Amphenol Corporation

Hello and welcome to the second quarter earnings conference call for Amphenol 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, so 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 second quarter 2019 conference call. Our second quarter 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 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 second quarter with sales of $2 billion, $15 million, and with GAAP and adjusted diluted EPS of $0.93 and $0.92, respectively. Sales were up 2% in U.S. dollars and up 4% in local currencies compared to the second quarter of 2018. From an organic standpoint, excluding both acquisitions and currency, sales in the second quarter decreased 1%. Sequentially, sales were up 3% in U.S. dollars and in local currency and 1% organically. Bringing down sales into our two segments, our cable business, which comprised 4% of our sales, was down 19% in U.S. dollars and down 17% in local currencies compared to the second quarter of last year. The interconnect business, which comprised 96% of our sales, was up 3% in U.S. dollars and 5% in local currencies compared to last year. Adam will comment further on trends by market in a few minutes. Adjusted operating income was $408 million for the second quarter of 2019 and adjusted operating margin was 20.3%, which is down 30 basis points compared to the second quarter of 2018. Compared to the first quarter of 2019, adjusted operating margins increased 20 basis points. From a segment standpoint, in the cable segment, margins were 9.7%, which is down compared to 13.2% in the second quarter of 2018, primarily driven by volume as well as to a lesser extent product mix. In the interconnect segment, margins were a strong 22.2% in the second quarter of 2019, which is down slightly compared to 22.4% in the second 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 to market conditions and thereby maximize both growth and profitability in an increasingly uncertain market environment. Through the careful fostering of this culture and the deployment of our 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 $26 million last year, and as discussed in our prior earnings call, this increase is due primarily to higher average interest rates as a result of the first quarter bond issuance and higher average debt levels. The company's adjusted effective tax rate was approximately 24.5% for the second quarter of 2019 compared to 25.5% in the second quarter of 2018. 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 second quarter of 2019 includes the items just mentioned. including the items just mentioned, with approximately 21.3% compared to 24.7% in the second quarter of 2018. Adjusted net income was a strong 14% of sales in the second quarter of 2019. On a GAAP basis, diluted EPS grew 2% in the second quarter to 93 cents compared to 91 cents in the second quarter of 2018. And adjusted diluted EPS grew 2% to 92 cents in the second quarter of 2019, from $0.90 in the second quarter of 2018. Orders for the quarter were $2.19 billion, which was flat compared to the second quarter of 2018, resulting in a book-to-bill ratio of 1 to 1. The company continues to be an excellent generator of cash. Cash flow from operations was $322 million in the second quarter, or approximately 114% of adjusted net income. From a working capital standpoint, inventory, accounts receivable, and accounts payable were approximately $1.3 billion, $1.7 billion, and $815 million, respectively, at the end of June. In inventory days, day sales outstanding, and payable days were 83, 75, and 53 days, respectively, all within the normal range. The cash flow from operations of $322 million was along with borrowings of $400 million from our commercial paper programs, proceeds from the exercise of stock options of $66 million, and cash, cash equivalents, and short-term investments on hand of approximately $10 million out of translation. We're used primarily to fund acquisitions of approximately $357 million to repurchase approximately $249 million of the company's stock, to fund net capital expenditures of $74 million dollars, to fund dividend payments of $69 million, and to fund the purchases of minority interest related to a previous acquisition of $21 million. During the quarter, the company repurchased 2.6 million shares of stock at an average price of approximately $94 under the $2 billion three-year open market stock repurchase plan. As mentioned in today's earnings release, the company's board of directors has approved a 9% increase in the quarterly dividend on the company's common stock from 23 to 25 cents per share. The increase is effective for payments beginning in October. At June 30th, cash and short-term investments were approximately $1 billion, the majority of which is held outside of the U.S. At June 30th, the company had issued approximately $1.3 billion under its U.S. and Euro commercial paper programs. The company's cash and availability under our credit facilities totaled approximately $2.2 billion. Total debt at June 30th was approximately $4 billion and net debt was approximately $3 billion. The second quarter of 2019 adjusted EBITDA was approximately $500 million. From a financial perspective, this was another excellent quarter. Before I turn the call over to Adam, I would like to make a brief comment relative to our 2019 guidance. Our current guidance for the second half of 2019 reflects a significant reduction in our sales expectations for the communications equipment-related markets, together with a reduced outlook by customers in the industrial and automotive markets. This reduction in organic sales is partially offset by the new acquisitions announced today. Adam will comment further in a moment. I would also note that the Amphenol management team is reacting quickly to this reduction in expected demand by initiating actions to adjust the cost structure of our impacted operations to current demand levels. Our EPS guidance includes the cost of these actions, which are primarily reflected in the third quarter. EPS guidance also reflects the lower than company average initial operating margins of our new acquisitions. I will now turn it over to Adam, who will provide an overview of the business and comment on current trends.

