Amphenol Corporation

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. Thank you, and you may begin. Thank you very much.

Good afternoon, everyone. This is Craig Lampo, Amphenol CFO, and I'm here together with Adam Norwit, our CEO. We would like to wish everyone a happy new year and welcome you to our fourth quarter of 23 conference call. Our 4th quarter and full year 23 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 gap 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 4th quarter with sales of 3,327,000,000 dollars. and record adjusted diluted EPS of 82 cents. Fourth quarter sales were up 3% in US dollars, 2% in local currencies, and down 1% organically compared to the fourth quarter of 2022. Sequentially, sales were up 4% in US dollars, 4% in local currencies, and 2% organically. Adam will comment further on trends by market in a few minutes. For the full year of 23, sales were 12,555,000,000 dollars, down 50 basis points in U.S. dollars, flat in local currencies, and down 3% organically compared to 2022. Orders in the quarter were 3,164,000,000 dollars, up 10% compared to the fourth quarter of 2022, and flat sequentially, resulting in a book-to-bill ratio of 0.95 to 1. For the full year, orders were $12,267,000,000, down 5% compared to 2022, resulting in a book-to-bill of 0.9821. Gap operating income and operating margin was $690,000,000 and 20.7% respectively in the fourth quarter of 23, which increased 10 basis points compared to both the fourth quarter of 22 and the third quarter of 23. Adjusted operating income was $706 million, which excluded $16 million in acquisition-related costs. Adjusted operating margin was 21.2% during the fourth quarter, a new quarterly record for the company. On an adjusted basis, operating margin increased by 30 basis points compared to the fourth quarter of 22 and increased by 40 basis points sequentially. The year-over-year increase in adjusted operating margin was primarily driven by strong operating leverage on slightly higher sales levels, as well as the benefit of pricing actions. These benefits were partially offset by the dilutive impact of recent acquisitions, most of which are currently operating below the corporate average. For the full year of 2023, GAAP operating income was $2,560,000,000, which included $35 million of acquisition-related costs. And excluding these costs, adjusted operating income was $2,594,000,000. For the full year of 23, GAAP operating margin was 20.4%, and adjusted operating margin was a strong 20.7%, consistent with our previous annual record margins achieved in 2022 and 2018. On a GAAP basis, operating margin decreased 10 basis points compared to 2022. Compared to 2022, adjusted operating margin was flat, which primarily was driven by strong operational performance as well as the benefit of pricing actions, partially offset by the dilutive impact of acquisitions. This was an impressive margin performance given the slight sales decline we experienced in 2023. 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 fourth quarter results by segment, relative to the fourth quarter of 2022, sales in the harsh environment solution segment were $900 million and increased by 13% in U.S. dollars and 6% organically. Segment operating margin was 26.5%. Sales in the communication solution segment were $1,345,000,000 and declined by 6% in U.S. dollars and 7% organically. Segment operating margin was 23.1%. Sales in the interconnect and sensor system segment were $1,082,000,000 and increased by 7% in U.S. dollars and 2% organically. Segment operating margin was 18.5%. Breaking down full year results by segment relative to 2022, sales in the harsh environment solution segment were $3,531,000,000 and increased by 14% in U.S. dollars and 9% organically. And segment operating margin was 26.7%. Sales in the communication solution segment were $4,913,000,000 and declined by 13% in U.S. dollars and organically, and segment operating margin was 21.6%. Sales in the interconnect and sensor system segment were $4,111,000,000 and increased by 6% in U.S. dollars and 3% organically, and segment operating margin was 18.3%. The company's gap effective tax rate for the 4th quarter was 22% and the just effective tax rate was 24%, which compared to 19.2 and 24.5 in the 4th quarter of 2022 respectively. And for the full year of 23, the company's gap effective tax rate was 20.7%. And the adjusted effective tax rate was 24%, which compared to 22.3 and 24.5% in 2022, respectively. In 2024, we expect our adjusted effective tax rate to be approximately 24%. GAP diluted EPS was 83 cents in the fourth quarter, up 1% compared to the prior year period. And on an adjusted basis, diluted EPS increased 5% to a record 82 cents compared to 78 cents in the fourth quarter of 22. This was an excellent result. For the full year, GAAP diluted EPS was a record $3.11, a 2% increase from $3.06 in 2022. And adjusted diluted EPS was a record $3.01 in 2023, an increase from $3 in 2022. Operating cash flow in the fourth quarter was a record $842 million, or 162% of adjusted net income. In net of capital spending, our free cash flow was a record $739 million, or 142% of adjusted net income. We are pleased to have continued to deliver such a strong cash flow yield in the quarter and for the full year. In the full year, 2023 operating cash flow was a record $2,529,000,000 or 130% of adjusted net income. Net of capital spending, our free cash flow for 2023 was a record $2,160,000,000 or 111% of adjusted net income, a very strong result. From a working capital standpoint, inventory days, sales outstanding and payable days were 85, 70 and 55 days respectively, all within our normal levels. And during the quarter, the company repurchased 1.3M shares of common stock and an average price of approximately 86 dollars, bringing total repurchases during 2023 to 7.2M shares or 585M dollars. When combined with our normal quarterly dividend, total capital return to shareholders in 2023 was $1,086,000,000. Total debt on December 31st was $4.3 billion and net debt was $2.7 billion. Total liquidity at the end of the quarter was $4.9 billion, which included cash and short-term investments on hand of $1.7 billion, plus availability under our existing credit facilities. 4th quarter and full year 2023 EBITDA was 830M dollars and 3.1B dollars respectively. And at the end of the 4th quarter of 2023, our net leverage was 0.9 times. We are very pleased that the company's financial condition remains 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. And I hope it's not too late to wish all of you a Happy New Year here from Wallingford, Connecticut. As Craig mentioned, I'm going to highlight some of our achievements in the fourth quarter and also for the full year of 2023. I'll then discuss our trends and progress across our served markets. I'll make some comments on our outlook for the first quarter. And then, of course, we'll have time for questions. 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 3% in U.S. dollars, 2% in local currencies, reaching $3,327,000,000. On an organic basis, our sales did decline by just 1%, with growth in commercial air, defense, automotive, and IT datacom markets offset by declines across our other end markets. The company booked $3,164,000,000 in orders in the fourth quarter. This was a 10% growth versus prior year and flat to the last quarter, but did represent a book to bill of 0.95 to 1. We're very pleased to have delivered record adjusted operating margins of 21.2% in the quarter. A clear reflection of our team's outstanding execution. And these margins increased 30 basis points from prior year and 40 basis points sequentially. Adjusted diluted EPS reached 82 cents in the quarter, representing a growth of 5% from prior year. I have to say that we were especially pleased that the company generated record operating and free cash flow of $842 million and $739 million, respectively, in the fourth quarter, both just really clear reflections of the quality of the company's earnings. I come out of the fourth quarter extremely proud of the ethanol team. 