Amphenol Corporation

And welcome to the fourth quarter earnings conference call for Antenol Corporation. Following today's presentation, there will be a formal question and answer session. Until then, all lines will remain in a listen-only mode. At the request of the company, today's conference is being recorded. If anyone has any objections, you may disconnect at this time. I would now like to introduce today's conference host, Sir Craig Lambeau. You may begin. Thank you.

Good afternoon, everyone. This is Craig Lampo, Amphenol CFO, and I'm here together with Adam Norwood, our CEO. We would like to welcome you to our fourth quarter 2018 conference call. Our fourth quarter 2018 results were released this morning. I will provide you some financial commentary on the quarter, and then Adam will give you an overview of the business as well as current trends, and then we will take questions. As a reminder, we may refer in this call to certain non-GAAP financial measures and may make certain forward-looking statements, so please refer to the relevant disclosures in our press release for further information. The company closed the fourth quarter with record sales of $2,225,000,000 and with record GAAP and adjusted diluted EPS of $1.09 and $1.05, respectively. exceeding the high end of the company's guidance for sales by approximately $122 million and adjusted diluted EPS by $0.07. Sales were up 14% in U.S. dollars and up 16% in local currencies compared to the fourth quarter of 2017. From an organic standpoint, excluding both acquisitions and currency, sales in the fourth quarter increased 14%. Sequentially, sales are up 4% in U.S. dollars and 5% in local currencies and organically. Breaking down sales into our two segments, our cable business, which comprised 5% of our sales, was up 12% in U.S. dollars and up 15% in local currency compared to the fourth quarter of last year. The interconnect business, which comprised the remainder of our sales, was up 15% in U.S. dollars from last year driven primarily by organic growth. For the full year 2018, sales were a record $8,202,000,000. Sales were up 17% in US dollars and in local currency and up a very strong 14% organically compared to 2017, an excellent performance. Adam will comment further on trends by market in a few minutes. Adjusted operating income was $466,000,000 for the fourth quarter of 2018. Adjusted operating margin was a record 21% in the fourth quarter of 2018, up 50 basis points compared to the fourth quarter of 2017 of 20.5%, and up 10 basis points compared to the third quarter of 2018 of 20.9%. From a segment standpoint, in the cable segment, margins were 11.9%, which is up compared to 11.2% in the fourth quarter of 2017. In the interconnect segment, margins were strong 22.8%. in the fourth quarter of 2018, which is up compared to the fourth quarter of last year at 22.4%. For the full year, 2018, the company delivered $1,695,000,000 in adjusted operating income, up a strong 18% from 2017. We continue to be very pleased with the company's adjusted operating margin achievement, both with the achievement of 20.7% for the full year, as well as 21% for the fourth quarter. This excellent performance is a direct result of the strength and commitment of the company's entrepreneurial management team, which continues to foster a high-performance action-oriented culture in which each individual operating unit is able to appropriately adjust to market conditions and thereby maximize both growth and profitability in a dynamic market environment. Through the careful fostering of such a culture and the deployment of these strategies to both existing and acquired companies, Our management team has achieved industry-leading operating margins and remains fully committed to driving enhanced performance in the future. Interest expense for the quarter was $26 million, which is comparable to last year. The company's adjusted effective tax rate was approximately 25.5% for the fourth quarter of 2018, compared to 26.7% in the fourth quarter of 2017. The adjusted effective tax rate excludes the impact of the tax charge in 2017 and related finalization in 2018 resulting from the Tax Act, as well as the excess tax benefits associated with stock option exercises and the tax effect of acquisition-related costs incurred in the 2018 period. The company's gap effective tax rate for the fourth quarter of 2018, including the items just mentioned, was approximately 21%, compared to 126.5% in the fourth quarter of 2017. For the full year, the adjusted effective tax rate was 25.5% and 26.5% for 2018 and 2017, respectively. The adjusted effective tax rate excludes the impact of the tax charge in 2017 and related finalization in 2018 resulting from the Tax Act. as well as the excess tax benefit associated with the stock option exercises and tax effect of acquisition-related costs incurred in both periods. On a GAAP basis, including the items just mentioned, the company's full-year effective tax rate was approximately 23 percent and 51 percent for 2018 and 2017, respectively. Adjusted net income was a strong 15 percent and 14 percent of