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.

Thank you. The question and answer period will now begin. And as a reminder, we will take one question per caller. Our first question is from Amit Daryani with Evercore. I'm sure you may go ahead.

Thanks a lot and good afternoon. Adam, there's been a fair amount of talk, a lot of talk, maybe around just supply chain challenges, inventory builds, and everything else. I'd love to get your perspective. What are you seeing from that basis across your customer base? Are you starting to see your orders or demands start to moderate a bit or customers being less eager to expedite orders? Or if anything, are you seeing variation between the channel and OEM demand trends? Just anything you see from that basis would be helpful.

Yeah, thanks very much, Amit. I mean, no doubt about it, a lot of chatter, a lot of news. You can't pick up the paper without reading about supply chains. I think for the first 22 years of my so far 23-year career, I don't recall that the front page was plastered with things about the supply chain, and now it seems to be virtually every day that you read something about it. And no question, throughout the quarter, there remained just a number of real significant challenges that our team fought through and really fought through. I think when you see the results, in particular, growing sequentially by 6% in the quarter, which was above our expectations, amidst what I would say were continued serious supply chain impediments, some of which even worsened throughout the quarter, whether that's availability of logistics and freight, the cost of raw materials, the availability of raw materials, even talk about things like labor shortages, which there are pockets of that around the world as well. And so no question that those are all dynamics that our team faced. And across that entrepreneurial landfill organization, our team just made it happen. Now, in terms of inventory builds and orders moderating, I mean, we still had strong orders in the quarter. There's no doubt about it. And Even though our book-to-bill was a bit lower, 107, compared to the second quarter, most of the reason why our book-to-bill was lower was because our sales grew into the level of the bookings. Orders were down by maybe 3% from the second quarter, but sales were up by 6%, thus the slightly lower but still robust book-to-bill. In terms of inventory, you saw for sure that our inventory was up a little bit, and I think many have seen a little bit elevated inventory, which is which is not surprising given both our growth as a company, very significant growth, but also the very significant supply chain impediments that are out there. To the extent that our customers have more inventory, we don't always have perfect visibility into that. I will say what we do have visibility to, which is in particular in distribution, we haven't seen really abnormal levels of inventory amongst our distributor for our products. In fact, I think what we've seen is continued strong sell-through of the products into customers around the world. And, you know, knowing that our distribution business is predominantly industrial and aerospace millero business, you know, we've seen continued really strong demand in particular across the industrial market. You know, in terms of the customers and their willingness to pull product, You know, we talked about last quarter in the automotive market, for example, that we probably could have shipped more if customers wanted it. And I think we continue to see some instances, anecdotes, where customers, because they don't have all the components that they need to make their finished product, be it a car or a truck or otherwise, they in the end don't take our product, as opposed to necessarily building the inventory of our product. They just tell us not to ship it. So a lot going on, but I think at the end of the day, amidst all these challenges, the performance of the company is shown very brightly.

And our next question is from Steven Fox with Fox Advisors. You may go ahead.

Hi, good afternoon. Adam, I was wondering if you could just maybe touch on IT Datacom a little bit more. It's been a very good year for that market for you guys, and After what seems like better expected quarters each quarter, you seem to sort of look for it to slow down. So I'm just curious, like, where you're seeing maybe concerns, where you're seeing more opportunities, whether markets or share trends or new products, et cetera. Thanks.

Well, thanks so much, Steve. I mean, no doubt about it, it's been a very, very strong year, and I would almost say a very strong couple of years for our team working in the IT Datacom markets. I mean, not forgetting that last year we grew in that market by 15%, and this year continuing to exceed our expectations with sales in this quarter in particular growing by 28% and 10% sequentially. So no question about it. And I think when I look into the fourth quarter, we're coming from very elevated levels of demand, and we're not guiding to like a catastrophic growth. We're talking about a modest sequential decline in the fourth quarter, which I think given the overall environment, given the overall demand from our customers, and in particular customers in web service where we've seen just really strong growth in whether you call them cloud or web service providers, and we've seen outstanding growth in that business over the last couple of years. And, you know, once in a while, you know, you could have a moderation. There could even be a little bit of seasonality that could come into that. So I don't think that this fourth quarter guide is at all a turnaround in that business. It would still, by the way, in the fourth quarter, reflect very, very strong year-over-year growth in that IT Datacom market. And in the end, I think, would be a very, very strong year for that market and for our teamwork in that market.

