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.

Thank you. The question and answer session will now begin. Please be reminded that questioners are only allowed to ask one question. Our first question is from Mark Delaney of Goldman Sachs.

Thank you very much for taking the question. I was hoping to better understand the orders that the company reported and the strong book to bill 1.04. To what extent do you think those orders are to help serve true end demand, and do you think any of the orders that the company is receiving are potentially customers placing longer-dated backlog because of some of the supply chain challenges that have really impacted semiconductors but perhaps is impacting orders to electronics companies more broadly, potentially including Amphenol or any other factors that may be – influencing the orders other than some of the more typical drivers like increasing content per unit? Thanks.

Thanks so much, Mark. Look, customers place orders to us, and we can't always exactly pinpoint what the demand is, except we know when they tell us they want the product. And I wouldn't tell you that we've seen any dramatic lengthening of lead times or longer-dated orders per se. You know, you mentioned the widely reported discussions around semiconductor availability in a variety of markets. I think our customers are pretty smart, and while they may be chasing lots of semiconductors or trying to put orders on those kind of products, they know that our products are available for them, and we haven't disappointed them throughout this year, even with the disruptions early in the year, even with the significant increases in certain of our markets in the second half. So I wouldn't necessarily say that customers are lumping us into that kind of semiconductor category. I think that customers are looking to us, no question about it, on the basis of the fact that we were there for them when they needed us most. In particular, as many of our customers coming out of the pandemic had some parts of their supply chain which still had a lot of disruptions. And the excellent job that our team did in recovering from those disruptions, whether that was early on in the year with bringing all of our factories in China back to full production substantially earlier than many, or continuing in through later part of the year with the recoveries that we saw, for example, in automotive, in industrial, and other markets. So I think that, you know, our team is doing a good job of making sure that we get more than our fair share of our customers' bandwidth and orders, and we're going to keep driving for that.

Thank you. Our next question is from Amit Daryanani of Evercore.

Thanks for taking my question. I wanted to follow up on what Mark was talking about and maybe more specifically, Adam, on the industrial and automotive kind of the non-tech markets where growth rates have been extremely strong. I think the concern is starting to become that are we starting to overship versus end demand and suddenly 20%, 24% organic growth is much better than what the underlying end demand is. So just on those two segments, I'd love to understand how does one get conviction? How do you get conviction? that a strong first half may not result in a bigger correction than half of the year?

Yeah, I mean, look, it's a fair question, Amit. I think we had just outstanding performance in the fourth quarter in both of those markets. As you know, 29% and 24% organic growth in industrial, 24% in 19, respectively, in automotive. I think that We are outperforming by any measure, I would say, the various markets. But does that mean that they're taking our product and putting it on the shelf? No. I mean, we don't see that whatsoever. But at the same time, you know, there is still uncertainty in the marketplace. We're not giving guidance for the full year. We have done an outstanding job of supporting our customers when they needed us in the ramp-up after the various disruptions. And, you know, regardless of what happens in end demand, I believe that our position with customers is stronger than ever. Now, I should also mention that whether it's an industrial or an automotive, and obviously industrial has a lot of different segments within it, we see continued content gains in both of those areas, which are greater than just the end unit demand. And that's the trend of adoption of electronics, into all types of systems, all types of equipment, all types of products. And if anything, we've seen that adoption accelerate over the course of this year for a variety of reasons. And, you know, much has been reported about the acceleration, for example, of electric drivetrains in cars where we benefited greatly for that. But we've seen a lot of very similar dynamics across the multiple segments within the industrial market. So, you know, look, what does this mean for the second half of 2021? Again, we're not giving guidance for the year. There's a lot of uncertainty related to the pandemic. But I think our position with our customers is stronger than ever before.

Thank you. Our next question is from Joe Giordano from Cohen.

Hey, guys. Good afternoon.

Hello, Joe.

