Amphenol Corporation

Hello, and welcome to the third quarter earnings conference call for Amphenol Corporation. Following today's presentation, there will be a form and answer session. Until then, 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 exit this time. I would now like to introduce today's conference host, Mr. Craig Lambeau. Sir, you may proceed.

Craig Lampo, Good afternoon, everyone. This is Craig Lampo, Amphenol CFO, and I'm here together with Adam Norritt, our CEO. We would like to welcome you to our third quarter 2022 conference call. Our third quarter 2022 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, all prior year comparative data discussed during this year, during this call, is on a continuing operations basis. The company closed the third quarter with record sales of $3,295,000,000 in record GAAP and adjusted diluted EPS of 80 cents. Third quarter sales were up 17% in U.S. dollars, 21% in local currencies, and 18% organically compared to the third quarter of 2021. Sequentially, sales were up by 5% in U.S. dollars, 7% in local currencies, and 6% organically. Adam will comment further on trends by market in a few minutes. Orders in the quarter were 3,151,000,000, resulting in a book-to-bill ratio of 0.96 to 1, Near the date our book, the bill remains strong at 1.07 to 1, and the company continues to have a robust order backlog. GAAP and adjusted operating income were $681 million and $693 million, respectively, in the third quarter of 2022. GAAP and adjusted operating margin were 20.7% and 21%, respectively, in the third quarter. On a GAAP basis, operating margin increased by 40 basis points compared to the third quarter of 21 and was flat sequentially. GAAP operating margin for the third quarter included $12 million of acquisition-related costs. On an adjusted basis, operating margin increased by 70 basis points compared to the third quarter of 21 and 30 basis points sequentially. The year-over-year increase in adjusted operating margin was driven by strong operating leverage on the significantly higher sales volumes, as well as the benefit of ongoing pricing actions. On a sequential basis, the increase in operating margin reflected strong operating leverage on the higher sales volumes. Given the continuing 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 company's entrepreneurial culture, which continues to foster a high-performance action-oriented management team. Breaking down third quarter results by segment relative to the third quarter of 21, sales in the harsh environment solution segment were $794 million and increased by 12% in U.S. dollars and 14% organically, and segment operating margin was 26.1%. Sales in the communication solution segment were $1,518,000,000 and increased by 19% in U.S. dollars and 17% organically. Segment operating margin was 22.5%. Sales in the interconnect and sensor system segment were $983,000,000 and increased by 17% in U.S. dollars and 23% organically. Segment operating margin was 18.8%. The company's GAAP effective tax rate for the third quarter was 23.1%, and the adjusted effective tax rate was 24.5%, which compared to 22.2% and 24.5% in the third quarter of 21, respectively. GAAP diluted EPS from continuing operations was a record $0.80 in the third quarter, an increase of 19% compared to $0.67 in the prior year period. Adjusted alluded EPS was record $0.80, an increase of 23% compared to $0.65 in the third quarter of 2021. This was an excellent result, especially considering the variety of challenges that the company continues to face during the quarter. Operating cash flow in the third quarter was a record $576 million, or 116% of adjusted net income. And net of capital spending, our free cash flow, was a record $457 million, or 92% of adjusted debt income. Given our continued strong top line growth, we are pleased to see cash flow yield remain at these strong levels in the third quarter. From a working capital standpoint, day sales outstanding and payable days were 71 and 56 days respectively, both within our normal range. And despite the continued challenging supply chain environment, our inventory days were 83 days, which came down in the third quarter, and we're also within our normal range. We are very pleased with our organization's strong management of working capital. As mentioned in today's earnings release, the company's board of directors has approved a 5% increase in the company's quarterly dividend to 21 cents from the previous 20 cents per share, effective for payments beginning in January 2023. During the quarter, the company repurchased 2.4 million shares of common stock at an average price of approximately $72. When combined with our normal quarterly dividend, total capital returned to shareholders in the third quarter of 2022 was $289 million. Total debt at September 30th was $4.8 billion, and net debt was $3.5 billion. Total liquidity at the end of the quarter was $3.6 billion, which included cash and short-term investments on hand of $1.3 billion, plus availability under our existing credit facilities. Third quarter 2022 EBITDA was $806 million, and at the end of the third quarter of 22, our net leverage ratio is 1.1 times. I also wanted to make a few comments on interest expense and currency impacts. Due to the rising interest rate environment, our interest expense has increased primarily as a result of our floating rate commercial paper, which had a balance of $904 million and represented approximately 19% of our total debt outstanding at the end of the quarter. Due to the significant increase in interest rates over the last several months, we expect fourth quarter interest expense to be approximately $38 million, which is reflected in our fourth quarter guidance. Based on current debt balances as well as current and near-term projected rate increases, we expect quarterly 2023 interest expense to be approximately $40 million. Regarding currency and the significant continued appreciation of the U.S. dollar in the fourth quarter, we expect currency to have a negative sequential sales impact of approximately one percentage point and a year-over-year negative impact of five percentage points, assuming current rates. 