Amphenol Corporation

Hello and welcome to the first 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 the 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.

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 first quarter 2022 conference call. Our first quarter results were released this morning. I will provide some financial commentary, and then Adam will give an overview of the business and current trends. Then we will take questions. As a reminder, during the call, we may refer to certain non-GAAP financial measures and make certain forward-looking statements. So please refer to the relevant disclosures in our press release for further information. In addition, as previously announced, effective January 1st of 2022, we aligned our businesses into three new reportable segments. Effective for the first quarter of 2022, we are reporting results for these new segments as well as the relevant comparable historical financial data. The company closed the first quarter with sales of $2,952,000,000 and GAAP and adjusted diluted EPS of 68 cents and 67 cents, respectively. First quarter sales were up 24 percent in U.S. dollars, 25 percent in local currencies, and 17 percent organically, compared to the first quarter of 2021. The significant sales increase was driven by double-digit organic growth in the IT data communications, commercial air, industrial, automotive, and broadband markets. as well as contributions from the company's acquisition program. Sequentially, sales were down by just 2% in U.S. dollars and in local currencies and down 4% organically. Adam will comment further on trends by market in a few minutes. Orders for the quarter were a record $3,441,000,000, which is up 26% compared to the first quarter of 2021 and up 5% sequentially, resulting in a strong book-to-bill ratio of 1.17 to 1. Gap in adjusted operating income was $590 million in the first quarter, and operating margin was a strong 20% in the first quarter of 2022, which increased by 40 basis points compared to the prior year quarter. Sequentially adjusted operating margins declined by only 10 basis points, which is significantly better than we typically see in the first quarter. The year-over-year increase in operating margin was primarily driven by normal operating leverage on higher sales volumes, as well as the benefit of ongoing pricing actions. These benefits were partially offset by the impact of the more challenging commodity and supply chain environment, together with the slight margin dilution of acquisitions completed over the past year. On a sequential basis, the slight decrease in adjusted operating margin reflected a normal conversion on the lower sales volumes, slightly offset by the benefit of ongoing pricing actions, which became effective in the quarter. 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 the myriad of challenges around the world is a direct result of the strength of the company's entrepreneurial culture, which continues to foster a high-performance, action-oriented management team. Gap diluted EPS was $0.68 in the first quarter, an increase of 28% compared to $0.53 in the prior year period, and adjusted diluted EPS was $0.67, an increase of 29% compared to the $0.52 in the first quarter of 2021. This was an excellent result, especially considering the significant costs, supply chain, and other operational challenges the company continued to face during the quarter. The company's gap effective tax rate for the first quarter was 23.8%, and the adjusted effective tax rate was 24.5%, which compared to 23.9% and 24.5% in the first quarter of 2021, respectively. Bringing down first quarter results into our three new segments, relative to the first quarter of 2021, Sales in the harsh environment solution segment were $728 million and increased 16% in U.S. dollars and organically. Operating margins in the quarter for the segment was 25.2%. Sales in the communication solution segment was $1,320,000,000 and increased 28% in U.S. dollars and 21% organically. Operating margin in the quarter for the segment was 21.4%. Sales in the interconnect and sensor system segment were $904 million and increased 25% in U.S. dollars and 13% organically, and operating margin in the quarter for the segment was 17.7%. Operating cash flow in the first quarter was $351 million, or 83% of adjusted net income. Net of capital spending or free cash flow is $274 million or 65% of adjusted income. Cash flow in the quarter was a bit lower than we would normally expect even in a typically weaker first quarter, primarily due to a higher than normal increase in inventory levels driven by the continued challenging supply chain environment. From a working capital standpoint, day sales outstanding and payable days were 74 and 57 days respectively. both within our normal range. Inventory days were 88, which are slightly elevated due to the normal Q1 seasonality, as well as the challenging supply chain reasons just mentioned. Our management teams are focused on reducing these inventory levels, although given the challenging environment, this may take a couple quarters. During the quarter, the company repurchased 2.6 million shares of common stock at an average price of $78. And when combined with our normal quarterly dividend, total capital return to shareholders in the first quarter of 2022 was more than $320 million. Total debt at March 31st was $4.9 billion, and net debt was $3.6 billion. And 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 existing credit facilities. First quarter 2022 GAAP EBITDA was $699 million. And at the end of the first quarter of 2022, our net leverage ratio is 1.3 times. 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 it's my pleasure also to welcome everybody here for our first quarter earnings call. And first and foremost, I hope that everybody here today, together with your family, friends, and colleagues, are managing to stay safe and healthy as the world comes to some degree of normalcy again. I also wanted to just offer our thoughts to the people of Ukraine who are obviously going through this very difficult time period with the unfortunate war. While we don't have operations in the Ukraine, we do have many employees of Ukrainian descent, and our hearts are clearly with them together with their families and friends. As Craig mentioned, I'm going to highlight some of our first quarter achievements. I'll then spend a few moments to discuss our trends and our progress across our served markets. Then finally, I'm going to comment on our outlook for the second quarter, and of course, we'll then have time for questions at the end. As Craig mentioned, we drove results in the first quarter that were substantially beyond our original expectations. exceeding the high end of our guidance in sales as well as adjusted diluted earnings per share. Sales grew a very strong 24% in U.S. dollars and 25% in local currencies, reaching $2,952,000,000. And on an organic basis, our sales increased by 17%, with growth across nearly all of our end markets. And that was driven particularly by double-digit growth in the IT Datacom, commercial air, industrial, automotive, and broadband markets. And I'll talk about each of those in a few moments. The company booked a record $3,441,000,000 in orders in the first quarter, and this represented another very strong book to build, this time 117 to 1. And despite continuing to face substantial inflationary pressures and supply chain disruptions, our operating margins reached 20.0% in the quarter, which was a 40 basis point increase from last year's levels. We're very encouraged by this strong profitability performance for the company, and we see that as a clear sign that our local management teams are successfully managing through this challenging cost environment. Saluted EPS in the quarter grew a robust 29% from prior year to 67 cents, again, an excellent reflection of our continued strong execution. The company also generated strong operating and free cash flow in the quarter of 351 and 274 million, and that's despite all of the challenges that Craig alluded to. And again, another clear reflection of the high quality of the company's earnings. I'm just very proud of our team this quarter. These results once again reflect the discipline and agility of our entrepreneurial organization as we continue to perform well in a very dynamic and challenging environment. Now, turning to our end markets, I would just comment that we continue to be very pleased that our end market exposure remains highly diversified, balanced, and broad. In particular, amidst these very dynamic times, this market diversification continues to create great value for Amphenol. Starting with our military market, represented 10% of our sales in the quarter. Sales grew by 7% from prior year and were up 1% organically, with growth in space and avionics applications somewhat offset by moderations in our sales onto UAVs, naval, and military vehicles. Sequentially, our sales decreased by 2%, which was just a hair below our expectations coming into the quarter. And looking now into the second quarter, we expect sales in the defense market to increase modestly from these first quarter levels. We continue to be very pleased with the strength of the company's position in the defense market, a market that has renewed importance given the current geopolitical environment. 