Amphenol Corporation

Hello and welcome to the fourth 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 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. Craig Lampo. Sir, you may begin.

Great. 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 2019 conference call. Our fourth quarter and full year 2019 results were released this morning. I will provide some financial commentary and then Adam will give an overview of the business as well as current trends. 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 sales of $2,151,000,000 and with gap in adjusted diluted EPS of $1.03 and 98 cents respectively. Sales were down 3% in U.S. dollars and 2% in local currencies compared to the fourth quarter of 2018. From an organic standpoint, Excluding both acquisitions and currency impacts, sales in the fourth quarter decreased 8%. Sequentially, sales were up 2% in both U.S. dollars and in local currencies and up 1% organically. Breaking sales down into our two segments, the internet business, which comprised 95% of our sales, was down 3% in both U.S. dollars and in local currencies compared to the fourth quarter of last year. Our cable business, which comprised the remainder of our sales, was down 3% in U.S. dollars and down 1% in local currencies compared to the fourth quarter of last year. For the full year 2019, sales were a record $8,225,000,000, which was flat in U.S. dollars, up 2% in local currencies, and down 3% organically compared to 2018. Adam will comment further on trends by market in a few minutes. Adjusted operating income was $430 million for the fourth quarter of 2019. Adjusted operating margin in the quarter was 20%, which compared to 21% in the fourth quarter of 2018, and 19.7% in the third quarter of 2019. From a segment standpoint, in the interconnect segment, margins were 22% in the fourth quarter of 2019, which was down compared to the fourth quarter of 2018 at 22.8%. This reduction was primarily driven by a normal downside conversion on the organic decline in sales, as well as the impact of acquisitions, which are currently operating at profitability levels below the company average. In the cable segment, margins were 10%, which was down compared to 11.9% in the fourth quarter of 2018, primarily driven by volume and product mix. For the full year 2019, adjusted operating income was $1,645,000,000, down 3% from 2018. We continue to be very proud of the company's operating margin achievements, which reached 20% for the full year 2019, especially given the demand environment. This 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 any 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 $28 million and compares to $26 million in the fourth quarter of last year. The company's adjusted effective tax rate was 24.5% for the fourth quarter of 2019 compared to 25.5% in the fourth quarter of 2018. The fourth quarter adjusted effective tax rate for both periods excludes the impact of the excess tax benefit associated with stock option exercises. And the fourth quarter of 2018 adjusted effective tax rate also excludes the tax effect of acquisition-related costs as well as the finalization of the provisional income tax charge related to the Tax Act. The company's GAAP effective tax rate for the fourth quarter of 2019 was approximately 20.3% compared to 21% in the fourth quarter of 2018. For the full year, the company's adjusted effective tax rate was 24.5% compared to 25.5% in 2018. The adjusted effective tax rate excludes the impact of the excess tax benefits associated with stock option exercises, as well as the tax effect of both acquisition-related costs and refinancing-related costs associated with the debt tender offer in the third quarter of 2019. For the full year 2018, the adjusted effective tax rate also excludes the finalization of the provisional income tax charge related to the Tax Act. The company's GAAP effective tax rate for 2019 was 22.2% compared to 23.4% in 2018. Adjusted net income was a strong 14% of sales for both the fourth quarter and full year 2019. On a GAAP basis, diluted EPS declined by 6% in the fourth quarter to $1.03 compared to $1.09 in the fourth quarter of 2018. And adjusted diluted EPS declined 7 cents to 98 cents in the fourth quarter of 2019 from $1.05 in the fourth quarter of 2018. For the full year, GAAP diluted EPS was $3.75, a 3% decrease from 2018 GAAP diluted EPS of $3.85. and adjusted diluted EPS was $3.74 for 2019, a 1% decrease from 2018 adjusted diluted EPS of $3.77. Orders for the quarter were $2.2 billion, which resulted 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 $424 million in the fourth quarter and a record $1,502,000,000 for the full year, or 140 percent and 131 percent of adjusted debt income, respectively. Net of capital spending or free cash flow for the fourth quarter was $352 million, and for the full year was a record $1,207,000,000, or 117 percent and 105 percent of adjusted debt income, respectively. These are excellent cash flow results and reflect the hard work of the management team around the world in carefully managing working capital amidst the uncertain economic environment in 2019. From a working capital standpoint, inventory, accounts receivable, and accounts payable were $1.3 billion, $1.7 billion, and $867 million, respectively, at the end of December. In inventory