Amphenol Corporation

Q2 2022 Earnings Conference Call

7/27/2022

spk17: 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.
spk13: 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.
spk09: 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.
spk17: Thank you. The question and answer period will now begin. Please limit to one question per caller. Our first caller is Mark Delaney with Goldman Sachs. You may go ahead.
spk10: Yeah, good afternoon. Thank you very much for taking the question and congratulations on the strong results. Something to better understand the guidance, I think 3Q revenue is typically up sequentially and the company guided it down just a touch at the midpoint of guidance. I'm hoping to better understand, are you seeing any slowdown in customer demand perhaps because of some of the macroeconomic conditions or is this more about sales coming off of a very high base and still being at a very good overall level? Thanks.
spk09: Yeah, thanks so much, Mark. I mean, look, this is a very unique year. There's no doubt about it. There's a lot of things going on. I talked about the uncertainty that is in the market. And I won't go through each of the end markets. I think I just went pretty fulsomely through our expectations. I think we have a really strong outlook here, given the real strength that we saw in the second quarter, given the continued momentum that we have across the company and We see growth in a number of our end markets. In a number of our end markets, we view as having, at this point at least, the potential that they may moderate slightly. But I feel that this is very strong guidance from a top line perspective. We have great momentum, both order momentum as well as continued strong positions with our customers. And I think that overall, given the environment, given all what is happening in the global economy, I think this is very strong guidance.
spk17: Our next question is from Amit Daryanani with Evercore. You may go ahead.
spk16: Thanks a lot. Congrats on the great quarter for mine as well. You know, I guess, Adam, the question is for you. Yeah, I'd love to get your perspective. There seems to be a lot of concern around the macro had been impacting in demand. You talked a little bit about that as well. You tend to have a very broad perspective. You talk to a lot of customers. Are you seeing signs of softness of customers holding back orders and demand at this point, given what we're seeing in the macro side? Just anything you can talk about from your discussion with customers and anything you've seen different in the channel versus OEM would be really helpful.
spk09: Yeah, thanks so much, Ahmed. Look, I think we read the papers and watch the news like everybody does, but what we really listen to is our customers. And I think you saw in the second quarter our customers gave us still very robust orders, and we executed on the orders that we had, and thereby were able to deliver the upside that we did here in the second quarter. I think if I look across the end markets, if any market has some customers who are saying maybe there's a little bit of a breathing, a little taking a breath, for example, and we have very strong demand in the IT Datacom market. I talked about the fact that in IT Datacom we expect to see a little moderation in the third quarter. And I think that's a bit of a reflection of some customers taking some breathing and so to speak, after really, really strong demand. But have we seen broadly across areas like industrial, automotive, aerospace impacts of the macroeconomic? I mean, we really haven't at this stage. I will say this. You know, the Amphenol team, we're not in the business, and we don't view it as our business to try to guess where the economy is going. Can there be one day a recession? I mean, there's lots of people who are much more expert than I am who are probably going to make prognoses about that, and we won't get in the business of doing so. But what we are doing always inside our company is making sure that we're prepared either way. And I've used that term before in this forum of driving with one foot on the gas and one foot on the brake, and that's just the Amphanolian way. We are going to have our foot heavy on the accelerator, capitalizing on this great backlog that we have, capitalizing on the wonderful position we've built with customers, capitalizing on the new technologies that we're enabling, next-generation applications with our customers. But we're always going to have a foot covering the brake in case we see something different coming our way, and then our general managers, 130 of them around the world, will quickly take action to adjust our resources, to react to whatever dislocations can come in the marketplace, and thereby to both preserve the financial strength of the company while ensuring that we can continue to grow our market position in any economic environment. And that's where we stand today. Is there going to be, because of the Fed or because of whatever geopolitics or because of whatever reason, some macroeconomic slowdown or some shock? We don't know, and in all honesty, we don't try to spend a lot of time wondering about that. We talk to our customers, and when we see something change, we'll react with the type of speed that everybody has been accustomed to from the Amphanolian organization.
spk17: Our next question is from Wamsi Mohan with Bank of America. You may go ahead.