And our next question is from Wamsi Mohan with Bank of America. You may go ahead.

Yes, thank you. Adam, you guys have done a tremendous job maintaining profitability through many difficult cycles. As you look at this cycle here and through 2021, how much would you say your ability to raise prices has offset some of these inflationary pressures? And as you look look into 2022. It sounded from some of the comments, especially in cable, that there was room to raise pricing some more to catch up. If you could just characterize sort of 2021, 2022 from ability to sort of recapture some of that potential inflationary elements and how you think about it into 2022, that'd be great. Thank you.

Hey, Wamsi, this is Craig. I think that if we think about our profitability, we're certainly very proud of our achievement in the quarter and certainly this year, given the significant challenging cost environment. And certainly that cost environment has been increasingly, I'd say, gotten worse over the course of the year. And I think that we have done a good job of of neutralizing that worsening environment given the actions we've been able to take during the year. And one of those actions, you know, clearly is being able to pass on some of that cost to our, you know, to our customers to the degree that we can't offset it in other ways. And, you know, so certainly the management team, I think, has done a really good job of that. You know, different markets are more challenging than other markets. And certainly things, you know, things like distribution is easier to pass on, pricing and Other markets are a little bit more difficult, or channels are difficult to press on pricing. But I think overall, we've done a pretty good job. And most of the markets that are passing on some of the pricing, I wouldn't make the exception. And you comment on cable, and certainly that market is a different type of a market from a competitive environment, as well as the products are a little bit different. They're certainly more cost-sensitive and certainly more impacted by logistics costs, which we've seen a significant increase of in and there's been quite a quick increase of those types of costs that actually have had an impact that we haven't necessarily been able to offset at this point, and the team's doing certainly a good job of working through that, and we do think over some period of time they'll be able to offset those cost pressures, but that's something that in that market you can't really do overnight. You know, other markets, you know, like automotive aren't so easy, but certainly I think the team's done a good job of starting those conversations and And there's other markets that are easier. So I think that, you know, we've done a good job. I think that we've been able to offset the majority, certainly of the sequential increases that we've seen during the year of the cost environment. And, you know, we're not guiding into 22, you know, at this point. But I do believe that the cost environment is not going to get any easier anytime soon. So the team certainly has been tasked with, and I think they're doing a good job of continuing those conversations with their customers today. in all of the markets, some of which are easier and some of which are harder, in terms of being able to ultimately pass on those cost increases to our customers and be able to continue to leverage and increase our margins as we continue to grow.

I would just add, Wamsi, to that one important principle here. Pricing is an art. It's not just you issue a price increase and off it goes. And the beauty of how we're organized is that we're not making those pricing decisions here at headquarters. Rather, we have, you know, 125 general managers around the world, and those general managers are best suited to make the right decision around pricing because they know the strength of their own position. They know their competitive position. They know their technology position. And they also can go to a customer and say, look, I have tried everything else, and the only remaining thing I can do is raise the price to you. And then it's a genuine, it's a reasonable discussion, and it's one that's grounded in fact and basis as opposed to in corporate policy. And I think that's why we've always been, you know, maybe a little bit more successful in moderating the impacts of these because our general managers have every tool available to them. All of the functions, all of the inputs are part of their responsibility, and thus they're able to go out and make it happen. And just because the cost of materials is up or the cost of logistics is up does not give absolution to an Amphenol general manager for their performance, not in our company. I mean, no matter what the cycle is, we have absolute standards for performance, and they have to hit that. And they'll figure it out. And if that means having those tough discussions with customers, then that's what they're going to do.

And our next question is from Samekh Chatterjee with JPMorgan. You may go ahead.

Thank you. This is Joe Cardoso. I'm for Samekh. So broader question, I guess the setup and guidance for 3Q seems very similar to what we are seeing now for 4Q. However, Infanol was able to outperform the high end of the guide in terms of both revenue and earnings in 3Q. I guess, can you help investors understand why they shouldn't expect a similar level of outperformance this time around? For example, are there headwinds around supply and cost intensifying? Or were there any material surprises you would point out in 3Q that are not sustainable into 4Q? Any color around the puts and takes there would be appreciated. Thank you.

