Amphenol Corporation

Hello, and welcome to the third 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 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 third quarter 2023 conference call. Our third 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. 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 third quarter with sales of $3,199,000,000 in GAAP and adjusted diluted EPS of 83 cents and 78 cents respectively. Third quarter sales were down 3% in U.S. dollars and local currencies and 5% organically compared to the third quarter of 2022. Sequentially sales were up 5% in U.S. dollars, local currencies, and organically. Adam will comment further on trends by market in a few minutes. Orders in the quarter were $3,164,000,000, which was flat compared to the third quarter of 22, and up 4% sequentially, resulting in a book-to-bill ratio of 0.99 to 1. GAAP operating income was $658,000,000 in the third quarter of 2023, which included $9 million of acquisition-related transaction costs. Excluding these costs, adjusted operating income was $667 million. GAAP and adjusted operating margins were 20.6% and 20.8% respectively in the third quarter. On a GAAP basis, operating margin was down 10 basis points compared to the third quarter of 22 and increased by 30 basis points sequentially. On an adjusted basis, Operating margin decreased by just 20 basis points compared to the third quarter of 22, but increased by 40 basis points sequentially. This modest year-over-year decrease in adjusted operating margin was primarily due to the dilutive impact of recent acquisitions, which are currently operating well below the corporate average. On an organic basis, we were very pleased with our operating margin performance, which represented a smaller-than-typical downside conversion on the lower organic sales levels. This strong organic performance reflected the agility of our team in adjusting costs as well as the continued benefit of pricing actions taken in the prior year. On a sequential basis, the increase in adjusted operating margin reflected strong conversion on the higher sales levels. Our team continued 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. Breaking down third quarter results by segment, relative to the third quarter of 22, sales in the harsh environment solution segment were $887 million and increased by 12% in U.S. dollars and 7% organically. Segment operating margin was 26.9%. Sales in the communication solution segment were $1,279,000,000 and declined by 16% in the U.S. dollars in organically. Segment operating margin was 22.1%. Sales in the interconnect and sensor system segment were $1,033,000,000 and increased by 5% in U.S. dollars and 1% organically. Segment operating margin was 18.3%. The company's GAAP effective tax rate for the third quarter was 18.2% and the adjusted effective tax rate was 24.0%, which compared to 23.1% and 24.5% in the third quarter of 22 respectively. GAAP diluted EPS was up 4% at 83 cents compared to 80 cents in the prior year period. And on an adjusted basis, diluted EPS decreased 3% to 78 cents compared to 80 cents in the third quarter of 22. This was an excellent result, especially considering the variety of challenges that the company continued to face during the quarter. Operating cash flow in the 3rd quarter was 618M dollars or 128% of adjusted net income and net of capital spending our free cash flow was 544M dollars or 112% of adjusted net income. We are 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, 70 and 52 days respectively all within the normal levels. 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 22 cents, effective for payments beginning in January of 2024. During the quarter, the company's repurchased 1.7 million shares of common stock at an average price of approximately $86. And when combined with our normal quarterly dividend, total capital returned to shareholders during the third quarter of 23 was approximately 275 million dollars. Total debt on September 30th was 4.3 billion dollars and net debt was 2.6 billion dollars. Total liquidity at the end of the quarter was 5 billion dollars, which included cash and short-term investments on hand of 1.7 billion plus availability under existing credit facilities. Third quarter 2023 EBITDA was $784 million, and at the end of the third quarter of 2023, our net leverage ratio was 0.8 times. We are very pleased that the company's financial condition 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, Craig, thank you very much, and I'd like to extend my welcome to everybody on the phone here today. I hope that you're all having an enjoyable fall so far. It's a pleasure here in Wallingford to see the beautiful orange and red hues out of our windows. As Craig mentioned, I'm going to highlight our third quarter achievements. I'll then discuss our trends and progress across our diversified end markets. And then I'll comment on our outlook for the fourth quarter and for the full year of 2023. Turning to the third quarter, Our results in the third quarter were better than expected, as we exceeded the high end of our guidance in sales and adjusted diluted earnings per share. Sales declined by 3% in U.S. dollars and local currencies, reaching just under $3.2 billion, with growth in the commercial, air, military, and automotive end markets, as well as contributions from our acquisitions, which were more than offset by moderations in the mobile networks, mobile devices, IT datacom, broadband, and industrial end markets. On an organic basis, sales declined by 5%, but sales did increase sequentially by 5% from second quarter levels. We're pleased that the company booked orders of 3,164,000,000 and that represented a book to bill of 0.99 to 1. I'm especially encouraged that our orders in the third quarter did exceed prior year levels, and that's an encouraging sign going forward. Profitability was very strong in the quarter. We generated adjusted operating margins of 20.8%, and that was down just 20 basis points from prior year. Sequentially, our margins improved by 40 basis points, and as Craig already mentioned, These operating margins in the third quarter reflected just outstanding execution by our global management