Amphenol Corporation

Hello and welcome to the first quarter earnings conference call for Anthenol Corporation. Following today's presentation, there will be a formal question and answer session. Until then, all lines will remain in 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, Mr. Craig Lampo. Sir, you may begin.

Thank you very much. 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 first quarter 2019 conference call. Our first quarter of 2019 results were released this morning. I will provide some financial commentary on the quarter, and then Adam will give an overview of the business as well as current trends, and then we will take questions. As a reminder, we may refer on 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 first quarter with sales of $1,959,000,000 and with GAAP and adjusted diluted EPS of $0.87 and $0.89, respectively. Sales are up 5% in U.S. dollars and up 8% in local currencies compared to the first quarter of 2018. From an organic standpoint, excluding both acquisitions and currency, sales in the first quarter increased 5%. Sequentially, sales were down 12% in U.S. dollars and in local currency and 14% organically. The sales decline was driven primarily by the anticipated reduction in the mobile devices market. Breaking down sales into our two segments, Our cable business, which comprised 5% of our sales, was down 1% in US dollars and up 2% in local currency compared to the first quarter of last year. The interconnect business, which comprised 95% of our sales, was up 5% in US dollars and 8% in local currency compared to last year. Adam will comment further on trends by market in a few minutes. Adjusted operating income was $393 million for the first quarter of 2019. adjusted operating margin was 20.1 percent, which is down 10 basis points compared to the first quarter of 2018, reflecting the impact of SSIs slightly lower than company average profitability. Compared to the fourth quarter of 2018, adjusted operating margins are down 90 basis points, which is primarily driven by normal conversion on the reduced sales levels. From a segment standpoint, in the cable segment, margins were 10.9 percent, which was down compared to 11.7% in the first quarter of 2018, primarily driven by product mix. In the interconnect segment, margins were a strong 22% in the first quarter of 2019, which was down slightly compared to the 22.1% in the first quarter of last year. This strong 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 the 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 approximately $30 million, which compares to $25 million last year. As discussed in our prior earnings call, this increase is due to higher average interest rates as a result of the recent bond issuance and the generally higher interest rate environment in addition to higher average debt levels. The company's adjusted effective tax rate for the first quarter of 2019 was approximately 24.5%. which we expect to maintain this year. This compared to 25.5% in the first quarter of 2018 and compares to our prior expectation and guidance of 25%. The adjusted effective tax rate excludes the impact of the excess tax benefit associated with stock option exercises and the tax effect of acquisition-related costs incurred in both periods. The company's GAAP effective tax rate for the first quarter of 2019, including the items just mentioned, was approximately 22.8% compared to 24.4% in the first quarter of 2018. Adjusted net income was a strong 14% of sales in the first quarter of 2019. On a GAAP basis, diluted EPS grew 4% in the first quarter of the year to 87 cents compared to 84 cents in the first quarter of 2018. Adjusted diluted EPS grew 7% to 89 cents in the first quarter of 2019 from 83 cents in the first quarter of 2018. Orders for the quarter were $2 billion and $3 million, which was down 1% compared to the first quarter of 2018, resulting in a book-to-bill ratio of 1.02 to 1. The company continues to be an excellent generator of cash. Cash flow from operations was $344 million in the quarter, or approximately 125% of adjusted debt income. From a working capital standpoint, inventory, accounts receivable, and accounts payable were approximately $1.2 billion, $1.7 billion, and $797 billion, respectively, at the end of March. In inventory days, day sales outstanding and payable days were $84, $78, and $55, respectively, all within our normal range. The cash flow from operations of $344 million, along with proceeds from the bond offering of $500 million, borrowings of $268 million from our commercial paper program, proceeds from the exercise of stock options of $47 million, in cash, cash equivalents, and short-term investments on hand of approximately $306 million net of translation, were used primarily to repay the $750 million five-year senior note, to fund acquisitions of approximately $399 million, to repurchase approximately $160 million of the company's stock, to fund net capital expenditures of $70 million, and to fund dividend payments of $69 million. During the quarter, the company repurchased 1.8 million shares of the stock at an average price of approximately $90 under the $2 billion three-year open market stock repurchase plan. At March 31st, cash and short-term investments were approximately $1 billion, the majority of which is held outside the US. At the end of the quarter, the company had issued approximately $889 million under its US and Euro commercial paper programs, and the company's cash and availability under our credit facilities totaled approximately $2.6 billion. Total debt at March 31st was approximately $3.6 billion, and net debt was approximately $2.6 billion. In addition, we have adopted the new lease accounting standard, which was effective during the first quarter of 2019. I would note that the new standard had no impact on the income statement or cash flow, and the balance sheet reflects a gross up of approximately $180 million for the right-to-use asset and the offsetting lease liabilities recorded related to the company's outstanding leases. The first quarter 10-Q will include the relevant and required disclosures related to this new standard. The first quarter of 2019 adjusted EBITDA was approximately $479 million. From a financial perspective, this was an excellent quarter. Before I turn the call over to Adam, I would like to make a brief comment relative to the 2019 guidance. Our current guidance reflects a reduction in our expectations for the mobile devices market, resulting in an anticipated full-year decline of approximately 30% for this market. This compares to our prior expectation of mid- to high-teens decline. Adam will comment further on trends by market in a moment. I will now turn it over to Adam, who will provide an overview of the business and comment on current trends.

