Amphenol Corporation

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

Thank you. Good afternoon, everyone. This is Craig Lampo, Amphenol CFO, and I'm here together with Adam Norwood, our CEO. We would like to wish everyone a happy new year and welcome you to our fourth quarter 2022 conference call. Our fourth quarter and full year 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'll 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 call is on a continuing operations basis. The company closed the fourth quarter with sales of $3,239,000,000 and GAAP and adjusted diluted EPS of 82 cents and 78 cents respectively. Fourth quarter sales were up 7% in U.S. dollars, 11% in local currencies, and 8% organically compared to the fourth quarter of 2021. Sequentially, sales were down by 2% in U.S. dollars, 1% in local currencies, and 2% organically. Adam will comment further on trends by market in a few minutes. For the full year 2022, sales were a record $12,623,000,000 which were up 16% in U.S. dollars, 19% in local currencies, and 15% organically compared to 2021. Borders in the quarter were $2,884,000,000, which was down 12% compared to the fourth quarter of 2021 and 8% sequentially, resulting in a book-to-bill ratio of 0.89 to 1. This was driven by lower bookings in the communications-related markets. For the full year, orders were $12,925,000,000, resulting in a book-to-bill ratio of 1.02 to 1. Gap in adjusted operating income were $666 million and $676 million, respectively, in the fourth quarter of 2022. Gap in adjusted operating margin were 20.6% and 20.9%, respectively, in the fourth quarter. On a GAAP basis, operating margin increased by 100 basis points compared to the fourth quarter of 21 and decreased by 10 basis points sequentially. GAAP operating margin for the fourth quarter included approximately $10 million of acquisition-related costs. On an adjusted basis, operating margin increased by 80 basis points compared to the fourth quarter of 21 and decreased by 10 basis points sequentially. The year-over-year increase in adjusted operating margin was driven by strong operating leverage on the higher sales volumes, as well as the benefit of ongoing pricing actions. On a sequential basis, the slight decrease in adjusted operating margin reflected normal downside conversion on the lower sales levels. For the full year 2022, GAAP operating margin was 20.5%, and adjusted operating margin was 20.7%. When compared to 2021, adjusted operating margin increased by 70 basis points, which was primarily driven by normal operating leverage on the higher sales volumes, as well as the benefit of the pricing actions. Given the overall cost and supply chain headwinds we experienced in 2022, we are very proud that our adjusted operating margin equaled our previous full year record operating margin set in 2018. Breaking down fourth quarter and full year results by segment, In the harsh environment solution segment, sales were $795 million and $3,107,000,000 in the fourth quarter and full year of 2022 respectively. Compared to the prior year fourth quarter, segment sales increased 10% in U.S. dollars and 12% organically. Compared to the full year 2021, segment sales increased by 13% in U.S. dollars and 15% organically. Segment operating margin was 25.7% and 25.8% in the fourth quarter and full year of 2022, respectively. In the communication solution segment, sales were $1,436,000,000 and $5,652,000,000 in the fourth quarter and full year of 2022. Compared to the prior year fourth quarter, segment sales increased 1% in U.S. dollars and organically. And compared to the full year, 2021, segment sales increased by 17% in U.S. dollars and 13% organically. Segment operating margin was 22.2% and 22% in the fourth quarter and full year of 2022. In the interconnect and sensor system segment, sales were $1.8 billion and $3.863 billion in the fourth quarter and full year of 2022. Compared to the prior year fourth quarter, segment sales increased 14% in U.S. dollars and 17% organically. Compared to the full year 2021, segment sales increased by 17% in U.S. dollars and 18% organically. Segment operating margin was 19.2% and 18.5% in the fourth quarter and full year 2022. The company's GAAP effective tax rate for the fourth quarter was 19.2%, and the adjusted effective tax rate was 24.5%, which compared to 18.8% and 23.8% in the fourth quarter of 2021, respectively. For the full year 2022, GAAP effective tax rate was 22.3%, and the adjusted effective tax rate was 24.5%, which compared to 20.6% and 24.3% in 2021. In 2023, we expect our adjusted effective tax rate to be approximately 24%. Gap diluted EPS from continuing operations was 82 cents in the fourth quarter, an increase of 14% compared to 72 cents in the prior year period. Adjusted diluted EPS was $0.78, an increase of 11% compared to the $0.70 in the fourth quarter of 2021. This was an excellent result. For the full year, gap diluted EPS from continuing operations was $3.06, a 22% increase from $2.51 in 2021. Adjusted diluted EPS was $3.00, in 2022, a 21% increase from 2048 cents