Amphenol Corporation

Hello and welcome to the fourth quarter earnings conference call for Amphenol Corporation. Following today's presentation, there will be a formal question and answer session. Until then, all lines will remain in a listen-only mode. At the request of the company, today's conference is being recorded. If anyone has any objections, you may disconnect at this time. I would now like to introduce today's conference host. Mr. Craig Lampo. Sir, you may begin.

Good afternoon, everyone. This is Craig Lampo, Amphenol CFO, and I'm here together with Adam Norwood, our CEO. We would like to welcome you to our fourth quarter 2020 conference call. Our fourth quarter and full year 2020 results were released this morning. I will provide some financial commentary, and then Adam will give an overview of the business as well as current trends. Then we will take questions. As a reminder, 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 fourth quarter with record sales of $2,426,000,000 and record GAAP and adjusted diluted EPS of $1.15 and $1.13, respectively. Sales were up 13% in U.S. dollars and up 11% in local currencies and organically compared to the fourth quarter of 2019. Sequentially, sales were up 4% in U.S. dollars and 3% in local currencies and organically. Breaking down sales into our two segments, the InterConnect business, which comprised 96% of our sales, was up 14% in U.S. dollars and 11% in local currencies compared to the fourth quarter of last year. Our cable business, which comprised 4% of our sales, was down 4% in U.S. dollars and 2% in local currencies compared to the fourth quarter of last year. For the full year 2020, sales were $8,599,000,000, which was up 5% in U.S. dollars, 4% in local currencies and 2% organically compared to 2019. Adam will comment further on trends by market in a few minutes. From a segment standpoint, in the interconnect segment, margins were 22.5% in the fourth quarter of 2020, which increased from 22.0% in the fourth quarter of 2019 and 22.4% in the third quarter of 2020. In the cable segment, margins were 10.3%, which increased from 10% in the fourth quarter of 2019 and decreased from 10.7% in the third quarter of 2020. For the full year 2020 adjusted operating income was $1,650,000,000, which was slightly up from 2019 and resulted in a full year 2020 adjusted operating margin of 19.2% compared to 20% in 2019. This 80 basis point decline reflects the challenges and resulting impacts related to the COVID-19 pandemic, primarily in the first half of the year. Given the unprecedented challenges we saw this year, We are extremely proud of the company's performance. Our team's ability to effectively manage through 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, which has enabled us to capitalize on opportunities and maximize profitability in an uncertain market environment. The company's gap effective tax rate for the fourth quarter was 21.7%. which compared to 20.3% in the fourth quarter of 2019. On an adjusted basis, the effective tax rate was 24.5% for both the fourth quarter of 2020 and 2019. For the full year, the company's gap effective tax rate for 2020 and 2019 was 20.5% and 20.2% respectively. On an adjusted basis, the effective tax rate for both the full year 2020 and 2019 was 24.5%. On a GAAP basis, diluted EPS increased by 12% to $1.15 in the fourth quarter, compared to $1.03 in the prior year period. Adjusted diluted EPS increased by 15% to $1.13 in the fourth quarter of 2020, from $0.98 in the fourth quarter of 2019. For the full year, GAAP diluted EPS was $3.91, a 4% increase from 2019 GAAP diluted EPS of $3.75. Adjusted diluted EPS was $3.74 for 2020, which was unchanged compared to 2019. This was a strong performance considering the significant challenges and related incremental costs resulting from the pandemic. Orders for the quarter were $2,512,000,000, which was up 14% compared to the fourth quarter of 2019, and up 10% sequentially, resulting in a book-to-bill ratio of 1.04 to 1. The company continues to be an excellent generator of cash. We are proud that operating and free cash flow for both the fourth quarter and full year 2020 were all records for the company. Cash flow from operations was a strong $441 million in the fourth quarter, or 124% of net income. Net of capital spending or free cash flow was $371 million or 104% of net income. Cash flow from operations for the full year was $1,592,000,000 or approximately 132% of net income. And net of capital spending or free cash flow for 2020 was $1,328,000,000 or 110% of net income. From a working capital standpoint, inventory days, day sales outstanding, and payable days were 79, 72, and 61 days, respectively, all within a normal range. During the quarter, the company repurchased 1.5 million shares of common stock for approximately $182 million under the $2 billion open market stock repurchase plan, bringing total repurchases for the year to 6 million shares, or $641 million. Total debt at December 31st was $3.9 billion, and net debt at the end of the year was $2.1 billion. Total liquidity at the end of the quarter was $4.2 billion, which included total cash and short-term investments on hand of $1.7 billion, plus the availability under our credit facilities. Fourth quarter and full year 2020 EBITDA was approximately $600 million and $2 billion, respectively. And at December 31st of 2020, our net leverage ratio was 1.1 times. Lastly, the company announced a 2 for 1 stock split, which will be effective as of March 4th of 2021. I will now turn it back to Adam, who will provide some commentary and current trends.