Well, thank you very much, Craig, and welcome to all of you on our call today. As a customer, I'm going to highlight a few of our achievements here in the second quarter. I'll then talk about our trends and our progress across our diversified served markets. And then finally, I'll make some comments on our outlook for the third quarter and full year 2019. And, of course, we'll have some time at the end for questions and answers. As Craig just detailed, our results in the second quarter were within the company's guidance, and that's despite a clear increase in market uncertainty that we saw during the quarter. Sales grew by 2% in U.S. dollars and 4% in local currencies, reaching just over $2 billion, in fact $2 billion and $15 million. The company booked $2 billion and $19 million in orders, representing essentially a book-to-bill of one-to-one for the quarter. Adjusted operating margins were again very strong in the quarter, reaching 20.3%. Also, the company generated healthy operating cash flow, $322 million in the second quarter, which is yet again an excellent reflection of the quality of the company's earnings. I'd like to also just note that I'm very pleased that the Board of Directors just yesterday approved a 9% increase in the company's quarterly dividend to $0.25 per share, which effective with the October payment. I'm very proud of the Amphenol management team. The results this quarter were just another clear reflection of the agility and discipline of our entrepreneurial organization around the world, as we perform well amidst both a very dynamic electronics industry and a volatile demand environment, all while driving outstanding operating performance for the company. Very pleased to announce today that we completed four outstanding acquisitions just in the last several weeks, which collectively represent approximately $150 million of annualized sales and which we acquired for a total purchase price of approximately $280 million. First, CONEC, which we completed in late June, is a provider of high-technology connectors for the industrial market with annual sales of approximately $80 million. CONIC is based in Lippstadt, Germany, and its products are sold into a wide array of applications in the industrial market, including factor automation, instrumentation, and many, many others. This company represents an outstanding complement to our already broad array of interconnect solutions for industrial applications. COPEC, which also closed in late June, is a manufacturer of RF passive interconnect components for the broadband markets. COPEX products are sold primarily to Amphenol as a vendor to us, together with a very small amount of sales to outside customers. The company is based in Hong Kong with manufacturing operations in Shenzhen, China. Bernrichter, which we completed just here in July, is a manufacturer of leading-edge interconnect assemblies primarily for the medical market, with annual sales of approximately $30 million. Based in Wipfers, Germany, Vern Richter's products are sold into a variety of applications for medical equipment made by customers in Europe as well as in North America. This great company strengthens our already successful medical interconnect products offering while also improving our position in value-add assemblies for the European medical market. And then finally, just last week, late last week, in fact, we closed the acquisition of the GJM Group, GJM is a provider of cable assemblies for the automotive market based just outside of Barcelona, Spain. It is of approximately $40 million, manufactures cable assemblies for complex applications within passenger vehicles, and represents an excellent complement to our already broad value-add offerings for the worldwide automotive market. As we welcome these outstanding new teams to the Ampanol family, We remain very confident that our acquisition program will continue to create great value for the company. In fact, so far this year, we've already acquired seven great businesses, which collectively represent annualized revenues of approximately $470 million. But even more importantly, we've strengthened Amphenol with these new, strong management teams, their complementary market positions, and the capabilities they offer. thereby creating platforms for future expansion as well as performance improvement. No question that our acquisition program clearly remains a core competitive advantage for Amphenol. Now, before I get into reviewing the details of our performance by end market, I would like to comment on some recent market developments over the last quarter that have impacted our outlook heading into the second half here of 2019. First, following the restrictions that were placed on sales to Huawei by the U.S. government, there has been a significant increase in uncertainty across the communications equipment markets as many customers are grappling with potential changes in China demand. This has resulted in certain customers reducing their outlooks for the second half of 2019. Second, there has also been a moderation of demand expectations in both the industrial and automotive markets, including in both Europe and Asia in particular, as customers no longer expect a step-up in sales in the second half, which they previously had been anticipating. Finally, and no doubt related to these two dynamics, our distributors have also moderated their expectations for demand for our products, reflecting both the reduced and market demand as well as their elevated inventory levels. We have reflected these lower demand levels in our outlook, and I'll discuss the specific impact of these changes in each of the relevant markets in a few moments. But before I do that, I just want to say that I'm very proud of our teams working in these affected markets, who are around the world quickly adjusting their costs while equally importantly redeploying their resources to ensure that Amphenol is well positioned regardless of the market environment. And look, I mean, ultimately, This is the ultimate reflection of Amphanolian agility. Now, turning to our trends and progress across our served markets, I would just note that we continue to be very pleased with the value created by the company's balanced and broad end market diversification. In fact, in the second quarter, once again, no market represented more than 20% of our sales. You know, very importantly, that market diversification helps to mitigate the impacts of the volatility of individual end markets, while also serving to expose us to leading technology