in 2021. Operating cash flow in the fourth quarter was a record $705 million, or 147% of adjusted net income. And net of capital spending, our free cash flow, was a record $613 million, or 127% of adjusted net income. We are pleased to have delivered a cash flow yield at these strong levels. For the full year 2022 operating cash flow was a record $2,175,000,000 or 117% of adjusted net income. And out of capital spending, our free cash flow for 2022 was a record $1,796,000,000 or 96% of adjusted net income, a very strong result. From a working capital standpoint, inventory days, day sales outstanding and payable days were 86, 73, and 54 days, respectively. During the quarter, the company repurchased 2.3 million shares of common stock at an average price of approximately $75, bringing total repurchases during 2022 to 9.9 million shares, or $731 million. When combined with our normal quarterly dividend, total capital returned to shareholders in 2022 was more than $1.2 billion. Total debt on December 31st was $4.6 billion, and net debt was $3.1 billion. Total liquidity at the end of the quarter was a very strong $4.1 billion, which included cash and short-term investments on hand of $1.4 billion, plus availability under existing credit facilities. Fourth quarter and full year 2022 EBITDA with $798 million and $3.1 billion, respectively. And at the end of the fourth quarter of 2022, our net leverage ratio was 1.0 times. I also wanted to make a few comments on interest expense. As I mentioned last quarter, due to the rising interest rate environment, our interest expense has increased primarily as a result of our floating rate commercial paper, which represents approximately 14% of our total debt outstanding at the end of the year. And based on current and near-term expected interest rates and debt levels, we expect 2023 quarterly interest expense to be approximately $40 million, which is reflected in our first quarter guidance. I will now turn it over to Adam, who will provide some commentary on current market trends, as well as the recently completed acquisition this month.

Well, thank you very much, Craig, and welcome to all of you to our first earnings call of 2023. And I hope it's not too late to wish as well all of you a happy new year. And to those of you who celebrate the Lunar New Year, I wish you all a happy year of the rabbit. As Craig mentioned, I'm going to highlight our fourth quarter and full year 2022 achievements, including some discussion about the acquisitions that we mentioned in our press release. I'll then discuss our trends and progress in our serve markets. and then make some comments on our outlook for the first quarter. And then, of course, we'll have time for questions at the end. So turning to the fourth quarter, our results in the fourth quarter were stronger than expected, exceeding the high end of our guidance in sales and adjusted diluted earnings per share. Sales grew by 7% in U.S. dollars and 11% in local currencies, reaching $3,239,000,000. On an organic basis, our sales increased by 8%, and that was driven by robust growth in the broadband, commercial air, automotive, and military end markets. And I'll give some more details about those markets in a few moments. The company booked $2,884,000,000 in orders in the fourth quarter, representing a book-to-bill of 0.89 to 1. And this negative book-to-bill was driven by order reductions in several of the communications-related markets, as certain customers adjusted demand in light of excess inventory that they had built up throughout 2022. We're especially pleased to have delivered another quarter of resilient and strong profitability, with adjusted operating margins reaching 20.9% and 80 basis point increase from prior year. We achieved these results despite the continued wide range of challenges around the world. Adjusted diluted EPS, as Craig mentioned, was 78 cents, representing robust growth of 11% from prior year, and that's just another excellent reflection of our organization's continued strong execution. Finally, the company generated record operating in free cash flow in the quarter of $705 million and $613 million respectively, clear reflections of the quality of the company's earnings. I'm extremely proud of our team around the world, and our results this quarter once again reflect the discipline and agility of our entrepreneurial organization as we continue to perform well amidst the challenging and dynamic environment. We're also pleased to announce that we closed the Acquisition of Control Measure Regulation Group, or CMR, just here in January. CMR is based in France and has annual sales of approximately $75 million. and they're a manufacturer of a broad array of cable assemblies and complex interconnect assemblies for the industrial market with a particular focus on heavy equipment engine applications. This acquisition further expands our offering of high technology value-added interconnect products in the diversified industrial market. In addition, we're pleased to have signed an agreement for the acquisition of the North