Earnings Call Transcript
TE Connectivity plc (TEL)
Earnings Call Transcript - TEL Q3 2022
Operator, Operator
Thank you for joining us for TE Connectivity’s Third Quarter 2022 Earnings Call. I will now hand it over to our host, Vice President of Investor Relations, Sujal Shah. Please continue.
Sujal Shah, Vice President of Investor Relations
Good morning. And thank you for joining our conference call to discuss TE Connectivity's third quarter 2022 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 are asking everyone to limit themselves to one question. We are willing to take follow-up questions, but ask that you re-join the queue if you have a second question. Now let me turn the call over to Terrence for opening comments.
Terrence Curtin, CEO
Thank you, Sujal. And 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 three segments and organic growth across all nine of our business units. Adjusted operating margins were in the mid-18% range and this is at 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 were 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 teams 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 developments since our call 90 days ago. When we provided our guidance last quarter, we told you about an anticipated impact on our sales due to the COVID lockdown in China. And even during these lockdowns extended further into the third quarter than our original expectation, our teams were able to recover and the sales impact to the quarter was negligible. When you think about the global supply chain challenges, specifically around material availability, I would tell you they are 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. Returning 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. We are seeing some consumer-facing markets like appliances 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. This includes automotive, commercial air as well as medical devices. 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 is the benefit we continue to see from the secular trends in our markets and the outperformance that we are 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. 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 third-quarter sales were record at $4.1 billion, which 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, 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. This shows that the demand environment continues to be strong. 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 of $1.86 and that's up 4% year-over-year with adjusted operating margins of 18.6%. From a cash flow generation perspective, our year-to-date free cash flow was approximately $1 billion with approximately $1.6 billion returned to shareholders this year. We've been aggressively executing share buybacks as we're taking advantage of the recent market price dislocations with our stock. As we look forward, we expect fourth-quarter 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 and also factors in the impact of an increased headwind from currency exchange rates. If you look at the slide, we've provided the details of each of these items and how they impact our fourth quarter. 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. The report has many highlights, but one of the keys was that we were successful in driving a 30% reduction in absolute greenhouse gas emissions in a single year in fiscal 2021. This is a large step towards our goal of achieving a 40% plus absolute reduction in our Scope 1 and 2 greenhouse gas emissions by 2030. So with those being the highlights on Slide 3, let me turn to Slide 4 and discuss order trends as well as what we're seeing in our markets. For the third quarter, our orders were $4.2 billion, reflecting the continued strong demand environment from our customers and the ongoing supply chain volatility. Our backlog is up over 20%, with double-digit increases in each of our segments versus the prior year. It's also important to note that currency exchange headwinds are not only impacting our sales but also negatively impacting the value of orders in the third quarter. This impact means that on a year-on-year comparison, 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 one in the third quarter, which aligns with historical performance. Demand for automobiles 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 return 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, which benefit both our industrial equipment and energy businesses. We’re also seeing improving order trends in the commercial aerospace sector and 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 discussing all year. One important point about the communications order trends is that our backlog in this segment is approximately $1 billion.
Heath Mitts, CFO
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, along with $12 million of acquisition-related charges. We continue to expect restructuring charges of approximately $150 million for the full year as we optimize our manufacturing footprint and enhance the cost structure of the organization. Adjusted EPS was $1.86 and GAAP EPS was $1.83 for the quarter, including a tax-related benefit of $0.06, along with 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%. We maintain expectations for our adjusted effective tax rate to stay at around 19% for the full year but importantly, we continue to expect our cash tax rate to remain well below our adjusted effective tax rate for the entire year. Now turning 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. Approximately one-third of our organic growth was driven by price increases, while the remaining two-thirds came from volume due to 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 present a sequential headwind of approximately $70 million and a year-over-year headwind of about $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 at 18.6%, and I am pleased with our team's performance given the incremental inflationary and supply chain pressures. We continue to pull pricing levers to partially offset these pressures, and as we previously mentioned, while we are not able to offset these costs dollar-for-dollar, we continue to recover approximately two-thirds through pricing and the remaining through productivity initiatives. We are continually taking pricing actions to counteract inflationary pressures. Cash flow generation for the quarter included cash from operating activities totaling $579 million and free cash flow of $423 million. As noted in past calls, the year-over-year trend in free cash flow reflects strategic inventory builds. However, we expect to work down inventory this quarter, with Q4 anticipated to be the highest quarter of free cash flow for the fiscal year. Through the first three quarters, we have returned approximately $1.6 billion to shareholders, with around $1.1 billion returned through share buybacks. We will continue to remain disciplined in our capital use. In the near term, we've been aggressive in buying back our stock and taking advantage of investing in our value creation opportunities. Overall, we've made substantial progress towards our business model over the past few years, and our teams continue to execute well in this volatile environment. The strategic positioning of our portfolio has enabled us to deliver sales growth, margin resilience, and EPS expansion despite the challenges we're facing. Now, let's open the floor for questions. Sujal?
