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 the 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 Rampo. Sir, you may begin.

Thank you very much. Good afternoon, everyone. This is Craig Lampo, Amphenol CFO, and I'm here with Adam Norwood, our CEO. We would like to welcome you to our first quarter 2020 conference call. As a reminder, during the call, we may refer 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. But before I review the financial performance for the quarter, Adam would like to say a few words.

Well, thank you very much, Craig. And first and foremost, I wanted to express my hope to everybody that's here on the phone today, that you, your family, your friends and your colleagues are all staying safe and healthy amidst the current COVID-19 crisis. As Craig just mentioned, I'm going to comment on the current environment. I'll discuss also some of our highlights in the first quarter. I'll then turn it over to Craig. to provide further detail on our financial performance. And then finally, I'll come back to me to discuss the trends and progress across our serve markets, and I'll make a few comments about the future. No question that we're living in truly unprecedented times. As the COVID-19 pandemic has impacted all of us around the world in really extraordinary ways, here at Amphenol, our first priority from the earliest days has been to ensure the safety and well being of our employers, our suppliers, our customers, and the many communities in which we operate around the world. And I'm sure that this pandemic has also personally impacted many of you on the phone here today, just like it has really everyone around the world. Our company began to see the impact from the outbreak at the time of the government restrictions that were imposed by China starting with the shutdown of Wuhan on January 23rd. While we don't have any facilities in Wuhan, our team successfully navigated an unprecedented three-week shutdown of our 50 manufacturing operations in China. And I just wanted to mention here how truly proud I am of our entire China team, who were able to return to full production level by the beginning of March, substantially earlier than we had originally expected. As the COVID-19 virus has continued to spread around the world, Amphenol's entire global team has been focused on executing amidst very challenging market conditions and quickly evolving government measures to control the pandemic, all while clearly prioritizing the safety and the health of our more than 75,000 employees around the world. To that end, we early on proactively instituted significant measures to protect our employees, which has ultimately enabled us as a company to continue to operate throughout this pandemic. I'm truly proud of the Amphanol organization, who despite these unprecedented conditions, has continued to execute as Amphanolians always do, including by supporting our communities around the world when they need us the most. We've donated hundreds of thousands of masks to local hospitals, reconditioned machines to produce our own face masks, dedicated 3D printers to help make space shields, significantly expanded our production of components used in ventilators and other critical equipment, and ramped up the capacity of our high-speed and power products to support the expanded bandwidth needs around the world. And these are just a few of the many, many initiatives that have been taken by our more than 120 operations around the world. And I just wanted to take this opportunity to thank each and every one of our Amphenol employees around the world for their dedication, resolve, agility, and focus amidst these most challenging and uncertain times. Now, turning to the first quarter, as I'm sure you all well know, due to the widespread disruption caused by the COVID-19 pandemic, On February 24th, we withdrew our first quarter guidance that had been issued at the time of our January earnings release. Despite this, I'm very proud of the results that the company ultimately achieved in this uniquely challenging quarter. Our sales reached $1,862,000,000, a reduction of 5% in U.S. dollars versus prior year and 9% organically. And that was driven by lower sales in the mobile devices, mobile networks, IT datacom automotive and industrial markets. These declines largely related to the COVID-19 disruptions in China, including in particular the approximately three weeks shutdown of all of our manufacturing operations in that country. I'm very pleased that the company booked 2 billion 150 million in orders in the first quarter and that represented a book-to-bill of 1.15 to 1, the highest level in the modern history of the corporation. And despite the significant disruptions to our operations in the quarter, adjusted operating margins held up very well, reaching 17%. Amphenol's financial position is extremely strong, with operating cash flow of $384 million in the first quarter, supporting the company's excellent liquidity, which included a substantial financial $2.4 billion in cash and cash equivalents at quarter end. Craig will give more details on this in a few moments. Just like to close by saying I'm extremely proud of our team and that our performance this quarter once again reflects the discipline and agility of our entrepreneurial organization as we continue to perform well amidst the truly unprecedented challenges related to the COVID-19 crisis. And with that, I'll turn it over to Craig to review our financial performance and then come back in a few moments to talk about our end market. Craig, please. Thanks a lot, Adam.

So, as Adam just reviewed, the company closed the first quarter with sales of $1.862 million and with GAAP and adjusted to lose EPS of 79 cents and 71 cents, respectively. Sales were down 5% in US dollars and 4% in local currencies compared to the first quarter of 2019. And from an organic standpoint, excluding both acquisitions and currency impacts, sales in the first quarter decreased 9%. Sequentially, sales were down 13% in U.S. dollars in local currency and organically. Breaking down sales into our two segments, the internet business, which comprised 96% of our sales, was down 5% in U.S. dollars and 4% in local currencies compared to last year. Our cable business, which comprised 4% of our sales, was down 13% in U.S. dollars and 11% in local currencies compared to the first quarter of last year. Adam will comment further on trends by market in a few minutes. Operating income was $317 million for the first quarter of 2020, and operating margin was 17%, which was down 310 basis points compared to the first quarter of 2019. Compared to the fourth quarter of 2019, operating margins decreased 300 basis points. The reduction in operating margins reflected a negative conversion rate higher than our typical 40% downside conversion. This elevated conversion was primarily driven by the impact on the first quarter of the COVID-19 pandemic on production and productivity, particularly due to the various government restrictions that limit our ability to adjust payroll costs. From a segment standpoint, In the interconnect segment, margins were 19.1% in the first quarter of 2020, which was down compared to 22% for both the first and fourth quarters of 2019. In the cable segment, margins were 7.6%, which was down compared to 11% in the first quarter of 2019 and 10% in the fourth quarter of 2019. Despite the year-over-year and sequential operating margin decline, we are proud of this quarter's performance given the unprecedented challenges created by the COVID-19 pandemic. Our team's ability to minimize the negative margin impact from this crisis 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 and thereby maximize both growth and profitability in an uncertain market environment. Interest expense for the quarter was $29 million, which compared to $30 million in the first quarter last year. And the company's adjusted effective tax rate was 24.5% for both the first quarter of 2020 and 2019, respectively. The adjusted effective tax rate for the first quarter of 2020 excluded a district tax benefit of $20 million due to refunds in certain non-U.S. tax jurisdictions. and the resulting adjustment to deferred taxes, as well as an excess tax benefit of $5 million associated with stock option exercises during the quarter. The adjusted effective tax rate for the first quarter of 2019 extrudes the impact of acquisition-related costs partially offset by the impact of an excess tax benefit associated with stock option exercises during the quarter. The company's gap effective tax rate for the first quarter of 2020, including the items just mentioned, was 15.9% compared to 22.8% in the first quarter of 2019. Adjusted net income with a strong 12% of sales in the first quarter of 2020, another confirmation of the strength of the company's financial performance. On a GAAP basis, the Lewis EPS declined by 9% in the first quarter to 79 cents compared to 87 cents in the first quarter of 2019. Adjustability ETF declined 20% to $0.71 in the first quarter of 2020 from $0.89 in the first quarter of 2019. As Adam mentioned, orders for the quarter were $2,150,000,000, which was up 7% compared to the first quarter of 2019, resulting in a record book-to-bill ratio of 1.15 to 1. Despite the extremely challenging environment, the company continues to be an excellent generator of cash. Cash flow from operations was $384 million in the first quarter, or 177% of adjusted net income. And net of capital spending of $61 million, our free cash flow was $323 million, or 149% of adjusted net income. From a working capital standpoint, inventory, accounts receivable, and accounts payable were $1.3 billion, $1.5 billion, and $817 million respectively at the end of March. And inventory days, day sales outstanding, and payable days were 92, 75, and 57 days, respectively. While DSO and DTO were both within our normal range, DSI was slightly elevated due to the lower sales levels in the first quarter, which were driven primarily by the extended shutdown of production in China, as well as the production challenges in other parts of the world. Due to the current crisis, we do expect inventory days to remain somewhat elevated while sales levels are depressed, but to come back down to normal levels as business returns to a more typical pattern. The COVID-19 pandemic created significant uncertainty, significant economic uncertainty in volatility in the credit and capital markets during the first quarter of 2020. As a result, and as mentioned in our earnings release, out of abundance of caution in late March, the company proactively borrowed 1.25 billion under our 2.5 billion revolving credit facility. In addition, due to the significant volatility in the commercial paper markets, the company decided to reduce its reliance on the public commercial paper markets. And as such, approximately half of the proceeds from the revolving credit facility was allocated to repay amounts due under our commercial paper programs. During the first quarter, our cash flow from operations up to $384 million along with net proceeds from our various credit facilities of $1.36 billion, proceeds from our recently completed bond offering of $400 billion, and proceeds from the exercise of stock options of $30 million were used primarily to repurchase $257 million of the company's stock at an average price of approximately $96, fund repayments under our commercial paper programs of $250 million, fund dividend payments of $74 million, the net capital expenditures of $60 million, fund acquisitions of $16 million, and fund distributions to and purchases of non-controlling interests of $8 million. At March 31st, cash and short-term investments were $2.4 billion, of which $1.4 billion was held in the U.S. This elevated level of cash was driven by $400 million on hand from proceeds of the February bond offering, which was subsequently used to fund the $400 million bond maturity due on April 1st. and the previously noted drawdown of our credit facilities in excess of our current or expected cash needs in order to fund the decision to reduce our reliance on our commercial paper market and to provide a cash buffer during this period of extreme market volatility. At March 31st, there was $1.36 billion outstanding under our credit facilities, as well as $138 million of outstanding commercial paper remaining that will come due in April and be repaid with cash on hand. As a result, total debt at March 31st was 5.1 billion, and net debt at March 31st was 2.7 billion, which was unchanged from the net debt level as of December 31st, 2019. Total cash on hand, as well as the remaining availability under our credit facilities, was $3.6 billion at the end of the quarter, which leaves the company a very strong liquidity position. The first quarter 2020 EBITDA was $403 million and a pro forma net leverage ratio was 1.4 times. In summary, although this was certainly a much more challenging quarter than we had anticipated coming into the year, we finished the quarter in a position of real financial strength and with a very strong balance sheet and liquidity position. We believe this financial strength coupled with the company's broad market and geographic diversity But this is as well for the current market volatile environment, which is characterized by moderating demand and continued uncertainty across global markets. And with that, I will now turn it over to Adam, who will provide some commentary on current market trends.

