Amphenol Corporation

Hello and welcome to the first 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 the listen-only mode. At the request of the company, today's conference is being recorded. If anyone has any objections, you may disconnect at this time. I would now like to introduce today's conference host, Mr. Craig Lampo. Sir, you may begin.

Craig Lampo, Thank you. Good afternoon, everyone. This is Craig Lampo, Amphenol CFO, and I'm here together with Adam Norwit, our CEO. We would like to welcome you to our first quarter 2021 conference call and our first quarter 2021 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. Please refer to the relevant disclosures in our press release for further information. In addition, as a result of our previously announced two-for-one stock split effective on March 4th of 2021, all share and per-share data discussed on this earnings call is on a post-split basis. The company closed the first quarter with sales of $2,377,000,000. and GAAP and adjusted diluted EPS of 53 cents and 52 cents, respectively. Sales were up 28 percent in U.S. dollars, 25 percent in local currencies, and 23 percent organically compared to the first quarter of 2020. Sequentially, sales were down 2 percent in U.S. dollars, 3 percent in local currencies, and 4 percent organically. Orders for the quarter were $2,734,000,000. which was up 27% compared to the first quarter of 2020 and up 9% sequentially, resulting in a very strong book-to-bill ratio of 1.15 to 1. Breaking down sales into our two segments, the interconnect business, which comprised 96% of sales, was up 28% in U.S. dollars and 25% in local currencies compared to the first quarter of last year. Our cable business, which comprised 4% of our sales, was up 17% in US dollars and 18% in local currencies compared to the first quarter of last year's. Adam will comment further on trends by market in a few minutes. Operating income was $465 million in the first quarter of 2021. Operating margin of 19.6% was down 100 basis points sequentially compared to the fourth quarter of 2020 adjusted operating margin. and up a strong 260 basis points compared to the first quarter of 2020. The year-over-year improvement in operating margin was primarily driven by normal operating leverage on the higher sales volumes combined with the benefit of a lower cost impact resulting from the COVID-19 pandemic, partially offset by the impact of a more challenging commodity and supply chain environment. The sequential decline in operating margin was driven by normal conversion on the reduced sales levels, as well as a more challenging commodity and supply chain environment. From a segment standpoint, in the interconnect segment, margins were 21.5% in the first quarter of 2021, which increased from 19.1% in the first quarter of 2020 and decreased 100 basis points sequentially. In the cable segment, margins were 8.8%, which increased from 7.6% in the first quarter of 2020 and decreased from 10.3% in the fourth quarter. Given the continuing challenges posed by the COVID-19 pandemic, we are very 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 the many opportunities for incremental sales while driving strong operating performance in this very dynamic market environment. The company's gap effective tax rate for the first quarter was 23.9%, which compared to 15.9% in the first quarter of 2020. On an adjusted basis, The effective tax rate was 24.5% in the first quarter of both 2021 and 2020. On a GAAP basis, diluted EPS increased by 33% to 53 cents compared to 40 cents in the prior year period. Adjusted diluted EPS increased by 49% to 52 cents from 35 cents in the first quarter of 2020. The company continues to be an excellent generator of cash. Cash flow from operations was $321 million in the first quarter, or 97% of GAAP net income, and net of capital spending or free cash flow was $243 million, or 74% of net income. From a working capital standpoint, inventory days, day sales outstanding, and payable days were 85, 73, and 59 days respectively, all within the normal ranges. During the quarter, the company repurchased 2.4 million shares of common stock for approximately $153 million, and during the month of April, the company repurchased the small amount of remaining stock authorized under our existing stock repurchase plan. As a result, and as mentioned in today's earnings release, yesterday the company's board of directors approved a new three-year open market stock repurchase plan for the purchase of up to $2 billion of the company's common stock. At March 31st, cash and short-term investments were $2.4 billion, of which $963 million was held in the U.S., with the remainder held outside of the U.S. The elevated level of cash on hand at the end of the first quarter was driven by borrowings under the company's U.S. commercial paper program in anticipation of the MTS closing in early April. Total debt was $4.6 billion, and net debt was $2.3 billion. Total available liquidity at the end of the quarter was $4.1 billion, which included total cash and short-term investments on hand. First quarter 2021 EBITDA was $559 million and our net leverage ratio was 1.0 times. Following the close of the quarter on April 7th, we completed the acquisition of MTS, which Adam will discuss in more detail in a moment. The MTS acquisition was funded by a combination of cash and cash equivalents on hand, as well as additional borrowings under the company's U.S. commercial paper program. On a pro forma basis, including the MTS acquisition and the anticipated divestiture of the test and simulation business, total available liquidity and net leverage at March 31, 2020 would be $3.2 billion and 1.4 times, respectively. Until the divestiture of the MTS test and simulation business has closed, we will account for and report the test and simulation business as a discontinued operation. As such, the expected sales and earnings of the test and simulation business are not included in our guidance. Our guidance also excludes cash and non-cash expenses that will be expensed in the second quarter related to the MTS acquisition. These expenses, which we expect to total approximately $85 million or 12 cents per share, include costs related to the early extinguishment of debt, non-cash purchase accounting related expenses, external transaction expenses, severance and other costs. In conjunction with the divestiture of the test and simulation business, the company will also incur certain additional cash tax related and other acquisition related costs which will not be included in income from continuing operations. Our guidance does incorporate the expected results of the MTS sensors business which, as previously announced, is expected to generate $350 million in sales and $0.05 into EPS in the first 12 months after closing. And I'll now turn it over to Adam, who will provide some commentary on current market trends as well as our recently completed acquisitions.

