Earnings Call Transcript
TE Connectivity plc (TEL)
Earnings Call Transcript - TEL Q4 2023
Operator, Operator
Everyone thank you for standing by and welcome to the TE Connectivity Fourth Quarter and Final Year Results 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.
Sujal Shah, Vice President of Investor Relations
Good morning, and thank you for joining our conference call to discuss TE Connectivity's fourth quarter and full year results for fiscal 2023 and outlook for our first quarter of fiscal 2024. 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. I also want to remind you that our Q4 results in fiscal 2022 included an extra week. In this call, year-over-year income statement and orders comparisons for Q4 and fiscal 2023 are made excluding this extra week. You will find related reconciliations in the press release and presentation tables. Finally, during the Q&A portion of today's call, we're asking everyone to limit themselves to one question, and you may rejoin the queue if you have a second question. Now let me turn the call over to Terrence for opening comments.
Terrence Curtin, CEO
Thank you, Sujal, and we appreciate everyone joining us today. To start off, I am pleased that we delivered revenue in line with our guidance and earnings per share that were ahead of guidance, driven by strong execution by our teams across our segments in what continues to be a dynamic market environment. Before we get into the slides, I want to take a moment to discuss our performance for the full year, along with what we're seeing in the markets versus our last call. When we look back on fiscal 2023, we set out to accomplish three key initiatives that we shared with you. First was to continue to demonstrate the strategic positioning of our portfolio through alignment to secular growth trends. Second was to deliver strong free cash flow with a focus to drive down inventory levels. Lastly, to improve our margin performance through both cost reduction and pricing actions to offset inflation. As Heath and I will discuss on today's call, our teams executed successfully on all of these initiatives during the year, and it sets up for a good jumping off point as we enter 2024. When we think about the portfolio performance, our results demonstrated continued growth in the Transportation and Industrial Solutions segments, which offset market weakness in Communications and headwinds from a stronger dollar. We generated growth above the market in several of our businesses as we continue to benefit from secular trends, including increased global production of electric vehicles, adoption of renewable energy, and applications for cloud as well as artificial intelligence. We delivered record free cash flow of $2.4 billion for the year, representing over 110% conversion, and we also returned $1.7 billion to shareholders for the year. We drove down our inventory levels in response to improvements in our supply chain while at the same time we improved our service levels to our customers. Our cash generation model gives us both confidence as well as opportunities to return capital to shareholders and support bolt-on M&A activities, which aligns with our capital strategy. We also worked to drive margin expansion in the second half of 2023, and we delivered on this commitment, improving our exit rate on adjusted operating margins to above 17% as we closed the year, despite our Communications segment being at the bottom of the cycle. Now, let me share what we're seeing in our market since our last call 90 days ago. Overall, markets are playing out as we expected. Most of our key end markets are on a growth or recovery trajectory, with a few markets continuing to cycle as we previously discussed with you. Our view of Transportation end markets remains consistent with our prior view, with global auto production remaining stable. Our growth will continue to be driven in Transportation by content outperformance that leverages our leading global position in this market. In our Industrial segment, three out of our four businesses continue to show growth momentum. You see our strong positioning in renewable energy with growth from both wind and solar applications. Commercial air sales continue to grow as this market recovers, and our medical business is benefiting from increases in interventional procedures. In our Communications segment, while sales are down significantly versus last year's cyclical peak, we saw a sequential growth in orders in our fiscal fourth quarter due to early ramps of artificial intelligence programs, and we continue to expect volume growth from AI applications as we progress through 2024. Finally, I want to reinforce that the way we think about long-term value creation remains unchanged. It is built on the pillars of secular growth trends that will drive increased content in the markets where we position TE, strong free cash flow generation with discipline around capital deployment, and certainly levers to enable margin expansion as we move forward. So, with that as an overview, let me turn to Slide 3, and I'll get into the presentation and discuss some additional highlights for the fiscal fourth quarter as well as the full year, and Heath will get into more details during his section. Our fourth quarter sales were $4 billion, which was in line with our guidance. Transportation segment organic growth of 5% was offset by declines in Communications due to ongoing market weakness that we've been discussing. Adjusted earnings