Amphenol Corporation

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

Thank you very much. Good afternoon, everyone. This is Craig Lampo, Amphenol CFO, and I'm here together with Adam Norwood, our CEO. We would like to welcome you to our second quarter 2021 conference call. Our second 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, and then we'll take some 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. In addition, all data discussed during this call will be on a continuing operations basis unless otherwise noted. The company closed the second quarter with record sales of $2.654 billion and GAAP and adjusted diluted EPS of 59 and 61 cents, respectively. Sales were up 34 percent in U.S. dollars, 30 percent in local currencies, and 22 percent organically compared to the second quarter of 2020. Sequentially, sales were up 12 percent in U.S. dollars and in local currencies, and 7 percent organically. Orders for the quarter were a record $3,120,000,000, which was up 58% compared to the second quarter of 2020 and up 14% sequentially, resulting in a very strong book-to-bill ratio of 1.18 to 1. Breaking down sales into our two segments, the interconnect segment, which comprised 96% of our sales, was up 34% in U.S. dollars and 30% in local currencies compared to the second quarter of last year. Our cable segment, which comprised 4% of our sales, was up 27% in U.S. dollars and 24% in local currencies compared to the second quarter of last year. Adam will comment further on trends by market in a few minutes. GAAP and adjusted operating income were $476 million and $532 million, respectively, in the second quarter of 2021. GAAP operating income includes $55 million of transactions, severance, restructuring, and certain other non-cash costs related to the MTS acquisition. And the company also incurred $34 million related to the extinguishment of outstanding MTS senior notes that, in accordance with GAAP, was recorded as an increase to goodwill in the second quarter and therefore had no impact on the second quarter earnings. Excluding these acquisition-related costs, adjusted operating margin was 20%, which increased by a strong 200 basis points compared to the second quarter of last year and increased by 40 basis points sequentially. The every year improvement in adjusted operating margin was primarily driven by normal operating leverage on the higher sales volumes and a lower cost impact from the COVID-19 pandemic, partially offset by the impact of the challenging commodity and supply chain environment that we experienced in this year's quarter. The sequential increase in adjusted operating margin was driven by the normal conversion on the increased sales levels, partially offset by the impact of MTS Sensor's business, which is currently operating below the company's average operating margin. From a segment standpoint, in the interconnect segment, margins were 22% in the second quarter of 2021, which increased from 20% in the second quarter of 2020 and increased 50 basis points sequentially. In the cable segment, margins were 6.1%, which decreased from 9.4% in the second quarter of 2020 and 8.8% in the first quarter. These lower margins in the cable segment are directly related to the rapid increases in the prices of certain commodity and logistics costs, which we have not yet been able to offset with pricing actions. Given the dynamic market environment, we are very proud of the company's performance. Our team's ability to effectively manage through the current market challenges 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. The company's GAAP effective tax rate for the second quarter was 17.5%, which compared to 20.7% in the second quarter of 2020. On an adjusted basis, this effective tax rate was 24.5% in the second quarter of both 2021 and 2020. GAAP diluted EPS was 59 cents, an increase of 40% compared to 42 cents in the prior year period. An adjusted diluted EPS was a record 61 cents, an increase of 53% compared to 40 cents in the second quarter of 2020. The company continues to be an excellent generator of cash. Operating cash flow was $411 million in the second quarter, or 109% of adjusted net income. And net of capital spending, or free cash flow, was $307 million, or 81% of adjusted net income. From a working capital standpoint, inventory days, day sales outstanding, and payable days were 85, 71, and 60 days respectively, all excluding the impact of acquisitions in the quarter and within our normal range. During the quarter, the company repurchased 2.5 million shares of the common stock for approximately $167 million at an average price of approximately $67. At the end of the quarter, total debt was $5.2 billion, and net debt was $4 billion. Total liquidity at the end of the quarter was $2.3 billion, which included cash and short-term investments on hand of $1.2 billion, plus availability under our existing credit facilities. Second quarter 2021 GAAP EBITDA was $597 million, and our net leverage ratio was 1.6 times. On a pro forma basis, after giving effect to the sale of MTS test and simulation business, net leverage as June 30th, 2021 would have been 1.3 times. As previously discussed, due to the pending sale of the MTS test and simulation business, that business is being reported as a discontinued operation and therefore its expected results are excluded from our Q3 guidance. In addition, in conjunction with the divestiture of the test and simulation business, the company will incur certain additional cash tax-related and other acquisition-related costs in the third quarter, which will not be included in income from continuing operation and therefore are not included in our guidance. I will now turn the call over to Adam, who will provide some commentary on current market trends.