Hey, so there's a lot of debate in auto, like, longer term about, like, what applications should be – that need to be hardwired versus when wireless is most appropriate. I mean, I know your portfolio is – seems to be intentionally structured to benefit kind of no matter what the answer to that question is or that trend is. But can you talk about how you think that plays out? What are your customers thinking? Like, is there, like, a limitation on what can be wireless?

Yeah, I mean, without getting into too deep of a technical discussion here, I think you already kind of answered the question as I would answer it, which is we're agnostic, right? The fact is we're a significant supplier of interconnect products, antennas, and sensors into the automotive market. And to the extent that there's next-generation developments, new architectures in the car that create a kind of an open field to help enable that, that's always been a benefit for Amphenol in the long term. And so I would expect the same, that to the extent that things become – how you say it, less wired or more wired, more wireless. The fact that we're a manufacturer of interconnect antennas and sensors positions us very well regardless of what that outcome is.

Thank you. Our next question is from Craig Heddenbach from Morgan Stanley.

Yes, thank you. Adam, can you just touch on or follow up on the MTS acquisition? I mean, pretty unique in terms of size of a business that you're acquiring here and also maybe expand on just, you could talk about some of the complimentary nature, kind of what it does to your portfolio as you go out in time.

Yeah, thanks very much, Craig. I mean, look, I think the only thing that I would say is really unique about MTS is the fact that it's a public company and You know, it's our first public company acquisition. But, you know, in terms of scale of the acquisition, you'll recall that we made the acquisition of FCI. I think it's been, what, Greg, six years or so since that acquisition. And at the time when we were a substantially smaller company, FCI was about a $1.2 billion purchase price. And this is 1.7, you know, less the proceeds from the test and SIM business. So I wouldn't say that the size is unique, but the process is a little bit more unique with the public company process. And then with the strategic review that we did that ultimately resulted in an outstanding outcome of us negotiating together with Illinois Tool Works or ITW, the disposition of the test and simulation segment to ITW. And ITW is just an outstanding company. MTS is an outstanding company, and you know how we feel about Amphenol. So I think this is just three really outstanding companies ending up in a real win-win-win for all parties, whether that's the shareholders of MTS, whether that's Amphenol, or whether that is, in fact, ITW. From our position, the MTS sensors business, which is what ultimately attracted us to MTS is just extraordinarily complementary. I mean, I'd say virtually no overlap with our own sensor offering, extremely harsh environment products used in a variety of really high technology applications. These are sensors that are used in force and vibration, pressure, position, really at the highest level of reliability with also complex interconnect systems associated therewith. And so when we talk about the complementary aspect of the MTS Center's business, it is really just that uniquely complementary set of products across the end markets where we're very excited by. And then you add to all of that just a wonderful, wonderful management team across the business. By the way, all of MTS, we've just been so impressed with the people at MTS. But particularly with the MTS sensors team, we're just so excited by this entrepreneurial organization, and it's a team that we've known for a long time. This was not a kind of last-minute thing here, far from it. We've known this organization for a very long time, and we're very excited, you know, subject to the shareholder approval, subject to the regulatory and other closing conditions, we're very excited one day to welcome them into the Amphenol family.

Thank you. Our next question is from Sameek Chatterjee from J.P. Morgan.

Hi. Thanks for taking my question. Adam, I wanted to use the last question here on MTS as an excuse to ask you about cable products. I mean, I think you didn't want to be in the test business and that led to the decision of selling that MTS asset to ITW. I mean, on the same lines, how should I think about the longer-term reasons to be in cable products and solutions, which you report as a separate segment? I can see the margins are quite a bit below your other segments, and we haven't seen strong growth for a while here. So what's the longer-term opportunity? How does it fit in with the rest of the business, or do you see it as a core part of your portfolio overall? Sure.

