TE Connectivity - Q2 2023
April 26, 2023
Transcript
Operator (participant)
Ladies and gentlemen, thank you for standing by, welcome to the TE Connectivity Second Quarter 2023 Earnings Call. At this time, all lines are in listen only mode. Later, we will conduct a question-and-answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. As a reminder, today's call is being recorded. I'd now like to turn the conference over to our host, Vice President of Investor Relations, Sujal Shah. Please go ahead.
Sujal Shah (VP of Investor Relations)
Good morning, thank you for joining our conference call to discuss TE Connectivity Second Quarter 2023 Results. With me today are Chief Executive Officer, Terrence Curtin, and Chief Financial Officer, Heath Mitts. During this call, we'll 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 section 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.Let me turn the call over to Terrence for opening comments.
Terrence Curtin (CEO)
Thanks, Sujal. I do appreciate everyone joining us today to cover our results for our second fiscal quarter, along with our outlook for our third quarter. Through the details on the slides, I want to take a moment to discuss our performance this quarter within the backdrop of what remains a dynamic market environment, along with what we're seeing versus our last call 90 days ago. We continue to operate in a world with cyclicality in certain end markets, as well as impacts from foreign currency exchange and inflation. At the same time, the strategic positioning of our portfolio around key secular trends. These include global growth in electric vehicle adoption, momentum in renewable energy adoption, growth in interventional medical procedures, and wins in the artificial intelligence space. Growth from these trends are enabling us to offset the impacts from.
We delivered 8% organic sales growth that was above our guidance and adjusted EPS that was ahead of our guidance as well. We remain on our journey to expand margins through a combination of growth, price increases, and cost reduction actions. As we discussed back in the first quarter, our plan was to drive margin improvement from the beginning of this year as we enter next year. We are executing to this plan, and you see this in the sequential margin progression in our transportation segment in the second quarter and the sequential margin expansion at the company level that's implied in our third quarter guidance. You all know that an important part of our business model is strong cash generation.
With supply chain driving our inventory levels down, and along with our team's strong operational performance, inventory reduction helped to drive free cash flow improvement of over 35% year-over-year in the first half and enabled us to continue strong return of capital back to our owners. Let me now provide some color on markets that we're seeing and other updates. With the macro environment we're experiencing, it is driving uneven impacts across our portfolio. We have some markets that are growing, some that are remaining very stable, and some that are cycling. you know, this is truly evident as we go through our second quarter results today, where all our businesses in the transportation and industrial segments grew. While both of our business in the communication segment declined.
Our view of the transportation end markets remain consistent with our prior view. We continue to expect auto production to remain roughly flat at approximately 20 million units per quarter as we move through the second half of our year. Our growth will continue to be driven by content outperformance and our electric vehicles. In our industrial segment, when we spoke to you last quarter, all of our businesses were strong, and our second quarter sales results reflect this. We continue to see strength in three out of our four businesses. Our commercial air business continues to recover. Our medical business had record quarterly sales. Our energy momentum in renewable applications. In our communication segment, orders and sales remain weak due to both the market weakness and inventory corrections across our customers' supply chain.
Last quarter, we talked about being in a $450 million-$500 million quarterly revenue range, and we now believe we will be at the lower end of this range for the next couple of quarters to get worked off by our customers. Finally, before I get in the slides, I do wanna highlight the way we think about long-term value creation and that it's remained unchanged. It is built on the pillars of secular growth and increased content around the markets where we have positioned TE, strong free cash flow generation, a disciplined approach and levers which will enable margin expansion as we move through this year, as well as longer term. With that as a quick overview, let me get into the slides and discuss additional highlights that are on slide three.
Our sales in the second quarter were $4.2 billion. It was ahead of our guidance driven by the transport. We saw organic growth of 12% in the transportation segment and 15% in the industrial solutions segment, with organic growth in all businesses in these two segments. In our communications segment, the decline was in line with our expectations. On a reported basis, sales were up 4% year-over-year and included approximately $100 exchange headwinds. In the quarter, our orders grew 10% sequentially to $4 billion. I will talk more about order trend dynamics by segment on the next slide. Adjusted EPS was ahead of our guidance at $1.65 and included $0.17 of currency exchange and tax headwinds versus the prior. Adjusted operating margins came in at 16%.
Free cash flow for the first half of the year was very strong at approximately $850 million, with nearly $800 million being returned back to our owners. We do expect continued strong cash generation in the second half, along with strong free cash flow conversion this year. We are expecting our third fiscal quarter sales to be approximately $4 billion and adjusted EPS to be around $1.65. Our guidance represents a sequential decline in sales of flat EPS, which implies margin expansion from the second to third quarter. We continue to be confident in margin expansion as we move from the first half, largely driven by our transportation segment. Just moving away from the financials for a second, we are pleased that we were named among Fortune World's Most Admired Companies.
This is the sixth consecutive year that TE has received this recognition, which measures a number of criteria, including a company's investment value and product quality for responsibility. Let's talk about orders, and let's move to slide four, and we'll talk about order trends as well as what we're seeing in the markets. The sequential growth of our orders to $4 billion reflects increased stability in the supply chain as well as our team's ability to improve the service levels to our customers. I think the key take is that we're continuing to see stability in transportation, overall strength in the industrial market, and continued weakness in communications. Looking at orders by segment, our transportation orders grew 12% sequentially, and this reinforces the stability I mentioned.