American hybrid and fiber optic cable and cable assembly as well as the global infrastructure antenna business of RFS at the end of the fourth quarter. Based just down the street from us here in Meriden, Connecticut, RFS is a provider of interconnect and antenna products for the mobile networks market with expected sales of approximately $100 million in 2023. This acquisition, which we anticipate will close by the end of the second quarter and thus is not included in our guidance, expands Amphenol's product offering and presence with mobile network service providers who are continuing to invest in their next generation 5G networks. As we welcome the outstanding CMR team to Amphenol and look ahead to welcome the RFS team once that transaction closes, we remain confident that our acquisition program will continue to create great value for the company. Our ability to identify and execute upon acquisitions and successfully bring these new companies into Amphenol remains a core competitive advantage for the company. I just want to make a few comments about 2022. And I will just say that 2022 was another very successful year for Amphenol. We expanded our position in the overall market, growing sales by 16% in U.S. dollars, 19% in local currencies, and 15% organically. reaching a new sales record of 12,623,000,000. In fact, over the past three very dynamic years, we're proud to have grown our sales by more than 50% from our 2019 levels, actually 53% to be exact, a great reflection of the company's diversification and agility in these truly dynamic times. Our full year 2022 adjusted operating margins reached 20.7%, and that was an increase of 70 basis points from 2021. This strong level of profitability enabled us to achieve record adjusted diluted EPS of $3. Finally, we generated record operating and free cash flow of $2,175,000,000 and $1,796,000,000 respectively, clear confirmations of the company's superior execution and disciplined working capital management. Our acquisition program again created value this year, with two new companies added to the Amphenol family in 2022 and one added here already in 2023. CMR, NPI, and ICA holdings have expanded our position across a broad array of technologies, particularly in the industrial market, while bringing outstanding and talented individuals into the Amphenol family. We're excited that these acquisitions, as well as the RFS acquisition, which we expect to close at the end of the second quarter, represent expanded platforms for the company's future performance. We also bought back in 2022 almost 10 million shares under our share buyback program and increased our quarterly dividend by 5%, representing, as Craig detailed, a total return of capital to shareholders of just over $1.2 billion for the year. Finally, and really importantly, especially in today's dynamic environment, we come out of 2022 in a uniquely robust financial position with the lowest leverage and highest liquidity and availability we've seen really in modern times. And while there continued to be a high level of volatility in the overall market environment in 2022, as we enter 2023, our agile entrepreneurial management team is confident that we have built further strength from which we can drive superior long-term performance. I'd like to spend a little bit of time to talk about our trends and progress across our served markets. And I would just comment that we remain very pleased that our balanced and broad end market diversification continues to create real value for the company, with no single end market representing more than 25% of our sales in the year of 2022. We believe this diversification mitigates the impact of the volatility of individual end markets, while continuing to expose us to leading technologies wherever they may arise across the electronics industry. Turning first to the military market, this market represented 10% of our sales in the fourth quarter and 9% of our sales for the full year. Sales in the quarter grew strongly from prior year, increasing by 11% in U.S. dollars and 13% in local currencies. And on an organic basis, sales increased by 12%. with broad-based growth across virtually all applications, but particularly military vehicles, space, and airframes. Sequentially, our sales increased by a better than expected 11%. For the full year 2022, sales grew by 4% in U.S. dollars, 6% in local currencies, and 4% organically, reflecting our operational execution as well as strength in space-related, unmanned aerial vehicles, ground vehicles, and avionics applications. Looking ahead, we expect sales in the first quarter to grow slightly from these fourth quarter levels. And we continue to be excited by the strength of the company's position in the defense market, where we offer the industry's broadest array of high technology interconnect products. As the geopolitical environment has become more dynamic, militaries around the world are expanding their investments in next generation technologies thereby increasing the demand potential. We look forward to supporting this increased demand with