Amphenol Corporation

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

Thanks. 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 second quarter 2022 conference call. Our second quarter 2022 results were released this morning, and 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, all data discussed during this call is on a continuing operations basis, including prior year comparative information. The company closed the second quarter with record sales of $3,137,000,000, and record GAAP and Adjusted Looted EPS of 76 and 75 cents, respectively. Second quarter sales were up 18 percent in U.S. dollars, 21% in local currencies and 18% organically compared to the second quarter of 2021. Sequentially, sales were up 6% in U.S. dollars, 8% in local currencies and 8% organically. Adam will comment further on trends by market in a few minutes. Quarters in the quarter were a record $3,449,000,000, which was up 11% compared to the second quarter of 2021 and relatively flat sequentially, resulting in a strong book-to-bill ratio of 1.1 to 1. Both GAAP and adjusted operating income were $649 million in the second quarter of this year, and GAAP and adjusted operating margin were both 20.7% in the second quarter. On a GAAP basis, operating margin increased by 280 basis points compared to the second quarter of 2021, and 70 basis points sequentially. As a reminder, GAAP operating margin for the prior year quarter included $55 million of acquisition-related costs as a result of the MTS acquisition. On an adjusted basis, operating margin increased by 70 basis points both year-over-year and sequentially. The year-over-year increase in adjusted operating margin was driven by operating leverage on the significantly higher sales volume as well as the benefit of ongoing pricing actions, which we believe have offset a meaningful amount of the inflation-related cost increases. On a sequential basis, the increase in operating margin reflected operating leverage on the higher sales volumes, as well as the benefit of ongoing 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 the myriad of operational and supply chain challenges around the world is a direct result of the company's entrepreneurial culture, which continues to foster a high-performance, action-oriented management team. Breaking down second quarter results by segment, relative to the second quarter of 2021, sales in the harsh environment solution segment were $790 million, an increase by 14% in U.S. dollars and 16% organically. Segment operating margin was 26.1 percent. Sales in the communication solution segment was $1,378,000,000 and increased by 24 percent in U.S. dollars and 19 percent organically. Segment operating margin was 22 percent. Sales in the interconnect and sensor system segment were $968,000,000 and increased by 15 percent in U.S. dollars and 19 percent organically. And segment operating margin was 18.3 percent. The company's GAAP effective tax rate for the second quarter was 23.3 percent, and the adjusted effective tax rate was 24.5 percent, which compared to 17.5 percent and 24.5 percent in the second quarter of 21, respectively. GAAP diluted EPS was a record 76 cents in the second quarter, an increase of 29 percent compared to 59 cents in the prior year period. An adjusted diluted EPS was a record 75 cents, an increase of 23% compared to 61 cents in the second quarter of 2021. This was an excellent result, especially considering the significant costs, supply chain, and other operational challenges that the company continued to face during the quarter, including certain COVID-related shutdowns in China. Operating cash flow in the second quarter was a record $543 million, or 117% of adjusted net income. In net of capital spending, our free cash flow was a record $452 million, or 97% of adjusted net income. Given the continued supply chain challenges, we were pleased to see cash flow yield recover back to normal levels in the second quarter. From a working capital standpoint, day sales outstanding and payable days were 72 and 58 days respectively, both within our normal range, and inventory days were 86. which was slightly elevated due to the challenging supply chain environment that continued in the second quarter. During the quarter, the company repurchased 2.7 million shares of common stock at an average price of approximately $70. And when combined with our normal quarterly dividend, total capital return to shareholders in the second quarter of 2022 was $305 million. Total debt on June 30th was $4.9 billion, and net debt was $3.5 billion. Total liquidity at the end of the quarter was $3.7 billion, which included cash and short-term investments on hand of $1.3 billion, plus availability under our existing credit facilities. Second quarter 2022 EBITDA was $759 million, and at the end of the second quarter, our net leverage ratio was 1.2 times. I will now turn the call over to Adam, who will provide some commentary on current market trends.