Well, thank you very much, Craig. And I'd like to also extend my welcome to everybody on the call here today. And I certainly hope that you, your family, your friends, and all of your colleagues are continuing to stay safe and healthy. As Craig mentioned, I'm going to highlight some of our achievements in the first quarter. I'll then discuss our trends and our progress across our diversified served markets. And then finally, I'll make a few comments on our outlook for the second quarter. And of course, we'll have time for Q&A at the end. Our results in the first quarter were substantially better than we had expected coming into the quarter, as we exceeded the high end of our guidance in sales, as well as adjusted diluted earnings per share. Sales grew a very strong 28% in U.S. dollars and 25% in local currencies. And on an organic basis, sales increased by 23%. And we had organic growth in nearly all of our end markets and driven particularly by growth in the automotive, mobile devices, industrial, and IT datacom markets. And I'll talk about each of those markets in a few moments. Craig mentioned we booked record orders in the quarter of $2,734,000,000, and that represented a very strong book to bill of 115 to 1. Despite continuing to face a range of operational challenges related to the ongoing pandemic, as well as increased costs related to commodities and supply chain pressures, our operating margins were very healthy in the quarter, reaching 19.6%. which was a 260 basis point increase from last year's levels. Greg mentioned our adjusted diluted EPS grew a very robust 49% from prior year, which is, again, an excellent reflection of the Amphenol organization's strong execution. We generated operating and free cash flow of $321 million and $243 million in the first quarter, respectively, both clear reflections of the high quality of the company's earnings. I just want to say how proud I am of our team this quarter. Our results once again reflect the discipline and agility of our entrepreneurial organization as we continue to perform well amidst a very dynamic and challenging environment. I'd like to make a few comments on our acquisitions in the quarter. As you can tell, our small acquisition team here in Wallingford was very busy in the first quarter, closing three additional acquisitions since our last earnings release. bringing our total number of acquisitions closed this year to five. First, as we announced on April 7th, we were very pleased to close on the acquisition of MTS Systems earlier than originally anticipated. Also, as previously announced, we had signed an agreement to sell the MTS test and simulation business to Illinois Tool Works for a sale price of $750 million, and that remains subject to certain post-closing adjustments and and excludes transaction-related expenses. We expect this sale to close following the receipt of all required regulatory approvals. We're really excited to welcome the talented MTS sensors team to the Amphenol family. We especially look forward to the strength of the combined breadth of our company's highly complementary sensor product portfolios, which we believe will enable us to offer our customers an expanded array of innovative technologies across multiple end markets. We expect the MTS sensors business to add approximately $350 million of sales and $0.05 in adjusted diluted earnings per share in the first 12 months after closing. More importantly, though, we look forward to realizing the long-term benefits of the opportunities created by the collective strengths of Amphenol and MTS sensors for many years to come. We're truly excited about this significant acquisition which ultimately has positioned Amphenol as one of the broadest and most diversified sensor companies in the industry. In addition to the MTS acquisition, we also closed on two other small acquisitions during the first quarter. In February, we acquired Euromicron, a manufacturer of highly engineered fiber optic interconnect solutions for the mobile networks and IT datacom markets. Based in Germany with annual sales of approximately $25 million, Euromicron represents a great addition to our interconnect product offering for customers across the European communications market. And then in March, we completed the acquisition of CableCon from Corning Incorporated. CableCon, which also has sales of approximately $25 million, is a Denmark-based designer and manufacturer of high-technology connectors and interconnect assemblies, primarily for customers in the European broadband markets. As we welcome these outstanding companies to the Amphenol family, I remain confident that our acquisition program will continue to create great value for Amphenol. Our ability to identify and execute upon acquisitions and then to successfully bring these new companies into Amphenol remains a core competitive advantage for the company. Now turning to our trends 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 great value. We believe this diversification mitigates the impact of the volatility of individual end markets while continuing to expose us to leading technologies wherever they may arise across the electronics industry. This diversification has become ever more valuable given the many market dynamics related to the COVID-19 pandemic. Now, turning first to the military market, the military market represented 11% of our sales in the quarter, and as we had expected coming into the quarter, sales grew by 3% from prior year, and were essentially flat organically with growth in naval, unmanned aerial vehicles, communications, and vehicle ground systems offset by declines or flat performance in other applications. Sequentially, our sales were modestly down by about 3%. Looking into the second quarter, we expect sales to grow in the low double digits from these first quarter levels as we benefit from the addition of MTS sensors together with the increased demand for interconnect products. We're especially excited by the addition of the sensors products of MTS to our military product offering, together with our already leading interconnect products as well as our broad exposure across virtually all defense programs. We look forward to supporting the continued adoption of next-generation electronics into a wide array of military hardware. The commercial aerospace market represented 2% of our sales in the quarter, and not surprisingly, and as expected, sales were down significantly, declining by 47% from prior year as the commercial aircraft market continued to experience unprecedented declines in demand for new aircraft due to the ongoing pandemic-related disruptions to the global travel industry. Sequentially, our sales were a bit better than expected, moderating by just 3% from the fourth quarter. And looking into the second quarter, we do expect a sequential improvement in sales as we benefit from our recently completed acquisitions. Regardless of the ongoing challenging environment in commercial air, Our team working in this market remains committed to leveraging the company's strong interconnect and sensor technology position across a wide array of aircraft platforms and next generation systems integrated into those airplanes. The industrial market represented 24% of our sales in the quarter. Sales in industrial in the first quarter were better than expected. growing a very strong 43% in U.S. dollars and 33% organically. This was driven by robust growth in battery and electric heavy vehicle applications, rail mass transit, heavy equipment, instrumentation, factor automation, alternative energy, and medical, really a broad performance across many of the segments. On a sequential basis, sales grew by a better than