Well, thank you very much, Craig, and I'd like to extend my welcome to all of you here on the call today, and I hope that you, your family, friends, and colleagues continue to stay safe and healthy and indeed are able to enjoy the summer so far. As Craig mentioned, I'm going to highlight some of our achievements in the second quarter. I'll then get into a discussion of the trends and our trends and progress across our serve markets. I'll make some commentary on our outlook for the third quarter, and then, of course, we'll have time for questions at the end. Our results in the second quarter were substantially better than expected, as we exceeded the high end of our guidance in sales and adjusted diluted earnings per share. Craig already mentioned our sales grew a very strong 34% in U.S. dollars and 30% in local currencies, reaching a new record of $2,654,000,000. On an organic basis, our sales increased by 22%, with growth driven in particular by the automotive, military, industrial, and broadband markets, as well as contributions from the company's acquisition program. We're very pleased to have booked record orders in the quarter of $3,120,000,000, and that represented a very strong book-to-bill of 1-18-1. Despite facing operational challenges in certain geographies related to the ongoing pandemic, as well as continued increases in costs related to commodities and supply chain pressures, we were very pleased to deliver very strong adjusted operating margins of 20.0% in the quarter. This was a 200 basis point increase from last year's levels and a 40 basis point improvement sequentially. Adjusted diluted EPS grew a very significant 53% from prior year to another new record of 61 cents and just an outstanding reflection of our continued strong execution. And finally, the company generated operating and free cash flow of $411 million and $307 million respectively in the second quarter. I just can't emphasize enough how proud I am of our organization around the world. These results once again reflect the discipline and agility of our entrepreneurial organization as we have continued to perform well amidst what is a very dynamic and challenging environment. Very pleased that in the quarter we closed on the acquisition of Unlimited Services. Unlimited is based in Oconto, Wisconsin, but also with operations in Mexico and has annual sales of approximately $50 million. This is a great manufacturer of cable assemblies for the industrial market, primarily with a particular focus on heavy vehicles. The addition of Unlimited broadens our already strong position in value-add interconnect products that are integrated into a wide array of industrial applications. As we welcome this outstanding new team to Amphenol, I remain very confident that our acquisition program will continue to create great value for the company. In fact, 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 served markets, I just would comment once again how pleased we are that the company's broad and balanced end market diversification continues to create real value for us. We believe that ultimately this diversification mitigates the impact of the volatility of individual and markets while also giving us broad exposure to leading technologies and the innovations of those technologies wherever they may arise across the broad scope of the electronics industry. Now turning to the military market, the military market represented 11% of our sales in the quarter And as expected, sales grew a strong 45% from the COVID-impacted prior year second quarter and were up 30% organically. And this was really driven by broad strength across virtually all segments of the military market. On a sequential basis, sales increased by 12%, also very strong. As we look into the third quarter, we expect sales to remain at these current elevated levels. And we continue to be very excited by the strength of our position in the military market. And that position is really based upon our industry-leading breadth of high-technology interconnect and now sensor products, together with our support of essentially all major military programs. This gives us great confidence for our long-term performance in this important area. The commercial air market represented 2% of our sales in the corridor, Sales grew by 7% versus prior year, really with the benefit of the contributions of our recent acquisitions. On an organic basis, sales were down by about 14%, as the commercial aircraft market continued to experience declines in demand for new aircraft production. Sequentially, however, our sales did increase by better than expected 19%. And that's really from the benefit of the MTS acquisition as well as some organic progress. As we look ahead, we expect a slight seasonal moderation in sales in the third quarter, which we would typically see in commercial air. And regardless of the ongoing difficult environment, our team working in this commercial aerospace 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 that are integrated into those planes. As personal and business travel continues to recover from the pandemic, we look forward to jet manufacturers beginning to expand their production levels. The industrial market represented 27 percent of our sales in the quarter, and our performance in the second quarter in industrial was really much stronger than expected, with sales increasing by 54% in U.S. dollars and 28% organically. This growth was broad-based across most areas of the worldwide industrial market and was driven in particular by organic strength in the transportation, battery and heavy electric vehicle, marine and energy generation segments, together with the contributions from our acquisitions that have been completed over the past year. On a sequential basis, sales increased by a very strong 26% from the first quarter, really with the benefit of acquisitions as well as strong organic performance. Looking into the third quarter, we expect sales to remain at these elevated levels despite what would typically be a seasonally lower quarter. I can't say enough how proud I am of our team working in the industrial market. And we've had a long-term strategy to expand our high-technology interconnect antenna and sensor offering, both organically as well as through complementary acquisitions. And that strategy has positioned us strongly with industrial customers around the world who are accelerating their adoption of electronics. The acquisition of unlimited services further bolsters our leading value-add capabilities in this important market, And we look forward to realizing the benefits of this strategy for many years to come. The automotive market represented 