TE Connectivity plc (TEL) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the TE Connectivity Third Quarter 2022 Earnings Call. [Operator Instructions] As a reminder, today's call is being recorded. I would now like to turn the conference over to our host, Vice President of Investor Relations, Sujal Shah. Please go ahead.

Good morning, and thank you for joining our conference call to discuss TE Connectivity's third quarter '22 results. With me today are Chief Executive Officer, Terrence Curtin; and Chief Financial Officer, Heath Mitts. During this call, we will be providing certain forward-looking information, and we ask you to review the forward-looking cautionary statements included in today's press release. In addition, we will use certain non-GAAP measures in our discussion this morning, and we ask you to review the sections of our press release and the accompanying slide presentation that address the use of these items. The press release and related tables, along with the slide presentation, can be found on the Investor Relations portion of our website at te.com. Due to the large number of participants on the Q&A portion of today's call, we're asking everyone to limit themselves to one question. We are willing to take follow-up questions but ask that you rejoin the queue if you have a second question. Now let me turn the call over to Terrence for opening comments.

Thank you, Sujal, and I also want to thank everyone for joining us today to cover our results for the third quarter, along with our outlook for the fourth quarter of fiscal 2022. As I normally do, and before Heath and I get into the details on the slide, I want to take a moment to discuss our performance within the backdrop of the current environment. We delivered strong performance again in the third quarter with record sales, and this represents 11% organic growth year-over-year. We had growth in each of our 3 segments and organic growth across all 9 of our business units. Adjusted operating margins were in the mid-18% range, and this is a level similar to where we've been running through the year despite incremental headwinds that we've been experiencing, and we also delivered record adjusted earnings per share that was above our guidance. I feel our performance is a result of how we strategically positioned our portfolio around secular growth trends as well as the execution of our teams, both from a manufacturing perspective and in our ability to effectively manage pricing in this inflationary environment. I'm also proud of our team as they continue to overcome broader macro challenges to effectively serve our customers and deliver the strong financial results we're going to talk about today. Now let me provide some color on the supply environment, key end demand trends and the development since our call 90 days ago. When we provided our guidance last quarter, we told you about an anticipated impact from the sales -- on our sales to the COVID lockdown in China. And even though these lockdowns extended further into the third quarter than our original expectations, our teams were able to recover, and the sales impact of the quarter was negligible. When you think about the global supply chain challenges and specifically around material availability, I would tell you they're about the same as they were 90 days ago and inflationary pressures continue to linger. One element that I want to highlight that has changed since the last time we spoke is the strengthening of the U.S. dollar. This strengthening has significantly increased the headwind we're facing from foreign currency exchange rates both year-over-year and sequentially, and Heath will talk about that a little bit more later. Turning to the markets. Customer demand remains strong as evidenced by our order levels and our strong backlog position. And just to highlight, our backlog has grown over 20% versus the prior year. And we are seeing some consumer-facing markets like appliance moderate, but we continue to see broad strength across our industrial segment, and we still have a number of markets that we serve that are not yet back to pre-COVID levels. And this includes automotive, commercial air as well as medical devices. And we expect growth in these businesses as supply constraints are alleviated and those markets continue to recover. The other thing that I want to highlight we've consistently talked about, and it has not changed, is the benefit we continue to see from the secular trends in our markets and the outperformance that we're generating from content growth and share gains. We are benefiting from our position as an industrial technology leader with growth from electric vehicles, smart factory applications, including automation, renewable energy and high-speed cloud and artificial intelligence applications. The other thing that I want to highlight that we -- as we continue to navigate through this noisy macro environment, is that we remain committed to our business model and long-term value creation by driving further growth, margin expansion and strong cash generation. So with that as a backdrop, let me get into the slides and discuss additional highlights that are on Slide 3. Our quarter 3 sales were a record at $4.1 billion, and this was up 7% on a reported basis and up 11% organically. As I mentioned, we saw growth across each of our segments and organic growth across all of our businesses, once again demonstrating the strength and positioning of the portfolio. We generated double-digit organic growth in the industrial and communications segments and 8% organic growth in transportation despite an auto production environment that was essentially flat year-over-year. Our orders were $4.2 billion in the quarter with a book-to-bill of 1.02, and this shows that the demand environment continues to be strong, and I'll get into more details about order trends by segment when I get to the next slide. From an earnings perspective, our adjusted earnings per share was a record at $1.86, and that's up 4% year-over-year with adjusted operating margin of 18.6%. From a cash flow generation, our year-to-date free cash flow was approximately $1 billion with approximately $1.6 billion returned to shareholders this year. And I will tell you we've been aggressive with share buybacks as we're taking advantage of the recent market price dislocations with our stock. As we look forward, we are expecting quarter 4 sales to be approximately $4.2 billion and adjusted earnings per share to be around $1.85. Our guidance reflects the benefits of an extra week that we have in the fourth quarter but also factors in the impact of an increased headwind from currency exchange rates. And if you look at the slide, we've provided the details of each of these items and how they impact our fourth quarter. Before I get into orders, one thing I do want to do is move away from the financials for a moment and highlight that I'm pleased that we issued our 12th corporate responsibility report last quarter, which reinforces