Amphenol Corporation

Hello and welcome to the fourth 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. 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 fourth quarter 2021 conference call. Our fourth quarter and full year results were released this morning. I will provide some financial commentary, and then Adam will give you an overview of the business as well as current trends. Then we will take questions. As a reminder, during the call, we may refer to certain non-GAAP financial measures and may make certain forward-looking statements, 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 fourth quarter with record sales of $3 billion and $27 million, and GAAP and adjusted diluted EPS of 72 cents and 70 cents, respectively. We are very proud that the fourth quarter represents the first time in Amphenol's history that we achieved quarterly sales in excess of $3 billion. Fourth quarter sales were up 25% in U.S. dollars and in local currencies and up 18% organically. Compared to the fourth quarter of 2020, the significant sales increase was primarily driven by the robust growth in the IT data, communications, industrial, mobile networks, commercial air, automotive, and broadband markets, including contributions from the company's acquisition program. Sequentially, sales were up 7% in U.S. dollars and organically, and 8% in local currencies. For the full year of 2021, sales were a record $10,876,000,000, which were up 26% in U.S. dollars, 25% in local currencies, and 18% organically compared to 2020. Quarters for the quarter were $3,278,000,000, which is up 30% compared to the fourth quarter of 2020 and up 9% sequentially, resulting in a strong book-to-bill ratio of 1.08 to 1. Breaking down fourth quarter sales into our two segments, the interconnect segment, which comprised 96% of our sales, was up 25% in U.S. dollars, while the cable segment was up 22% in U.S. dollars. Breaking down full year sales into our two segments, the interconnect segment was up 27% in U.S. dollars, and the cable segment was up 21% in U.S. dollars. Adam will comment further on trends by market in a few minutes. GAAP and adjusted operating income was $593 million and $608 million, respectively, in the fourth quarter of 2021. And GAAP operating margin was 19.6%, which decreased by 50 basis points compared to the Q4 of 2020 and by 70 basis points relative to the third quarter of 2021. Fourth quarter 2021 GAAP operating income included $15 million of acquisition-related costs related to the HALO acquisition, which closed during the fourth quarter. Excluding these costs, the fourth quarter 2021 adjusted operating margin was 20.1%, which decreased by 50 basis points compared to the fourth quarter of 2020, and by 20 basis points relative to the third quarter of 2021. The year-over-year decrease was primarily driven by the impact of the more challenging commodity and supply chain environment, together with a slight margin dilution of acquisitions. And these impacts were partially offset by the normal operating leverage on higher sales levels, as well as the lower negative cost impacts from the pandemic. On a sequential basis, the slight decrease in adjusted operating margin was due to the continued challenging commodity and supply chain environment, which has not yet been fully offset by pricing and other actions. For the full year, 2021, gap operating margin was 19.4%, and adjusted operating margin was 20%. The 80 basis point increase in adjusted operating margin as compared to 2020 was primarily driven by the normal operating leverage on higher sales volumes, as well as the lower negative cost impacts resulting from the pandemic. And these benefits were partially offset by the more challenging commodity and supply chain environment experience in 2021, as well as the current margin dilutive effect of the acquisitions we made during the year. From a segment standpoint, Operating margin in the interconnect segment was 22.1% in the fourth quarter of 2021, and operating margin in the cable segment was 2.4%. Our margins in the cable segment continue to be particularly impacted by the ongoing and significant increase in commodity and logistics costs, which have not yet been offset by pricing actions. Given the dynamic overall cost and supply chain environment, we are very proud of the company's operating performance. Our team's ability to effectively manage through all of these 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 gap effective tax rate for the fourth quarter was 18.8%, and the adjusted effective tax rate was 23.8%, which compared to 21.7% and 24.5% in the fourth quarter of 2020, respectively. The slightly lower adjusted tax rate in the quarter reflected the year-to-date true-up of a full-year adjusted effective tax rate from the expected 24.5% to a slightly lower 24.3% as a result of a slightly more favorable mix of income for the full year. For the full year 2021, the company's GAAP effective tax rate was 20.6%, and the adjusted effective tax rate was 24.3%. which compared to 20.5% and 24.5% in 2020, respectively. In 2022, we expect our adjusted effective tax rate to be approximately 24.5%. GAAP diluted EPS was a record 72 cents in the fourth quarter, an increase of 26% compared to 57 cents in the prior year period, and adjusted diluted EPS was also a record 70 cents, and an increase of 23% compared to $0.57 in the fourth quarter of 2020. For the full year, GAAP diluted EPS was $2.51, a 