In the industrial segment, we saw sequential businesses with continued momentum around renewable applications in our energy business, improving trends in commercial air, as well as our medical business, where we continue to see recovery. One change that we've seen since last quarter is that order patterns are indicating moderation in certain industrial equipment end markets. In segment, orders reflect a continued weakness in the Data & Devices that we've talked about for a few quarters now, as well as the expected moderation of the appliances market. With that brief overview around orders, let's get into the year-over-year segment results that are highlighted on slides five through seven. You can see the details on each of these slides. Starting with transportation, sales growth was strong, up 12% organically year-over-year, with organic growth across all businesses.
Our auto business grew 14% organically versus auto production that was up low single digits versus the prior year. The outperformance was driven by our leading position in electric vehicles, electronification trends in the vehicle access from pricing. As we previously discussed, we were lagging in the recovery of inflationary pressures, but we've implemented price increases which help us enable margin expansion as we go forward. While overall auto production is expected to remain flat for this fiscal year, we continue to expect production of hybrid and electric vehicles to be approximately 25% in 2023. As you know, we generate 2x extra content in EV platforms versus ICE vehicles. We expect our content per vehicle to continue to expand as we move through this year.
In commercial transportation, we saw 7% organic growth driven by North America and Europe, partially offset by declines in China. We remain excited about our leading global position in electric vehicles for commercial transportation market. We continue to make significant progress with design wins at all the key truck, bus, and specialty vehicle OEMs. We are providing a broad range of high voltage connectivity products, which are enabling our customers to solve fundamental challenges that they face in the EV space. These include 1,000 volts throughout the vehicle, increasing the speed of battery charging, and withstanding the harsh environment that's expected in a heavy truck application. Turning to our sensors business, we had 9% organic growth, which was driven by automotive applications as we see increased volumes from our new design wins. Adjusted operating margins were 16.6% as expected.
While the dynamics of price versus inflation caused year-over-year impacts to margin, we saw an 80 basis point sequential improvement in the quarter reflecting the progress that I mentioned. We expect adjusted operating margins to improve sequentially again in the third quarter in the transportation segment to get back into the high teens in the second half of the year. Moving to the industrial segment, sales increased 15% organically year-over-year with organic growth across all businesses. Our medical business sales in the quarter was a record at $200 million, and it had 26% organic growth. The interventional medical market was depressed following COVID, but now is back up to pre-pandemic levels, and it's nice to be talking about growth in medical again.
In our energy business, we continue to see the growth momentum with 28% organic growth, this is entirely driven by renewable applications. We continue to drive growth both from wind and solar applications, the addressable market for TE and renewable applications has a double-digit CAGR. We're helping enable utility scale solar and wind farm deployments around the world. When you get into these renewable applications, we provide switchgear and high voltage connectivity products. You know, just to give you a little bit perspective, when we talk about high voltage and energy, these are mentioned in kilowatts, not volts like we talk about in the car. It's very important that the application knowledge we bring on these higher wattages are very important to enable these renewable applications. Through our broad product portfolio, we are helping our customers reduce installation and maintenance costs.
You can see our strong positioning playing out in the growth of the renewable applications. Now in our energy business, it's going to represent nearly 25% of our total revenue. Turning to our aerospace, defense, and marine, our sales were up 19% organically with ongoing improvement in the commercial air market. Finally, in the industrial equipment business, our sales were up 3% organically with growth in Europe, partially offset by weakness in the Americas and China. Adjusted operating margins for the segment came in at 14.6%. This reflects an impact from business mix as well as the impact from acquisitions and divestitures. We expect margins to expand sequentially into the third quarter and continue to target high teen margin for our industrial segment.
Let me turn to the communication segment, where our sales were down as expected at 20% organically, but within the $450 million-$500 million range provided last quarter. The appliance market is down as we expected and declined across all regions. In Data & Devices, we were down due to market weakness and supply chain inventory digestion, as I discussed earlier. Communications adjusted operating margins were 16.3%, as we expected. As I mentioned earlier, we expect quarterly segment sales to be at the low end of the range we gave and closer to the $450 million. We think it's going to be there for the next couple of quarters. We do think adjusted operating margins at this lower volume will be able to maintain in the mid-teens.
As we look beyond the near term, I do want to highlight that our D&D business continues to have strong design win momentum in next generation platforms that's serving the cloud data center market. When you get into the rising complexity in artificial intelligence, it drives low latency architectures that need both high-performance processing as well as interconnect. I'm pleased that we're engaged with the key ecosystem providers, including leading semiconductor and cloud companies. We have already generated over a billion dollars of new design wins in AI and server applications and expect new programs to then begin ramping up in fiscal 2024. With that as a backdrop of the segment performance, let me turn it over to Heath who will get into more details on the financials and our expectations going forward.
Heath Mitts (EVP and CFO)
Well, thank you, Terrence. Good morning, everyone. Please turn to slide eight where I will provide more details on the Q2 financials. Adjusted operating income was $664 million, with an adjusted operating margin of 16%. GAAP operating income was $537 million and included $62 million of restructuring charges, $57 million of other non-cash charges related to divestiture activities, and $8 million of acquisition-related charges. Year to date, we have taken $166 million of restructuring charges and would expect full-year restructuring charges to now be approximately $250 million as we continue to optimize our manufacturing footprint and improve the cost structure of the organization.
Adjusted EPS was $1.65, and GAAP EPS was $1.34 for the quarter and included restructuring, acquisition, other charges of $0.31. The adjusted effective tax rate was approximately 20% in Q2. For the third quarter and for the full year, we now expect our adjusted effective tax rate to be approximately 20%. Importantly, as always, we continue to expect our cash tax rate to stay well below our adjusted ETR for the full year. Let's turn to slide 9. Sales of nearly $4.2 billion were up 4% reported and up 8% on an organic basis year-over-year. Currency exchange rates negatively impacted sales by $155 million and adjusted EPS by $0.15 versus the prior year.
