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.

Thank you. And participants, we will now begin our question. Please be reminded that questioners are only allowed to ask one question. Our first question is from Wamsi Mohan of Bank of America. Sir, the line is now open.

Yes, thank you. Adam, can you talk about what you're seeing as far as inventory levels go, particularly in the channel in industrial where you expected low-teens growth quarter-on-quarter? You grew almost double that. If you could give us some sense of where things stand, that would be great. Thank you.

Thank you very much, Wamsi. We've talked about this in the past, that we don't have necessarily perfect visibility into the inventory, in particular of our OEM and service provider customers. But as far as the channel is concerned, we have not seen any real changes in the inventory levels. In fact, it appears that for the vast majority of our distributors, in particular with respect to the industrial market, they want to ship it out as soon as we can get it to them. There's clearly... a very significant end demand across really many segments of the industrial market. And, you know, I mentioned earlier that we saw growth across virtually every segment of the industrial market. And, you know, whether that was in marine applications, in industrial batteries, in electrification of industrial vehicles, in transportation, heavy equipment, factory automation, I mean, we saw even growth in areas like oil and gas where we haven't seen so much growth in the past. Instrumentation, where we've continued to see very robust performance over a long time period. So I wouldn't say that across the industrial market we've seen necessarily any worrisome inventory trends. I think that more broadly across the whole company, again, maybe the only area where, you know, talk of inventory issues acutely is that there's not a lot of inventory of cars on lots right now. And so I don't know what that means through the whole chain, but for sure, dealer inventories of vehicles are extremely low by any measure. And I think, you know, there's a lot of supply chain issues that are going on around the automotive industry that I'm sure others will ask about and many have spoken about and reported about But by and large, we see inventory as relatively healthy.

Thank you. Now our next question is from Amit Daryaneni of Evercore. Sir, line is now open.

Perfect. Thanks a lot and good afternoon. You know, I get some questions around the supply chain dynamics as well, and I'd love to understand, Adam, you know, how is it, on tool of A, how is it playing out For Amplimol, from operations, from a P&L basis, what's the impact on your revenue and margins that can be from the supply chain issues? And then beyond the operational challenges, I'd love to understand, does this create an opportunity for you over time to win new customers, to have new share gain? And if so, which segment of those options is bigger?

Yeah, well, thank you very much, Amit. Look, I mean, the current supply chain environment is certainly not for the faint of heart. And I think our agility as an organization, that unique entrepreneurship of what we call Amphenolians around the world, in many ways is an ideal approach to deal with a supply chain environment that is so broadly disrupted and where new things pop up every day. And so could we have shipped a little bit more in certain cases? I'm sure we probably could have. Did it cost us money in many cases? I'm sure it did. To put a number on that, it's not easy for us to do, but I can tell you that it's more than zero. And I think for sure the cost of the supply chain, whether that's freight and logistics, whether that's the cost of commodities, the availability of certain things. A lot of stuff went on over the course of this quarter. There was floods in Germany. There were challenges with various countries. There were some COVID-related things that were happening, in particular in places like Southeast Asia. So our general managers, all 125 of them, each of them had to deal with a unique set of challenges, and they had to tailor-make their approach to exactly what they were facing. It wasn't that we had to sort of process all of this in this sort of corporate wave act machine and then issue a bunch of edicts to say, here's what we should do. It was really dealt with on an individual case by case basis in the moment. And that kind of moment by moment management is a real premium in a time like this. And as it relates to your second question or the second part of your question, for sure, if we are satisfying the needs of our customers, better than our competitors are doing in a time when they need us the most, when they have robust demand from their customers, when they're facing a much broader array of supply chain challenges. Because fortunate for us, we don't buy a ton of semiconductors. We buy a little bit here and there. But we have a lot of customers who are facing really existential kind of shortages in certain semiconductors. And when we can help them, for example, they're redesigning a system to change a chip that they can't get support of. They're redesigning that, and all of a sudden, that redesign requires them to completely redesign an interconnect system. Our team does it. You know, in one case, we did this in five days. A customer came to us, said they had to totally change the design of their system, otherwise they wouldn't have a chip for a year. They redesigned it. Our team went, completely redesigned the system. Five days later, sent them samples, and they came to us with big orders thereafter. So those are the kind of situations that are popping up more and more and I think long-term customers don't forget if you were there for them when they needed you the most.