Yes. I mean, the simple answer to, you said it at the end, do we see it as a core part of our portfolio? For sure. And it's very different than the situation with MTS. In the case of MTS, we were drawn to MTS because of the sensor business. We were impressed, by the way, very impressed with the team and with the business of test and simulation, but it's a different business for us, really categorically different. And that was why we talked about having a strategic review. And in the end, I think a great outcome for all parties with the agreed sale to ITW. In the case of our cable products, cable products are an integral part of an interconnect system that is used in particular for getting high-speed bandwidth to customers and to companies. And what we've said all along is, yes, the cable product segment may underperform from an operating margin perspective, you know, for the moment. We don't want to be in the business of picking the winners and losers of how people and companies are going to get Internet connectivity to their homes, to their businesses, to their universities, to their governments. We want to be betting really on every possible way of doing that. And thus, you know, our position with the cable operators, with the MSOs, is a very important strategic position for Amphenol. And that importance, by the way, carries over into our interconnect segment. where the strength that we have, the reputation that we have, our ability to service these service providers as opposed to OEMs has been a fabulous value to the rest of the company, in particular as we've seen other markets move more towards the service provider market. And let me just give you an example of that. You take the IT Datacom market, which traditionally we were selling products that go just directly to equipment manufacturers. Well, as I think everybody on the call knows, over the recent five or more years, maybe even a little bit more than half a decade, we've seen increasing strength and increasing demand from web service providers. How you work with a service provider is very, very different than how you work with an OEM who ultimately is making a piece of equipment in a factory. And our experience in the cable products has been invaluable to our team overall. in making sure that we can react to the demand and the volatility of the demand that is really endemic in any service provider business. When I look at our results this year, in particular in IT Datacom, where we did see extremely strong demand from service providers, our ability to react on a moment's notice, the mindset of that is a mindset that we developed, that we incubated originally in our cable business. And I think that that's just a great reflection of the broad value that we see in that business beyond just the fact that, you know, it does have today a little bit lower margins. It's a much smaller piece of our business than it once was, but it's still an important part of Amphenol's strategy.

Thank you. Up next for question is Nick Todorov from Longbow Research.

Yeah, thanks. Hi, Adam. Hi, Kim. I want to touch upon the outlook on the mobile device. Adam, I think you mentioned seasonal about down 40%. Can you maybe give us a little bit more color? Because as we're looking at the data points, smartphone sales are strong, PC sales remain strong, as well as all the consumer electronics. So maybe can you talk, what are you seeing that the first quarter is going to be more seasonal than anything else? Thank you.

Yeah, well, thanks very much, Nick. I think this is not an abnormal guidance that we see. Look, we had very, very strong performance in mobile devices this year. We came into the year with an expectation of the market being flat, I will tell you. I mean, we didn't give guidance at the time, but had you asked me at the end of Q1 what would mobile devices be for the year, I probably would have thought it would be even down given the disruptions that we saw in the first quarter to our China facilities. And, you know, the vast majority, if not all, of our mobile device production is really in China. And all of those factories were shut down, as you know, for the better part of three weeks due to the early stage of the coronavirus. And then our team just did an unbelievable job of reacting to the strength in the market. And, you know, the strength this year, while, you know, there was, you know, on a sequential basis in the fourth quarter strength in smartphones, Where we really saw a lot of strength this year was maybe not surprisingly in devices that are needed by people when they're working, when they're learning, when they're being entertained at home. So things like laptops, things like tablets. We saw a lot of strength in wearables. I know a lot of people got on health kicks, and maybe these wearables can be very useful there. A lot of strength in things that go in your ears, your hearable devices, as we call them, and probably because you have a lot of people doing work and school from home, and they might have other people in the same house, and they want to have some privacy. Whatever the reason is, there was just a great amount of strength, and our team was able to react to quite unexpected demands. And, you know, so as you go into the first quarter, I think that, you know, we would expect normally some relaxation of that demand. I mean, look, anecdotally, I tried to buy Christmas presents for my wife and my daughter of a computer because they both have really old computers, and I totally failed as a father and a husband, and they each got their present. One got it about a month late, and the other one still hasn't gotten hers. So, you know, there was a real demand back in the fourth quarter in particular for these devices, and I think we wouldn't expect such a continuation here in the first quarter.

Thank you. Up next for questions would be Luke Young from Baird.