We expect FX to have a modest negative impact for both sales and EPS again in our third quarter on a year-over-year basis. Adjusted operating margins were 16% in the second quarter. To provide some perspective, we saw about 200 basis points of headwind to our adjusted operating margins year-over-year as a result of lower volumes in our communication segment, combined with the impacts from currency exchange rates. As we go forward, we remain confident about margin expansion in the second half, and it's important to note that we are not dependent on higher volumes to drive margin expansion. We have successfully implemented pricing actions to offset inflationary impacts in our transportation segment, and this will drive margin expansion at the company level as we move through the second half of our fiscal year.
We also expect that industrial margins will modestly expand in the second half from Q2 levels. Communication should remain in the mid-teens at the expected volume levels that Terrence mentioned. It's a good story here. In the quarter, we once again demonstrated our cash generation model of our business with cash from operations of $634 million. Free cash flow for the quarter was approximately $445 million. Through the first half of our fiscal year, free cash flow was $845 million, up 37% year-over-year, with roughly $785 million returned to shareholders through share buybacks and dividends. As you may recall, a few quarters ago, I indicated that we would look to drive our inventory levels lower as we see performance improving in our supply chain.
As Terrence mentioned earlier, we reduced inventory again this past quarter, which contributed to our free cash flow performance. We continue to remain disciplined in our use of capital, and our long-term strategy remains consistent. Which is to return 2/3 of our free cash flow to shareholders and use 1/3 for acquisitions over time. I want to stress that our capital structure remains very strong, as evidenced by our robust credit profile, ample available liquidity, and ease of access to the capital markets. We are maintaining a consistent financial policy and a strong balance sheet, which are integral parts of our business model. Excuse me. Before I turn it over to questions, let me provide a quick recap. The strategic positioning of our portfolio is enabling us to deliver strong results from secular growth trends, despite cyclicality in certain end markets.
From a market perspective, the transportation and industrial segments are consistent with our view 90 days ago, with ongoing cyclical weakness in our communication segment, as we expected. Our focus in the second half is to continue to generate strong free cash flow and expand our adjusted operating margins, driving to a higher margin rate as we enter fiscal 2024. We continue to demonstrate our strong cash generation model with a strong balance sheet that can support investments for growth. We remain excited about the opportunities we have ahead of us to drive long-term growth, margin expansion, and value creation for all of our stakeholders. With that, let's open it up for questions.
Sujal Shah (VP of Investor Relations)
Thank you, Heath. Chris, can you please give the instructions for the Q&A session?
Operator (participant)
Certainly. At this time, I'd just like to remind everyone, in order to ask a question, press star then one on your telephone keypad. In order to have time for all questions, each participant is limited to one question. If you'd like to ask a follow-up question, please press star one to return to the queue. The first question is from Mark Delaney with Goldman Sachs. Your line is open.
Mark Delaney (Managing Director and Senior Equity Analyst)
Yes. Good morning. Thanks for taking the question. Could you comment in more detail?
Terrence Curtin (CEO)
Hey, Mark.
Mark Delaney (Managing Director and Senior Equity Analyst)
Good morning. Could you comment in more detail on your end market expectations for the balance of the year and how that's being impacted by the various cyclical crosscurrents and content drivers? On the topic of content, maybe elaborate, if you could please, on China in particular and how TE's content per vehicle and share compares between China domestic auto OEMs and then your content with the multinational OEMs.
Terrence Curtin (CEO)
All right. Yeah. Thanks, Mark. Let me start with the first part of that, which is what are we seeing in the various markets. You know, some of this will be repetitive, but I'll add a little bit of color. Clearly, there's unevenness of what we're seeing. I think with what we see in orders as well as the markets, it is, you know, most of the industrial space continues to be very strong. You have stability in transportation, and you have communication markets where, you know, you do have inventory correction and some market weakness. I think you have to keep it in the framing of those big buckets.
I think if you click down, and I think about transportation, you know, transportation is still, and automotive is still well below the 90 million ± units it had back in 2019. We've sort of been now for three years in a row around 80 million units. You know, we're still off 11% or so on the production side.
One of the things that you can see comes through and, you know, it's been built up over time is, you know, our automotive business is up about $1.5 billion over the same period while production's down. It is the content trends we talk about every quarter. It is about... It's also about, you know, the chunk of that, the vast majority comes out of electric vehicles. I think it shows, you know, where we position the business. Also, we do expect this year in excess of $2 billion of our automotive revenue will be from electric vehicles. You know, that's something we're proud of, and it also proves the content. Even with production staying flat, as we've said, you're gonna continue to see that content growth.
The one thing we do have this year in our growth of content, you know, is the benefit from the pricing that we put in to offset inflation. That's about 300 basis points more on the growth than we would normally have. I do feel with even the guide we said where margin will be up next quarter, implied in our guidance versus this quarter really reflects those dynamics. I think when you get into the industrial businesses, we have three markets that still remain strong. Like we talked about last quarter, our industrial equipment market, you know, showed some plateauing in some areas, and we've seen a little bit more weakness in our orders in certain areas in the industrial equipment market. You're gonna continue to see strong growth in our energy business due to renewable applications.
If you take this quarter, we grew high 20%. Over since 2019, you know, it's high single-digit growth on a CAGR basis. It's really what we've done to position TE around renewable and turn energy into a growth business. Medical, it's really nice that you see the record revenue. I also think that's where we position ourselves in interventional procedures, and I think that's something that, you know, as we get supply chain corrected and growth back there again can be higher single digits. Com Air, we're still in a recovery mode. Our revenue is still below pre-COVID levels. Dual-aisle is not back. I still think there's upside there, as that entire space recovers and the supply chains get better. In communications, really what's happening there is, you know, well documented.