Well, thank you very much, Craig. Craig just mentioned the value that we see in the company's balanced and broad end market diversification. And I can just tell you, that that value is even more clear in times like we're living today. In the quarter, no single end market represented more than 21% of our sales. Such diversification continues to mitigate the impact of the volatility of individual end markets and geographies, while also exposing us to leading technologies wherever they may arise across the electronics industry. And this is just a great asset in a dynamic and unpredictable environment like we are experiencing today. Now, turning to our end markets, the military market represented 14% of our sales in the quarter. Sales again grew very strongly from prior years, increasing by a bit less than expected 18% in the first quarter. And this was driven by growth across virtually all segments of the military market, including, in particular, helicopters, space, military vehicles, and avionics applications. Sequentially, our sales decreased by 5% from the fourth quarter. Looking now into the second quarter, we expect sales to decrease from the first quarter level, as certain of our facilities that support military customers are operating with reduced staffing as a result of governmental restrictions related to the COVID-19 pandemic. Nevertheless, our team focused on the military market and has worked hard for many years to strengthen our position across the market while increasing our capacity to serve customers really in all segments of the military market. The company's continued strong performance is a great reflection of the results of those efforts. Given the ongoing favorable military spending environment, our team continues to solidify our leadership position by ensuring that we execute on the demand that we see in support of the many next-generation technologies that are required for modern military hardware. The commercial aerospace market represented 5% of our sales in the quarter, and our sales were down slightly as production volumes declined and as overall demand from commercial aircraft manufacturers began to experience the negative impact of the COVID-19 crisis late in the quarter. Sequentially, our sales decreased by 10% from the fourth quarter, which was a bit more than we had expected coming into the first quarter. There's little doubt that the commercial air market has been significantly impacted by the rapid and unprecedented reduction in air travel around the world. Accordingly, we do expect a further reduction in sales as customer shutdowns and reduced demand for air travel impact overall aircraft production volume. Regardless of the difficult environment that we're seeing in the commercial air market today, our team working in this market remains committed to leveraging the company's strong technology position across a wide array of aircraft platforms and next generation systems integrated into those airplanes. And that positions us very well for the long term. The industrial market represented 21% of our sales in the quarter. Sales in the industrial market declined by approximately 3% as growth in medical instrumentation, alternative energy, and battery-related applications, together with contributions from our acquisitions completed last year, were offset by declining sales related to heavy equipment, rail mass transit, oil and gas, as well as other segments. On a sequential basis, sales in the industrial market were down more than we expected by about 4% from the fourth quarter, And this reflected in particular the China COVID-19 related shutdown. I'd like to take this opportunity to highlight just how proud we are of our team working in the medical segment of our industrial market, who is ramping up our production of sensors, connectors, and a wide variety of interconnect assemblies in support of countless applications that are providing medical treatment for COVID-19 patients. Looking into the second quarter, we expect the industrial market to remain relatively stable as increases in production in China are offset by lower sales in other geographies related to some of the restrictions on production that we're now seeing. We remain very pleased with the company's broad position in the worldwide industrial market, and through both our acquisition program as well as our organic innovation, We have developed a very broad array of products across a diversified range of exciting segments within this market. We're proud of the company's long-term success in the industrial market, and we look forward to realizing the benefits from our efforts for many years to come. The automotive market represented 19% of our sales in the quarter. Sales were weaker than we had expected coming into the quarter due to both the China shutdown in February as well as COVID-19-related shutdowns by automotive customers in other parts of the world later in the quarter. Sales declined by 8% in U.S. dollars and 6% in local currency, and sequentially our automotive sales decreased by 13%. As we look towards the second quarter, we do expect sales to further reduce as customer shutdowns continue to impact demand. and as a number of our automotive plants are restricted from full operations in certain countries. At this time, it's very difficult to predict the exact timing and nature of the automotive market recovery. Nevertheless, and regardless of this extremely challenging period for the automotive market, we're very confident in our long-term position. When this crisis is behind us, we look forward to once again benefiting from our long-term and consistent strategy of expanding our range of interconnect sensor and antenna products, both organically and through acquisitions, which enable a wide array of onboard electronics across a diversified range of vehicles made by auto manufacturers across the world. The mobile devices market represented 10% of our sales in the quarter. Our sales to mobile device customers were significantly impacted by the three weeks shutdown and subsequent month long ramp up of production in China. Sales in the mobile devices market declined by 20% from prior year, and by a greater than expected 43% from the fourth quarter of 2019. Although the first quarter was very difficult for our team working in the mobile devices market, I'm just so proud that they were able to fully recover our production levels by early March. And as we look towards the second quarter, we do expect our sales mobile device customers to increase from these first quarter levels. Regardless of the COVID-19 related disruption in the first quarter, our long-term position in the mobile devices market remains very robust. Our leading array of antennas, interconnects, and products and mechanisms continues to enable a broad range of next-generation mobile devices. And while there's no doubt that this market will always be one of our most volatile, our outstanding and agile team is poised as always to capture any opportunity from our customers that arises in 2020 and into the future. The mobile networks market represented 7% of our sales in the quarter. Sales decreased as expected from prior year by 14% in US dollars and 31% organically. as we were impacted by reduced demand from wireless OEMs. As we discussed extensively last year, the US 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. In addition, the China shutdowns related to the COVID-19 crisis also impacted our sales in the first quarter in the mobile networks market. On a sequential basis, our sales actually increased 6% from the fourth quarter. And that was driven by higher sales to mobile network service providers. Given the continued disruptions related to the COVID-19 crisis, as well as the ongoing US government restrictions that I just discussed, we anticipate sales in the second quarter to be similar to those levels that we realized in the first quarter. Regardless of the continued challenges in the mobile networks market, 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 opportunities with next-generation equipment and networks. And as customers plan for these 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. I would just mention in addition that as we all know, global communication systems are being stretched by the radical shift in work and education practices due to the COVID-19 crisis. These factors create 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 were weaker than expected due to the impact of the China shutdown and the subsequent ramp back up to full production. Sales declined by 4% in US dollars and 10% organically from prior year. As the contributions from the Charles Industries and XGIGA acquisitions completed last year, together with stronger sales of server-related products were offset by the impact of the production shutdowns, in particular in China. Sequentially, our sales declined by 12% from the fourth quarter. I would mention that we did see a significant uptick in orders in the first quarter from a wide array of customers in the IT Datacom market. We believe the surge in activity is related to our customers' efforts and our customers' customers' efforts to increase bandwidth in support of new demands related to the COVID-19 crisis. This includes the increase in online video communication, streaming services, and gaming, among others. We're well positioned to support these initiatives due to our team's continued efforts at developing industry-leading products across a wide array of technologies, including, in particular, high-speed and power products. And while we do expect sales to increase in the second quarter due to these strong orders, I would mention that we continue to face production challenges in many geographies due to COVID-19-related government restrictions. Nevertheless, 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 IC datacom through their ongoing development of a wide range of next generation technologies. The broadband market represented 4% of our sales in the quarter. sales decreased by 10% from prior year, as spending levels from broadband operators continued to moderate. On a sequential basis, sales decreased by greater than expected 11% from the fourth quarter. We expect sales in the second quarter to increase as customers seek to quickly upgrade capacity in their networks to support the significant increase in demand for bandwidth that I discussed earlier. Our team is working very hard amidst the number of operational challenges to support these upgrades in capacity. Now, turning to our outlook. Given the significant uncertainty related to the COVID-19 crisis, we believe it's prudent to withdraw our full-year sales and EPS guidance at this time, and we'll not be providing a specific sales and EPS outlook for the coming quarter. With that said, we do expect sales and EPS in the second quarter to be lower than our first quarter level. This expectation is related to weaker demand in certain markets due to the overall economic environment, as well as certain operational restrictions that we're experiencing in several countries related to the government measures that have been implemented to reduce the spread of COVID-19. In some cases, these restrictions have limited our ability to adjust our resources in line with the volume declines we are experiencing, resulting in elevated costs in several of our businesses as we take action to comply with government mandates while also ensuring the safety and health of our employees. Nevertheless, despite all these challenges, you can rest assured that the team of anthenolians around the world is fighting hard to secure the company's overall performance, all while dedicating ourselves to protect the safety and health of our more than 75,000 employees around the world. So now to summarize, while the first quarter of 2020 has been uniquely challenging, I come away extremely proud of our team's performance. Amidst an unprecedented global pandemic, the Amphenol organization continued to execute extraordinarily well. In fact, It is in times of crisis like we're all facing today that the Amphanolian culture demonstrates its true value. The company's strong performance is a direct reflection of our distinct and consistent competitive advantages. Our leading technology, our increasing position with customers in diverse markets, our worldwide presence, lean and flexible cost structure, our highly effective acquisition program, and our agile entrepreneurial management team. And I would just like to take this final opportunity to recognize and thank the entire Amphenol organization around the world for their focus on protecting our people and their communities, their dedication to supporting our customers, and their agility in the face of uncertainty, all of which helps to create value for all of our stakeholders. And at this time, operator, we'd be very happy to take any questions that there may be.