Sujal Shah, Vice President of Investor Relations
Hey, thank you. Can you please give the instructions for the Q&A session?
Operator, Operator
Our first question comes from Chris Snyder with UBS. Your line is open.
Chris Snyder, Analyst
Thank you. I wanted to ask about expectations for global auto production over the next couple quarters. Obviously, there’s a big debate in the market. Consumers are pressured, but we've already had production year-to-date levels for the last two years. So just what are you hearing from customers around expectations for production and, in turn, connectors over the visible time horizon, and I would also be interested in any views on the auto demand versus production debate? Thank you.
Terrence Curtin, CEO
Sure, Chris. Thanks for the question. Let's frame it a little bit. Auto production, I talked about it in my comments; we think in our fiscal year, the September year, there can be 76 million vehicles made this year, which is the same amount as last year. And regarding demand, we would tell you we believe demand is well above 80 million units. Also, to provide another context, back in 2019, pre-COVID, approximately 88 million cars were made globally. So we still have a way to go to get back to pre-COVID production. Inventory levels in almost every region of the world are still very low. Therefore, we think there is potential for production increases even if demand comes down a little bit, as there remains a significant disconnect between demand levels versus what our customers can deliver. Much of that is well documented by the OEMs regarding semiconductor supply issues. We recorded 18 million units produced this quarter. Going into the next quarter, we expect 19 million units, suggesting an upward momentum in production as we advance into next year, assuming supply chain issues continue to improve. I also want to stress that TE controls content, not production. TE does not manufacture semiconductors. It is notable that despite frustrations surrounding production levels, our overall content has expanded. You can see that $20-plus delta per vehicle—about 60% of it driven by electric vehicle growth, and the other 40% coming from electronics on both combustion engines and electric vehicles. I believe that while production challenges have persisted, we are still well below demand levels, and if we can alleviate some issues surrounding semiconductors and other supply chains, there could be upsides as we move into next year, even in a cloudy macro environment.
Sujal Shah, Vice President of Investor Relations
Okay. Thank you, Chris. Can we have the next question, please?
Operator, Operator
The next question comes from David Kelly with Jeffries. Your line is open.
David Kelly, Analyst
Hey, good morning, Terrence and Heath. Thanks for taking my question. Maybe to follow up on the order summary page, specifically the transportation and communications orders which pulled back a bit here. Can you talk about demand trends, perhaps transportation, outside of automotive, and what you're seeing in communications? Can you also give us a sense of how orders are tracking for both markets in Q4 to date? That would be great. Thank you.
Terrence Curtin, CEO
Sure. Let me take the last piece of your question first. When you look at our orders in July from a TE level, they are running very similarly to what they were running last quarter. Our orders overall have been pretty steady here. What we saw last quarter transitioning into this one month in, so from July, they remain healthy. The other thing to keep in perspective is that customers were ordering ahead. We have an elevated backlog position. Even in our communications segment, last year in this quarter, our orders were over $800 million, so there are very strong year-over-year comparisons. What we look at in our orders is orders combined with backlog; as mentioned, we have $1 billion of backlog in communications. Our communication customers effectively secured supply and did a better job than transportation customers. Overall trends indicate that while the industrial markets appear to be accelerating, we find myself and the team optimistic about future demand, with the exception of what we've mentioned regarding the appliance market where we anticipated moderation. In that context, talking about moderation, there was a 12% decrease from our March quarter to our June quarter of our orders, which we expected concerning the consumer-facing markets, especially China.