Good afternoon, everyone. My question, I was wondering about the company's ability to, I guess you could say, cross-pollinate between the strength that you cited in industrial as it relates to batteries and electric vehicles and your core auto business. I guess I'm wondering, does that sort of two-pronged approach open additional doors for Amphenol?

Yeah, actually, Luke, it's a great question. The simple answer is yes. Our team working in industrial, our team working in automotive, and there's a lot of crossover, by the way, in those teams. There's an enormous amount of interaction from a technology, from a customer perspective, to ensure that we're maximizing our position with customers, whether they're making an electric bus or an electric sports car. And so that interaction, as you call it, cross-pollination, we call it inside Amphenol collaboration, is something that we're doing all the time. And that's collaboration from a product development, making sure that we're bringing a full suite of products to customers in each of those markets, and really capitalizing on that trend of electrification that we're seeing, again, not just in automotive, but we're seeing that trend very significantly in the industrial market as well. And I'd say that when you look at our performance in both of those end markets, which we talked about with one of the earlier questions, you know, it's not totally coincident that we're seeing those strong content growths in both of those markets, some of which is being driven by this trend of electrification.

Thank you. Next for our question is Wamsi Mohan from Bank of America.

Yes, thank you. Adam, if we step back a couple of years over here, the company was operating north of 20% operating margins. You're slightly below that embedded in your guidance over here on slightly higher revenues versus 1Q19. Clearly, these are unprecedented times. There's been a lot of cost inefficiencies that have crept in because of COVID. Can you maybe characterize if that is the reason why the margins are where they are? I mean, clearly very strong in the face of what is actually transpired, but still below a couple of years ago. And I'm wondering if, A, you know, you could help us think through what the reasons are, if it is truly COVID inefficiencies, and if it is, how large are these and how long do you expect them to persist, after which we should start to see sort of back to historical levels of margin?

Hey, Wamsi, yeah, thanks for the question. Yeah, I think, I mean, if you look back, you know, the first quarter of 2019, You know, we were certainly operating at, you know, very strong profitability at that point. Honestly, and we finished the fourth quarter at very strong profitability levels. So I guess I wouldn't necessarily just kind of look back, you know, into 19 to kind of just to see a time where we're operating at strong profitability levels. If you look at the fourth quarter, we already reached 20.6% here in the quarter. We certainly still see some disruption related to the pandemic, and that's certainly embedded you know, in those numbers, you know, maybe slightly offset by some other benefits we have in things like T&E. So, you know, I think I've said last quarter that, you know, we kind of see a relatively neutral impact in the second half of the year. You know, as we kind of go into the first quarter, you know, our guidance really reflects, you know, I would say, you know, a sequential seasonal decline. And we talked about approximately 10% kind of seasonal, you know, seasonal decline sale. And That does, as you mentioned, imply a conversion rate maybe slightly higher than our normal 30% downside, which would maybe get to the profitability level in the 19, a little above 19% range. I think that that's probably the basis of your question. I wouldn't say this conversion certainly isn't so significant, given the level of sequential decline we're seeing going into the first quarter. You know, in addition, you know, combined with the continued challenging kind of cost environment, we are seeing still, you know, COVID-related inefficiencies, you know, and I think that the company's really done a great job thus far, as you saw in 2020, of dealing with those inefficiencies and really, you know, snapping back in a profitability level, but we are seeing a little bit of a decline going into the first quarter from a sales perspective, which is going to have some impact, and I think the team has done a great job dealing with that and will continue to deal with that and So I'm real proud of kind of where we ended up in 2020, and I have no doubt that, you know, we'll get back to those levels. The other thing that's happening in the first quarter, you know, certainly is the acquisitions we just, you know, closed on here in January are having some small effect on a conversion if you look sequentially into the first quarter. And the ones we did in 2019, you know, certainly haven't made necessarily the the progress that maybe we would have expected in 2020 for very understandable reasons, I think, with dealing with the pandemic during 2020. So I think there's a few reasons, but all in all, we're real happy with where we are with profitability. Certainly, you know, in the second half here of 2020, and to be quite honest, even in the first half, given the challenges we had, and certainly, you know, we are really confident that as we go into 2021, you'll see those levels snap back to normal levels once COVID is behind us.