Well, Craig, thank you very much, and thanks to everybody for joining our conference call here on a wonderful spring day in Wallingford, Connecticut. As usual, I'm going to highlight our achievements in the quarter and then spend a little bit of time discussing the trends and progress across our diversified served markets. Then I'll spend a few moments to comment on our outlook for the second quarter and the full year. And then, of course, we'll have time at the end for questions. With respect to the first quarter, our results in the quarter were stronger than we had expected coming into the quarter. We exceeded the high end of our guidance in both sales and adjusted earnings per share. Sales in the quarter grew 5% in U.S. dollars and 8% in local currencies. reaching $1,959,000,000, and very pleased that sales in the quarter grew organically by 5%. The company also booked just over $2 billion in orders, representing a book-to-bill of 1.02 to 1, and our adjusted operating margins were again very strong in the quarter, reaching 20.1%. Finally, the company generated strong operating cash flow of $344 million in the first quarter, as Craig described, which is yet another strong reflection of the quality of Amphenol's earnings. Just have to say with respect to our overall results in the quarter that I'm extremely proud of our team around the world. The results this quarter once again reflect the true value of the discipline and agility of Amphenol's entrepreneurial organization as we continue to perform well amidst the very dynamic electronics industry, all while driving outstanding operating performance for the company. Very pleased in the quarter to have completed two new acquisitions, actually just in the last several weeks, which collectively represent $140 million of annualized sales and which we acquired for a total purchase price of approximately $200 million. Aurora, which we completed three weeks ago, is a provider of high technology, fine-pitched printed circuit board connectors based in Huizhou, China. Aurora has annual sales of approximately $20 million. Aurora's products are sold into the automotive and IT datacom markets and are incorporated in particular into embedded computing platforms in these areas. The company represents a great complement to our already broad array of connector products for these important markets. Charles Industries, which closed actually just yesterday, is a manufacturer of harsh environment fiber optic and copper interconnect enclosures sold to service providers in the mobile networks and IT datacom markets. Charles is based in Schaumburg, Illinois, and has manufacturing operations around the U.S. in Florida, Illinois, and Missouri, and the company expects annual sales of approximately $120 million. I can just say that as we welcome these outstanding new teams to Amphenol, we remain very confident that the company's acquisition program will continue to create great value. Our ability to identify and execute upon acquisition opportunities And then to successfully bring these new companies into the Amphenol family remains a core competitive advantage for Amphenol. Now, turning to our progress across our served markets, I'd just reiterate once again how pleased we are that the company's balanced and broad end market diversification continues to create value for the company. In particular, no market in the first quarter represented more than 21% of our sales. We believe this diversification helps to mitigate the impact of the volatility of individual end markets, while also continuing to expose us to the leading technologies around the interconnect industry, wherever they may arise. Turning first to the military market, the military market represented 11% of our sales in the quarter. Sales grew by a better than expected 16% in U.S. dollars and 18% organically. This growth was very broad-based, but it was driven in particular by growth in military vehicles, avionics applications, as well as space. Sequentially, our sales increased by 4% from the already very strong fourth quarter. Looking ahead, we expect sales in the second quarter to again increase from these first quarter levels. And for the full year of 2019, We now expect to achieve mid-teen sales growth in the military market, a stronger performance than we anticipated coming into the new year. I just have to say how proud I am of our entire team who works in the military market. They continue to leverage our broad and high technology product range across a wide array of next-generation military applications. This position, together with the current robust military spending environment, has resulted in us expanding our overall position in the military interconnect market. Our upgraded outlook for 2019 is another reflection of this strengthening, and we look forward to continuing to enable next-generation military electronics for many years into the future. The commercial aerospace market represented 5% of our sales in the quarter, and in this market as well, our sales in the quarter were stronger than expected. growing 14% in U.S. dollars and 16% organically, as we continued to grow our design and position amidst increasing volumes from commercial aircraft manufacturers. Sequentially, our sales increased by 6% from the fourth quarter. Looking into the second quarter, we expect sales to moderate somewhat from these levels, but nevertheless, for the full year, we have now raised our expectations to amid the high single-digit sales increase. as procurement of our products used in commercial jetliners continues