sales in the fourth quarter of 2018 and for the full year of 2018, respectively. On a GAAP basis, diluted EPS was $1.09 in the fourth quarter of 2018 compared to a loss of $0.34 in the fourth quarter of 2017. For the full year, GAAP diluted EPS was $3.85 compared to $0.06 in 2017. Both periods reflect the one-time tax and other items previously mentioned. Adjusted diluted EPS grew 22% to a record $1.05 in the fourth quarter of 2018 from $0.86 in the fourth quarter of 2017. For the full year 2018, adjusted diluted EPS was a record $3.77, up 21% over 2017 at $3.12. This strong growth was supported by excellent operating performance as reflected in the company's strong operating margins. Orders for the quarter were a record $2,198,000,000, a 10% increase over the fourth quarter of 2017, resulting in a book-to-bill ratio of 0.99 to 1. The company continues to be an excellent generator of cash. Cash flow from operations was $378,000,000 in the fourth quarter and $1.1 billion for the full year, or approximately 116% and 94% of adjusted net income, respectively. The full year amount includes the previously mentioned payment of approximately $81 million to fully fund our U.S. pension plans, as well as higher than normal tax-related payments during 2018 due to the Tax Act. Excluding both of these items, the cash flow from operations was 108 percent of adjusted debt income for the full year. From a working capital standpoint, inventory, accounts receivable, and accounts payable were approximately $1.2 billion, $1.8 billion, and $890 million respectively at the end of December. And inventory days, day sales outstanding, and payable days were 74, 73, and 53 days, respectively, which were all within our normal range. The cash flow from operations of $378 million, along with proceeds from the Euro bond offering of $572 million, were used primarily to purchase approximately $255 million of the company's stock. We repaid $245 million under our commercial paper programs and revolving credit facilities. to fund net capital expenditures of $101 million, and to fund dividend payments of $69 million, which resulted in an increase in cash, cash equivalents, and short-term investments on hand of approximately $272 million net of translation. During the quarter, the company repurchased 2.9 million shares of stock at an average price of approximately $87 under the $2 billion three-year open market stock repurchase plan. bringing total repurchases for the year to approximately 11 million shares or $935 million. At December 31st, cash and short-term investments were approximately $1.3 billion, the majority of which is held outside of the U.S. At December 31st, 2018, the company had issued approximately $624 million under its U.S. and Euro commercial paper programs. and the company's cash and availability under our credit facilities totaled approximately $2.7 billion. Total debt at December 31st of 2018 was approximately $3.6 billion, and net debt is approximately $2.3 billion. In addition, and as previously announced on January 7th, the company successfully launched a $500 million U.S. bond offering, which has a 10-year term and bears interest at 4.35%. The company will use the proceeds from the note issuance as well as capacity under its U.S. commercial paper program to repay the upcoming maturity of its $750 million U.S. senior note, which is due at the end of this month. As a result of the new 10-year bond offering just mentioned, which carries with it a higher interest rate than the rate on the $750 million note maturing at the end of January, as well as considering the rising interest rate environment impacting our variable rate debt, we expect our quarterly interest expense from the 2019 to increase to approximately $30 million. The fourth quarter 2018 adjusted EBITDA was approximately $585 million, bringing the company's full-year EBITDA to a record $2 billion. From a financial perspective, this was an excellent quarter and year. Before I turn the call over to Adam, I would like to make a brief comment relative to 2019 guidance. As mentioned in our press release, our significant beat in sales during the fourth quarter of 2018 compared to the high end of our guidance was primarily driven by incremental strength in the mobile devices market, along with strength in the IT datacom and communications market, partially offset by some additional weakness experienced in the automotive market. Given the incremental strength in the mobile devices market in the fourth quarter, we expect a commensurate decline in the mobile devices market in the first quarter, which will result in a higher than typical seasonal reduction in mobile devices sales. This decline is reflected in our higher than typical seasonal decline in our first quarter guidance, as well as in our full year growth expectations. In addition, we expect that our tax rate may come down slightly in 2019. At this point, we expect this reduction to be a maximum of 50 basis points, which is reflected in our 2019 guidance. I will now turn it over to Adam, who will provide an overview of the business and comment on current trends.