our One Connected World strategy. When you look at the report, it has many highlights, but one of the keys that I think is important was that we were successful in driving a 30% reduction in absolute greenhouse gas emissions in a single year in fiscal 2021, and this was a very large step towards our goal of achieving a 40%-plus absolute reduction in our Scope 1 and Scope 2 greenhouse gas emissions by 2030. So with those being the highlights on Slide 3, let me turn to Slide 4, and I'll discuss order trends as well as what we're seeing in our markets. For the third quarter, our orders were $4.2 billion as we expected, and this reflects the continued strong demand environment from our customers as well as we continue to see the impacts of ongoing supply chain volatility in the markets. Our backlog is up over 20% and increased double digits in each of our segments versus the prior year. It is also important to note that currency exchange headwinds are not only impacting our sales but also, when you look on the year-on-year compares, negatively impacts the valuable orders in the third quarter. And this impact when you look at the year-on-year compare, our orders would be $230 million higher this quarter if it wasn't for the strengthening of the U.S. dollar. In transportation, we have a book-to-bill of 1 in the third quarter, which is in line with where the segment has run historically, and keep in mind that we also have a strong backlog position. And demand for auto remains healthy and is significantly higher than what OEMs can currently produce, providing a potential setup for future auto production increases as supply chain bottlenecks begin to resolve and dealer inventories get back to more normal levels. In our Industrial segment, we saw another quarter of strong orders with a book-to-bill of 1.16 and growth across all businesses year-over-year. We continue to see a favorable backdrop in capital expenditures for factory automation, manufacturing capacity and renewable energy, and these trends benefit both our industrial equipment and our energy businesses. The other thing about our Industrial segment orders are we're continuing to see improving order trends in the commercial aerospace as well as medical markets where we expect growth as those markets continue to recover. In our Communications segment, orders reflect a double-digit increase in our backlog versus the prior year, along with expected moderation in the appliance market that we've been talking about all year. And one thing when you look at the communications order trends, it is important to note that our backlog in our Communications segment is approximately $1 billion. So with that as a backdrop on orders, let me get into the year-over-year segment results that you can see on Slide 5 through 7, and each one of those slides have the details for each segment. So starting with transportation. Our sales were up 8% organically year-over-year. Our auto business grew 9% organically versus auto production that was roughly flat versus the prior year. Global auto production was 18 million units, and this was slightly lower than our expectations due to lockdowns in China, and we do expect some sequential increase in auto production into the fourth quarter. The trends around our content remain robust as we continue to benefit from increased electronification as well as higher production of electric vehicles, and we do expect electric vehicles to be up over 30% this year compared to a total auto production environment that is going to be flat. As we look forward, we do expect continued expansion in our content per vehicle, and you'll see that as we move from the first half to the second half of this year. In the commercial transportation market, we saw 10% organic growth driven by North America and Europe with significant market outperformance in all regions driven by strong content growth as well as share gains. In our Sensors business, we grew 2% organically, and what was nice is that growth was driven by the focus we have on factory automation applications. When you look at earnings for the segment, adjusted operating margins were 17.3%, and this was impacted by the inflationary pressures. As you know, there is a time lag from when we incur higher inflation until price increases become effective with our auto customers. So let's move to the Industrial segment. And in our Industrial segment, sales increased 13% organically year-over-year. Industrial Equipment was up 19% organically with double-digit growth in all regions and continued benefit from increased capital spending in factory automation. In our Energy business, we saw 17% organic growth driven by increased penetration in renewable applications. And in our Aerospace, Defense and Marine business, this is the first time we've seen year-over-year growth since the market was impacted by COVID, and we now expect continued growth as we go forward. Our medical sales in the segment were up 1% organically with a modest increase in interventional procedures as well as medical device market is continuing to work through supply chain challenges. From a segment margin perspective, our adjusted operating margins expanded year-over-year by 100 basis points to 16.8% driven by higher volume and strong operational performance by our team. We have made significant progress on our margin progression over the past several years, and I'm pleased with how the team continues to drive towards its business model target of consistent high teens operating margin. So let's turn to the Communications segment. And as you can just see looking at the slide, our team continues to execute while capitalizing on the growth trends in the markets they serve. Sales growth was 16% organically year-over-year for the segment with growth in both businesses, as highlighted on the slide. In our Data and Device business, we saw market outperformance driven by content growth in high-speed cloud as well as share gains in artificial intelligence applications. And as we highlighted last quarter, these artificial intelligence applications do improve energy efficiency in the data center, and it's just another example of how we enable lower carbon emissions with our customers through our engineering. In our appliance business, it didn't perform ahead of our expectations despite the expected declines in the China market. We saw growth both in North America and Europe in our appliance business, and that is driven by continued share gains enabled by our global manufacturing strategy. From a margin perspective, the communications team continues to deliver outstanding performance. The adjusted operating margins were 26.2%, and this was up 270 basis points versus a strong quarter in the prior year, and our teams continued to deliver strong performance both on sales as well as proving margin resiliency. So with that as a backdrop of our segment results, let me turn it over to Heath, who will get into more details on the financials as well as our expectations going forward.