Sujal Shah, Vice President of Investor Relations
Okay. Thank you, David. Can we have the next question, please?
Operator, Operator
Our next question comes from Wamsi Mohan with Bank of America. Your line is open.
Wamsi Mohan, Analyst
Yes. Thank you. Terrence, can you talk about the various moving pieces and margins across the segments? Automotive was weaker and I know you experienced a lot of headwinds in the quarter, but comps in industrials were quite strong. How should we think about the trajectory from here? And could you also address how the incremental margin should track? It seemed to decelerate somewhat in the quarter. Thank you.
Heath Mitts, CFO
Hey, Wamsi. This is Heath. I appreciate the question. Let’s start with where we are at TE in total—tracking around the mid-18% level, consistent with where we've been all year. The strength in our communications segment and improvement seen in industrial has helped offset pricing lag in our automotive business overall. However, we are pleased with the diversity of the portfolio and our ability to withstand these volatile environments. Part of the answer involves the timing of price increases that affect us; in transportation specifically, the many automotive customers have a lag between price increases for us and the consequent impact of inflation. It's important to note that the inflation landscape varies widely across the world, particularly in Europe, where rising energy prices are a headwind. Despite these challenges, we’re offsetting about two-thirds of inflationary pressures through price; as you know, moving into positive pricing was significant post-COVID, but we aren't able to offset costs dollar-for-dollar. This also necessitates productivity initiatives alongside restructuring activities. Additionally, transportation did experience some impact from supply chain irregularities, mainly due to the inefficiencies of shipping significantly in just the last month of the quarter after two months of delays. Moving forward, we believe we’ll continue enhancing our price control capabilities. So, hopefully, this answers your questions. Thanks.
Sujal Shah, Vice President of Investor Relations
Thank you, Wamsi. Can we have the next question, please?
Operator, Operator
Our next question comes from Mark Delaney with Goldman Sachs. Your line is open.
Mark Delaney, Analyst
Yes. Good morning and thank you for taking my question. I'd like more insight into FX impacts from a couple of dimensions. First, you spoke of translational impacts, but are you seeing a change in business conditions? Are any international firms being more aggressive with quoting activity given the shifts in currencies? Additionally, regarding the P&L, could you clarify the Q4 sequential EPS impact? I believe you stated it to be about $70 million in revenue quarter-on-quarter; could you comment on the expected EPS impact?
Heath Mitts, CFO
Sure, Mark. As I stated on the call, regarding our FX impact, it escalated in severity since we spoke 90 days ago when I anticipated a negative FX effect ranging between $400 million and $500 million for the full year; that number has now increased to about $700 million. Approximately 75% of this negative impact occurred in the second half of our fiscal year, which is relevant right now. In terms of overall EPS impact, all combined, that translates to about $0.17 for the FY2022. Regarding the fourth quarter, we anticipate this number to reflect a year-over-year impact of about $275 million, so it has indeed worsened compared to the third quarter. Looking into FY2023, while we’ll provide more guidance next quarter, if one was to draw a clear line based on current currency rates, we would expect about $300 million to act as a headwind in FY2023, mostly concentrated during the first half. As for the competitive landscape, we haven't seen much change yet, but we are keeping a close eye on it. Overall, we haven't noticed any significant shifts in how competitors are positioning themselves concerning currencies. We're prudent about our global balance sheet.
Sujal Shah, Vice President of Investor Relations
Okay, thank you, Mark. Can we have the next question, please?
Operator, Operator
Our next question comes from Joe Giordano with Cowen & Company. Your line is open.
Robert Jamieson, Analyst
Hey, good morning. This is Robert Jamieson in for Joe. I'd like to pivot quickly and ask about your buyback activities. It appears you all are running about two times the pace compared to last year. Any changes to your capital allocation strategy?