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 that we announced this morning that we closed for acquisitions in the quarter, really in November and December. Based in Ohio, TPC Wire and Cable is a value-added provider of harsh environment cable and cable assemblies for applications across the industrial market. And this includes particularly factory automation and heavy equipment, and TPC has annual sales of roughly $110 million. Headquartered in New Hampshire and with annual sales of approximately $90 million, Aramar is a leading provider of sensors, for the recreational marine, commercial fishing, and industrial markets. LID Technologies, based in Toulouse, France, has annual sales of approximately $40 million. And LID is a high technology supplier of sensor products to the industrial and automotive markets with a focus on tire pressure monitoring and the telematics associated with that. We also closed on the previously announced acquisition of PCTel, a leading global provider of antennas for a broad array of markets, including and particularly the Internet of Things or industrial IoT market. PCTel generated in 2023 approximately $85 million in sales. As we welcome these outstanding new teams to Amphenol, I remain confident that our acquisition program will continue to create great value for the company. In fact, our acquisition program was very successful in 2023, and our pipeline of prospective deals remains strong as we enter the new year. Indeed, we continue to see interesting near-term potential opportunities to bring outstanding and complementary organizations into the Anthenol family. Our ability to identify and execute upon acquisitions and then to successfully bring these companies into the Amphenol family remains a core competitive advantage for the company. As our organization has evolved and scaled, so too has our ability to effectively manage a greater number of acquisitions of all sizes. Now, turning to the full year of 2023, despite the demand challenges that we did experience in certain end markets in the year, I have to say that the Amphenol team delivered another successful year of performance. Amidst significant organic declines in the communications end markets due to inventory builds in 2022, as well as the more recent moderations in demand in the industrial market, our team was able to deliver overall sales that were only slightly down from prior year. This was a testament to the breadth and diversification of the company, as well as our team's ability to capitalize in real time on opportunities for incremental sales across the entirety of our markets. Our full year 2023 adjusted operating margin of 20.7% was flat with our last year record levels in 2022, despite the organic sales decline. This excellent performance by our team allowed us to deliver adjusted diluted EPS of $3.01, which was just slightly above prior year levels. We also generated record operating and free cash flow of $2,529,000,000 and $2,160,000,000 respectively, both confirmations of the company's superior execution and disciplined working capital management. Our acquisition program, which I just discussed, really created great value throughout the year with 10 new companies contributing annualized sales of more than $600 million joining Amphenol in 2023. These new acquisitions enhanced our position across a broad array of technologies while bringing outstanding and talented individuals into the Amphenol organization. We're excited that these companies represent expanded platforms for the company's future performance and have deepened our already strong bench of leaders around the world. In addition, in 2023, we bought back over 7 million shares under our share buyback program, and increased our quarterly dividend by 5%. And that represented a total return of capital to shareholders of nearly $1.1 billion. So while there continued to be a high level of volatility across the overall market environment in 2023, As we enter 2024, our agile entrepreneurial management team is confident that we have built further strength from which we can drive superior long-term performance. Now, turning to the trends and our progress across our served markets, I would just comment that we remain very pleased that the company's end market exposure is still highly diversified, balanced, and broad. with no end market representing more than 25% of our sales in 2023. This market diversity helps to insulate us from the effect of any given market's volatility while also exposing us to the exciting revolutions happening across the electronics industry. Turning first to the defense market, our sales represented 12% of our total in the fourth quarter and 11% for the full year of 2023. Fourth quarter sales once again grew strongly from prior year. increasing by 18% in U.S. dollars and 17% in local currency. On an organic basis, sales in the defense market increased by 15%, with broad-based growth across virtually all defense applications, particularly strong in naval, helicopters, communications, and airframe applications. Sequentially, our sales increased by a better than expected 4% from the third quarter. For the full year 2023, sales in the defense market grew by 20% in U.S. dollars in local currency and by 18% organically. This reflected our operational execution as well as broad strength across most segments of the defense market, and that particularly related to naval, aircraft engine, helicopter, communications, and space-related applications. Looking ahead, we expect sales in the first quarter to decline in the mid-single digits sequentially, and we remain very encouraged by the company's strengthened position in the defense market, where we continue to offer the industry'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 well positioned to accelerate our new product development and increase our capacity to support this demand long into the future. The commercial air market represented 3% of our sales in the quarter and 4% of our sales for the full year 2023. In the fourth quarter, our sales grew by a very strong 25% in U.S. dollars and 23% in local currency and organically. And this was driven by broad-based strength across all aircraft applications. Sequentially, our sales grew by 1% from the third quarter, which was actually ahead of our expectations for a modest seasonal decline. For the full year 2023, sales increased by a very robust 36% in U.S. dollar local currency and organically, reflecting our strong design in positions on a broad range of platforms, as well as broad-based demand across all aircraft applications. Looking into the first quarter, we expect sales to remain at these lofty fourth quarter levels. 