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 military programs. This gives us great confidence for our long-term performance. The commercial air market represented 3% of our sales in the quarter, and sales in commercial air increased by a strong 42% from prior year and 28% organically, as we benefited from the continued recovery in global aircraft production. Sequentially, our sales grew by a better than expected 8% from the fourth quarter. And as we look into the second quarter, while we do expect a sequential moderation of sales compared to these first quarter levels, we anticipate another quarter of year-over-year growth in commercial air. You know, after two very challenging years in the air travel industry, we're encouraged by the strengthening of our Comair business. As personal and business travel continues to recover, We look forward to benefiting from the company's strong interconnect and sensor technology position across a wide array of aircraft platforms as well as the next generation systems that are integrated into those planes. The industrial market represented 25% of our sales in the quarter and we drove another quarter of excellent performance in the industrial market. Sales grew 31% in US dollars and 20% organically This was driven by robust growth across most of the segments within the industrial market, but we did see particular strength in battery and electric heavy vehicle applications, factor automation and oil and gas, as well as the benefits of several of the acquisitions that we've done over the last year. On a sequential basis, sales were down just 1% from the fourth quarter, which was better than our expectations coming into this quarter. Looking into the second quarter, we expect sales in the industrial market to increase moderately from current levels. This first quarter confirmed once again that 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 offering, both organically and through complementary acquisitions, has positioned us well to capitalize on the many revolutions happening across the industrial electronics market. We look forward to realizing the benefits of this strategy for many years to come. The automotive market represented 20% of our sales in the quarter, and sales grew by 17% in U.S. dollars and organically, with our growth driven once again by the strength of our sales into electric and hybrid electric vehicle applications. Sequentially, sales increased by 5% from the fourth quarter, which is actually much better than our expectations of a high single-digit decline, and this just reflected strong execution by our team working in the automotive market. For the second quarter, we expect a modest sequential decline in sales as customers manage through a wide array of supply chain challenges in the global automotive market. I remain extremely proud of our team working across the automotive market. They continue to manage through a difficult supply chain environment, all while remaining laser focused on driving new design wins with customers who are implementing a wide array of new technologies into their vehicle platforms. Our continued outperformance is a direct result of that team's excellent efforts. The mobile devices market represented 10% of our sales in the quarter, Sales increased by 7% from prior year, with strength in tablets, smartphones, wearables, as well as laptops. Sequentially, our sales decline was less than we had expected, declining 27% from the fourth quarter. As we look into the second quarter, we now anticipate a low double-digit sequential sales decline from these levels, driven by typical seasonality, as well as by some impact from the recent COVID related shutdowns that have been occurring and continue to occur in China. There's no question that mobile devices remains our most volatile of end markets. Nevertheless, 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 continues to enable a broad range of next-generation mobile devices, positioning us well for the long term. The mobile networks market represented 5% of our sales in the first quarter, and sales in this market grew from prior year by a stronger than expected 14% in U.S. dollars and 5% organically. As strength from products sold directly to network operators, together with the benefit of acquisitions, more than offset a moderation of our sales to equipment OEMs. Sequentially, our sales in the first quarter were flat to the levels that we achieved in the fourth quarter. As we look into the second quarter, we expect a modest decline from these first quarter levels. Nevertheless, we're encouraged to see continued strength in our sales to the mobile networks market. As operators continue to ramp up their investments in next generation systems, Our team remains focused on realizing the benefits of our efforts to expand our position in next generation 5G equipment and networks around the world. We look forward especially 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% of our sales in the Sales were stronger than expected in IT Datacom, rising by a very robust 41% in U.S. dollars and 35% organically from prior year, as our teams capitalized on broad-based strength across server and networking applications. And in particular, we saw continued robust growth of our sales to web service provider and data center operator customers. We were pleased that sales moderated by just 2% sequentially in the first quarter, which was better than our expectations coming into Q1. Looking to the second quarter, we expect sales to increase in the mid-single digits from these first quarter levels as customer demand continues to grow in IT Datacom. We remain encouraged by the company's outstanding position in this important market. Our OEM and web service provider customers continue to drive their equipment and networks to ever higher levels of performance in order to manage the 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. The broadband market represented 5% of our sales in the quarter and sales in this market also grew by a very strong 47% from prior year and 12% organically as broadband spending levels increased and as we benefited from our recent acquisitions. On a sequential basis, sales increased by a much better than expected 30 percent from the fourth quarter, and we're pleased in particular to start to see some progress in pricing actions across this market. In the second quarter, we expect sales to the broadband market to increase modestly from these levels. And we look forward to continuing to support our broadband service provider customers around the world with our expanded range of high technology products. As our customers increase the bandwidth and capacity of their networks to support the expansion of high-speed data applications to both homes and businesses, our products have become even more critical. Now, turning to our outlook for the second quarter, The current market environment remains highly uncertain, with ongoing supply chain and inflationary challenges being in many ways exacerbated by both the war in Ukraine as well as the continued impact of the pandemic, which is causing shutdowns in certain geographies, most notably in China. Assuming conditions do not meaningfully worsen and also assuming, of course, constant exchange rates. For the second quarter, we expect sales in the range of $2,890,000 to $2,950,000 and adjusted diluted EPS in the range of $0.66 to $0.68. These expectations would represent strong sales growth of 9% to 11% and adjusted diluted EPS growth of 8% to 11% versus the second quarter of last year. I just have to say that I remain confident in the ability of our outstanding management team to adapt to the many opportunities and challenges that are still present in the marketplace and to continue to grow our market position while expanding the company's profitability. In addition, our 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 I'd just like to take this opportunity at the end here to thank all of those employees, more than 90,000 of them around the world, the entire Amphenol team, for their truly outstanding efforts here in the first quarter. And with that, operator, we'd be very happy to take any questions that there may be.