Sure. Thanks very much, Joe. I mean, look, we always give guidance with the information at hand, just as we did 90 days ago. We're doing here today. I wouldn't point to some different dynamic, nor would I say that one should expect that we're going to beat by the same amount that we beat last quarter. Our team is always going to strive to maximize our results amidst whatever environment we're in. As we've talked ad nauseum, it's a very dynamic environment. They're going to continue to push until the last minute of the last hour of the last day of the year. in supporting our customers and executing amidst this environment. And if that ends up that this guidance is exceeded, then that will be what it will be. But right now, we're giving a guidance based on what we see in the marketplace.

And our next question is from William Stein with Truist Securities. You may go ahead.

Great. Thank you for taking my question. Adam, I wanted to ask about lead times and expedites. It doesn't really sound like you're significantly stretched from a lead time perspective, so maybe you can provide some context. I'm aware in every end market, every company within the Amphenol umbrella has different characteristics, and so an average might not be meaningful, but however you can describe the current lead time situation relative to how it might have been, let's say, a quarter ago and versus what would be sort of a middle of the cycle sort of dynamic, and then the degree to which expedite requests might have changed. There are some companies in the supply chain talking about the level or number of expedited parts falling significantly in the last quarter. I'm wondering if you're seeing that same dynamic. Thank you.

Thanks so much, Will. I mean, relative to our lead times, I mean, it should not be surprising that maybe we have a little bit of extra lead times now than we would have had a year ago. It is a very constrained environment, sometimes even just, you know, getting materials in from overseas if you need to have to do that, whatever. There's just a lot of sort of sand in the gears of the global supply chain, and that can lead to extra lead times. Also, you know, I've talked about our orders. maybe not even because of our own lead times, but just customers opening up the aperture of their order window a little bit longer, and that has led to some of the higher levels of orders that we've seen, in addition to just overall robust demand. As it relates to expedite requests, I don't know that I can give you a good read on that more thoroughly or systematically across the company. I mean, we continue to have some customers who really need product, I mean, to the extent that we are using a material that is really constrained, and there are certain cases of that, you know, I continue to see the odd expedite request here and there. I don't know that I have a good read on whether it's less or more or the same. I mean, I guess I would say it's kind of the same over the last 90 days. Nothing that I would take note of, really.

And our next question is from Mark Delaney with Goldman Sachs. You may go ahead.

Yes, good afternoon, and thanks very much for taking the question. I was hoping to get an update on what the company is seeing in China, both from a demand and an operational perspective. There's been a number of headlines around companies having a more difficult time operating in China, things like electricity shortages, certain materials constraints, and I'm hoping you could elaborate on what Amphenol is seeing there. Thank you.

Thanks so much, Mark, and good afternoon to you. I think one thing that I would just point out from this last quarter is actually our growth on a year-over-year basis was very balanced across all the geographies. I mean, almost, you know, extremely balanced on an organic basis. Virtually every region grew by that 13% organically, and that was really nice to see, actually, and a bit surprising given the the sort of dynamics, whether they be pandemic related, supply chain related, electricity related, or otherwise. And our team in China continues to do a fabulous job of managing through whatever challenges come their way. And that did include in the quarter some challenges related to the availability of electricity. But fortunately for us, our approach operationally around the world, and that is the same approach that we have in China, is never and not to put all our eggs in one basket. People are sometimes surprised that we have so many facilities around the world, something like 200, 250 facilities, and that includes something like 50 facilities in China that are spread across the country. And so when there are pockets of challenges over the last year and a half, whether that be from COVID-related shutdowns, supply chain challenges, or even the electricity issues that you've heard about in China, You know, that's not having a material impact across the company, but rather may create a single challenge for one or another operation and the local management team just makes it happen. And that's kind of the approach that we take.

And our next question comes from Nick Torov with Longbow Research. You may go ahead.

Yeah, thanks, and congrats on great results. I have a question on auto, Adam. If you look at your auto numbers, it seems like they, again, outperform relative to peers, and I think you talked about seeing upside in the quarter relative to expectations. So why, in your view, do you continue to see upside in the quarter? Maybe going back to the expedite, do you continue to see expedites in auto? I'm just curious because your lead times are relatively, you know, maybe they'd be a little bit extended, but they're still nothing compared to what semiconductors are, and I'm sure you're not the one that's constraining the auto production. So why do you think you continue to see upside in auto? Thanks.

