Amphenol Corporation

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

Thank you very much. Good afternoon everyone. This is Craig Lampo, Amphenol CFO, and I'm here together with Adam Norwood, our CEO. We would like to welcome you to our second quarter 2023 conference call. Our second quarter 2023 results were released this morning. I will provide some financial commentary and then Adam will give an overview of the business and current trends, and 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. The company closed the second quarter with sales of $3.54 billion and GAAP and adjusted diluted EPS of $0.74 and $0.72, respectively. Second quarter sales were down 3% in U.S. dollars, 2% in local currencies, and 4% organically, compared to the second quarter of 2022. Sequentially, sales were up 3% in U.S. dollars in local currencies and 2% organically. Adam will comment further on trends by market in a few minutes. Orders in the quarter were $3 billion and $44 million, which was down 12% compared to the second quarter of 2022, but up 5% sequentially, resulting in a book-to-bill ratio of 1 to 1. GAAP operating income was $620 million in the second quarter of 2023, which included $4 million of acquisition-related costs. Excluding these costs, adjusted operating income was $624 million. Gap and adjusted operating margins were 20.3% and 20.4% respectively in the second quarter of 2023. On a gap basis, operating margin decreased by 40 basis points compared to the second quarter of 22, but increased by 40 basis points sequentially. And on an adjusted basis, operating margin decreased 30 basis points compared to the second quarter of 2022, but increased by 30 basis points sequentially. This modest year-over-year decrease in adjusted operating margin reflected a strong downside conversion on the lower sales volumes, as well as the dilutive impact of acquisitions, which are currently operating below the corporate average. On a sequential basis, the increase in adjusted operating margin reflected strong conversion on the higher sales levels. Our team continues to execute well in the quarter, and we are proud to have sustained these healthy levels of profitability despite the continued range of challenges around the world. During the second quarter, we were excited to have closed on the previously announced acquisition of RFS. The value of the net assets we acquired were in excess of the RFS purchase price, and as a result, we recorded a non-cash gain of $5 million in the second quarter, which has been excluded from our adjusted EPS results. In the third quarter of 2023, we expect to incur restructuring costs associated with RFS, which we estimate will be in a range of five to ten million dollars. These costs will be excluded from our third quarter adjusted UPS results and are excluded from our Q3 2023 guidance. Breaking down second quarter results by segment relative to the second quarter of 2022, Sales in the harsh environment solution segment were $889 million and increased by 12% in U.S. dollars and 9% organically, and segment operating margin was 27%. Sales in the communication solution segment were $1,162,000,000 and declined by 16% in U.S. dollars and organically, and segment operating margin was 20.5%. Sales in interconnect and sensor systems segment were $1 billion and $3 million, and increased by 4% in U.S. dollars and 1% organically, and segment operating margin was 18.5%. The company's gap effective tax rate for the second quarter was 21.9%, and the adjusted effective tax rate was 24%, which compared to 23.3% and 24.5% in the second quarter of 2022, respectively. Cap diluted EPS decreased 3% to 74 cents compared to 76 cents in the prior year period. And on an adjusted basis, diluted EPS decreased 4% to 72 cents compared to 75 cents in the second quarter of 2022. Operating cash flow in the second quarter was $536 million, or 120% of adjusted net income. and out of capital spending our free cash flow was $442 million or nearly 100% of adjusted income. We are very pleased to continue to deliver such a strong cash flow yield. From a working capital standpoint, inventory days, day sales outstanding and payable days were 87, 71, and 48 days respectively. Through the focused attention of our management team during the quarter, we were able to bring inventory days back in line with our normal range. During the quarter, the company repurchased 2M shares of common stock at an average price of approximately 77 dollars. When combined with our normal quarterly dividend, total capital returns to shareholders in the second quarter of 2023 was 280M dollars. Total debt on June 30th was 4.3B dollars and net debt was 2.8B dollars. Total liquidity at the end of the quarter was $4.8B, which included cash and short-term investments on hand of $1.5B, plus availability under our existing credit facilities. Second quarter 2023 EBITDA was $736M, and at the end of the second quarter of 2023, our net leverage ratio was 0.9 times. We are very pleased that the company's financial position remains extremely strong by any measure. 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 I'd like to extend my welcome to all of you here on the phone today on this beautiful summer day here in Wallingford, Connecticut. And I do hope that all of you on the call together with your family, friends and colleagues are enjoying a little bit of your summer thus far. As Craig mentioned, I'm going to highlight some of our achievements in the second quarter. I'll then spend a few moments to discuss our trends and the progress across our served markets and make some comments on our outlook for the third quarter. And then obviously we'll have time for questions at the end. With respect to the second quarter, our results were better than expected as we exceeded the high end of our guidance in sales and adjusted diluted earnings per share. Sales declined 3% in U.S. dollars and 2% in local currency, reaching $3 billion and $54 million, with growth in commercial air, military, and automotive end markets, as well