Amphenol Corporation

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

Thank you very much. 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 third quarter 2021 conference call. Our third 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 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, all data discussed during this call will be on a continuing operations basis unless otherwise noted. The company closed the third quarter with record sales of $2,818,000,000 and GAAP and adjusted diluted EPS of 67 cents and 65 cents respectively. Sales were up 21% in U.S. dollars, 20% in local currencies, and 13% organically compared to the third quarter of 2020. Sequentially, sales were up 6% in U.S. dollars in local currencies and organically. Orders for the quarter were $3 billion and $16 million, which was up 33% compared to the third quarter of 2020 and down 3% sequentially. resulting in a very strong book-to-bill ratio of 1.07 to 1. Breaking down sales into our two segments, the interconnect segment, which comprised 96% of sales, was up 21% in U.S. dollars and 20% in local currencies compared to the third quarter of last year. Our cable segment, which comprised 4% of our sales, was up 18% in U.S. dollars and 70% in local currencies compared to the third quarter of last year. Adam will comment further on trends by market in a few minutes. Operating income was $571 million in the third quarter. Operating margin was 20.3%, which decreased by 20 basis points compared to the third quarter of 2020, but increased by 30 basis points sequentially when compared to the second quarter of 2021 adjusted operating margin. The year-over-year decline in operating margin was primarily driven by the impact of the more challenging commodity and supply chain environment in 2021, together with the slight margin dilution of recent acquisitions, including MTS, which are currently operating at a lower operating margin than the company average. The sequential increase in operating margin compared to the second quarter adjusted operating margin was driven by normal conversion on the increased sales levels. From a segment standpoint, in the interconnect segment, margins were 22.4% in the third quarter of 2021, which was equal to the third quarter of 2020 and increased from 22% in the second quarter of 2021. In the cable segment, margins were 3.8%, which decreased from 10.7% in the third quarter of 2020 and 6.1% in the second quarter of 2021. Our margins in the cable segment continue to be particularly impacted by the ongoing and sudden increase in commodity and logistics costs, which have not yet been offset by pricing actions. Given the dynamic economic environment, we are very proud of the company's performance. Our team's ability to effectively manage amidst many 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 third quarter was 22.2 percent, which compared to 22.1 percent in the third quarter of 2020. On an adjusted basis, the effective tax rate was 24.5 percent in the third quarter of both 2021 and 2020. GAAP diluted EPS was 67 cents, an increase of 20 percent compared to 56 cents in the prior year period. An adjusted diluted EPS was a record 65 cents, an increase of 18 percent compared to 55 cents in the third quarter of 2020. Operating cash flow in the third quarter was $328 million, or 81 percent of adjusted net income. Net of capital spending or free cash flow was $238 million, or 59 percent of adjusted net income. Cash flow in the quarter was a bit lower than we would typically expect, primarily due to the higher than typical increase in inventory levels driven by the continued challenging supply chain environment. From a working capital standpoint, inventory days, day sales outstanding, and payable days were 91, 70, and 61 days, respectively. While day sales and payable days were both within our normal range, inventory days at the quarter end were elevated for the reason just mentioned, as well as the impact of recent acquisitions, which have inventory days that are currently significantly above the company average. As mentioned in today's earnings release, the company's board of directors has approved a 38 percent increase in the company's quarterly dividend to 20 cents from 14.5 cents per share, effective for payments beginning in January of 2022. During the quarter, the company repurchased 2.3 million shares of common stock for approximately $171 million at an average price of approximately $73. And at the end of the quarter, total debt was $5.2 billion and net debt was $3.9 billion. Total liquidity at the end of the quarter was $2.9 billion, which included cash and short-term investments on hand of $1.3 billion, plus availability under our existing credit facilities. Third quarter 2021 GAAP EBITDA was $686 million, and our net leverage ratio was 1.6 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 Q4 guidance. In addition, the company will incur certain additional cash tax and other acquisition-related costs upon the divestiture of the test and simulation business, which is not included in income from continuing operations. I will now turn the call over to Adam, who will provide some commentary on parent market trends.

