Amphenol Corporation

Hello and welcome to the second quarter earnings conference call for Amphenol Corporation. Following today's presentation, there will be a formal question and answer session. Until then, all lines will remain in 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.

Thank you very much. Good afternoon, everyone. This is Craig Lampo, Amphenol CFO, and I'm here together with Adam Norwood, our CEO. We would like to welcome you to our second 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. The company closed the second quarter with sales of $1,987,000,000, and with GAAP and adjusted diluted EPS of 85 and 81 cents respectively. Sales were down 1% in U.S. dollars and were flat in local currencies compared to the second quarter of 2019. From an organic standpoint, excluding both acquisitions and currency impacts, sales in the second quarter decreased 3%. Equentially, sales were up 7% in U.S. dollars in local currencies and organically. Breaking down sales into our two segments, the interconnect business, which comprised 96% of our sales, was down 1% in U.S. dollars and was flat in local currencies compared to last year. Our cable business, which comprised 4% of our sales, was down 1% in U.S. dollars and up 3% in local currencies compared to the second quarter of last year. Adam will comment further on trends by market in a few minutes. Operating income was $357 million in the second quarter of 2020, and operating margins were 18%, which was down 230 basis points compared to the second quarter of 2019. Similar to last quarter, the year-over-year reduction in operating margin reflected a higher negative conversion rate than our typical 30% downside conversion due to the continued negative impact of the COVID-19 pandemic on production and productivity. particularly due to various government restrictions that have limited our ability to adjust costs in certain geographies. Compared to the first quarter of 2020, operating margin increased 100 basis points and reflected a strong sequential conversion margin on the higher sales levels. From a segment standpoint, in the interconnect segment, margins were 20% in the second quarter of 2020, which was down compared to 22.2% in the second quarter of 2019, but up from 19.1% in the first quarter of 2020. In the cable segment, margins were 9.4%, which is down compared to 9.7% in the second quarter of 2019, but up from 7.6% for the first quarter of 2020. Given the continued unprecedented challenges created by the COVID-19 pandemic, we are proud of this quarter's performance. Our team's ongoing ability to minimize the negative margin impact resulting from the 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 allows us to capitalize on opportunities and maximize profitability in an uncertain market environment. Interest expense for the quarter was $30 million, which was unchanged compared to the second quarter of last year. The company's adjusted effective tax rate was 24.5% for both the second quarter of 2020 and 2019. The adjusted effective tax rate for the second quarter of 2020 excludes an excess tax benefit of $12 million associated with the stock option exercises during the quarter. And the adjusted effective tax rate for the second quarter of 2019 excludes the impact of an excess tax benefit associated with stock option exercises during the quarter, partially offset by the tax impact of acquisition-related costs. The company's gap effective tax rate for the second quarter of 2020, including the items just mentioned, was 20.7% compared to 21.3% in the second quarter of 2019. Adjusted net income was 12% of sales in the second quarter of 2020, another confirmation of the strength of the company's financial performance. On a gap basis, diluted EPS declined by 9% in the second quarter, to $0.85 compared to $0.93 in the second quarter of 2019. Adjusted diluted EPS declined 12% to $0.81 in the second quarter of 2020 from $0.92 in the second quarter of 2019. Orders for the quarter were $1,971,000,000, which was down 2% compared to the second quarter of 2019 and resulted in a book-to-bill ratio of just under 1 to 1. Despite the unprecedented challenges in the current environment, the company continues to be an excellent generator of cash. Cash flow from operations was $368 million in the second quarter, or 150% of adjusted net income. A net of capital spending of $67 million of free cash flow was $301 million, or 123% of adjusted net income. From a working capital standpoint, inventory accounts receivable and accounts payable were $1.4 billion, $1.7 billion, and $928 million, respectively, at the end of June. In inventory days, day sales outstanding and payable days were 89, 74, and 60 days, respectively. While DSO and DPO were both within our normal range, DSI was slightly elevated. Due to the current crisis, we expect inventory days to remain somewhat elevated but to come back down to more normal levels as business returns to a more typical pattern. During the second quarter, our cash flow from operations at $368 million, along with proceeds from our recently completed bond offering of $543 million, proceeds from the exercise of stock options of $123 million, in cash, cash equivalents to short-term investments on hand of $1.1 billion, net of translation, We're used primarily to fund repayments under our various credit stores of 1.35 billion, fund repayments of senior notes of 400 million, fund net repayments under our commercial paper programs of 135 million, fund payment of contingent acquisition-related obligations of 75 million, fund dividend payments of 74 