expected 6% versus the fourth quarter. Looking into the second quarter, we expect the industrial market to once again grow in the low teens versus the first quarter, and as we benefit from the addition of MTS sensors while continuing to gain momentum in many segments of the industrial market. The acquisition of MTS sensors has expanded our range of sensors sold into the industrial market, adding position, vibration, force, and shock sensors that are used in a wide array of industrial applications. Together with our existing sensor operations, we now have a diversified range of sensors supporting virtually all of the segments of the industrial market that we serve. I remain truly proud of our team working across the industrial market around the world. Our high technology interconnect antenna and sensor offering positions us strongly with customers who are accelerating their adoption of electronics no matter the application. The automotive market represented 22% of our sales in the quarter, and sales in this market were also much stronger than we expected, growing 52% in US dollars and 44% organically, as our team was able to execute strongly in the face of a robust and broad recovery in the automotive market. In particular, we saw very strong growth of our products that are used in electric and hybrid electric vehicles in the quarter. a great confirmation of our global team's long-term efforts at designing in high voltage and other interconnect and sensor products into these important next-generation platforms. Sequentially, our sales increased by 6% from the fourth quarter. Now, as has been widely reported, there are a variety of supply chain challenges facing the automotive industry. Accordingly, as we look towards the second quarter, we do expect a modest sequential decline in sales, as the global supply chain disruptions temporarily impact certain pockets of new vehicle production. I'm extremely proud of our team working in the automotive market. They have really demonstrated their agility and resiliency through these most turbulent times, and thereby have secured the company's position with our customers across the automotive market. We look forward to benefiting from their efforts long into the future. The mobile devices market represented 12% of our sales in the quarter. Sales in this market increased by a better than expected 51% from prior year, with strength across all product types, including particularly in wearables and laptops. Sequentially, our sales declined by 35%, which was a bit better than our expectations coming into the quarter and is within the typical range of first quarter seasonality that we have seen traditionally in the mobile devices market. Looking into the second quarter, we anticipate a further high single-digit sequential sales decline, which is also not atypical for this market in the second quarter. While mobile devices will always remain one of our most volatile markets, our outstanding and uniquely 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, thereby positioning us well for the long term. Turning to the mobile networks market, this market represented 6% of our sales in the quarter, and sales did grow from prior year by 4% in U.S. dollars and 1% organically, as strength from products sold to OEMs was offset in part by a moderation of our sales to network operators. We were encouraged, though, to realize a better than expected sequential growth of 19% in the mobile networks market in the quarter, as mobile network operators increased their spending on next generation networks. Looking to the second quarter, we do expect a modest increase in sales from these first quarter levels, helped by the addition of Euromicron, which expands our offering for mobile networks operators in Europe, and positions as well to support future network upgrades. Our team continues to work aggressively to expand our position in next generation equipment and systems around the world. And as our customers ramp up the investment of these advanced networks, we look forward to benefiting from the increased potential that comes from our unique position with both original equipment manufacturers as well as mobile network service providers. The information technology and data communications market represented 19% of our sales in the quarter. Sales in the quarter were stronger than expected, rising 25% in U.S. dollars and 24% organically from prior year, really on broad-based strength across networking, storage, and server applications. While we had expected sales to decline coming out of the fourth quarter, we were pleased to realize actually a sequential growth of 6%. as customers continue to increase their demand for our high technology products used by web service providers and in data centers around the world. Looking to the second quarter, we expect a further increase of sales in the mid-single digits from these levels as customer demand continues to accelerate. We remain very encouraged by the company's outstanding technology position in the global IT datacom market. Our customers around the world, no doubt about it, are continuing to drive their equipment to ever higher levels of performance in order to manage the dramatic increases in demand for bandwidth and processor power. In turn, our team remains singularly focused on enabling this continuing revolution in IT Datacom with our unique high-speed power and other interconnect products. Finally, the broadband market represented 4% of our sales in the quarter, And sales grew by a very strong 16% from prior year as broadband spending levels remained elevated. On a sequential basis, sales grew slightly from the fourth quarter. We do expect a high teen sequential sales increase in the second quarter as customers continue to upgrade the capacity of their networks to support the significant increase in demand for bandwidth and as we benefit from our recent acquisitions, including CableCon. The addition of CableCon expands our offering for broadband customers in the European market, which enables us to provide a more diversified range of products for their next-generation networks and their related upgrades. We look forward to continuing to offer this expanded product offering to broadband service operators around the world, all of whom are working to increase bandwidth to support the expansion of high-speed data applications to homes and businesses. Now, turning to our outlook, and given the current still dynamic market environment, as well as assuming no new material disruptions from the COVID-19 pandemic and constant exchange rates, for the second quarter, we now expect sales in the range of $2,415,000,000 to $2,475,000,000, and adjusted diluted EPS in the range of 53 to 55 cents. This would represent strong sales growth of 22 to 25% and adjusted diluted EPS growth of 33 to 38% compared to the second quarter of last year. And I would just note that the second quarter of last year, as you will recall, was already a strong recovery quarter for the company coming out of the first quarter. I remain confident in the ability of our outstanding management team to adapt to the ongoing challenges that are in the marketplace and to capitalize on the many future opportunities to grow our market position and expand our profitability. The entire Amphenol organization remains committed to delivering long-term sustainable value, all while prioritizing the continued safety and health of each of our employees around the world. And most importantly, I'd like to just take this opportunity to thank the entire Amphenol team for their truly outstanding efforts here in the first quarter. And with that operator we'd be happy to take whatever questions there may be.