Thank you, Terrence. And good morning, everyone. Please turn to Slide 8, where I will provide more details on the Q3 financials. Adjusted operating income was $761 million with an adjusted operating margin of 18.6%. GAAP operating income was $719 million and included $30 million of restructuring and other charges and $12 million of acquisition-related charges. We continue to expect restructuring charges of approximately $150 million for the full year as we continue to optimize our manufacturing footprint and improve the cost structure of the organization. Adjusted EPS was $1.86, and GAAP EPS was $1.83 for the quarter and included a tax-related benefit of $0.06. And additionally, we had restructuring acquisition and other charges of approximately $0.09. The adjusted effective tax rate in Q3 was approximately 19%. For the fourth quarter, we expect our adjusted effective tax rate to be roughly 20%, so we continue to expect an adjusted effective tax rate around 19% for the full year. Importantly, we continue to expect our cash tax rate to stay well below our adjusted ETR for the full year. Now turn to Slide 9. Sales of $4.1 billion, a company record, were up 17% reported and up 11% on an organic basis year-over-year. When you think about our organic growth, approximately 1/3 was driven by price increases, and the remaining 2/3 was driven by volume as a result of the strength of our portfolio. In the third quarter, currency exchange rates negatively impacted sales by $236 million and $0.07 versus the prior year. As Terrence mentioned, FX impacts have worsened significantly over the past 90 days. In Q4, we expect currency exchange rates to be a sequential headwind of approximately $70 million and a year-over-year headwind of approximately $275 million. For the full year, we now expect a negative impact from FX of roughly $700 million, which is significantly worse than our view 90 days ago. Adjusted EPS was a record at $1.86. Adjusted operating margins were 18.6%, and I am pleased with the performance of our team given the incremental inflationary and supply chain pressures we are seeing. We continue to pull pricing levers across the business to help partially offset these pressures. And as we talked about last quarter, while we are not able to offset these costs dollar for dollar, we continue to recover approximately 2/3 through price and the remaining through productivity initiatives. We continue taking pricing actions to offset these inflationary pressures. Turning to cash flow in the quarter. Cash from operations -- excuse me, from operating activities was $579 million. Free cash flow for the quarter was $423 million. As we mentioned in past calls, the year-over-year trend in free cash flow does reflect strategic inventory builds. However, we expect to work down inventory this quarter with Q4 expected to be the highest quarter of free cash flow for the fiscal year. Through the first 3 quarters of the year, we have returned approximately $1.6 billion to shareholders with approximately $1.1 billion returned through share buybacks. We will continue to remain disciplined in our use of capital. And near term, we have been aggressive in buying back our stock and taking advantage of investing in our own value creation opportunities. So we've made significant progress towards our business model over the past few years, and our teams are continuing to execute well in a volatile environment. The strategic positioning of the portfolio has enabled us to deliver sales growth, margin resiliency and EPS expansion despite the challenges we are facing. We will continue to focus on what we can control to effectively serve our customers and drive strong financial performance, including strong cash generation. So now let's open it up for questions, Sujal?