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 continue to see great long-term opportunities for expansion of our technology offering to this important market. and look forward to realizing the benefits of those growth initiatives for many years to come. The industrial market represented 23% of our sales in the quarter and 25% of our sales for the full year. Our sales in the fourth quarter did decline by 4% in U.S. dollars, 5% in local currencies, and 12% organically. As growth that we realized in oil and gas, rail mass transit, and marine applications was more than offset by moderations in demand in other segments, including battery and electric heavy vehicles, building automation, transportation, and heavy equipment. In addition, our sales into the industrial distribution channel continued to be more muted than they were a year ago. On a sequential basis, sales grew by 1%, but that was driven primarily by acquisitions that we did close in the quarter. For the full year 2023, sales were flat in U.S. dollars in local currency and declined by 7% organically as the contribution from acquisitions was offset by weakness in instrumentation, battery and electric heavy vehicles, factory automation, and heavy equipment applications in particular. Looking into the first quarter, we expect sales to remain at these levels as the benefit of recent acquisitions offsets a modest organic sequential decline. Despite this near-term demand pause, driven in particular by elevated inventory levels, both in the distribution channel as well as in certain end markets, I remain proud of our outstanding global team working in the industrial market. We are very excited by the additions of TPC, Aramar, LID, and PCTel, each of which adds complementary new interconnect sensor and antenna technologies to our industrial product offering. And I'm 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 24% of our sales in the quarter and 23% of our sales for the full year. Sales in the fourth quarter grew by a robust 16% in US dollars and 15% in local currency. And on an organic basis, our sales to the automotive market increased by 12%. That was really driven by broad-based strength across most automotive applications, including electric and hybrid electric vehicles. Sequentially, our automotive sales increased by 8%, which was better than our expectations coming into the quarter. For the full year, 2023, I'm pleased that our sales increased by a strong 12% in U.S. dollars, 13% in local currency, and 12% organically, and that reflected broad strength across the automotive market, including, in particular, next-generation electronics, for example, electric and hybrid drivetrains. Looking into 2024, we expect a high single-digit sequential seasonal moderation in sales in the first quarter from these levels. I'm truly proud of our team working in the automotive market. Their performance in 2023 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. It's really a multitude of applications, including electrified drivetrains, but not just that, many other applications. We look forward to benefiting from that strong position for many years to come. The mobile devices market represented 11% of our sales in the quarter and 10% of our sales for the full year 2023. Our fourth quarter sales moderated by 3% in U.S. dollars, local currency, and organic, as robust growth in smartphones was once again more than offset by declining sales into tablets, laptops, and wearables. Sequentially, our sales increased by 9%, which was much better than our expectation coming into the quarter, for a high single-digit decline. For the full year 2023, sales in the mobile devices market declined by 12% in U.S. dollars and 10% organically, as strong growth in smartphones was more than offset by declines in other mobile device applications. Looking into the first quarter, we do anticipate a typical seasonal sequential decline of approximately 35%. 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 2024 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 3% of our sales in the quarter and 4% of our sales for the full year. Sales in this market declined from prior year by 26% in U.S. dollars, 27% in local currency, and 34% organically as we continued to manage through a broad-based reduction in spending by network operators and wireless equipment manufacturers. Sequentially, our sales decreased by 6%, which was in line with our expectations. For the full year, sales declined by 26% from prior year and 32% organically, driven by the spending reductions that we've discussed throughout the year. Looking ahead, we expect a modest increase in sales from these fourth quarter levels. And 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 wireless investments, we look forward to benefiting from the increased potential that comes from our position with both equipment manufacturers and mobile service providers. The information technology and data communications market represented 20% of our sales in the quarter and 19% of our sales for the full year. We're very pleased that our sales in the fourth quarter returned to growth compared to prior year with sales in U.S. dollars and local currency increasing by 6% and organically by 5%. Sequentially, our sales increased by a much better than expected 6% as we continued to benefit from our strong presence with AI data center customers as well as some overall improved demand. For the full year 2023, our sales in the IT Datacom market declined 13% in U.S. dollars and organically as strong demand for AI-related applications was more than offset by inventory adjustments that we saw amongst our traditional IT Datacom applications. Looking ahead, we do expect in the first quarter a mid-single-digit sequential seasonal decline in sales. I have to say, coming out of what was a challenging year in the overall IT Datacom market, that we're more encouraged than ever by the company's position in this space. Our team continues to do an outstanding job securing future business on next generation IT systems, particularly those enabling artificial intelligence. Indeed, the revolution in AI has created a unique opportunity for Amphenol, given our leading high-speed power and fiber optic interconnect products. With machine learning driving a more intensive usage of these highest technology interconnect products, we're very well positioned for the future. This creates a continued long-term growth opportunity for Amphenol. The broadband communication market represented 4% of our sales in the quarter and 4% for the year. Sales in the fourth quarter were down 31% in US dollars and 32% organically, as broadband operators continued to moderate their procurement levels. On a sequential basis, sales did decline by 12%, which was worse than our expectations coming into the quarter when we anticipated more of a modest increase. For the full year 2023, sales were down by 7% in U.S. dollars and organically, driven by the continued pause in broadband operator spending. Looking ahead, we expect sales in the first quarter to increase modestly from these levels. Regardless of the current demand dynamics, we do remain encouraged by the company's strength and 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. And finally, turning to our outlook, there's no doubt that the current economic environment remains somewhat uncertain. assuming the continuation of these current market conditions and also assuming constant exchange rates. For the first quarter, we expect sales in the range of $3.4 billion to $3.1 billion and adjusted diluted EPS in the range of $0.71 to $0.73. This would represent sales growth of 2% to 4% and adjusted diluted EPS growth of 3% to 6% compared to the first quarter of 2023. 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 Amphenol's market position while driving sustainable and strong profitability over the long term. And finally, I just want to take this opportunity to thank our entire global team around the world, including all of those who work across our factories, touch our products, and ultimately deliver to our customers what they need. I'm just truly grateful for all of their outstanding efforts, both here in the fourth quarter, but moreover, for the entirety of 2023. Without them, we wouldn't be able to make it happen like we do. And with that, operator, we'd be very happy to take any questions.