Thank you. Now the question and answer will begin. Please be reminded that questions are only allowed to ask one question per participant. Now our first question is from Chris Snyder of UPS.

Thank you. I guess my question is on supply chain. You know, if you look across the end markets, just given the really, or the stronger than expected growth, did you see any inventory building across any of the end markets? And then kind of staying on that supply chain, as we look into Q2, the top line guidance, you know, screens a bit light relative to the Q1 orders and the 1.15 book to bill. Is there an implication here that deliveries maybe pushed out to the right a little bit, just given all the supply chain disruptions we're seeing?

Well, thanks very much, Chris. I mean, first, relative to the supply chain and our robust results in the first quarter, I mean, I would tell you that across the board, you know, customers want our product because their end customers, by and large, also need the product, whether that's delivering IT datacom connectors that go into web service providers to satisfy the demand for bandwidth that is happening, whether it's automotive customers scrambling to build as many cars as they can given the low inventory, low dealer inventories that are out there. We really saw customers taking product and converting that product into their end systems. And And, you know, we obviously don't get full visibility into the warehouses of our customers, but we do get some visibility into the distribution channel. And there we did not see any material increases in inventory or any noticeable inventory builds. I mean, actually, to the contrary, you know, our growth in distribution, our book-to-bill in distribution was not meaningfully higher than what we saw across the total company. Relative to the second quarter, look, we think there's a very strong guidance from several perspectives. First and foremost, there are these supply chain challenges, and I think some of these have been widely reported, in particular in places like the automotive market, where I talked about that we do see the automotive market having a slight downtick in demand in the second quarter, as certain customers have had to take factories offline or otherwise curtail production because of supply chain challenges. So there's no doubt that we see that. As well, when you look at on a year-over-year basis, our second quarter guidance, as I mentioned just a few moments ago, this is a very strong guidance, 25% growth at the high end of guidance. And that's on top of a second quarter last year where we had grown already 7% sequentially from the first quarter. You'll also remember that in our mobile devices business, We had a very strong comeback last year in the second quarter. And so that 25% comparison, when seen in the context of last year, I think is a very, very robust demand. In terms of the orders, yes, these are very strong orders that we received in the quarter. And could there be some customers who are maybe opening up the aperture of their order scheduling, ordering a little bit longer out? There could be some of that. I think we have some customers, there are many across the supply chain who are a little skittish because of some of the challenges that are so widely reported and that I'm sure all of you know even better than I do. And that can cause some customers to maybe order a little bit more in advance, not to build inventory per se, but to get it on the books. But look, all that being said, if you look at our orders on a year-over-year basis, they also grew at a similar rate to what our sales grew, about 27%, I think, was the order growth. And I think they're reflective of strong demand on our products from our customers, who we have consistently supported through all cycles of this crisis. And when you look at our performance across each of the individual markets, it's clear that customers are coming back to us because we were there for them when they needed us the most.

Thank you. Now our next question is from Wamsi Mohan of Bank of America.

Yes, thank you. Adam, I was wondering if we could just step back perhaps given your really broad diversified portfolio. How should investors think about the areas in which Amphenol can benefit from this proposed infrastructure plan?

Well, Wamsi, it's a great question. And it's still a proposed infrastructure plan, obviously. So I take everything with a grain of salt, in particular with the political system that we have now in the U.S. But look, I think we have a lot of our businesses that do stand to play a role in upgrading the infrastructure of the U.S., especially because infrastructure is being defined, as I would think it should be, in a very broad sense. It's not just roads and highways and bridges and tunnels and airports, which would stimulate demand for a wide variety of products that we sell into heavy equipment and otherwise. But infrastructure means the domestic capacity to produce electronic components in certain cases. Infrastructure means bandwidth. Infrastructure means access to data, access to devices. And I think that all of these things ultimately today have a common thread and that is that the adoption of electronics and in turn our ability to enable that adoption of electronics plays a significant role in the upgrade of those various quote unquote elements of infrastructure. And so whatever ends up coming out of kind of the sausage factory of Washington, if you will, there's no question to me that electronics is going to play a significant role in helping this country to upgrade its infrastructure in the broadest sense. And I think we're very well positioned across our end markets to play some constructive role in that.

Thank you. Now our next question is from Amit Duryanani of Evercore.

Thanks a lot. Good afternoon everyone. I guess my question is really around, you know, Adam, when I look at your growth rates for the first half of this year, they're about 25% or so. Much of this, I assume, is a cyclical market recovery. But I'm wondering if you could actually talk about if Amphenol is seeing share gains pick up as well in the first half of the year, especially as I imagine that your peers have not been able to ramp up capacity as quickly as demand has come back. And if that's true, then going forward, you know, Could that enable you to grow at a larger premium to the underlying industry growth rate given share gains become bigger for you, hopefully?