Cloud spending pause we have throughout everything, corrections across the supply chain and inventory, whether it be at the OEM, the ODMs, any of the contract manufacturers that are there, as well as distributors. We do think that's gonna be with us at least the next couple of quarters. I, as I said on the call, feel very good that the design wins we're getting on next generation artificial intelligence, which comes, you know, on the back of cloud, where our teams are gonna get there with the highest speed interconnects that are required, really like where we're positioned there once that inventory does get worked off and we move forward. Clearly some moving pieces, but I do think where we've talked to you about content is coming through and has come through during the cycle that we've been in.
Now let me turn to China, your second question. You know, I think the first thing we all have to remember is that China just printed its GDP report, and that was up 4.5%. Clearly, as it comes out of recovery, you know, it's been choppy. For TE, what we see in China is the things in the communication segment look very similar to the overall segment, not only in China but globally. Those markets are weak, lot of supply chain correction. When you look at our industrial segment, our bigger play in the industrial segment in China is around our industrial equipment. That, you know, remains weak, and, you know, we're looking to see if that does get some positive momentum. Then the automotive and transportation side, you know, we grew last quarter.
We expect to grow year-over-year this quarter. We continue to see the growth from the momentum we have there. I think what's important is when you think about it, China is the grower of electric vehicles globally. You see that in our growth. We have even share when you look at whether it's a multinational or local, our share's very even. It's something our teams have worked very hard to make sure we get. You know, as EVs get adopted, whether it's in China or elsewhere in the world, it's gonna be something that drives content growth, and it's part of our 4%-6%. We don't see any change in our content momentum related to any OEM change. What's important for TE is we're always agnostic to OEM.
We're trying to win and scale, you know, what we do to make sure that the auto industry has further adoption of electric vehicles out to the consumer.
Sujal Shah (VP of Investor Relations)
Okay. Thank you, Mark. Can we have the next question, please?
Terrence Curtin (CEO)
The next question is from Chris Snyder with UBS. Your line is open.
Chris Snyder (Equity Research Analyst)
Thank you. The auto business was up 16% organically in the first half of the year, so, you know, about double-digit outgrowth versus production, you know, 2x the targeted levels. How should we expect this to trend into the back half of the year? You know, the company in the prior response, you just called out about 300 basis points of price, I believe, for auto this year. Is the back half stronger than the first half as the recent price increases are implemented, or is that roughly flat throughout the year? Thank you.
Terrence Curtin (CEO)
Now, thanks for the question. you know what I'm probably gonna say first is please be careful looking at content in any quarter or short period of time because you do get into supply chain elements as you get in there. I do think to your comment around price, I do think 300 basis points is gonna be the benefit as we continue and as price rolls in. That will, you know, continue to take for the year, drive us above the 4%-6% range that we normally talk about. Price will be a part of that when we look at this year. I think the other thing, and I know it'll be a little bit, probably redundant with what I just said, you know, we continue to expect that electric vehicles will be 25% of global production.
I do think you're gonna continue to see that set up be very good. I think overall content per vehicle and how it trends over time is the most important factor to look at. We talked about this a lot on these calls a few years ago. You know, back in 2018, we were in the low 60s. We're in the low 80s today. That just proves it's due to electric vehicle content. You know, as global supply chains continue to improve and our service levels go up, you're gonna have some of these inter-quarter impacts at times. Net-net, feel very good about where we're positioned on content growth.
Sujal Shah (VP of Investor Relations)
Okay. Thank you, Chris. Can we have the next question, please?
Operator (participant)
The next question is from Wamsi Mohan with Bank of America. Your line is open.
Wamsi Mohan (Senior Equity Research Analyst and Director)
Yes, thank you. Good morning. I was hoping to get some incremental color on the margins in Q2 where you made progress in transport, but industrials turned a bit lower. Also, the decremental margins on a year-on-year basis was much higher than normal. What drove that and how should we think about the overall margin and conversion margin trajectory through the course of this year? Thank you.
Heath Mitts (EVP and CFO)
Hey, Wamsi. This is Heath. I'll take this one. Well, listen, I think the single biggest impact if you look at the TE margins on a year-over-year basis is the pretty significant decline in the communications segment. You have to remember, if you go back a year ago, you know, we kind of framed up the communications segment margins as a bit overheated, and it kinda showed how much volume leverage you could get at those types of volumes you were getting. When you have a business that goes from roughly, you know, a quarterly run rate of between $600 million-$650 million down to $450 million-$500 million, that de-leveraging is steep and, you know, you get brought back to reality pretty quickly.
You know, we expected this. We were certainly, you know, didn't expand our cost structure or anything when our revenue was higher, knowing that it would cycle down at some point. Add to that, if you, if you add in the impact of FX, those together are over 200 basis points of impact year-over-year to the company margins. Quite honestly, if you go back and look at our third quarter, which is our June quarter that we're guiding to now, and you look at that from last year, we're gonna have similar kind of impact. And that impacts both, whether you wanna say the year-over-year margin. That's gonna have that same impact. You know, that's implied in our guidance, as you can see.
If you take a broader picture and say, where does it look like going forward from here, right? We're kind of running in this, you know, $4 billion range of revenue, you know, ±. You know, I'm not guiding out beyond the quarter that we just gave, but let's just assume we're kind of in that range. Transportation's kind of in this $2.4 billion-$2.5 billion quarterly in our back half of our fiscal year. Industrial running between $1.1 billion and $1.2 billion, right? You get into the communications business, which, as Terrence said, is going to be closer to $450 million quarterly run rate for the next few quarters.