Thank you. The question and answer series will now begin. Please limit to one question per caller. Our first caller is Amit Daryanani with Evercore. You may go ahead.

Thanks. Good afternoon, everyone. The one question for me would be, can you touch on the weakness on the industrial market? You talked about softness there, a little bit of inventory as well. I'm curious, is that stable worse than what you saw 90 days ago, or do you feel like it's getting worse as you head into 2024? And then to the extent you can talk about it, do you see the risk of this perhaps in other markets as well? Great. Thank you. Great.

Yeah, I didn't perfectly hear the second part of your question. There's a little bit of a connection issue, but I think relative to your question, which was is industrial stable versus 90 days ago. I mean, look, I think we came into the quarter. with an expectation of kind of a modest reduction in sales. Our sales were essentially in that line with that. So I think it was kind of what we expected it to be. I would say that the book-to-bill in industrial was a bit weaker. I mean, if we think about why our book-to-bill was 0.95 to 1, I mean, the real driver for that was industrial on one side. And we did see in the IT Datacom market a little bit of a softer book-to-bill, but that That is really just a little bit more of an equalization from very high books to build that we've seen over the prior couple of quarters. So I don't I don't think the data come book to build at all representative of the of the demand environment. But I think in the industrial market, we did see bookings a little softer than we had anticipated. I'm going to assume that your second question is, how do we see that going forward? And where do we see that kind of cycle in industrial? And I think it's early to tell. I mean, the beauty of our industrial business is it's so broad. And so we're not levered onto one or another of the individual segments. And there are so many segments across the industrial market that we participate in. And we don't have any of those that are really disproportionate To our overall business, and we continue to see some of those segments, you know, areas like marine and oil and gas, rail, mass transit, you know, medical during the course of this year. It still had very robust demand, but but no doubt about it areas like factory automation instrumentation. Those are areas where we've seen more market reductions in demand and also more impact from the distribution channel. When is that going to be worked out in the distribution channel, the inventory? When does some of that demand return in some of those segments? I think it's a little too early to tell and as we go through the course of this year, we'll try to give you a really good read on that. I mean, as we look into here now the first quarter, as I said in my prepared remarks, we do anticipate in the first quarter a kind of a modest level, but that's really supported by the acquisitions that we've made. And on an organic basis, we see the first quarter, you know, again, modestly down from our current levels.

Our next question comes from Asya Merchant with Citigroup.

You may go ahead. Great. Hopefully you can hear me clearly and I don't have an echo. I will try. On the IT data call market, if you guys can please share some insight, looks like this market's ramping up quite nicely for you guys. So if you could elaborate a little bit on how you think about your wins in the AI segment and how you're able to ramp that into revenues going forward, especially given constraints on supply on the GPU side. How do you guys think you can ramp for AI for the remainder of the year? Thank you. Thank you.