to expand. We remain encouraged by the company's strong technology position across a wide array of aircraft platforms and next-generation systems integrated into such airplanes, and we look forward to benefiting from that position for many years to come. The industrial market represented 21% of our sales in the quarter, And sales and industrial increased by 10% in U.S. dollars, 13% in local currency, and 5% organically from prior year. And these increases really were driven by stronger organic sales in rail mass transit, medical, heavy equipment, and factory automation, together with contributions from the SSI acquisition that we completed at the beginning of the first quarter. On a sequential basis, sales increased by 5%. as contributions from SSI offset a slight organic moderation in sales from the fourth quarter, which we had expected. Looking into the second quarter, we expect sales to increase modestly from these first quarter levels, and for the full year 2019, we continue to expect high single-digit sales growth, resulting from the contributions of our acquisitions together with our organic growth efforts. I just want to emphasize that we remain encouraged by the company's leading position in the industrial interconnect and sensors 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. We're proud of our success thus far and look forward to realizing the benefits from our efforts in the industrial market for many years to come. The automotive market represented 19% of our sales in the quarter. Sales were a bit weaker than we had anticipated coming into the quarter, with revenues down 2% in U.S. dollars, up 3% in local currencies, and down 4% organically from prior year, as the contributions from SSI were offset by slower sales, in particular related to moderated demand in Europe. Sequentially, our automotive sales increased by 2%, as the contributions from SSI offset a sequential moderation in sales from the fourth quarter. Looking into the second quarter, we expect our sales to increase modestly from these levels. For the full year 2019, however, we now do expect sales growth in the mid-single digits, which is a slight reduction from our prior expectations due to an overall lower demand outlook from our automotive customers, in particular those based in Europe. Nevertheless, we remain encouraged by the company's strong position in the automotive market. We continue to benefit from our long-term and successful strategy of expanding our range of interconnect, sensor, and antenna products, both organically and through acquisitions, all to enable a wide array of onboard electronics across a diversified range of traditional and hybrid electric vehicles supplied by automakers around the world. In particular, this quarter's acquisition of Aurora, while relatively small, broadens the range of products we offer for onboard electronics and cars, positioning the company strongly as those new applications continue to proliferate across the automotive electronics market. Mobile devices market represented 12% of our sales in the quarter. As we had expected coming into the first quarter, sales were down by 10% from prior year, and by just over 50% from our very strong fourth quarter, as overall customer demand was reduced from the significant levels we experienced in the fourth quarter. Year over year, we did have some growth in tablets, but that was offset by reductions in demand related to both smartphones and laptops. And as we discussed last quarter, we do believe some of this quarter's shortfall in sales was related to incremental demand that we experienced in the fourth quarter. I just want to say how proud I am of our team working in the mobile devices market. Just as they managed so successfully the incredible ramp-up of demand in the second half of last year, they were able to quickly react to this significant sequential reduction in demand and thereby protect the financial performance of the company. There's no doubt that the mobile devices market is one of the most volatile segments in the electronics industry and that our team's agility enables Amphenol to be successful regardless. Now, looking into the second quarter, we expect demand to remain at approximately these first quarter levels. And given our latest outlook from customers in the mobile devices market, including changes in product architecture which have reduced content on certain mobile devices, we now expect a more significant full-year sales decline than previously thought, with sales down in the 30% range for the full year. This compares to our previous outlook of a mid- to high-teens decline for 2019. But as always, our team will be poised to capitalize on any incremental demand opportunities that may arise as the year progresses. Despite this volatility in demand that we're seeing here in 2019, we remain encouraged by the company's outstanding position in the mobile devices market. Our team continues to work diligently on a wide array of next-generation mobile devices, including smartphones, laptops, tablets, wearable devices, and other accessories, and we're confident that in the long term, this market will continue to be a positive contributor to Amphenol's overall performance. The mobile networks market represented 8% of our sales in the quarter. Our performance was better than expected in the quarter, with sales increasing by 5% in U.S. dollars and 9% organically, as stronger sales to OEMs were only partially offset by a moderation of demand from wireless service providers. Sequentially, sales were down just slightly