Thank you, speakers. The question and answers period will now begin. Our first question comes from Amit Dayanani from Evercore. You may ask your question.

Thank you for the time, guys, and I hope everyone at Amphenol and their families are safe and healthy as well. I'll just stick to one question. Adam, do you think structurally anything is different today versus pre-COVID for Amphenol that would prevent the company from getting back to this 20% operating margin or the incremental margin you just talked about once things eventually normalize? And I guess when I just think about the cost optimization and things you've talked about, does that actually inherently lower the revenue run rate you need to get to that 20% operating margin target?

Yeah, Amit, look, structurally – We are not different than we have been either in good times or bad. And, you know, while this is an organization in many respects that's purpose-built for a crisis like we see today, the agility and the flexibility of our organization in times of change has always been really the hallmark of Amphenol's performance. And so, for sure, this crisis is in many ways different. from the prior crisis, whether that was the tech collapse of 2001, the financial crisis of 2009, because this is also a crisis where health of people is at issue. And so, Craig mentioned, I think, very assertively that our conversion margins going into in the first quarter were higher negative conversion margins, because you're dealing with the fact that you have governments shutting down certain production or limiting production. You also have employees where, you know, we are taking steps to ensure the safety of our people, and some of those steps have, at least for the time being, not the greatest effect on productivity or on efficiency and all those things that you have grown to expect with us. But no doubt about it, the structural capability of this company, the organizational, the cultural capability of this company is to achieve the margins that we achieved just 90 days ago in the fourth quarter, that hasn't changed whatsoever. Now, does something happen during this crisis that ultimately allows us to do even better? Well, you know, let's let time tell. But I will say that we are always striving for strong conversion margins on the upside and moderating those conversion margins on the downside, even in an environment like today where there are very, very different dynamics.

Thank you. Our next question is from of Bank of America. Let me ask you a question.

Yes, thank you. Adam, can you maybe comment on the pace and cadence of new design activity? You mentioned significant headwinds in mobile devices that you witnessed in the quarter, given that a lot of it is China-centric. But given this disruption in travel and continued disruption, Are you seeing or anticipating resulting pushouts of product launches in mobile devices? Thank you.