Adam Werner Well, thank you very much, Craig, and thanks to everybody here today joining us at the time of our quarterly earnings call. And I hope it's not too late to wish everybody on the phone a Happy New Year from the winter wonderland here in Connecticut today. As Craig mentioned, I'm going to spend a few moments just to highlight some of our fourth quarter and full year achievements. I'll then discuss the trends and progress across our served markets, and then finally I'll make some comments on our outlook for the first quarter and the full year, and of course we'll have time for some questions at the end. As Craig detailed, our results in the fourth quarter were substantially stronger than expected. As we exceeded the high end of our guidance in sales and adjusted earnings, reaching new records in orders, sales, and adjusted earnings per share. Sales grew by a very strong 14% in U.S. dollars and 16% in local currencies, reaching another new sales record for the company of $2,225,000,000. I would just say that we're pleased in particular to have grown organically in the quarter by a very robust 14% year-over-year. The company booked a new record of $2.2 billion in orders in the quarter, representing a book-to-bill of just under 1 to 1.99. And our adjusted operating margins were, once again, very strong in the quarter, reaching a new record of 21%. We also generated strong operating cash flow of $378 million in the fourth quarter. And this is, again, a great reflection of the quality of the company's earnings. I can just say with the fourth quarter, how proud I am of the Amphenol team. I think our results once again this quarter reflect the true value of the discipline and agility of Amphenol's entrepreneurial organization as we continue to perform well amidst the very dynamic market environment of the electronics industry, all while driving outstanding operating performance for the company. We're very pleased also in the quarter to announce that we have closed here in January just recently the SSI acquisition that was announced back in December. SSI is a provider of high-technology sensors and sensing solutions based in Janesville, Wisconsin, with annual sales of approximately $180 million. The company, which has operations in Wisconsin as well as in the Czech Republic, offers a wide variety of sensor products, including ultrasonic level sensors, pressure and speed sensors, to customers across the automotive and industrial markets. SSI represents an excellent complement to our growing portfolio of sensor products, which have become a core pillar of our overall InterConnect product offering. As we welcome this outstanding new team to Amphenol, we remain very confident that our acquisition program will continue to create great value for the company. In fact, it is really our ability to identify and execute upon acquisition opportunities and then successfully bring them into the Amphenol family that remains a core competitive advantage for the company. Now, just with respect to 2018, I would just reflect back and say that 2018 was really a very successful year for Amphenol. We expanded our position in the overall market, growing sales by a very strong 17% in U.S. dollars and local currencies, reaching a new sales record of $8.2 billion for the company. Organically, we grew by 14%. our highest level in the last eight years, and substantially above the levels we had anticipated coming into 2018. Our full-year adjusted operating margins for the company reached a new record 20.7%, and that strong level of profitability enabled us to generate adjusted diluted earnings per share of $3.77, which grew a strong 21% from prior year. And then finally, we generated substantial operating and free cash flow of 1.2%. $1 billion and $800 million, roughly, respectively. Our acquisition program also continued to create great value for the company in 2018 with the acquisitions of CTI, Ardent, and all sensors earlier in the year, and SSI, as I mentioned just here in January. We're really excited that these acquisitions represent expanded platforms for the company's future performance, in particular because of just the outstanding and talented individuals involved that we're so pleased to have welcomed to the Amphenol family. These new managers and the company deepen what is already a very strong bench of Amphenolians around the world. In addition, in 2018, we bought back nearly 11 million shares under our share buyback programs, as well as increasing our quarterly dividend by 21%. I would just say that Amphenol's long-term mission remains the same, that is to be the enabler of the electronics revolution. and through the organic development efforts of Amphenol's entrepreneurial organization, together with the benefits from our acquisition program, we've expanded our partnerships with a broadening array of customers across all of the company's diversified end markets. This has resulted in Amphenol strengthening our position across the many interesting and exciting segments of the electronics industry. And while the overall market environment towards the end of the year did become increasingly uncertain, as we enter 2019, our agile entrepreneurial management team remains highly confident that we have built a platform of strength from which we can drive superior long-term performance going forward. Now, turning to the company's trends and progress across our served markets, I would just comment that we're pleased that the company's balanced and broad and market diversification continues to create value for