per share was ahead of our guidance and up 2% versus the prior year at $1.78 with adjusted operating margins of 17.3%. Cash flow from operations was a strong $1.1 billion and free cash flow was $945 million in the fourth quarter, both of which were quarterly records for the company and I believe reinforce the strong execution by our teams I already highlighted. For the full year, sales of $16 billion were flat on a reported basis, and we had organic sales that were up 3%, driven by our Transportation and Industrial segments. Adjusted operating margins were 16.7% for the full year. But on the margin side, the real highlight was that we expanded adjusted operating margins by 120 basis points from the first half to the second half of the year due to our team's execution. As we look forward into the first quarter of fiscal 2024, we are expecting that first quarter sales will be $3.85 billion and adjusted earnings per share to be around $1.70. On a year-over-year basis, we expect sales to be flat with organic growth in our Transportation and Industrial segments. We do expect adjusted EPS expansion of over 10% in the first quarter and strong margin expansion as well year-over-year. So, if you could turn to Slide 4, let me discuss order trends and what we've seen. We continue to benefit from markets with strong secular growth trends, and this is offsetting weakness in markets that are cycling or impacted by inventory destocking. At the total company level, we continue to see stability in our order levels. Orders of $3.9 billion in the fourth quarter were consistent with order levels for the past several quarters, and our backlog remains near record levels. Transportation orders grew both year-over-year and sequentially, reflecting ongoing stable global auto production. Industrial order patterns reflect some seasonality across this segment as well as ongoing destocking in the Industrial Equipment end markets. I ask you to keep in mind that 50% of our Industrial Equipment business goes through the distribution channel, and we expect that destocking here to continue for the next couple of quarters. In the Communications segment, while we continue to see our customers work down inventory in their supply chain, we had our second consecutive quarter of sequential order growth, driven by new orders for artificial intelligence applications. With that as an overview of orders, let me now get into year-over-year segment results in the quarter that are shown on Slides 5 through 7, and you can see the details on each one of those slides. Our sales growth in the Transportation segment remained strong. It was up 5% organically year-over-year, driven by our automotive business, which grew 9% organically with growth in all regions. Our performance continues to be driven by our leading global position in electric vehicles, electronification trends within the vehicle, and positive impacts from pricing. In fiscal 2023, electric vehicle and hybrid-electric vehicle production grew globally by approximately 40%. Most of this growth was driven by Asia, and we expect this region to continue to be the growth driver for electric vehicles. We generate approximately twice the content in electric vehicle platforms versus combustion engine vehicles, so we expect our content per vehicle to continue to expand as we move forward. Overall, we expect auto production next year to be about 21 million units per quarter with continued growth in hybrid and electric vehicle production. In our Commercial Transportation business, we experienced a 7% sales decline, which was in line with what we expected and was driven by market weakness in both North America and China. In our Sensors business, we saw growth in automotive applications that was offset by weakness in industrial applications. At the margin level for the Transportation segment, adjusted operating margins were 18.4% as we expected and up 170 basis points year-over-year as our teams executed on the cost and price actions that we've been highlighting to you. Now, let me discuss the Industrial Solutions segment. While sales were flat in the fourth quarter, three businesses are continuing on a very good growth trajectory. Our Aerospace, Defense and Marine sales were up 14% organically, with ongoing improvement in the commercial air market. In Medical, sales in the quarter were up 19% organically, driven by ongoing increases in interventional procedures. In our Energy business, we're seeing the benefit of this again this quarter with 6% organic growth. Finally, in the Industrial Equipment business, our sales were down 21% organically, driven by continued inventory digestion in the distribution channel, a trend similar to what you're hearing from other companies. Adjusted operating margins were 15.9% in the quarter, reflecting the impact of expected volume declines in the Industrial Equipment business. In Communications, our organic sales were down 27% year-over-year, but were up 9% sequentially to $463 million. We're seeing the benefits from the early ramps of artificial intelligence programs, which will strengthen as we move through 2024 and beyond. Adjusted operating margins were 15.3% for the segment, an increase of over 100 basis points sequentially. As we see destocking and AI increases in volume, you'll see margins expand in this segment as we advance through 2024. So, with that, let me turn it over to Heath, who will get into more details on the financials as well as our expectations going forward.