team who continued to manage dynamically and effectively even in the face of moderating sales. Adjusted diluted EPS in the quarter was 78 cents and that declined just 3% from prior year and increased by a strong 8% on a sequential basis. And then finally, we're very pleased with the company's cash flow generation in the quarter with operating and free cash flow of $618 million and $544 million respectively in the third quarter, clear demonstrations of the high quality of Amphenol's earnings. I come out of this quarter extremely proud of the team, and I'll just say that our results this quarter once again reflect the discipline and agility of our entrepreneurial organization. as we continue to perform well amidst the dynamic and challenging environment. Our acquisition team has been extremely busy this year so far, and I'm really pleased that since our last earnings call, we've closed on three acquisitions, Connor Manufacturing, QMicrowave, and XMA Corporation. In addition, we signed an agreement to acquire PCTel. With its headquarters in Illinois, Connor is a global manufacturer of power interconnect products including especially high-voltage bus bars for the automotive and industrial markets with annual sales of approximately $100 million. Based in California, Q-Microwave is a designer and manufacturer of mission-critical radio frequency components utilized in military platforms with annual sales of approximately $20 million. And based in New Hampshire, XMA is also a provider of RF components for the military as well as the IT datacom market with annual sales of approximately $15 million. We're very pleased that we signed a definitive agreement to acquire PcTel. PcTel is a leading global provider of antennas for a broad array of markets, as well as purpose-built industrial IoT products and test and measurement solutions. We expect the PcTel transaction to close by early 2024. I'm very excited to welcome the Connor, Q Microwave, and XMA teams to Amphenol, and I certainly look forward to welcoming the PCTel team once that deal closes. Most importantly, 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 then to successfully bring these companies into our entrepreneurial organization This remains a core competitive advantage for Amphenol. Now turning to our served markets, we're very pleased that the company's end market exposure remains highly diversified, balanced, and broad. And that creates great value for the company, particularly amidst these dynamic times. So turning to each of our served markets, the military market represented 11% of our sales in the quarter. Sales grew from prior year by a very strong 26% in U.S. dollars and 22% organically. And this was really driven by broad-based strength across virtually every segment of the military market. Sequentially, our sales grew by 3%, which was better than our expectations coming into the quarter. And as we look into the fourth quarter, we expect sales to remain roughly at these robust third quarter levels. And for the full year of 2023, we expect a high teens increase in sales from prior year. With the acquisitions last quarter of both 2Microwave and XMA, we further broadened our industry-leading RF product offering into this important defense market. And in general, we remain encouraged by the company's strengthened position across the defense industry, where we continue to offer the market's widest range of high-technology interconnect products. Amidst today's 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're going to continue to accelerate our new product development while also increasing our capacity, and thus are well positioned to support this increased demand long into the future. The commercial aerospace market represented 4% of our sales in the quarter, had another really strong quarter with sales increasing by a very robust 40% from prior year and 37% organically. And this was driven by broad-based strength across all aircraft applications. On a sequential basis, sales did decline by just 1%, and that was a bit better than our expectations coming into the quarter. As we look into the fourth quarter, we now expect a modest seasonal sequential decline in sales. And for the full year 2023, we expect sales to increase in the mid-30% range compared to 2022. I'm truly proud of our team working in the commercial air market. With the ongoing recovery in 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. We look forward to realizing the benefits of these initiatives for many years to come. The industrial market represented 24% of our sales in the quarter. Sales in the quarter did decline by 6% in US dollars and 13% organically, as growth in medical, oil and gas, and rail mass transit applications was more than offset by declines in other segments of the industrial market. I did want to highlight that our sales into the distribution channel were particularly soft in the third quarter, as many distributors have taken steps to reduce their inventory positions in the industrial market. Sequentially, sales declined by 4% from the second quarter, which was somewhat worse than our expectations coming into the quarter. Looking into the fourth quarter, we expect sales to moderate slightly from these third quarter levels. And for the full year 2023, we expect sales to be roughly flat versus prior year as some organic moderations are offset by the benefit of our acquisitions. Despite this near-term demand pause in the industrial market, I continue to remain so proud of our outstanding global team working in this important area. They continue to pursue growth opportunities across the many exciting segments of this truly diverse market. And 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 will no doubt continue to occur across the industrial electronics market. The automotive market represented 23% of our sales in the quarter And sales grew by a very robust 13% in U.S. dollars and 12% organically. This was driven by broad-based strength across most automotive applications, including electric and hybrid electric vehicle platforms. Sequentially, our sales increased by 7% from the second quarter, and this was much better than our expectations that we had coming into 3Q. For the fourth quarter, we expect sales to remain roughly at these levels. And for the full year 2023, we expect sales to increase by approximately 10% compared to prior year. I'm really proud of our team working in the automotive market. 