Well, thank you very much, Amit, and greetings to you as well. Look, I think the numbers here a little bit speak for themselves. When you look at our overall growth, growing 28% or 23% organically in the quarter, or when you look at some of the individual markets where we had significant growth in a number of our markets, clearly outpacing whatever the industry growth rate will be. And I'm not an expert in exactly what various industry growth rates are, but clearly growing in industrial by 33% organically and automotive by 44% organically and mobile devices by 51% organically and IT datacom by 25%. Those are clearly ahead of the overall industry growth rates. And you're correct. I think There is a meaningful component of that growth, which is our ability to react quickly despite a very challenging environment. It should not be understated. There still remains many challenges today in the world, both with COVID and with the supply chain. But our ability to react quickly in an entrepreneurial and agile fashion to satisfy the demand of customers when they need it has been, I think, through this whole cycle, an extraordinary advantage that we brought to bear. And, you know, as customers think for the long term about with whom do they want to partner, it's going to be very hard to forget who was there for you when the chips were down at the greatest moments. Who was there for you during the depths of the pandemic when bandwidth was at such a premium and factories were closing all over the place because of shutdown orders and and the spread of the virus and who was there to react when you needed to help you support your end customers. And I think that is something that our customers reflect on, integrate into their buying behavior, incorporate into their decisions about who should be their partner going forward. And so does that mean that we have a high potential to continue to outpace the market? And we've outgrown the market for now two decades. And I think that this just reinforces for our customers why having Amphenol as your first phone call is a really important principle and a very helpful way to run your supply chain.

Thank you. Now our next question is from James Siva of Citigroup Investment Research.

Thank you. And it's nice to see Amphenol continue to make acquisitions. In the past history, sometimes acquisitions have been companies that really needed a global footprint for sales or a global manufacturing footprint or helping to polish their operations. And others have been strategic to help the company grow in the future. But they recently announced acquisitions that you just talked about today. Can you help us, you know, figure out which bucket they are, more for the growth or more for health operations, and you can really improve their profitability or go to markets? How do they fit in with the Amplify family? Thank you.

Thank you very much, Jim. I mean, look, our criteria for acquisitions has always started with two things, and that's people and the products, in other words, the technology that those companies have. And so the very first test for us is are we acquiring a company that has people who have passion, drive, integrity, and entrepreneurial spirit that we think will fit into the Amphenol organization? And then second, do they have unique enabling technologies that ultimately solve real problems for their customers? And when we found those companies, we don't focus on either growth or on improvement in operating performance. We try to do both of those things. And our acquisition program, which has been so successful over so many years, has really been successful because we are able to find ways to accelerate the growth of those companies and find ways to improve their operating performance. And so I would say that the three acquisitions that we're talking about today, of course, MTS being far and away bigger than Euromicron or CableCon, they all share that great potential, both from a top-line growth perspective, taking advantage of being part of Amphenol, taking advantage of being part of a global company with strong partnership, preferred supplier relationships with customers across all of our end markets, but also being part of a company that has access to low-cost manufacturing when appropriate, who has access to collaborative initiatives across the company from a technology, a sourcing perspective, that ultimately can help to drive better operating performance. And so I would say with these three companies, we think that they all have great growth and profitability improvement potential despite their very different scales.

Thank you. Now our next question is from Matt Sheeran from Stifel.

Yes, thanks. Good afternoon everyone. A question, Craig, regarding your commentary about some cost headwinds weighing somewhat on your margins. Could you quantify that in terms of maybe what in terms of basis points you've seen? And is that just an issue that you see persisting over the next couple of quarters as we're hearing from other suppliers as well?

Yeah, thanks, Matt. Yeah, I mean, I just wanted to start by saying we are actually extremely proud of the ability to achieve these strong operating margins in the first quarter. I mean, 19.6% in this challenging environment while we still have COVID costs. And on top of that, we've seen certainly increasingly challenging commodity and supply chain environment. I think it's really just a great achievement. And I really am happy with the performance of the general managers to be able to offset some of these costs that they're seeing. You know, the reality is, is that, you know, we have seen, you know, increasing, you know, challenging environment as we come into the first quarter. To quantify that is a little bit difficult, but I think the way I would think about it is that if you, you know, as we kind of came into the first, you know, first quarter from the fourth quarter sequentially, we would expect, you know, a typical, you know, close to 30% kind of sequential downside conversion. So really the, you know, gap between that is, The vast majority of that, I think, is really the pressures from the commodity and supply chain environment. I mean, there is some small component related to some of the acquisitions of Positronix, as well as Euromicron that we closed earlier in the quarter. But the vast majority really would be that kind of cost environment that we're seeing some headwinds from. You know, in terms of how long that will last, I mean, there's certainly, we're doing a, you know, I think the team's, again, doing a good job of trying to offset some of that. I think, you know, through taking some cost actions and overtime, maybe also through passing on some of those increases to customers to the extent you can't, you know, do it within the factories. But, you know, I don't think this is necessarily something that we're going to be able to necessarily get through in a quarter. So, That certainly is still included in kind of our second quarter guidance that we gave is to expect to still have some of those headwinds we haven't guided to the rest of the year. So I guess I won't comment on that. But certainly I think that this environment that we find ourselves in now, I'm very happy with kind of what we've been able to achieve in terms of offsetting a certain level of those costs. But I think that the reality is that we're probably sitting here at least for another quarter here with some of those cost headwinds that we see today. Okay.