Heath Mitts, CFO
This is Heath, I'll take this question. Long-term, our strategy is unchanged, right? Over a cycle, we still think about two-thirds of our free cash flow being returned to shareholders in the form of buybacks and dividends, and about one-third being used for M&A. However, we've always stated that there will be times when we might invest more in M&A and other times when we might prioritize buybacks, depending on market dynamics. The strong balance sheet has enabled us to adopt an offensive posture, manifesting itself in strategic inventory builds and flexible working capital to ensure we are maximizing care for our customers. We've taken considerable advantage of our free cash flow to initiate buybacks. Although I wouldn’t view this as a permanent change, it's merely an opportunity for us to create value for our shareholders.
Sujal Shah, Vice President of Investor Relations
Okay. Thank you, Rob. Can we have the next question, please?
Operator, Operator
Your next question comes from Amit Daryanani with Evercore. Your line is open.
Amit Daryanani, Analyst
Yes. Good morning, everyone. Terrence, I have a question for you regarding expectations beyond the September quarter. There are many concerns around what 2023 could look like given the macro worries. Could you share some thoughts on your expectations across segments for the upcoming year? It would be helpful to level-set expectations around growth rates. Also, Heath, could you clarify why margins are projected to decline sequentially in the September quarter while some headwinds might have alleviated?
Terrence Curtin, CEO
Thanks, Amit. As you know, we've been guiding a quarter out, so anything we share for next year will be firmed up in 90 days. However, here are some preliminary thoughts to consider. Regarding transportation, we're seeing robust content trends driven by the onset of electric vehicles, this is not confined to one or two OEMs; every OEM is rolling out electric vehicle programs, and we continue to benefit from this content momentum. Thus, I expect to stay toward the higher end of the growth range that we've discussed, being in the 4-6% range. This applies to commercial transportation as well. It is worth noting that China faced challenges this year, causing a global contraction; however, our team has seen growth. As they emerge from COVID, we anticipate stimulus in China to foster infrastructure investment and provide auto production support, yielding potential upside in both markets. On the industrial front, I feel optimistic about trends in CapEx and renewable energy, especially within energy-related sectors that have seen 17% growth this quarter. We anticipate continued momentum there. In terms of commercial air and medical, while we expect improvements, we are still well below pre-COVID levels, implying growth potential as large air framers progressively ramp production. In communications, it could be a mixed scenario; the appliance market may moderate next year; however, we expect growth in cloud CapEx. There's uncertainty regarding if it remains at 20%, but we anticipate solid growth. Overall, although there are various moving parts, the current order trends combined with our content growth suggest a constructive outlook for 2023. As mentioned, we'll refine these insights in our next quarterly call, providing more clarity.
Heath Mitts, CFO
Amit, regarding your question about implied margins for the fourth quarter, we did not provide a definitive margin guide. However, if you're estimating a margin number from sales and EPS, note a key point; our adjusted effective tax rate increases will factor into the fourth quarter’s EPS. Consequently, we don’t foresee a dramatic margin decline. If anything, we expect some pressure due to the communications segment hitting lower revenue levels within the fourth quarter, particularly due to appliance products. There are no changes to our expectations surrounding inflation and pricing having noted that we can only cover approximately two-thirds. Additionally, we'll be addressing some inventory levels, and this may create slight impacts. Yet we do not anticipate substantial deterioration in the margins.
Sujal Shah, Vice President of Investor Relations
Okay, thank you, Amit. Can we have the next question, please?
Operator, Operator
Your next question comes from William Stein with Truist Securities. Your line is open.
William Stein, Analyst
Great. Thanks for taking my question. Terrence, if we zoom out and look at overall revenue performance and booking trends, it feels like we are experiencing an elusive soft landing. We are still witnessing solid revenue growth; however, orders are declining from the elevated levels we've seen in recent quarters. Would you agree on this characterization, and how many more quarters of this performance do you foresee? Do you anticipate this pattern of moderation in orders while revenue growth remains strong to continue?
