance market is moderating as we expected and we've been talking to you about. As we continue to move through this year and see supply chain improvements and a reduction of backlog levels, we expect book-to-bill levels to remain below 1, which is consistent with what we've been discussing. So with that as a brief overview of orders, let me now briefly discuss year-over-year segment results in the quarter that are laid out on Slide 5 through 7 and you can see the details on each of those slides. Starting with transportation, sales growth was strong. It was up 14% organically year-over-year, with organic growth across all businesses. Our auto business grew 20% organically versus auto production that was roughly flat versus the prior year. The outperformance was driven by our global leading position in electric vehicles. We're benefiting from electronification trends in the vehicle as well as some benefits from our pricing actions. While overall auto production is expected to be flat for this fiscal year, we expect production of hybrid and electric vehicles to grow approximately 25% of the total global auto production in 2023. And as you know, we generate 2X the content in EV platforms versus combustion engine vehicles. So we expect our content per vehicle to continue to expand as we move through the year. In the commercial transportation business, we saw a 3% organic growth, driven by growth in North America and Europe. And this growth was partially offset by declines driven by a continued Chinese market that remains weak. In our centers business, we grew 3% organically and that was driven by our growth in automotive applications. At the Transportation segment level, adjusted operating margins were 15.8% as expected, reflecting the lag in the timing of price actions to offset inflation. Over the past three to four months, we took incremental cost actions and are implementing additional price increases to improve margin performance. We expect adjusted operating margins to improve sequentially into quarter two and return to the high teens in the second half of this year as we mentioned last quarter. Now let me turn to the industrial segment. In this segment, sales increased 7% organically year-over-year, with organic growth across all businesses. Our industrial equipment business was up 3% organically, driven by continued benefits from automation applications. Our AD&M business was up 14% organically with growth driven primarily by ongoing improvement in the commercial air market. In energy, we saw 8% organic growth with continued momentum in renewable applications. And our medical sales were up 5% organically and we're benefiting from the recovery in interventional procedures. As you can see on the slide, from a margin perspective, we expanded adjusted operating margins by almost 200 basis points and we continue to make progress towards our high teens margin target for this segment. Now let me turn to Communications. In this segment, our sales were down 11% organic. The appliance market is down as we expected and as you would expect, with the benefit we got during COVID as it turns, we saw declines across all regions in this business. Our Data and Device business was down 6% organically, and this was driven by broad market weakness, which I already discussed. In the Communications segment, adjusted operating margins were 17%, driven by lower volume including declines in higher-margin distribution sales. We are taking additional cost actions to improve margin performance in this segment as we go forward. We will balance these actions with investments for growth as we continue to see strong design win momentum in next-generation platforms serving the cloud data center market. So with that as a quick overview of our performance by segment, let me turn it over to Heath, and he'll get into more details on the financials as well as our expectations going forward.