28% increase from $1.96 in 2020, and adjusted diluted EPS was $2.48 in 2021, an increase of 33% compared to 2020. This was an excellent result, especially considering the significant cost the supply chain and other operational challenges the company faced in 2021. Operating cash flow in the fourth quarter was a record $464 million or 106% of adjusted net income and net of capital spending. Our free cash flow was also a record $379 million or 87% of adjusted net income. For the full year, 2021 operating cash flow was $1,524,000,000, or 98% of adjusted debt income. In additive capital spending, our free cash flow for 2021 was $1,167,000,000, or 75% of adjusted debt income. From a working capital standpoint, inventory days, day sales outstanding, and payable days were 80, 71, and 56 days respectively. all of which were within our normal range. And we are especially pleased that our teams focused on all elements of working capital management, which resulted in a significant reduction of the company's inventory days from the third quarter. During the quarter, the company repurchased 2.1 million shares of common stock at an average price of $81, bringing total repurchases during 2021 to 9.3 million shares, or $662 million. When combined with our normal quarterly dividend, total capital return to shareholders in 2021 was more than $1 billion. Total debt at December 31st was $4.8 billion, and net debt was $3.6 billion. Total liquidity at the end of the quarter was $2.9 billion, which included cash and short-term investments on hand of $1.2 billion, plus availability under existing credit facilities. For the quarter and full year 2021 GAAP EBITDA was $726 million and $2.6 billion respectively. And at the end of 2021, our net leverage ratio is 1.4 times. Lastly, as noted in the press release effective January 1st, 2022, we have aligned our businesses into three new reportable segments. We will report results for these new segments as well as comparable historical financial data starting in the first quarter of 2022. 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 also extend my welcome to all of you here on the phone today. And hopefully it's not too late for me to wish you and your families all a Happy New Year. I also want to just express my wishes that everybody here on the call, together with your family, your friends, and your colleagues, are all managing to stay safe and healthy, in particular amidst the Omicron wave that's occurring in many areas of the country. As Craig mentioned, I'm going to highlight some of our fourth quarter and, in particular, our full year achievements. I'll discuss our trends and progress across our served markets, and then I'll make a few comments on our outlook in the first quarter. And, of course, we'll have time for Q&A thereafter. With respect to the fourth quarter, we're truly proud to have finished the year with record sales and adjusted earnings per share in the fourth quarter, both of which were significantly above the guidance that we gave just 90 days ago. Sales grew by a very strong 25% in U.S. dollars and in local currencies, reaching a new record of $3.27 billion. On an organic basis, our sales increased by 18%, driven in particular by robust growth in the IT datacom, mobile networks, industrial and automotive, and markets. And I'll talk through each of those markets here in a moment. The company booked a record $3,278,000,000 in orders in the fourth quarter, which represented another strong book-to-bill of 1.08 to 1. Despite the many operational challenges we and others continue to face, including ongoing cost increases related to commodities, supply chain, and other pressures, our adjusted operating margins in the quarter reached a very strong 20.1%. Adjusted diluted EPS was a new record 70 cents and represented robust growth of 23% from prior year, an excellent demonstration of our organization's continued strong execution. And as Craig mentioned, we generated record operating and free cash flow in the quarter of $464 million and $379 million, respectively, both of which are clear reflections of the quality of the company's earnings. Just at the end of this quarter, I'm extremely proud of our team as these quarter's results once again reflect the discipline and the agility of our entrepreneurial organization who continue to perform very well amidst a very challenging environment. We're also very pleased that in the quarter we announced on December 1st, the acquisition of Halo Technology Limited for a purchase price of approximately $715 million. Halo is a leading provider of active and passive fiber optic interconnect components for the communications infrastructure markets, with expected sales this year of approximately $250 million. Halo's product offerings are highly complementary to our existing high-speed and fiber optic interconnect solutions and represent a significant long-term growth opportunity for Amphenol in particular with customers in our IT datacom, mobile networks, and broadband markets. We're especially excited that Halo significantly bolsters our position in active fiber optic interconnect products, which is a technology with truly high growth potential as customers around the world are upgrading their networks to support the acceleration of high-speed data traffic. Halo is an agile supplier of these important products to a wide variety of customers, across these communications infrastructure markets whose unique technology