Well, Craig, thank you very much, and I hope that all of you in the call here today are enjoying the summer so far, and most importantly, your family, your friends, and your colleagues are all still managing to stay safe and healthy. As Craig mentioned, I'm going to highlight some of our achievements in the second quarter. I'm then going to discuss our trends and progress across our served markets. I'll then make a few comments on our outlook for the third quarter, and then finally, we'll, of course, have time for questions. As Craig just went over, our results in the second quarter were much better than expected. We exceeded the high end of our guidance in sales and adjusted diluted earnings per share. Sales grew a very strong 18% in U.S. dollars and 21% in local currencies, reaching a new record of $3,137,000,000. On an organic basis, our sales increased by 18%. supported by robust growth across nearly all of our end markets, as well as contributions from our acquisition program, which was partially offset by the strengthening U.S. dollar. Company book record orders of nearly $3,450,000,000, and that represented a continued positive book-to-bill of 1.1 to 1. We were especially pleased to deliver strong profitability in the quarter, with operating margins reaching 20.7%. And that's a 70 basis point increase from both prior year and prior quarter. And we achieved these operating results despite facing a wide range of operational, inflationary, and supply chain challenges, as well as the COVID shutdowns in China that Craig mentioned. Adjusted diluted EPS grew a strong 23% from prior year to a new record of 75 cents, another excellent reflection of our continued strong execution. Then finally, we're very pleased that the company generated record operating and free cash flow in the quarter of $543 million and $452 million, respectively. I just want to say how proud I am of our team around the world. Our results this quarter once again reflect the strength of Amphenol's entrepreneurial organization, who has continued to perform very well amidst a highly dynamic and challenging environment. We're very pleased to have announced in the quarter that we closed on the acquisition of MPI Solutions. Based in Morgan Hill, California, and with annual sales of approximately $65 million, MPI is a manufacturer of cable assemblies and complex interconnect assemblies for the industrial market, with a particular focus on customers in the semiconductor equipment and test and measurement markets. The addition of NPI expands our already broad position and value add interconnect for these important and high potential markets. As we welcome this outstanding new team to Amphenol, I remain confident that our acquisition program will continue to create great value for the company. In fact, our ability to identify and execute upon acquisitions and successfully bring those companies into Amphenol remains a core competitive advantage for the company. Now turning to our progress across our served markets, I would just note once again how pleased we are that our end market exposure remains highly diversified, balanced, and broad. No doubt about it, during these very dynamic times, that market diversification continues to create great value for the company. The military market represented 9% of our sales in the quarter. Sales declined by 2% from prior year but were flat organically. with moderations in our sales into naval and military vehicle applications offset by growth in space, avionics, and UAVs. Sequentially, our sales increased by 3%, which was in line with our expectations coming into the quarter. As we look into the third quarter, we expect sales to increase modestly from these second quarter levels, and we continue to be very pleased with the strength of the company's broad position across the military markets. As militaries around the world continue to adopt a wide array of next-generation defense technologies, our industry-leading breadth of high-technology interconnect and sensor products positions the company strongly across all major defense programs. This gives us great confidence for our long-term performance. The commercial aerospace market represented 3% of our sales in the quarter, And our sales increased by a very strong 32% from prior year and 36% organically as we benefited from the continued recovery in global aircraft production. Sequentially, our sales grew 11% from the first quarter, which was actually much better than the expectations that we had coming into the quarter. Looking into the third quarter, while we do expect a seasonal low double-digit sequential decline in sales, we anticipate continued and substantial growth from prior year. We're very encouraged to have driven another quarter of strength in the commercial air market, which is quite a welcome development after two extremely challenging years in the air travel industry. 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 and next-generation systems integrated into those planes. I'm particularly proud of our team working in commercial air who really have persevered throughout the downturn and who are now once again realizing the fruits of their long-term labors. The industrial market represented 26% of our sales in the second quarter. Sales in the quarter grew 13% in U.S. dollars and 15% organically. And this was driven by broad-based strength across most of our industrial and markets including especially the battery and electric heavy vehicle applications, oil and gas, medical, and rail mass transit. On a sequential basis, our sales increased by a better than expected 8% from the first quarter. Looking into the third quarter, we expect sales to roughly remain at these very robust second quarter levels. I have to say that our results this quarter confirm 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. To that end, the addition of MPI solutions further strengthens our position in the important semiconductor and test and measurement equipment interconnect markets. We look forward