Thank you. Now our next question is from Jim Suva of Citigroup Investment Research. Sir, your line is now open.

Thank you and congratulations to you and your team for all the hard work during the challenging times. I wanted to ask a question kind of on raw material and input costs. And of course, we've seen them all kind of skyrocket. Does that mean your salespeople need to be more active or change terms? Or do you have like indexing into your contracts when raw materials go up a lot? I assume some of your contracts are very long term in nature. Or do you hedge it out with some financial instruments? I'm just kind of curious because it's pretty unprecedented that Copper, steel, aluminum, you know, resins and cosset have recently been moving a lot. Thank you so much.

Well, thank you so much, Jim. And no doubt about it. I mean, there are certain dynamics which one could call unprecedented. And I think, you know, amidst that unprecedented inflationary environment on certain commodities, we were able to deliver exactly 20% operating, adjusted operating margins here in the quarter, which I think is a testament to to the hard work of our team around the world, each of whom is facing a different set of challenges. But no doubt about it, if you're a general manager in Amphenol, we don't tie their hands and say, you're only in charge of this or you're only in charge of that. They have every lever to pull in order to ultimately meet their obligations to reach their performance objectives. And so that means when all of your input prices have gone up, You're going to figure a way out of that. And sometimes when they go up very quickly, that makes it hard. And no doubt about it, we've seen relatively quick increases in a lot of different input costs. And again, not just commodities, but also the cost of freight and other logistics. And that sometimes there can be a little bit of a delay if that comes in so fast. But by and large, you know, our interactions with customers, the sort of contracts or programs that we have with them, generally they're not indexed. And as you know, we generally don't hedge either. And the reason we don't hedge is because then you're kind of detached from the reality of the moment when you want to have discussions with customers. And those discussions with customers for sure are ongoing because when you have such significant increases in the input costs, We're going to do everything in our power to offset those costs with our own management, redesigning the products, changing suppliers, pitting our suppliers against each other, reducing overhead, reducing every aspect. But sometimes there is only the option to pass that price, that cost increase onto your customer. We do that very thoughtfully. Every market is a little bit different how that works. But our customers know that we don't do that lightly. We don't take that initiative lightly, but ultimately you sometimes do have to pass the price on. And I can tell you our sales teams around the world, together with our operating teams, they're working hand-in-hand to make sure that we've done everything possible before we go into a customer and ask for them to share in the pain of these increases. But when you have such severe and sudden increases, ultimately then pricing does become very important. And I think our team is working that. It's hard work. There's no doubt about it. But I think our team is making really good progress in that front. And, again, it's very market dependent. It's very region dependent. But there's no one I would want more than a general manager who knows her business front to back to be the one who sits in front of a customer and decides is this now the right moment to ask that customer to share their in the challenges that we are facing.

Thank you. Now our next question is from Mark Delaney from Goldman Sachs. Sir, your line is now open.

Yes, good afternoon and thanks for taking the question. I was hoping to talk about MTS and perhaps you can share some of your early impressions of the company and what opportunities you may be seeing to not only sell the MTS sensors on a standalone basis, but combine it into full solutions with some of your other product lines. On a related note with MTS, Craig, I think you said the margins are still below corporate average. Maybe talk about when you see that getting back in line with the annual average. Thank you.

Well, thanks so much, Mark. I'll let Craig talk about the margins in a second, but I can just tell you our early impressions of the company are very, very positive. I mean, we said, and I think I mentioned last quarter, that MTS, the sensors business, is run by a team that we know well. And in particular, the person leading that organization is just a phenomenal, phenomenal leader who has an extraordinary organization underneath him. And the way that they have embraced being part of Amphenol is just truly rewarding for all of us in the company. We've known them for a long time. This was not a new acquaintance that we made through this process, but rather we've known them all the way back to when they were part of a family-owned company that ultimately MTS acquired. Our customers have received this extremely well. We have become more important to customers across the markets, whether that be industrial, military, commercial air, and automotive. I continue to be just amazed by the uniqueness and the depth of the technology that that we acquired in this business, force, vibration, sensors, pressure sensors, position, just a variety of products that really operate at the harshest of environments and with the highest of performance. In terms of being able to sell more complete solutions, I can tell you that there's already early activities, real collaborative activities ongoing. across the company with people within our interconnect businesses, working together, getting to know the MTS sensors organization, creating the sort of fiber of the relationships that ultimately can lead long-term to really collaborative success in the various markets that we serve. So all early returns for MTS, including their absolute performance, which is coming out a little bit better than we had thought in the quarter, all early returns are favorable. And I'll let Craig maybe comment specifically on the margin.