innovations wherever they may arise across the electronics industry. Now, starting out with the military market, that market represented 12% of our sales in the quarter, and sales grew by a better than expected 18% in U.S. dollars and 19% organically. This very strong growth was broad-based, but was driven in particular by growth in military vehicles, naval applications, avionics, as well as communications equipment. Sequentially, our sales increased by 7%. Looking ahead, we expect sales in the military market in the third quarter to again increase from these second quarter levels. And for the full year 2019, we now expect to achieve high teens sales growth in this very important market. This This represents an upgrade to our outlook provided last quarter. I remain extremely proud of Amphenol's team working in the military market. As demand for military interconnect products continues to accelerate, given both the robust government spending levels as well as the acceleration of adoption of new technologies, our organization has done an outstanding job reacting to meet these elevated levels of demand while also gaining market share. We simply have the broadest range of interconnect products together with the strongest and most international manufacturing footprint, and this positions us very strongly for the long term. The commercial aerospace market represented 5% of our sales in the quarter, and sales in the second quarter came in stronger than expected, growing 11% in U.S. dollars and 13% organically as we capitalized on continued strong demand for next-generation jetliners. Sequentially, our sales were down just slightly from the first quarter. Looking into the third quarter, we expect a slight moderation of sales given typical summer seasonality, but regardless, we now expect a low double-digit increase in sales in the commercial air market for the full year of 2019, and this represents an improvement from our prior expectations. We remain very encouraged by the company's strong technology position and across a wide array of aircraft platforms, as well as the next-generation systems that are integrated into such airplanes. And we look forward to benefiting from that position for many years to come. The industrial market represented 20% of our sales in the quarter. Sales in the second quarter were down by 3% in U.S. dollars and 8% organically, as growth in factory automation, industrial battery, and medical applications decreased. was offset by reductions in heavy equipment, instrumentation, and alternative energy. Sales to distribution were also softer on a year-over-year basis. On a sequential basis, sales increased by 2% from the first quarter. We're very excited about the recent additions of both Connick and Bernrichter, which strengthen our position in the European industrial market in particular, across a range of exciting segments, including medical, factor automation, instrumentation, and many other applications. As we look into the third quarter, we expect sales in the industrial market to increase from these second quarter levels as we benefit from the additions of our new acquisitions together with modest sequential organic growth. And while we do anticipate growth in the high single digits for the full year, As I mentioned earlier, we now do not expect to grow organically for the full year, as both our distributor and OEM customers no longer foresee a step-up in demand in the second half. Regardless of this organic moderation demand that we've recently seen, we remain very encouraged by the company's leading position in the industrial interconnect and sensors market. Through both our successful acquisition program as well as our innovation initiatives, 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 the success, and we look forward to realizing the benefits of our efforts in the industrial markets for many years to come. The automotive market represented 19% of our sales in the quarter. Sales in the automotive market were about as expected in the second quarter, with sales flat to prior year in U.S. dollars and down 3% organically. This organic moderation of sales was related primarily to the European market, and to a lesser extent, North America. Sequentially, our automotive sales increased by 4%. As we look into the third quarter, we expect sales to moderate slightly from these levels. And for the full year 2019, we now expect sales growth in the low single digits, which is a slight reduction from our prior expectations. As I alluded to earlier, while we came into the second quarter expecting a step up in demand in the automotive market in the second half, based on our current input from customers, we no longer expect any meaningful organic increase in sales here in the second half of 2019. This relates primarily to subdued vehicle production expectations for Europe and Asia. Regardless of this more muted outlook for the full year, The company's position in the automotive market is as strong as ever. We continue to work with a wide array of customers around the world to design in our broadening portfolio of interconnect sensor and antenna products into their next generation vehicles. In addition, we're working on many advanced technologies with customers around the world, including next generation electrified drive trains, autonomous driving systems, and many others. And with the acquisition of GJM further expanding our product range and customer reach, we believe we've built an excellent base for future performance. The mobile devices market represented 12% of our sales in the quarter. Sales were slightly lower than expected in the second quarter, growing 4% from prior year, as growth in smartphones, laptops, and wearables was partially offset by a reduction in sales related to tablets and production-related products. Looking into the third quarter, we expect demand to increase moderately from these levels as customers begin to ramp up their new platforms. And for the full year 2019, we continue to expect a roughly 30% reduction in sales from prior year, as we discussed extensively during last quarter's call. As always, our team will remain poised to capitalize on any incremental demand opportunities that may arise as the year progresses. I remain encouraged by Ampel's position in the mobile devices markets. Our team is continuing to work on a wide array of next-generation mobile devices, including smartphones, laptops, tablets, wearables, and many other accessories. And we're confident that in the long term, this market will continue to be