Yeah, thanks very much, Nick. Look, this is a long story for us, which is that we've been growing our automotive business for more than a decade through a consistent strategy of growing both organically and through acquisitions into new electronics applications, new applications in the car. Throughout the course of that time, we expanded our product offering from simple connectors and cable assemblies to sensors and antennas, complex sensor assemblies and the like. And through it all, our strategy has not been to just take share out of incumbents, but rather to participate in the expansion of electronics in the automotive market. And that expansion of electronics has really accelerated throughout that time. As I highlighted in my prepared remarks, one area of expansion of electronics has been across the electrification of vehicles, both electric and hybrid vehicles, where we've leveraged our strong legacy in high-voltage capabilities to really be a strong participant in that area. And that's been a great growth driver for us for many quarters, and that included in the quarter that just completed. Have we seen expedites in the automotive market? I would actually say we've seen this quarter and last quarter more of the opposite of expedites. We've seen that customers have pushed out demand because of supply shortages that they're seeing from other types of commodities. You mentioned semiconductors as one example, as opposed to expedites that of customers pulling in and, you know, but for those other supply chain shortages, I'm sure our automotive business would have been even more robust than it was.

Our next question is from Luke Young with Baird. You may go ahead.

Good afternoon, everyone. Adam, I've got another auto question. This one may be a little bigger picture. You know, a lot of the discussion around your business these days is around EVs, and rightly so. But what I wanted to ask you about is knock-on effects that you're seeing on some other factors. Some of the industry have talked about so-called Tesla halo, i.e. the fact that consumer expectations for tech in the vehicle are just simply much higher in an EV. And I'm wondering, as you look across your business and the outgrowth that you're Seeing both right now and over the last few years, how does this accelerated proliferation of technology inside the vehicle play to the company's strengths and positioning relative to electrification?

Well, Luke, it's a great question, and it's a question that I wouldn't even confine to EVs. I mean, you point out that consumer expectations for technology in EVs, but I would just say consumer expectations for technology in vehicles, full stop, has expanded and has continued to accelerate over many years. I mean, I just look at, you know, my kids, when we get in a car, you've got like a spaghetti of cables that people want to plug into various parts of the car. And then you now have car companies coming and putting in things like wireless charging and outlets in different places as opposed to me having one of these massive things that every kid has to plug their thing into a cigarette lighter. Now everybody has their little connectors all over the car and things like that. And whether it be navigation systems, communication systems, safety systems, passenger comfort systems, we have seen, and I think we are living through a revolution of electronics in vehicles, and that's all vehicles. Because we shouldn't forget, like, in the global automotive market, I don't know, hybrid and EVs, I'm not perfectly familiar with every one of these numbers, but I think they still represent less than 10%. And that's if you include hybrids of all total vehicle volumes. But I would say all vehicles are adopting more electronics because the car companies have realized not only that their customers want these things, but actually they can make more money on these things. These type of features are things that people will actually pay more for and thereby allow the car companies to make more profit from their products. And, you know, look, it's great news for anybody working in the automotive electronics market. And for our company where, again, our strategy has not been to go take share out of others but rather to work on the new things that are happening in the car, I think our company comes out of that very well positioned.

And our next question is from Jim Suva with Citigroup. You may go ahead.

Thank you. I just have one question, and I don't know if it's for Craig or Adam, but either one is fine. And that is on your cable products operating margins. Of course, you know, raw materials of copper, aluminum, and all that have gone up. It sounds like you've mentioned you are putting in price increases, which is fair and good to hear, but the operating margins of below 4%, you know, that's pretty, what's the right word, unprecedented in a opportunity to see upside from there as opposed to, you know, things about overall concerns. So, Do you think we're kind of at the lowest level here, or do you think they're going to be at these levels of suppression for a while? But if you can just kind of talk about the profitability of that segment, because it seems like while a small part of the company overall, it is materially challenged right now, but I think there could be potential there. Thank you.