Yeah, Mark, no, thanks for the question on the margin. As you mentioned, I have mentioned in the past that they're mid-teens profitability when we acquired them. As Adam mentioned, we're just really happy with the progress they've made in kind of all aspects, honestly, of the business. From a profitability perspective, we always say that profit ultimately is is really just the byproduct of the value that you bring to your customers, and there's no doubt that this company brings a lot of value to all their customers, and we believe that there's plenty of opportunity throughout the business to be able to increase that profitability in the business. I would tell you that even in the second quarter, I'd say we have seen green shoots, I guess, of progress in that area. The time it will take ultimately to get them to the company average or or beyond is certainly, you know, time will be, you know, will be told in the future here on that. And we're not necessarily going to try to estimate that at this time because every acquisition is different and, you know, and the tasks that need to happen, you know, take, you know, different differentiating amount of time. But I would tell you that the, you know, second quarter here, you know, the first quarter that we've had them, you know, and, you know, as part of Amphenol, we've certainly seen, you know, some progress in that area and certainly areas of opportunity in the future, you And we're, I would say that we're even more optimistic and, you know, we were optimistic in early on that they will be able to ultimately get to that target that we have for them to be at the company average and, you know, and hopefully beyond in the future.

Thank you. Now our next question is from William Stein from Truist.

Hi, this is Elliot Smith on for Will. I wanted to ask about the mobile devices in market. I know it can be quite volatile quarter to quarter, but can you speak to what you are seeing now and potentially over the next several quarters in terms of the in-market content trajectory and potential growth?

Well, thanks very much, Elliot. I think you correctly termed that it is a very volatile market on a quarter to quarter basis. And as I mentioned in my prepared remarks, Our year-over-year performance in the market was significantly impacted by the strength that we had a year ago in the second quarter, which was really a catch-up from the significant COVID impacts that we saw in the first quarter of 2020. This is not a market I like to get out ahead of my skis on in terms of, you know, several quarters out and giving a prognosis. But what I can say is that our position in the mobile market is an extremely strong position. We continue to have a unique ability to react quickly to customers when they need us the most. And that includes sometimes when our competitors aren't able to support the customers, in particular when they're launching new products. Our guidance for the third quarter being up about 25% or so on a quarter-to-quarter basis is a strong outlook and I think not inconsistent if you look over a long time period with a kind of second quarter to third quarter outlook. trajectory. What will be in the quarters thereafter, again, I'm not going to get ahead of my skis in giving a prognosis on mobile devices over the long term. But the content opportunity, as you say, there's no reason to think that the content opportunity with these devices as they become more complicated, as they have different feature sets, as they support different types of communication standards in them, Those have usually been, in the past, strong drivers of content in mobile devices, and we have no reason to believe that that would change in the future.

Thank you. Now our next question is from Joel Giorgiano from Cohen. Joel, your line is now open.

Can you guys hear me? Yes. Hi, Joel. Hey. Good afternoon, guys. Just curious on IT Datacom. I mean, you guys came in so much stronger than than your initial view last quarter. Just curious, how would you categorize that from market dynamics, just the overall spending in the industry was significantly better? Were you guys picking up specific share anywhere? How would you categorize that outperformance relative to your initial view?

I guess it's a combination of sort of all of the above. You know, our team continues to do a phenomenal job in IT Datacom, in particular, a phenomenal job enabling web service providers whose spending and, you know, you can call them web service providers like I do. You can call them cloud providers, whatever. And the fact is, these service providers who are making meaningful and very meaningful investments in high-speed data processing in order to enable the explosion of traffic that all of them are seeing And our team has just done an amazing job of reacting to that increase in demand. And we did that over the course of the last year when it was even more critical. And we talked about this several times last year that our growth in IT Datacom over the course of 2020, I think, grew in close to 50%, for example, sequentially in the second quarter and reacting to the literal explosion of data traffic resulting from all the video meetings and remote work and remote school and all of that, we made a lot of good friends in that market by stepping up and really enabling our customers when they needed us the most. At the same time, if anything, we've seen an acceleration in new product development as our customers look to really push the limits of the bandwidth of their systems. And that involves new interconnect solutions that ultimately can enable that high speed. It involves new power solutions that can help the efficiency. I mean, there's so many dynamics that are going on across IT Datacom, all of which converge on the need for higher performance interconnect products. And whether that's web service providers and video over the internet, whether that's even like cryptocurrency and the processor power that's being used in support of the crypto market. I mean, these are all things that are just driving extraordinary demand for high-speed interconnect and high-efficiency power interconnect. And I can just tell you our team working in both of those areas has done a bang-up job to react to this, to scale our capacity quickly in the face of really unexpected levels of demand. And this quarter was another example of that. We certainly did not expect a 20% sequential growth, I think we came into the quarter thinking kind of mid-single digits. And, you know, that requires you to perform on that. It requires you to have enough people and machines and automation and tooling and factory floor space and ready source of materials. And I think our team just did a great job of reacting in the moment here.