and service offering enables them to realize strong operating results. I'm just very excited to welcome the highly talented and entrepreneurial HALO team to the MFNL family and look forward to great things from them in the future. We also announced on December 1st the closing of the sale of the MTS test and simulation business to Illinois Tool Works, or ITW. We remain extremely pleased with the entirety of the MTS acquisition, which, as you'll all recall, was announced last year in the fourth quarter, meaning 2020. With the disposition of test and simulation to ITW, we have now acquired one of the leading sensor companies in the industry, further strengthening our broad offering of high technology sensors. We're very proud of the performance of the MTS sensors team during their first three quarters as part of the Amphenol family. And we look forward to them driving outstanding value for many years to come. I remain very confident that our acquisition program will continue to create great value for the company. And 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 the full year of 2021, I can just say it was an extremely successful year for Amphenol, despite the many operational and cost challenges that we faced. We expanded our position in the overall market, growing sales by a very strong 26% in U.S. dollars and 18% organically, reaching a new sales record of $10,876,000,000. I would just note that, in fact, over the past two years, both of which have been impacted by the COVID-19 pandemic. We've grown our sales by more than 32% from our 2019 levels, which is a great confirmation of the value of the company's diversification and the agility of our management team in every environment. Our full year 2021 adjusted operating margins reached 20%, which was an increase of 80 basis points from last year, from 2020, despite the multiple pressures and margins that we experienced around the world. And this strong level of profitability enabled us to achieve record-adjusted diluted earnings per share of $2.48. We generated operating and free cash flow of $1,524,000,000 and $1,167,000,000, respectively. Again, excellent confirmations of the company's superior execution and disciplined working capital management. We also put that cash to work with our acquisition program that created great value in 2021 with seven new companies added to the Amphenol family. MTS Sensors, Halo, Positronic, LCab, Unlimited Services, CableCon, and Euromicron have collectively expanded our position across a broad array of technologies and markets. while bringing outstanding and talented individuals into the Amphenol family and thereby strengthening our organization. We're excited that these acquisitions represent expanded platforms for the company's future performance. In addition, as Craig noted, in 2021, we bought back over 9.3 million shares under our share buyback program and increased our quarterly dividend by 38%. representing a total return of capital to shareholders of just over $1 billion for the year. So while there continued to be a high level of volatility in the overall environment in 2021, as we enter 2022, our agile entrepreneurial management team is confident that we have built further strength from which we can drive superior long-term performance. Now let me turn to the performance of the company across our served markets, and I would just note that We remain very pleased that the company's balanced and broad end market diversification continues to create value for Amphenol, with no single end market representing more than 25% of our sales in 2021, and that market, industrial, being really one of our most diversified markets across the segments within industrial. We believe that this diversification mitigates the impact of the volatility of individual end markets while continuing to expose us to the leading technologies wherever they may arise across the electronics industry. Now, turning to the military market, military represented 10% of our sales in the fourth quarter and 11% of our sales for the full year of 2021. Our sales grew from prior year by 6% in U.S. dollars in the fourth quarter as we benefited from acquisitions. On an organic basis, our sales did moderate by about 4%, driven by reduced sales related to airframe applications and ground vehicles. Sequentially, our sales increased slightly as we had expected coming into the quarter. For the full year, 2021, sales to the military market grew by 13% in U.S. dollars and 4% organically, reflecting our leading market position and strong execution across virtually all segments of the military market. together with the benefits of the MTS sensors and positronic acquisitions completed earlier in the year. Looking ahead, we expect sales in the first quarter to increase slightly from these fourth quarter levels, and we continue to be excited by the strength of the company's position in the military market. As militaries around the world continue to accelerate their adoption of next-generation technologies, 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 fourth quarter and as well for the full year of 2021. Sales in the quarter grew 27% in U.S. dollars and 6% organically as we benefited from the beginnings of a recovery in procurement to support growing aircraft production, as well as from the contributions from our recent acquisitions. Sequentially, we were very pleased that our sales grew a robust 15 percent from the third