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 allow me to extend my welcome to all of you on the phone here today. And I certainly hope that all of you are having an enjoyable fall. Here we are in beautiful Wellingford, Connecticut, with the leaves turning a wonderful autumn hue. I'm going to highlight our third quarter achievements. I'll then spend a little time to discuss the trends and our progress across our serve markets. And then finally, I'll comment on our outlook for the fourth quarter and the full year of 2022. And of course, we'll have time for some questions at the end. Turning to the third quarter, our results in the third quarter were much stronger than expected and exceeded the high end of our guidance in sales and adjusted diluted earnings per share. Sales grew a very strong 17% in U.S. dollars and 21% in local currencies, reaching a new record of just under $3.3 billion. On an organic basis, sales increased by 18%, with broad-based growth across most of our served markets, as well as contributions from the company's acquisition program. The company booked orders of $3.151 billion, representing a book-to-bill, as Craig mentioned, of 0.96 to 1. I would say that despite this slightly negative book to bill, the company's order backlog remains very robust. We are pleased to deliver strong profitability in the quarter, with adjusted operating margins reaching 21.0 percent, a 70 basis point increase from prior year, and a 30 basis point increase from prior quarter. We achieved these results despite the continued wide range of operational, inflationary, and supply chain challenges around the world. Adjusted diluted EPS grew strongly from prior year, increasing by 23% to a new record of 80 cents. And just really an excellent reflection of our organization's continued strong execution here in 2022. Finally, the company generated record operating and free cash flow, $576 million and $457 million, respectively, here in the third quarter. I just want to say how proud I am of our entire organization around the world. Our results this quarter once again reflect the discipline and agility of Amphenol's entrepreneurial team as we continue to perform well amidst what is no doubt a very dynamic and challenging environment. We're also pleased to announce that we closed the acquisition of Integrated Cable Assembly Holdings or ICA in September based in North America and with annual sales of approximately $90 million. ICA manufactures a broad array of cable assemblies for a diversified range of applications, particularly in the industrial market. This acquisition further expands our offering of high technology, value-added interconnect products in the industrial market. As we welcome this outstanding new team to the company, we remain confident that our acquisition program will continue to create great value for Amphenol. In fact, our ability to identify and execute upon acquisitions and successfully bring these new companies into the Amphenol family remains a core competitive advantage for the company. Now, turning to the trends and our progress across our served markets, I would just comment that we're very pleased that the company's broad and balanced end market diversification continues to create value for Amphenol. Importantly, and I've mentioned this many times before, Our diversification mitigates the impact of the volatility of individual end markets while also exposing us to leading technologies wherever they may arise across the electronics industry. And these are both very important benefits, in particular in today's dynamic market environment. I would also just mention that in the third quarter, each of our end eight end markets grew organically and seven of them in double digits organically. So starting with the military market, that market represented 9% of our sales in the third quarter. Sales in this market grew 1% in U.S. dollars and 3% organically, which was a bit lower than our expectation heading into the quarter. On an organic basis, growth in space-related ground vehicles and avionics applications was offset by moderations of sales of products used in communications, rotorcraft, and engine applications. Sequentially sales declined by just about 1%. As we look into the fourth quarter, we expect a high single-digit sequential sales increase in the military market. And for the full year 2022, we now expect a low single-digit increase in sales from last year's levels. We continue to be very pleased with the strength of the company's broad position in the defense electronics market. As militaries around the world increase their adoption of a wide array of next-generation technologies in the face of what is no question an increasingly volatile geopolitical landscape, our team managing our leading range of interconnect and sensor products continues to position the company strongly for the future. The commercial aerospace market represented 2% of our sales in the quarter, Sales grew a very strong 36% versus prior year and 42% organically, driven by broad-based strength across all aircraft applications. Compared to the second quarter, our sales declined just a slight 1%, which was actually better than our expectation coming into the quarter. As we look to the fourth quarter, we expect a modest decline in sales versus these third quarter levels. But for the full year of 2022, we expect sales to increase a very strong 30% compared to prior year. Our team is justifiably proud to have now realized four consecutive quarters of strong growth in the commercial air market, a clear sign of their resilience and of the continued recovery in the global air travel industry. Going forward, we look forward to benefiting from the company's strong interconnect and sensor technology positions across a wide array of aircraft platforms and next generation systems being integrated into those airplanes. The industrial market represented 25% of our sales in the third quarter. Sales increased by 11% in U.S. dollars and 13% organically. Our growth was broad-based across most segments of the worldwide industrial market, including battery and heavy electric vehicle, factory automation, alternative energy, heavy equipment, medical, oil and gas, and building automation. Sequentially, our sales actually increased by 2% from the second quarter, which was a bit better than our expectations coming into the quarter. Looking to the fourth quarter, we expect a modest sequential sales decline. And for the full year 2022, we expect a mid-teens increase in sales from prior year. Our results in the industrial market this quarter confirm once again that our outstanding global team working in this important market continues to find new opportunities for growth across the many segments of the exciting industrial electronics 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 technology revolutions happening across the industrial market. To that end, the addition of ICA further strengthens our position across a number of exciting segments within this important end market, and 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 in the third quarter grew by a