to realizing the benefits of this long-term strategy for many years to come. The automotive market represented 20% of our sales in the quarter. Sales in the second quarter grew 23% in U.S. dollars and 29% organically. And this was driven by broad-based strength across most automotive applications with particular strength once again in sales into electric and hybrid electric vehicle applications. Sequentially, our sales increased by 6%, which was much better than our expectations coming into the quarter when we had anticipated a modest sequential decline. For the third quarter, we now expect a moderate sequential decline in sales as customers continue to manage through a wide array of supply chain challenges in the global automotive market. I remain extremely proud of our team working in the important and dynamic automotive market. They continue to manage through a difficult supply chain environment, all while remaining focused on driving new design wins with customers who are implementing a wide array of new technologies into their vehicles. Our continued outperformance is a direct result of their excellent efforts. The mobile devices market represented 9% of our sales in the quarter. Our sales increased by 7%. in the second quarter as strength in smartphones and laptops were somewhat offset by a moderation of sales of products incorporated into tablets. Sequentially, our sales declined by a better than expected 6% versus the first quarter. Looking now into the third quarter, we anticipate sales to increase by more than 20% compared to these second quarter levels on typical seasonal strengths. I remain very proud of our team working in the mobile devices market. In particular, amidst the COVID-related disruptions in China that occurred early in the quarter, our outstanding and agile team once again delivered strong results. Most importantly, they continued to design our leading array of antennas, interconnect products, and mechanisms into a wide range of next-generation mobile devices. And they remain, as always, poised to capture any opportunities for incremental sales that may arise this year and beyond. The mobile networks market represented 5% of our sales in the quarter, and sales grew from prior year by 9% in US dollars and 6% organically. As strength from products sold to network operators, together with the benefit of acquisitions, more than offset a moderation of our sales to wireless equipment manufacturers. Sequentially, our sales in the second quarter grew by a slight 1%, but that was better than our expectations coming into the quarter. Looking to the third quarter, we now expect to grow moderately from these second quarter levels. We're encouraged by the company's continued strength in our sales into the mobile networks market. As operators ramp up their investments in next-generation systems, our team remains focused on realizing the benefits of our long-term efforts to expand our position in next-generation 5G equipment and networks around the world. The information technology and data communications market represented 23% of our sales in the quarter. Sales were stronger than expected, rising by a very robust 31% in U.S. dollars and 26% organically from prior year. Our team really just executed well in fulfilling broad-based strengths across server and networking applications, including with web service providers. Sequentially, our sales increased by 11% in the second quarter, which was better than our expectations. Looking to the third quarter, we expect sales to moderate from these very strong second quarter levels. Nevertheless, we remain encouraged by the company's outstanding position in the global IT Datacom market. Both our OEM and web service provider customers continue to drive their equipment and networks to ever higher levels of performance, really in order to manage the dramatic increases in demand for bandwidth and processor power. We look forward to realizing the benefits of that leading position in this important market for many years to come. Finally, the broadband market represented 5% of our sales in the quarter, Sales grew by a very strong 57% in U.S. dollars and 28% organically as broadband spending levels increased and as we benefited from our recent acquisitions. Our growth in broadband was particularly strong in North America. On a sequential basis, sales increased by a much better than expected 14% from the first quarter. As we head into the third quarter, we do expect sales to the broadband market to decline moderately from these levels. But 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 even more homes and businesses, these products have become even more critical. Now turning to the company's outlook, there's no doubt that the current market environment remains highly uncertain with ongoing supply chain and inflationary challenges, as well as some continued disruptions from the COVID-19 pandemic. Assuming those conditions do not meaningfully worsen and also assuming constant exchange rates. For the third quarter, we expect sales in the range of $3 billion, $40 million to $3 billion, $100 million. and adjusted diluted EPS in the range of 73 to 75 cents. This would represent strong sales growth of 8 to 10 percent and adjusted diluted EPS growth of 12 to 15 percent compared to the third quarter of 2021. I just want to say that I remain confident in the ability of our outstanding Amphenol management team to adapt to the many opportunities and challenges in the marketplace and to continue to grow our market position while expanding the company's profitability. In addition, our entire organization remains fully committed to delivering long-term sustainable value, all while prioritizing the continued well-being of each of our employees around the world. And finally, and most importantly, I would like to take this opportunity to thank that entire Amphenol team for their truly outstanding efforts here in the second quarter. And with that, operator, we'd be very happy to take any questions that there may be.