Well, Craig, thank you very much. And I'd like to extend my welcome to everyone here on the phone today. And I hope it's not too late to wish everybody a happy new year as we're still here in the month of January. First, I just want to express my hope that all of you on the call here today, that you, your family, your friends and colleagues are all staying safe and healthy throughout the pandemic. I'm going to highlight our achievements in the fourth quarter and the full year. As Craig mentioned, I'll discuss our trends and progress across our serve markets. I'll then make some comments on our outlook for the first quarter. And then, of course, we'll have time at the end for questions. Now, with respect to the fourth quarter and amidst what has no doubt been an unprecedented and volatile year, I'm truly proud that we finished 2020 with record sales and adjusted earnings per share in the fourth quarter, both of which were significantly above our guidance. Sales grew 13% in U.S. dollars and 11% organically, reaching a new record $2,426,000,000. This organic growth, which was very strong, was driven by growth in mobile devices, industrial and automotive end markets in particular. The company booked a record of $2,512,000,000 in orders in the fourth quarter, and that's a strong book to bill of 104 to 1. Despite continuing to face some operational challenges related to the ongoing pandemic, adjusted operating margins were strong in the quarter, reaching 20.6%. a 10 basis point increase from third quarter levels and 60 basis points from prior year. Craig already highlighted the operating and free cash flow of the company, very strong at 441 and 371 million respectively in the fourth quarter, both just excellent reflections of the quality of the company's earnings. I just want to say with this fourth quarter how proud I am of our team around the world. And our results this quarter once again reflect the discipline and agility of our entrepreneurial organization as we continue to perform well amidst an environment that still has continued challenges. Our small acquisition team was also very busy in the fourth quarter and here in the last few weeks of January. As we announced on December 9th, we're very pleased to have signed an agreement to acquire MTS Systems, a leading supplier of advanced test systems, motion simulators, and precision sensors, for $58.50 a share. The MTS acquisition continues to be subject to MTS shareholder approval, certain regulatory approvals, as well as customary closing conditions. In addition, last week we announced that we had entered into an agreement with Illinois Tool Works, under which ITW will acquire MTS's test and simulation segment following the closing of our acquisition of MTS. This sale is also subject to certain regulatory approvals and other customary closing conditions. We continue to expect that both the acquisition of MTS as well as the follow-on sale of the test and simulation business to ITW will both occur approximately in the middle of 2021. I can just say that we've long been attracted by the outstanding technology and deep entrepreneurial culture of MTS sensors. and look forward to welcoming this wonderful team of people into the Amphenol family. This acquisition, which is highly complementary to our current sensor offering, represents a further broadening of our high technology sensor offering to customers across the automotive, industrial, military, and commercial air industries. We expect the addition of MTS sensors to add approximately $350 million in revenues and to generate approximately $0.10 per share of earnings accretion in the first year post-closing. Now, here in the last few weeks of January, we're also pleased to have closed two additional acquisitions of outstanding entrepreneurial companies, which we purchased for a combined price of $160 million. First, Positronic is a provider of high-reliability, harsh environment connectors for customers primarily in the military aerospace, IT datacom, and industrial markets. Based in Springfield, Missouri, and with also operations in France, India, and Singapore, and with annual sales of approximately $80 million, Positronic represents a great addition to our harsh environment product offering. Next, LCAB, which is based in Poland, is a manufacturer of cable assemblies and related interconnect products, primarily serving the industrial market, and with annual sales of approximately $55 million. What I'm very pleased by is that both Positronic and LCAB are private, family-owned companies with rich histories, leading technologies, and excellent positions with customers in their target markets. As we welcome the outstanding Positronic and LCAB teams to the Amphenol family, and as we look forward to eventually welcoming the talented MTS sensors organization in the coming months, we remain confident that our acquisition program will continue to create great value for Amphenol. Our ability to identify and execute upon acquisitions and successfully bring these new companies into Amphenol remains a core competitive advantage for the company. Now, if we just look back on 2020 and some of the highlights from the year, Despite the many challenges we all faced in 2020, from both a personal and a professional