Thanks very much, Wamsi. And look, I think without commenting on any specific programs, I would tell you that our customers in all of our markets, and that includes mobile devices, I think there's an adjustment period to this new way of working. We are all working, and I'm sure all of you on the phone here today, are working in a way that is very different than you had worked in the past, sitting in your offices, meeting in conference rooms. And now we are all experts on video calls and working remotely and somehow trying to replicate the collaboration and the interaction that you can't really do in person, but that you can seek to replicate through all these different tools that we're all using. And as it relates to developing new products, launching new products, No doubt about it that, you know, customers had to sort of adjust to this. But I will tell you, our teams who are working on new programs with customers, and again, not just in mobile devices, but overall, the level of interaction with customers now that everybody has kind of figured out the technology and figured out, you know, how to work in this way, I think that that level of interaction continues really unabated. And in many ways, I will tell you just personally, My ability to interact with customers when I'm not flying, you know, 500 hours a year, it's amazing. I can visit so many customers from just the comfort of my desk here with a TV screen and a camera. And that is – and I know that technology existed before, but, you know, we all like to touch and feel and meet people in person and shake hands. And I think we've had to adapt very rapidly to this new environment. And I believe this new environment actually creates wonderful opportunities. And we'll learn a lot from it. And again, specific to individual launches, I think there were some sort of early adjustment periods that customers have. But by and large, what we see is to the extent that our customers have access to their manufacturing facilities that they can produce in full volume. we still see an enormous amount of activity with customers around the world.

Thank you. Next question is from Craig Kettenbach from Morgan Stanley. You may ask your question.

Yes, thank you. Adam, just a question on the book to build, which is very strong. I know there's particular markets like com and medical that are helping, but also kind of customers as they look to mitigate supply chain concerns. And so just, I'm curious to get a little bit more context on how you feel like kind of the shape of those bookings are and relative to kind of what the demand you're seeing is.

Yeah, well, thank you very much, Craig. I mean, let's go back a little bit. When you think about these bookings, and they were very strong. I mean, the strongest book to do in our history and, you know, one of the strongest order of quarters we've had. Craig mentioned about 7% year over year. Our original guidance for the quarter was, would have had us, I think, at the high end around $2 billion. And, you know, we booked orders of $2,150,000. So that would have been about, you know, 7%, 8%, which would have been a strong book to bill, no doubt about it. So I think some element of the strong book to bill is just the production restrictions that we had in the quarter. And there's another element of that book to bill, which is really increased demand in certain areas and pretty sudden increase in demand, whether it's in the wide range of medical products that our team is working on, whether that's in anything related to bandwidth and communications. And I talked about that in my prepared remarks as well, that we see, you know, actually sequential increase in sales in a number of those areas. Now, the third category that you allude to is our customers' placing orders to secure position and prevent against supply chain riskers kind of otherwise get in line, there may be some of that, but I would put that kind of in the distant third position of those three factors that I've just reviewed. We haven't seen really things like double ordering or frantic kind of ordering just to kind of get a place in line. That's not what we've seen yet. I think we have seen orders that we can't satisfy because of production requirements. Obviously, when you book 2 billion more than or 2 billion 150 and you ship 1 billion 860, there are some orders that you book that you couldn't get out because of some of the restrictions. But I don't think this is customers really having that kind of panic buy because of shortages. I think the orders are just a great reflection of the breadth of the importance that we play in the technologies of our customers and the importance in turn of our customers in the things that matter right now today. I mean, I will just say one thing. I mean, you know, we have worked in the IT datacom market and mobile devices market for so long, as you know very well, Craig. And we have always done a phenomenal job of reacting to our customers, reacting to their needs. And, you know, those devices, they were supporting so many different applications, you know, from video over the Internet, you know, helping social media, all the various things that were driving demand for things like mobile devices, things like IT datacom. I will tell you, our team today works with a different purpose. Because those systems that used to be for gaming and for video are now for educating kids. And without those systems, my kids would not be going to school today. We would not be able to function as a corporation. Hospitals would not be able to communicate with the families of the patients who they cannot visit physically because of all of the restrictions. You hear wonderful stories about the use of tablet computers to allow families to tragically meet their loved ones sometimes for the last time in these very, very critical stories. And I'll just say that, you know, our team around the world feels a sense of purpose around this and making sure that we can satisfy the requirements that our customers have. And we're fighting really hard to do that. And so the strong orders, I think they're more a reflection of the urgency of the purpose. And our team is going to find a way no matter what to really support those customers.

Thank you. Our next question comes from Matt Sheeran of Stifle. You may ask your question.

Yes, thank you, and good afternoon, Adam and Craig. Adam, relative to the operational restrictions you're facing outside of China, can you give us an idea of what your utilization or production levels are now, where you're seeing the biggest issues? And relative to that, are you expecting similar cost headwinds as you saw last quarter, or is it too early to tell given the fluid situation?

Yeah, thanks so much, Matt. I mean, look, the first quarter was largely about this sort of unprecedented, very clear shutdown in China. Chinese New Year came, and it was on then February 10th when essentially you were allowed to reopen, and by the way, reopen with a lot of challenges because the government put forth a very, very detailed, very detailed plan requirements for you to reopen your factory, including things like you had to have enough face masks for every employee to change their mask three times a day, and you had to have 14 days of stock, and they would come and audit, do you have enough face masks? So, and do you have enough disinfectant solution, temperature checking devices, all these things, a very rigorous process to reopen. I will say the rest of the world has not been necessarily as clear as what we saw in China. which is not surprising. I mean, every country does things their own way. And, you know, that is what it is. And it's not for us to judge that, but rather to react to it. And so we operate, as you know, in close to 40 countries around the world. And every country has a little bit of a different approach. And even here in the United States, where we operate in a number of locations, we have a very significant workforce in the U.S. Every state has a little bit of a different nuance to that. What are exempted businesses? What are essential businesses? And how is that all defined? And so, our team around the world has been reacting to that, to those restrictions, making sure that we are, when we are essential, that we're able to operate, making sure that our employees are kept safe. And fortunately, we learned a lot in China, a lot. And our Chinese team has been so helpful to all of our other operations in making sure that we can stay open as much as the governments will allow us, as much as they possibly will allow us, by putting in place the appropriate protective measures for employees. And that's been a real critical aspect of staying open where we have been able to do so, which is, by the way, the vast majority of places, is making sure that we can protect our employees and demonstrate to our people first that it's a safe workplace, And second, demonstrate that to the local government to, in most cases, come and audit and inspect that. If your people don't believe they're coming to a safe workplace, they're not going to come. This is a scary, scary virus. And there's no doubt about it that you need to make sure that the place of work is almost safer than the homes of our people. That's actually our mantra inside of Amphibol. Make the workplace safer than the homes. And then the people will be comfortable and justifiably comfortable in coming in. Now, ultimately, what does that mean? What is our utilization? I'm sorry to tell you, I can't tell you that. You know, we don't have a central computer system. I just don't know exactly what utilization is. I can tell you that we have a number of facilities, but not an enormous number who are operating at lower than their capabilities. The number of facilities that are really not producing is relatively small. You know, the countries where these restrictions have been a little more rigorous, I would maybe point to a place like in India or Mexico. And even in those countries, we are operating, we're not totally shut down in those countries. We're operating as an essential business where it's appropriate for us to do so. In terms of, you know, the second quarter, I think Craig talked about the fact that you know, we had these extra costs in the first quarter, and we would expect to continue to have extra costs in the second quarter. And what the extent of those will be is really hard to predict, and that's part of the uncertainty that is underlying our reluctance to give a specific outlook here in the second quarter.