days, day sales outstanding, and payable days, were 80, 73, and 53 days, respectively, all within a normal range. The cash flow from operations of $424 million, along with proceeds from an exercise of stock options of $100 million in cash, cash equivalents, and short-term investments on hand of approximately $95 million net of translation, were used primarily to repay $366 million in borrowings under our commercial paper programs and other facilities. fund dividend payments of $74 million, fund net capital expenditures of $72 million, fund acquisitions of $47 million, repurchase approximately $43 million of the company's stock, and fund acquisitions of and distributions to non-controllably interests of $18 million. During the quarter, the company repurchased 400,000 shares of common stock at an average price of $103 under the $2 billion stock repurchase plan. bringing total repurchases for the year to 6.5 million shares, or $600 million. At December 31st, cash and short-term investments were $909 million, the majority of which is held outside of the U.S. And at year end, the company had issued $395 million under its CUS and Euro commercial paper programs. The company's cash and availability under our credit facilities totaled $3 billion. Total debt at December 31st was $3.6 billion, and net debt was $2.7 billion. The adjusted EBITDA for the fourth quarter and full year 2019 was $522 million and $2 billion, respectively. In summary, this is a strong quarter and full year for the company financially, especially in light of the continued uncertainty across the global markets. And 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 welcome to all of you to our first call of the new decade here in 2020, and hope it's not too late for me to wish everybody on the call a happy new year. As Craig mentioned, I'm going to highlight some of our achievements here in the fourth quarter and for the full year of 2019. I'll then spend a few moments to discuss our trends and progress across our serve markets, And then finally, I'll make some comments on our outlook for the first quarter and the full year 2020. And, of course, we'll reserve some time at the end for some questions. Our results in the fourth quarter were stronger than expected, as we exceeded the high end of our guidance in both sales and adjusted EPS, and that's despite an ongoing environment of uncertainty in the global economy. Sales were down by 3% in U.S. dollars and 2% in local currencies, but reached $2,151,000,000. On an organic basis, as Craig described, sales were down by 8%, and that was largely driven by the significant reductions in the mobile devices and mobile networks markets. The company booked $2.2 billion in orders in the quarter, and that represented a strong book-to-bill of 1.02 to 1. Despite our decline in sales in the quarter, adjusted operating margins held up very strongly, reaching 20%. and the company generated excellent operating cash flow of $424 million in the quarter, really another reflection of the quality of the company's earnings. I just have to say I remain very proud of the Amphenol team. Our results this quarter once again reflect the discipline and agility of our entrepreneurial organization. As we continue to perform well amidst a very dynamic economic environment, all while driving superior operating performance in the corridor. Also very pleased to announce that just in the last several days, we closed the acquisition of Exa Thermometrics. Exa is a provider of high technology temperature sensors based in Bangalore, India, with annual sales of approximately $10 million. And while Exa is still a relatively small company, the company strengthens our overall sensor offering and expands our sensor manufacturing footprint to India. EXA represents an excellent complement to our growing portfolio of sensor products, which have become a core pillar of Amphenol's overall interconnect offering. As we welcome this outstanding new team to the Amphenol family, we remain very confident that our acquisition program will continue to create great value for Amphenol. Our ability to identify and execute upon acquisitions and successfully bring these new companies into our family remains a core competitive advantage for the company. Now let me just make a couple of comments about the full year 2019. And despite the many challenges in the global economy in 2019, it was a successful year for Amphenol. Amidst significant organic declines in the mobile devices market, as well as moderations in demand in several other markets that we discussed earlier last year, we are very pleased to have just surpassed our 2018 sales levels. Our full-year adjusted operating margins once again reached 20%, and this strong level of profitability enabled us to achieve adjusted diluted earnings per share of $3.74. And very importantly, we generated record operating and free cash flow, of $1.5 and $1.2 billion respectively, both of which are excellent confirmations of the company's superior execution together with our disciplined working capital management. Our acquisition program created great value for the company in 2019 with nine new companies added to the Amphenol family in the year. These acquisitions, which included SSI, Aurora, COPEC, Charles Industries, CONEC, Bernd Richter, GJM, CableScan, and finally XGiga, expanded our