20% of our sales in the quarter, and I can just say that sales were higher than our expectations, growing a very strong 134% in U.S. dollars and 117% 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 once again drove very strong growth of our products used in electric and hybrid electric vehicles this quarter, which confirms again for us our global team's long-term efforts at designing in high voltage and other interconnect and sensor products into these important next-generation platforms. Despite an increase in production disruptions among our automotive customers due to the widely reported global supply chain issues, we were able to achieve a small sequential increase in our sales, which was a bit better than we had expected coming into the quarter. No doubt about it, though, there continued to be a range of widely reported supply chain challenges that are arising within the automotive industry, and this is impacting overall demand from vehicle manufacturers around the world. Accordingly, as we look towards the third quarter, we do expect a modest sequential decline in our sales. I remain extremely proud of our team working in the automotive market. They continue to demonstrate a high degree of agility and resiliency in both driving a significant recovery from last year's reduced production levels, while expertly navigating the myriad of supply chain challenges that the entire automotive industry is still facing. We look forward to benefiting from their efforts long into the future. Turning to the mobile devices market, that market represented 10% of our sales in the quarter. Our sales to customers in the mobile devices market declined from prior year by 4% in U.S. dollars and 6% organically, as declines in handsets and laptops more than offset growth in wearables. Now, I would just remind you that our last year's second quarter did include a significant sequential recovery and really a catch-up from the COVID-impacted first quarter of 2020, which made the comparison versus prior year a little more challenging. Sequentially, our sales fell by 6% from the first quarter, which was modestly better than our expectations. Looking to the third quarter, we now expect an approximately 25% increase in sales from these second quarter levels, as we benefit from the seasonally typical higher demand in the mobile device market as customers launch a range of new products. While mobile devices remains the most volatile of Amphenol's end markets, our outstanding and agile team is poised as always to capture any opportunities for incremental sales that may arise in the second half of 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 in this exciting market. The mobile networks market represented 5% of our sales in the quarter. Sales were flat to prior year and down 4% organically, as sales to both OEMs and wireless service providers moderated. On a sequential basis, however, our sales increased by 5% compared to the first quarter, which was in line with our expectations coming into the second quarter. And as we look towards the third quarter, we expect a further increase in sales as mobile networks customers ramp up their investments in next generation networks. Our team around the world continues to work aggressively to realize the benefits of our efforts at expanding our position in such next generation networks and the equipment that populates them around the world. And as customers ramp up these investments of such 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. The information technology and data communications market increased by 21% in the second quarter. Sales in the second quarter rose by 5% in U.S. dollars and 3% organically from the very significant levels in last year's second quarter. Our strength this quarter was driven in particular by robust sales to web service providers, which was partially offset by some weakness in sales to networking equipment OEMs. Sequentially, our sales grew a very strong 20% from the first quarter, which significantly outperformed our original expectations. Looking now into the third quarter, we expect sales to increase modestly from these very high levels. We remain very encouraged by the company's outstanding position in the global IT Datacom market. Our OEM and web service provider customers around the world continue to drive their equipment and networks to ever higher levels of performance in order to manage the continued dramatic increases in demand for bandwidth and processor power. In turn, our team is singularly focused on enabling this continuing revolution in IT Datacom with industry-leading high-speed power and fiber optic interconnect products. And we look forward to realizing the benefits of our leading position for many years to come. Turning finally to the broadband market, this market represented 4% of our sales in the quarter, and sales increased by 12% from prior year and were flat organically, as we benefited from our recent acquisition of CableCon. On a sequential basis, sales increased by 7% from the first quarter, which was a bit lower than we had anticipated coming into the quarter. For the third quarter, we expect sales to moderate from current levels as operators digest the really high levels of spending that they have exhibited over the recent quarters. And regardless of this more muted outlook, we continue to look forward to supporting our broadband service operator customers around the world all of whom are working to increase their bandwidth to support the expansion of high-speed data applications to homes and businesses. Now, turning to our outlook, and I would just note that given the current dynamic market environment, and of course, assuming no new material disruptions from the COVID-19 pandemic, as well as constant exchange rates, In the third quarter, we expect sales in the range of $2,640,000,000 to $2,700,000,000 and adjusted diluted EPS in the range of $0.60 to $0.62. This would represent sales growth of 14% to 16% and adjusted diluted EPS growth of 9% to 13% compared to the third quarter of last year. I remain confident in the ability of our outstanding entrepreneurial management team to adapt to the continued challenges in the marketplace, and to capitalize on the many opportunities to grow our market position and expand our profitability. I can just say that our entire organization remains committed to delivering long-term and 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 take this opportunity to once again thank the entire global Amphenol team for their truly outstanding efforts here in the second quarter. And with that, operator, we'd be very happy to take any questions that there may be.