Sujal Shah: Thank you, Steve. Can we have the next question, please?
Operator: We’ll move next to Chris Snyder at UBS.
Chris Snyder: Thank you. I wanted to ask on supply chain inventory levels. You guys have been pretty consistent around destock headwinds for data appliance and industrial equipment. So, I guess maybe for those three sub verticals, can you just talk about where are we in the respective destock cycles. And beyond those three, is there anywhere else maybe where you’re starting to see more risk around destock relative to three or six months ago? Thank you.
Terrence Curtin: No, thanks for the question, Chris. And I think let’s talk about destocking a little bit. So, first off, is, as you all know, being a Tier 2, this is not a phenomenon that isn’t uncommon. And after you get strong cycles, you will have this. But I do think there’s — when you think about these three — there is one thing they have in common, which is close to 50% of their sales go through our distribution partners. And let’s face some of these are fragmented markets that they help us cover. So, when you think about the three, that’s about — while it’s big for their business units, total TE is only about 20% goes through the channel. And the one thing I want to highlight maybe the last part of your question is where else are we seeing it?
Actually, for the 80% of our business that we touch customers directly, it’s very stable, and we’re growing. So, when you think about the 80% that we aren’t highlighting, it’s really — that’s where we touch the customers most directly, and we have growth. Now, we have these destocking pockets that certainly very much with our distribution partners that, hey, they fill the need when maybe we weren’t delivering as consistently as we should have during the supply chain challenges he talked about. So, when you look at those three, what I would tell you where we are, what hitting we’re in — and hey, this is best guess stuff. What’s nice is in both D&D and appliances, usual our orders have increased sequentially. So it feels like we’re stable at the bottom.
And what’s nice in D&D, you see the driver of AI as those move up. In regard to industrial equipment, that started later. We started to highlight that to you over the past couple of quarters. I would say we’re more in the middle of innings of that. And I think both of them will be around in the first part of next year. But then I also view that they’ll turn into a tailwind once they get behind us, and we don’t expect major destocking elsewhere into how we have our direct relationship with our customers.
Sujal Shah: Thank you, Chris. Can we have the next question, please?
Operator: We’ll move next to William Stein at Truist Securities.
William Stein: Hey thanks for taking my question. I understand you’re only guiding for a quarter, but I’d like to sort of 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: Thanks Will. And I guess one part of it, let me talk about it maybe how we think about some of the trends we position ourselves out, knowing that we aren’t guiding beyond the first quarter, and I’ll let Heath maybe talk about margin. So, first one is similar to this year, where we have the secular growth trends, they really were the things that helped us cover some of the destocking, things that we dealt with and I think they’ll be evident again next year. So, first off, if you start with our largest segment, Transportation, we’re sort of viewing auto production is going to be around 21 million units a quarter, so mid-$80 million production. And I think what you’re going to see is our business model that we’ve shared with you once again demonstrated this year, we continue to expect four to six points of outgrowth versus the market due to the content we’re going to get, and that’s going to be driven by our leading position in EV, also ongoing electronification trends in the vehicle that will benefit from.
And so that’s where we sort of see Transportation. In our Industrial segment, and I know I mentioned it on the call, we have three markets that have really good growth momentum. We expect them to continue. You get places like comm air. We’re still in recovery mode. And [indiscernible] as it grows, we have more content on that, so that’s good. And then in Communications, I would tell you the growth will really be driven by these AI ramps that we’ve highlighted to you, and we think they’ll build up as we go through the year and they can be well over $100 million of incremental revenue contribution through the year. Now, one thing I just talked about, back to Chris’ question on destocking, de-stockings affecting three of our businesses, that’s going to be with us in the early part of the year.
That will come to an end. I mean you can probably make as good of a judgment as I can on when that will end. So, that’s certainly there. And then the only last two pieces that probably I would highlight. First one being, and Heath talked about it, the dollar strengthening is going to be a headwind into next year. We have a big headwind this year, probably going to be about $250 million next year. And then the last thing I would just say is right now, with where input costs are in the world, we would expect pricing at total TE to be net neutral next year. There are elements where metals and things like that are still elevated. There are some places where you have the deflationary impacts and no different than what inflation drove us to do in pricing.
Input costs will be the driver of price going forward. So, with that, I guess that’s some of the ways that you can think about it.
Sujal Shah: Okay. Thank you, Will. Can we get the next question, please?
Operator: We’ll go next to Amit Daryanani at Evercore.
Amit Daryanani: Good morning. Thanks for taking my question. I guess I have one and, I guess, Terrence and Heath, either one of you. You’ve also made some really good progress in terms of expanding your operating margins in the back half of fiscal 2023. But I’m curious, as you think about the exit rate of operating margins across the three segments. Can you maybe talk about what does it take for TEL to get to your target margins across those three segments — the delta from where you are to targeted you made. Is it volume? Is it cost optimization? Would love to get a sense on the path from here towards those target margins. Thank you.
Heath Mitts: Okay. Amit, this is Heath and I’ll certainly take this. We highlighted on the call, and you just referenced it as well, that we exited the year in a better position over the second half of fiscal 2023, than our first half performance. And just candidly, we were not pleased with our margin performance in the first half of the year, and there was a lot of work involved to get those up as we exited. However, we are still well below our target operating margins at the company and at the segment level. Transportation made good strides this past year, and we feel good about the momentum there. But the business model target for Transportation is still 20%. So, we’re still trending below that and we know there are some things that we still need to do.
There’s still a little bit of self-help left there but some volume support coming out of auto production would be healthy. And then the other thing that’s a drag on Transportation margins is — our commercial transportation business is in the downside of a cycle, and that’s obviously a very profitable business for us. So, as we think about that, I think we’re going to make good progress in Transportation margins in FY 2024. As we move forward, but we’ve got some work to do. Industrial segments, the business model target is high-teens operating margin. Obviously, we’re trending right now in the mid-teens. There’s some reasons for that, the biggest of which is our Industrial Equipment business, which is our highest margin business. is obviously at the bottom of the cycle.
And Terrence just talked about that. We do believe, as we work our way through FY 2024, that we’ll see those segment margins improve as some of this destocking gets behind us, assuming most of that’s over through the first half of our year. Communications, listen, we’ve all written the rollercoaster of communications here the last several years. And when the business was growing outsized volume and outsized margins. We’re on the other side of that now. And this is a very volume-dependent business. But when we’re running kind of in this $450 million-ish quarterly run rate for the segment. We’re going to be hovering in the mid-teens. When you start to see that begin to normalize some of the destocking gets behind us, you will see this business get up into the high teens with a 20% type of target margin there.