Thank you, Terrence and good morning, everyone. Please turn to Slide 8, where I will provide more details on the Q1 financials. Adjusted operating income was $622 million, with an adjusted operating margin of 16.2%. GAAP operating income was $502 million and included $111 million of restructuring and other charges and $9 million of acquisition-related charges. You'll note that we have taken nearly $200 million of restructuring charges over the last two quarters as we aggressively optimize our manufacturing footprint and improve the cost structure of the organization. We now expect full-year restructuring charges to increase versus last year and as we mentioned last quarter, with the charges being more heavily weighted towards the first half of our fiscal year. We will provide further updates to the restructuring expectations as we move through the year. Adjusted EPS was $1.53, and GAAP EPS was $1.25 for the quarter and included restructuring, acquisition, and other charges of $0.28. The adjusted effective tax rate was approximately 20% in Q1. For the second quarter and for the full year, we expect our adjusted effective tax rate to be approximately 21%. And as always, importantly, 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 9. Sales of $3.8 billion were up 1% reported and up 8% on an organic basis year-over-year. Currency exchange rates negatively impacted sales by approximately $300 million and adjusted EPS by $0.21 versus the prior year. In the second quarter, we expect currency exchange rates to be a headwind of approximately $165 million year-over-year. Last quarter, we indicated that foreign exchange would negatively impact full-year sales by approximately $1 billion year-over-year. We now expect the full-year impact to be roughly half of this number at the current exchange rates. Adjusted EPS was $1.53 and adjusted operating margins were 16.2% as we expected. Now turning to cash flow, in the quarter we once again demonstrated the cash generation model of our business with cash from operations of $581 million, free cash flow was approximately $400 million, and we returned over 100% of our free cash flow to shareholders through share buybacks and dividends. We continue to remain disciplined in our use of capital, and our long-term strategy remains consistent. And as you know, that is to return two-thirds of our free cash flow to shareholders and use one-third for acquisitions over time. Before I turn it over to questions, let me provide a quick recap. The strategic positioning of our portfolio enabled us to deliver Q1 sales and adjusted EPS that exceeded our guidance. From a market perspective, the Transportation and Industrial segments are consistent with our view 90 days ago. We continue to benefit from content growth in Transportation and continued market recovery and growth in the Industrial segment. However, some of this was offset with cyclical weakness in communication end markets and the inventory adjustments that come with that. We continue to execute on our margin journey and you can see that progression in the Industrial segment. We remain focused on the actions that we can control, implementing price increases to offset inflation and driving additional structural cost reductions to improve our margin performance as we go forward. We continue to demonstrate our strong cash generation model, with a strong balance sheet that can support investments for growth. We will balance the short-term pressures with long-term opportunities, and I'm very excited about the opportunities we have to drive long-term growth, margin expansion, and value creation for our customers, employees and shareholders. Let's now open up for questions.

Thank you, Heath. Abby, can you please give the instructions for the Q&A session.

Your first question comes from Mark Delaney from Goldman Sachs. You may proceed.

Hey, good morning guys. Thank you very much for taking my questions. Could you please provide more detail on orders, specifically the linearity of how orders tracked over the course of the quarter and into January and any differences in order trends by end market?

Sure. Thanks, Mark, for the question. Firstly, the trend of orders during the quarter and into January remained quite stable, with the exception of our communications segment. When analyzing orders, it's important to consider both the stability and the highlighted area. Our backlog in both transportation systems and industrial systems has increased year-over-year, and we are seeing progress in reducing the backlog in transportation systems, which reflects the demand dynamics. To get a complete picture, you should look at both orders and backlog together. Breaking it down by segment, in transportation, our orders increased by 9% year-over-year, excluding currency effects. Production has been around 20 million units per quarter, showing relative stability along with an improved supply chain. This growth is largely driven by our strong content opportunities. In industrial sectors, we continue to see benefits from recovering markets, particularly in commercial aviation, where single-aisle aircraft have returned to pre-COVID levels, and dual-aisle aircraft, which present larger content opportunities, are starting to improve. We also observe positive trends in the medical sector, although broader supply chain challenges remain. However, orders in these sectors are continuing to accelerate, including in renewables. Notably, in our industrial equipment business, after several years of strong growth, we anticipate some leveling off due to high comparatives. In communications, we noted weaknesses, particularly in the appliance business, which benefitted during the COVID cycle but has since declined as expected. We anticipated moderation in cloud capital expenditure spending, but both enterprise and telecom applications have significantly weakened. The supply chain pressures we face from distributors to lower-tier players and ODMs are leading to inventory reduction. This cyclical challenge is likely to persist for a couple of quarters, putting pressure on the communications sector.

Okay, thank you Mark. Can we have the next question please.

Your next question comes from the line of David Kelley from Jefferies. Your line is open.

Hey, good morning and thanks for taking my question. I wanted to follow up on the Communications Solutions segment discussion. I was hoping you could provide a bit more color on the progression of comms demand throughout the quarter? And then can you give us a view or sense into how you're thinking about sequential 2Q sales and margin trajectory for the segment? Thank you.