spk03: Yes, thank you. Adam, I was wondering if you might be able to comment on what you're seeing on the ground in China, clearly in the second quarter, there were lockdowns for a couple of months and then a recovery from there. But just from a demand perspective, can you maybe share any color on how those months transpired from a demand? And if you're seeing any real snapback in demand, especially in light of the view that There are some stimulus programs underway, and maybe if you can share some context on what you've seen in the past from such initiatives, how that might have benefited Amphenol. Thank you.
spk09: Sure. Thanks so much, Wamsi. I mean, look, first and foremost, I just have to credit our team in China. I mean, in particular, those who work in and around Shanghai. Now, as you know, Wamsi, we have facilities all over. We don't concentrate them in one or another city. And I have to say that manufacturing strategy that we have of having it be quite fragmented has been a very, very big asset for the company as these COVID lockdowns have occurred, because it never happens that we're impacted in our totality or in any material sense. But we do have several operations that operate around Shanghai. And some of our team members there, I mean, We had several of our general managers who were locked in their apartment for the better part of three months. And we had to operate factories in bubbles and things like that. And it was just an extraordinary, extraordinary effort and drive and ultimately success by our team. And I'm just so grateful to each and every one of them for making the sacrifices that they did and continuing to have the commitment to the company and to our customers that was clearly reflected in this quarter. All that being said, I think that ultimately the impact of those shutdowns on our business in the second quarter was very modest, if anything, because our team was able to execute through the shutdowns, and then to the extent that any catch-up was necessary, they were able to do that over the course of the quarter as some of the more severe shutdowns abated. We have seen strong demand, especially in areas like automotive and in the mobile market, some of the other communications markets in China, and also in industrial, where we have a very strong position. And in particular, we see strength in China in anything that's being electrified. And that's been a great progress for the company. And I think We have seen some pickup in demand coming out of those shutdowns in certain of those areas. With respect to the stimulus, I can tell you that I still remember my very first quarter as CEO, and this is taking us all back in time now because I've been CEO since January of 2009, but that was a really tough time period. Everybody will recall I became CEO in January of 2009 at the depth of the beginning of the financial crisis, and that was when China decided to build a 3G network, and it was effectively a stimulus program that accomplished also the goal of expanding the ability of people to have mobile broadband. And I think as they talk about stimuli today, In today's economy, a lot of that also does revolve around new technologies, things like electrification of vehicles, of heavy vehicles, the build out of other infrastructure. And so to the extent that those kind of stimuluses do in fact come, our position across all those end markets is a very strong one. And I would expect our local team to be well poised to take advantage.
spk17: And our next question is from Matt Sheeran with Stifel. You may go ahead.
spk15: Yes, thank you and good afternoon. Adam, I wanted to just ask or get a little bit more color on that really strong margin expansion that you saw, 70 basis points quarter on quarter. You talked about pricing. You also talked about leverage. Where do we stand on pricing right now in terms of continuing to increase ASPs as your input costs go up? Or should we just expect sort of the normal, you know, margin contribution that you typically see in the business?
spk13: Hey, Matt, this is Craig. Thanks for the question. Yeah, no, it's a great question. I mean, we're really proud, you know, of the achievement we had here in the second quarter, 20.7%, really strong operating margins and Obviously, we capitalized on the strong demand environment, but the team really did an outstanding job really navigating, I think, the environment around cost and inflation, supply chain, all these things that clearly have put pressure on margins. We talked about coming into the year how we have been starting to see some impact of the pricing actions that have been taken. We had strong margins in the first quarter. You know, we talked about, you know, coming into the second quarter here, expecting some additional, you know, traction related to pricing. And, you know, and as I mentioned in my prepared remarks, I think, you know, at this point coming into the second quarter, we really have, we believe, you know, had a meaningful progress on really offsetting a good portion of the inflation, supply chain, and other costs that we've seen over the past year. We do expect actually some additional progress here in the third quarter, and I think our guidance does reflect that on our guidance at the revenue line being a little bit lower sequentially and our EPS being kind of basically flat, which would represent an implied continued progress on margin, which is partially due to continued pricing actions that continue to take. Well, where we are on that journey in terms of, you know, will we be at the end of it at the end of the third quarter? I don't necessarily know that I would say that, but I'm not sure what, you know, what's going to happen with inflation. I mean, that continues to be a big question mark. I mean, the cost environment continues to be very dynamic. So I think, you know, as we have done, as we will continue to do, our general managers have done an outstanding job at, you know, just, you know, raising prices commensurate with the cost environment and, And we'll continue to do that, and I'm really proud of the team for the progress we've already made.