And I don't know, Craig, whether you would like to add to that.

Yeah, I would just add, you know, one quick thing to that, Adam, and I agree with absolutely everything you just said.

I think as

As we're coming into the second quarter, though, I mean, the first quarter we had the shutdown in China, which was that three-week period, and then obviously the ramp-up from that. And then really from what impacted us in other countries, really the most meaningful part of that was probably in the second half of March. So, you know, we're really in the second quarter. That's really in April in the second quarter really seeing more of an impact you know, from all the other countries and, you know, time will tell ultimately how that, you know, resolves itself. So it's a little bit of a difference between the first quarter and the second quarter, both actually having, you know, certainly a meaningful, you know, increase in costs, just of a different, you know, maybe a little bit of different nature if you use the full impact of the quarter with the rest of the countries, which are all doing a little bit of things a little bit differently.

Thank you. Our next question comes from Samik Chatterjee from J.B. Morgan. You may ask your question.

Hi. Thanks for taking the question. I just wanted to follow up on the order trends and your comments related to that. And if you can kind of help share anything in terms of what you've seen for order trends early on in 2Q, just because when I kind of compare the strong order trends you have with the lower economic activity, I mean, I would Why should I not think that there should be some order cuts down the line from your customers? Because otherwise, given kind of the strength you have, you would definitely have a very strong, robust deal, right? So just help me think about that. Are you starting to see some order cuts from customers, or am I wrong in thinking there should be some down the line?

Yeah, well, thank you very much. Look, I think our strong orders in the first quarter, I talked a lot about where those came from. I think it's a little premature to comment here on the second quarter order trends. We're just barely three weeks into the quarter, and it's hard to see. I mean, I guess I would say that we, the orders, which in areas like IT Datacom, you know, those were strong through the end of the quarter. It wasn't that it was kind of a thing early on, like in February. I mean, the orders definitely strengthened through the quarter. Does that strengthening through the quarter continue here into the second quarter? Again, I think it remains a little early to say that. Does that mean that there is an order correction coming? Again, we're dealing in a time period of an enormous uncertainty. But one thing is for sure, I mean, when I look at the orders in the market where we probably have the strongest orders, which is IT data comms, you know, these are not people putting stuff on shelves. Far from it. I mean, these are customers trying to get, frantically trying to get stuff in the field so that you and I and our children and our parents can have bandwidth that is not a disaster. I mean, I'll tell you, you know, I am here in a house. with three kids going to school. I mean, I have only two kids, but one of them brought, you know, a second one with them. And when everybody is in school at the same time and when I am on my perpetual video calls during the course of the day, it ain't the greatest experience for anybody because the bandwidth is so constrained in many, many places. And, you know, I am not talking from the most rural of places here. And so there is these upgrades, the capacity expansion, the bandwidth expansion, these are real things. This is not customers just saying, I need to buy a bunch of stuff, put it on the shelf just in case. These things are going to the field. I mean, if you think about the medical market, they are producing every possible thing they can. They need every sensor that they can get. They need every connector that they can get. in order to produce life-saving equipment that needs to save a life, like not in six months, but like yesterday or today or tomorrow. So I think this is real demand. I don't personally feel that we're looking at here a kind of a supply chain build and people putting stuff in warehouses. That's a different dynamic than I believe what we're seeing today.

Thank you. Our next question comes from Mark Delaney from Goldman Sachs. Let me ask a question.

Yes, good afternoon. Thanks for letting me ask a question. Is there something to better understand the medical business at Amphenol, maybe some sizing of that business in terms of the percentage of revenue, and then do you have any more details about how much exposure in terms of revenue Amphenol may have to some of these areas that are going to help support COVID-19 patients like ventilators? Thank you. Thanks so much, Mark.

Look, medical is part of our industrial market, and we haven't specifically split that up, but I would just tell you that it's, you know, it's an important part of our industrial market, even though our industrial market, you know, doesn't have a dominant segment, for sure. And, you know, across industrial to everything from factory automation, rail mass transit, heavy equipment, instrumentation, and, you know, and other important segments, including medical. Now, you know, I think our medical business in the recent years, we've done a fantastic job of expanding our position in medical products, and that started really with some acquisitions we made many years ago, but it was enhanced and accelerated six and a half years ago when we entered the sensor market. With our original acquisition of GE's advanced sensor business, which was six and a half years ago, who had a substantial sensor position across medical applications, And medical applications, which, by the way, included a longstanding leadership position in respiratory therapy. And, you know, you can imagine that today respiratory therapy is kind of an important part of the medical market. We've always had a strong position in areas like patient monitoring and imaging and things like, you know, x-ray and CT and MRI and, you know, delivery of medications. And, you know, so that sensor business really positioned us, I believe, even stronger than we were before because the sensor becomes such a critical component. And you'll recall when we first got into the sensor market, one of the theories and theses that we had was that while sensors represented a wonderful complement and a part of the interconnect system, oftentimes the sensor element was a critical piece of the technological architecture of the products that we were in. And while it may not have always the highest value as an element, it has enormous value as a kind of tip of the spear into that application and into the engineering teams and the importance of the customers. And I would just say that we saw that and we've seen that over these six years. We see it much more today. As we talk, and I personally, and it's so many medical customers around the world, there's no doubt about it that having that sensor capability, that sensor portfolio that we have built, not just with our original acquisition, but multiple acquisitions thereafter, close to eight companies, I believe it is now, that our position in the medical market, not just in terms of size, but the importance that we serve to customers in the medical market has really enhanced. You'll also remember that last year we made a wonderful acquisition in Germany of a great company called Vern Richter, a real leader in medical market value-add interconnect, together with our pre-existing companies that are very active in interconnect products in the medical market. So, again, I'm not answering specifically, Mark, your question in terms of, you know, what is the exact size, but I will just tell you that it's a very important market and segment within the industrial market. And it's one where we're very, very proud that our technology can play a significant role in helping the world to do battle against this COVID-19 virus.

Our next question comes from Sean Harrison from Loop. Please ask your question.

Good afternoon, everybody. Good afternoon, Sean. Good afternoon. Question on capital deployment in terms of thinking this, you know, downturn versus 2008, 2009. There wasn't really a lot of M&A activity back in that period other than Times Microwave, if I believe. And the share repurchase activity, you know, wasn't really something that Amphenol did either. And then we had this quarter where a significant share repurchase. and wondering if you could maybe just comment on your view of share repurchases going forward, and then also what do you think of the M&A environment in 2020? Does it dry out? Sure.