Thank you. The question and answer period will now begin. Please limit to one question per caller. Our first question is from Amit Daryanani with Evercore. You may go ahead.

Thank you. Good afternoon, everyone. My question is really around, and I'm hoping, Adam, you would just elaborate on what are the impacts you're seeing out of the China lockdowns, maybe on two fronts. So one is how are you thinking about that impacting your supply, your demand environment coming out of China? And secondly, do you think this is really resulting in customers perhaps deciding to hold on to more inventory for longer versus trying to get back to just-in-time models That's the discussion we have with the customers. Thank you.

Amit, thank you very much for the question. I mean, look, relative to our own supply and demand, there's no doubt about it that our team is navigating lots of things in China. I just have to take a moment to really reflect on how extraordinary they have managed through the first quarter because some of these these disruptions, they already had started well into the first quarter. And the fact that our team was able to drive the results that they did across the board and including in China is a real testament to the reactivity, the agility, the fortitude of our team there. Because these lockdowns are really quite something. We have employees who are sort of locked in their apartment in Shanghai for four or five weeks. We have factories that have had to operate in bubbles and things like this. And it's just extraordinary how the team has managed through this. But no doubt about it, I mean, we see some impact. You know, it's not a massive impact here in the quarter, but there is some impact here in the quarter. And I specifically talked about the impact that we see in mobile devices, which is, you know, the one market that has the highest exposure to China. So it shouldn't be surprising that that's one where there's, you know, maybe a little more magnitude impact. of impact both with customers and their demand and the supply chain and our own abilities to reach really full levels of production. But our team is doing a fabulous job and I think that they will manage through this and I'm very confident that China as a country is going to manage through this, no question in my mind. Relative to customers holding more inventory, I think that whole concept of just in time has in many ways over the last two years been a little bit replaced by, to coin a cliche, just in case. And no doubt we have customers who are looking at lots of ways to balance risk in their supply chain. I think their first choice is not just to put inventory on the shelves, but rather to look to their supplier partners, companies like us, and say, What can we do to create diversification in the supply base such that they don't have all their eggs in one basket? And no doubt, we've done a lot of work over these couple of years through the pandemic, through the supply chain crisis, through the logistics crisis, whatever that may be, to demonstrate to our customers and ultimately to deliver to our customers a kind of multiplicity of options of supply that thereby minimize their risk. But beyond that, are customers kind of opening up their order window a little more? I think we would say yes. Are customers putting a little more inventory on the shelf? There I can only speak with anecdotal evidence because we don't have great visibility into the warehouses and the inventory levels of our OEM or service provider customers. The one where we do have visibility, which is our distribution channel, I would actually say that inventory levels there are even a little low in many of the relationships that we have, and certainly not at levels that one would think are reflective of some sort of risk aversion. So I think customers are doing a lot of things here. Is the odd customer carrying a little bit more inventory? It wouldn't surprise me if that were the case.