Thank you. Up next for questions would be David Williams from Loop Capital.

Hey, good afternoon, and thanks for letting me ask a question. But I just wanted to touch a little bit on the automotive market maybe and what your outlook is there. I know you're not providing full-year guidance, but if you're kind of thinking about the automotive market in terms of the total growth this year and then maybe the mix of EV versus the traditional vehicles, what are your thoughts around that perhaps?

Yeah, I mean, you said it, David. We're not giving an outlook for the year. And I couldn't actually quote for you exactly how much of our business is related to EV versus traditional. I don't have the numbers close at hand. But what I can tell you is that we're seeing higher growth from EV applications. over the last several years. And so EVs definitely represent a higher proportion today than they did a year ago, two years ago, and three years ago. And we would expect in the coming year or two for that trend to continue. These EVs, not only do they tend to have potentially a little more content, but the nature of the content can be more attractive and more interesting for a company because of the high reliability, the harsh environment, the high power aspects of those vehicles. So, look, we'll see how the year progresses. We're not giving, again, guidance, but we have seen good strength in EV, and we would expect to see that going forward.

Thank you. Up next for question would be Chris Snyder from UBS.

Thank you. I have a follow-up on auto. Can you talk a bit about the EV versus ICE competitive environment? Are you seeing new entrants just given the different product mix and high voltage focus? And conversely, does the shift carry any implications for maybe some of the smaller competitors who could struggle to invest in EV solutions, at least in the early days? And I just ask because the company's outperformance on the auto side has been very strong the last couple quarters, and I just wanted to see if there are any share shifts going on.

Yeah, I mean, look, I don't know specific share shifts. What I do know is we're outperforming the market. And so just, I guess, by definition, we're taking some share. And part of the reason for that is EVs, and part of the reason is other applications. You know, are there different competitors in an EV versus an internal combustion engine? There may be. I mean, there's different competitors for all different systems in the car. You have to remember in our industry, there is not a monolithic competitive landscape. There are obviously some companies that are publicly traded and well-known, which are excellent companies, but there's a whole diaspora of competition in the interconnect industry, and each application may have a different landscape of competitors than the application before it. So I guess, you know, by definition, yes, you're going to have some different competitors involved, I think our strength in EV in part stretches back to the fact that, you know, we've been making high-power, high-voltage connectors for really the entire history of Amphenol. You know, that is a legacy. You would call it even a birthright of Amphenol with our military and industrial business. And our ability to collaboratively share some of those underlying core technologies across our team, a little bit like we discussed just a few moments ago, has really positioned the company well to be an enabler of those next-generation systems, which are really mission-critical. So I think we're very happy to have a whole diaspora of competition across all our markets, and that includes within automotive.

Thank you. Our next question is from Stephen Fox from Fox Advisors.

Thanks. Good afternoon. Adam, I was wondering if you could just dig into the weeds on the two acquisitions you just closed in January. You mentioned one was around harsh environments, and we know you're already a leader in that area. And then the other one was tied to cable assemblies, and we know you have a pretty broad offering there. So can you just sort of get into what attracted you to the businesses from a product standpoint? Thank you.