Thanks, Sean. You know, yes, as we did mention, we did purchase this 2.7 million share during the quarter for the average price of about $96. I would note, I guess, that these repurchases did precede this extreme market volatility that we saw during the quarter, which kind of somewhat is evidenced by the average price of the stock that we bought it for during the quarter. The timing of our stock repurchasing certainly does always take a number of factors into account with regard to other cash needs in a particular period, and in periods where we have you know, less acquisitions or other repurchases, you know, there could be less share repurchases during that quarter or more share repurchases during the quarter when we have those, you know, lower cash needs. So that's, you know, certainly one of the reasons why we had a little bit higher in the quarter and per se gives you maybe a feel for the timing of that. You know, subsequently, we did draw down the revolver when that extreme kind of market environment took place, but those were really independent you know, actions that really had, you know, nothing to do with each other and just so happened to occur in the same quarter when we drew down the $1.25 billion under our revolving credit facility. And our intention would be, you know, with the revolving credit facility to really, you know, once, you know, as we generate cash, you know, as we continue to explore other opportunities with regards to funding, as the markets become a little bit more stable, you know, we do intend even as early as the second quarter here to start paying down, you know, some of those amounts under the revolver. But so, you know, in terms of capital deployment, you know, we do continue to take a flexible and balanced approach. That has not changed. We haven't stopped anything kind of in a formal way. But certainly in this, you know, environment, you know, where things are a bit uncertain, we're going to be very thoughtful about our deployment and things like, you know, share repurchases and other things and be very prudent from that perspective. And I guess I'll let maybe Adam mention, comment on the M&A.

Yeah, thanks very much, Craig. I mean, very well said. And I would just note that the M&A environment, Sean, you correctly point out that back in 2009, we did complete one acquisition early on, Times Microwave, a fabulous company, by the way, here. 11 years later, I can't tell you how happy we are to own it. We have never been a company that just chases markets either up and down during times of crisis, you know, bottom fishing, if you will, for prices and other things like that. We take a very thoughtful long-term approach to our M&A program. And that means, you know, having long-term conversations with people and ultimately dating them with the intention one day to get married. And I can tell you that, you know, in a short-term market dislocation, most people, if they don't have to sell, probably are not going to want to sell during a short-term market dislocation. And probably you don't want to necessarily buy during that short-term market dislocation when you really don't know the full extent of what you're buying. All that being said, what I will tell you that during this environment, this is a very, very kind of existential environment for many companies. And a company like ours, who has the financial strength that Craig talked about, who has the diversity that we talked about, who has the geographical diversity as well, the footprint diversity, if you will, and who has that culture and reputation as an acquirer becomes an even more attractive destination for companies who may be going through today an existential crisis. Maybe they are only in one market. Maybe they are only in one geography. And they look kind of over the ledge today at their own existence. And I think that that is a time where if those companies do survive, they may start thinking long-term about, do I want to do this alone now that I know this kind of a crisis can happen? And I think the long-term prospects for us being a real acquirer of choice, I believe coming out of this can be quite substantial. Now, what does it mean this year? How much of our capital are we going to allocate to what? How much M&A will we do? It's a lot of uncertainty to make any prediction on that front. But our long-term approach to capital deployment clearly is the priority toward new product development, M&A, and then obviously the dividend, the buyback that Craig has always talked about. And we look forward to continuing to be the acquirer of choice for the thousands of companies in this industry going forward.

Thank you. Our next question comes from Deepa Raghavan from Wells Fargo Securities. Please ask your question.

Hey, good afternoon. I'm going to look ahead and ask about better times. Just looking back in history, can you talk about which verticals you typically see recovering earlier and which usually take longer to recover? And hypothetically, let's assume macro forecasts are right and we start to see some recovery sometime in the second half. Should we think about most of your sales actually being recoverable, some of them that got pushed out, or can there also be examples of lost sales within your portfolio? Thank you.

Well, thank you very much, Deepa. And I love that you ask about better times. This is a great question and one that is really close to my heart. Look, which verticals recover when? The answer to that is it depends. I mean, you cannot, I believe, compare the current environment with either 2009 or with 2001. But in 2001, we had many of our markets which didn't even go down. You think about the military market as one example. Even the industrial market was still relatively strong then. It was really a tech bubble that burst and then was followed by, you know, the tech collapse. And then, you know, the recovery in 2001 was not so fast, if you'll remember well. I mean, 2002 was also not the easiest year. If you then go to the financial crisis, you know, we had in the financial crisis a very severe, in the fourth quarter of after Lehman Brothers, reduction in demand, You'll recall that we quickly adjusted our headcount in the fourth quarter of 2008. Sales, I believe, were down something like 15%. We adjusted our headcount down by 17% in the same quarter. And we ultimately secured the profitability of the company in both of those crises down by 300 basis points. Now, I think this crisis is a little different because it's our first global pandemic in our lifetimes. It scares people. It affects people. People are afraid to go to work. They're afraid to go to the grocery store. They don't know. There is an intense personal insecurity to this crisis. But I will tell you this too shall pass. I don't know if we are in the middle or, you know, the old Winston Churchill saying, you know, I don't know if this is not the beginning of the end, but it might be the end of the beginning. I don't know where we are in this crisis, but no doubt about it, it will one day have a beginning, a middle, and an end. And what lies beyond that end? I believe an enormous amount of opportunities lie beyond that end. And I think what we are going to see at the end of this crisis, when that quote unquote normal that you referred to comes, it will not be the same normal that we all knew on the 22nd of January. There will be differences. We will reevaluate how we work, how we live, how we learn, how we function. And there's one common thread across all of that, from our perspective, is people are seeing the importance of electronics in everything. Whether that's electronics for medical equipment, whether that's electronics for communication purposes, you name it, safety, HVAC systems, building automation. I mean, it doesn't take a big leap to start to think of just dozens and hundreds of new applications that will follow ultimately the reckoning that comes out of this very significant disruption that we've all experienced here. And I can tell you this, Amphenol sits strongly positioned for all of those opportunities wherever they may come. Our organization, 123 general managers around the world, each of them functioning in their little areas of the electronics world, are poised to capitalize on whatever comes along. And we're going to be very proud to do that. Now, look, what does that mean for the second half? I mean, you know, you mentioned some macro forecasts. In the last 90 days, I haven't heard a single forecast that's been correct. So I don't know what those macro forecasts are really going to be, whether there will be a An L shape, a V shape, a U shape, an S shape. I don't know. You tell me what shape a recovery is going to be. But a recovery will one day come. That I'm sure of. And when that comes, is there a catch-up of demand? It's hard to say is there a catch-up of demand. I mean, we're all sitting in our homes. I'm certainly not using a lot of gas right now. So I don't know that people are going to go use a bunch more gasoline when they get out and catch up to all the gasoline that we didn't use. I haven't filled the tank in my car for, I think, a month right now. And so, you know, there are some things that may have disappeared in terms of demand, but there are so many opportunities for new things that are going to come out of this whole crisis. And ultimately, I think those things are going to be real positive in the long term. Not a second half necessarily commentary, but I'm telling you, I think there's going to be a lot of good that's going to come out of this.

And our next question comes from Steve Fox from Fox Advisors. Please ask your question.

Thanks. Good afternoon. Adam, thanks for all the helpful discussion. I guess the one thing I was left wondering about in terms of your own operations was your supply chain. You mentioned disruptions with, you know, running your factories, but can you just talk about your ability to source raw materials, subcomponents, and how that has been handled and how you think it's going to be handled in this quarter? Thank you.

Thanks so much, Steve, and congratulations on your newly founded organization. We love your logo, by the way.

Thanks very much.