position across a broad array of technologies and markets. We're excited that these acquisitions represent expanded platforms for the company's future performance, in particular because of the outstanding and talented individuals that have joined the Amphenol organization. These new Amphenolians, as we call them, deepen our already strong bench of leaders around the world. In addition, in 2019, we deployed further our capital by buying back over 6.5 million shares under our share buyback program, while also increasing our quarterly dividend by 9%. Amphenol's long-term mission is to be the enabler of the electronics revolution. Through the organic development efforts of Amphenol's entrepreneurial organization, together with the benefits of our acquisition program, we have expanded our relationships with a broadening array of customers across all of our diversified end markets. This has resulted in the company strengthening our position across the many segments of the electronics industry. And while the overall market environment in 2019 was highly uncertain, our agile entrepreneurial management team is very confident that we've built further strength from which we can drive superior performance into the long term. Now, turning to our trends and progress across our serve markets, I would just note that we continue to be very pleased that the company's balanced and broad end market diversification remains a real high-value asset for the company. No single end market in the year represented more than 20% of our sales. And we believe this diversification mitigates the impact of the volatility of individual end markets, while also exposing us to all of the leading technologies wherever they may arise across the electronics industry. Now turning first to the military market, the military market represented 13% of our sales in the fourth quarter and 12% of our sales for the full year 2019. Sales again grew very strongly from prior year, increasing by a greater than expected 30% in the fourth quarter. driven by growth across essentially all segments in the military market, including in particular military vehicles, rotorcraft, and airframe applications. On a sequential basis, sales increased by 7%, which is very strong performance given the normal fourth quarter seasonality that we've typically seen. For the full year 2019, we're very pleased that our military sales grew by an outstanding 23% in U.S. dollars and 22% organically. reflecting broad-based strength across virtually all segments of the market. Our organization working in the military market has worked so hard for many years to strengthen our broad technology position while increasing our capacity to serve customers across all of the segments of this important market. I can just tell you that our superior performance in 2019 is a great reflection of the results of their efforts. Given the ongoing favorable military spending environment, our team continues to solidify our leadership position by ensuring that we 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 decrease slightly from these fourth-quarter levels, and for the full year 2020, we expect to achieve mid- to high-single-digit sales growth on top of our already strong sales levels from 2019. Turning to the commercial air market, that market represented 5% of our sales, both in the fourth quarter and for the full year of 2019. And sales in the fourth quarter increased by a stronger than anticipated 15%, as overall demand from commercial aircraft manufacturers continued to be robust. Sequentially, our sales increased by 8% from the third quarter, also very strong performance. For the full year, 2019, we're pleased that our sales grew by 14%, as we benefited from broad design-ins of our next-generation interconnect products on new aircraft. Looking into 2020, we do expect a sequential moderation in sales from these levels in the first quarter, For the full year, we expect sales to remain at roughly 2019's levels, as increased sales onto new jet platforms is offset by some impact from one program's widely reported production delays. Regardless of this more muted outlook for 2020, 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 19% of our sales in the fourth quarter and 20% of our sales for the full year 2019. Sales in industrial in the fourth quarter grew by a bit stronger than expected, 7% from prior year, driven largely by the contributions from our acquisitions completed over the past year. On an organic basis, sales actually declined by 3% as growth in instrumentation, alternative energy, and medical was more than offset by moderations in other segments of the industrial market. On a sequential basis, sales reduced by 2% from the third quarter, reflecting continued moderation in the overall industrial market, in particular in Europe. For the full year 2019, sales in the industrial market grew by 4% in U.S. dollars and were down by 3% organically, as growth in medical, factory automation, rail mass transit, and oil and gas were offset by moderations in other segments of the industrial market. We remain very pleased with the company's broad position in the worldwide industrial market. And while the overall environment in 2019 became increasingly uncertain as the year progressed, We added several outstanding acquisitions which strengthened our overall