Yeah. Well, thank you very much and welcome to our call. I look forward to getting to meet you in person. We're really excited about the progress that the company has made in AI. And I just want to reflect on one aspect, which is that AI is not new to us. While the world over the course of the last year has sort of woken up to AI with the advent, you know, a year ago, November of ChatGPT and this sort of revolution of generative AI, our team's been working on the interconnect architecture surrounding AI for a long, long time. And so it is only now that maybe there is this acceleration, almost you could call it even a kind of revolution or a gold rush around AI. But we've been building the capability, building the product capability, building the manufacturing capability and capacity to support that for a long time. And I think this year, one of the ways that we were able to maybe even get a disproportionate share of some of the more urgent demand was that we were very quick to flex our capacity in favor of customers who needed products and when they needed it. And I think our team has always showed the ability to have that agility in reacting to upticks of demand. And I think that this AI is no different. I'm really proud of our team and how they've done that. Looking forward, it's still too early to say what does that look like over the long term. But there's no question in my mind that AI seems like something that is not such a small deal. It seems like something where there are real economics behind it. where large companies are making significant investments into AI and where ultimately, you know, our architecture, our interconnect architecture is a very critical component together with the chips that you alluded to. Now, relative to shortages of chips, you know, that's, I mean, We hope that there are significant investments in chip manufacturing because in our industrial business, we do supply a lot of interconnect products that go into the industry for semiconductor manufacturing. I don't think that we've necessarily seen that as a governor on our output or on our customers' demand right now. But, you know, we'll see. It's not something that would directly impact except that maybe customers, if they couldn't get enough chips, they would moderate their overall construction. But we haven't seen that yet. And I think our team is just doing a fabulous job dealing with the surge in demand that we saw this year. And it came at a time when overall IT demand was down. But in fact, some of the products were very different products. So it wasn't just that we were able to reallocate capacity from IT products that were not being consumed as much into these. There was a lot of new stuff that we had to do. And I think we did a really great job executing on that.

Our next caller comes from Luke Young with Baird. You may go ahead.

Great. Thanks for taking the question, Adam. Just hoping you could comment on pricing dynamics into 2024, especially in which parts of the portfolio you might look at as more normal with respect to price downs this year versus areas of the business that could be a laggard in that respect. And then the related question would just be, how you're feeling about delivering productivity of your supply chain and your operations to offset any price downs you might face this year. Thanks, Adam.

Hey, Luke, it's Craig. I'll take that one for Adam. I think as we think about pricing, you know, 23, certainly we talked about the fact that we didn't necessarily, we saw pricing coming back to normal. I mean, 22, we talked a lot about, you know, pricing adjustments we were making to try to catch up to inflation. inflationary increases on costs that we saw. And I think that, you know, as we came into 23, you know, sequentially, we did a great job on the profitability, but that wasn't necessarily the pricing dynamics. That was more really just operational execution. And I think the pricing in 23, and as we look into 24, is certainly more normalized in that the pricing cost environment is more balanced. I wouldn't say the cost environment necessarily has you know, decreased at all. I think there is certainly an elevated level of cost, but they're just not increasing at the pace that we saw, you know, a year ago. So from that perspective, I think the pricing environment is in more of a normal situation. And as we move into 24, I don't necessarily think we're going to get necessarily the benefit of price. And historically, that's not something that we would see anyways. And, you know, typically, if you have a normal cost environment, a normal price environment, you know, I think you'll see kind of typical kind of margins and margin increases from a profitability perspective. We talk about 25% as being a typical target that we have in a normal environment. And I think as we move into 24, I would expect that to be the case kind of sequentially as we move into it. So really happy with where we actually ended the year here at record operating level. So we're really well positioned, I think, as we move into 24. I mean, if you look at our margin improvements, I think that that's something that I'm really proud of the team to be able to actually you know, execute so well during the year to get to these profitability levels. So as we move into 24, I expect that overall environment to be the same, and I certainly expect the team to be able to execute at a similar level.

The next question comes from Lomson Mohan with Bank of America. Go ahead.

Yes, thank you. Adam, you called out the weakness in 2023 in the communication-related markets. But you did exceed your expectations in the fourth quarter. Do you see a greater than normal organic growth rate over the next two years in these markets, given the historically easier compares here? And if you could also just talk about the environment in China, that'd be really helpful. Thank you.