You know, I think when you look at that and you say, "Okay, what's that, what's that gonna do for margins?" Within transportation, the price that we've discussed so far in this call, and Terrence just walked you through in a prior question, the price that we have been successful in implementing, that was a long time coming and was negotiated contract by contract with OEM by OEM, is largely in effect. We'll get the full benefit of that as we work our way through the second half of the year. It gives us confidence in our margins, in addition to all of the outside growth versus market that we get from content. We're feeling more confident around the transportation margins as we look forward. The industrial side is a bit more challenged, right?
We've got a business in here that the industrial equipment business, which is feeling the pressure on the order front and certainly as it translates into the revenue side of things. That is our highest margin business within the segment. You saw that as we moved from our fiscal Q1 into our fiscal Q2, that, you know, while industrial equipment grew, albeit modestly at 3%, the rest of the segment far outgrew it. If you look at how that impacted the mix within the industrial equipment, or I'm sorry, within the industrial segment, it did have an impact. Will have an impact as we work our way through the rest of the year.
The good news is, as we're seeing revenue increase for commercial transportation within aerospace and defense, Terrence also mentioned medical, and then obviously our energy business, which we've highlighted on this call. You know, those, albeit they have structurally lower margins than the industrial equipment business, volumes do help. Our commercial transportation, or I'm sorry, our commercial air business is not back to pre-pandemic levels yet. We are still catching up on the margin front. There's some things trending in the right directions. There's also some things cycling down with our industrial equipment business that is putting pressure on those margins. We do expect from a modeling perspective, Wamsi, if you wanted to assume a modest improvement as we move from our Q2 levels through the rest of the year within the segment.
Communications is pretty straightforward. Listen, it's roughly $450 million quarterly level. Mid-teens is a good. I think we've discussed that already. Hopefully, that answers your question. Happy to take anything else.
Sujal Shah (VP of Investor Relations)
Thank you, Wamsi. Can we have the next question, please.
Operator (participant)
The next question is from Amit Daryanani with Evercore. Your line is open.
Amit Daryanani (Senior Managing Director in Equity Research)
Perfect. Thanks. I guess, you know, I was hoping if you folks could spend a better time just talking about from a supply chain perspective, you know, what are you seeing from a component availability and then also the inflation side? Really on the inflation side, I'd love to understand if you think the price increases so far are adequately offsetting this, or do you think that more that needs to be done here? Then just secondly, if I could just get the clarification, could you just remind me what are you estimating from an auto production perspective in the June quarter? I think IHS is at 21.5 million units. Love to get a sense of what are you kind of taking into the guide from an auto production side. Thank you.
Terrence Curtin (CEO)
Yeah, sure, Amit. Let me do the last one first. All year, we've sort of said we're gonna be around 20 million units of auto production to 80 million in total. It's just gonna be a flat environment, and that hasn't changed from the beginning of the year. That's pretty much how we think about it. I know there's some differences of heavy vehicles that are in the IHS number that we put in our commercial transportation, but we viewed flat. On your first about supply chain inflation and price. I wanna give a little bit before I get into supply chain is service levels of how we're servicing our customers. Because I do think whether it is supply chain, whether it is the orders that I talked about earlier, is they're all interrelated.
It's why when we talk about some markets being strong or stable, it does come into how we're servicing our customers. What I would tell you at the overall TE level, our service levels are back to 2019 at the overall TE level. Some people are higher, some people we're servicing better as supply chain has improved. There are markets like commercial air and medical, which were late in the recovery. I would tell you our service levels still need to improve. The main reason the service levels need to improve is we're still seeing supply chain impacts. At the big picture, what I would tell you is the availability across the global supply chain has improved. Our customers are feeling it from us, and I think that's a key element that also explained why we see some stabilization and backlog.
I think our orders going up sequentially is a positive factor. Now, from an inflationary impact, what I would tell you is places like trade and logistics, we have seen deflationary impacts. I would tell you elsewhere, it's sort of just moving sideways. I wouldn't say it's getting worse, I wouldn't say it's getting better. It's why when we feel with the things that we've done on pricing, especially in transportation, where we're lagging, we do think we're really in a mode of recovering the inflation that we've incurred over the past 2 years, and that's why we feel good about the margin impact. We do expect that the pricing will stick.
Sujal Shah (VP of Investor Relations)
Okay. Thank you, Amit. Can we have the next question, please?
Operator (participant)
The next question is from Joe Giordano with TD Cowen. Your line is open.
Joe Giordano (Managing Director and Research Analyst)
Hey, guys. Good morning.
Terrence Curtin (CEO)
Hey, Joe.
Joe Giordano (Managing Director and Research Analyst)
One just a quick clarification and then a question on in industrial and some of your other markets here. Just in China on EV, do you have a big spread between like, you know, a high-end Tesla type vehicle and a low-end kind of local manufacturer in terms of content? Bigger picture, if I look at, you know, something like industrial equipment or IT, obviously, those are moderating here. Even with moderations, they're still up a lot, even adjusted for inflation or M&A from like a pre-COVID level. If those markets... Like, how much of a real reset should we think is reasonable in like an economic downturn for something like that's moderating now but still up a lot over like a, you know, a fairly short period? Thanks.