Heath Mitts, CFO
Thank you, Terrence, and good morning, everyone. Please turn to Slide 8, where I will provide more details on the fourth quarter and fiscal 2023 financials. Sales of $4 billion were flat on a reported basis year-over-year. Adjusted operating income was $699 million with an adjusted operating margin of 17.3%. GAAP operating income was $635 million and included $57 million of restructuring and other charges and $7 million of acquisition-related charges. For the full year, restructuring charges were approximately $260 million, which were in line with expectations. Our restructuring efforts over the last several years have enabled a more efficient operating footprint while continuing to localize to support our customers in the regions of the world where they operate. I expect restructuring charges to decline significantly in fiscal 2024 and to be approximately $100 million for the year. Adjusted EPS was $1.78 and GAAP EPS was $1.75 for the quarter and included a noncash tax-related benefit of $0.16 related to a decrease in the valuation allowance. Additionally, we had restructuring, acquisition and other charges of $0.19. The adjusted effective tax rate was approximately 19% in both Q4 and fiscal 2023, which was as expected. For Q1 and fiscal 2024, we expect our adjusted effective tax rate to be roughly 20%. And as always, importantly, we continue to expect our cash tax rate to stay well below our adjusted effective tax rate for the full year. Turning to Slide 9 for additional information on our full year performance. Fiscal 2023 sales were $16 billion, while sales were flat year-over-year, we had 9% organic growth in the Transportation segment and the Industrial segment grew 5% organically despite the softening in the Industrial Equipment business. The growth in these two segments was offset by roughly $1 billion of headwinds from the cyclical weakness in the Communications segment that we've discussed, combined with the impacts from the stronger dollar. The stronger dollar negatively impacted sales by approximately $430 million versus the prior year. Due to the further strengthening of the dollar against other currencies, we expect year-over-year currency exchange headwinds of approximately $250 million in fiscal 2024. Adjusted operating margins were 16.7% for the full year with margin expansion of 120 basis points from the first half to the second half of the year driven by both cost reduction initiatives and price increases. This was most evident in our Transportation segment, where our margins expanded over 200 basis points from the first half to the second half, exiting the year in the mid-18% range. At the company level, we exited the year with adjusted operating margins of 17.3% and we expect to expand from this level in fiscal 2024. Adjusted EPS was $6.74 and included a $0.45 headwind from currency exchange rates. Turning to cash, we generated record free cash flow of approximately $2.4 billion in fiscal 2023, and with roughly $1.7 billion returned to shareholders through share buybacks and dividends. Free cash flow was up 35% year-over-year with over 100% conversion to adjusted net income, and we expect to generate approximately 100% free cash flow conversion going forward. I am pleased with the progress our team has made in reducing inventory levels through the year, contributing to our strong free cash flow. Our cash generation model, coupled with our strong balance sheet, will enable us to continue to be aggressive with capital returned to shareholders while pursuing bolt-on acquisitions, including the Schaffner acquisition we expect to close at the end of this quarter. Before I turn it over to questions, let me reinforce some of the key points discussed today. While markets remain dynamic, we are continuing to take action on the things we can control to improve our financial performance. We worked hard to achieve a better exit rate on margins at the end of the year but we still have work to do to reach our business model margin targets. We do expect to make progress on further margin expansion and EPS growth this year. Most of our end markets have a growth or recovery trajectory, and we expect the destocking we have seen to improve as we move forward. Our balance sheet is solid. We are demonstrating our strong cash generation model, and we remain excited about the opportunities ahead of us to drive value creation for all stakeholders. With that, let's open it up for questions.
Sujal Shah, Vice President of Investor Relations
Audra, can you please give the instructions for the Q&A session?
Operator, Operator
Thank you. We'll take our first question from Mark Delaney of Goldman Sachs.