Thank you. Now our next question is from Chris Snyder of UBS. Your line is now open.

Thank you. So, industrial and auto have seen a pretty massive inflection in market outgrowth over the last year or so. It sounds like there's not been much or any supply chain tailwinds here. So, is this, you know, outgrowth inflection, you know, is it driven by share gains or just an acceleration in the electronics revolution, so to speak? And if so, would we expect a structurally higher level of end market outgrowth relative to what we were seeing in the years leading up to COVID?

Yeah, I mean, look, I don't know how it's going to look in the future, but for sure, over the course of the last year, and we shouldn't forget Q2 of last year was almost a nuclear winter for the automotive industry. But over the last year, our team working in industrial, working in automotive, has clearly done an outstanding job of supporting customers when they needed us the most. And in certain cases, doing that because some competitors could not rise to the occasion. So I think that there has been, for us, some outperformance relative to the industry. I think as well... We clearly have seen an acceleration of the adoption of electronics across the automotive industry, across the many, many segments of the industrial market, this kind of electronification of everything, if you will. And it's not just EVs, and it's not just batteries for those EVs. I mean, we're really seeing so many examples of traditionally mechanical, fuel-based, hydraulic, converting to an electronic control, electronic functionality. And each time that happens, that's a new inflection point whereby if we can step in with the right types of interconnect products, the right types of sensors, leading edge products, if we can do that in a timely fashion, we can have it available for the customers when they need it, when they're seeing also an increase in their end demand, that positions us very well. And so I think I think all of the factors that you mentioned have all come together in a very positive fashion to ultimately lead to us having the growth that we realized this quarter, as well as the positive outlook that we see in the third quarter, and I would hope also beyond. What does that mean for the long term? Typically, the adoption of electronics is a one-way ratchet. It's not that people adopt a new electronic system and then one day go back to a mechanical system. That's not really how the evolution of electronics operates. And so I think long term it gives me some encouragement to see that there has been an acceleration and that kind of step function adoption of electronics you would hope would continue to create opportunities for the long term.

Thank you. Now, our next question is from David Kelly from Jefferies. Sir, line is now open.

Hi. Good afternoon, Adam and Craig. I always ask the automotive question, but the organic growth really stands out. So, you referenced electrification as a driver. We're seeing EV auto sales really start to inflect and actually reach some scale now. Is there any way to quantify the contribution for you and then even taking a step back just more broadly in autos? Just curious if you're seeing any customers start to build some inventories. You referenced the low dealer inventory level. So with some planning for the medium term, just curious if you're seeing that in the market.

Yeah, I mean, look, I think the organic growth was pretty special, David, so I don't blame you for asking another automotive question. Again, I always say you could teach the master class here on automotive. But, yeah, 117% organic growth, albeit to a quarter that was a pretty rough quarter a year ago, but still it was really a very, very special performance, and our automotive team is very proud and justifiably proud of what they were able to achieve. Relative to the contribution of EV, I can tell you that, if you can imagine it, the growth of EV was substantially higher than the growth that I just mentioned of that 117%. And without giving a specific amount of the total of our EV business, it's bigger than it used to be. And it's meaningful. It's a meaningful business. It clearly is an area of success for the company. And it's one that we look forward to realizing the benefits from for many years to come. Relative to inventory, I would actually say that what we've seen more of in the automotive market than stockpiling of inventory is we've seen customers not wanting to take our product because they all of a sudden can't get the appropriate semiconductor to finish the vehicle. And so we've seen more what I would call push-outs of deliveries as opposed to customers just throwing a bunch of stuff in their warehouses. Now, you know, could there be some buildup of component inventory in certain places? There could be, and we may not see it perfectly. But what we have seen for sure, and that went through the course of the quarter, is customers saying, well, you know, we're going to have to shut down our factory for a couple of weeks, and thus we don't need your stuff right now. And we've had to react quickly to that, and that's actually – meant that for us, we ended up with maybe a little bit more of our own finished goods, a little bit more of our own work in progress than we would have liked in the course of the quarter. And still with that, we were able to achieve that 117% organic growth. So I don't know that there's a big buildup. There could be pockets of it. But the more obvious thing that we saw over the quarter were these pushouts from customers who couldn't get matching components to make the car.

