Amphenol Corporation

Hello and welcome to the 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 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, Mr. Karaglampo. Sir, you may begin.

Thank you. Good afternoon, everyone. This is Craig Lampo, Amphenol CFO, and I'm here together with Adam Norrid, our CEO. We would like to welcome you to our third quarter 2019 conference call. Our third quarter results were released this morning. I will provide 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 third quarter with sales of $2,101,000,000 and with GAAP and adjusted diluted EPS of $0.92 and $0.95, respectively. Sales were down 1% in U.S. dollars and flat in local currencies compared to the third quarter of 2018, and from an organic standpoint, excluding both acquisitions and currency impacts, Sales in the third quarter decreased 6%. Sequentially, sales were up 4% in U.S. dollars, 5% in local currencies, and 3% organically. Breaking down sales into our two segments, our cable business, which comprised 5% of our sales, was down 9% in U.S. dollars and down 8% in local currencies compared to the third quarter of last year. The InterConnect business, which comprised 95% of our sales, was down 1% in U.S. dollars and flat in local currencies compared to last year. Adam will comment further on trends by market in a few minutes. Adjusted operating income was $414 million for the third quarter of 2019, and adjusted operating margin was 19.7%, which is down 120 basis points compared to the third quarter of 2018. Compared to the second quarter of 2019, adjusted operating margins decreased 60 basis points. From a segment standpoint, in the cable segment, margins were 10.2%, which was down compared to 13.1% in the third quarter of 2018, primarily driven by volume as well as to a lesser extent product mix. In the interconnect segment, margins were 21.7% in the third quarter of 2019, which was down compared to 22.7% in the third quarter of last year. This reduction was primarily driven by a relatively normal downside conversion, together with the impact of the cost of the restructuring actions taken in the quarter, as well as the contribution from acquisitions, which are currently operating at a profitability level below the company average. This quarter's 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 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 remained at approximately $30 million and compares to $25 million in the third quarter of last year. As discussed in our prior earnings calls, 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 third quarter of 2019, compared to 25.5% in the third quarter of 2018. The adjusted effective tax rate excludes the impact of the excess tax benefit associated with stock option exercises, as well as the tax effect of the refinancing related costs associated with the tender offer in the third quarter of 2019. The company's GAAP effective tax rate for the third quarter of 2019 including the items just mentioned, was approximately 24.5% compared to 23.8% in the third quarter of 2018. Adjusted net income was a strong 14% of sales in the third quarter of 2019. On a GAAP basis, a diluted EPS declined by 9% in the third quarter to $0.92 compared to $1.01 in the third quarter of 2018. Adjusted diluted EPS declined 4% to $0.95 in the third quarter of 2019 from $0.99 in the third quarter of 2018. Orders for the quarter were $2 billion and $91 million, which was down 1% compared to the third quarter of 2018 and resulted 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 $412 million in the third quarter, or approximately 142 percent of adjusted net income. This was a very strong result. Net of capital spending of $71 million, or free cash flow, was $341 million, or 117 percent of adjusted net income. From a working capital standpoint, inventory, accounts receivable, and accounts payable were approximately $1.3 billion, $1.7 billion, and $831 million respectively at the end of September. And inventory days, day sales outstanding, and payable days were 79, 72, and 52 days, respectively, all within our normal range. I would note that we are very pleased with the meaningful improvement in net working capital days compared to June. The cash flow from operations of $412 million, along with proceeds from our recently completed bond offering of $900 million, proceeds from the exercise of stock options of $33 million, and cash, cash equivalents, and short-term investments on hand of approximately $13 million net of translation were used primarily to repay approximately $532 million in borrowings under commercial paper programs and other facilities, redeem approximately $373 million in senior notes, repurchase approximately $150 million of the company's stock, fund acquisitions of approximately $135 million, fund net capital expenditures of $71 million, and fund dividend payments of $68 million. During the quarter, the company repurchased 1.7 million shares of common stock at an average price of approximately $88 under the $2 billion three-year open stock repurchase plan. At September 30th, cash and short-term investments were approximately $987 million, the majority of which is held outside of the U.S., As previously announced on September 4th, the company launched a $900 million U.S. bond offering, which has a 10-year term and bears interest at 2.8%. In conjunction with the U.S. Senior Note issuance on September 11th, the company also tendered $147 million of its $375 million 318th U.S. Senior Notes and $205 million of its $500 million 4% U.S. Senior Notes. The company used the proceeds from the note issuance to fund the tender offer, with the remaining funds being used for general corporate purposes, including the repayment of a portion of the borrowings under the U.S. commercial paper program. This issuance and tender offer further strengthened our capital structure by extending our average debt maturities by approximately two years, while keeping our average effective interest rate on outstanding borrowings unchanged. At September 30th, after giving effect to a new bond offering, the company had issued approximately $754 million under its U.S. and Euro commercial paper programs. The company's cash and availability under our credit facilities totaled approximately $2.7 billion. Total debt at September 30th was approximately $3.9 billion, and net debt was approximately $3 billion. The third quarter of 2019 adjusted EBITDA was approximately $501 million. In summary, this was a very strong quarter. for the company financially, especially in light of moderating demand and continued uncertainty across global markets. 