Thank you. The next question is from Mark Delaney with Goldman Sachs. You may go ahead.

Yes, good afternoon, and thank you very much for taking the question, which is about the M&A landscape. I'm curious to what extent you're seeing any increased willingness of companies to be acquired. Financial markets are at Good absolute levels, but you've seen some pullback recently in valuations. I'm curious if more companies are perhaps willing to be open to an acquisition. Could you also speak to F&L's willingness to do larger acquisitions? You've done a few larger ones of late, including Halo and MTS, and wondering do you think you need to spend some time digesting those, or would you be willing to do a larger acquisition if the opportunity presented itself? Thank you.

Yeah, Mark, thanks so much. I mean, look, I don't know that we've seen any meaningful difference in the M&A environment. I would tell you the M&A environment is very robust. Our pipeline is as strong as ever. As you know, over the last two and a half years, we closed on a large number of deals, including last year just extraordinary progress that we made in our M&A program with very significant deals like MTS and at the end of the year, Halo. as well as a number of wonderful tuck-in companies, tuck-in deals that ultimately strengthen our position across a wide array of our end markets. And I think that we continue to see among companies that we talk to, I don't know if it's a general willingness, increased willingness, but our reputation is a wonderful home for their companies, that continues to strengthen over time. And so there's no doubt about it that our phone continues to ring. We continue to create that sort of organic pipeline of acquisitions. And not a week goes by where Craig and I don't hear of, you know, some new company that we had never heard of. At the same time, you know, we have very high standards. And so, you know, to the point that, you know, if companies are kind of coming out of the woodwork, we're not just saying yes to every one of these. We hold very, very high standards around our acquisition program, and that includes looking for great people with great products who have complementary market position. That is never going to be something that we compromise, and nor do we ever compromise on valuation, because at the end of the day, whether the stock market is high or the stock market is low, we pay fair value for great companies and we pay a value that's really based on what they have delivered and not what the company can become as part of Amphenol. In terms of our willingness to do larger deals, I would just let our history speak almost for itself here. I mean, for sure, we have the wherewithal to do an enormous number of deals, and that includes deals large and small. I would say that the evolution of our organization, one of the benefits of that is really also opening up the bandwidth across the company so that we have capacity to to either do more deals or bigger deals, both of which we kind of arithmetically need to do if we want acquisitions to continue to represent roughly a third of our growth over the long term, which is what we continue to target. So I think the M&A landscape remains a very positive driver for Amphenol, and I think that the strategy of complementing our superior organic growth with adding excellent companies is something that has created enormous value for the company in the past and will continue to do so going forward.

Thank you. The next question is from Sameek Chatterjee with JPMorgan. You may go ahead.

Hello. This is Manmohan Preet on for Sameek Chatterjee. Thanks for taking my question. I just wanted to ask, like, the way we were thinking and the way some of the investors you were talking to, like, we were expecting you to have higher headwinds in terms of margins compared to your peers, but the results were a little contrary to that with better operating margins and peers, both for current quarter as well as for the next quarter. So is this, like, the expectations were dead due to the... Decentralized way of functioning the centralized hedging activity was lesser. So what exactly is things that we are missing here? Is this entirely due to better success with price increases or at some other dynamics here at work?

Yeah, yeah, thanks a lot. I appreciate the question I mean, you know, I we talked about this a little bit coming into the quarter and you know in January and You know, we certainly saw some pressures from the cost environment, as everybody has, and I think we did a great job in 2021, you know, really protecting against that through pricing and certainly other actions as well. And we talked about in the fourth quarter where our margins were a bit lower that we did expect coming into the first quarter some, you know, improvement in profitability as was kind of reflected in our guidance there. in our implied guidance that our profitability improved from pricing actions starting to take hold. And that's exactly what we saw. I think the team has done a fabulous job of ensuring that they were taking the actions they needed to. There's no doubt we're in an inflationary environment, and there's a lot of difficult conversations that we're having with customers. on a frequent basis. This isn't something that's happening just annually anymore. This is something that's happening on probably a monthly basis or maybe even sometimes more frequent than that as we continue to see costs rise. And I think the team's done a great job of that. We don't do any hedging. Hedging is something that we typically don't do other than maybe FX hedging or things of that nature. But certainly as it relates to commodity costs, we don't do any of that. So that certainly has no impact on on our margins. But certainly the pricing actions we've taken with our customers are starting to take hold here in the first quarter. We're expecting that to continue into the second quarter as is in our implied guidance of our margins continuing to improve a bit here into the second quarter. And I'm certainly real proud of the team. I mean, the inflationary environment has gotten worse here in the first quarter, and we certainly don't expect it to get any better in the second quarter. So the ability of our team to continue to, you know, protect them, not only protect the margins, but, you know, starting to expand the margins a bit, you know, and starting to, you know, basically offset, you know, more than offset some of the cost environment is certainly, you know, great to see. And, you know, we're going to continue to work hard to, you know, do the same thing as the inflationary environment continues.

Thank you. Next question is from Steven Fox with Fox Advisors. You may go ahead.