Terrence Curtin, CEO
Thank you for the question. Indeed, we’ve discussed this before. An average lead time for our product ranges from six to twelve weeks. Please consider this when analyzing TE; our lead times are not akin to those of other product categories, which can considerably vary. When discussing book-to-bills of around 1.20, we always indicated that as markets normalize, fiscal results would reflect more typical patterns. As I look at transportation nearing a one, we are projected to approach this level. Our backlog and order rates remain strong, especially in communications, where we currently maintain a backlog exceeding $1 billion. This suggests confidence among customers in fulfilling the existing backlog, which should mitigate the need for additional orders. We will continue to monitor pushes and cancellations—thus far, we aren't seeing significant shifts in order cancellations. Therefore, with the indicators under consideration, our performance trends reflect continued demand in some markets for commercial aerospace while emphasizing potential softening for appliances. Overall, we believe book-to-bills will normalize alongside these concurrent order trends.
Sujal Shah, Vice President of Investor Relations
Okay. Thank you, Will. Can we have the next question, please?
Operator, Operator
Your next question comes from Samik Chatterjee with J.P. Morgan. Your line is open.
Unidentified Analyst, Analyst
Hi, this is MP on for Samik Chatterjee from J.P. Morgan. Thank you for taking my question. I wanted to inquire about order trends in the industrial sector; some competitors have recently downgraded their growth expectations in this space. Coupled with declining global PMIs relative to earlier indicators for this year, what fosters the strong order growth you experience, particularly given you’re seeing acceleration in this space?
Terrence Curtin, CEO
Thank you for your question. We are closely monitoring developments in our industrial business unit, which relates significantly to overall customer backlogs. Our customers represent robotics manufacturers globally and participate actively in critical automation initiatives and overall manufacturing capacity—this has resulted in strong demand. Firms are prioritizing automation, and capital expenditures remain robust, thus fueling continued backlog growth for our customers. Ultimately, our extensive global presence has positioned us favorably, translating into orders that are representative of customers fulfilling their backlog in a rising environment, and we have consistently recorded outperformance over the past year and a half.
Sujal Shah, Vice President of Investor Relations
Okay. Thank you. Can we have the next question, please?
Operator, Operator
Your next question comes from Matt Sheerin with Stifel. Your line is open.
Matt Sheerin, Analyst
Yes. Good morning, everyone.
Terrence Curtin, CEO
Hey, Matt.
Matt Sheerin, Analyst
Terry, I was hoping to get your take on the inventory situation at your customers. Given longer lead times, we may see double ordering of your products. Are you sensing any inventory growth, particularly in the industrial markets where distribution exposure is prevalent? We’ve observed significant inventory buildups at EMS and OEMs, and at some point that could lead to corrections. Are you witnessing this or expecting such a situation?
Terrence Curtin, CEO
It's important to clarify that there have been efforts to ensure manufacturing isn't halted because of connector shortages. Manufacturers waiting on semiconductors will still acquire the required interconnect components to proceed with assembly. Distribution inventory levels are still approximately 15 days lower compared to pre-COVID expectations, indicating that distribution channels have not yet reached normal levels. Given this backdrop, our monitoring of inventory positions remains crucial to prevent potential overload within distribution channels. Presently, inventory levels are stable but do require close attention to modify necessary shifts as circumstances evolve.
Sujal Shah, Vice President of Investor Relations
Okay. Thank you, Matt. Can we have the next question, please?
Operator, Operator
Your next question comes from Christopher Glynn with Oppenheimer. Your line is open.
Christopher Glynn, Analyst
Thanks. Good morning, Terrence, Heath, Sujal.
Terrence Curtin, CEO
Hey, good morning.
Christopher Glynn, Analyst
I had a question regarding how you view market share in the electric vehicle sector. Are you able to cite or observe share gains there, or do you believe the market remains too early to confirm?
Terrence Curtin, CEO
I think we begin with acknowledging that we currently hold a robust position in market share. Essentially, we're present in nearly every car globally. Thus, we feel confident in our strong positioning historically tied to combustion engine operations. The content per vehicle increases approximately double in electric vehicles, translating into additional benefits with low voltage architectures upon adding in high voltage motors. From a market share perspective, we are positively securing new programs consistent with our global pre-eminence and similarly excellent historical standings.
Sujal Shah, Vice President of Investor Relations
Okay. Thank you, Chris. Can we have the next question, please?
Operator, Operator
Your next question comes from Shreyas Patil with Wolfe Research. Your line is open.