our expanded range of interconnect and sensor products, as well as our significant investments in new capacity that we've made in recent years. The commercial aerospace market represented 3% of our sales in the fourth quarter, as well as for the full year 2022. And in the quarter, our sales grew by a very strong 33% in US dollars, and 38% in local currency and organic, as we benefited from the continued recovery in the commercial area market. Sequentially, our sales grew by 13% from the third quarter, which was well ahead of our expectations coming into the quarter. For the full year 2022, sales increased by 36% in U.S. dollars, 40% in local currency, and 36% organically, reflecting our strong design and positions on a broad range of platforms as well as the ongoing recovery in demand for aircraft. Looking into the first quarter of 23, we expect now a modest sequential moderation in sales. I just want to say how grateful I am to our team that's working in the commercial air market. Over the last three years, they've performed really well amidst a truly volatile demand environment. And with the ongoing recovery in travel and thus in demand for jetliners, Our team's efforts to strengthen our breadth of high-technology interconnect and sensor products while diversifying our market position, including into next-generation aircraft, are now paying real dividends. We look forward to realizing the benefits of this in 2023 and beyond. The industrial market represented 25% of our sales, both in the fourth quarter and for the full year, and sales in the quarter grew by 7% in U.S. dollars 12% in local currency, and 7% organically from the prior year fourth quarter. This growth was driven in particular by sales into alternative energy, battery and electric heavy vehicle, factory automation, oil and gas, and medical applications. On a sequential basis, sales were down by just 1%, which was a bit better than our expectations. For the full year 2022, sales grew by a strong 14% in US dollars, 19% in local currency and 13% organically. And we really had broad-based growth across virtually all segments of the global industrial market. And looking into the first quarter, we expect sales in the industrial market to be roughly at the same level as we achieved here in the fourth quarter. 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 to capitalize on the many revolutions happening across the industrial electronics market. To that end, the addition of CMR further strengthens our position, particularly in the important heavy equipment segment. And we look forward to realizing the benefits of this strategy for many years to come. The automotive market represented 21% of our sales, both in the fourth quarter and for the full year. And we had another great quarter in automotive, with sales growing by a strong 21% in US dollars and 31% in local currency and organic. Our growth was broad-based, but was once again particularly robust in hybrid and electric vehicle applications. On a sequential basis, our automotive sales increased by 5%, which was above our prior expectations. For the full year of 2022, I'm very pleased that our sales increased by a strong 22% in U.S. dollars and 29% in local currency and organic, reflecting broad strength across our automotive markets, including in particular in next generation electronics, including electric and hybrid drive trains. Looking into 2023, we expect a high single digit sequential moderation of sales in the first quarter from these high levels, driven especially by a seasonal moderation of sales in Asia. I remain extremely proud of our team working in the automotive market. They continue to manage through a dynamic 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. In particular, our long-term efforts at expanding our range of next generation interconnects incorporated into electric and hybrid electric vehicles. has enabled Amphenol to expand our position with a broad range of customers and thereby created further potential for the future. The mobile devices market represented 12% of our sales in the quarter and 11% of our sales for the full year 2022. Our sales in the quarter declined from prior year by 11% in US dollars and 7% in local currency and organically. And this is driven by reduced sales of products incorporated into smartphones, laptops, tablets, and wearables. Sequentially, our sales declined as we had expected by 10% as demand was impacted by a pull forward of demand into the third quarter as we previously discussed 90 days ago. For the full year 2022, sales in this market increased by 3% in US dollars and 5% organically as growth in smartphones and wearables was somewhat offset by moderation in tablets coming off the high levels of the pandemic. We are pleased with this performance amidst a market with generally muted demand in 2022. As we look into the first quarter of 23, we anticipate a seasonal sequential decline of approximately 35%. And while mobile devices will always remain one of our most volatile of markets, Our outstanding and agile team is poised as always to capture