standpoint, Amphenol's dedicated entrepreneurial team performed just incredibly well, and I just could not be more proud of our performance this year. Sales reached a record $8.6 billion, growing 5% in U.S. dollars and 2% organically, and actually surpassed our pre-pandemic outlook that we had given back a year ago. Our full-year adjusted operating margins of 19.2% did decline 80 basis points from prior year, but this decline was due to the significant cost challenges we experienced in the first half of 2020, after which our team was able to return to more typical profit levels in the second half. And that enabled us to achieve adjusted diluted EPS of $3.74, which was the same level as we achieved in 2019, No question, an impressive result given the circumstances. We generated record operating and free cash flow of $1,592,000,000 and $1,328,000,000 respectively, excellent confirmations of the company's superior execution and disciplined working capital management, even in these most unprecedented of times. Our acquisition program remains strong despite the challenges related to the pandemic, with two new companies added to the Amphenol family in 2020, EXA, Thermometrics, and Onanon, as well as Positronics and LCAB here in January, and the signing of MTS that we already discussed. These acquisitions expand our position across a broad array of technologies and markets, while bringing outstanding and talented individuals into the Amphenol organization. We're particularly excited that these acquisitions represent expanded platforms for the company's future performance. In addition, in 2020, we bought back over 6 million shares under our buyback program and increased our quarterly dividend to 16%. And as Craig mentioned, we're announcing today a two-for-one stock split of the company's shares. So while the overall market environment in 2020 was highly uncertain, our agile entrepreneurial management team is confident that we have built further strength from which we can now drive superior long-term performance. Now, turning to the trends and our progress across our served markets, I would just comment that we remain very pleased that the company's balanced and broad end market diversification continues to create value for the company, with no single end market representing more than 22% of our sales in the year 2020. We believe that this diversification mitigates the impact of the volatility of individual end markets. That was particularly important here in 2020, but while also exposing us to leading technologies wherever they may arise across the electronics industry. The military market represented 11% of our sales in the fourth quarter and 12% of our sales for the full year. Sales in the quarter grew modestly from prior year, increasing by approximately 1% in the fourth quarter, with growth in naval, space, and avionics applications offset in part by moderations in ground vehicles, rotorcraft, and airframe. Sequentially, our sales increased as we had expected coming into the quarter by 3%. For the full year 2020, our sales grew by 3% in U.S. dollars and 2% organically. reflecting our leading market position and strong execution across virtually all segments of the military market, offset in part by the impact of the pandemic-related production disruptions that we experienced in the first half of 2020. Looking ahead, we expect sales in the first quarter to decrease modestly from these fourth quarter levels. I just want to say that our organization working in the military markets has worked long and hard for many years to strengthen our broad technology position while increasing our capacity to serve customers across all segments of this important market. Our performance in 2020, especially given the many disruptions related to the pandemic, is a great reflection of the results of those efforts. Given the ongoing and favorable military spending environment, our team continues to solidify our leadership position by ensuring that we execute on the demands of our customers by supporting the many next-generation technologies that are required for modern military hardware. The commercial air market represented 2% of our sales in the fourth quarter and 3% of our sales for the full year. Not surprisingly, fourth quarter sales were down significantly, reducing by approximately 50% as the commercial air market continued to experience unprecedented declines in demand for new aircraft due to the pandemic-related disruptions to the global travel industry. Sequentially, our sales were a little bit better than expected, declining 10% from the third quarter. And for the full year of 2020, sales declined by 34%, reflecting that significant impact of the pandemic on travel and aircraft production. Looking into the first quarter of 2021, we expect a sequential moderation in sales from these levels. Look, there's no doubt that these are difficult times for the entire travel industry, which is seriously impacting the market for commercial airplanes. Nevertheless, our team, who's just been so resilient over the course of this year, remains committed to leveraging the company's strong technology position across a wide array of aircraft platforms, as well as next generation systems that are integrated into those airplanes. And