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.