Well, thank you very much, Craig, and I'd like to extend my welcome to everybody here on the phone today. I hope that all of you had an enjoyable and healthy summer and are staying dry here if you're in the Northeast today. As Craig mentioned, I'm going to highlight some of our achievements here in the third quarter. I will discuss the trends and our progress across our serve markets. And then finally, I'll make some comments on our outlook for the fourth quarter and for the full year of 2021. And of course, we'll have time at the end for questions. As Craig went over, our results in the third quarter were substantially better than we had expected coming into the quarter. We exceeded the high end of our guidance in sales as well as an adjusted diluted earnings per share. Our sales grew a very strong 21% in U.S. dollars and 20% in local currencies, reaching a new record $2,818,000,000. On an organic basis, our sales increased by 13%. with broad-based growth across most of our served markets, as well as contributions from the company's acquisition program. Orders in the quarter were robust again, more than $3 billion, $3 billion and $16 million, and this represented another strong book-to-bill of 1.07 to 1. Now, despite the many operational challenges that we've continued to face throughout the quarter, including continued cost increases related to commodities, supply chain, and other logistics pressures, We were very pleased to deliver robust operating margins of 20.3% in the quarter, and as Craig detailed, that was a 30 basis point sequential improvement. Our EPS, adjusted diluted EPS, grew strongly from prior year, increasing by 18% to a new record 65 cents, and that's just an excellent reflection, once again, of our organization's continued strong execution. The company generated operating and free cash flow of $328 million, and $238 million in the third quarter. And we're very pleased that the Board of Directors just approved yesterday an increase in our dividend of 38% effective in January of next year. Coming out of this quarter, I'm just extremely proud of our team around the world. These results once again reflect the discipline as well as the agility of our entrepreneurial organization as we continue to perform well amidst a very dynamic and challenging environment. Now, turning to our trends and progress across our serve markets, we're very pleased that the company's broad and balanced end market diversification continues to create value for Amphenol. Very importantly, our diversification mitigates the impact of the volatility of individual end markets, while also at the same time exposing us to leading technologies wherever they may arise across the electronics industry. And these are both important benefits, especially amidst such a dynamic market environment. Turning first to the military market, this market represented 10% of our sales in the third quarter. Sales grew by 7% from prior year and declined by 4% organically, which was a little bit lower than our expectation heading into the quarter. On an organic basis, growth in ordnance, airframe, and space-related products was more than offset by moderations of our sales of products that were used in vehicle, naval, and communications applications. Sequentially, sales declined by about 3%. Looking into the fourth quarter, we now expect a slight sequential sales increase, and for the full year of 2021, this would imply a mid-teens increase in sales from last year's levels. We continue to be excited by the strength of Amphenol's position in the military market. As defense customers around the world continue to adopt next-generation technologies at an increasing pace, Our industry-leading breadth of high technology interconnect and sensor products positions the company strongly across essentially all major defense programs, and this gives us confidence for our long-term performance. The commercial aerospace market represented 2% of our sales in the quarter. Sales were flat compared to prior year and declined by about 19% organically, as the benefit of our recent acquisitions was offset by continued declines in demand from aircraft manufacturers. As expected coming into the quarter, our sales declined by about 3% sequentially. Looking into the fourth quarter, we're happy to now expect a mid-teens increase in sales compared to these levels. And for the full year 2021, this would imply a roughly 10% sales decline compared to last year, a clear reflection of the pandemic-related headwinds that have impacted the travel industry and thus the commercial aircraft market during the COVID-19 pandemic. Regardless of this challenging environment so far, our team working in the commercial aerospace market remains committed to leveraging the company's strong interconnect and sensor technology position across a wide array of airplane platforms and next generation systems integrated into those aircraft. As personal and business travel continues to recover from the pandemic impacted lows, we do look forward to benefiting as jet manufacturers expand their production and in turn, expand their procurement of our components. The industrial market represented 26% of our sales in the quarter. Sales increased by a very strong 44% in U.S. dollars and 24% organically. This excellent growth was broad-based across most segments of the worldwide industrial market, including in particular the battery and heavy electric vehicle, factory automation, oil and gas, rail mass transit, heavy equipment, alternative energy, and instrumentation segments, together with the contributions from our recent acquisitions. On a sequential basis, sales increased by 4% from the second quarter, which was much better than our expectations coming into the quarter. Looking into the fourth quarter, we expect sales to moderate from these levels, but for the full year 2021, we expect sales to increase more than 40% from prior year, a very strong performance. I remain extremely proud of our global team working in the industrial market. Our long-term strategy to expand our high-technology interconnect, antenna, and sensor offering, both organically and through complementary acquisitions. has positioned the company to capitalize on the many revolutions that are occurring across the industrial electronics market. We look forward to realizing the benefits of this strategy for many years to come. The automotive market represented 19% of our sales in the quarter, and despite the widely reported challenges across the automotive market, our sales actually