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 I'd like to extend my welcome to all of you here on the phone today. Thanks so much for spending a few of your precious minutes with us today. As Craig mentioned, I'm going to highlight some of our achievements in the third quarter. I'll then discuss the trends and progress across our served markets. Finally, I'll comment on our outlook for the fourth quarter and the full year 2019. And, of course, we'll have some time for questions at the end. Our results in the third quarter exceeded the high end of the company's guidance in both sales and earnings per share, and that was despite continued elevated levels of uncertainty in the marketplace. Sales declined by 1% in U.S. dollars and were flat in local currencies. reaching just over $2.1 billion. Sales in the quarter were down by 6% organically. Company books just under $2.1 billion in orders, representing a book-to-bill of also just under one-to-one. Adjusted diluted EPS in the quarter reached $0.95, which, while down 4% from prior year, was $0.07 above the high end of our guidance that we gave at the end of last quarter. Operating margins in the quarter were 19.7% and did come in a bit stronger than we had anticipated coming into the quarter. Craig mentioned that the company generated very strong operating and free cash flow of $412 and $341 million respectively in the quarter. I just want to emphasize that this is a great reflection of the quality of the company's earnings. I'm extremely proud of the Amphenol team around the world. In what's clearly a challenging market environment, we performed very well this quarter. And these excellent results are another clear reflection of the agility and discipline of our entrepreneurial organization around the world. We're very pleased to have completed two additional acquisitions just here at the end of the quarter, which together represent approximately $60 million in annual sales and which we acquired for a collective purchase price of approximately $87 million. First, CableScan, it's a manufacturer of high-technology cable assemblies for the military aerospace market. Based in Yorkshire in the U.K., CableScan's products are sold into a range of military aerospace applications, including in particular land vehicles and aviation. And this company represents an outstanding complement to our already broad array of value-add interconnect solutions for the important military and commercial aerospace markets. XGIGA is a manufacturer of active fiber optic interconnect products for the global communications markets. And this company, which is based in Shenzhen, China, broadens our product offering and strengthens our already industry-leading offering of high-speed interconnect products for the communications infrastructure markets. So as we welcome these outstanding new teams to the Amphenol family, we remain very confident that our acquisition program will continue to create great value for the company. We have now acquired nine great businesses so far here in 2019, and these excellent companies collectively represent annualized revenues of approximately $530 million, and more importantly, they have strengthened Amphenol across nearly all of our end markets with their entrepreneurial management teams, their high technology product offerings, and their complementary market positions. Most importantly, though, these new family members create additional platforms for future expansion and performance improvement in the company. We're pleased that our acquisition program remains a core competitive advantage for Amphenol. Now, turning to our progress across our serve markets, I would just comment that we continue to be very encouraged by the value created by the company's balanced and broad end market diversification. Once again, in the third quarter, no market represented more than 20% of our sales. And very importantly, this diversification helps to mitigate the impact of the volatility of individual end markets, while all the while exposing us to leading technologies wherever they may arise across the electronics industry. So turning first to the military market, the military market represented 12% of our sales in the quarter. Sales grew by a better than expected and very strong 26% in both U.S. dollars and organically. This strong growth was very broad-based but was driven in particular by growth in military vehicles, naval applications, aviation, and communications equipment. Sequentially, our sales increased by a very strong 9% in what is normally a seasonally more moderate quarter. Looking ahead, we expect sales in the fourth quarter to again increase modestly from these third quarter levels. And for the full year of 2019, we now expect to achieve sales growth in the military market of just above 20%. This improved outlook reflects our team's excellent execution in the face of higher demand from customers across the defense markets. I remain extremely proud of Amphenol's team working in the military market. With strong demand that's being driven by both robust