And, Matt, I would just add to that a little color. You know, there are certain parts of this which are pretty significant cost differences in commodities, for example. I mean, they're all very well reported. And you know the way that Amphenol operates is we have close to 125 general managers around the world, and each of them is really tuning their operation in light of the costs that are hitting them in particular. So you take an example, a general manager in our cable business, which has a very high component of material cost, very significant in our cable segment, there's not a choice but to go and work with customers and to make sure you take a leadership position in adjusting price to account for for those commodity prices. And we would certainly expect that others in the industry would have that same dynamic. And that's just one example of how it goes. But the beauty is that these general managers have every tool available to them to adjust, whether it's from the price you sell to the customer to every element of cost are all in the power of the general managers. And when you see a sudden increase in some of these things, it can take a short while to work through it. But Craig and I are confident that over time our team is going to manage this as they always have.

Thank you. Now our next question is from Mark Delaney of Goldman Sachs.

Yes, good afternoon and thanks for taking the question. This quarter was certainly a good illustration of Amphenol's leadership and operational flexibility, but I'd still be interested in understanding if you're thinking of making any changes in how the company operates going forward in terms of things like how you're sourcing material, where you locate manufacturing or inventory management once you have some time to fully reflect on how COVID and some of the trade issues have stressed global supply chains or even just because Amphenol is becoming a bigger company with the M&A that you've done, including most recently with MTS. Thank you.

Thanks so much, Mark. I mean, look, the answer I'll give you is really two sides. The answer is no. We think that our approach is our culture, the unique entrepreneurial organizational structure that we have had in Amphenol for many decades is uniquely tailored to an environment like we've been in and to an environment like we're headed into. But the other answer is yes every day, meaning we're making changes every day. We're not making those changes from here at headquarters. We're not deciding on a blanket approach like we're going to go out of one country and go into this country. or we're going to increase our inventory this much, or we're going to change how we're sourcing things. But those general managers around the world are every day making course corrections, and some of them pretty significant course corrections in the moment to react to the environment that is around them. So when tariffs came in, you'll remember this already. It seems like so long ago that there was this thing called tariffs several years ago. But our team immediately reacted to that in every way possible, from moving production to changing logistical flows to doing lots of other things to passing on the price to customers when there was no other option. And that was a real-time, in-the-moment process. kind of transformation, but not at a corporate level. Rather, it was at the individual operating unit levels. And I think as we've gone through the pandemic, as we see the very robust demand coming out of this part of the cycle, we're making lots of changes every day to make sure that we remain the most competitive, that we are able to outperform the market at the highest degree possible, and that we're able to deliver to the bottom line superior operating profitability and ultimately convert that to cash. And And those are just day-to-day decisions that are made by our general managers, obviously in some consultation with us, but ultimately the proof I think is really in the pudding of that approach.

Thank you. Now our next question is from Craig Heddenbacher of Morgan Stanley.

Yes, thanks. Just questions on MTS. I think their operating margins are roughly in the mid-teens, and I know other acquisitions you've done in the past where they've been lower, there's a path to kind of get them to corporate average. So just curious if there's any similarities or differences in terms of that approach for this deal. And then, Adam, you mentioned a number of the key markets for MTS where they play. Any of those stand out in particular from a growth perspective that you're most excited about?

Thanks very much, Craig. I think you're roughly accurate about the operating margins with MTS. Obviously, there will be some amortization, and we include amortization in our numbers so that they can have a little bit of downward impact on the operating margins. But you're right. I mean, every company who comes into Amphenol thinks about how are they going to achieve ultimately that growth in margins to get up to the Amphenol corporate average or above. Obviously, an average is just an average, and there are some above and some below. And I would tell you that the management team in the MTS sensors business is an extraordinarily capable team of individuals. The gentleman who leads that business, who led the business inside of MTS, who, by the way, led the predecessor family-owned company that was acquired by MTS, I mean, this is a just truly outstanding individual who also, you know, likes to see that his company is doing as well as his sister companies. And there's no doubt about it that there's a little bit of peer pressure inside of Amphenol when you come in and see the margins of your peers. And something tells me that that's an organization that does not want to be below the average. And how long is that going to take? You know, that's always a question. But when there's a will, there's a way. And I think this is a team that has an extraordinary will to make that happen. In terms of the markets with the MTS sensors business, I talked already that they have a strong position in industrial, in military, and then in commercial air and automotive, roughly in that order, I would say, in terms of magnitude. And they participate in just some of the most exciting applications within those. MTS makes products that are really at the cutting edge of the harsh environment, high performance requirements of some of these systems. So when you're making a turbine, and that turbine, be it a gas turbine or a windmill, and you want to know that that thing is operating with good function and smoothly and that there's no issues inside the turbine, you're going to use a sensor from MTS, a number of sensors, let me say, that are going to be in the most harsh of environments, hot, out in the middle of the ocean, you name it, that are going to ultimately tell you is your system working or not and do you need to go maintain that. That's just one example of these extraordinary harsh environments, vibration, force, pressure, and position sensors that they sell. I had the good fortune to go around to several of the factories just in the last couple of weeks and had been there of course before, but going now as the owner is a little bit different. And not only do you see products that are truly at the high leading edge of sensor technology, but these are sensor products where the harsh environment interconnect packaging of those sensors is almost of equal import to the good functioning of the product. in the systems where they participate. And so we see just great opportunities in the industrial market across many segments of the industrial market, in the military market, as I spoke earlier, where we have already a leading position in military interconnect. We're just really excited to now have a significant position also in sensors in the military market, as well in automotive and in commercial air. We see great opportunities really across the markets of MTS and look forward to taking full advantage for many years to come.