Hi, good afternoon. I was wondering if you could drill down a little more into the IT Datacom segment. You know, as I mentioned before, it keeps surprising to the upside for you guys. I'm curious, like, when you, what you're seeing during the quarter from both a market standpoint and then a content standpoint, whether we're missing the boat maybe on market shares or just better content or certain interconnect products, or is it all related to spending coming in better than you think? Any call to that would be helpful. Thanks.

Thanks, Steve, so much. And, Steve, you're never missing any votes, so I wouldn't say that. Look, our IT Datacom business and the operations within Amphenol who are serving that end market have just done a phenomenal job over the last two years on several fronts. Number one, it's developing the products that our customers need. And I think the innovation in this market is so critical because our customers are under enormous pressure, enormous pressure to satisfy this kind of unquenchable thirst among consumers for bandwidth. And at the other side, the kind of unquenchable thirst for power that these data centers create And so where we've seen the real innovations is happening around high-speed interconnect across the board as well as in the power interconnect that goes to drive the efficiency of these systems in a way that ultimately these data centers don't become such hogs of energy. And I think on both of those fronts, we just continue to see this immutable march forward and drive for customers forward. to really push the limits of technology, and that's something where our engineers are just really excelling. Whether it's designing the latest high-speed interconnects such that we can stretch the ability of copper interconnect far beyond what people ever thought was possible, and thereby saving both cost as well as power consumption and the design resources of our customers, to designing really complex power interconnects that ultimately reduce the power consumption of these data centers and make them more efficient. There's a lot of work going on there. At the same time, coupled with those great products, has been our consistent, and I will say really consistent through this whole cycle of the pandemic, ability to satisfy the needs of our customers, even when those needs change dramatically in a moment's notice. And that responsiveness and the fact that we never let our customers down while others were consistently letting them down has meant that our customers come to us more and more and give to us maybe a disproportionate share of their needs because they know that we're there for them when they need us the most. I remember so clearly in the second quarter of 2020, going all the way back to kind of the beginning of the pandemic, when everybody started going on to video calls and video meetings and the bandwidth just kind of exploded and people were watching over the top video at home, Netflix and other things like that. And our customers came to us with not just marginal increases in demand, but multiples of increase of demand. And we just figured out a way to make it happen. And that's the entrepreneurial reactivity of Amphenol that we talk about so often. And I think the customers in IT Datacom have been real beneficiaries of that. And we've been recognized by our customers, not just with more share, but with more supplier awards than I can remember in my entire career over this time period, recognition from those customers, both OEMs and service providers, that Amphenol really differentiated ourselves in terms of our reactivity and our reactions. What's that market going to be going forward? I think the demand for bandwidth does not seem to abate. Are we always going to grow by 35% organically in a quarter? I don't know that I would go out and commit to that, but I think our team has done a great job positioning us to outperform for a long time to come.

Thank you. Next question is from Nick Todorov with Longbow Research. You may go ahead.

Yes, good afternoon, everyone, and thanks for taking the question. Adam, I think you mentioned that you're starting to see some progress on pricing in the broadband market. I know that has been one of the most difficult ones to get the pricing through. Can you please help us unpack there a little bit what is causing that change and what are you able to do in terms of offsetting the impact of inflation that you're seeing there and maybe generally across the businesses?

Yeah, Nick, thanks so much for the question. I did make that mention, and we think some portion of our organic growth, certainly not the totality, but some portion is a credit to our team's long-term and very challenging efforts on pricing. I mean, the thing about our traditional broadband business, as you know, is it has a very high material content, but it hasn't always had a very rational competitive landscape. And so I think what we're starting to see now is the severity of the inflation is has really woken up the other participants in the market that there needs to be some reasonable sharing of that inflation with customers. And we've always been at the forefront of that. I've said for many, many years that we don't let the sun set on a pricing action from our peers in order to match that and to keep up with these inflationary pressures. And I think we've taken maybe even more of a leadership position over the course of the last year or so. And we're pleased to see some signs of maybe a little bit more discipline in that market that didn't traditionally have as much discipline. And it is a market where inflation has a disproportionate impact because of the higher material content, the raw material content, things like plastics and metals and the like. And so we're hopeful. It's certainly not a kind of fully told story here. But we're encouraged to start to see a little bit more progress in pricing in that market.

Thank you. Next question is from Jim Suva with Citigroup. You may go ahead.

Thank you very much. While it's very sad about the world conflict that's happening in Russia and Europe and such, taking a step back, I wonder, are you seeing and having discussions with defense companies that are maybe doing, say, electronic radar, surveillance, smart warfare, defense items, material pickup, because with the supply chain issues, you know, it'd be tough to simply put in an order and expect it pretty quickly. So I'm wondering if this is kind of a sector that all of a sudden unexpectedly and for sad situations start to see a pretty sharp increase in demand for the defense.