Thank you. Can you please give the instructions for the Q&A session?

[Operator Instructions] Our first question comes from Chris Snyder with UBS.

I wanted to ask about expectations for global auto production over the next couple of quarters. Obviously, a big debate in the market. Consumers are pressured, but we've already had production in your top levels for the last 2 years. So just what are you hearing from customers around expectations for production and intern connectors over the visible time horizon? I would also be interested in any views on auto demand versus production debate.

Sure, Chris. Thanks for the question, and let's just frame it a little bit. Auto production, I talked about it in my comments. We think in our fiscal year, the September year, there's going to be 76 million vehicles made this year, and that's the same amount as it was made last year. And if you look at demand, we would tell you we think demand is well above 80 million units. And also to give you another guide that goes back in '19 pre-COVID, there was 88 million cars made on the planet. So we still have a way to go to get back to pre-COVID production, and we can also see where inventory levels are in pretty much every region of the world still very low. So we do think there is potential for production increases. Even if demand comes down a little bit, there's still a big disconnect between demand levels versus what our customers can deliver, and a lot of that is well documented from the OEMs around semiconductor supply and things like that. I think the other thing that I just want to say is that we did see 18 million units made this quarter. Going into the next quarter, we do think, and I said in my prepared remarks, 19 million units. And so there is, I think, upward momentum to production. As we move into next year, the supply chain continues to improve. I think to Heath's point, though, the other thing is what we control, we control content. We don't control production. Certainly, TE does not make semiconductors. But I think the other element I just want to stress is, and I think it's shown up through this period even in a tough production environment like we've been in the past couple of years, how our content has expanded from what was in the 60s, consistently in the '80s, you've seen an increase in the second half, really shows where we position the portfolio, both around electric vehicles continue to be built, continue to be a bigger pie but also from the electronification. And as I've told you in other calls, you look at that $20-plus delta per vehicle. About 60% of that is driven by electric vehicle growth. The other 40% is due to electronics on both combustion engines as well as electric vehicles. So I do think, while production has been frustrating, I do think we're still well below demand. And if we do get some breaks on semiconductor and other supply chain, there could be upside as we go next year even with a cloudy macro environment.

Your next question comes from David Kelley with Jefferies.

Maybe to follow up on the order summary page and specifically in the transportation and communications orders, which pulled back a bit here. Can you talk about demand trends and maybe transportation kind of outside of automotive and then also what you're seeing in communications? And maybe also if you could give us a sense of how orders are tracking for both end markets, Q4 to date, that would be great?

Sure. So let me take the first -- the last piece of your question first. So when you look at our orders in July at total TE level, they're running very similar to what they were running at last quarter. So our orders overall have been pretty steady here, what we saw last quarter as we go into this one month in. So from July, they remain healthy. The other thing that I think is important is we do have to keep in perspective, and we talked about this a lot over the past year, 2 years. A lot of customers were ordering ahead. Certainly, we have an elevated backlog position. And even in some of the compares like our Communications segment, last year in this quarter, our orders were over $800 million. So it's very strong comparison and tough comparison. What we continue to look at in our orders is orders with backlog. And I mentioned on the call, communications, we have $1 billion of backlog, and our communication customers did a good job of ordering out. I do think they did a better job than our transportation customers when they were trying to make sure they were securing supply. And overall, that's what you're seeing in the trends. So as we look forward, and no different with our guide, we continue to see healthy demand trends. Certainly, the industrial markets continue to look like they're accelerating, and we have 2 of our 4 markets in industrial. We're a little bit later to the recovery party with medical and commercial aerospace. Industrial equipment stays strong. And the one market that we do see moderation in which isn't a surprise that we talked about has been the appliance market. We would have thought there'd be moderation even before now. We sold it in China. Certainly, that's tied to housing and property, and we would expect that will continue to moderate. But when we say moderation, you're really talking about our orders sequentially going from our March quarter to our June quarter being down like 12%. I don't want us to be they're falling off a cliff, but they did moderate. And certainly, the backlog also supports where we guided. So hopefully, that gives you better color about how we think about and also confidence.