Yeah, thanks, Jim. Yeah, there's no doubt that the profitability of the cable segment is at the lowest level it's been in, certainly in my memory, and And I think when we talk about it being unprecedented, I think we're also in an unprecedented environment from a cost perspective, especially as it relates to things that impact that segment, which are things like logistics and things like certain commodity costs that have always had more of a significant impact on that segment. We've talked about commodities and cost environment impacting that segment more. And when you're in a more unprecedented environment where the costs have just increased so quickly And so significantly, and then you're in a market where it's not as easy to overnight increase prices, even in an unprecedented cost environment due to the competitive dynamics and other factors within that market, that it just becomes an unfortunate situation that it does have a more significant impact in the short term here. There's no doubt that the team is working hard on pricing actions, and we're confident that they will be successful over some period of time. Don't forget this is 4% of the company right now. It's relatively small. But for the businesses that are involved in dealing with this, it's as impactful for them as it is for any other operation. So it's not meaningful, but it certainly has a lower impact on the overall company. But there's no doubt, as the management team is extremely focused on this, We are optimistic that, you know, that over some, you know, not so, you know, long-term period of time in the, you know, shorter term, we'll be able to get, you know, these margins back up. You know, whether or not it's next quarter or the quarter after, you know, I think time will tell, but we are optimistic that it will, you know, we are on the lower end of the scale in terms of profitability in this market, and it will improve over, you know, over those coming quarters.

And our next question is from Chris Snyder with UBS. You may go ahead.

Thank you. So I have another one on auto. I mean, the company was up over 20% organic against the backdrop of, you know, high teens, declines in auto production. So very, very substantial levels of outgrowth. I understand all powertrains are seeing content gains, but this outgrowth inflection we've seen over the last year kind of really lines up with ramping EV production. So I guess the question is, would you guys be able to provide

know maybe what percentage of auto revenues are coming from high voltage today so we could try to you know kind of see how that's lining up against you know EV units thanks thanks very much Chris I mean look we give a lot of details across the company and I think we're we haven't publicly talked about the specific numbers of what makes up what different powertrains make up what different sales of our automotive market but what we have said very consistently and I would say it again this quarter is is that the growth in our EV business, whether that's in auto or also our industrial electrification business, have been significant drivers of our outperformance. So you can imagine that after a number of quarters of doing so, that business represents a lot more today than it did many quarters ago. And it's a meaningful piece of the business. It has a real impact on the business, and it continues to have great potential for the future.

Our next question is from David Kelly with Jefferies. You may go ahead.

Good afternoon, Adam and Craig. Thanks for taking my question. Maybe if we could dig a bit deeper into the industrial strength, you noted growth across a number of your in-market exposures there. So how should we think about the in-market dynamics in some nation? And again, realizing there's a lot of puts and takes there. versus Amphenol's kind of content opportunity and some of your market share gains? And then, if I may, how should we think about some of the moderation into year-end? You know, is there specific in-market where you expect to see that?

Yeah, well, thanks very much, David. I mean, you said it. The industrial market is for us a very, very diversified range of segments. You know, everything from medical to heavy vehicles to oil and gas, things like marine factor automation, the battery and heavy electric vehicles, alternative energy. I mean, even in an area like building automation where we've seen, you know, a lot of strong growth. I mean, what was, I think, really unique here in the third quarter was virtually every one of those segments grew. in the quarter. So, you know, you don't always see that. Usually there's some sort of counter-cyclicality across one or another of those segments. And we saw really strong performance across all of them. And when I think about why the company has really done such an excellent job in industrial, I mean, I point to a few factors. Number one is, you know, our strategy for many years has been to build out a range of products that make us more important to customers and across the industrial world. And again, remembering that what ties those products together is that they are all harsh environment solutions. So whether they be discrete connectors, value-add interconnect assemblies, sensors, antennas, or the like, these are all products that have to be ruggedized. They have to be fit to an environment that maybe as an ultra-clean environment in an operating theater or maybe an ultra-dirty environment in an oil and gas drilling setup or in an alternative energy on an offshore windmill or something like that. So all of these have just really uniquely challenging environments around them. And what we see in common across these customers and where a lot of our growth has come from, and this is really the second factor, is that customers across the industrial market are adopting electronics at an increasing pace. So the same discussion that we had in the auto market just a few moments ago, we see that really broadly across the industrial market as customers adopt next-generation electronic systems and put those systems into tougher and tougher environments. I would also say that the industrial market is a very fragmented market from a competitive perspective. And so while for sure we're taking advantage of new things in this market like we are in automotive, I think there's also the fact that we continue to gain position against competitors who either don't have the breadth of offering, don't have the geographical position to support customers on a global basis, don't have the diverse and resilient footprint that has been able to support those customers during the pandemic or during all the other disruptions that have come along. And thereby, customers have come increasingly to us to solve their problems, and we've not disappointed them. And that creates a positive feedback loop. So it's a market that I think we're very excited about. I think our team working in this market is just doing a great job. If you look into the fourth quarter, for sure, you can look at that fourth quarter kind of through the prism of saying, well, we're guiding it to be down slightly here. But in fact, on a year-over-year basis, this is going to be an outstanding fourth quarter as well. So I think the team just continues to excel, and we're very excited about the industrial market for many years to come.