as contributions from our acquisitions slightly more than offset by moderations in the mobile networks, IT datacom, and mobile devices segments. On an organic basis, sales did decline by 4%. We're very pleased that the company booked orders in the quarter of $3 billion and $44 million, which represented a book to bill of one to one. As Craig described, our margins in the quarter adjusted operating margins were 20.4%, which was down 30 basis points from prior year, but which improved by 30 basis points from the first quarter sequentially. I'm very pleased that our margins in the second quarter once again reflected outstanding execution by our global management team, who continue to quickly adjust to changing demand and costs amidst these very dynamic times. Adjusted diluted EPS in the quarter of 72 cents declined 4% from prior year, but increased 4% from the sequential prior quarter. We also generated strong operating and free cash flow of $536 million and $442 million in the second quarter, yet another demonstration of the high quality of the company's earnings. I'm extremely proud of the Amphenol team around the world. Our results this quarter once again reflect the strength of our entrepreneurial organization as we continue to perform well amidst a very dynamic and challenging environment. We're pleased to announce today that we close the previously announced acquisition of the North American Cable and Global Base Station antenna business of RFS. Despite some current moderation in the mobile networks market, We remain excited about the long-term prospects of RFS as part of the Amphenol family. We now expect this acquisition to generate roughly $30 million of sales in the second half of 2023. In addition, we're pleased that just in the last few days, we closed on the acquisition of EBY Electro. EBY is based in the state of New York in the U.S. with annual sales of approximately $15 million. And EBY is the designer and distributor of terminal block interconnect products to the North American industrial market. The addition of EBY further expands our offering of high technology interconnect products into the diversified industrial market. As we welcome these outstanding new teams to Amphenol, 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 organizations into the Amphenol organization remains a core competitive advantage for us. Now turning to the trends and progress across our served markets, we're very pleased that the company's end market exposure remains highly diversified, balanced, and broad. In particular, amidst these very dynamic times, Amphenol's end market diversification continues to create great value for the company. The military market represented 12% of our sales in the quarter, and sales in this market grew by a very strong 21% in U.S. dollars and 19% organically, and this was really driven by broad base growth across most segments within the defense market. Sequentially, our sales increased by a better than expected 8%. Looking into the third quarter, we expect sales to remain at these robust second quarter levels. I just have to say that we remain very encouraged by the strength of the company's position in the defense market, where we continue to offer the industry's widest range of high technology interconnect products. Amidst today's highly dynamic geopolitical environment, countries around the world are expanding their investments in both current and next generation defense technologies. thereby increasing the long-term demand potential for Amphenol. We continue to make targeted investments to expand our capacity and look forward to supporting this increased demand with our broad product offering. Turning to the commercial aerospace market, this market represented 4% of our sales in the quarter, and we had another very strong quarter with sales increasing by a robust 40% in U.S. dollar and organically from prior year. as we benefited from both the continued recovery in global aircraft production, as well as our ongoing efforts to expand our position within this market. Sequentially, our sales grew 9% from the first quarter, which was much better than our expectations coming into Q2. We're also very pleased that in the second quarter, our commercial air business was able to reach its highest ever level of quarterly sales. Looking to the third quarter, we expect sales to moderate slightly from these strong second quarter levels. And I'm just truly grateful to our team working in the commercial air market. With the ongoing recovery and travel and thus demand for jetliners, our efforts to strengthen our breadth of high technology interconnect products while diversifying our market position into next generation aircraft are paying real dividends. And we look forward to realizing the benefits of these initiatives in 2023 and beyond. The industrial market represented 26% of our sales in the quarter, and sales in this market were flat in U.S. dollars and local currencies, but did decline by 7% organically, as growth in medical, transportation, oil and gas, alternative energy, and rail mass transit segments was more than offset by moderations across the other segments of the industrial market, together with lower sales to the distribution channel. On a sequential basis, sales declined 3% from the first quarter, which was somewhat worse than our expectations. This reflected some incremental slowing of demand from certain customers, in particular in factory automation and heavy equipment. Looking into the third quarter, we expect sales to moderate slightly from these second quarter levels. Nevertheless, and despite this pause in demand, I'm very proud of our outstanding global team working in the industrial markets. They continue to pursue growth opportunities across the many distinct segments of this exciting and truly diverse 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 that continue to occur across the industrial electronics market. We look forward to realizing the benefits of this strategy for many years to come. The automotive market