million, fund net capital expenditures of 67 million, and fund new debt financing costs of $5 million. As communicated in our April earnings release, Due to the significant economic uncertainty and volatility in the credit and capital markets created by the COVID-19 pandemic, in March, the company had proactively borrowed $1.25 billion under our revolving credit facility and reduced our reliance on commercial paper markets. As the credit and capital markets stabilized during the second quarter, we repaid the amounts borrowed under our revolving credit facility with cash on hand, as well as the proceeds from the $500 million and 500 million euro bond offering completed in May. As such, as of June 30, 2020, there are no balances outstanding under either our revolving credit facility or our commercial paper programs. As a result, at June 30th, cash and short-term investments were $1.3 billion, the majority of which is held outside of the U.S. And total debt at June 30th was $3.8 billion, with no maturities before the third quarter of 2021. Net debt at June 30th was $2.5 billion, which decreased from $2.7 billion as of March 31st, 2020 and December 31st of 19. Total cash on hand as well as the remaining availability under our credit facilities was $3.8 billion at the end of the quarter, which leaves the company in a very strong liquidity position. The second quarter of 2020 EBITDA was $444 million, and our pro forma net leverage ratio was 1.3 times. In summary, although this continues to be a challenging environment, we finished the quarter in a position of continued financial strength with a very strong balance sheet and liquidity position. We believe this financial strength, coupled with the company's broad market and geographic diversity, positions us well for the currently volatile environment, which is characterized by continued uncertainty across global markets. I will now turn it back over to Adam, who will provide some commentary on current market trends.

Well, thank you very much, Craig, and allow me to extend my welcome to everybody here on the phone today. First, I just want to also offer my hope and wishes that for all of you on the call here, that you, your family, your friends, as well as your colleagues remain safe and healthy over the course of the last quarter. As Craig mentioned, I'm going to highlight some of our achievements in the second quarter. I'm also going to discuss the trends and progress across our serve markets. And then finally, I'll make some comments on our outlook for the third quarter. With respect to the second quarter, as Craig just detailed, our sales reached $1,987,000,000, which was a reduction from prior year of just 1% in U.S. dollars. It was actually flat in local currencies and down just 3% organically. And this was driven by reductions in the automotive, commercial air, mobile networks, and military markets, which were essentially offset by growth that we saw in the IT datacom, mobile devices, and industrial markets. The declines that we saw in the quarter were largely related to the weakness in demand, disruptions, and government-mandated factory shutdowns that resulted all from the COVID-19 pandemic. We're in particular very pleased to have realized 7% sequential growth from the first quarter, which is substantially higher than our original expectations. The company booked $1,971,000,000 in orders, representing a book to bill of just under one to one. And very importantly, despite the significant disruptions to our operations in the quarter related to the pandemic, operating margins reached 18%, a very strong performance given this environment. As Craig just mentioned, Ampel's financial position remains extremely strong, and that is reflected very well in our operating cash flow of $368 million in the quarter. I just want to say that I'm extremely proud of our team around the world, and our performance this quarter, once again, is a great reflection of the discipline and agility of Amphenol's entrepreneurial organization, who has continued to perform well amidst the unprecedented challenges that have arisen throughout the COVID-19 pandemic. We're very pleased in the quarter to announce that we just last week closed the acquisition of Onanon, Inc. Onanon is based in California and has annual sales of approximately $20 million. and the company designs and manufactures a wide array of high-technology connectors and cable assemblies for customers in the industrial market and with a particular focus on medical-related applications. As we welcome this outstanding new team to Amphenol, I remain very confident that our acquisition program will continue to create great value for the company. In fact, it is our ability to identify and execute upon acquisitions and successfully bring these new companies into Amphenol that remains a core competitive advantage for the company. Now, turning to our progress across our served markets, I just want to comment first that the value of the company's balanced and broad end market diversification has become even more evident during the COVID-19 pandemic. While several of our end markets were negatively impacted by the pandemic in the second quarter, That impact was essentially offset by growth that we achieved in other markets. Our diversification continues to mitigate the impact of volatility that can be seen in individual end markets and geographies, while at the same time exposing us to new opportunities as well as important new technology developments wherever they may arise across the electronics industry. In a dynamic and unpredictable environment like