we remain well positioned when this market ultimately returns to growth. The industrial market represented 22% of our sales in the quarter and in the full year 2020. Our sales in this market significantly exceeded expectations that we had coming into the quarter, increased by a very strong 29% in U.S. dollars and 24% organically from prior year. This robust growth was driven especially by the battery and electric vehicle, instrumentation, heavy equipment, factory automation, and medical segments of the industrial market. On a sequential basis, sales increased by 4% from the third quarter. We're really pleased with our results in industrial for the full year, with sales growing 15% in U.S. dollars and 11% organically annually. as we saw strong demand in really those same markets, battery and EV, instrumentation, heavy equipment, also alternative energy, and of course medical, which was a very strong segment in the year. Looking into the first quarter, we expect a slight moderation from these strong fourth quarter sales levels. I'm truly proud of our team working in the industrial market, whether enabling the growth in volumes of a wide array of medical equipment or managing through significant increases in demand for semiconductor capital goods and next-generation batteries, our global organization has reacted quickly to ensure that our customers are fully supported regardless of the many operational challenges that have arisen during the pandemic. The automotive market represented 20% of our sales in the fourth quarter and 17% of our sales for the full year of 2020. Sales in this market were also much stronger than we had expected coming into the quarter, with revenue growing by 24% in U.S. dollars and 19% organically in the fourth quarter. And that was really driven by broad-based growth across all geographies in the automotive market. Sequentially, our automotive sales increased by a very strong 22% as we continued to benefit from the broad recovery in the global automotive market. For the full year 2020, our sales declined by 6% in U.S. dollars and 8% organically, and that really reflected the significant challenges and factory shutdowns experienced by the auto industry in the first half of the year related to the pandemic, but was partially offset by our strong recovery that we drove in the second half. Looking into 2021, we do expect a sequential moderation from these high sales levels in the first quarter. Look, no doubt about it, the automotive industry faced one of the most difficult periods in recent memory during the first half of 2020, in particular in the second quarter. And that was followed by an unexpectedly robust recovery here in the second half. I'm just so proud of our team working in this important market, who has clearly demonstrated their agility and resiliency through these most turbulent times. And thereby secured the company's position with our customers across the automotive market. Regardless of this most dynamic of years, we have continued to expand 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 traditional fuel and electric-powered vehicles made by auto manufacturers around the world. This consistent strategy will continue to benefit us long into the future. The mobile devices market represented 18% of our sales in the fourth quarter and 15% of our sales for the full year. Our sales in the quarter to mobile device customers increased by a much stronger than expected 32% from prior year, with strength in all product types, but particularly in wearables and laptops. Sequentially, our sales increased by 15%, and that was driven by higher sales to smartphones and wearable devices. For the full year of 2020, sales in the mobile devices market increased by a very strong 16%, as we continued to benefit from our agility in reacting to changes in demand in this dynamic market. For the full year, we saw particularly strong sales growth in products incorporated into laptops, tablets, wearables and other accessories, as well as production-related products, and that was offset in part by a slight moderation of sales of products incorporated into smartphones. Looking into the first quarter, we anticipate a typically significant seasonal sequential decline of approximately 40%. While mobile devices will always remain one of our most volatile of markets, Our outstanding and agile team is poised as always to capture any opportunities for incremental sales that may arise in 2021 and beyond. Our leading array of antennas, interconnect products, and mechanisms continues to enable a broad range of next-generation mobile devices, all positioning us well for the long term. The mobile networks market represented 5% of our sales in the quarter and 6% of our sales for the full year of 2020, Sales in the quarter decreased from prior year by 8% in U.S. dollars and 9% organically, with declines in sales to both equipment manufacturers as well as operators. Sequentially, our sales did increase by a bit less than we had expected, 12%. For the full year 2020, sales declined by 16% from prior year, which reflected the impact of the U.S. government restrictions on certain Chinese customers, that had been imposed in 2019, as well as other impacts related to the COVID-19 pandemic. Looking