Amphenol. Once again, for the full year, no market represented more than 19% of our sales. And we truly believe that this diversification mitigates the impact of volatility of individual end markets while also very importantly exposing us to leading technologies wherever they may arise across the electronics industry. So turning to those markets, first the military market represented 10% of our sales in the fourth quarter and also 10% of our sales for the full year. Sales in the military market again grew strongly from prior year, increasing by a greater than expected 15% and actually 16% organically, driven by growth in avionics, military vehicles, rotorcraft, as well as ordnance applications. Sequentially, our sales increased by 4% into the normally seasonally softer winter quarter. For the full year of 2018, we're very pleased. that our military sales grew by an excellent 20% in U.S. dollars and 19% organic, and that really reflected broad-based strength across virtually all segments of the military market. Our organization working in this important market has really driven hard for many years to strengthen our broad technology position with customers across all segments of the military industry. The company's superior performance in 2018 showed is yet another great reflection of the results of those significant efforts. And given the ongoing favorable military spending environment, our team continues to solidify their leadership position by ensuring that we're able to execute on this increased demand by supporting the many next-generation technologies that are required for modern military hardware. Looking ahead, we expect sales in the first quarter to increase modestly from these fourth-quarter levels And for the full year 2019, we expect to achieve high single-digit sales growth on top of our already strong sales levels in 2018. The commercial aerospace market represented 4% of sales both in the fourth quarter and in the full year of 2018, and sales increased by a stronger than expected 10% as overall demand from commercial aircraft manufacturers continued to be robust. Sequentially, our sales increased by 8% from the third quarter. For the full year of 2018, we're very pleased that our sales grew by 13% as we benefited from our broad design ends of next generation interconnect products on new jet liners. In addition, we were encouraged to also begin to see some improvements in the sales of both business jets and helicopters here in 2018. Looking into the new year, we expect a slight moderation in sales from these levels in the first quarter, But for the full year, we expect a mid-single-digit sales increase, as procurement of our products used in commercial jetliners increases. We remain encouraged by the company's strong technology position across a wide array of aircraft platforms and next-generation systems that are integrated into those airplanes. And we look forward to benefiting from that position for many years to come. The industrial market represented 17% of our sales in the fourth quarter and 19% of our sales for the full year 2018. Sales in the fourth quarter were up slightly from prior year as stronger sales in medical, oil and gas, and rail mass transit were essentially offset by reductions in heavy equipment, factory automation, and alternative energy. On a sequential basis, sales were down by about 4% from the third quarter, reflecting some moderation in the overall industrial market. For the full year 2018, our sales in the industrial market grew by a very strong 16% in U.S. dollars and 9% organically, driven by excellent performance in medical, battery and electric vehicle, oil and gas, and rail mass transit, together with contributions from our acquisition program. No question that 2018 was another excellent year for our teams working in the industrial market. Through both our successful acquisition program as well as our organic innovations, we've developed a very broad array of products across a diversified range of exciting segments within the global industrial market. Very proud of the success and look forward to realizing the benefits from our efforts in the industrial market for many years to come. This quarter's addition of SSI to the Amphenol family further strengthens are already robust position in sensors that are used in heavy equipment, factory automation, as well as other very dynamic and high technology industrial applications. Looking into the first quarter of 2019, we anticipate a modest sequential increase in sales as we benefit from the addition of SSI. And for the full year 2019, we expect to realize high single-digit sales growth as we continue to benefit from our acquisitions as well as our organic growth efforts. The automotive market represented 16% of our sales in the fourth quarter and 18% of our sales for the full year 2018. Sales were a bit weaker than we had anticipated coming into the quarter, with revenues just up slightly from prior year, as our increased sales of interconnect and sensor products into new applications was nearly offset by moderated vehicle volumes. Sequentially, our automotive sales decreased by 2% in U.S. dollars, and we're basically flat organically from the third quarter. Regardless of this more recent slowing of demand from our customers in the automotive market in the fourth quarter, for the full year 2018, our sales grew by a very strong 14% in U.S. dollars and 7% organically, which is a great performance given the overall trends in global automobile production. We continue to benefit from the company's long-term and consistent