we're experiencing today, This diversification is a truly great asset for the company. Now, first, the military market represented 10% of our sales in the quarter. Sales were down by 12% compared to prior year, as certain of our facilities faced production restrictions from government measures put in place to control the COVID-19 pandemic. Sequentially, our sales decreased as we had expected by about 20%. Looking into the third quarter, we expect sales to increase back to our first quarter levels as we look to recover to full production at most of our facilities that work in support of military customers. Our team, focused on the military market, has worked hard for many years to strengthen Amphenol's broad technology position while increasing our capacity to serve customers across all segments of this important market. Given the ongoing and continuing favorable military spending environment, the FNAL team continues to solidify our leadership position by ensuring that we can execute on this increased demand even amidst the disruptions that we experience here in the second quarter. This enables us to continue to support the many next-generation technologies that are required for modern military hardware. The commercial air market represented 3% of our sales in the quarter. Second quarter sales declined by 41% from prior year, as the commercial aircraft market saw unprecedented declines in demand for new aircraft due to the disruptions to the global travel industry related to the COVID-19 pandemic. Sequentially, our sales decreased also by 41% from the first quarter. As we look ahead, we expect the commercial air market to continue to be negatively impacted by the significant reduction in demand for air travel that we're seeing across the world. Accordingly, we expect a further approximately 20% sequential reduction in our sales in this market in the third quarter. Regardless of the difficult environment in the commercial air market, our team remains committed to leveraging the company's strong technology position across a wide array of aircraft platforms and next generation systems that are integrated into those aircraft. And we remain well positioned when this market ultimately returns to growth. In fact, it is in challenging times like this that our steadfast and reactive support for customers can create the most long-term value and thereby position us for long-term success. The industrial market represented 23% of our sales in the quarter, and our performance in the second quarter was stronger than we had expected, with sales increasing by 12% in U.S. dollars and 8% organically. This growth was driven in particular by strength in the medical, instrumentation, and heavy equipment segments, together with some contributions from our acquisitions that we completed last year. On a sequential basis, sales increased by a very strong 17% from the first quarter. I'd like to emphasize how proud I am of our team, in particular working in support of medical applications within the industrial market. That team continues to work tirelessly to ramp up our production of sensors, connectors, and interconnect assemblies to meet demand from a broad array of customers producing equipment that's used in support of medical treatment for COVID-19 patients. We're just very proud of them. This month's acquisition of On and On further strengthens our broad high-technology offering for the medical equipment market. As we look into the third quarter, we expect a modest decline from these higher levels of sales. Nevertheless, we remain very pleased with the company's strong position in the worldwide industrial markets. Through both our acquisition program as well as our organic innovations, we've developed a broad range of products across a diversified array of exciting industrial segments. 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. The automotive market represented 11% of our sales in the quarter. Sales declined by a very significant 42% in U.S. dollars and 41% in local currency, as stay-at-home orders around the world reduced customer demand for new cars, and at the same time, as government restrictions across many countries resulted in factory shutdowns by automakers and their suppliers. Sequentially, our automotive sales decreased by 35%. As we look towards the third quarter, we now expect sales to the automotive market to substantially improve compared to the second quarter as the industry begins to recover and as factories ramp up their production levels. However, we did not yet expect sales to reach last year's levels as the global automotive industry continues to experience somewhat lower demand in the face of the COVID-19 pandemic. Regardless of this very challenging time period for the automotive market, we remain confident in Amphenol's long-term position. We've expanded 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. This consistent strategy will continue to benefit us as the automotive market recovers. The mobile devices market represented 14% of our sales in the quarter, our sales to mobile device customers increased by 20% from prior year, as demand recovered after the three-week shutdown and subsequent month-long ramp-up of production that we saw in China during the first quarter. Sequentially, our sales in mobile devices increased by a very strong 47%, which was substantially better than our expectations had been coming into the quarter, and which did reflect some catch-up of production after the first quarter shutdowns in China. Looking to the third quarter, we now expect a modest increase from these elevated second