Well, thank you very much, Jim. And I would use the same adjectives as you, that it is a sad situation, what is happening in Ukraine, tragic in many respects. But I would also tell you that we're proud of the role that our company has played, both in supporting refugees coming from the Ukraine and some of the neighboring countries where we have operations, not only supporting them monetarily, but also providing jobs to some. I mean, this has been a real initiative by our team to support these people who have really had their livelihoods crushed. And at the same time, I think we've all witnessed the power of defense and that some of these new technologies that we have talked about for so many years, have real importance in people's lives to keep a country safe in the face of what I think many would consider an unreasonable aggression. So I wouldn't want to comment on specific conversations that we have in the defense industry. You can imagine that that's not something that we would want to do. But I think we're encouraged for the long term to see that many countries are waking up to the fact that maybe the defense budgets should be calibrated a little bit better to the level of threat that may very well exist in the world in order to keep the peace loving people of the world more secure. And that can translate into overall spending and it can translate long term into an acceleration of adoption of technologies. I've talked for a long time about the kind of difference in the defense industry between the more tactical defense spending and the more strategic defense spending. And I think, Jim, you've covered us probably as long as anyone, and you've heard that theme before. And I think what we're seeing here is no doubt about it a shift, a marked and relatively rapid shift in the focus of countries, especially those countries in NATO, towards an emphasis of strategic defense. And whenever you start talking about strategic defense, you immediately start to talk about technology. You talk about radar. You talk about missile defense. You talk about all of the things that electronics can do to protect people in their homes and in their sovereign nations. And I think Amphenol has played a leading role over the years in being an enabler of those kind of next generation electronic defense systems And so, you know, to the extent that this tragic and unfortunate conflict does drive an even greater focus among NATO countries, you know, we certainly sit, you know, as the leader in the military interconnect market in a position to really help those countries, to help the companies that are supporting that initiative in really adopting next generation technology to protect all of the citizens of these sovereign countries.

Thank you. Next question is from Wamsi Mohan with Bank of America. You may go ahead.

Yes, thank you. We appreciate the new segment disclosures. It seems like the operating margins here are ranging from 17% to 26% based on the segment. Can you talk about what is driving the dispersion there? Because in your 10-K, you do report most of these all three of these segments more or less cover all of your end markets. And you give some color about the products too, but would love to hear from you, Adam. But maybe what is it that's driving that delta in margins? And as you think about M&A, is there a propensity to lean towards one versus another segment? Thank you.

Yeah, thanks, Ramzi. I'll take this one, at least the first part of it. Yeah, certainly you're right. There's a range in margins of our segments. I don't think that's so surprising. We have 130 businesses, and you can't imagine that some of them are above the company average and some of them are certainly below the company average. And our businesses are typically – based on product technologies that have application across many different markets. I mean, we're very diversified from a market perspective. And one of the things we try to do for all of our businesses is to apply our products amongst those, proliferate our products amongst all the markets in which they can add value. And that, I think, has been a strength of the company and certainly has driven growth over the years. So, you know, that's the same as our segments. We didn't, you know, our segments aren't a, you know, market-focused segments. Our segments are product-focused segments for the most part. That does serve many different markets. So certainly there's no correlation from a market perspective. I guess the only thing I would mention is that there is, you know, in our communication solutions market, there is the broadband and mobile device markets are typically more the vast majority of those markets are served by that segment. But other than those, the rest of the six segments effectively are broad-based amongst all of our segments. And as it relates to margin, as I mentioned, some operations are above and some are below. I don't think there's really much to draw from in terms of the profitability, again, from a market or necessarily from a specific market. you know, business perspective. I think that when I think about the segments, clearly over time, you know, we have, we spend a lot of time on the businesses that have the lower profitabilities, including certainly acquisitions. You know, the interconnect and sensor systems segment has a couple more acquisitions, recent acquisitions in it, specifically MTS, which did drive actually the year-over-year reduction kind of in the margin in that particular business. So as you can imagine, we're working, as we talked about, with those businesses to drive up the profitability over time. But I think that we don't have margin or conversion margin targets. by segment, but we certainly do an overall company level that hasn't changed. And we talk about the 25% conversion margin. As you can imagine, the higher profitability businesses are going to convert possibly a little bit higher than the lower profitability businesses. But ultimately, our goal is to drive profitability up in all of our businesses and ultimately all of our segments over time. But I wouldn't necessarily point out anything specific that's driving you know, that significant margin differences, other than that's kind of how the businesses ultimately were segmented for management reporting purposes.

Yeah, and relative to your question on M&A, Wamsi, no question, we have a propensity to look for acquisitions across every one of our markets and across all of our three now segments, as we call them. we're not at all going to kind of direct our resources strategically towards one or another. It's an equal opportunity resource for all of them. And to the extent that we find strong acquisitions with the criteria that I alluded to earlier, we're very aggressive and happy to make those acquisitions regardless of which segment it's in.

Thank you. The next question is from Luke Young with Baird. You may go ahead.

Good afternoon and thanks for taking the question. Have a maybe what's a part backward and forward looking question. And specifically, Adam, I'm wondering if there's any color on bookings or orders in your auto business specifically you could share after obviously a very big increase in that business in 2021 and here in the first quarter as well. But look back a couple of months ago, the 10K included some language on the overall business, stating that the increase in the company's backlog was with the significant sales increase. Given the significant sales increase in auto specifically, how should we think about that backlog in orders relative to that end market? Thank you.

