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.