came in higher than expectations in the quarter. growing a strong 31% in U.S. dollars and 26% organically. This strong performance reflected our automotive team's excellent execution in the face of numerous supply chain challenges, as well as robust growth of our products used in electric and hybrid electric vehicles. This was another clear confirmation of our global team's long-term efforts at designing in high voltage and other interconnect and sensor products into these next generation platforms. On a sequential basis, sales were flat compared to the second quarter. The widely reported supply chain challenges in the auto industry continue to impact demand from vehicle manufacturers around the world. Accordingly, we do expect in the fourth quarter a high single-digit sequential moderation in sales. For the full year 2021, this implies sales will increase by more than 40% compared to last year, driven by our expanded position in next generation electronics integrated into cars, including in particular those electric and hybrid drive trains. I remain extremely proud of our team working in the automotive market, who has continued to demonstrate a high degree of agility and resiliency in both driving a significant recovery from last year's reduced sales levels, while also expertly navigating the myriad of supply chain challenges that the entire automotive industry is facing. We look forward to benefiting from their efforts long into the future. The mobile devices market represented 13% of our sales in the quarter, and our sales in this market declined from prior year by 5%, as modest growth in sales of products incorporated into smartphones and laptops was more than offset by declines in wearables and tablets. Sequentially, sales increased by a stronger than expected 36%. driven by higher sales across virtually all product categories that we serve. Looking into the fourth quarter, we expect a continued mid to high single digit increase in sales from these third quarter levels. And for the full year, we anticipate sales to grow modestly from 2020, which is in fact an impressive achievement given last year's robust demand. I remain very proud of our team working in the mobile devices market. Their unique agility continues to enable the company to react quickly to changing demand in this most volatile of markets. With our leading array of antennas, interconnect products, and mechanisms enabling a broad range of next generation mobile devices, we're positioned well for the long term. Turning to the mobile networks market, this market represented 5% of our sales in the quarter, and sales increased by 11% from prior year and 7% organically. And this sales growth was really driven by our sales to mobile service providers, which was offset by a small moderation of sales to OEMs. On a sequential basis, our sales increased just slightly, which was largely in line with our expectations coming into the quarter. For the fourth quarter, we expect another slight sequential increase in sales as mobile networks customers continue to ramp up their investments in 5G and other next-generation networks. And for 2021, this would imply that our sales would grow by approximately 10%. Our team continues to work aggressively in the mobile networks market to realize the benefits of our efforts to expand our position in next-generation 5G equipment and networks around the world. As our customers ramp up their investments into these advanced systems, we look forward to benefiting from the increased potential that comes from our unique position with both equipment manufacturers and mobile service providers. The information technology and data comm market represented 22% of our sales in the quarter. Sales in this market rose from prior year by a very strong 28% in U.S. dollars and 26% organically. This was driven by increased demand from OEMs and in particular increased demand from web service providers. Sequentially, our sales grew by a better than expected 10% from second quarter levels. As we look into the fourth quarter, we do expect a slight decline from these elevated levels. And for the full year of 2021, we expect sales to increase in the low 20% range. We remain encouraged by the company's outstanding position in the global IT Datacom market. Our OEM and service provider customers 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 remains highly focused on enabling this continuing revolution in IT datacom with industry-leading high-speed power and fiber optic interconnect products. We look forward to realizing the benefits of that leading position for many years to come. And finally, the broadband market represented 3% of our sales in the quarter. Sales declined by 5% from prior year and 10% organically as cable operator procurement moderated. On a sequential basis, sales decreased by a slightly better than expected 3%. For the fourth quarter, we now expect a further moderation in sales from these levels. And for the full year 2021, we anticipate that sales will grow in the mid-single digits. Despite this more challenging environment in the broadband market, we continue to look forward to supporting our service provider 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 to businesses. Now, turning to our outlook, there's no question that the current market environment remains highly uncertain, with significant supply chain and inflationary challenges as well as the ongoing pandemic. Given this and assuming constant exchange rates, for the fourth quarter, we expect sales in the range of $2,690,000,000 to $2,750,000,000 and adjusted diluted EPS in the range of $0.61 to $0.63. This would represent year-over-year sales growth of 11% to 13% and adjusted diluted EPS growth of 7% to 11%. Our fourth quarter guidance represents an expectation for full-year sales of $10,540,000,000 to $10,600,000,000 and full-year adjusted diluted EPS of $2.39 to $2.41. This outlook represents full-year sales and adjusted EPS growth of 23% and 28% to 29%, respectively. I remain confident in the ability of our outstanding management team to adapt to the continued challenges in the marketplace, and to capitalize on the many future opportunities to grow our market position and expand our profitability. In addition, our entire 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. Most importantly, I'd like to take this opportunity to once again thank the entire Amphenol team for their truly outstanding efforts here in the third quarter. And with that, operator, we'd be very happy to take any questions.