Sure. Thanks so much, Steve. Look, these are both outstanding companies. We've known them both for a long time. I mean, the The family who founded, and still until we just closed recently, Positronix, I've known that family for, I don't know, a decade and a half. I mean, it's an outstanding company, Positronix, just a real marquee brand in the interconnect industry, known for harsh environments, in particular board-level power connectors and some data connectors. These are I.O. connectors. These go on the board. They're used in a wide variety of systems in the military as well as in datacom for power and industrial applications. And it's very complementary, actually. A lot of the products that they have, positronics, they have just a real proprietary position across their customer base. And sometimes you look in admiration at at the strength of a company's position because of the uniqueness of their technology. And that's something that we have done for many years with Positronics. LCab is a little bit of a different story. LCab, first of all, is our first company that's really fully based in Poland. Poland is an outstanding location for low-cost manufacturing with proximity to all of Europe. And they have an excellent position in cable assemblies for industrial applications, and in particular, next-generation electric-powered industrial vehicles. And whether that's buses, whether that's trucks, delivery vehicles, they're also involved in marine-related cable assemblies. But what really attracted us to them is they're just leading position in this sort of EV revolution, industrial EV revolution. And that's something we've done a great job of in Asia. We've done a great job of it in North America. We've done a really good job in Europe. But this accelerates our position in that electrification of industrial vehicles in Europe. And, again, a fabulous team, family-owned company, great management, great products, great position. Those are the factors that we always look for in acquisitions. And I think both Positronics and LCAP deliver really well. wholeheartedly in all those areas.

Thank you. Our next question is from Joseph Spack from RBC Capital Markets.

Thank you very much. Adam, you mentioned battery factories a couple of times, and there are likely to be trillions of dollars of CapEx spent to build terawatts of capacity, not only for electric vehicles, but storage and other uses. So it's probably one of the the faster-growing market opportunities out there. Is there anything you could tell us about Henfinol's opportunity positioning in that market, and are there some regional differences? Because I think a lot of the capacity right now is in Asia, but, you know, there probably needs to be factories built all over the globe.

Yeah, I think maybe it might have conflated a little bit, Joe. I think what I talked about was battery and EV and factory automation, but not necessarily together. But the fact is you raise a very good point, which is, for sure, Whenever you have a massive build-out of factories, be that for batteries where there's a lot of automation, next-generation vehicles, whatever, and we've seen a lot of build-out of factories. By the way, semiconductor factories as well. You've seen the strength that we've had in instrumentation. Our position in factory automation and instrumentation, test equipment and otherwise, interconnect for all of those, puts us in a very strong position to benefit manufacturers from the expansion of these facilities. But when we talk about our sales of industrial products into battery applications, it's really actual interconnect sensors that get integrated into these high-technology, high-voltage battery systems, both to allow the signal of the battery, the power to come in and out of the battery, and also the control systems for these batteries, which is a wonderful opportunity where there's a lot of you know, kind of interconnect and sensor applications where you're selling to customers just a complete solution to allow them to manage these batteries and thereby get more efficiency and safety out of them once they're integrated into vehicles.

Thank you. Up next for questions would be William Stein from Truist Securities.

Great. Thanks for taking my question. There's always been quite a focus on the trend to EV, but when we think about US federal energy policy, it looks like there's perhaps a shift in the works to favor more renewables versus carbon-based. And I wonder, Adam, if you can sensitize us to the potential impact of your business are, are renewables a good market for Amphenol relative to downhole, which I understand is very harsh and typically high margin, high ASP sorts of connectors. Thank you.

Yeah. I mean, look, we're, we're agnostic will to whatever that may be. If it's, uh, you know, traditional oil and gas, uh, versus renewables versus all that's related to renewables, the battery storage that Joe just asked about and otherwise, you know, we're really agnostic. I mean, if you look, you know, as an example, last quarter, we had last quarter a strong growth in alternative energy, and that was offset by, you know, a relatively strong decline in oil and gas. And I think that's a good indication of the value and the strength of the diversified position that we have really across all areas, whether that be power generation, power consumption, power storage. We've made sure to not place a bet on kind of one trend or another, but rather to be present, supporting customers across the board. And we're still supporting our oil and gas customers, for sure. I mean, that's an important market, and I don't think the world is totally detaching from fossil fuels. But if the trend is away from them, we're well positioned either way.

Thank you. Our next question is from James Huvel from Citigroup.

Thank you very much. Adam and Craig, you've seen a lot of success with your company in automotive. You know, it used to be about 5% of the company and now it's 20% of the company. Is most of that success coming from like the infotainment in the cabin, the safety along the bumper? or the batteries in it, or the electronic motors. I'm just trying to see because there's some big trends that are going on. I'm trying to see where has been the most part of your strength in automotive.