Yeah, I mean, it's interesting. When we look across all of our end markets in terms of our book-to-bill, we had pretty strong – books to bill across really all of our end markets, with the exception of mobile devices, where it's always kind of one-to-one. And I think broadband was also a relatively flat book to bill. But all the other markets had pretty robust books to bill. And I would say maybe automotive was even a little below the average, but still a strong, more than one book to bill. And I don't know that I would draw any conclusions about automotive and the past performance or the trajectory based on those bookings. I think what I would just highlight again is that, you know, our performance in automotive has been really consistently outperforming the end market, whatever the end market is. And, you know, lots of people take lots of different cuts at, you know, what is end market performance units or whatever it is. But for sure, our growth in this quarter where we achieved 17% growth, that was on the heels of last quarter where we grew 18%. The quarter before, 31%. The quarter before that was even this kind of crazy number of more than 100%. And I just think that it's a reflection of the dynamics that I have talked about earlier and before, which is the higher content that we see on next generation platforms. In particular, we've seen a market increase in the adoption of electrification, electrified drive trains, and our team has done a fabulous job to position themselves in that area. And we're doing that really across the globe, really broadly from a geographical perspective. And then all the other new electronic systems that are coming into cars, where we're not necessarily taking share from out of one's pocket, but we are maybe getting a little more than our fair share of these new things because of our reactivity to the customers and the appropriateness and the breadth of the technology that we can offer from the interconnect products, connectors, value-add interconnect products, sensors, and antennas. And so I think our position in automotive, well, certainly we're not the biggest in the automotive interconnect space, far from it, but I think our performance has really been differentiated because of our ability to really capture a little bit more than our fair share of these new things.

Thank you. The next question is from William Stein with Truist Securities. You may go ahead.

Great. Thanks for taking my question, and congrats on the good results and outlook. First, you may have quantified it if you had. I apologize for asking, but the impact of the COVID-related shutdowns in China that you're seeing? If you've already answered that, perhaps you can talk about linearity of bookings and whether you've seen any perturbations from what's going on in either Ukraine or China and any erosion into April. Thank you.

Yeah, well, thanks very much. I don't think we put an exact number on the COVID shutdowns and we don't plan to. I think it's not like a massive impact It's also hard to count it. I mean, every day it's changing a little bit, but there's certainly some impact. And I think I mentioned earlier, we see it most in the mobile devices, but we see it in a few other markets as well, like automotive and IT datacom and industrial. In terms of the linearity of bookings, you know, our first quarter, we saw... you know, pretty good strength through the quarter. I mean, February is a short month, you know, sort of Chinese New Year, but we finished the quarter really strong. And bookings in March were really strong indeed. And, you know, April, we're still three days away from the end. So I couldn't even give you a number if I wanted to, but we'll see how it goes here in April. I mean, would I expect a 117 to one book to bill here in the second quarter? I don't think I would expect that. I didn't expect it coming into the first quarter. And, and we had very strong bookings, but I don't expect that here in the second quarter, but we'll see. I think customers still have quite a propensity to give us business new and existing, and that's translating into very robust orders for quite a number of quarters there.

Thank you. The next question is from Chris Snyder with UBS. You may go ahead.

Thank you. I wanted to follow up on the prior commentary around customers more so valuing diversification in their supply chain, which certainly screens positive for a global leader like Amphenol. My initial question is, where is this dynamic showing up, and where would you expect it to show up? Is it just the rate of share gains, maybe helping with some of these pricing negotiations? Or could it even help facilitate M&A for maybe some of your smaller competitors who might be on the opposite side of that equation? Thank you.

Yeah, thanks so much, Chris. It's hard to sort of pinpoint it because at the end of the day, well, why does a customer give us an order in any given moment? I mean, there's an enormous number of factors that go into that all along a spectrum. from the technology that we offer, the reliability of our delivery to that customer, our quality, our support, the breadth of our relationship, obviously the price. That's something that no customer wants to ever forget about. And so as you build over a long term a sustainable advantage with customers, it's all about continuing to just add to each of those factors Further reason for customers to place an order to you and not to your competitor. And I think over the last two years, look, over a long time, that's always our focus. How do we have a little bit better product? How do we have a little bit better quality? How do we have a little bit better credibility of delivery? How do we have a more competitive cost by going to low-cost countries and the like? But what has changed over these two years is there's a new factor that customers are considering, and that is risk. And I will tell you that over many years I've been, you know, now I'm in my 24th year in this company and my 14th year as CEO, I think customers under-accounted for risk in many cases because it was just easy to say, well, here's the price and, you know, the quality is good and it's the right product and we don't really need to think about all these kind of black swan events that may or may not happen. And, by the way, that was true – through earthquakes and tsunamis that was true through volcanoes in Iceland and floods in Thailand and all these things. But something about the last two years has caused them really to wake up to think about the real risk of their supply chain. And when they do that and they look at the landscape of competitors, they look at a small company and they see risk. They look at a centralized company and they see risk. But when they look at Amphenol and they look at our decentralized, very fragmented, very global, you know, we have more than, what, something like 250 factories around the world, which is a lot more than most companies of our size, they see not risk but actually opportunity. And I think that that change has been just another factor that didn't exist in the past. And where does it manifest? I mean, I think it does manifest to some degree in our outperformance and in the continuation of our outperformance. As it relates to M&A, I think there is actually also an advantage because if you're a small company and you've been through this kind of Rubicon of challenges that we've all faced over these couple of years, being part of a bigger company that gives you more options of where you can make stuff and where you can source stuff and where you can sell stuff that starts to be a pretty compelling thing to think about if you really truly care about the company that you as an entrepreneur have built. And so I think that can also have an advantage. I think there's advantages that sort of go throughout the business, and it's, again, why we're so religious about our adherence to the culture of Amphenol, that unique entrepreneurial culture which has served us in good times and bad times And I think the value of it has been more enhanced over these last couple of years than really ever before.