strategy of expanding our range of interconnect sensor and antenna products, both organically and through acquisitions, which enables us to really drive a wide array of products into onboard electronics across a diversified range of vehicles that are made by auto manufacturers around the world. We're especially excited that the acquisition of SSI significantly bolsters our growing sensor offering for the global automotive market, expanding in particular our range of sensor products to include ultrasonic level, speed, and pressure sensors. I would also just note that since acquiring the advanced sensors operations just over five years ago, which was our first sensor acquisition, we've significantly expanded our sensor business while broadening our portfolio of high-technology products. Looking ahead in the automotive market for the first quarter, we expect sales to increase from current levels due primarily to the contributions from SSI. And for the full year 2019, we expect to achieve sales growth in the high single digits, driven by organic growth as well as the contributions from our acquisitions. We look forward to continuing to realize the benefits from our successful automotive business well into the future. The mobile devices market had a great quarter. Sales were 23% of our total in the fourth quarter and 17% for the full year. And our sales into this market were substantially stronger than expected in the fourth quarter, growing by a very significant 47%, as our shipments of products used in smartphones, in particular, strengthened significantly. But we did also realize growth related to laptops, tablets, wearables, and other accessories On a sequential basis, our sales grew a very substantial 34% from what was already a very strong third quarter. For the full year of 2018, sales in mobile devices increased by 41%, significantly ahead of our expectations coming into the year. Our growth for the year was driven by higher sales of products used in smartphones and accessories and was offset slightly by declines in the volumes of tablets. I can just tell you how proud I am of our team working in the mobile devices market. They were once again able to capitalize on substantial demand for next generation high technology components from our customers while really executing flawlessly on a very challenging ramp up of production to these high volume levels that we saw in the quarter. In addition, our team continues to dynamically adjust their resources in the face of the high level of volatility that we have always grown accustomed to in this market. Based on our significant incremental sales in the fourth quarter that were well beyond expectations, we now expect a sequential decline in sales for the first quarter of approximately 50%. While this is a greater than normal seasonal decline, when factoring in the higher than expected purchases of our products by customers in the fourth quarter, this seasonal decline is largely similar to what we have seen in prior years. For the full year of 2019, we expect our sales to decline in the mid to high teens, also due in part to this excess demand that we experienced in the fourth quarter of 2018. Despite this volatility in demand that we're expecting going into the new year, I can tell you that we remain encouraged by the company's very strong position in the mobile devices market. Our superior performance in 2018 is just an excellent confirmation that our team's proven ability to capitalize on unexpected opportunities from customers around the mobile device market really remains unrivaled in the industry. The mobile networks market represented 7% of our sales in the fourth quarter and 8% of our sales for the full year of 2018. Sales increased from prior year by 9% in U.S. dollars and 12% organically as we grew both with equipment manufacturers and service providers around the world. Sequentially, sales in the mobile networks market were down by approximately 4%, due to typical fourth quarter seasonality. We're particularly pleased that for the full year 2018, our sales grew by 10% in U.S. dollars and 8% organically, as we were able to capitalize on increased spending by a number of operators around the world. Looking ahead, we expect the first quarter 2019 sales to moderate from these levels, But for the full year 2019, we expect the low single-digit growth in the mobile networks market as operators further increase their spending on next-generation systems. We're very encouraged by our performance in the mobile networks market, which was, in the end, stronger than we had anticipated coming into 2018. I can just tell you that our team continues to work aggressively to expand our position with next-generation equipment and networks, And as customers plan for their next-generation advanced systems, we look forward to benefiting from the increased potential that comes from our unique position with both equipment manufacturers and mobile service providers around the world. And we believe this creates a significant long-term expansion potential for the company. The information technology and data communications market represented 19% of our sales, in the fourth quarter and 19% also for the full year 2018. Sales in the fourth quarter were stronger than we had expected coming into the quarter, rising a very robust 15% in U.S. dollars and 13% organically from prior year. And this was really driven by strong growth in particular in servers and storage systems, as well as also by improved demand for networking-related products. So really we saw growth across