Mark Delaney, Analyst
Yes, good morning and thanks for taking my question. There have been many crosscurrents and various end markets, including the UAW strike, inventory destocking in industrial, and content opportunities like AI and electrification. I hope you could help us better understand in a bit more detail key trends by end market and what you expect going forward, including your assumptions by end market in 1Q guidance?
Terrence Curtin, CEO
Sure. Thanks Mark. Let's talk about the fourth quarter first a little bit because we went through a lot there. I think when you look at the top line, it came in exactly as we expected. What was a little bit better than we would have expected, certainly, was automotive, where we had growth in all three regions of the world, as well as in our D&D, and our Communications segment, which was a little bit stronger due to the ramps of artificial intelligence that I mentioned in my comments. The area that was a little bit weaker was Industrial Equipment. We highlighted last quarter that we were seeing some inventory destocking around channel partners. I would say that was a little bit worse, and we think that's going to be with us for a bit. We were ahead on EPS, and that was driven on the conversion side across all operations. Looking at the first quarter and our guidance, it will resemble many aspects of the fourth quarter. We expect continued growth in Transportation with three strong markets in industrial, as well as ongoing inventory destocking in Industrial Equipment. There are still some challenging comparisons in the Communications segment, but overall, it will likely be flat on the top line year-over-year, and you'll see margins that look like the fourth quarter, with strong EPS growth approaching 10%. Orders have been coming in, as we expected, this quarter to 3.9, remaining stable even amidst the destocking we're seeing. This indicates positive trends highlighted as we approach 2024. Thanks for the question, Mark.
Sujal Shah, Vice President of Investor Relations
Thank you, Mark. Can we have the next question, please?
Operator, Operator
We'll go to Wamsi Mohan at Bank of America.
Wamsi Mohan, Analyst
Yes, thank you. Good morning. Terrence, can you sort out some of the puts and takes in autos, given all the recent news around the D3 companies paring back on EV ambitions and potentially slower adoption rates of EVs? Also, you didn't explicitly call out the UAW strike. Did you not see any impact, or is it yet to come in terms of any impact from that? Thanks so much.
Terrence Curtin, CEO
Thanks Wamsi for the question. You had two very different questions there, so let me take the latter part first, around the UAW. The UAW impact on TE is negligible, both in what happened in the fourth quarter and what we see in the first quarter. Just to remind everyone, our global position is what makes our automotive business special. 80% of our business is outside the United States, which is unaffected by the UAW. So, we did not address it because it didn't have a significant impact, and we don't expect it to have a significant impact in the first quarter. Now, regarding your EV question, I want to remind everyone to think about the EV landscape clearly. EV production reached 20 million units globally this year, with two-thirds produced in Asia. As you may expect, adoption of EVs is cyclical, and while growth may not always be linear, it's important to note that technology is working and consumers are making choices. Our opportunity remains on increasing the content of our EV platforms, and we continue to expect growth in electric vehicles globally next year. Although it may not reach the 40% growth rate seen this year, we anticipate continued expansion, especially in areas like China, where EV sales rose over 30% this year. Local OEMs have over 50% market share and our position is strong, giving us confidence in our performance. We're optimistic about the sustained demand for EVs and the content opportunity it presents for TE.
Sujal Shah, Vice President of Investor Relations
Thank you, Wamsi. Can we have the next question, please?
Operator, Operator
We'll go to Steven Fox at Fox Advisors.
Steven Fox, Analyst
Hi, good morning. I was just wondering if you could dig in a little bit more into free cash flows. Obviously, you guys overperformed by over 10%. Can you just talk about some of the dynamics that went into that? And then the expectations for cash flow this year, and any dynamics around the use of excess cash, considering your capital allocation strategy remains consistent and you did do an acquisition during the quarter. Thanks.