Terrence Curtin (CEO)
Yeah, let me take both of those. First off, when you think about content per vehicle, I think what you have to start with, especially with China, is anytime you move from an electric vehicle to from a combustion engine, that's a content growth element for us because we're on both multinationals and locals. I do think the bigger thing is to be thinking about not comparing content between. It's really about it drives content growth because we have a good position on them. Depending upon class of car you're always gonna have, whether it's a combustion or an electric vehicle, it's gonna come into the features of what's in the vehicle. I think the real thing is, as I think China's over 20% of new cars sold are electric vehicles. All that is good for us.
It's really, you know, a key driver to our growth. We've always said Asia overall is the growth driver of electric vehicles. The 25% of the 80 million units that we've said we think it's gonna be at this year, 70% of those units are gonna be in Asia, and certainly China. China is the largest, so it's only positive for us. On industrial equipment, I think the element that you come into, and let me add a little bit of color to your question is, you know, industrial equipment's a very broad space. There's factory automation, there's building automation, things that go into construction, there's process automation. There's a number of different buckets. What I would tell you, in areas around factory automation that supports consumer electronics, you know, that has.
There will be some element of where that will downdraft. Areas around building automation. Also, you've seen weakening there where you get into, you know, the commercial construction side. I don't expect it'll be what we see in our communication segment, but you will see it come down a little bit as some of those markets moderate. There's also the element of our service levels have improved across that market as well, even though it's up. You know, we are seeing some of our OEM customers pull out some buffer stock. You know, we do think there can be some moderation. Right now, you can probably think about it, the growth in the other three businesses can offset some of that moderation.
You know, we got to continue to watch it and make sure it stays contained in some of the sub-markets in the industrial space.
Sujal Shah (VP of Investor Relations)
Okay. Thank you, Joe. Can we have the next question, please?
Operator (participant)
The next question is from Scott Davis with Melius Research. Your line is open.
Scott Davis (Founding Partner, Chairman, and CEO)
Hey, good morning, guys.
Terrence Curtin (CEO)
Hey, Scott.
Scott Davis (Founding Partner, Chairman, and CEO)
I wanna switch gears a little bit, and you mentioned AI a couple of times in the prepared remarks. How material is this upgrade cycle? Is this kind of a nice to have, or is this something that could be kind of a multi-year, pretty powerful, demand driver for you guys?
Terrence Curtin (CEO)
No. Super, Scott. Yes, Scott, we talked about it in there. We talked about some of the design wins because it's really just the next extension of what you get into high speed. One of the things that's nice is where we position ourselves in cloud. That will be a multi-year cycle as you get into those higher speeds. Also the importance of, like I said, the low latency you need. Those design wins we're getting today will start in 2024, and I think it could be very similar to the cloud cycle that we saw over the past three-four years.
I think as we work through the whole communications and the telecom and the cloud inventory work off, once that settles, I think you're gonna continue to see content growth that will be both from reinvigorated cloud investment plus the AI element that will really drive our D&D business, as you get into 2024 and 2025 and beyond.
Sujal Shah (VP of Investor Relations)
Okay. Thank you, Scott. Can we have the next question, please?
Operator (participant)
The next question is from Christopher Glynn with Oppenheimer. Your line is open.
Christopher Glynn (Managing Director and Senior Analyst)
Yeah, thanks. Good morning. Just wanted to dig into transportation revenues a little bit more. Looks like it was well above your guidance. Production may be in line with guidance, but there's always some timing around supply chain and EV launches pull forward or more likely push out a little bit. Sounds like you expect consistent revenue in the back half. Just curious what really changed there with the volumes that came through versus expectations.
Terrence Curtin (CEO)
When you look at it, you know, one of the things we saw is that, you know, a lot of our over performance in this past quarter was really out of Europe. You know, Europe was an area that, you know, coming into this year, and I don't think we were atypical of anybody else between what was going on from a utility perspective and energy costs as well as the war. I would tell you, in our transportation business and our OEM customers, you know, they've been building more aggressively than we would have thought when we came into it. China's a little bit slower, which sort of gets you to the flattish and really not a change in our view. What's really nice is, you know, we were able to service them when they wanted it here.
On the back half, the back half isn't that much different, when you go first half, second half. When you think about we're gonna be down sequentially a little in transportation, that's really just due to the choppiness I talked about in China.
Sujal Shah (VP of Investor Relations)
Okay. Thank you, Chris. Can we have the next question, please?
Operator (participant)
The next question is from Matt Sheerin with Stifel. Your line is open.
Matt Sheerin (Managing Director and Senior Equity Research Analyst)
Thanks, and good morning, everyone.
Terrence Curtin (CEO)
Hey, Matt.
Matt Sheerin (Managing Director and Senior Equity Research Analyst)
I had a question regarding your distribution channels. Terrence, I know that you've got the big concentration of distribution within your industrial markets, and I imagine you're seeing some destocking at the industrial equipment market. Are you seeing that play out anywhere else or expectations that the distributors are gonna start to cut inventories, particularly as lead times continue to come in?
Terrence Curtin (CEO)
Sure. A couple of things, Matt, just to frame everything. When you really look at where we play in the distribution channel, certainly in our communication segment, a big chunk goes through to our channel partners. You're exactly right, a big chunk goes through in our industrial business and our aerospace business. What I would tell you is in our aerospace business, as that continues to ramp, orders continue to grow, backlog builds, and certainly we need to continue to increase our output to service, you know, the backlog and get service levels where they were before the pandemic. What you see is you sort of see trends in the distribution channel that do mirror what we talk about in our different business verticals.
We've been seeing already, and it started a few quarters back with our distribution partners, those that were around our communication segment units. You know, order levels have come down. They have been trying to manage their inventory. It's probably at, it's at the higher end of their range. You know, that's something that when we talk about what we're gonna be at a $450 million in the next couple of quarters, that includes OEMs bringing down inventory, ODMs bringing down inventory, and certain our distribution partners getting to a better inventory level. I would tell you in the industrial space, we have seen some impacts, but I would also say part of it comes to service levels.