Sure, David. Thanks for the question. And I'm not going to repeat what I said in the last question on the demand side. But as you think about our comm segment, last year, pretty much every quarter, it ran in excess of $600 million and really showed the momentum we have in those applications. In the first quarter, it's down to 520. When we look at where we see the demand levels, we think that we're probably going to be around $450 million to $500 million in revenue in the second quarter. So we do expect an incremental step down with what we're seeing in demand patterns and this inventory work off. And then right now, with the best we can tell, that's probably where we're going to stay for a couple of quarters. So that's how I think you should think about it. I do think what you'll see from a margin perspective is I think we've done a great job proving to you what we've done with the cost base of this segment when you saw the margin outperformance last year. But I do think you'll see this in the mid-teens as we work through this and working its way back up into the higher teens as we work through the year.

Okay, thank you David. Can we have the next question please.

Your next question comes from the line of Wamsi Mohan from Bank of America. Your line is open.

Yes, thank you. Good morning. Terence, can you just help us with some color around margins in your other segments as well, particularly, you stressed confidence in moving industrial back to high teens and also recovery in transport margins. How much of that is predicated on some of these restructuring actions versus the pricing initiatives that you've taken in transport and how contractual are those or is there a lot of cyclicality or uncertainty associated with accomplishing those initiatives?

Wamsi, this is Heath, and I'll address your question. First, our margin targets for each segment remain unchanged. We will adapt to various market conditions in terms of demand, as expected. However, our focus on cost reduction and footprint consolidation strategies remains consistent. We have expedited some actions, evident in recent charges, partly due to a more rapid decline in the communications sector than we initially expected. Breaking it down by the three segments, each has its own narrative. For transportation margins, we've experienced a lag between feeling inflationary pressures and implementing negotiated price increases. These price adjustments are significant, and we believe they will positively impact us as we progress through the year, with expectations for transportation segment margins to reach the high teens in the second half of fiscal 2023. We're satisfied with the performance of the industrial business. In the last quarter, we saw year-over-year growth, and we are committed to achieving a high teens margin trajectory for the industrial segment. This will involve a balance of restructuring and growth, and we hope you will recognize the progress reflected in our Q1 results. The communications segment is currently a bit uncertain. In previous years, we achieved strong margins at high volume levels. As Terrence noted, over the past year, our communications revenue has been well over $600 million per quarter. Looking ahead, we anticipate revenue in the $450 million to $500 million range for this segment due to inventory corrections. There will be a deleveraging impact, and we will address the cost structure as needed. Our long-term margin goal for this sector is still around 20%, but we can't adjust in just one quarter to maintain that level. As Terrence mentioned, it’s best to model the communications segment margins in the mid to high teens this year as we navigate the decline. Importantly, all the areas we've targeted and the platforms we are enthusiastic about present good margin opportunities for the future, so we are confident in the overall margin outlook.

Okay, thank you Wamsi. Can we have the next question please.

Your next question comes from the line of Chris Snyder from UBS. Your line is open.

Thank you. I know the company is only guiding for the March quarter, but I wanted to ask a little bit about the outlook for the various end markets into the back half of the year. And then specifically for auto, I know the company said last quarter that there was agreed to price coming into effect in January. Is that not really having an impact until the back half or are you going to start to see that in Q2? Thank you.

Thank you, Chris. Let me address the initial part before I respond to your pricing question. As mentioned in the script, I want to share some insights about how we expect the markets to develop. We are only providing guidance for one quarter. In transportation, there are a few key points to consider. It is clear that we expect production to remain flat, and it’s important to note that we are still significantly below pre-pandemic levels in auto production. While the production might hover around 80 million units annually and remain flat compared to 2019, the pre-pandemic figure was 88 million cars. This means we are still around 10% short of those levels. This year, our focus will be on our penetration and leading position in electric vehicles. We are excited about this position because if electric vehicles and plug-in hybrids reach approximately 25% of those 80 million units, our automotive revenue from these segments will exceed $2 billion. We believe we have demonstrated our content story effectively, as reflected in our outperformance. Regarding commercial transportation, last year was tough for those submarkets, but this year is likely to be flat. Any growth in North America and Europe will likely be offset by challenges in China, though we expect to slightly outperform the market due to our content momentum. In the industrial sector, I mentioned before that commercial air and medical markets are on the rebound, and we anticipate continued growth as we catch up. There are additional growth opportunities, especially in commercial air and dual-aisle aircraft, which are currently at only 50% of pre-pandemic levels. The momentum in renewables is also strong, contributing up to 25% of our energy revenues. As for your second question about pricing, in the first quarter, we engaged with our customers. Our pricing in automotive tends to lag behind. When inflation rises, there is a delay in its impact. We've conducted additional negotiations in the December quarter, which are now starting to take effect, phasing in during the early part of the calendar year. We expect margin improvement in transportation in the second quarter compared to the first, and this trend will continue throughout the year as we start reaping the benefits of these negotiations.