Our next question comes from Wamsi Mohan from Bank of America.

Terrence, can you talk about the various moving pieces in margins across the segments? Automotive was weaker, and I know you experienced a lot of headwinds in the quarter, but comms and industrials were quite strong. How should we think about the trajectory from here? And also if you could address how the incremental margin should track? Because that seemed to decelerate somewhat in the quarter.

Wamsi, this is Heath, and I appreciate the question. Listen, I think if we just start with where we are at TE in total, right, we're still tracking in that mid-18% level, which is really where we've been tracking most of the year. And there's no doubt some of the strength coming out of our communications segment and then some of the improvement we're seeing in industrial has helped offset some of the pricing lag that we get in the automotive and overall transportation business. But we're pretty pleased with the diversity of the portfolio and the ability to be able to withstand these volatile environments. Part of the answer to your question, though, is the timing on when price increases go into effect. Within transportation, specifically, you're dealing with a lot of automotive customers, and there's a lag between when we see the price increases go in relative to when we see the impact of inflation. And I think it's important for us all to remember that where we operate in the world, the inflation looks very different. And in some cases, it has worsened, including in Europe, where energy prices have continued to be a pretty significant headwind. So we are offsetting about 2/3 of that inflationary pressure with price, which as you know well, is moving into positive price, it was a big move coming out of COVID here. But it does still -- because we can only cover about 2/3 of it, it still does require us to make up the difference through either productivity initiatives and then obviously what we've been undertaking with some of the longer-term restructuring activities. Within the quarter, I think it'd be fair to say transportation also felt a little bit of the impact from China, just the inefficiencies of not shipping much for 2 months and then catching it all up in the final month of the quarter. That did have an impact. And as we move forward, I think we'll continue to focus in on where we stand from our ability to be able to pass on price. But overall, we're feeling good in where we stand. So with that, hopefully, that answers your questions.

Our next question comes from Mark Delaney with Goldman Sachs.

Just to better understand the FX impacts and from a couple of dimensions potentially. So first, you spoke to some of the translational impacts. But are you seeing any change in actual business conditions? And are any of the international companies potentially be more aggressive with quoting activity given some of the changes in currencies? And then specifically to the P&L, I was hoping you can maybe speak a little bit more specifically to the 4Q sequential EPS. I think you said $70 million on revenue quarter-on-quarter. Could you speak to the EPS impact?

Sure, Mark, this is Heath. As I said on the call, it's -- when we sat here 90 days ago, I gave a number of range for the full year FX impact. I think I said between $400 million and $500 million, and that has stepped up by a couple $250 million for our full year now to about $700 million. And about 75% of that has been in the second half of our fiscal year that we're in the middle of right now. So it does flow through when we give the translational impact. The overall EPS impact from all that, it's about $0.17 for the full year FY '22. So it is meaningful to us. In the fourth quarter, we expect that number to be year-over-year, about $275 million, so incrementally worse than what we saw in the third quarter. And as we look into the first -- we look into FY '23, obviously, we'll provide more guide here next quarter. But if we just snapped the line in the sand right now with where various currencies are, it would be about a $300 million headwind in FY '23 for us, most of which would be in the first half of our fiscal year. So there are some numbers out at you just to try to frame up what we're seeing out there. Now your question on the competitive landscape, we really haven't seen a whole lot of difference in that yet. We're keeping an eye on it. But for the most part, we haven't seen anything change considerably in terms of how competitors are treating each other or along those lines. And listen, we're not economists. We're not going to predict where the dollar is going to go relative to these other currencies that we do transact in, but we feel pretty good about our balanced position globally.