Shreyas Patil, Analyst
Hey, thanks so much. I just want to understand the relationship between order activity and backlog. For example, if you're observing segments like transportation attaining a more normalized book-to-bill, yet simultaneously seeing backlog growth, is the correct interpretation that order activity could decline as customers attempt to reduce backlog? I am trying to grasp how we should interpret these metrics moving forward.
Terrence Curtin, CEO
Regarding book-to-bill figures at one, this indicates that backlog isn't experiencing growth. When analyzing book-to-bill ratios, it's crucial to appreciate that the two figures—orders and revenue—interact. Observing increases in output linked to our revenue growth means that order figures must adjust as well. We did note strong bookings; furthermore, we mentioned earlier that in communications, a backlog of $1 billion conveys confidence. Customers will likely fulfill the backlog before placing additional orders. This needs contemplation as pushes and cancellations are not re-appearing significantly at this point. Thus, as indicated during this conference, TE is less dependent on long-term backlog than other sectors, as most of our schedules span between six to nine months.
Sujal Shah, Vice President of Investor Relations
Okay. Thank you, Shreyas. Can we have the next question, please?
Operator, Operator
Your next question comes from Jim Suva with Citigroup. Your line is open.
Jim Suva, Analyst
Thank you. I know it's just an accounting detail regarding the extra week, but I realize that there are other implications, including annual changes with stock vesting, merit increases, and various OEM production model changes. Could you provide further insight on how the last quarter's additional week impacts expectations for Q1? While it sounds relatively linear, it's likely more complex than first impressions may indicate. Additional clarity for Q1 would be greatly appreciated to establish appropriate expectations for revenues and EPS for our financial forecasting.
Terrence Curtin, CEO
Thanks, Jim. It’s great to hear from you. I'll allow Heath to address that.
Heath Mitts, CFO
Thanks, Terrence. Regarding Jim's question, the extra week introduces consistency to our fiscal calendar every five to six years. Operationally, nothing changes; all employee schedules and operations remain consistent as we prepare for the transition into FY2023. As we estimated, the extra week should yield about $250 million in revenue and approximately $0.10 in EPS. We'll adjust expectations for the fourth quarter results and Q1 guidance accordingly when we close our books in 90 days. In the first quarter, we resume our standard 13-week period which reflects back to normal metrics.
Sujal Shah, Vice President of Investor Relations
All right. Thank you, Jim. Can we have the next question, please?
Operator, Operator
Your next question comes from Steven Fox with Fox Advisors. Your line is open.
Steven Fox, Analyst
Thanks. Good morning. I heard all the comments regarding margins. However, I wanted to delve deeper into communications margins. I know you previously suggested not to anticipate these mid-20 margins to replicate, yet they continue to persist. What underlying fundamentals support these margins?
Heath Mitts, CFO
Thanks, Steve. I acknowledge previous guidance indicated high teen operating margins should be expected within this segment, and I've noted that we’ve experienced margins significantly above that for the last couple years. It's critical to recognize that reaching this segment’s current performance took substantial time and competition. Several years ago, we offloaded about $1 billion in consumer products, undergoing restructuring to elevate this business to where it stands today. Enhancing operating footprint efficiency has enabled robust performance. Aggressive pricing strategies across both industrial and communications businesses have yielded effective pass-throughs; particularly in these segments working via channel partners has been advantageous, enabling swift pricing adjustments compared to transportation. Appliance sectors could present potential for moderation, but the operational structure remains solid, reflecting a positive margin outlook.
Sujal Shah, Vice President of Investor Relations
Okay. Thank you, Steve. Can we have the next question, please?
Operator, Operator
Your next question comes from Joseph Spak with RBC Capital Markets. Your line is open.
Joseph Spak, Analyst
Thanks so much. Could you offer insights into how your customers view situations in Europe, especially amid the ongoing energy issues? Ironically, some transportation and industrial players seem focused on maximizing production while foreseeing potential challenges over the winter. Are you detecting any indications of this being true? Also, since you possess facilities in Germany, are gas shortages likely to directly affect your operations?