Okay, thank you Chris. Can we have the next question please.

Your next question comes from the line of Matt Sheerin from Stifel. Your line is open.

Yes, thanks, and good morning. Heath, I wanted to just ask about your inventory levels. I know last quarter, you talked about some margin headwinds due to reduction in your own inventory within transportation. It looks like your actual inventory dollars were up quarter-on-quarter. So could you walk us through that inventory picture? Thanks.

Yes, Matt. Thank you for your question. It's quite simple. We typically increase our inventory in fiscal Q1 in preparation for activities related to the Chinese New Year. Regarding the increase we saw this quarter, about half of it was due to foreign exchange revaluation, while the other half was our planned inventory build. Looking ahead for the year, we plan to remain aggressive with our inventory management. I do not expect that we will face significant inventory inflation by the end of the year. We will address the communication aspects as we manage the challenges Terrence has previously mentioned, and the other two segments are on track as planned. I hope that clarifies your question.

Thank you Matt. Can we have the next question please.

Your next question comes from the line of Jim Suva from Citi. Your line is open.

Thank you. Your transportation content story is very positive and compelling. So congratulations on that. One concern we get though is given a recession or a slowdown and the economy, is there any signs of auto unit you mentioned flat outlook, but a potential inventory correction there or a slowdown there as we progress through 2023?

No. Thanks Jim for the question. And what we continually monitor with our customers is really how's inventory to the consumer. And when we look at that inventory, Jim, North America is still in the mid-30 days, which is well below the 60 days, which is more traditional. Europe is pretty much in line and China is in line. We continue to monitor that. What's also nice is you continue to see the supply chain improving across the world that anything that would be out there in the supply chain is being worked off. So I'll be honest with you, we've got to watch it. Certainly, we're in a slowing macro economy, but I do want to also stress again auto production is still 10% below pre-pandemic. So I don't think we've overshot, but I think we have to keep an eye on it. And I think flat is the way we're seeing it is a prudent way that we've been planning our business right now.

Alright, thank you Jim. Can we have the next question please.

Your next question comes from the line of Amit Daryanani from Evercore. Your line is open.

Thanks for taking my question. I guess, could you kind of have you spent a bit more time on the price increases that you're expecting on the transportation side, how that flows into the model in 2023, can you just quantify what the size increases are that you expect this year? And then secondly, I think the fear I would have is, can you really raise prices on customers, the auto OEMs were actually lowering the price of their own car sales by 15%, 20% at this point or do you end up with more sizable pushback, if not for this, likely for next year? So I'd love to just see your perspective on your confidence that these price increases will flow through and what sort of benefit are you embedding from that into your guide for 2023?

Yes. Amit, first off, our pricing with our customers is based on contracts, similar to the lag we experience in transportation. We have been negotiating terms over the past few months, which gives us confidence in our pricing. Each agreement is unique, and we expect to see benefits starting in this current quarter, with improvements as we progress through the year. Additionally, we are still facing inflation, particularly with oil-based materials and utility costs affecting some of our inputs. Although inflation rates have decreased since last year, we continue to navigate this environment as these costs impact transportation. As I mentioned in our prerecorded message, we anticipate our margins will reach the high teens in a stable environment later this year, benefiting from the pricing adjustments we've implemented. We operate in a commodity business and play a crucial role in our customers' electric vehicle launches, not just producing generic products. There may be price pressures on both sides, but we have successfully negotiated these terms and maintain confidence in our agreements.