Heath Mitts, CFO
Well, Steve, thanks for the question. I'll take it. We've talked a fair amount about free cash flow during fiscal 2023, and it was a key focus both internally and in our communications with you. We navigated supply chain issues and buffered some inventory in prior years. As we entered this year, as demand stabilized, we were able to focus on driving working capital down despite some market conditions. I am pleased with how we finished the year and it provides us confidence as we head into fiscal 2024 that we can maintain this momentum. The 112% conversion we achieved in fiscal 2023 was somewhat higher than I expected, but I am proud of our performance. For 2024, I am confident we can cover around a 100% mark in terms of cash conversion, which is an improvement from our historic trend. This allows for greater flexibility in our capital allocation strategy, which remains unchanged. We will continue to return cash to shareholders and increase our repurchase activities where it makes sense relative to valuations. The acquisition coming at the end of December, that's a $300 million use of cash that will come off the balance sheet, but we expect continued cash generation through the first quarter as well, ensuring a positive outlook.
Sujal Shah, Vice President of Investor Relations
Thank you, Steve. Can we have the next question, please?
Operator, Operator
We'll move next to Chris Snyder at UBS.
Chris Snyder, Analyst
Thank you. I wanted to ask about supply chain inventory levels. You guys have been fairly consistent about the destocking headwinds for data appliances and industrial equipment. For those three sub-verticals, can you just talk about where we are in the respective destock cycles? Beyond those three, is there anywhere else you may be seeing more risk around destock compared to three or six months ago? Thank you.
Terrence Curtin, CEO
Thank you for the question, Chris. Let's discuss destocking a bit. As you know, being a Tier 2 supplier, this process is not uncommon after strong cycles. There is one commonality among the three segments: close to 50% of their sales go through distribution partners. While this is significant for their business units, total TE relies on distribution for only about 20%. It's worth noting that 80% of our business, where we connect directly with customers, is stable and experiencing growth. Regarding the three segments, we are seeing stability in our order levels, highlighting positive trends heading into 2024. The orders for D&D and appliances have increased sequentially, and we believe we are stable at the bottom. We anticipate that the destocking in industrial equipment, which we began discussing over the past couple of quarters, will continue into the first half of next year, but we expect that to recover afterward.
Sujal Shah, Vice President of Investor Relations
Thank you, Chris. Can we have the next question, please?
Operator, Operator
We'll go next to William Stein at Truist Securities.
William Stein, Analyst
Hey, thanks for taking my question. I understand you're only guiding for a quarter, but I'd like to give you an opportunity to help us sensitize our models as we consider what the trajectory will be in 2024 in terms of revenue growth and margin expansion. Thank you.
Terrence Curtin, CEO
Thanks, Will. I will talk about trends as we position ourselves, knowing we aren't guiding beyond the first quarter. In Transportation, we view auto production to be around 21 million units per quarter. Our business has historically outperformed the market by four to six points due to our leading EV position and ongoing electronification. In Industrial, three markets are showing strong growth momentum that we expect to maintain. In Communications, growth will be driven by the AI ramps we've highlighted to you, which we estimate will contribute well over $100 million in incremental revenue this year. You should factor in that destocking will affect some of our businesses in the early part of the year, but it should come to an end, allowing for growth opportunities. Additionally, the strengthening dollar is expected to be a headwind impacting revenues by approximately $250 million in fiscal 2024, while input costs remain elevated but manageable.
Sujal Shah, Vice President of Investor Relations
Thank you, Will. Can we get the next question, please?
Operator, Operator
We'll go next to Amit Daryanani at Evercore.
Amit Daryanani, Analyst
Good morning. Thanks for taking my question. I have one, and I'd like to hear from either Terrence or Heath. You've made notable progress expanding operating margins in the latter half of fiscal 2023. What does it take for TE to reach your target margins across the three segments? Is it volume, or is it cost optimization? I'd love to get a sense of the path from here toward those target margins. Thank you.