Thank you. Our next question is from .

Great. Thanks for taking my questions. Congrats on the very good results today. Adam, I'd like to ask you about the commercial aerospace end market. You know, that end market was already in a pretty significant downturn because of the 730 MAX grounding. And then we had COVID, you know, obviously stopped travel and demand for planes. But I think you guided this segment up sequentially. And I wonder if that's an indication that you think we're past the bottom here. I wonder what you're seeing in terms of

recovery what you're seeing in the order book and maybe what you're hearing more anecdotally from your customers thank you thanks well yeah I mean it's tough time in the commercial air market there's no doubt about it I mean it's hard to think of a market that was not there was more heavily impacted over the last year and a half then the commercial air market it represents now just 2% of our sales And we did guide it up sequentially in the quarter ahead, although I would say that that's really the impact of the MTS sensors acquisition. I don't know that I would necessarily say that I'm kind of calling a bottom, so to speak. But clearly the rate is declining. The rate of decline on a sequential basis is getting smaller. It's down by just 3% sequentially in the quarter, which is, you know, I guess a green shoot of encouragement, if you will. But the commercial art market has a tough road ahead of it, and our team working in that market is doing everything they can to continue to diversify their business to make sure that the products that they sell, which have other applications, are being proliferated, and we're redevoting resources to designing those products into other applications where they can be very enabling technologies such that when the commercial air market does eventually come back, which it will, we're not going back to horses and buggies. We will be flying again one day, and I hope to be doing so very soon after I get my second shot tomorrow morning together with Craig. That market will come back, and when it comes back, our operations working in that market will be stronger than ever because they will have taken this opportunity to diversify themselves, diversify their product sets, leverage their resources in a broader fashion. And I think that's the way to deal with a crisis like this, and that's always been the Amphenol way.

Thank you. Now our next question is from Joe Giordano from Cohen.

Hey, good afternoon, guys.

Hello, Joe.

So we've heard kind of like different strategies and different responses from many companies this season about how they're dealing with sourcing of of components that are in scarcity. And we've heard some say that the ability to like leverage all of their individual businesses as one big customer kind of gives them leverage at, at, at suppliers. I think you guys probably going the other way. Can you, can you kind of talk about how the structure of Amphenol as kind of small independent companies essentially gives them an advantage when, when sourcing, is it because some of these businesses are small enough that they're, you know, it's not a big quantity that they need and maybe just talk us through that relative to some other maybe ways to accomplish that.

Yeah, look, Joe, we try to have the best of both worlds in sourcing. And so at the end of the day, sourcing happens under the purview of those 125 general managers around the world. And sometimes it's good to be small and sometimes it's good to be big. And what we try to do is we present ourselves as whichever is most beneficial in the moment. So we oftentimes are a few general managers who buy a common material. We'll work together and they may go together to a vendor if that's what gets us the results that we need. But in other cases, it's a very local decision where maybe a purchasing person says to a local sales rep, hey, just sneak me what I need here. No one's going to notice. And in between both of those, there's a whole spectrum of techniques, strategies, tactics that our supply chain team around the world will be taking. The most important principle, though, is this. If you have supply chain disconnected, from the business, it's actually really hard to decide, ultimately, am I doing the right thing? What if I need to redesign something? Well, if there's this monolithic engineering team and a monolithic sourcing team, and the sourcing team says, well, we can't get this part, we need to redesign it, and it has to go sort of up and down the corporate chain to get that redesigned resources to be allocated or to convince the engineer to do so, that can be a very laborious process. Whereas in our organization, the purchasing person is sitting in the door right next to the engineering person reporting to the general manager who's two doors down from her, and they can just get in a room together and say, look, we can't find this thing. Let's redesign it right now. Let's reallocate the resources. Let's make it happen. And it's that kind of real-time connected to the business approach, whether it is, dealing with shortages, whether it's dealing with logistical challenges, whether it's dealing with quality issues, whether it's dealing with new design, whatever, we've always found that that approach can be very effective. But we try to be what will make us be the most successful. Let's say that.

Thank you. Our next question is from David Kelly from Jeffrey.

Good afternoon, Adam and Craig. Just hoping to follow up on automotive issues. really robust growth versus underlying production in the quarter. You referenced electrification wins as a contributor. And then you mentioned broadly you aren't seeing channel inventory build, but I would assume you've delivered some market share gains and then probably benefited from favorable mix as well. Just hoping you can walk us through some of the drivers of your really strong automotive performance in the quarter.

Sure. Well, thanks very much, David. I mean, you know the underlying market much better than I do. You could teach a master class on it for sure. But what I would tell you is, you know, our team in all regions really performed very strongly here. And we saw great growth really across the board, across the regions. And we saw disproportionate growth from new programs that we've long worked to design ourselves in on relative to EVs, but it wasn't exclusively EVs. We saw growth in lots of other new platforms as well. I think our long-term share gains in the automotive market, and I referenced this earlier, is really a function of us focusing our efforts on next-generation technologies in-car, next-generation systems, next-generation applications, everything from passenger comfort and connectivity to safety to engine management, emissions control, and obviously high voltage related to EVs and hybrid EVs. And I think all of those things are helping us to outperform the broader market in a quarter like we just had here in the first quarter, but also over a very long time period. We're really talking about the better part of a decade where we have had a relatively consistent performance that is a decent amount if not far in excess of the underlying unit production volumes that are out there. So there's not like one silver bullet to this. I think it's been a collective approach. It's been our acquisition program where we've added new companies, both interconnect, antenna, and sensor companies. And it's a lot of work on engineering of next generation systems that go into these cars across all of the regions. And I think when you put all that together Ultimately, we've seen strong performance.