Our next question comes from Joe Giordano with Cowen and Company.

This is Robert Jameson in for Joe. Just wanted to pivot quickly and ask about the buyback activity. It looks like you guys are running about 2x what you did last year this time. Just wondering if there's any changes to your capital allocation strategy?

This is Heath. I'll take this question. Listen, long term, our strategy is unchanged, right? If you think about it over a cycle, we still think about 2/3 of our free cash flow being returned to shareholders in the form of buyback and dividends and about 1/3 being used for M&A. However, there's -- we've always qualified that with -- there will be times when we might deploy more into M&A. There will be times when we might deploy more through buybacks. And that kind of takes into consideration market dynamics, where we're trading, the value of acquisitions out there relative to our value and weighing everything through a strategic lens as well. So we have the good fortune that we have a very strong balance sheet, and that has allowed us to play offense in the near term here. It's allowed us to play offense in the sense that we were able to make some strategic inventory builds and flex our working capital to make sure we're taking care of our customers. That's not letting ourselves off the hook. We will start working that back down. Now that we're seeing a little bit in certain markets, a little bit more visibility allows us to plan and our factories. But we've been able to flex with that. We've been able to flex, obviously, using our free cash flow for buybacks as well. But I would not consider this a permanent change but more of an opportunity into create value for our shareholders.

Your next question comes from Amit Daryanani with Evercore.

Yes. So I guess I was asking for a clarification. Terrence, the question for you as we think about beyond the September quarter, I think there's a lot of concern around what '23 could look like given all the macro marries that are out there. Can you perhaps just maybe talk about the cost growth that you see at TE as it relates to '23 across the segments? Would be helpful, I think, to just level set things like content growth, and how you see that stacking up next year? And then, Heath, if you could just clarify, I heard your discussion on margins. Maybe I don't appreciate this enough yet. Why are margins going down in September quarter sequentially when I think some of these headwinds you've talked about [should set alleviate]. So maybe just talk with the margin puts and takes as well for September.

Thanks. And let me get into the first half of your question. And as you know, we've been guiding a quarter out to anything. We'll give you more about next year, but I'll give you some initial thoughts here, and then we'll tighten them up in 90 days. The transportation back to an earlier question I had, content feel very good about. And you can all see the OEM programs that are coming out on electric vehicles. It isn't 1 or 2 OEMs in the world, every OEM in the world that's coming out with electric vehicles that the content momentum that we've had, we continue to see that and probably being closer to the higher end of the range that we've talked about in the 4 to 6. But that's not only in automotive, that's also in commercial transportation. And our commercial transportation teams in driving a lot of content, so I think you can have a good content there. And let's face it, this year in Commercial Transportation in '22, China was rough. China drove the entire global market to contract this year, but our team group. And I do think, as you think about some of the stimulus China is doing around infrastructure as well as what they're doing around auto stimulus as they're coming out of COVID, I do think there's upside opportunity versus the production environment in both of those markets that I said earlier. And certainly, that China stimulus is important because it's one of the most -- the bigger market in the U.S. as well as Europe. In Industrial, I would tell you feel good about the CapEx trends. We feel very good about the renewable positioning we've done in energy, and you saw our 17% growth here this quarter in energy. I think you're going to continue to see that momentum because they were tied to good trends. And then comm air and medical, I know I spoke about they're growing again. But in comm air, we're still only at 2/3 of what we were pre- COVID. And while single-aisle is improved, there's double-aisle opportunity that's even more content for us in a single-aisle aircraft. So the content is true there, and it's really about how does the large airframers continue to ramp production as it gets in there. When you look at our Communications segment, I think it's going to be probably a tale of 2 cities. The appliance market we talked to you about, we expect that to moderate next year, but offsetting that will be cloud CapEx. And the question, where does cloud CapEx go after it was up 20% this year? We do expect cloud CapEx growth next year. We just have to see where our customers really put it at. I'm not sure it will be at 20%, but I still believe it will be growth. So there's a bunch of moving pieces out there. But I would tell you, when we look at the order trends, we also look at the content growth that you've seen in our results, plus the backdrop of where we play. It still feels very constructive as we go into '23. And as I said, when we get on our next quarter call, we'll add more color versus what we're seeing. So Heath, why don't you take the second piece of the question.