Heath Mitts, CFO
Amit, this is Heath. I'll take that. We highlighted on the call that we exited the year with better positioning than in the first half of fiscal 2023, and we were not satisfied with our margins in the first half, which required significant work to improve. However, we remain below our targeted operating margins. Transportation made strides this year, but the target for Transportation is still 20%. We require some additional volume support, and our commercial transportation business is experiencing a downturn, which impacts profitability. Pushing forward, we expect good progress in Transportation margins in FY 2024. For Industrial Solutions, the business model target is high-teens operating margin, and we're currently in the mid-teens due to weakness in the Industrial Equipment business. We believe that segment margins will improve as we move through FY 2024 and as destocking normalizes. Communications has been on a rollercoaster ride, and margins are currently in mid-teens. Volume dependency will be critical in this segment, but we anticipate that improvements in destocking will lead to a mix of profitability, aiding margin recovery.
Sujal Shah, Vice President of Investor Relations
Thank you, Amit. Can we have the next question, please?
Operator, Operator
We'll go next to Samik Chatterjee at JPMorgan.
Joe Cardoso, Analyst
Hey, good morning and thanks for the question. This is Joe Cardoso on for Samik Chatterjee. Regarding your AI opportunity, this might be more of a medium-term question. There's been increasing discussions about various architectures cloud providers might take beyond just GPUs or underlying switch fabrics in relation to TEL's business. Can you discuss the breadth of your portfolio and whether you see yourself agnostic regarding customers' future architectural decisions? Are there areas in your portfolio that you think you could bolster or are looking to bolster going forward? Thank you.
Terrence Curtin, CEO
Thanks for the question. One aspect of our space is that when architectural decisions are made for an AI cluster, their connection requirements are crucial and necessitate customization. Therefore, we get excited seeing companies, including ourselves, working with both semiconductor players and cloud architects. This interaction allows us to offer solutions that maximize compute performance and connectivity, which is critical. In the recent quarter, we noted earlier ramps than anticipated, translating to an increased pipeline of $1.3 billion from the prior $1 billion in just three months. The programs stemming from these wins develop over three to four years, providing a steady ramp, particularly considering that timely connectivity is critical in an AI cluster to avoid latency issues. We are optimistic about our traction and believe this growth will support us as destocking effects wane and we continue discussions around AI.
Sujal Shah, Vice President of Investor Relations
Thank you, Joe. Can we have the next question, please?
Operator, Operator
We'll go next to Joe Giordano at TD Cowen.
Joe Giordano, Analyst
Hey, good morning guys.
Terrence Curtin, CEO
Hey, good morning Joe.
Joe Giordano, Analyst
I just want to follow-up on the AI discussion. Can you let us know how revenue from AI looked this quarter relative to last quarter? More broadly, how do you see AI cannibalizing other business that you otherwise would have had on a more standard offering? I'm guessing this is a net positive for you on a content standpoint, but if your customers have finite spending, how much of this is a transition of spending rather than an increase in total spending?
Terrence Curtin, CEO
Certainly, you're going to see some cannibalization where there's only so much allocation of dollars within a CapEx budget. However, we view this as a net positive. AI requires extensive infrastructure, which still necessitates a lot of servers and components. In the last quarter, we had expected Communications to remain flat, but our growth is attributed to AI applications and their corresponding ramps. Going into the new year, we may experience some lumpiness due to the calendar, but foresee opportunities for AI revenue to continue to increase as we advance through 2024.
Sujal Shah, Vice President of Investor Relations
Okay, thank you, Joe. Can we have the next question, please?
Operator, Operator
We will go next to Luke Junk at Baird.
Luke Junk, Analyst
Good morning. Thanks for taking the question. Terrence, might you clarify how you're thinking about growth potential in the auto sector for 2024? I'm especially considering the impacts of EVs amidst potentially flattening adoption trends, but with rising content for you going forward and perhaps even a bit of upside above that 2x content multiplier. More importantly, how does your overall breadth in the auto and EV landscape limit your exposure to any individual customer? Thank you.
Terrence Curtin, CEO
You have a lot of questions in that question, so I'll do my best. First, let's discuss 2023 outgrowth. Our auto business grew over 12% in 2023 versus auto production, which rose by 3%. That equated to a 900 basis point outperformance, with two-thirds of that due to content and the remaining third driven by pricing. Looking ahead, we feel confident about expecting a 4% to 6% outgrowth over production. I want to emphasize that we don't typically focus on one OEM or platform over another, but our EVs are expanding due to automotive as a scale business. We will continually adapt to provide the best connectivity solutions globally, and we strongly believe the trend of EV production growth will persist next year, long-term driving top line growth opportunities for TE.