defense spending together with accelerating adoption of new technologies, our organization has simply done an outstanding job reacting to satisfy that demand while also expanding our overall market position. The addition of CableScan this quarter further strengthens our already strong value-add interconnect offerings, for a wide array of harsh environment applications. And our broadened range of interconnect products together with the strongest and most international manufacturing footprint positions us very strongly for the future. The commercial aerospace market represented 5 percent of our sales in the quarter. Sales in commercial air were also stronger than expected, growing 15 percent in U.S. dollars and 16 percent organically. as we capitalized on continued strong demand for next-generation jetliners with high electronics content. Sequentially, our sales were up slightly from the second quarter. Looking into the fourth quarter, we expect sales to increase modestly from these levels, and for the full year 2019, we continue to expect a low double-digit increase in sales from prior year. The commercial air market continues to represent a significant opportunity for the future in Amphenol. Our customers are implementing new technologies on existing and next-generation jetliner platforms, which creates increased demand for our high-technology products. We look forward to benefiting from that favorable trend for many years to come. The industrial market represented 20% of our sales in the quarter. Sales in the third quarter increased by less than expected 4% in U.S. dollars, and we're down by 6% organically. as growth in oil and gas and medical applications was more than offset by reductions in heavy equipment, instrumentation, and battery-related products. On a sequential basis, our sales did increase by 2% from the second quarter, as the contributions from the Connick and Bernrichter acquisitions that we announced last quarter were offset in part by slowing demand in the industrial market, and that demand was slowing in particular in Europe. Looking into the fourth quarter, we expect sales in the industrial market to further moderate from current levels due to slowing demand, especially in Europe. And for the full year 2019, we now expect growth in the low single digits, and this represents a modest reduction from our prior expectations. This slowdown is related to reduced demand outlooks from both our distributor and OEM customers. Regardless of this further erosion of demand that we are now seeing, we remain very encouraged by the company's leading position in the industrial market. Through both our successful acquisition program as well as our organic initiatives, we have developed a very broad array of interconnect sensor and antenna products across a diversified range of exciting segments within the global industrial markets. We're proud of the success and look forward to continuing to realize the benefits of our efforts in the industrial market into the future. The automotive market represented 18% of our sales in the quarter. Sales in the automotive market were roughly as expected in the third quarter, with sales increasing from prior year by 4% in U.S. dollars but down 2% organically. The organic moderation of sales was related to both the European and North American markets. Sequentially, our automotive sales decreased slightly as the addition of GJM last quarter was offset by a moderation of demand from European automakers in particular. Looking into the fourth quarter, we expect a slight decrease in sales from these levels, and for the full year 2019, we now expect sales to be up only slightly from prior year. Regardless of the less favorable demand environment in the automotive market this year, I will just tell you that our position in this important market is as strong as ever. Customers around the world are continuing to design their new vehicle platforms with a wide array of electronic functionality. And we're working aggressively with those customers to design in our broadening portfolio of interconnect sensor and antenna products onto their next-generation vehicles. In addition, we continue to work on a wide array of advanced vehicle technologies, including next-generation electrified drivetrains, autonomous driving systems, and many others. The mobile device market represented 15% of our sales in the quarter, and our sales were much better than expected in the third quarter, growing a very strong 32% sequentially from the second quarter. On a year-over-year basis, sales were down, although by a less than expected 21%, as growth in tablets and wearables increased. was more than offset by lower sales related to smartphones and laptops. Looking into the fourth quarter, we do expect sales to moderate from these levels. For the full year 2019, however, we now expect a sales reduction in the mid-20% range, which is an improvement from our prior guidance of an approximately 30% reduction from prior year. This upgrade in our outlook is related to increased demand for our antenna connector and mechanism products that have been designed into new mobile platforms. And I can say that as we drive towards the end of the year, our team will for sure remain poised as always to capitalize on any additional incremental demand opportunities that may arise. I remain encouraged by our position in the mobile devices market. Our team is working on a wide array of next generation mobile devices, including smartphones, laptops, tablets, wearables, and many, 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, though, our exceptional team remains the most agile at reacting to the inevitable changes that occur in the mobile devices market, which allows us to thereby secure both our market position as well as the company's financial performance. The mobile networks market