spk17: Our next question is from Steven Fox with Fox Advisors. You may go ahead.
spk02: Hi. Good afternoon. Could you talk a little bit more about the wireless device markets? I know you mentioned it's looking seasonal. It sounded like it's on the low end of seasonal. So from an end market standpoint, and also, Can you touch on how you're looking at content this year versus maybe last year where maybe you're doing better or different types of technologies that you're leveraging into new phones and tablets, et cetera? Thank you.
spk09: Thanks so much, Steve. Yeah, look, I think we've guided it to be up at least 20% here in the third quarter, the mobile devices market. It's a very hard market to predict, as you know, with any certainty, one quarter out, let alone a month out, or sometimes even a week out. There's no doubt about it. It's our most volatile of markets. And I think that's a strong guidance, given the inherent volatility in the market. I think relative to our content, this continues to be a market where there's a lot of different devices, where every one of those devices is a bit of a jump ball. And we try to win more than we lose of the content on those devices. And I think Over time, we've successfully broadened the range of products that we sell into mobile devices to be not just, you know, antennas and interconnect, but also a wide range of mechanisms and the like. And we've also broadened the range of products that we sell into. So today, when we think about mobile devices, you talk not just about smartphones and mobile computing devices like laptops and tablets, but wearables and hearables and all these various things and lots of just new devices that are technically mobile devices. It's unbelievable, actually, the continued spread of these devices. Hopefully, we can have next year a normal consumer electronics show, and we can go to something and just see the extraordinary array of things that are there. It's actually just a really exciting market. And so I think from a content perspective, I'd say that our team continues to accomplish their goal of maximizing their content while never being able to win everything on every platform. And I think we remain in a very strong position. And the team remains just so agile and reactive to the inherent volatility that's in that market, which gives me confidence that whatever comes along, if there's an uptick in demand or or vice versa, that our organization who works in mobile devices is going to be prepared for it.
spk17: Our next question is from Sameek Chatterjee with JPMorgan.
spk11: You may go ahead. Great. Thank you. Thanks for taking my question. I guess I wanted to dig into the industrial segment a bit, Adam, if you can. I know you have a collection of different end markets in there and you had strong growth. If you can just dig into sort of the different end markets there and if you're seeing sort of broad-based trends or are there any pockets where you still sort of see a recovery where it might be below sort of pre-pandemic levels? And just curious, now that this segment is tracking more than 25% of your revenue mix on a more consistent basis, is there any change in thinking relative to sort of acquisitions particularly if it adds exposure to the broader industrial market further. Thank you.
spk09: Thank you very much, Sameek. Look, industrial has been a really strong market for us here for quite some time period. I'm just so proud of our team in industrial. If I look back, I mean, this is, I think, something like our ninth consecutive quarter of double-digit growth in industrial. And that has included some really wonderful acquisitions that we've made both on interconnect and sensors and antennas. And today, the breadth of where we sell industrial products, per se, is broader than it's ever been before. I mean, if you think about where kind of industrial is, it can be everything from a high-speed train to an offshore oil platform to an alternative energy solar farm or windmill to It can be in heavy equipment. It can be in building architecture and HVAC systems. It can be sensing for a wide variety of things. I mean, you can't imagine where you can put, like, a sensor and an antenna and a connector to, like, to check the weather. You can put these things on tall buildings all the way down to tiny birdhouses. I mean, you name it. There can be so many different places where industrial products can go. And all along what ties them together is this unique – harsh environment packaging of the products, be they interconnect, be they sensors, be they antennas. We think it's a great place to make acquisitions. And the fact that industrial is today something like 26 or so percent of our sales doesn't at all give us pause because it's also our broadest, most diversified market of all of our end markets in terms of the applications and the variability of those applications. So far from it. I mean, we just completed the acquisition of NPI this last quarter. NPI sells harsh environment, complex interconnect assemblies that are used in a very specific part of the industrial market in particular, which is the semiconductor capital equipment and the test and measurement equipment market. This is a great space to be for the long term. I mean, just look at some of the legislative priorities in our country and in many others and the trends for many years into the future, that seems like a very good place to be. But so does electrification of heavy equipment. So does something like alternative energy and all what that is entailed. And so we're very committed to the industrial market. If we see great acquisitions that come along that expand both our product technology and our position across some of these segments, we're not going to shy away from them.