Thank you. Next question is from David Kelly with Jefferies. You may go ahead.

Hey, good afternoon, Adam and Craig. I was hoping to drill down on industrials. You posted another really strong quarter there. And just given your broad exposure to Can you walk us through how you're thinking about the industrials market growth visibility and what feels like a strong capex cycle but also an uncertain near-term global macro? And then just curious as your thoughts on the potential magnitude of content outgrowth given what, again, feels like an, I would argue, unprecedented pace of technology transformation currently undergoing in industrials. Thank you.

Thanks so much, David. No doubt about it, our team working in the industrial market has just been consistently outstanding in their performance. I mean, since the kind of acute phase of COVID in Q1 of 2020, at least in Asia, you know, we've posted consistently strong double-digit year-over-year growth every quarter since then. So we just did our eighth straight quarter in industrial of strong double-digit growth, and it's really a testament to, to their efforts. As you pointed out, it's a very broad market. It's everything from advanced medical equipment to next-generation agricultural equipment to high-speed rail to semiconductor manufacturing equipment to heavy equipment to electrification of heavy vehicles and battery technology, battery storage, where we see just a lot of opportunities to enable a real myriad of customers who are developing next-generation energy storage systems. And, you know, they want our sensors. They want our connectors. You know, they want everything. I mean, these applications are really all over the place. And they all go on, you know, somewhat different cycles, I should say. But at the end of the day, they have one thing in common, which is it is the adoption of electronics into harsh environments. into areas where those electronics otherwise should not really be able to operate. And that is a legacy that we have of many, many decades of building up the capability of packaging interconnect and sensors for harsh environments, which now means putting highly computerized autonomous driving systems on tractors. and now means putting next generation sensor technologies and alternative energy devices and monitoring of windmills and things like this. I could go on and on and on. Amidst the uncertain global macro, you have the certainty of the continued onward and upward march of the adoption of electronics. Am I going to say that we're going to grow every quarter here in perpetuity by these outstanding amounts? No, I wouldn't expect that we're going to grow by 31% every quarter going forward, but I do believe that the opportunity to outperform here remains very strong and that the breadth of our industrial product technologies is really second to none, and I think that positions us well for the future.

Thank you. Next question is from Joe Spack with RBC Capital Markets. You may go ahead.

Thank you. Maybe just to go back to one of the other questions about the end markets and sort of being pretty well split across all the new segments. Is the implication also that the growth you've laid out for the entire company, organic in the second quarter, Like, is that also evenly split by the new reporting segments? Is there any sort of color in terms of how we should think about the segment performance would be helpful?

Yeah, thanks very much, Joe. I mean, we're not guiding necessarily to growth by segment. I think we give a lot of details by each of our end markets. But as you saw this quarter, I mean, the growth was pretty balanced across those segments. Now, we had really broad growth across the company. So I wouldn't necessarily say that, you know, what we would expect by each segment going into the second quarter.

Thank you. Our last question comes from Joe Giordano with Cohen. You may go ahead.

Hey, guys, thanks. On auto, obviously the performance has been really good for a long time relative to peers, relative to the market, however you want to cut it. I'm just curious, like if you were to break down the outperformance in like large buckets as to what's driving it, maybe I can leave it open in there. But I'm also curious as to how much maybe is with production being constrained here and focused on SUVs, high end EVs, like kind of the things that are probably best for you. How much of that is driving some of this as well?

Yeah, I mean, I don't know that there's a significant impact, Joe, from kind of the hot potato of people tossing semiconductors back and forth and deciding which vehicles they should put them in and thereby which they should sell and prioritize. I mean, look, if our customers are building higher content cars, is that a good thing? Yeah, I guess that would surely be a good thing, but that should be a good thing for everybody in the market. And I think, you know, would that drive specifically our outperformance? I don't know that that would necessarily be the case. I think really what we see, and I'll just reiterate it again, is we see just an acceleration of the adoption of next generation systems across all vehicles. And that includes, you know, the electrified drivetrains that we mentioned, but not exclusively that. It's next generation infotainment. It's next-generation communication. It's next-generation comfort, passenger comfort. It's next-generation connectivity in the cars. It's everything from sensors that keep the HVAC systems running better and being safer for the people inside. I mean, you think about, like, going through a respiratory-borne illness pandemic, and all of a sudden car companies want to have better HVAC filtration and sensing inside their cars, and that's a great new application that may not have existed kind of in the past. And so I think that's the bigger driver here than just that some car companies are making more tactical decisions about which models to produce based on constrained availability of certain components. Well, thank you very much to everybody. I think that's our last question, and I do want to take this opportunity once again to thank you all for spending a few of your precious time, a few of your precious minutes with us today, and wish you all the best, and we look forward to seeing everybody again either over the course of this quarter or at the latest 90 days from now. Thanks so much, everybody. Thank you. Bye-bye.

Thank you for attending today's conference, and have a nice day.