represented 8% of our sales in the quarter. Our performance was a bit better than expected in the third quarter, with sales decreasing only slightly in U.S. dollars and flat in local currencies. On an organic basis, our sales declined by 12%, as the impact of the restrictions put on certain Chinese entities that we discussed last quarter more than offset growth that we did see with service providers in the quarter. Sequentially, sales were down by 10% from the second quarter, largely related to the same dynamics that we discussed extensively last quarter. Looking into the fourth quarter, we expect a further reduction of sales in the mobile networks market. And for the full year 2019, we continue to expect sales to be flat to prior year in U.S. dollars, but down in the high single digits organically. As benefits from our acquisitions increase, are offset by a moderation demand from both OEM and operator customers. Regardless of the more challenging market environment here in 2019, 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 both equipment manufacturers and operator customers around the world. As those customers plan for 5G and other network upgrades, We look forward to benefiting from our robust position as their partner. This creates a significant long-term expansion potential for the company. The information technology and data communications market represented 18% of our sales in the quarter, and sales were down by a bit less than expected, 9% in U.S. dollars and 13% organically, with reductions in products sold into networking servers and storage hardware. Sequentially, our sales were down only slightly from the second quarter, as demand from OEMs exceeded our reduced expectations that we had coming into the quarter. Looking into the fourth quarter, we expect sales to moderate from current levels, and for the full year 2019, we now anticipate a decline in the low single digits from prior year, and this represents a modest upgrade from our guidance that we discussed last quarter. Amidst all 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 ever higher levels of performance. Our ability to enable such performance through our next-generation high-speed fiber optic power and other interconnect solutions has allowed Amphenol to be a leader in this market, and we are confident that we will continue to maintain that position over the long term. The addition of XGIGA this quarter significantly strengthens our offering for high-speed applications, adding active fiber optic interconnect to our already strong passive fiber optic and high-speed copper solution. The broadband market represented 4% of our sales in the quarter. Sales in the third quarter grew by 11% sequentially, which was a bit better than we had expected. Compared to prior year, our sales declined by 5%. as spending by broadband operators, essentially in all geographies, continued to moderate. Looking ahead, we expect sales to moderate seasonally in the fourth quarter, and for the full year 2019, we continue to expect sales to be down in the high single digits from prior year on reduced investments by broadband operators. Irrespective of this continued muted outlook in the broadband market, we remain encouraged by the company's still expanding range of products for this market, which, together with our deep relationships with customers around the world, positions Amphenol for future success. In summary, with respect to the third quarter, I just want to say that I'm very pleased with the company's performance in the quarter, especially given the high degree of uncertainty that remains in the world economy. While we had come into this quarter with a more muted outlook, we were able to outperform those levels through excellent execution by our teams around the world. The Amphenol organization has clearly continued to perform well in this very dynamic marketplace. And in particular, our long-term 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. And that superior financial performance is a direct reflection of the company's distinct competitive advantages. our leading technology, our increasing position with customers in diverse markets, our broad worldwide presence, our lean and flexible cost structure, our highly effective acquisition program, and most importantly, our agile and entrepreneurial management team. Now, turning to our outlook for the fourth quarter and the full year, Considering the heightened level of uncertainty in the overall economy and, of course, assuming, as always, constant exchange rates, we now expect the following results. For the first quarter, we expect sales in the range of $1,960,000,000 to $2,000,000,000 and adjusted diluted EPS in the range of $0.89 to $0.91. This represents a sales reduction versus prior year of 10% to 12%, and a decrease versus prior year adjusted diluted EPS of 13 to 15 percent. For the full year 2019, we now expect sales in the range of $8.35 billion to $8.75 billion, and adjusted diluted EPS in the range of $3.65 to $3.67. For the full year, this new guidance represents sales and adjusted diluted EPS declines of 2 and 3 percent respectively. Regardless of this year's more challenging market environment, I just want to assure you that the Amphenol management team looks forward to driving strong results into the future. Our team is aggressively pursuing a diverse array of growth opportunities while reacting quickly to align costs with current levels of demand. This is the essence of the agile Amphenolian culture as embodied by that outstanding organization And it is that team, coupled with our deep technology position with customers across our markets, and complemented by our successful acquisition program, that positions the company very strongly for the long term. And with that, operator, we'd be very happy to take any questions that there may be.