During COVID, when we could not meet service levels due to supply chain, certainly our customers would go to our distribution partners to get. Which is part of the role they play. We have seen as our service levels improve, you've seen buffer stocks taken out, and we have seen order levels weaken in certain of those industrial markets. It's not even across all of them like we see in communications. It's around the markets that we talked about that can be building automation and things like that. We do see that the inventory levels, you know, are at the higher end of the range that our distribution partners would want to be at. That's why their inventory levels are a little bit down, but not to the extent that we see in the communication segment.
Sujal Shah (VP of Investor Relations)
Okay. Thank you, Matt. Can we have the next question, please?
Operator (participant)
The next question is from Samik Chatterjee with JPMorgan. Your line is open.
Samik Chatterjee (Managing Director and Equity Research Analyst)
Yep. Hi. Thanks for taking my question. I guess, thanks for all the color about the individual end markets. I was just trying to think of it in more aggregate terms when we take all your outlook for the different end markets, export and order activity here. Are we comfortable that, in relation to cycling paths or trough in relation to aggregate autos as you sort of match all those outlooks up by the end markets? Maybe if you can touch on autos there. Particularly, I know you mentioned choppiness in China, but IHS also has a pretty material step up in production in China all through the year. Is that what you sort of are maintaining more caution around, or are you seeing it in the autos yet? Thank you.
Terrence Curtin (CEO)
Yeah. No. A couple of things. As I said on our orders in transportation, they were actually up 12%. I think the other thing we have to realize, the China automotive market does a big build in our December quarter. Typically, you do have a step down in China, and we sort of view China auto production for the rest of our fiscal year being pretty flat to where it was in the second quarter. We don't see an acceleration of build. I do wanna highlight that typically the December quarter, Chinese auto producers do a big build to meet production targets. As we look forward, it is choppy right now. We're watching it.
Certainly, the price activity that certain OEMs are doing in China, I think is creating a little bit of pause for consumers to say, "Hey, how does this settle out?" The Chinese consumer is an intelligent consumer when it comes to price. You know, there are some things that are creating some near term choppiness, but we view it's gonna be flat from here when we look at auto production in China for the rest of our fiscal year.
Sujal Shah (VP of Investor Relations)
Okay. Thank you, Samik. Can we have the next question, please?
Operator (participant)
The next question is from Steven Fox with Fox Advisors. Your line is open.
Steven Fox (Founder and CEO)
Hi. Good morning. I was just curious on the restructuring charges that you've taken, year to date and plan to date for the full year, how those are flowing through the income statement. When are you getting the benefits? What kind of return on it? It looks like more is going into transportation than other segments, based on what I saw in the slides. Any color there will be helpful. Thanks.
Heath Mitts (EVP and CFO)
Sure. Thanks, Steve. We did. As you recall, when we went out early part of the year back in our initial view into 2023, we said the restructuring would be somewhere around $150 million, which was flat from prior year. In the last call 90 days ago, I said we were reevaluating that. We did. In the discussions with our business and obviously with our board, we've increased that by about $100 million-$250 million. Now you are right. There is chunks. It isn't just in transportation. There is some incremental things we're doing to adjust some cost structure, as you can imagine, in this more accelerated downturn in both the communications and in the industrial equipment business that is driving some of that.
In addition to, accelerating some of the rooftop consolidations in other parts of TE that had been planned that we wanna go ahead and pull in and get done sooner, that we've determined we have the capacity to handle. That's part of it. A bigger chunk of this, as has been the trend over the past couple of years, has been a little bit more in Europe-based. The payback when you start getting into Europe-based, restructuring activity is a little bit longer than what you would think of in other parts of the world, and it just has to do with the demographics that you're dealing with and country constructs and statutory requirements. If you're looking at it, I would say, nor...
Historically, we've said that the payback on our restructuring has been just inside of two years. That's been traditionally kinda how it's blended together. It's a little bit longer for that, especially for this incremental piece. It's probably stretching out to two and a half, maybe not quite three years on the payback of this. It does give us structural benefits in terms of fixed cost reductions, and that's what we're really aiming for, to lower the fixed cost side of the thing and give us more nimbleness to flex the business.
Sujal Shah (VP of Investor Relations)
Okay. Thank you, Steve. Can we have the next question, please?
Operator (participant)
The next question is William Stein with Truist Securities. Your line is open.
William Stein (Managing Director and Senior Equity Research Analyst)
Great. Thanks for taking my question. You all have done an excellent job of highlighting the content growth opportunity in EV and executing against it. At Tesla's recent Analyst Day, they showed how in the Cybertruck and also in the next gen platform, they're transitioning the lower voltage part of the vehicle to a 400 volts architecture, this looks like it consumes significantly content in terms of cabling and I suspect connectors as well. Can you talk about the degree to which this might have already become a trend at other OEMs, or if it's brand new and still on the come, what impact, if any, you think this will have in your business? Thank you.
Terrence Curtin (CEO)
You know, thanks, Will. Yeah, when you, when you get into this, I think the first thing is even if you take a Model 3, which has a simplified harness versus the Model S, we have more content on it. I appreciate harnesses being showed, but you really need to look at when you look at a harness, not the wire, you need to look at the functionality. In some cases, what certainly they're trying to achieve is how do they improve assembly quality as well as they do over the top updates. When you're bringing data, power, and signal together, and it's coming together in what may look like it's a simplified harness, the interconnects on that harness are a lot more complicated, higher pin count, and a higher pin count means an individual contact or connection point.