Thank you. Next question is from Joseph Spack from RBC Capital Markets. Sir, your line is now open.

Thank you. I too am going to follow up on our motive. Sorry. So it doesn't sound like you think inventory is a big issue. It did sound like you maybe think you took a little bit of share. And obviously EV is helping. And I know even when we compare to global production, your geographic exposure probably helped you a little bit you know, larger recovery in North America and Europe. I guess what I'm, the other factor I'm wondering about is, is there a material content per vehicle difference between, let's call it high value vehicles, like a full-size truck and a lower value vehicle? Because, you know, that can obviously also help. And as we start thinking about next year, you know, maybe some of the volume recovery is more in those lower volume vehicles.

Yeah, well, Joe, again, no problem to get another auto question. I should say that you and David could probably co-teach the master class together. But look, one maybe thing I would mention, you alluded to regional in automotive, and actually we saw really strong performance across all of the regions where we operate. And I would tell you, actually, that Our business now regionally is more balanced than ever before. It's roughly equal size between Asia and Europe and just a tick lower in North America. And that's quite a transformation if you think about it over a decade when at one point our business was kind of two-thirds in Europe and maybe a fifth in North America and the rest in Asia. So we've made really great progress. And I would also say that in Asia, we've made great progress also in the electrification and EVs, where our team's just done a fabulous, fabulous job. You know, relative to your question, do luxury cars have more content, for example, than a lower-end car? I think the answer to that is absolutely yes. That's always been the case. I think that will always be the case. But one of the differences that we have seen, and that's not just a difference of this year or last year, but maybe over the last kind of half a decade or so, is we have seen that more and more automakers are equipping their lower-end cars with a greater degree of electronic functionality than they did in the past. The traditional approach for automakers was to just stuff their high-end cars with every possible feature and to test out electronics in those cars, to put the newest thing there first, and then maybe it would trickle down to the low-end, more fleet-type cars, or maybe it wouldn't. But I tell you, you get any car of any size now, and it's going to have features in it that you never would have imagined before. Even in the smallest kind of Fiat 500 or something like that, you're going to see just a real array of electronics functionalities. So So for sure, you know, a $100,000 car is always going to have more content than a $30,000 car. But I don't know that the intensity of electronics in that $100,000 is so many multiples more than it is on that maybe $30,000 car. And, you know, in the past, that would have been quite a different intensity of the electronic value in the car. So, you know, what does that mean for long term? You know, are companies selling more high value trucks and luxury cars today? And maybe they'll sell more low-value cars in the future. That I don't have a good read on, but I think there's electronics opportunities across all these types of cars.

Thank you. Now our next question is from Samit Chatterjee from JPMorgan. Sir, your line is now open.

Hi. Thank you. Good afternoon, Adam, Craig. I guess I have a more quick one just trying to get a better handle on the difference between orders and your revenue guide for the next quarter? I mean, when I look at the difference now, it's about $400 million last quarter. I think when you guided, the difference was about $300 million. So just kind of wondering, is that more of a supply concern in securing supply? Or are you getting orders with longer lead times from your customers? Just kind of trying to get a better handle of what you're trying to bake in there and if it's conservative at all. And then I think in conjunction with that, I think one thing that I wanted to understand is broadly across your businesses, if you're just kind of feeling that the supply constraints are getting tougher or are they getting easier to navigate at this point? Thank you.