a positive contributor to the company's overall performance. Most importantly, our team working in the mobile devices market remains just simply the most agile at reacting to the inevitable changes that occur in in this very exciting space, thereby securing both our market position and financial performance. The mobile networks market represented 9% of our sales in the quarter, and our performance was a bit better than expected in the second quarter, with sales increasing by 9% in U.S. dollars and flat organically, as we benefited from the contributions from the Charles Industries acquisition that we announced last quarter. On an organic basis, our sales increased to OEMs, but were offset by a continued moderation of demand from wireless service providers. And sequentially, sales grew by a strong 17% from the first quarter with those contributions from Charles. Looking into the third quarter and the second half of 2019, we now anticipate a significant sequential reduction of sales as a result of the dynamics that I addressed earlier in the call. And for the full year 2019, we now expect sales to be flat to prior year in U.S. dollars, but down in the high single digits organically, as benefits from the Charles acquisition are offset by a moderation in demand from both OEM and operator customers in the second half of 2019. Regardless of this more challenging situation that emerged here in the second quarter, we remain very confident in the long-term outlook for our mobile networks business. Our leading-edge interconnect and antenna solutions have positioned the company strongly with OEM and operator customers really in all geographies. As those customers plan for 5G and other network upgrades, we look forward to benefiting from our robust position as a partner with those customers. And this creates a significant long-term expansion potential for Amphenol. The information technology and data communications market represented 19% of our sales in the quarter. As we had expected coming into the second quarter, sales were slightly down from prior year as growth in networking-related products was more than offset by reductions of sales of products sold into servers and storage hardware. Sequentially, sales were up slightly from the first quarter with the addition of Charles Industries. Looking into the third quarter, we now expect a significant sequential reduction in sales, resulting from those dynamics I addressed earlier. And for the full year 2019, we now anticipate a mid-to-high single-digit decline from prior year. Regardless of these current market dynamics, our OEM and service provider customers across the IT Datacom market are continuing to push their systems and networks to higher levels of performance. Our ability to enable such performance through our next-generation high-speed fiber optic power and other interconnect solutions has enabled Amphenol to be a leader in this market, and we're confident that we will continue in that position into the long term. And then finally, the broadband market represented 4% of our sales in the quarter. Sales in the second quarter reduced by a greater than expected 15% from prior year, as spending by operators in the broadband market continued to moderate. On a sequential basis, sales were down by roughly 3%. Looking ahead, we expect sales to increase modestly from these levels in the third quarter. However, for the full year 2019, we now do expect sales to be down in the high single digits from prior year on reduced capital investments by broadband operators. Regardless of this more muted outlook in the broadband market, we remain encouraged by the company's continually expanding range of products for the broadband market, together with our strong position with customers around the world. The acquisition of COPEC, while small, brings in-house our capabilities for RF passive interconnect devices and represents yet another strengthening of our product offering. So in summary, I would just say that I'm very pleased, actually, with the company's performance in the second quarter, in particular given this heightened level of uncertainty that emerged during the quarter. The Amphenol organization has clearly continued to execute very well in this dynamic marketplace. In particular, our long-term, dual-pronged approach of growing both organically and through our successful acquisition program has resulted in us expanding our market position while strengthening the company's financial performance. The company's superior performance is a direct reflection of Amphenol's distinct competitive advantages. Our leading technology, our increasing position with customers across our diverse end markets, broad worldwide presence, a lean and very flexible cost structure, and a highly effective acquisition program, together most importantly with Amphenol's agile entrepreneurial management teams. Now, turning to our outlook, as I mentioned earlier, we have moderated our outlook in the second half due to the dynamics affecting the communications equipment, industrial, and automotive markets, which include as well the effects of reduced demand from our distributors. Based on these factors and considering the heightened level of uncertainty in the overall economy and, of course, assuming constant exchange rates, we now expect the following results. For the third quarter, We expect sales in the range of $1,960,000,000 to $2,000,000, and adjusted diluted EPS in the range of $0.86 to $0.88. This represents a sales reduction versus prior year of down 6% to down 8%, and a decrease versus prior year adjusted diluted EPS of 11% to 13%. For the full year 2019, we now expect sales in the range of $7,920,000,000 to $8 billion, with adjusted diluted EPS in the range of $3.56 to $3.60. For the full year, this represents sales and adjusted diluted EPS declines of 2% to 3% and 5% to 6% respectively. Regardless of this reduction in our outlook, the ethanol management team looks forward to driving further strength into the future. Our team is reacting quickly to align costs with the level of demand reflected in this outlook, all while aggressively pursuing a diverse array of growth opportunities. This is the essence of the Agile Amphanolian culture as embodied by our outstanding management team. And that team, coupled with our deep technology position with customers across our markets and complemented by our successful acquisition program, positions the company very strongly for the future. And with that, operator, we'd be happy to take any questions that there may be.