quarter, which was in line with our expectations coming into the quarter. For the full year, sales declined by 10 percent, reflecting the significant impact of the ongoing pandemic on travel and aircraft production. Looking into the first quarter, we expect a sequential moderation in sales from these levels. Regardless of the challenges in the Comair market in both 2020 and 2021, our team working in this market remains very committed to leveraging the company's strong interconnect and sensor technology positions across a wide array of aircraft platforms and next-generation systems integrated into those airplanes. As personal and business travel continues to recover from the pandemic-impacted lows, We look forward to benefiting as jet manufacturers expand their production and, in turn, their procurement of our products. The industrial market represented 25 percent of our sales in the fourth quarter and for the full year, and sales in this market significantly exceeded our expectations coming into the quarter, increasing by a very strong 42 percent in U.S. dollars and 25 percent organically from prior year. we experienced robust strength in essentially all segments of the industrial market, with particular strength in battery and heavy electric vehicle, transportation, rail mass transit, factory automation, heavy equipment, as well as oil and gas. On a sequential basis, our sales increased by 2%, which was significantly better than our expectation for a sequential moderation, as we saw broad-based strength. For the full year 2021, Sales in the industrial market grew by a very strong 46% in U.S. dollars and 27% organically, as we saw, again, broad-based growth across virtually all market segments of the global industrial market. Looking into the first quarter of 2022, we do expect a sequential moderation in sales from these very strong fourth-quarter sales levels. Our outstanding global team working in the industrial market continues to find new opportunities for growth across the many segments of this exciting market. I remain confident that our long-term strategy to expand our high technology interconnect, antenna, and sensor offerings, both organically as well as through complementary acquisitions, has positioned us to capitalize on the many revolutions happening across the industrial electronics markets. 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 fourth quarter and 20% for the full year 2021. Sales in automotive were actually much stronger than we had anticipated coming into the quarter with revenue growing by a very strong 18% in U.S. dollars and 16% organically versus prior year. And this was driven particularly by a strength of our sales in the hybrid and electric vehicle applications, as well as our sales to customers in Asia. Sequentially, our automotive sales increased by a very strong 10%, well above our prior expectations for a high single-digit decline, as we saw strong demand from customers in anticipation of improving production volumes in the first quarter. For the full year 2021, Our sales to the automotive market increased by a strong 47% in U.S. dollars and 41% organically, reflecting the continued recovery of the automotive market as well as our expanded position in next-generation electronics integrated into cars, including in particular electric and hybrid drivetrains. Looking into the first quarter, we expect a high single-digit sequential moderation in sales from these very lofty levels that we achieved in the fourth quarter. I remain extremely proud of our team working in the automotive market, who has demonstrated an incredible degree of agility and resiliency in both driving a significant recovery from the reduced sales levels in 2020, while also expertly navigating the myriad of supply chain challenges that struck the entire automotive industry during the course of this year. We look forward to benefiting from their efforts long into the future. The mobile devices market represented 14% of our sales in the fourth quarter and 12% of our sales for the full year of 2021. Our sales to mobile device customers declined from prior year by 5% in U.S. dollars and 6% organically. As declines in products incorporated into smartphones more than offset the growth that we did realize in wearable devices, laptops, and tablets. Sequentially, our sales increased by a better than expected 14% driven by higher sales to smartphones and wearable devices. For the full year 2021, sales in the mobile devices market increased by 4% in U.S. dollars and 2% organically, as we benefited from growth in our products used in laptops and wearables, offset in part by a moderation of sales related to smartphones and tablets, which, as you will recall, were particularly strong during 2020 with all of the work from home and study from home dynamics that were there early on in the pandemic. Looking into the first quarter, we anticipate a typical seasonal sequential decline of approximately 35%. While mobile devices will always remain one of our most volatile markets, our outstanding and agile team is poised as always to capture any opportunities for incremental sales that may arise in 2022 and beyond. our leading array of antennas, interconnect products, and mechanisms continue to enable a broad range of next-generation mobile devices, which positions us well for the long term. The mobile networks market represented 5% of our sales in the quarter and for the full year, and we're very pleased