represented 23% of our sales in the quarter, and sales in this market grew 9% in U.S. dollars and 11% organically. And this was really driven by broad-based strength across most automotive applications, including electric and hybrid electric vehicle applications. Sequentially, our sales increased by 7% from the first quarter, and this was slightly better than our expectations coming into Q2. For the third quarter, we expect sales to be roughly at the same level as we achieved here in the second quarter. And I'm just really proud of our team working in automotive. Their performance so far this year is yet another confirmation of the benefits of their focus on driving new design wins with customers who are implementing a wide array of new technologies into their vehicles. And this includes electrified drive trains, as well as a multitude of other exciting applications. The mobile device market represented 8% of our sales in the quarter, and our sales did moderate by 8% in U.S. dollars and 6% organically in the second quarter, as strength in smartphones and related products was more than offset by declines in tablets and wearables. Sequentially, our sales increased by 3%, which was substantially better than our expectation for a mid-teens decline that we had coming into the quarter. As we now look into the third quarter, we anticipate sales to increase sequentially in the mid-teens from these second quarter levels on seasonal strength. While there's no question that mobile devices remains our most volatile of end markets, our team once again in the second quarter did an outstanding job of capitalizing on opportunities to realize incremental sales. Their agility and ability to adjust resources in real time with the changing levels of demand continues to create value for Amphenol. As we head into the second half of 2023, our team stands poised as always to leverage our leading array of antennas, interconnect product, and mechanisms to capture any opportunities for incremental sales that may arise this year and beyond. The mobile networks market represented 4% of our sales in the quarter. Sales declined by 24% in U.S. dollars and 32% organically as we managed through the expected and broad-based weakness in spending by network operators and wireless equipment manufacturers. Sequentially, our sales in the second quarter declined by 6%, which was a touch better than our expectations coming into the quarter. Looking to the third quarter, we now expect sales to remain at roughly similar levels as we achieved here in the second quarter. Look, there's no doubt that it's a challenging short-term wireless investment environment, but nevertheless, our team continues to work aggressively to realize the benefits of our efforts to expand our position in next generation 5G equipment and networks around the world. With now the addition of RFS together with our already broad array of products, when customers once again drive renewed wireless investments, we look forward to benefiting from the increased potential that comes from our unique position with both equipment manufacturers and mobile service providers. The IT Datacom market represented 18% of our sales in the quarter. And while sales did decline by 24% in US dollars and organically from prior year, our performance in the quarter was actually better than we had expected 90 days ago. In fact, on a sequential basis, sales increased by 6%, which was in excess of our expectations for sales to be flat. This sequential uptick in sales was driven by a surge in demand from customers accelerating their investments in AI-focused systems or alternative intelligence, artificial intelligence, which offsets somewhat weaker demand in more traditional markets. We also saw robust orders for AI-related applications, which is a strong affirmation of our team's success in positioning Amphenol as a true leader in the interconnect systems that support AI. Looking to the third quarter, we expect sales to increase modestly from these second quarter levels. While we're continuing to manage through the inventory adjustment in the broader IT market, we are more encouraged than ever by the company's position in this important space. Whether enabling the current surge in AI-related installations or the broader range of internet-enabling networks, Our team has done an outstanding 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. This creates a continued long-term opportunity for Amphenol. The broadband market represented 5% of our sales in the quarter, and sales were flat from prior year and up just 1% organically. as broadband operators tempered their procurement levels. On a sequential basis, sales declined by 2%, which was modestly better than our expectations. Now looking into the third quarter, we do expect a mid-single-digit sequential decline in sales as operators moderate their spending following several quarters of strong demand and investment. Regardless of this momentary pause in demand, we do remain encouraged by the company's strengthened 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 network coverage and bandwidth to support the proliferation of high-speed data applications to homes and businesses. In addition, there remains a significant amount of government-funded initiatives, particularly in North America, which gives us confidence for the future of the broadband market. Now, turning to our outlook and assuming the current market environment does not meaningfully worsen and also assuming constant exchange rates. For the third quarter, we now expect sales in the range of 3 billion, 40 million to 3 billion, 3.1 billion and adjusted diluted EPS in the range of 72 cents to 74 cents. This would represent a sales decline of 6 to 8 percent and an adjusted diluted EPS decline of 8% to 10% compared to the third quarter of 2022. 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 strong profitability over the long term. Finally, and really most importantly, I'd like to take this opportunity to thank the entire Amphenol team around the world