spk17: Our next question is from Luke Young with Baird. You may go ahead.
spk14: Good afternoon. Another question on the broader business, but more of a company-specific standpoint. So although you're not seeing the business yet, there are, of course, these broader signs of rising economic risks. Overall, as other callers have highlighted, what I'm wondering, Adam, is if you could comment on your conversations with your general managers right now, given the backdrop, and specifically, any contingency planning they might be doing at present for their businesses to find growth and protect earnings in what could be a more challenging environment from here in other words the break side of the gas and break dynamic that you spoke to earlier thanks yeah well thank you very much i mean look we we have a lot of conversations with our management team including directly with our general managers uh and and and all of the people in the organization and
spk09: And you can bet we're always talking about this concept of one foot on the gas and one foot on the brake. I mean, even just this morning, we have always a discussion with our whole team at the time of our earnings. That's, by the way, why we do this call in the afternoon. It's because we have all of our management team together at 8 in the morning, and that's a better time for people around the globe. And you can bet that we're always reinforcing that idea that, We have a strong momentum right now. Our customers want a lot of product from us. Let's execute on that. But let's keep the windshield clear so that you see ahead of you if there is a problem. And if a problem comes, I can tell you nobody's faster to react than the Amphanolian general managers. I mean, I use this analogy like a race car. You have a foot on the gas and a foot on the brake, and you've got your eyes staring out the windshield just in case something pops along. And when that thing comes, whatever it may be, It's not for us to guess what it is. It's not for us to do something differently because of our guesswork. It's to be ready regardless. And I can tell you that all of our 130 general managers, this is second nature to the Amphanolian culture, and all of them are prepared for whatever may come along. But at the same time, we are not sitting here saying, hey, you know, the Fed is raising interest rates. You know, the world is going to end. That's just not how we run the company. We don't. sit back and just reflect on macro things and just say to them, well, the macro says this, so we better do that. We listen to our customers, and then we take action. And that's what our team is going to do.
spk17: Our next question comes from Nick Todorov with Longbow Research. You may go ahead.
spk05: Yeah, thanks, and congrats from me as well on the strong results. Adam, a question on bookings and maybe bookings linearity. If I look at your bookings, they're stronger than your peers. I wonder if you can comment if you're seeing broad-based trend or maybe there are certain markets that are driving such a strong bookings at this point and any color there would be helpful. Thanks.
spk09: Yeah, well, look, I think our peers are doing very well, too. I think relative to our bookings, actually bookings across the quarter were fairly linear. It wasn't that we saw a big spike early and it tailed off later or vice versa. Actually, orders were pretty consistent across the three months of the quarter, which was encouraging to see, actually. And relative to our end markets and the booking trends of the end markets without going sort of one by one, again, I would say that we had good strength across virtually all of our markets, especially our kind of what I refer to as our longer cycle markets where we saw still great bookings, military, commercial air, industrial automotive. We saw really strong bookings in broadband as well. And I think that's a great reflection of some of the planning of broadband customers right now who are really working on expanding the capacity and also the breadth of the networks. There's a lot going on around opening up the opportunities in rural America, for example, with broadband access. And our team is really on the front lines of supporting our customers in those initiatives. I think the one market where, again, bookings were still strong, but where maybe we started to see towards the end of the quarter, you know, a slight moderation is IT Datacom. And I talked about that earlier. I think we were seeing, you know, some maybe in the third quarter, a little bit of the digestion of the strong consumption that some of our customers have had there. We hear a little bit about touches of inventory in that space as well, which is not surprising given the the extremely strong demand that we've seen in that space. But nothing of any cataclysmic variety here. I mean, the IT Datacom market remains very, very strong. But as we said in our guidance, we would anticipate in the third quarter to see a little bit of a moderation there. So overall, I think just really strong bookings. And I got to give a call out to our salespeople around the world. You know, they do the toughest job there is here. And it's just amazing how they continue to support customers and and ultimately generate the bookings that we've seen.