Thank you. Now our next question is from Sameek Chatterjee of JPMorgan.

Great. Hi, Adam. Hi, Craig. Good afternoon. I wanted to get your views on mobile networks. You mentioned you had better revenue than you expected in the quarter. You're guiding to sequential improvement in revenues. how should I think about visibility or sustainability of this improvement through the rest of the year? And how correlated is that going to be to some of the 5G capex plans that the North American telcos recently outlined? How much of that is going to probably help sustain some of this growth through the rest of the year? Thank you.

Thank you, Sami. Well, look, we're really pleased with the sequential growth that we saw in this market. Obviously, that's a market that over the last year or two has has not always had the most robust growth as the operators have somehow struggled. There's been a lot of corporate things going on, delays in investment. Last year, we also saw some redeployment of the investment towards really the core of the networks to support the massive growth in bandwidth. But we've always talked about the fact that our team has been working diligently over many years to design in our products into next-generation systems and networks be they 5G or otherwise. And I think we start to see kind of some early progress with that here in the first quarter. And to the extent that operators are expanding their investment, we would hope to benefit from that. It may not always be in a perfect quarter-to-quarter correlation. We don't have a position with absolutely every operator with the exact same degree of success, but we have a very strong position on the equipment that is really going to enable 5G for the long term. To the extent that 5G creates incremental capital spending, which again has yet to be perfectly articulated, then for sure we would feel like we would be in a good position to be able to benefit from that in the medium and long term.

Thank you. Our next question is from .

Good afternoon. You mentioned hybrids and electric vehicles, especially as a growth driver in your end market discussion of both auto and industrial trends this afternoon. Could you help us better understand the span of EV-related products, especially across those two segments? And in particular, I'm wondering how that might differentiate the company's opportunity set versus some of your connector peers that have a more auto-based focus.

Thanks very much, Luke. Yeah, no, you picked up on that very astutely. We participate in the electrification of vehicles, whether those are passenger vehicles or commercial vehicles, and both have been really great drivers for us in recent quarters and years. In the industrial, we talk about that industrial battery and the heavy vehicles. There's a wide range of vehicles that are undergoing electrification right now from from big trucks, and there's plenty of news media around that, to postal vehicles and trash trucks and buses and goods vehicles, delivery vans, you name it. And so all of that is what we classify really in our industrial business or industrial market as that battery-heavy vehicle. And then when we talk about automotive, the hybrid EV, that's really passenger cars and the related products. In addition, we think about the charging infrastructure for electrification as really an infrastructure piece, and that we think about in our industrial business as well. Those are all components of areas where we've seen strong performance, certainly in the first quarter and over a number of years, and look forward to that, because I think If you confine your view of electrification just to passenger vehicles, you're missing a really exciting area of the electronics revolution, which is that electrification more broadly. By the way, I mean, we're working as well with the departments of defense in certain countries on the electrification of military vehicles, which I think is going to be a long process. But over the long term, we see that as an area that can also be another benefit and another growth lever along this just real, you know, kind of call it a megatrend, if you will, of electrification across kind of all things that move.

Thank you. Now our next question is from Steven Fox from Fox Advisors.

Hi, good afternoon. Craig, I just wanted to talk a little bit more about your extra costs in the coming quarter. If I applied your analysis for Q1 to Q2, it looks like the pressure is about $20 million or so, similar to Q1. I imagine there's some M&A impacting your incrementals. But can you talk about whether that's in the ballpark and what you guys are doing to sort of reduce that $20 million nut going forward?

Yeah, actually your math probably isn't so far off, certainly in the range of what we would probably quantify that as. If you look sequentially going from Q1 to Q2, essentially a lot of that growth is our acquisitions that we just announced. As you can imagine, the sequential conversion is going to be a little bit lower than your typical conversion just because those acquisitions are at a lower profitability level than the average of the company. And clearly, as we talked about with MTS specifically, but also related to the other two, over time we would expect to be able to work those up to the company average. But as we're talking about Q2 specifically, that sequential conversion really mostly is impacted related to the acquisitions. But essentially the cost impact that you just quantified and kind of is in that ballpark that, you know, we have in Q1 is essentially we're expecting to still see, you know, in Q2 as the team continues to work through all those actions to ultimately over time neutralize those impacts.

Thanks very much.

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

Well, this is Mr. Norwood. But anyways, thank you very much. And we truly appreciate everybody's time today on the call. And, you know, I did want to take a moment just to wish everybody good health here. And I hope everybody is getting the chance to be vaccinated soon, wherever you may be. And I wanted to make just a special comment and note about any of you who may have friends or family in India. We obviously have an organization in India, and we're very carefully attentive to the ongoing situation with the pandemic there and doing our part to help the communities in India. And I just wanted to send our best wishes to any of you on the phone here today with family, friends in India. It's a fabulous country, and I'm sure they're going to work their way through this difficult stage in the pandemic. Thank you all to everybody and wish you all good health and we'll talk to you all in the next 90 days. Thank you everybody. Bye bye.

Thank you and thank you everyone for attending today's conference. Have a nice day.