Sure, Amit. Your question was relative to implied margins for Q4. As you know, we did not guide a margin number. So if you're backing into a margin number relative to the sales and the EPS, I think, one, taking consideration the tax rate is going to be 1 point higher as we guided in the fourth quarter. So we're not seeing a dramatic falloff in margins. But if you're on the fringes, if you will, keep in mind a couple of things as we signaled. We do expect our Communications segment to be a little bit lower revenue levels in the fourth quarter just because some of the appliance pieces that Terrence just talked about. That has a little bit of a mix impact. There's no change in our assumptions around this inflation and price go get when we're only covering 2/3. And then again, on the fringes, we're going to be working on some inventory in the quarter, and that's going to have a little bit of impact as we work through that cap. But it's not something that we see falling materially at all, if any.

Your next question comes from William Stein with Truist Securities.

Terrence, if we zoom out and don't really focus on any particular end market or segment, just look at the overall revenue performance and overall bookings, this sort of feels like the elusive soft landing. We're still seeing good revenue growth, but the orders are backing off these very elevated levels that we've experienced in recent quarters. Is that the way you all see it? And if that's the right characterization, how many more quarters of this sort of performance do you anticipate? Do you think that this is going to continue to play out and we'll continue to see perhaps a moderation of orders but sort of a burning of the backlog and revenue growth still sort of at good levels?

Well, thanks for the question, and I guess -- I know we spoke to many about it. When we think about our business and the lead time for our product, let's put things into perspective about our lead times. For an average product, you might be 6 to 12 weeks. So I do want to frame when you look at TE, when you think about an average lead time, you're 6 to 12 weeks. It's not some of the lead times you hear from other product categories that you have. So there's an element here of -- when we were talking to you about book-to-bill at 1.20 (sic) [ 1.02 ], we always said that we'll come a time that as markets become more normalized, we would expect our book-to-bill to reflect more normal patterns than a 1.2 book-to-bill. So when I look at it and I think about transportation, getting closer to 1, we expected to get to. Certainly, as we work our backlog, like you saw on communications, we got a lot of backlog. We have over $1 billion of backlog in communications. Customers, they feel good with that backlog, they're not going to place more orders. They're going to want to work that off, and we look for pushes and cancellations. Are people pushing out orders? Or are they canceling orders? We are not seeing any major trends in pushes and cancellations. So with the indicators that we're looking at show that, hey, while we have some markets in transition like appliance that we've been highlighting to you, we also still have markets that are still trying to catch up like commercial aerospace. So I do think it's an environment where not everything is going up to the -- and growing and we just have to realize if the customer is concerned about the macro, they're probably going to get a little bit more conservative and say, "Hey, let me work off a little bit of backlog." So I think you're going to continue to see book-to-bills be getting more normalized in an environment like we have. But certainly, we have some markets where customers are concerned about supply chain volatility. And like we used to talk about in the industrial segment, we're still at a 1.16 book-to-bill, which is a very strong book-to-bill, and that means we're still building backlog.

Your next question comes from Samik Chatterjee with JPMorgan.

This is MP on for Samik Chatterjee from JPMorgan. So I just wanted to ask regarding the order trends in industrial, like you're seeing some of your POs downgrading their expectations for the growth in this particular sector. Additionally, the global PMIs are also down relatively compared to the starting of the year. What exactly is driving like strong order growth for you in this particular sector, and as you said, that you see accelerating as well?

Yes. When I look at our -- thank you for the question. When we look at our Industrial business unit, it also comes into the backlog of our customers. If you look at our customers that are all the robot manufacturers of the world, certainly the factory automation, and you even go back to semi capacity be put in, electric vehicle battery capacity being put in, other automation programs being put in, they are the drivers of it. So you have to look at the capital spending, and the backlog of the projects continues to be very strong. And that's creating backlog for our customers of the world, whether they're in Asia, whether they're in Europe, whether they're here. And what's nice is we're very globally deployed in that business unit, and orders continue to be very strong as people are trying to make sure they can fulfill their backlog. And we've really positioned well in that space, and you've seen that outperformance consistently over the past 1.5 years.

Your next question comes from Matt Sheerin with Stifel.