Well, thank you very much. Well, you're asking me to do a tough thing, which is to talk about the next 2 years in a very volatile space, which is communications. I think that's hard to say what will be the overall growth across communications. I would tell you, we see great opportunities across each of those areas with different things going on because remember communications. It's not just IT Datacom. It includes mobile networks. It includes mobile devices and obviously broadband. And I think there's different stuff going on in each of those areas. If you talk just about IT Datacom, which is the biggest part of our communications business, I mean, there is no doubt that, as I mentioned earlier, these investments in AI, I think we're in early days on this. I think that there are going to be more and more developments around the real kind of creation of new economic models around AI and then the investments to support that. That's already been broadly talked about. You've heard folks talking about, you know, pretty significant investments in these next generation systems. And again, the interconnect products are really integral part of those systems. So I think on that front, you know, I'm not getting out too ahead of my skis to say that I think at least specific to AI in IT Datacom, I would expect over the coming couple of years to see, you know, some, some great opportunities. I don't know about the base of IT Datacom over the next two years. I couldn't, I couldn't get, I can barely give you a 90 day kind of a very inaccurate guidance for mobile devices. I think that on wireless it, We're going through a cycle, which is a typical cycle where they invest in a new type of a standard. They wait to see and by they, I mean, the service providers, the operators, they wait to see how does that settle out? How do customers take it? Are customers willing to pay more for the functionality? that's delivered by that. And then there starts usually another round of the investments around that. And I think we're in that low period right now. I couldn't tell you when that low period will inflect and become more investment, but I can tell you for sure that in the coming years, there will need to be more investments around 5G and ultimately 6G and all the wireless networks, because the vast majority of people connecting to the internet are doing it not on a connection, like a cat five cable or in an office, they're doing it on a wireless basis while they're moving around the world. And so that network is going to have to keep up with the data traffic that continues to expand, you know, kind of on an unabated basis. And then finally, broadband, you know, broadband is an area where I think there is a lot of push in countries like ours and others to ensure that there is both the capacity and the coverage for broadband access because it's viewed not as a luxury, but rather as a necessity that folks can have broadband access. And so I think long-term there's good opportunities there as well. Relative to China, I think I'm very happy to see that, you know, the sort of geopolitics of China and the U.S. seems to be the pendulum is swinging towards a more moderate phase. There's more people talking and all of that. And we're encouraged by that. I think the world is a better place when countries are talking rather than arguing. And I think that's a good thing. I think there's a lot written about the Chinese macro environment, and I'm not the expert to sort of go off on that. But what I will say is that in those areas of the electronics industries where we support in China, places like the automotive industry, places like the industrial market, We continue to see great opportunities, and our team continues to do a fabulous job of capitalizing on those opportunities for the domestic market. And, you know, we feel really good about the position that we have as a company who is, of course, a global company, but who operates through our unique organizational approach as a local company in that environment. And being the best of both worlds at a time like this when the world is somewhat uncertain is a really good advantage for Anthenol.

And our next caller is Sumik Chatterjee with JPMorgan. You may go ahead.

Hi. Happy New Year, and thanks for taking my question. I guess, Adam, I wanted to see if you can share your thoughts around organic growth opportunities for the company in 2024 related to inorganic growth. You have a strong pipeline of revenue from the acquisitions you've closed that you're onboarding. Maybe share your thoughts about how you think about the rest of the business growing, whether there are more positives related to negatives in 2024, and what is the average sort of growth expected of the acquisitions that you closed more recently for 2024? Thank you.

Yeah, thank you very much, Amit. Again, there seems to be a little bit of a cutout of the sound there. But I think your question is, you know, how do I see the organic growth prospects as opposed to just the acquisitions? And I think we feel, you know, we feel good about the organic prospects of the company, you know, given all what I talked about each of our individual markets, and I'm not going to go through each of them once again. But I will just tell you that the investments that we've made in next generation technologies, the work that we've done to support customers when they need us the most over the last, you know, two, three, four years, has positioned us very, very strongly organically to have strong, robust performance in the years to come. And the other thing I would say as well is we think about acquisitions, and obviously in the first year that you own a company, you know, that's considered acquired growth. But we're focused much more on what happens thereafter. And are we acquiring companies that become platforms of future organic growth for the company? And I would tell you, you know, all these 10 companies that we acquired this year, the nearly 30 companies that we've acquired since 2019. To me, these companies all represent expanded platforms for future organic growth for the company. which makes me feel confident that over time we will have, you know, subject to all of the market dynamics that for sure we're not immune to, that the company is positioned to have really great organic growth potential.

And our next caller is Andrew Buscalio with BNP. You may go ahead.

Hi, guys. I just wanted to ask on IT Datacom, again, with AI, the past couple of quarters, you called out sequential, you know, attributed sequential improvements to AI. Would you say the same thing took place in Q4? And then, you know, that plus your guidance, would you imply, you know, is this, because we can't see that AI piece in that business, would you say it's continuing to accelerate on a sequential basis?

Thank you very much, Andrew. Yeah, I think what I said in my remarks is that we saw growth in AI and we saw also growth in the underlying business. So I think over the last couple of quarters, I've described that all of our upside, all of our sequential growth really did come from AI. I think that this quarter, you know, it's some of each, which is actually really encouraging for us that we've seen maybe what one could call a bottoming of the underlying IT demand. You know, are we continuing to make progress in AI? Do we see continued acceleration opportunities? Yeah, I wouldn't say that every quarter it's going to accelerate, you know, in lockstep like it did, you know, over the course of Q2 and Q3. But for sure, we see opportunities long-term to be generating sales related to AI that are greater than we are today.

And our next caller is Mark Bellini with Goldman Sachs. You may go ahead.