Terrence Curtin, CEO
Yes. Great question. It is critical that we are engaged with our customers in real-time on this pressing issue. No one approach fits all, and we need to stay connected with specific customer challenges in Europe. Some firms are still adapting to recent changes. We have a team closely monitoring customer feedback while understanding that for facilities we operate, particularly in Europe, any customer production output issues could impact us. Thus, we need to retain flexibility in our strategies as circumstances continually evolve.
Sujal Shah, Vice President of Investor Relations
Thank you, Joe. Can we have the next question, please?
Operator, Operator
Your next question comes from Luke Junk with Baird. Your line is open.
Luke Junk, Analyst
Good morning. Heath, could you elaborate on the industrial margin observed this quarter? It's a new high watermark, marked by notable sequential improvements. Previous instances of such notable jumps occurred last year. Last time such a major increase presented, it maintained a long-term positive trajectory. Hence, could you offer insight into the causes of this progress and the expected industrial margin trajectory moving forward? Thank you.
Heath Mitts, CFO
Sure. Thanks, Luke. We've been public about our commitment to enhancing margins in this segment for nearly five years. The restructuring efforts taken, including winding down over 20 facilities and consolidating operations, have driven this journey forward. Today, we see two-thirds of this mission accomplished, though we didn't foresee the COVID interruptions that reshuffled the timeline—our focus has remained on this strategy despite the challenges. The strategy includes sharing synergies as we integrate acquisitions which enhance the overall operational capability. Notably, our most recent acquisition, ERNI, presents a significant opportunity to elevate margins within industrial equipment. Although some performance areas lag, primarily due to volume constraints affecting medical and commercial aerospace markets, we are optimistic about driving improved margins into the future. Margin expansion correlates with volume increase and enhanced operational efficiency, while our communications segment has demonstrated its pricing power with beneficial overall implications.
Sujal Shah, Vice President of Investor Relations
Okay. Thank you, Luke. Can we have the next question, please?
Operator, Operator
Your next question comes from Nikolay Todorov with Longbow Research. Your line is open.
Nikolay Todorov, Analyst
Yes. Thanks and good morning. I have two clarification questions. In automotive, you reported 9% growth versus production, but I wonder if there was an inventory increase in the June quarter last year that might suggest your outgrowth was even stronger? For my second clarification, regarding FX, I believe you estimated a $70 million to $75 million sequential revenue impact. What will be the sequential EPS impact?
Terrence Curtin, CEO
When evaluating the performance in any quarter, it’s essential to be cautious about tying in inventory levels, especially given volatility. In this case, I do not believe substantial inventory impacts our outperformance observed. In reference to second quarter comparisons, it's essential to consider the dynamics of inventory fluctuations.
Heath Mitts, CFO
Nikolay, apologies if we didn’t provide that. We estimate the sequential FX impact to be around $70 million in revenue, translating to approximately $0.05 in EPS sequentially.
Sujal Shah, Vice President of Investor Relations
Okay. Thank you, Nik. Can we have the next question, please?
Operator, Operator
Your next question comes from William Stein with Truist Securities. Your line is open.
William Stein, Analyst
Great. Thanks for getting me back in. I apologize if this has been addressed already. Specifically concerning the transportation end market, you target a 20% EBIT margin. I understand we currently face well-documented inputs of inflation as well as FX impacts with notable time delays in passing these on. When should we anticipate approaching that 20% mark once more? Do you foresee it occurring in the next year or two, or is this prospect looking more distant?
Heath Mitts, CFO
Thanks for your inquiry. As mentioned, we have previously covered many factors affecting the current circumstances. Our stated target of 20% comes with the understanding that previous auto production volumes were lower—around 76 to 77 million. An increase to levels closer to 21 million units per quarter would afford better opportunities to capitalize on content advantages and enhance absolute volumes, propelling us toward that goal. We’ll aim to work optimally on our strategic initiatives to achieve that target.
Sujal Shah, Vice President of Investor Relations
Okay. Thank you, Will. I want to thank everybody for joining our call today. If you have further questions, please contact Investor Relations at TE. Thank you, and have a nice day.
Operator, Operator
Ladies and gentlemen, today’s conference call will be available for replay beginning at 11:30 AM Eastern Time today, July 27th on the Investor Relations portion of TE Connectivity’s website. That will conclude the conference for today.