ahead, we expect sales in the first quarter to increase from this quarter's levels as operators expand their investments in next-generation mobile networks. Regardless of the challenging demand environment in the mobile networks market in 2020, we're confident in the company's long-term position in this important and exciting industry. Our team continues to work aggressively to expand our opportunity with next-generation equipment and networks. And as customers ramp up investment of 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 18% of our sales in the quarter and 21% of our sales for the full year 2020. Sales in the quarter were stronger than expected, rising by 3% in U.S. dollars and 2% organically from prior year, as stronger sales of networking equipment and server-related products were offset by lower sales of storage-related products. Sequentially, our sales declined by 8% from our very robust third quarter. We're very pleased with our performance for the full year for IT Datacom, with our sales growing a very strong 15% in U.S. dollars and 11% organically, as we capitalized on increased demand from our OEM and service provider customers as they work to accelerate bandwidth capacity expansions, in particular to support home-based work, school, and entertainment. Our team working in support of these customers has clearly distinguished themselves this year. reacting quickly to capitalize on unprecedented demand for our industry-leading high-speed and power products. At the same time, we've not slowed down our efforts to further develop that broad range of leading interconnect products in support of data communication networks around the world. Looking into the first quarter of 2021, we expect a typical seasonal moderation of sales here in the quarter. But 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 bandwidth and processor power. In turn, our team remains singularly focused on enabling this continuing revolution in IT datacom. The broadband communications market represented 4% of our sales in the quarter and 4% for the full year. Sales increased by 3% in the fourth quarter from prior year, driven by stronger demand for home installation-related equipment from our broadband operators. On a sequential basis, sales decreased as expected by 9% from the third quarter. For the full year of 2020, sales were flat. and that's despite the significant disruptions to production and demand that we experienced in the first quarter, offset by the accelerated investments in support of bandwidth later in the year. Looking into the first quarter, we expect sales to moderate from these levels, and we remain encouraged by the company's position in the broadband market. With our expanded range of products, together with strong relationships with customers around the world, We look forward to benefiting as operators increase their network investments in the future. Now, just to summarize, there's no question that 2020 was one of the most challenging years we've all experienced. But in the face of these challenges, I am just so proud of the entire team of Amphanolians around the world who have managed extraordinarily well throughout the pandemic and the related disruptions to the economy. Through our dual-pronged approach of growing both organically and through our acquisition program, the company continues to expand our market position while strengthening our financial performance. Amphenol's superior performance is a direct reflection of our distinct competitive advantages. Our leading technology, our increasing position with customers across our diverse end markets, a worldwide presence, a lean and flexible cost structure, a highly effective acquisition program, and I can say most importantly in this pandemic-impacted 2020, an agile and entrepreneurial management team. Now, turning to our outlook, and regardless of our strong performance in the fourth quarter, there still remain significant economic uncertainties related to the COVID-19 pandemic. Accordingly, we will not be providing full-year guidance at this time. Assuming no new material disruptions from the pandemic as well as constant exchange rates, for the first quarter, we now expect sales in the range of $2,120,000,000 to $2,180,000,000 and adjusted diluted EPS in the range of $0.90 to $0.94. I would just note that on a post-split basis, this adjusted diluted EPS guidance would be $0.45 to $0.47. This guidance represents sales growth in the first quarter of 14% to 17% year-over-year and adjusted diluted EPS growth of 27% to 32%, again, compared to the first quarter of 2020. I remain confident in the ability of our outstanding management team to adapt to the continued challenges in the marketplace and to capitalize on the many future opportunities to grow our position and expand our profitability. Our entire organization remains committed to delivering strong financial results, all while prioritizing the continued safety and health of each of our employees around the world. Most importantly, I'd like to take this opportunity to thank the entire Amphenol team for their truly heroic efforts here in the fourth quarter and throughout the entirety of 2020. And with that, Operator, we'd be very happy to take any questions that there may be.