What you get into while the harness simplifies, and yeah, if we made cable or we were a harness maker, it would probably be bad for us. What occurs is you move to a lot more complicated interconnect, which typically have data, power, and signal running through them, which create a whole bunch of other demons in the architecture that engineers need to solve for. What we get excited about, that actually, while it may lower the amount of interconnects themselves, the more complex interconnects in there are higher content, more highly engineered. Really, what you get rid of is some of the commodity interconnects that are out there. The same goes true if you jump from not only a simplified harness, you get the zonal architecture.
All of that plays into part of the content increase we talk about when we talk about electronification. The trend for us, we like it. It does get into what we do and what we do well. You know, we've dealt with this for decades, and it's gonna continue to evolve. I think certainly when you get to an electric vehicle, it allows you to look at the architecture with a clean sheet versus an ICE vehicle. That's what we like to do. Net-net, it's a positive for us. Appreciate you bringing up the question.
Sujal Shah (VP of Investor Relations)
Thank you, Will. Can we have the next question, please?
Operator (participant)
The next question is from Luke Junk with Baird. Your line is open.
Luke Junk (Senior Research Analyst)
Good morning. Thanks for taking the question. A question for Heath this morning. Heath, as you saw the change in mix develop during the quarter in industrial, I'm wondering how the margins within the sub-segments performed or levered versus your expectations in the areas that are exciting right now. So differently, should we view adverse mix as being more mechanical, or are there levers you can pull to get to that better volume leverage out of those higher growth areas that you're envisioning in the back half? Maybe if you could put a finer point on what you think margins might look like in industrial in the back half, that'd be great too. Thank you.
Heath Mitts (EVP and CFO)
Sure, Luke. Listen, I mean, you know, the thing we're coming off of is a pretty significant, you know, what we're worried about in terms of our worry beads is a mix of the, of that, obviously less of the industrial equipment business, which it, you know, can run anywhere from 500-800 basis points more profitable than the combination of the other businesses in that segment if you combine those all up. Now, you know, the challenge then is obviously we've enjoyed a nice part of the cycle, and the margins that has helped drive for the segment overall is to minimize that impact on the way down. Some of the restructuring and undertaking that I just mentioned is gonna help with that.
The other side is getting more volume leverage out of the pieces, as you mentioned, that we're growing through. You know, there's a lot of moving parts in that I won't wanna, you know, air in terms of how we've layered in acquisitions and the impact from those acquisitions. There's also some of the rooftop consolidations and things that don't get captured restructuring but drive near-term margin pressures. I do feel confident as I think about our aerospace defense business to continue. We've seen it, although we don't share those margins at the business unit level externally. We have seen that business begin to improve as commercial air has come off of a pretty steep decline and is starting to work its way back, but still not back to pre-pandemic levels.
Our medical business is not nearly as profitable, but as we've seen the volume get back to pre-pandemic levels, we've started to see volume leverage there. The other piece is our energy business, which is more of a steady state margin business. There is some challenges that we have as we look at it on the near term. As I look at it and look at where the growth is coming from and how that mix impact goes, I could see it if I was to frame it up, you know, the industrial equipment business, you know, could run another, let's say 50-100 basis points higher as we work our way through into the second half.
The ultimate goal here and, you know, if the team was here to show it, I mean, the ultimate goal is still high, high teens margins within this segment. We know that we do a lot of acquisitions in this segment. Sometimes they're small for TE, but they're more meaningful for the segment. You know, that resets it down some. The goal is still to get the operating footprint in the right place where it needs to be, as well as getting the overall cost structure where it needs to be. I feel good about where we'll get to on this, but I do think this mix impact in the near term is a bit of a pinch point for us.
Sujal Shah (VP of Investor Relations)
Okay. Thank you, Luke. Can we have the next question, please?
Operator (participant)
The next question is from Shreyas Patil with Wolfe Research. Your line is open.
Shreyas Patil (VP of Equity Research)
Hey. Thanks so much. In the past, you've talked about typical price downs that you pay customers. I think normally it's in the 1%-2% range, you know, especially within your automotive business. You have been taking price over the last couple of years through recoveries. But with the supply chains broadly stabilizing, I'm wondering if you expect that you will have to start those price downs with customers again. If so, are you able to extract productivity from your own supply base or drive restructuring savings to kind of help mitigate that?
Terrence Curtin (CEO)
Shreyas, thanks for the question. I do think there's an element where does price really occur? Like you sort of say, you know, it's typically in our automotive and our D&D businesses where you really see those types of impacts like you stated. I don't think we're close to that yet. You know, with where inflation's at for TE, and still we're in a recovery mode, that's the discussions that we're having with our customers. I think that if there was things like deflation, real deflation, and things like that, we may get back to those traditional patterns because it does come into how do we drive productivity that helps our customer if they hit the volumes in places like auto. That's not gonna be something we're seeing in the second half.
As cost comes down around the world, that is something we could get back into in outer years.
Sujal Shah (VP of Investor Relations)
Okay. Thank you, Shreyas. Before we wrap up, we have heard from some of you that we had patchiness of audio cutting in and out. We are going to publish our earnings script on the Investor Relations portion of the website, and that should be up shortly. Thank you everyone for joining us today. If you have any questions, please contact Investor Relations at TE. Have a nice morning. Thank you.
Operator (participant)
Ladies and gentlemen, today's conference call will be available for replay beginning at 11:30 A.M. Eastern time today, April 26, 2023 on the investor relations portion of TE Connectivity's website. That will conclude today's conference for today.