Okay, thank you Amit. Can we have the next question please.

Your next question comes from the line of Scott Davis from Melius. Your line is open.

Okay, good morning guys.

Hey Scott.

There has been a lot of discussion about inventories, prices, and inflation. Can you break down inflation for us a bit more and help us understand if you are seeing any significant moderation in areas like labor inflation? We can track material costs ourselves, but labor is something that is more challenging to monitor.

Yes, Scott, I think it's important when you look through that in our world, material is the biggest part of our spend when you look through it. Labor is incrementally higher, but the bigger pressure that we have is really around the base materials we use. And during this period, you cover it well, you really have not only the base material, but then you also have where do utilities and conversion costs come in. And where I would say we're still seeing inflation metals have come off, I would say it's more neutral year-over-year. In resin-based things and chemicals, where you use a lot of energy to make those, and let's face it, some of those come out of Europe; we continue to see inflation there. Utilities around the world, certainly, the cost to run factories is inflationary. And the other area that I would say we talked about that actually has retreated is around how do you move things around the planet from a freight and logistics perspective. So last year, you would have had everything being inflationary. You're seeing freight logistics come down. You're seeing metals be more neutral, but you're still seeing resins and oil-based things that are energy-intensive still have inflation around it. Labor for us is incrementally inflationary, but I wouldn't say it's the biggest headwind we have, and that may be different for other companies.

Okay, thank you Scott. Can we have the next question please.

Your next question comes from the line of Christopher Glynn from Oppenheimer. Your line is open.

Hey, thanks. Good morning. Just shifting gears a little bit. I was curious about the Industrial segment margins; incrementals were a few hundred percentage points. And you held margins on lower sales versus the second half of last year. So I'm curious if you're hitting more of a culmination of the cost structure program that you've been talking about for a while?

Hey Chris, it's Heath. That's a great question. It seems like we're always on this journey with Industrial. We're definitely pleased with the results for the quarter, and we see progress as we look through the year. One important point is that we are quite active in this segment regarding acquisitions. We've completed several acquisitions over the past couple of years, which has contributed to about 100 basis points of margin pressure. However, this is part of our value creation journey; we bring in lower margin assets, adjust the cost structure, integrate effectively, and then begin to see overall returns. Excluding that impact, I feel very positive about the progress we've made in our restructuring journey, particularly with the rooftop consolidation efforts we've been discussing for the last five years. We've made significant advancements in those consolidations, while acquisitions add an element of unpredictability in terms of their pressure versus opportunity. I wanted to highlight that since it relates to your question.

Okay, thank you Chris. Can we have the next question please.

Your next question comes from the line of William Stein from Truist. Your line is open.

Great. Thanks for taking my question. You just answered a bit of this, but I'd like to dig a little bit more into the M&A opportunity. You highlighted that the company plans to spend over time about a third of its free cash flow on acquisitions. I think it's been significantly below that level for several years. So I'm hoping you can maybe refresh our memories as to both the strategic and tactical approach to M&A and whether we might expect that to accelerate in the next couple of years given the spend has been, I think, quite a bit below that third of free cash flow number? Thank you.

I appreciate the question. The two-thirds, one-third ratio we've discussed for years pertains to a cycle. There will be times when we make acquisitions, and the size of those deals can influence this ratio. Over the past few years, there have been instances where we haven't utilized that third. However, that doesn't indicate we aren't active in the market. So far this fiscal year, we've spent about $100 million on transactions. While I can't quantify that within our typical ratio, it's important to look at this over a longer timeline rather than on a quarterly or yearly basis. We have a pipeline of opportunities, and in addition to our own monitoring and cultivation, we're involved in many external processes. Our approach remains consistent: the deal must be strategically significant, we need to identify how we can add value as the owner, and the financial profile must align with prudent use of cash for our shareholders. We will maintain discipline in this process, focusing on smart acquisitions in areas we are confident in. There is fragmentation out there, depending on our various business units, and we will continue to be proactive in those markets while monitoring our progress over time.