position. Through both our 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 the success and look forward to realizing the benefits from our efforts in the industrial market for many years to come. Looking into the first quarter 2020, We anticipate a slight decrease in sales from these levels as demand continues to be uncertain, particularly in Europe. And for the full year 2020, we expect to realize low single-digit sales growth as we continue to benefit from our acquisitions as well as our organic growth efforts. The automotive market represented 18% of our sales in the quarter and 19% of our sales for the full year. Sales were stronger than we had expected coming into the quarter, with revenues growing by 8% in U.S. dollars and 10% in local currency, driven by the contributions from our acquisitions completed earlier in the year. On an organic basis, sales were flat from prior year, as slowing vehicle volumes offset increased sales of products sold into new vehicle electronics applications. Sequentially, our automotive sales increased by 3% in the fourth quarter, as we benefited from several new program launches. For the full year of 2019, our sales in the automotive market grew by 3% in U.S. dollars and 6% in local currency, but were down by 2% organically, reflecting the benefits of our acquisitions as well as our broad array of new products into next-generation applications, offset by the overall slowing of the worldwide automotive market. We continue to benefit from our long-term and consistent strategy of expanding our range of interconnect sensor and antenna products, both organically and through acquisitions, to enable a wide array of onboard electronics across a diversified range of vehicles made by auto manufacturers around the world. Looking into the first quarter 2020, we expect sales to moderate slightly from these levels, And for the full year 2020, we expect a low single-digit sales increase for the automotive market. And while the overall market remains uncertain, we're confident that our broad range of high-technology solutions positions us for continued growth in automotive into the future. The mobile devices market represented 15% of our sales in the quarter and 13% of our sales for the full year 2019. Sales in the mobile devices market exceeded our expectations coming into the fourth quarter, growing 9% sequentially from the third quarter, as our team executed extremely well to satisfy increased demand from customers making both smartphones and tablets. Compared to prior year, sales were down by 35%, but which was better than we had expected, especially in light of the very strong fourth quarter we had had in the fourth quarter of 2018? For the full year of 2019, sales in the mobile devices market decreased by 20%. And as we discussed extensively at the time of our first quarter earnings release, our reduction in sales for both the fourth quarter and the full year were driven really by changes in available content due to architectural shifts in product designs of certain smartphone models. We're pleased that the team outperformed our previously revised expectations of an approximately 30% reduction for the full year, a great testament to our mobile device team's continued agility in the face of an always volatile market. Looking into the first quarter 2020, we anticipate a relatively normal seasonal sequential decline of approximately 25%. And for the full year 2020, we expect sales in the mobile device market to be flat with 2019 levels. Although 2019 was a difficult year for this market after our record performance in 2018, I can just tell you that we come into 2020 in a great position to capitalize on any future opportunities for growth that may emerge. Our leading array of antennas, interconnect, and mechanisms continues to enable a broad range of next-generation mobile devices. And while this market will no doubt remain one of the most volatile, Our outstanding team working in mobile devices looks forward to continuing to drive value for our customers and for Amphenol into the future. The mobile networks market represented 6% of our sales in the quarter and 8% of our sales for the full year 2019. Sales in this market decreased from prior year by a bit more than expected, 20% in U.S. dollars and 31% organically. as we were impacted by reduced demand from both OEMs and operators. As we discussed extensively back in July, the U.S. government restrictions on sales to certain Chinese entities ultimately resulted in many operator and OEM customers reassessing both their build-out plans and inventory levels, leading to lower demand for our products. For the full year 2019, our sales were down slightly from prior year, but were down organically by 9%, as the benefits of our acquisitions completed earlier in the year were offset by the dynamics I just mentioned. Looking ahead, while we expect sales in the first quarter to increase modestly from these levels, we do expect sales for the full year to be down in the low single digits, as the full-year impact from the U.S. government restrictions, as well as the associated effects, are partially offset by increased demand from operators who are beginning their next-generation network build-outs. Regardless of the challenges that arose in the mobile networks market in 2019, we're confident in the company's long-term position in this important and exciting industry. Our team continues to work aggressively to expand our opportunity with next-generation equipment and networks. And as customers plan for their 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. 