spk17: Our next question is from Jim Suva with Citigroup. You may go ahead.
spk01: Thank you. Adam, on your prepared comments, you mentioned the auto sector, how it outperformed this quarter, which is great. But then you mentioned that you expect it to decline, I think you said moderately, for the Q3 outlook. Has something changed there? Because the supply constraints have kind of been ongoing for a long time, and you'd think that maybe we've stabilized or gotten a little bit better with those. But I'm just kind of wondering about, you know, the outperformance was fantastic, but kind of why kind of a little bit of a downtick for the outlook? Thank you.
spk09: Well, thanks very much, Jim. I mean, one thing I would just clarify, I talked about the fact that we see in the second quarter some moderation on a sequential basis. That would still reflect very strong year-over-year growth in the auto market on a year-over-year basis. I think it'd be still very strong double-digit organic growth at the levels that we've guided to. So I don't think that represents at all a slowdown in our momentum in automotive. There's some seasonality sometimes that we'll see in the automotive market. I think there are still supply chain constraints that customers are seeing. I think there were some announcements in recent days from some of the OEMs that I think reflected that. And you add all that together, and it ultimately results in the outlook that we have. And, you know, if there's better opportunities, you can bet that our team is going to try to exceed that outlook.
spk17: Our next question is from William Stein with Truth Securities. You may go ahead.
spk04: Great. Thanks for taking my question and congrats on the great results and outlook. And I want to address one aspect of the P&L. It was at least one question about it already, but the conversion margins were very strong in the quarter, which is pretty surprising given we'd expect some headwinds from FX and input cost inflation, which continues. And I understand, you know, in the kind of constantly in the process of responding to these market dynamics. But did the company somehow get more ahead of these changes in the current quarter than it typically does? Or maybe the converse of that is, if you haven't, and we see FX and material input costs stabilize, shouldn't we expect a somewhat elevated level of contribution margin in the next couple quarters? Thank you.
spk13: Yeah, thanks, Will. Appreciate the question. No, listen, as I mentioned before, we're certainly super proud of the results here in the second quarter in regards to the profitability. In regards to – I'll parse this question out into a couple different pieces. In regards to FX, Although clearly there's translation impacts on both the top and bottom line in regards to currency, it typically doesn't have a meaningful impact on our margins. So certainly there could be some small impacts here or there, but nothing that would call out as being a meaningful impact. So I would say currency doesn't really impact our conversion as you think about it in any meaningful way. As it relates to our pricing and input cost inflation, we've been – we certainly had pressure last year. If you remember Q1 of 21, that was kind of a step down a bit, certainly a larger negative conversion in the first quarter of 21. And as the year progressed, as we kind of were chasing that with pricing – we were able to neutralize the incremental worsening of the inflationary environment. But I wouldn't tell you that we ever kind of got back to neutral from a Q121 perspective. And I think what we're seeing is that, you know, we're seeing in the first half of this year a bit of a catch-up, you know, from the first half of last year. And that's why when I said I think that at this point we've been able to kind of offset a meaningful amount of that inflation, I mean a meaningful amount, you know, kind of that's happened over the last 12 months. So the conversion, the strong sequential conversion you see here in the second quarter is really kind of catch up, I would say, for pricing for inflation that we've seen over the course of the last year. And that will continue to hopefully catch up on as we expect to here in the third quarter. So it's kind of been a journey and pricing typically is behind cost a bit. And that's what we've seen here in the 21 and coming in here in the 22. But I think at this point, pricing is starting to catch up the cost, and that's really reflective of the strong conversions that you see. Now, we're not guiding here into the fourth quarter in full year, and we don't know what inflation is going to do and all that. But you can guarantee that our general managers are close to their costs, and they're continuing to have conversations with the customers. And if the environment continues to either level out or ultimately the inflation continues to increase, we're going to take the appropriate action, you know, both on the cost and on the top line.