Well, Jim, thank you very much. I think you listed a lot of them. I mean, the fact is, if I look over the long term, and you've followed us for a very long time, and so you have a great sense of the arc of the progress of our automotive business over these many years, You know, we started out in automotive many, many years ago as the innovator of airbag connectors. And that was kind of our first thing we did. And we're talking a long time ago. I think the first airbag was like in 1990 or something like that. So, you know, we're talking a 30-year time period. And over time, we developed into interconnect products for satellite radio and GPS and other infotainment. We built through acquisitions and organic means presence in emissions control and engine control, other electronics. And essentially, as the car adopted new electronic systems, we were positioning ourselves either organically or through acquisition to participate in those next-generation systems. Our growth in automotive... was never a question of kind of taking someone else's business that was a legacy business. Rather, it was positioning ourselves as these new systems were developed to be there for customers, for tier ones, for tier twos, whomever. And I think that's been very successful over all these years. You know, we believe there's still a lot more potential left in our automotive business. The growth in content in the car is really outstanding, and we're not the only one to talk about that. In many ways, to me, a car is becoming kind of a data center on wheels. It's becoming an electric powertrain on wheels. I mean, you name it. And each of those new systems, many of which you mentioned, are contributors to the growth of the company. But what I wouldn't say is that any of them are disproportionate to our long-term success in that market. I think It's been actually a relatively balanced contribution to that long-term success that in particular we've seen over really the last decade.

Thank you. And next question on cue would be from David Kelly from Jefferies.

Good afternoon, Adam and Craig. Just wanted to ask about the industrial trajectory. You discussed and highlighted several secular opportunities. It feels like from a broad cyclical standpoint, industrial equipment seems to be ramping back up, but we're also going to be comping against some difficult medical comps through the year. So could you just talk about what you're seeing or what you do see as the biggest drivers for industrials in 2021?

Yes. I mean, look, again, we're not giving guidance for 2021. But, you know, when I look at the breadth of our performance here at the end of the year, as we closed out the year, and also throughout the course of the year, it's just there's no single story to the strength. I mean, yes, great performance in battery EV, great performance in instrumentation, great performance in medical. Again, I could give you a long list of the positive aspects. contributors to our industrial market. You know, will there be, you know, some areas where there will be a little bit of a tougher comparison? You know, obviously the second quarter was a particularly acute quarter for medical where our team, I mean, I just cannot emphasize enough how proud we were to be a contributor to to the fight against COVID through our reactivity to the demand for new medical equipment, whether that be respiratory therapy devices and the sensors and interconnect products that are contained therein, whether that be hospital equipment to outfit ICUs and other patient care devices. I mean, that is something that we at Amphenol will forever be proud of, the contributions that our team made to the fight against COVID to protect lives and to enable countries around the world to have a fighting chance against this virus. And so, yeah, will there be a little bit less maybe of some of those more acute care things? There could be, but who knows? There was also, as many have talked about, reductions in elective procedures, which actually reduced demand for certain medical equipment in some areas too. And so maybe that has the chance to come back. I think There is not the visibility today, and thus why we are not giving the guidance for the year, for me to say which of those segments, as we go through the course of the year, are going to have the stronger or the weaker performance. But for sure, we have positioned ourselves with our customers by being there for them when they needed us most in really the most critical of time periods, such that to the extent that they have business to give, I would expect that they will give at least, if not more than our fair share to Amphenol.

Thank you. As of this time, we don't have any further questions on queue. I'll turn the call back to Mr. Lampo for his closing remarks.

Well, this will be Mr. Norwood for one last remark here. And listen, thank you all for all of your great interest in the company. We really appreciate everybody's support through this 2020. We know this was not an easy year for all of you working from home and cooped up and not being able to come visit us, for example. And we, for sure, Craig and I, the two of us, no doubt about it, look forward to the day where we get to meet you in person again, host you here in our modest headquarters in Wellingford, Connecticut, where we are today. And we look forward to great success and wish you all good health as we continue into 2021. Thank you so much. Thank you.

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