Steve, look, the supply chain is very important. I mean, suppliers are really important for us. One thing about Amphenol that you know very well, we don't have a centralized supply chain. We don't seek to put all of our stuff into one vendor and leverage that one vendor. We put the responsibility of managing our suppliers across all of our more than 120 general managers around the world. We may share information and do some smart things about that, but we're not putting all of our eggs in one basket of a supplier. And I can tell you, today I'm very grateful for that because there are suppliers. Even in the month of February through the China shutdown, our organization was so much quicker than most others to come back to full production. There were suppliers who were not able to come back. We didn't have the wherewithal, the agility, the capability to do what our team was so successful at doing and coming back to production. And, you know, to the extent that any of those, which for us usually are very small suppliers, created any disruption, we went and helped them right away. Our team was there for them, supporting those suppliers. We haven't seen anything material in terms of or meaningful, I should say. It's a double entendre material. Anything real meaningful in terms of the impact from our supply chain. I guess the one thing I would maybe point to is not really suppliers as much as logistics. It's been well reported. There are some logistical impediments going on in the world right now. Freight capacities are quite significantly limited in certain areas. And, you know, our team's doing a great job of working collaboratively across the organization to make sure that we're getting the product that we need when we need it and getting what our customers need when they need it. But, you know, there's a little bit more work involved in doing that right now than there was 90 days ago.

Next question comes from William Stein from SunTrust. Please ask a question.

Great. Thanks for taking my question. It relates to the margin trajectory we might expect over the current and next couple quarters. We understand that the decrementals were a little bit less, well, let's say they were a little bit worse than what they typically are in a downturn for Amphenol because you have some more challenging times in adjusting costs when you can't take actions on the employee base given all the things going on with COVID. And I wonder whether we should expect this to have a relatively quicker resolution where we could see a quarter here of better than expected decrementals because you can align the the cost base with the level of demand, or if we should expect another quarter or two of the sort of current more challenging alignment of those two things. Thank you.

Thank you. Yeah, thanks a lot, Will, for the question. You know, let me just start off by saying, you know, I think as a company, we're really just proud of the fact that we are still able to achieve these 70% operating margins in the first quarter with all the, you know, obstacles that we had to, you know, deal with in the first quarter with China being closed, with the other parts of the world, you know, having productivity issues and having, you know, some of our facilities closed or limited in terms of people. The fact that we, in that case, still achieved 17% and, you know, essentially had a sequential quarter kind of conversion from Q4 to Q1 of just, you know, 40%, you know, not so far over our typical 30% downside conversion, I think it's just a testament to the team. So I I just kind of wanted to start with kind of that because I think that's really just an important point and that we're really – we are truly proud of. Now, as it relates to kind of going forward into the second quarter, and we certainly didn't – aren't giving guidance for the second quarter. Adam, we did say that we do expect sales and ETFs to be lower in the second quarter. So with that being said, I said I wouldn't expect profitability or the pressures on our profitability – to be as meaningfully better in the second quarter than they were in the first quarter. I mentioned before that, you know, in the first quarter, we had this China-specific event that happened, and it really wasn't until the end of the first quarter that we really saw the other parts of the world starting to create, you know, issues with regards to adding cost or limiting our ability to adjust cost. And that's really what we're seeing, you know, in a bigger way in the second quarter. And so I think that, you know, we would expect still to have a drag from, you know, from that and, you know, throughout the second quarter at this point in time. I wouldn't expect, you know, dramatically different sequential quarter conversions going into the second quarter that, you know, from a first quarter to second quarter, I would expect kind of maybe normalish conversions. But, you know, but again, you know, there's so many unknowns right now as we kind of come into the second quarter that, you know, it's really difficult to conclude on that.

Thank you. Our next question comes from Jim Suva from Citigroup Investment Research. You may ask your question.

Thank you so much, and great to hear the Amphenol team's doing well and your positive outlook, which a lot of my questions have been answered for that. So I'll just ask one a little bit. When we think about guideposts, and I've been on the sell side for over 20 years, I think back in history, in the global financial crisis, the worst quarter year over year was down 19%, but then back at the tech bubble burst, there was some times of down 30% year over year. And I think about this crisis, the Coronavirus is much different of global plant closures, but then you talked about how positive your team came back in China. So, can you give us any guideposts at all about is it much different from some of those past historical trends we've seen? or the prank closures and coming back make it much different. It's just, you know, any guidance or color would be greatly appreciated. Well, thanks so much, Jim.

I mentioned earlier that I think while, you know, one can on their face say, well, there was the global financial crisis, there was the tech collapse, and should we or should we not compare this moment to those? I think there is the difference here. We have never worked in an environment where governments are so deeply impactful, and for good reason, by the way. I mean, I think governments need to take a role. They have an extraordinary role to play in protecting the health of all of us on the phone and all of the citizens of the world. And so justifiably, I think governments have taken steps to limit interaction of people and thereby slow the spread of the virus. And the way it's happened has been very different. China, I talked about, was a very clear, very distinct, and by the end of a certain time period, which was not so long, I mean, at the time, it felt like ages, let me tell you. Those three weeks felt like three years to all of us as we were planning the kind of reentry. But there was a moment in time where you knew you could take your people back to work as long as you did certain things to protect them. And I think in the rest of the world, the actions haven't been as clear as the actions were in China. And thus, the coming out of that is also, I believe, less clear. And so, you know, what is that going to look like? It will depend. It will depend on the country. It will depend on the results. It will depend on, you know, the sort of – I hear so many times this term, you know, are we bending or not the curve and all of these various things. And it's not dependent on is the fiber capacity in the market now finally filled and we can start rebuilding fiber optic equipment back in the year 2000. It's not dependent on is demand coming back because people are not getting foreclosed upon in their mortgages and unemployment and all of those things. There's an element, obviously. I mean, unemployment is increasing in many countries, ours, for example, very significantly. So, there is an end demand that is related in some way to this crisis, but not a direct part of the battle against COVID-19. When does that end demand come back depends on so many factors. What's the degree of government stimulus that's going to be available to people? What will companies have in terms of support, loans or grants or otherwise? I mean, there are a lot of factors that come into this, which make me feel like to draw that perfect parallel from those two crises would be maybe a dangerous parallel to draw. Again, I just reiterate one more time, from our perspective, it just doesn't matter because our team is ready regardless. We are purpose-built for a time of strong demand. we're also purpose-built for a time where demand is very uncertain. And that's the agility, the flexibility of all of our organizations, and really the resiliency of the organization in a time of kind of unprecedented uncertainty. And our ability to adapt and to embrace a new environment is, I believe, second to none. And we'll get us through this regardless.

Thank you. Our next question comes from Joe Spack of RBC Capital Markets. Please ask your question.

Thank you so much. Adam, I do want to just quickly, I guess, follow on your last comment and go back to some of the color you gave on the China restart and the lessons learned there because I think that's important. And as you mentioned, that was pretty intense. It's unclear if that's followed elsewhere in the world. But you also mentioned you want your employees to feel safe, and I think there's, you know, some plans for the decent amount of manual labor and lines can be set up with employees So you might have to do more than is minimally required in certain areas to get that level of comfort among your employees. So if we think about, you know, even beyond second quarter when there's obviously still going to be some costs because of the shutdown, does productivity not get back to where it was until there is a vaccine? Is that your view? Or does it sort of not matter because to follow on your last comments, you know, maybe it doesn't snap back to pre-COVID immediately either?