Alright, thank you Will. Can we have the next question please.

Your next question comes from the line of Joe Giordano from Cowen. Your line is open.

Good morning. This is Michael on for Joe. Earlier, you mentioned elevated restructuring costs in the first half of the year, which are more in line with 2020 levels. Can you disaggregate the drivers behind that, I know you had mentioned a little bit earlier, but any additional color would be super helpful?

Yes, Michael, thank you for the question. When we started the year, we anticipated that restructuring costs would be roughly flat or lower than the previous year. The figure for FY 2022 was about $150 million. That was our initial plan, but given the additional downturn, especially in the communications segment, we decided to accelerate some initiatives to respond more aggressively, which will result in higher expenses for FY 2023. I can't specify right now how much higher it will be, but we should have a clearer picture when we reconvene in April. In Q1, we took a charge exceeding $100 million, and we've already utilized a significant portion of that to pursue particular actions. Looking ahead, once we address the current situation, we expect to bring costs down; we hoped to start that process in 2023, but market conditions have changed those plans.

Okay, thank you Michael. Can we have the next question please.

Your next question comes from the line of Samik Chatterjee from J.P. Morgan. Your line is open.

Hi, thanks for taking my question. I wanted to explore the industrial equipment sub-segment further and get more information on it. You mentioned the recovery in medical, Commercial Air, and the strength in renewables. However, regarding the industrial equipment and the broader industrial group, what are you observing in terms of macro impacts? What are the positives and negatives, and could you provide any details on the book-to-bill ratio and how that sub-segment is performing?

Yes. First off, our industrial equipment business has experienced 25% growth in each of the last two years, indicating strong performance. We're observing a robust backlog related to capital expenditures, particularly in the automotive and electric vehicle sectors. Additionally, the supply chain is improving, which will slightly influence order levels, though not as significantly as in the Communications sector. We are also attentive to the developments in consumer electronics, which relies heavily on factory automation and has shown signs of weakness. The warehousing sector might also face challenges. However, there are strong areas, particularly with infrastructure investment where our products are utilized, and we are witnessing strength in process automation as well. Overall, the situation is mixed. We are prepared for tough comparisons ahead and believe we are experiencing a peak, with order levels and supply chain improvements stabilizing.

Okay, thank you Samik. Can we have the next question please.

Your next question comes from the line of Steve Fox from Fox. Your line is open.

Hi, good morning. Just one broad question on China and there's been a lot of news flow out of there and questions around how companies manufacturing footprint should look for the long-term or even shorter term given all the changes in terms of government policies, etc. Can you just sort of sum up your current situation in China and then how you look at sort of your global footprint, especially as you do some restructuring down the road here? Thanks.

Thanks, Steve. You've been following us for quite some time and we've consistently focused on how we produce and engineer our products. Our operations in China are primarily for the local market; we don't export much from there. Where we do, we're exploring options to consider a "China plus one" strategy for regional production for Japanese or Korean clients who might need alternatives. I see this more as an evolution rather than a complete overhaul since we don't import many goods back to countries like the United States. Regarding our growth opportunities, we often highlight electric vehicles, as China is the largest market for them. We're looking at how to expand our capacity in China to support local original equipment manufacturers, who dominate the electric vehicle market. Overall, our strategy is to manufacture within the region for a better supply chain alignment. We need to align with our customers' supply chains, and you'll continue to see us adapt our strategies for local production. Even as Heath mentioned restructuring, we're still exporting from Europe to China in some cases, but we aim to localize more of our production in China. Therefore, we're investing in essential sectors within China that we believe will support our growth in the long term.

Okay, thank you Steve. Can we have the next question please.

Your next question comes from the line of Guy Hardwick from Credit Suisse. Your line is open.