most of the areas of the IT Datacom market. Sequentially, our sales were down by just 3% from the high levels that we experienced in the third quarter, which was, as I said, better than we had expected coming into the fourth quarter. For the full year 2018, our sales grew by a strong 12% U.S. dollars and 9% organically, another year of excellent performance in this important and dynamic market. The company's strong results are a direct result of our team's continued efforts at developing industry-leading products across a wide array of technologies, including in particular high-speed and power interconnect products. In addition, our team continues to adapt quickly to the changing market environment in IT Datacom, in particular by capitalizing on the emergence of these new generation web service providers. Looking ahead, while we anticipate a low double-digit sequential decline from these high demand levels into the first quarter, For the full year 2019, we expect to achieve growth in the low single digits. I can tell you we're very encouraged by the company's strong technology position in the global IT datacom market. Our customers around the world are continuing to drive their equipment and networks to reach ever higher levels of performance in order to manage the dramatic increases in demand for bandwidth and processing power. In turn, Our team remains singularly focused on enabling this continuing revolution in IT Datacom through their ongoing development of a wide array of next-generation technologies. And then finally, the broadband communications market represented 4% of our sales in the quarter and 5% of our sales for the full year of 2018. Sales in broadband increased by a bit less than we had expected, 7% in U.S. dollars and 9% organically. with growth driven by increased spending on network build-outs by our service provider customers. On a sequential basis, sales decreased by a greater than expected 5% from the third quarter, although the fourth quarter is typically impacted by the winter weather. I would say that 2018 was a challenging year in the broadband market, as our sales were slightly down from prior year. On an overall pause in operator spending growth, And as we look into 2019, we expect our sales to remain at the current quarterly levels in the first quarter as operator spending remains stable. And for the full year 2019, we expect sales to be flat with our current 2018 levels. Despite this muted outlook for demand in the broadband market in 2019, we remain encouraged by the company's continually expanding range of products, together with our strong positions with customers around the world. We continue to position the company as the most flexible supplier, thereby ensuring that Amphenol can benefit should there be any upticks in demand from our customers. So just in summary, I can just tell you I'm extremely proud of the company's performance here in 2018. It was a truly special year for Amphenol as we passed $8 billion in sales and reached an adjusted return on sales of 20.7%. The Amphenol organization has clearly continued to execute extraordinarily well in this very dynamic marketplace. In particular, our dual-pronged approach of growing both organically and through our acquisition program has resulted in the company expanding our market position while strengthening our financial performance. Amphenol's superior performance is a direct reflection of the company's distinct competitive advantages. Our leading technology, our increasing position with customers across a diversified array of end markets, our worldwide presence, a lean and flexible cost structure, a highly effective acquisition program, and most importantly, the base of it all, an agile and entrepreneurial management team. So now turning to the outlook for the first quarter and full year of 2019, As both Craig and I have already mentioned, given the incremental and excess demand from the mobile devices market that we experienced in the fourth quarter, we do expect a commensurate reduction in sales in that market in addition to the traditional seasonal decline that we would typically see. In addition, we would just say that there is clearly a heightened level of uncertainty in the overall market environment, and that includes those factors related to trade policy. On this basis and based on constant exchange rates, we now expect for the first quarter and full year 2019 the following results. For the first quarter, we expect sales in the range of $1,898,000,000 to $1,938,000,000 and diluted EPS in the range of $0.86 to $0.88 respectively. This represents the sales increase versus prior year of 2% to 4% in U.S. dollars and 5% to 7% in local currency, and an increase versus prior year of adjusted diluted EPS of 4% to 6%. For the full year 2019, we expect sales in the range of $8,190,000,000 to $8,350,000, and diluted EPS in the range of $3.88 to $3.96, respectively. For the full year, this represents sales and adjusted diluted EPS growth of flat to 2% and 3% to 5% over 2018 levels, respectively. I can just say once more that we're very encouraged by the company's record performance in 2018, and we look forward to driving further strength going forward, even given the many dynamics around the world. I'm confident in the ability of our outstanding management team to build upon our new performance records and to continue to capitalize on the many future opportunities to grow our market position while also expanding the company's profitability. And with that, operator, it would be our pleasure to take any questions.