Yeah, no, look, it's a great question, Joe. I mean, I think what you're saying is, you know, there is a pre-vaccine and a post-vaccine world. And I would tend to agree with you. There is a pre-vaccine world and there's a post-vaccine world. the pre-vaccine world is going to require you to probably take more aggressive steps to protect your people. And I would just point out one thing. It was for us absolutely clear as right on January 23rd when that shutdown happened, the pure priority, the overarching priority of our corporation has to be to protect our people. And we do that because it's the right thing to do as a fellow human. of those 75,000 people around the world. But we do it also because it's just good business. If you don't protect your people, you see what happens. And there have been so many examples around the world, you know, some well reported and others not so well reported of the kind of catastrophic effect on a corporation's business if they're not sufficiently protecting their people. So we went overboard. We absolutely went overboard from the very get go. making sure that our people were well protected. And yes, we have factories where we have assembly workers who used to work very close together. They're not working close together today. And we've figured it out. We've repurposed offices. We've repurposed warehouses. We've staggered shifts. We've done so many things. Now, do all of those things ultimately hurt productivity in the pre-vaccine medium term? Not necessarily. I don't think they do necessarily. I mean, you'd be amazed at the resilience and adaptability, not just of our management team, but of our people on the factory floor. And I tell you, and I'll just put a plug in here right now, we have every time for our earnings release a management call. These people in our factories are the heroes of Amphenol today. They are every day walking in the door of a factory. While those people who can work from home are doing so, We have a lot of people who have to go to work every day to do their job. And their jobs are so important today. Like I said, I mean, we are building things that go into life-saving equipment. We're building things that go into mission-critical communications networks. And these heroes of our company who are going in every day, it's our job to protect them, regardless of if that means I have to face them out in the factory or regardless of whether that means I have to have the shifts not overlap quite as much and lose 2% in productivity that day because of it. That's not a consideration at this point. I believe that our team is going to make it happen regardless, and we're going to always follow that priority right now, which is we've got to protect our people, and protect them we will.

Thank you. Our next question comes from David Kelly from Jefferies. You may ask your question.

Good afternoon. A quick question on automotive. I believe you mentioned sales declined 8% year-over-year in the quarter. That's significantly helped perform the market. I was just hoping for some color on your exposure and what you're seeing there. Are you seeing any step-up in content? Was there anything region-specific that drove that upside? And then just curious if you expect any impact from supply chain timing that might be a headwind coming into the second quarter here. Thank you.

Yeah, thanks. Thanks very much, David. I mean, look, I think we have been outperforming the automotive market for the better part of a decade. And I think, you know, I hate to say outperforming when we're down 8%. I don't like saying that, but I guess maybe it's technically true. I mean, we're down 8%. It's not the greatest thing in the world. But yes, is it outperforming? Maybe it is. And I think our outperformance has been because we've just done a great job at capitalizing on new electronic applications in the car. I think that this crisis, you know, when all is said and done, the automotive market is going to return. And I think that that constant quest for new features in cars, is going to continue. And I would bet that there are going to be some new features that may not be unrelated to keeping people safe in cars and keeping cars clean and keeping the air clean in cars and so many other things like that. So I personally think that the long-term in the automotive market remains to be a great opportunity, and the long-term content growth opportunity for Amphenol remains strong.

Thank you. Our next question comes from Nikolai Todorov from Longbow. Please ask your question.

Hi, guys. Thanks for taking the question. I understand it's more of an art than a science, but I would like to hear your assessment of what downstream inventories look like. I understand that things like communications and IT systems and medicals, those orders are going directly to the field, but what about some of the other markets? What is your view on you know, how much current orders are driven by underlying consumption versus inventory positioning.

Yeah, I mean, I think I mentioned earlier, we don't see a lot of customers just putting a bunch of stuff in their warehouses. We don't have perfect visibility. The only place where we have visibility to inventory is in our distribution channel. We haven't seen anything abnormal in the inventories amongst our distributors at this point. In fact, I'd say, you know, our distributors are continuing to to service their customers, you know, very vigorously, especially those customers who have, you know, incremental demand related to the COVID-19 battles that are going on. So, I wouldn't say that we see a big mismatch in inventories to the extent that we have this ability.

Thank you. Our next question comes from Joe Giordano from Cohen. The line is open.

Hey, good afternoon, guys. I just wanted to follow up on some of the questions we talked about on productivity. So, you know, Adam, you mentioned like the pre-vaccine, post-vaccine. How do you guys just think about structurally, is this just like a fundamental change where what you thought was 100% capacity is now like 120% capacity? Like do we have to rethink how these facilities long-term are laid out? Do we need to use more automation? Is there an upward bias on labor costs to kind of incentivize people to come back? And just how do you think of that longer term than just what we're seeing right today?

Thanks. Look, we don't think about this monolithically. I think that every operation is different in Amphenol. That's one of the beauties of the company is we have also an enormous amount of operational diversity across the company. We have some operations who are highly automated. We have others who are highly manual. And they usually tend to be very much tailored to the market that they serve, the geography that they serve it from. Is this going to create a new factor for people to consider? Of course it is. I think it's going to create a new factor for everybody to consider for the rest of our lives. And that just means that each of our general managers in managing their operations is going to integrate that into their calculus of what are they going to do to optimize their business. But, you know, look, we have an expression in Amphenol, a no excuses approach to management. It's a team of people who just makes it happen. We've been through a lot of different stuff over the course of our careers. And, you know, my career is now 22 years with this company wonderfully. And through that time, we have seen so many changes, changes in business, The cost of labor in certain geographies changes and where things can be made. Terrorists, I mean, you name it. There have been an enormous amount of changes that come along. And the fact now that we need to prioritize and secure our locations for the health of the people, do I believe that this is going to have a kind of a permanent negative drag on productivity? I do not. Look, in the short term, we have a lot of governmental shutdowns we're dealing with. Of course, that's going to have short-term impacts. You're paying people not to work in a number of places. And you're doing that by law and also because it's the right thing to do. But is this going to have a structural change to Anthenol's ability to be a highly productive manufacturing organization and thereby to drive strong returns for the company? I don't think it will.

Thank you, speakers. As of this time, we don't have any questions on queue. I'll try to call back to you for any closing remarks.

Well, thank you so much, and thank you all for your extended time today. We wanted to give everybody a chance to have their question. Look, I wanted to say just a few words here. I mentioned earlier, you know, we're in a crisis unlike any of us have lived through, but there will be a beginning, a middle, and an end. to this crisis. There's no doubt about it. I'm not going to be the one to predict when does the end come or when does the beginning of the end come, but it will come. There's no doubt about it. And what I have encouraged our employees to do, and I will encourage all of you as well, is relish the positives that may come out of it. Take advantage of the things that we're learning about ourselves, about how we can work, how we can operate, and about our fellow people. that I think are really some of the wonderful silver linings of what is a true tragedy for many people. And that tragedy, I'm sure all of you have been touched in some way or another by that tragedy. And we wish that all of you continue to stay safe, that your families, your colleagues and all stay safe. And I'm sure one day we will get the chance to meet all of you in person. And I look forward certainly to sitting in the office with my colleagues at the nearest possible occasion. And regardless of how that comes, you can rest assured that the Amphenol Management Team is there to support all of our stakeholders and to make sure that this company, that our people remain safe and strong, and that our company remains also healthy and strong for the long term. Thank you all very much, and we look forward to speaking to you again 90 days from now. Thanks, everybody.

Thank you for attending today's conference, and have a nice day.