quarter levels. While 2020 has thus far seen substantial impacts on the mobile devices market from the pandemic, our long-term position in this market remains very robust. Amphenol's leading array of antennas, interconnect 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 remain one of our most volatile, our outstanding and agile team is poised as always to capture any opportunities for incremental sales that may arise in 2020 and beyond. The mobile networks market represented 7% of our sales in the quarter. Sales in this market decreased by 20% from prior year and 23% organically. as we were impacted by reduced demand from wireless OEMs, particularly related to the U.S. government restrictions on certain Chinese entities that we discussed extensively in previous quarters. On a sequential basis, our sales increased by a stronger than expected 9% from the first quarter, driven essentially by higher sales to equipment manufacturers. For the third quarter, we expect sales in the mobile networks market to moderate from these levels on lower demand from both OEMs and service providers. Regardless of any near-term 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 opportunity with next-generation equipment and networks. As customers ramp up their investments 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. The information technology and data communications market represented 27% of our sales in the quarter, and sales in the second quarter for this market were much better than expected, rising from prior year by a very strong 37% in U.S. dollars and 32% organically, as increased data traffic drove both our OEM and service provider customers, to significantly increase their demand across virtually all segments of the IT Datacom market. Sequentially, our sales increased by a very strong 43% from the first quarter. I just can't tell you enough how proud I am of our team working in the IT Datacom market, who, despite facing production restrictions related to the COVID-19 pandemic in certain geographies, was still able to react quickly to satisfy the significant increase in demand from our customers. As we look towards the third quarter, we now expect a roughly mid-teens sequential decline from the second quarter's very high levels. Our team's continued efforts at developing industry-leading products across a wide array of technologies, including in particular high-speed and power products, has positioned us to benefit from the continued demand for increased bandwidth that is likely to persist as individuals, companies, students, and governments adjust to interacting remotely. We remain encouraged by the company's strong technology position in the global IT datacom market, and especially given this increased demand for bandwidth, our customers around the world are driving their equipment to ever higher levels of performance in order to manage these dramatic increases in demand. 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 products. The broadband market represented 5% of our sales in the quarter. Sales increased by 3% in U.S. dollars and 5% organically from prior year, driven by stronger demand for home installation-related equipment from broadband operators. On a sequential basis, sales increased by 12% from the first quarter. We expect sales in the third quarter to remain roughly at these levels as our operator customers continue to upgrade capacity in their networks to support the significant increase in demand for bandwidth driven by online video and other remote school and work tools. We remain encouraged by the company's continually expanding range of products for the broadband market together with our strong positions with customers around the world. And we continue to position ourselves as the most flexible supplier, thereby ensuring that the company can benefit as operators increase their network investments. Now turning for a moment to our outlook, the continued and significant economic and public health uncertainties created by the COVID-19 pandemic make it difficult to accurately forecast our performance in the second half of 2020. Accordingly, we will once again not be providing full-year guidance. However, considering the current demand environment and assuming no new material disruptions from the pandemic, as well as constant exchange rates, for the third quarter, we now expect sales in the range of $1,960,000,000 to $2,000,000,000, and we expect adjusted diluted EPS in the range of $0.84 to $0.86. This guidance represents a sales decline versus prior year of 5% to 7% in U.S. dollars and a decrease versus prior year adjusted diluted EPS of 9% to 12%. Now, let me just say I'm extremely pleased by Amphenol's performance here in the second quarter, particularly in light of the many challenges our team has faced, related to the COVID-19 pandemic. I remain very confident in the ability of our outstanding management team to meet these challenges and to navigate these challenges while capitalizing on the many current and future opportunities to grow our market position and expand our profitability. The Ampanel team around the world remains committed to fighting hard to secure the company's financial performance all while dedicating ourselves to protecting the safety and health of all of our employees during this pandemic. And I would just like to finish by taking this opportunity to thank each and every one of the Amphanolians around the world for their dedication and their outstanding efforts here in the second quarter. And with that, operator, we'd be very happy to take any questions that there may be.