that sales in mobile networks increased from prior year by a very strong 36% in U.S. dollars and 28% organically, And this was with growth particularly from our sales to mobile network operators in support of their next generation 5G network buildouts. Sequentially, our sales increased by a higher than expected 7%. For the full year of 2021, our sales to the mobile networks market grew by 12% from prior year and 7% organically. Looking into the first quarter of 2022, we do expect sales to moderate from these very strong levels. Our team continues to work aggressively to realize the benefits of our long-term efforts at expanding our position in next-generation 5G equipment and networks around the world. As customers continue to 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 communications market represented 22 percent of our sales in the fourth quarter and 21 percent of our sales for the full year. Sales in the fourth quarter in IT Datacom were much stronger than expected, rising by 53 percent in U.S. dollars and 49 percent organically from prior year. as we benefited from broad-based demand for our industry-leading high-speed, power, and fiber optic solutions. While we saw strength really across server, networking, and storage applications, we experienced especially robust growth from web service providers and other data center operators in the quarter. Sequentially, our sales grew by 10%, which was significantly higher than our expectations, which had been coming into the quarter of a slight decline. We do believe our sales growth benefited from some modest pulling of demand from the first quarter as customers prepared for potential supply chain issues related to Chinese New Year. For the full year 2021, our sales to the IT Datacom market grew by a very strong 26% in U.S. dollars and 24% organically as we continued to benefit from our strong technology solutions and leading position across a broad array of applications. Again, sales to web service providers were a significant contributor to our full year growth in 2021. Looking ahead, we do expect a high single-digit moderation in the first quarter, reflecting the very robust demand in the fourth quarter. Nevertheless, we're excited by our strength in technology position, especially with the addition of Halo's active and passive fiber optic interconnect products. I 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. We look forward to realizing the benefits of our leading position for many years to come. And finally, the broadband market represented 3% of our sales in the quarter and 4% for the full year. Sales increased by 14% in U.S. dollars and 2% organically from prior year, as we benefited from increased spending by cable operators as well as the contributions from our recent acquisitions. On a sequential basis, sales grew by a better than expected 10%. For the full year of 2021, sales to the broadband market grew by 9% in U.S. dollars and 1% organically. Looking ahead, we expect sales to increase in the low double digits from these levels as we benefit from the addition of Halo's product sales into the broadband market. We remain encouraged by the company's position with broadband customers, and we look forward to continuing to support 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 both homes and businesses. Now, turning to our outlook, the current market environment no doubt remains highly uncertain, with significant continuing supply chain and inflationary challenges, as well as the impact of the ongoing pandemic. Assuming that conditions do not meaningfully worsen and also assuming constant exchange rates, For the first quarter, we expect sales in the range of $2,690,000 to $2,750,000, as well as adjusted diluted EPS in the range of $0.59 to $0.61. This guidance represents very strong sales growth over prior year of 13% to 16%, as well as adjusted diluted EPS growth of 13% to 17% compared to the first quarter of last year. Finally, I just want to note, as we described in our press release, effective January 1st of this year, we have aligned our business units into three newly formed divisions, harsh environment solutions, communication solutions, and interconnect and sensor systems. This new alignment will allow us to further scale our business beyond the $10 billion sales level that we crossed last year. Very importantly, this alignment further strengthens our unique and strong Amphanolian culture of entrepreneurship while reinforcing the accountability of our 130 general managers around the world. We look forward to providing more detail, financial detail, about these reportable segments at the time of our April earnings release. I come away from this quarter still so 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. And most importantly, I'd just like to close by taking this opportunity to once again thank the entire Amphenol team. In particular, I'd like to extend my thanks to all of our factory workers around the world. You know, while many of us have been able to work from home on occasion during these last two pandemic impacted years, I'm just so inspired by the dedication of our factory workers who never worked a single day at home. And it was just a phenomenal thing to see. And the results that we saw in the fourth quarter really are a great credit to their and our entire Amphel organization's dedication. And with that, operator, we'd be very happy to take any questions that you may have.