Sujal Shah, Vice President of Investor Relations
Okay, thank you, Luke. Can we have the next question, please?
Operator, Operator
Next, we'll go to Scott Davis at Melius Research.
Scott Davis, Analyst
I wanted to dig deeper into the cost structure. You guys have done a fair amount of heavy lifting to probably lower fixed costs compared to a couple of years ago. How do you see your cost structure, fixed costs plus ongoing labor inflation? Is your cost position in 2024 similar to what it was in 2023, or is it actually lower?
Heath Mitts, CFO
It's a good question. Labor inflation is real, and it's a consideration for our equation. I think our fixed cost base is going to be lower due to some restructuring efforts related to consolidating our operational activities, especially in Europe. We've shifted operations from Western Europe to regions where our supply chain has migrated, which could be Eastern Europe, Northern Africa, as well as Mexico. As for inflation in areas like metals and resins, they remain elevated but manageable. Overall, I believe we are in a better position in 2024 than we were last year, but we still need to manage labor inflation and other rising costs.
Sujal Shah, Vice President of Investor Relations
Thank you, Scott. Can we have the next question, please?
Operator, Operator
We'll go next to Christopher Glynn at Oppenheimer.
Christopher Glynn, Analyst
Thanks. Good morning. I was curious about the non-auto parts of transportation. What are you seeing in terms of cycle projections for that segment in 2024, particularly the first half versus the second half? I know you're very broadly based across platforms, customers, and applications within that sector. Secondly, could you address your Sensors business? I believe you have some attrition or rationalization happening there?
Terrence Curtin, CEO
Let me break those into two parts. In commercial transportation this year, both in North America and Europe have shown nice production growth, driving our overall growth. In contrast, China has been relatively weak, especially within construction equipment. While there was flat production numbers in 2023, we expect further weakness in China for 2024, especially in construction, while some recovery may be present in the truck and bus segment. For the initial half of the year, I expect a slower market. That said, we have content outperformance that will buffer some of that softness. Regarding the Sensors business, we are implementing pruning efforts. As mentioned earlier, we're expecting about a $50 million exit rate in terms of focus areas as we enhance margin performance, aligning better with automotive and industrial applications in the long run.
Sujal Shah, Vice President of Investor Relations
Thank you, Chris. Can we have the next question, please?
Operator, Operator
We will take our last question from Shreyas Patil at Wolfe Research.
Shreyas Patil, Analyst
Hey, thanks for taking my question. Regarding the Industrial Equipment business, you've mentioned the destocking trends, but I'm curious about what you're seeing on CapEx deployments. We've heard from some automakers about deferring EV investments, which I believe has significantly impacted your business. Additionally, could you elaborate on the payback from restructuring investments made in 2021 and 2022? Should we anticipate seeing this payback reflected in 2024?
Terrence Curtin, CEO
In terms of Industrial Equipment, we do notice mixed signals on CapEx with continued stability in orders among our customers, despite some of the destocking changes. Pockets of strong investments remain, particularly in EV battery plants and expansions, while other sectors like consumer electronics are experiencing weakness and automation demand. It is a diverse landscape within Industrial Equipment and impacts vary by sector. As for restructuring, we see a typical payback period of about two years for the charges, especially regarding the initiatives we took in 2021 and 2022. This adds to our confidence in improvement through fiscal 2024.
Sujal Shah, Vice President of Investor Relations
Thank you, Shreyas. We don't have any further questions, so please contact Investor Relations at TE if you have additional questions. Thank you for joining us this morning, and have a nice day.
Operator, Operator
Today's conference call will be available for replay beginning at 11:30 A.M. Eastern Time today, November 1, on the Investor Relations portion of TE Connectivity's website. That will conclude the conference for today. You may now disconnect.