Yes, good afternoon. Thanks very much for taking my question, and Happy New Year to all of you as well. Automotive has been a fast-growing market for the company. However, several auto OEMs have been seeing slower EV sales, and they've said they're going to rethink how fast they want to shift their production toward EVs. And so I'm hoping to better understand if you think that will create any meaningful near-to-intermediate-term challenges for Amphenol that could limit it could limit the company's growth of our market or perhaps lead to some inventory stocking. Thanks.

Well, thank you very much, Mark, and Happy New Year to you as well. Look, we read all the same papers and we hear about the sort of discussions about slowdowns in EV sales. I think we shouldn't forget that this is a fairly Western dynamic. I don't think we hear for example, in Asia and specifically in the largest car market in the world, China, about folks turning their back on EVs and going back to internal combustion engine. But we do hear a little bit about that, I think, here and in Europe. And as I've described, I mean, we don't care if a car has an EV drivetrain or not. What we care about does a car have a lot of electronics in it and new electronic systems. Among those systems are certainly electrified drivetrains or hybrid electric drivetrains. And I think that what we've seen in Asia, what we've seen in Europe, what we've seen in North America is that there is a real acceleration of the adoption of electronics in cars, period. And some of that may actually be related to the fact that EVs tend to be a little more fancy electronically. And I think car companies are seeing that and upgrading their standard companies to incorporate more electronic functionality. And whenever you have electronic functionality in a car, regardless of the drive train, you're going to have new interconnect solutions. You're going to have new sensor solutions. You're going to have new antenna solutions. And those are the three areas of our participation. in the automotive market. For sure, if I go to like the world's largest EV market, China, for example, I mean, there continues to be unabated, a real adoption. And I would almost say that EVs in that market have kind of reached a sort of escape velocity where it's just really normal. I mean, you see them all over the place. And I think our team there just did a fabulous job of getting a breadth of penetration across both domestic and international EV manufacturers, whereby we really are able to enjoy the benefits of that. And I think in Europe and in North America, we've done a great job, but we've also done a really great job on capitalizing upon some of these new electronics. And so I wouldn't put any dynamic here in the category of something that we view as a real near or medium term challenge. I think quite the contrary. As car companies struggle to figure out how they can sell their products and make more money from doing it, they're always going to fall back on electronics as the way to do that. And that's a good thing for Amphenol.

Our next caller is William Stein with Truist Securities. You may go ahead.

Great. Thanks. Adam, I'm hoping you can comment on the the aperture for M&A and products within it. I think historically you've talked about not wanting to acquire system level solutions. And I think at least one of the acquisitions you've done recently has such products. And I wonder if that could potentially be something you'll grow into and expand, or if we should see you perhaps shy away of that business going forward. Thank you.

Will, thank you so much. I think what you're alluding to is PcTel and the fact that they have a very small test and measurement business and really wonderful people, wonderful products. But that's not why we bought PcTel. You'll recall we've acquired companies in the past, some of which are not purely the things that we were looking to acquire. And we're always very sensitive that we're never going to put ourselves in a competitive situation with our customers. And, you know, really PCTel is known for their antenna technologies, which are fabulous. And, you know, not to say a bad word about their team that works in test and measurement, but we're not adopting a strategy to go after system level products. You know, in terms of our aperture for M&A, I mean, we just see fabulous opportunities. I mentioned it in my prepared remarks. You know, I think we have demonstrated an ability to acquire companies really across the board from a size perspective. We've demonstrated the ability to acquire a lot of companies and to process those effectively. And, you know, our small little headquarters team here, they may have been a little bit busier than normal over the last year with these 10 acquisitions. But the beauty is because of our organizational structure, now having 14 groups across three global divisions, we have the wherewithal to make sure that those acquisitions get really their due attention when they become part of Amphenol. And I think the near-term pipeline remains a very robust pipeline and we look forward to taking advantage of that. We will always remain a very disciplined buyer, as we have forever. I am willing to walk away at the very last moment if I have to, if something we find is not to our liking. We'll always pay a reasonable price, a fair price for great companies. We may not always be the highest priced buyer, but I think we are often the best buyer because of our effectiveness, our willingness to work aggressively to get things done. And the fact is, our organizational structure allows those newly acquired companies to become part of Apple in a very unobtrusive fashion. They join seamlessly, they come in and on day one, they just keep operating like they were doing on all the days before. And that is a relatively low risk approach to acquisition because we're not going in and just over just sort of having these kind of convulsive restructuring of the company where you run the risk of destroying what you didn't even know you had. So we look forward to continuing to have great acquisitions in the future, but we're not going to be a kind of a system-level company. We know what we are. We're an interconnect company. There are wonderful opportunities for interconnect products to be expanded both organically and through acquisition going forward. Lots of really attractive companies out there, and we'll continue to position ourselves so that the ones that match with us, the ones that go through our really rigorous kind of Rubicon of of deciding whether or not to buy them, you know, we'll be in a good position to execute on those over the near, medium, and long term.

And our next caller is Chris Snyder with UBS. You may go ahead.

Thank you. I wanted to follow up on some of the earlier conversation on AI. So it sounds like book to bill for AI moderated sequentially, maybe after some early outside is orders, just given the company's foundation in that market. So I guess the question is, do you think that this moderation is a single quarter phenomenon, or would you expect that to persist for multiple quarters? Because it does seem like the top line is still continuing to grow sequentially. Thank you.