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 fourth quarter and 19% of our sales for the full year 2019. Sales in the quarter were stronger than expected, rising by 3% in U.S. dollars, but down by 3% organically from prior year. As the contributions from the Charles Industries and XGIGA acquisitions together with stronger sales of server-related products, were offset by lower sales of products incorporated into networking and storage systems. Sequentially, our sales in IT Datacom grew by a stronger-than-expected 10% from the third quarter, as our team capitalized on stronger demand in servers and storage, and to a lesser extent, networking products. For the full year 2019, our sales in the IT datacom market were flat from prior year in U.S. dollars and down by 3% organically, a really strong performance by our team given the impact of the U.S. government restrictions and the associated knock-on effects we discussed earlier. These results were 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 products. In addition, our team continues to adapt quickly to the changing market environment, including by capitalizing on the expanding importance of web service providers, a group of customers that grew strongly in 2019. Looking ahead, we expect sales in the first quarter to moderate from these levels, and for the full year 2020, we anticipate sales to remain flat to 2019 levels as the full-year effects from the U.S. government restrictions are offset by continued growth of next-generation products sold into a wide array of customers, including those web service providers. We remain very encouraged by the company's strong technology position in the global IT datacom market. Our customers around the world continue to drive their equipment to ever higher levels of performance in order to manage the dramatic increases in demand for bandwidth and processor power. In turn, our team remains singularly focused on enabling this continuing revolution in IT datacom through their ongoing development of a wide range of next-generation technologies. Finally, the broadband market represented 4% of our sales both in the fourth quarter and the full year. As we had expected, sales decreased by 6% from prior year as spending levels from broadband operators continued to moderate. On a sequential basis, sales decreased by 6% also from the third quarter. It's no question that 2019 was a challenging year in this market as our sales declined by 7% from prior year on reduced levels of operator capital spending. Looking ahead, while we expect sales to moderate slightly from these levels in the first quarter, for the full year we expect our sales in the broadband market to increase in the low double digits as operators begin to ramp up their network upgrades. Despite the challenging conditions in the broadband market last year, 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 ourselves as the most flexible supplier, thereby ensuring that the company can benefit as operators begin to increase network investments. So just in summary, while 2019 was a challenging year in many respects, I come out of the year extremely proud of our team's performance. Amidst a very uncertain market environment and in the face of many unexpected dynamics that develop during the year, the Amphenol organization has clearly continued to execute extraordinarily well. Through our dual-pronged approach of growing both organically and through our acquisition program, the company continues to expand our market position while strengthening our financial performance. Amphenol's superior performance is a direct reflection of our distinct competitive advantages. our leading technology, our increasing position with customers in diverse markets, our worldwide presence, a lean and flexible cost structure, highly effective acquisition program, and most importantly, our agile entrepreneurial management team. Now, turning to our outlook, and given the continued heightened level of market uncertainty and based, of course, on constant exchange rates, We now expect for the first quarter and full year 2020 the following. For the first quarter, we expect sales in the range of $1,960,000,000 to $2,000,000, and adjusted diluted EPS in the range of $0.85 to $0.87. This represents a sales increase versus prior year of 0% to 2% in U.S. dollars and 1% to 3% in local currency, and a decrease versus prior year adjusted diluted EPS of 2% to 4%. For the full year 2020, we expect sales in the range of $8,240,000,000 to $8,400,000,000, and adjusted diluted EPS in the range of $3.76 to $3.84. For the full year, this guidance represents sales growth of flat to up 2%, and adjusted diluted EPS growth of 1% to 3%. We're encouraged by the company's performance in 2019, and all of us at Amphenol look forward to driving renewed strength going forward into 2020, even amidst the many dynamics around the world. I remain very confident in the ability of our outstanding management team to build upon our results in 2019 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 very happy to take any questions.