any opportunities for incremental sales that may arise in 2023 and beyond. Our leading array of antennas, interconnect products and mechanisms continues to enable a broad range of next generation mobile devices, which positions us well for the long term. The mobile networks market represented 4% of our sales in the quarter and 5% for the full year 2022. Sales in the quarter declined from prior year by 8% in U.S. dollars, 6% in local currency, and 12% organically, as we experienced a pause in demand from operators after a number of quarters of strong growth. Sequentially, our sales declined by a higher than expected 17%. For the full year 22, sales grew by 8% from prior year and 3% organically, as we saw increased demand for products used in next-generation 5G equipment. Looking ahead, we expect a high single-digit sequential reduction in sales in the first quarter as operators continue to moderate their investments. Our team continues to work aggressively to realize the benefits of their efforts to expand our position in next-generation 5G equipment and networks around the world. And as customers continue their investments in these systems, We look forward to benefiting from the increased potential that comes from our unique position with both equipment manufacturers and mobile service providers. We're also excited by the pending acquisition of the hybrid and fiber optic cable and antenna assets of RFS, which will further broaden our product offerings for this important market. The information technology and data communications market represented 19% of our sales in the quarter and 21% of sales for the full year. Sales in the fourth quarter declined by 6% in U.S. dollars, 5% in local currency, and 8% organically from prior year, as many customers reduced their demand after five consecutive quarters of robust double-digit growth. Sequentially, our sales declined by 11%, as we had expected coming into the quarter. For the full year 2022, our sales in the IT Datacom market grew by a strong 18% in U.S. dollars, 19% in local currency, and 14% organically as we continue to benefit from our leading technology solutions and design-in positions across a wide array of applications. Looking ahead, we expect a roughly 20% sequential decline in sales in the first quarter as our OEM and web service customers continue to moderate their demand levels. Regardless of this current demand pause, we remain encouraged by the company's outstanding position in the global IT datacom market. Our team has done an excellent job developing leading high-speed power and fiber optic interconnect products that are enabling our OEM and web service provider customers to continue to drive their equipment and networks to higher levels of performance. 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 6% of our sales in the quarter and 5% of our sales for the full year 2022. Sales increased by a very strong 79% in US dollars, 82% in local currencies, and 64% organically, as we experienced a significant increase in demand from cable operators for a wide range of our products. On a sequential basis, sales grew by a much better than expected 19%. For the full year 2022, sales grew by 62% in US dollars and 38% organically, as we benefited from strong demand from broadband service operators who are both upgrading and expanding their data networks, as well as from the Halo acquisition completed last year. Looking ahead, we expect sales to decline in the low double digits from these levels due to seasonal adjustments from customers. We remain encouraged by the company's expanding position in the broadband market, and we look forward to continuing to support our service provider customers around the world, all of whom are working to increase their bandwidth to support the proliferation of high-speed data applications to homes and businesses. and in certain cases, in furtherance of government programs to expand broadband. Now, just in summary, I want to comment on our outlook. You know, the current economic environment remains highly uncertain, and in addition, as we did discuss earlier, we have seen certain customers in the communications markets reduce their demand as they normalize inventory levels. Assuming market conditions do not meaningfully worsen and also assuming constant exchange rates, For the first quarter, we expect sales in the range of $2,840,000 to $2,900,000 and adjusted diluted EPS in the range of $0.65 to $0.67. This would represent a sales decline of 2% to 4% and adjusted diluted EPS of flat to down 3% compared to the first quarter of 22. I remain confident in the ability of our outstanding management team to adapt to the many opportunities and challenges in the current environment and to continue to grow our market position while driving sustainable and robust profitability over the long term. And finally, I'd like to take this opportunity to thank our entire team around the world for their truly outstanding efforts here in the fourth quarter and for the full year of 2022. And with that operator, we'd be very happy to take any questions.