spk17: And our next question is from David Kelly with Jefferies. You may go ahead.
spk08: Hey, good afternoon, Adam and Craig. Thanks for taking my question. You noted touches of inventory build and IT data column. Just curious if you're seeing any signs of a build in any of the pockets of industrials' land or You know, is the demand appetite there still strong enough to absorb the incremental order strength you're seeing?
spk09: Yeah, thanks very much, David. Honestly, if I look at industrial, it's very hard to get great visibility because the range of customers is just so broad. Where we do have some visibility and obviously some portion of our industrial business is through distribution. And there I would tell you that inventory levels are not really excessive. In fact, we've continued to see good strength, good pull-through from our distributors, and healthy inventory levels across our distributors who have a little bit higher percent of industrial than they would, for example, of like IT Datacom or mobile networks or automotive. And so from that perspective, I would say we see it as healthy, but I can't tell you that we have perfect visibility to the thousands and thousands of customers that we ultimately sell to across the industrial market. What we do see in industrial is just really continued strong demand, as well as in many pockets the inability of some of our competitors to satisfy that demand, and thus our ability to get a little bit more than our fair share of the business. And so I think our team working in industrial across all those segments, and we talked about those earlier, I think they've done a great job of executing when demand is really strong and we continue to do so. And that doesn't really give me a feeling that there is a lot of inventory buildup or excessive inventory buildup given that customers continue to want to take product from us. You know, what we're always on the lookout for is order cancellations or pushouts and things like this. We just haven't seen that in any real meaningful way, if at all. And so I think right now we feel very good about the prospects and continued momentum in industrial.
spk17: Our next question is from Joseph Speck with RBC Capital Markets. You may go ahead.
spk07: Thanks so much. Adam, you've used the race car analogy a couple times, and how you keep an ear to the customer to react. So I'm curious if you could just give us a little bit of color about what some of your customers in your industrial, machinery, auto and markets are saying about the energy issues in Europe. One of the things we've sort of started to hear ironically is that they may try to sort of produce as much as they can or as much as the supply chain will allow them to nearer term in advance of maybe some potentially larger issues in the winter. Are you seeing any evidence of that, or what are they telling you?
spk09: Yeah, thanks so much, Joe. Look, we're very sensitive to all the geopolitical issues around, and that includes the potential energy issues that are coming in Europe. And no doubt about it, we're putting a lot of real-time thought into what that means for ourselves and also what it means for our customers and for the end demand. We have not heard a lot of direct – of the behavior that you're talking about. I mean, we've heard, you know, people sort of third-hand, fourth-hand, like you've just said here. But I can't tell you that we've had a big flood of customers coming up and saying, hey, you know, we're going to try to produce everything while it's still warm outside. Could that happen? Would it surprise me? I guess it wouldn't totally surprise me. I think there's going to be a lot of creative efforts that people are going to have to take here as we head into the winter months in Europe to offset what may very well be a very challenging energy availability and cost situation. And I know that if I look at what our teams are doing today, while it's still hot outside, there's a lot of efforts ongoing to prepare ourselves and to make sure that that we are not caught kind of cold, so to speak, this winter in Europe. And that's in Germany. That's in Eastern Europe. That's to some extent in France and to some extent in even the U.K., Scandinavia, where maybe there will be availability, but it might be very, very expensive. And so what are we doing right now? And you can do a lot of things, actually, it turns out. Maybe there were some projects that you had to – to increase insulation and the ceiling of your buildings. Maybe you had some things on the shelf to put in heat exchangers in factories and things like that. Maybe you had already started construction of solar panels on certain rooftops in certain countries. All things that we've been doing and have been doing and maybe would even accelerate a little bit as we come into this year. So there's a whole host of solutions to this. Inside our company, those are going to be very, very site-specific under the purview of our general managers. It's not that we're going to make some big dramatic kind of corporate decision about how are we going to offset the potential risk of energy availability in Europe. But you can bet that there's a lot of activities going on. And so I can extrapolate from that that probably our customers are doing the same. And does that mean putting inventory in place or does that mean taking a lot of the steps internally that one can take to insulate oneself literally and metaphorically from the challenges, I guess that customers are going to be looking at all those options.