very strong 27% in U.S. dollars and 37% organically. driven by broad-based strength across most automotive applications, and particularly strong growth once again in sales to electric and hybrid electric vehicle applications. Sequentially, our sales increased by 4% from the second quarter, which was much better than our expectations. For the fourth quarter, we expect sales to remain roughly at these levels, and for the full year of 2022, We expect sales to increase by approximately 20% compared to last year, driven by our expanded position in next-generation electronics and electrical systems being integrated into cars. I remain extremely proud of our team working in the automotive market. They continue to manage well through a challenging overall 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 12% of our sales in the quarter, and our sales to customers in this market increased by 13% in U.S. dollars and 15% organically. And this was driven by strong growth in sales of products incorporated into smartphones, wearables, and laptops. Sequentially, our sales increased by much stronger than expected, 43%, driven by higher sales across virtually all product categories that we serve. As we've seen periodically in the past, we do believe that some small portion of this robust demand in the third quarter may have been pulled forward from the fourth quarter. Accordingly, we expect a low double-digit sequential decline in sales from these strong third quarter levels. For the full year, we anticipate sales to grow modestly from our strong 2021. I'm very proud of our team working in the mobile devices market as they continue to execute strongly in the face of an ever dynamic demand for our leading array of antennas, interconnect products and mechanisms that are integrated into a wide range of next generation mobile devices. And no question that this team remains poised as always to capture any opportunities for incremental sales that may arise here in 2022 or beyond. The mobile networks market represented 5% of our sales in the quarter, and sales increased by a strong 19% versus prior year and 15% organically, as growth in our sales to mobile service providers was only partially offset by a moderation of sales to equipment manufacturers. On a sequential basis, our sales increased by 9%, which was better than our expectations. For the fourth quarter, we expect a low double-digit sequential sales reduction after our very strong third quarter. And for the full year 2022, sales are expected to grow in the high single digits. We're encouraged by our strengthening performance in 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 long-term efforts to expand our position in next-generation 5G equipment in networks around the world. The information technology and data communications market represented 22% of our sales in the quarter. Sales in the third quarter rose from prior year by 16% in U.S. dollars and 11% organically. This was driven by increased demand for products in servers and networking applications, and that was only partially offset by some declines in storage-related products. Sequentially, our sales did decline by 3%, albeit better than our expectation coming into the quarter. We believe that this begins to reflect some of the expected inventory corrections that we've discussed in the past by our IT Datacom customers. As we look towards the fourth quarter, we expect a low double-digit decline in sales from these third quarter levels as customers continue to moderate their demand and adjust their inventory levels. For the full year 2022, however, we expect very strong high teen sales growth compared to prior year. We remain encouraged by the company's outstanding position in the global IT Datacom market. Our team has done just an outstanding job developing leading high-speed power and fiber optic interconnect products that are enabling our OEM and web service provider customers who continue to drive their equipment and networks towards ever higher levels of performance. We look forward to realizing the benefits of that leading position in this important market for many years to come. And finally, the broadband market represented 5% of our sales in the third quarter. Sales in this market increased by a very robust 65% in U.S. dollars and 46% organic. as we experienced strong demand from cable operators for a wide range of our products. On a sequential basis, sales increased by 2%, which was better than our expectation coming into the third quarter. Looking towards the fourth quarter, we expect sales to increase moderately from these strong third quarter levels, and for the full year 2022, We expect sales to increase by more than 50% from prior year, and that includes both robust organic growth as well as the benefit of acquisitions. We look forward to continuing to support our broadband service provider customers around the world with our expanded range of high technology products. These products have become even more critical as our customers increase the bandwidth and capacity of their networks. to support the expansion of high-speed data applications to homes and businesses. And this is, in certain cases, in furtherance of government-funded programs to expand broadband. Now, turning to our outlook, there's no doubt that the current economic environment remains highly uncertain and increasingly dynamic, assuming market conditions do not meaningfully worsen and also assuming constant exchange rates. For the fourth quarter, we expect sales in the range of $3,090,000 to $3,150,000 and adjusted diluted earnings per share in the range of $0.73 to $0.75. This would represent sales growth of 2% to 4% and adjusted diluted EPS growth of 4% to 7% versus the fourth quarter of 2021. Our fourth quarter guidance represents also an expectation for full-year sales of $12,474,000,000 to $12,534,000,000 and full-year adjusted diluted EPS of $2.95 to $2.97. This outlook would represent full-year sales and adjusted EPS growth of 15% and 19% to 20% respectively. I remain confident in the ability of our outstanding management team to adapt to the many opportunities and challenges in the current dynamic environment and to continue to grow our market position while driving strong profitability. In addition, I just have to say that the entire Amphenol team around the world remains committed to delivering long-term sustainable value, and I would be remiss if I did not take this opportunity here to thank each and every one of our Amphanolian team members around the world for their truly outstanding efforts here in the third quarter. And with that, operator, we'd be very happy to take any questions.