Hi, good morning. Just want to understand, sorry if this has been covered already, but I want to understand that the transportation margins just a little bit better. So I think you guided to, at the last quarter, at least 100 basis points of impact on the transportation margins for the inventory reduction. At the same time, you also benefited in this quarter from, I believe, very strong pricing as well as strong outgrowth driven by mix. And even if I take out that 100 basis points of inventory reduction impact, you're still like 100 to 140 basis points decline in the margin despite the pricing. So does the pricing get even stronger as the year progresses, is that kind of what you're communicating, can you help me understand that a little better?

Sure. This is Heath. We discussed some of this earlier, but our price increases are mainly based on the calendar and are already in effect. While they aren't all aligned to the same date, we didn't see much impact on our first quarter results in transportation or elsewhere from pricing. As we move through the year, both in this quarter and the second quarter we're currently in, as well as the second half of our fiscal year, we expect to see significant benefits from these pricing increases. I'm confident you will notice these improvements in both our second quarter results and the latter half of the year.

Okay, thank you Guy. Can we have the next question please.

Your next question comes from the line of Luke Junk from Baird. Your line is open.

Good morning, thanks for taking my question. A modeling question for me. Heath, just wondering if you can help us understand the moving pieces around your updated FX guidance, specifically, how that translates from revenue to earnings, wondering what has changed versus 90 days ago in terms of how it works through the plumbing, if you will, especially thinking about the back half of the year and the earnings impact as the top line impact starts to moderate?

Sure, Luke. It's been a dynamic situation for us over the past 90 days. When it comes to the top line, we established a baseline regarding the dollar's performance. We observed a weakening of the dollar during the quarter, especially toward the end, which has affected almost all global companies due to translation impacts. The transactional impact is more complex, as it involves the currencies in which we denominate our revenues against our costs and how we manage cross-border transactions. This aspect has a more pronounced effect on our EPS. We previously mentioned a $1 billion year-over-year impact, primarily concentrated in the first half of the year. Currently, with the rates we have today, it’s about half of that amount, still mostly in the first half. Specifically, we talked about a $300 million year-over-year impact in the first quarter and guided for $165 million for the second quarter. We also shared the EPS implications of these figures. Looking ahead to the second half of the year at today's exchange rates, the impacts tend to balance out. We anticipate a slight headwind in the third quarter, shifting to a small tailwind in the fourth quarter, though the numbers will be much smaller at that stage. In summary, for the latter half of the year based on current rates, the outlook is uncertain.

Okay, thank you Luke. Can we have the next question please.

Your next question comes from the line of Shreyas Patil from Wolfe Research. Your line is open.

Hey, thanks so much for taking my question. Just coming back to communications. So maybe thinking a little bit beyond this year. You've talked about the ability to sustain low 20% margins in that segment. Obviously, we're going to be dipping below that for the next few quarters, but I'm just trying to get a sense of the bridge to get back to that low 20s level, I mean how much of that is really dependent on the end markets versus some of the internal cost actions that you're talking about taking out?

Sure. This is Heath. I'll take this. If you look at your models, first of all, this is our smallest segment. There's a bit of a law of small numbers here when it comes to the margin rates. We are careful about not getting too excited when we had high margins over the last two years because we understood the leverage in those factories during that output and the changes that come with it. When you see a shift from a $600 million to $650 million quarterly run rate for that segment down to below $500 million for the next few quarters, it significantly impacts us. Part of this is also due to the inventory reduction, and the margins tied to that channel inventory reflect the cyclical nature of our business. Our confidence in returning to closer to a 20% margin for the segment comes from our belief that this is still more than a $2 billion segment annually. We anticipate continued growth, as we understand the markets, our customers' capital needs, and the platforms we are involved with that will contribute to our growth over the next several years. We feel positive about this, and we have a clear idea of what the margins will look like, but we are facing a bit of a challenge for the remainder of 2023, or at least for the next couple of quarters.

Okay, thank you. We'd like to thank everybody for joining our call this morning. And if you do have additional questions, please contact Investor Relations at TE. Thank you and have a nice day.

Ladies and gentlemen, today's conference call will be available for replay beginning at 11:30 A.M. Eastern Time today, January 25th, on the Investor Relations portion of TE Connectivity's website. That will conclude the conference for today.