from the fourth quarter. Looking ahead, we anticipate second quarter sales to increase in the low double digits from these levels. And for the full year, we now expect to realize low double digit sales growth from prior year as we benefit from the addition of the Charles Industries acquisition. We're very encouraged by our continued strong performance in the mobile networks market. Our team around the world continues to work aggressively to expand the company's position with next generation equipment and networks. And with the addition now of Charles Industries, we've significantly broadened our range of products for mobile network operators, just as those operators and OEM customers plan for their next generation systems. And 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. This creates a significant long-term expansion potential for the company. The information technology and data communications market represented 20% of our sales in the quarter. Sales in the first quarter grew by a better than expected 11% from prior year, driven by strong performance in networking as well as some growth in servers, but partially offset by a moderation demand for storage-related products. Sequentially, our sales were down by a bit less than expected, 6%, due to what we normally do see in the first quarter, a normal level of seasonality. Looking into the second quarter, we expect sales to remain at these first quarter levels. And for the full year, we continue to anticipate growth in the low single digits, as the benefits of our acquisitions are offset by a modest moderation of demand that we expect among some customers in the IT market. We're excited by the benefits of both Charles Industries and the Aurora acquisitions, which bring together added product capabilities to our customers in the IT Datacom market. With these new family members, the company's already strong technology position has become even broader and more robust. And we continue to work with customers around the world to drive their equipment and their networks to ever higher levels of performance in order to manage the dramatic increases in demand for particularly bandwidth and processor power. Whether in high-speed, power, fiber optics, or complex value-add interconnect assemblies, we offer the broadest range of products for customers in the IT Datacom market. The broadband market represented 4% of our sales in the quarter, and our performance in broadband was a bit softer than expected in the first quarter, with sales declining slightly from prior year and by 7% sequentially. These lower sales levels were related to more modest spending by operators in the broadband market. Looking ahead, we expect sales to increase from these levels in the second quarter. However, for the full year 2019, we now expect sales to be slightly down from 2018 levels on an overall softer operator capital spending. Nevertheless, we remain encouraged by the company's continually expanding range of products for the broadband market. together with our strong positions with customers around the world. We continue to position Amphenol as the most flexible supplier in the marketplace, thereby ensuring that the company can benefit should there be any upticks in demand from our customers around the world. In summary, I just want to say I'm extremely proud of the company's performance in the first quarter. Our organization clearly continued to execute well in what is very clearly a dynamic marketplace and in particular given the ongoing uncertainties in the global economy. Our long-term, dual-pronged approach of growing both organically and through our acquisition program has resulted in us expanding our market position while strengthening the company's financial performance. Amphenol's superior performance is a direct reflection of our distinct competitive advantages, our leading technology, our increasing position with customers across our diverse markets, a broad worldwide presence, our lean and flexible cost structure, a highly effective acquisition program, and most importantly, our agile entrepreneurial management team. Now turning to our outlook, and given the ongoing uncertainty in the global economy, and in particular our reduced outlook in mobile devices, which I discussed just a few moments ago, and also based on constant exchange rates, we now expect the following results. For the second quarter, we expect sales in the range of $1,980,000 to $2,020,000 and adjusted diluted earnings per share in the range of $0.91 to $0.93. This represents a sales increase versus prior year of flat to 2% in U.S. dollars and 2% to 4% in local currency and an increase versus prior year adjusted diluted EPS of 1% to 3%. For the full year 2019, we now expect sales in the range of $8,130,000,000 to $8,250,000,000 and adjusted diluted EPS in the range of $3.80 to $3.86. For the full year, this new guidance represents sales and adjusted diluted EPS performance of down 1 to up 1% and up 1 to up 2% over 2018 levels respectively. Regardless of this somewhat more muted growth outlook for 2019, I can just tell you that the entire Amphenol team looks forward to driving further strength going forward, even given the many dynamics in the world's marketplace. I'm confident in the ability of our outstanding management organization to build upon these new performance records across the company and to continue to capitalize on the many future opportunities to grow our market position and expand our profitability. And with that, operator, we'd be happy to take any questions that there may be.