spk17: Our next question is from Joe Giordano with Cowen. You may go ahead.
spk12: Hey, guys. Thank you. So I just want to touch again on price. I mean, so you had obviously very strong in the quarter driving the leverage there and next quarter guide. is for down revenues a little bit sequentially, but up margins. So I guess that keeps reading out. Just curious as to like the runway of the ability to keep driving price. And if we start seeing orders start to kind of like normalize or maybe directionally moderate a bit, lead time starts to normalize. Like historically, when you look back, how long have you been able to drive price positive? And like what are the conditions that make that harder to do?
spk09: Joe, look, I think Craig talked a lot about this already. And what I would just add is this. I mean, we are being very thoughtful about pricing with our customers. This is a tough environment for everybody. And our first and foremost thing that we do when there's inflation is we try to offset it with costs. And I mean, that's our duty as a partner to our customers around the world. And only when we can't do that Do we then have to pass it on in price? And we do that in a very reasonable fashion. So what the runway, to use your term, is, I mean, it just depends on how the environment goes. We're not going to take advantage of our customers. We're certainly not in the business of doing excessive measures on price. We're strong supporters of our customers, but we're also – making sure that we're protecting our company and protecting the company's bottom line and taking reasonable measures. And we'll continue to do that to the extent that that's what the environment requires.
spk17: Our last question is from Chris Snyder with UBS. You may go ahead.
spk06: Thank you. So the business is nearly 50% bigger than it was back in 2019 before the pandemic. Just given the suddenness and magnitude of the acceleration coming out of COVID, has this led to any capacity constraints for you guys as you try to realize all of the demand that is out there in the market? Thanks for squeezing in.
spk09: Hey, thanks so much, Chris. And look, it's a great question to squeeze in. I mean, you pointed out, I mean, we are over just a very short time period, nearly 50% bigger, and it's just an outstanding testament to the organization that they've been able to flex the company in such a difficult environment. I mean, let's not forget we're 50% bigger, which in a normal environment would be a challenge to increase our capacity, to expand our footprint, to hire the people, to put in place whatever equipment is necessary, to do all of that. But to do it in a pandemic, to do it in a supply chain crisis, to do it in an inflationary environment, I think is just the best testament to the Amphanolian entrepreneurs around the world that have made this company special. So do we see capacity constraints today? I think we've battled through them all. I mean, have there been challenges over the course of these couple of years? Like you cannot imagine. I mean, really like you cannot imagine. Personal, professional for everybody through the pandemic. I mean, it's not for the faint of heart. But it is right down the pipe for what Amphenol general managers do every day. I mean, every single day, every one of those 130 general managers, they're fighting so many different challenges, so many different barriers that pop in front of them. And they're not bemoaning it. They're not hiring consultants to help them manage it. They're not going to some corporate bureaucracy to sort of find the answer. They're looking out their own window, and they're making it happen with their teams. And then when they need help, they come to us. We collaborate across the company. We deal with it. We work the problem. And I think the result speaks in my mind for itself. Through those challenges, through all the tribulations here of these recent years, to expand the company by 50% or close to 50% is something that I think our team is really justifiably proud of and appreciate you bringing that up here at the end. Well, I think that is our last question. And so with that, I'd really like to wish everybody a great finish to the summer. I hope all of you get a little bit of chance to spend some time with your family and hopefully enjoying some of this wonderful weather that we've been having here in Connecticut. And we look forward, Craig and I, to speaking with all of you here in just another 90 days. Thanks so much. Thanks, everybody. Bye-bye.
spk17: Thank you for attending today's conference, and have a nice day.
Disclaimer

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