Thanks very much, Chris. Yeah, I mean, look, I don't usually talk about book-to-bill by sub-markets, but I will tell you that for sure, I mean, we had very strong bookings in AI, AI-related applications in Q2 and Q3. And so it's not surprising that here in Q4, our IT Datacom book-to-bill was a bit below zero. And because of those significant orders that we received, which customers wanted to place because they need the product, and then we're executing upon those orders. And yeah, I think that our IT Datacom business is in a good position looking forward. I mean, our guidance for the first quarter is to have a little moderation. which is not abnormal this time of year, actually quite normal, let me say that. And layered on top of that, I think the AI is a good thing to have. So, no, I think you characterized it quite well.

Our next caller is Joseph Giordano with TD Cohen. You may go ahead.

Hi, guys. This is Michael on for Joe. So earlier you had mentioned, you know, commentary regarding orders and specific markets. Can you just provide like a high level, maybe book to bill on a consolidated basis for the quarter or any color there?

About earlier that our book to bill was 0.95 to one for the quarter.

Our next caller is Steven Fox with Fox Advisors. You may go ahead.

Hi. Good afternoon. I guess broadly speaking, the latest round of acquisitions were around sensors, antennas, and assemblies. I was just curious, Adam, your updated thoughts on your M&A focus by technology, especially in the context of what looks like gross margins that are now at the 33% level. I guess some of these products have lower gross margins, some have higher. I don't know if there's a mixed impact that's influencing the gross margin now with the M&A, but just broadly speaking, the general buckets of technology that you look at, what is your thinking of what you've done and where you need to go now? Thanks.

Well, thanks very much, Steve. Yeah, I mean, look, in the quarter, we acquired companies who make sensors, antennas, cable and cable assemblies, and, you know, really high technology cable, actually, that has really great value for its customers. And we continue to see acquisition opportunities across really all of our interconnect products, from discrete connectors to cable assembly, value-add, complex value-add interconnected products. sensors, complex sensor interconnect assemblies, antennas and the like. And, you know, we're really pleased to continue to find companies across all of those products. I wouldn't tell you that we think so much about gross margin by product. We see great margin opportunities, as you know, and Craig has said it so many times, We're very much focused on operating margins and yeah, I mean, some of these companies do operate below our corporate average. Not all of them, by the way, but some of them do. And I think that doesn't relate at all to their product type. We don't believe that there is a correlation between whether someone makes a connector, a sensor, an antenna, a cable or a cable assembly, that that is necessarily going to put them in a certain bucket of profit potential. We actually see great profit potential for all companies, and that's one of the ways we screen for acquisitions. I mean, we're not going to buy a company if we don't see the long-term potential for that company to elevate its profitability to, you know, at or above our corporate average. Now, we do have industry-leading margins, and so most of the companies that we do acquire tend to be lower than we are, And then it's our job and their job, becoming part of the Amphenol family, to bring those margins up over time. But it's really not at all correlated to the type of products that they sell.

And our last question comes from Matt Sheeran with Stifel. You may go ahead.

Yes, thank you. Good afternoon. Adam, in your commentary on mobile devices, you mentioned that tablets and notebook PCs continue to be weak. But we are hearing some chatter about expectations for a potential refresh, PC refresh cycle playing out in the next year or two. So, wondering if you have any visibility into that. And can you give us a sense of the content opportunity for Amphenol within Notebooks, particularly in the next generation so-called AI-enabled PCs?

Great. Thanks so much, Matt. Look, I hope what you say is the case. We certainly hope that there is a refresh. Look, I think we've talked about this year and even a little bit last year that the strength that we've seen in phones this year, which was more than offset in particular by things like laptops and tablets, it had to do with the clear fact that during the pandemic and when everybody went to work from home and study from home, there was an enormous rush to buy new devices, which caused a surge and really kind of upset the normal replacement cycle of those products. And so I guess that one could expect that if everybody bought a bunch of stuff in 2020 and 2021, And if those things tend to last, you know, three, four, five years, that eventually you would hope to see a little bit of a refresh. I don't know. I can't tell you I have any information to support that. I'm sure you're getting your information from even wiser sources than I would have. Relative to the content, you know, we do see great content opportunities in these devices as they get more complex, as they get more different wireless standards that they have to support. as they have higher speeds, as they have more fine pitch and more precision inside of them. All of these create opportunities for Amphenol long-term. We've always said about the mobile device market, and that includes tablets and laptops and the like, that to the extent that there is a premium on the hardware of the product, That can create opportunities for all over the long term. And I think that that will, whether that's related to AI or not that I have, I can't necessarily connect those dots. But but for sure, people are going to need new devices in the future and we'll be happy to enable the interconnect products across those devices. Well, Operator, if that was our last question, I guess I'd like to take this opportunity to thank everybody here today for spending a little bit of your time with us. I wish that you all have a good continuation of your winter, wherever you may be, and we look forward to talking to all of you just 90 days from now. Thanks so much. Thanks, everybody.

And this concludes today's conference. Thank you for participating. You may disconnect at this time and have a great rest of your day.