And our next question is from Joe Giordano with Cohen. You may go ahead.

Hey, good afternoon, guys. Adam, you've articulated your position position and overall views of operating in China many times on these calls, but I want to give you a chance to do it again just in light of the ramp-ups and tensions and is it more challenging for companies to do business? I understand how you guys are positioned there. It clearly works. Do you have to, on the margins, think about things slightly different as to how you deploy capital or how you grow incrementally in a region like that? How is increasing escalation here impacted the way you view things?

Well, look, I mean, we're not blind to the world around us, Joe. There's no doubt about it. I mean, the geopolitical tension that has been present for a number of years has certainly not gone away. And I, for one, would fully advocate that countries like the U.S. and China, the world's two largest economies, should for sure get along. There's lots and lots of reasons why we should. And by the way, personally, I'm very optimistic that long term that is going to be the case. But as it relates to our position in any country, including China, I would just remind everybody, we have a very unique operating strategy. We rely on local managers in every country that we operate. And we operate in more than 40 countries around the world. And in each of those places, we have local general managers who have the authority to run their business as they need to run it in that region to be most successful. And so our general managers in China are able to tailor-make how they do business, obviously within the confines of ethics and law and everything that it means to be a global company, but they're able to meet their customers on a level playing field with their local competitors. But in fact, it's not a level playing field because then they're able to bring the totality of Amphenol's capabilities to bear in support of those customers. And that's where the advantage is. We bring the best of both worlds of both being a local company Partner, but also a global company who has global resources global breadth and global capabilities And that's why we've been successful in India. That's why we've been successful in China That's why we've been successful in France in Germany in the UK and and of course here in the US It's a very unique operating model that that is that is that works really really well in a world where everybody's getting along and But it also works really well in a world where people aren't necessarily getting along. In terms of how we deploy our capital, we're always careful about deploying capital in every country in the world. We're always going to incorporate all the risks and opportunities into our calculus about what we're going to invest in and what we're not going to invest in. And ultimately, those investment ideas are all coming up from below, not dictated from above. But for sure, we're going to apply appropriate scrutiny to investments in every place in the world. using sort of the full picture of the environment into which we're investing.

Our last question comes from Joseph Spack with RBC Capital Market. You may go ahead.

Thanks, Adam. Just to follow on one more on China, are you seeing any impact either direct or indirect from some of the power shortages that have been going on, and how is that impacting the business?

Thanks, Joe, very much. Look, I think we've seen a lot of challenges, and I talked a little bit about this earlier, and those challenges have included in China a few power shortages. But I think, like I described, luckily for us, our approach is to not put all our eggs in one manufacturing basket. And so while we've had maybe an odd power shortage in one location or another, it hasn't had a meaningful impact on the company. And our local team is doing a fabulous job of mitigating any impact that there could be of such shortages. But, you know, it gives everybody something else to think about in a time where there's a lot going on.

And I would now like to turn the call back to Mr. Norwitz for closing remarks.

Well, thank you so much, and I'd like to just extend my best wishes to everyone here on the phone. Thank you so much for taking the time with us, and we will talk to you after the holiday season, so I will be the first to wish everybody a happy holiday season, a happy and successful end of the year, and we'll talk to you in 2022. Thanks so much. Thank you. Have a great day.

And this concludes today's conference. Thank you for participating. You may disconnect at this time.