Thanks, Samik. Well, first, I guess maybe we have a little bit different numbers in automotive than what you mentioned. I think our automotive business is – At 20% of sales, it works out to more than half a billion dollars in the quarter. And, you know, with the guidance that I've given, it wouldn't be so dissimilar in the third quarter. So I'm not sure the numbers that you referred to. Relative supply constraints, are they getting better, worse, staying the same? I don't know. I guess it feels about the same. I wouldn't say that it feels that much worse. And there are a few things that maybe do feel a little bit worse, like Like freight, the cost of freight is not that great. So, you know, the price of a container from Asia to the U.S., and, you know, it's not that that's a huge impact on us, but once in a while you do that or your customer does that. And, you know, those have gotten, you know, quite a bit more expensive over the recent times. even just the availability of that. There's also been a few sort of funky things that have happened, like there were some floods in Germany, which were, you know, really tragic. And we feel for the people of Germany that suffered through these just sudden catastrophic floods. And, you know, there's a, you know, Germany has a pretty decent sized electronic supply chain of vendors and various things like that. And we've, you know, seen a disruption or two there. You know, I talked about the COVID situation the COVID-related restrictions that are happening a little bit in Southeast Asia. So I don't know that I would say it's getting easier, that's for sure.

Thank you. Next question is from Liu Qian from Baird. Sir, your line is now open.

Good afternoon. Thanks for taking the question. I had a big picture question this afternoon and it's about the competitive landscape in your auto business. As we move into what's increasingly an EV world you've made, if we look over the last 10, 20 years, great inroads growing in auto and what has been a combustion world, of course, where there are a lot of incumbent players, and a world where there are no true incumbents with respect to EV powertrains, how does that change the competitive landscape for Amphenol, both in terms of your view of the opportunity set and ultimately how aggressively you pursue that business?

Well, I mean, the last part of your question I'll answer first, which is I think we've pursued this business very aggressively over a long time period. We shouldn't forget that the whole concept of a high voltage system in a car is not new. In fact, our teams have been working on development of specific automotive capable high voltage interconnect systems for, I don't know, the whole time I've been CEO and I've been CEO for nearly 13 years now. So I think that's not a new development. I don't think EVs are a new thing. Hybrids are not a new thing. But they're growing, and I think they're reaching – I don't know if you want to call it an inflection point. Someone mentioned that term earlier. But for sure, the adoption of these vehicles is accelerating on a global basis, even if they still represent a relatively modest proportion of the overall vehicle market. I mean, the vast majority of cars sold today are still combustion engine cars. But to your point, they're – We have, I think, in EVs a proposition maybe that we didn't have in traditional automotive, which is that we've been making high-voltage connectors for a very, very long time. I mean, if you think about the legacy of Amphenol over the nearly nine decades that our company has been in business, we were early on a leader in the innovation and development of power interconnect that's used in military, aerospace, industrial applications. And that came with unique proprietary technologies, in particular around the efficient and safe transmission of high voltage power across an interconnect system that requires a very unique contact technology that we have developed over many, many years. And so early on, and when I say early on, this is a dozen years ago or more when we were really working early on in these hybrid electric vehicles, we were already repackaging our high-voltage interconnect technologies from the military and industrial into more of an automotive-type interconnect interface and otherwise. And so that gave us a very strong position. So it's not new to us. to be making high voltage products. And to the extent that there are more traditional incumbents who are pure automotive companies who may not have had that rich legacy of high power, high voltage interconnect, we could on occasion have an advantage. Now granted, they have an advantage with the breadth that they work in that market. So it's not that this is a kind of a clear path to world domination in the EV market. I mean, we have a lot of competition and we respect them a great deal. But if anything, I think our outperformance in automotive over many years, and in particular over the recent years, there has been a not insignificant component of that, which has been us realizing the benefits of our long-term position in high-voltage products.

Excuse me, participants. Thank you for holding, and sorry about the technical issue. We now have Mr. Clay Galampo back on the line.

Hello, operator. Do we have any more questions, please?

Thank you for that, Mr. Lampo. As of now, we don't have any questions on queue. I'll turn it back over to Anthony for any closing remarks.

Thank you very much, and we apologize, everybody. There appears to have been a communications issue with the provider here, and we apologize if anybody was not able to have their questions answered. Of course, you can feel free to reach out to our investor relations team, to Craig and Sherry, But let me just take this moment to thank all of you again for your time here in this summer. And we're very proud again of the company's results over the course of this second quarter. And we look forward to finishing the second half also in the third quarter strongly as we go into 2021. And I want to take this opportunity also to wish each of you that you have a little bit of rest. as the summer continues and come back recharged when we talk to each other 90 days from now. Thank you all so much, and we'll talk to you soon. Thank you.

Thank you, and ladies and gentlemen, thank you for attending today's conference call, and have a nice day.