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, including electrified drive trains, as well as a multitude of other exciting new applications. With the addition of Connor to the Amphenol family, we now have an even broader array of products for global electric vehicle manufacturers, and we look forward to benefiting from this position for many years to come. The mobile device market represented 10% of our sales in the quarter, and our sales moderated by 20% in U.S. dollars and 18% organically. as strong growth in smartphones was more than offset by declining sales of products that are incorporated into laptops, tablets, and wearables. On a sequential basis, our sales increased by a much stronger than expected 25%, and that was really driven by higher than expected sales in smartphones and wearables. Looking into the fourth quarter, we expect sales to moderate in the high single digits sequentially. As strong growth in smartphones, we expect to be more than offset by continued declines in laptops and wearables. For the full year, we anticipate sales to decline in the mid-teens compared to 2022. While there's no question that mobile devices remains our most volatile end market, our team once again in the third 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 end of 2023, our team stands poised as always to leverage their leading array of antennas, interconnect products, and mechanisms to capture any opportunities for incremental sales that may arise this year and beyond. The mobile networks market represented 3% of our sales in the quarter. Sales declined by 35% in U.S. dollars and 43% organically as we continue to manage through a broad-based reduction in spending by network operators and wireless equipment manufacturers. On a sequential basis, our sales declined by 6%, which was a bit worse than our expectations coming into the quarter. For the fourth quarter, we expect sales to decline in the mid to high single digits sequentially. And for the full year, we anticipate a moderation in sales in the sort of mid 20% range versus 2022. Despite this more challenging short-term wireless investment environment, 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. When customers once again drive renewed investments in these next generation systems, we look forward to benefiting from the increased potential that comes from Amphenol's unique position with both equipment manufacturers and mobile service providers. The IT Datacom market represented 20% of our sales in the quarter, and while sales did decline by 12% in U.S. dollars inorganically from prior year, Our performance in the quarter was actually much better than we'd expected 90 days ago. In fact, on a sequential basis, our sales increased by a strong 13% in the third quarter, much better than previous expectations. The growth in our sales from the second quarter was driven by an accelerating surge in demand from customers who are making significant investments in AI data centers. We also continue to see robust orders for AI-related applications, a confirmation of our team's success in positioning Amphenol as a leader in the complex interconnect systems that support alternative intelligence or artificial intelligence. As we look towards the fourth quarter, we expect sales to remain at these third quarter levels, and for the full year of 2023, we expect a mid-teens decline in sales compared to prior year. While we've certainly had to manage through the inventory adjustments in the broader IT market, I am more encouraged than ever by the company's position in the global IT datacom industry. This revolution in AI is creating a true and unique opportunity for Amphenol given our leading high speed and power interconnect products. With machine learning applications driving a more intensive usage of our highest technology interconnect products, we're very well positioned for the future. In addition, our team just continues to do 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 the company. Finally, the broadband market represented 5% of our sales in the quarter. and sales were down 8% in U.S. dollars inorganically as broadband operators continued to moderate their procurement levels. On a sequential basis, sales were down by 6% in line with our expectations coming into the quarter. For the fourth quarter, we expect a modest sequential increase in sales, and for the full year 2023, we expect sales to decline in the mid-single digits from prior year. Regardless of the current demand dynamics, we remain encouraged by the company's position in the broadband market. 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, we're very well positioned to benefit from the broad array of government-funded initiatives, particularly in North America, thereby giving us confidence for the future. Now turning to our outlook, there's no question that the current economic environment remains uncertain. And assuming market conditions do not meaningfully worsen, and also assuming constant exchange rates. For the fourth quarter, we expect sales in the range of $3.9 billion to $3.15 billion, and adjusted diluted EPS in the range of $0.75 to $0.77. This would represent a sales decline of 3% to 5%, and an adjusted diluted EPS decline of 1 to 4% compared to prior year. Our fourth quarter guidance also represents an expectation for full year sales of $12,317,000,000 to $12,377,000,000 and full year adjusted diluted EPS of $2.94 to $2.96. This outlook represents full year sales and adjusted EPS declines of 2% and 1 to 2% respectively. I'm very 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 Amphenol's market position while also driving strong profitability. In addition, I just want to reiterate that our entire Amphenol team around the world remains committed to delivering long-term sustainable value And I would like to finally take this opportunity to thank each and every one of our 90,000 employees 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.