Amphenol Corporation

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

Thank you. Good afternoon, everyone. This is Craig Lampo, Amphenol CFO, and I'm here together with Adam Norwit, our CEO. We would like to welcome you to our second quarter 2024 conference call. Our second quarter 2024 results were released this morning. I will provide some financial commentary, and then Adam will give an overview of the business and current market trends, and then we will take questions. As a reminder, during the call, we may refer to certain non-GAAP financial measures and make certain forward-looking statements. So please refer to the relevant disclosures in our press release for further information. In addition, as a result of our recently announced two for one stock split effective on June 11th of 2024, all share and per share data discussed on this earnings call is on a split adjusted basis. The company closed the second quarter with record sales of $3,610,000,000 and gap in and record adjusted diluted EPS of 41 and 44 cents respectively. Second quarter sales were up 18% in U.S. dollars, 19% in local currencies, and 11% organically compared to the second quarter of 2023. Sequentially, sales were up 11% in U.S. dollars and in local currencies and up 8% organically. Adam will comment further on trends by market in a few minutes. Borders in the quota were a record $4,061,000,000, up 33% to the prior year and up 21% sequentially, resulting in a strong book-to-bill ratio of 1.12 to 1. Gap operating income and operating margin were $699,000,000 and 19.4% respectively, which included $70,000,000 of acquisition-related costs primarily associated with the CIT acquisition. Excluding these costs, adjusted operating income was $769 million, resulting in record adjusted operating margin of 21.3% in the second quarter of 24. On an adjusted basis, operating margin increased by 90 basis points from the prior year quarter and 30 basis points sequentially. The year-over-year increase in adjusted operating margin was primarily driven by strong operating leverage on higher sales volumes which was partially offset by the dilutive impact of acquisitions completed in the prior 12 months. On a sequential basis, the modest increase in the just operating margin reflected strong conversion on the higher sales levels, partially offset by the dilutive impact of acquisitions made in the second quarter, particularly CIT, which is currently operating well below the company's average profitability levels. We are very proud of the company's operating margin performance in the second quarter, which reflects continued strong execution by our teams. Breaking down second quarter results by segment compared to the second quarter of 23, sales in the harsh environment solution segment were 1 billion 46 million and increased by 18% in U.S. dollars and 1% organically, and segment operating margin was 24.8%. Sales in the communication solution segment were $1,445,000,000 and increased by 24% in U.S. dollars and 23% organically. Segment operating margin was 24.3%. Sales in the interconnect and sensor system segment were $1,119,000,000 and increased by 12% in U.S. dollars and 7% organically. And segment operating margin was 18.2%. The company's gap effective tax rate for the second quarter was 20.4% and the adjusted effective tax rate was 24%, which compared to 21.9% and 24% in the second quarter of 23 respectively. We continue to expect our adjusted effective tax rate to be at 24% in the third quarter and for the full year of 24. Gap adjusted EPS was 41 cents in the second quarter, up 11% compared to the prior year period. And on an adjusted basis, diluted EPS increased 22% to a record 44 cents compared to 36 cents in the second quarter of 23. Property and cash flow in the second quarter was $664 million, or 120% of adjusted net income. And net of capital spending, our free cash flow, was $528 million, or 95% of adjusted net income. We are pleased to have continued to deliver a strong cash flow yield in the quarter despite our slightly increased levels of CapEx. I would note that while our second quarter capital spending was higher than the first quarter, it was still within our normal range. We continue to expect somewhat elevated levels of capital spending in the coming couple of quarters as we invest to support the growth we are seeing in the defense and IT datacom markets. From a working capital standpoint, inventory days, day sales outstanding, and payable days were 84, 69, and 56 days respectively, all within normal levels. During the quarter, the company repurchased 3.1 million shares of common stock at an average price of approximately $62. When combined with our normal quarterly dividend, total capital returned to shareholders in the second quarter of 2024 was more than $320 million. Total debt on June 30th was $5.4 billion, and net debt was $4.1 billion, and total liquidity at the end of the quarter was $4.3 billion, which included cash and short-term investments on hand of $1.3 billion, plus availability under our existing credit facilities. Excluding acquisition-related costs, second quarter 2024 EBITDA was $900 million, and at the end of the second quarter of 2024, our net leverage ratio was 1.2 times. As a result of the $1.5 billion U.S. bond offerings completed earlier in the second quarter and the subsequent closing of CIT in May, we expect quarterly interest expense net of interest income earned on cash on hand to be approximately $45 million in the third quarter. The company is in a very strong financial position and we continue to be well positioned to fund future opportunities as they arise. In particular, we are well-positioned to fund the pending acquisition of the owned and dashed businesses of CommScope for a purchase price of $2.1 billion, which we expect to close by the end of the first half of 2025. We will fund this acquisition through cash on hand and debt. Finally, as mentioned in today's earnings release, the company's Board of Directors has approved a 50% increase in the company's quarterly dividend to $0.605 per share. effective preferred payments beginning in October of 2024. I will now turn it over to Adam, who will provide some commentary on current market trends.

Well, thank you very much, Craig. And I'd like to extend my welcome to all of you here on the phone today. And I hope that you and your family, friends and colleagues are enjoying a very nice summer so far. As Craig mentioned, I'm going to highlight a few of our achievements in the second quarter. I will spend a few moments to review our recently closed and announced acquisitions. I'll talk about our trends and progress across our served markets, and then we'll make some comments on our outlook for the third quarter. And of course, we'll have some time for questions at the end. Our results in the second quarter were stronger than expected, exceeding the high end of our guidance in sales and adjusted diluted earnings per share. Sales grew from prior year by 18% in U.S. dollars and 19% in local currencies, reaching a new record 3,610,000,000. On an organic basis, sales increased by a strong 11% with growth in IT datacom, defense, commercial air, mobile networks, mobile devices, and automotive only slightly offset by moderations in the broadband and industrial markets. Importantly, the company booked record orders of 4,061,000,000 representing a robust book to bill of 1.12 to 1. I would just note here that our bookings were particularly strong from IT Datacom customers focused on artificial intelligence or AI. Adjusted operating margins reached a record 21.3% in the second quarter, a strong 90 basis point increase from last year's second quarter. And adjusted diluted EPS grew 22% from prior year to a record 44 cents. We also generated strong operating and free cash flow in the quarter of $664 million and $528 million, respectively, both clear demonstrations of the high quality of the company's earnings. And finally, as Craig mentioned, we announced this morning a 50% increase in the company's quarterly dividend to 16.5 cents per share, effective with our October dividend payments. Just want to say how proud I am of our team here this quarter as the results that they drove once again reflect the strength of our entrepreneurial organization as we continue to perform well amidst a very dynamic environment. As you know, our M&A team has once again been very busy of late. I'm very pleased to announce that on May 21st, We closed the previously announced acquisition of CIT, previously called Carlyle Interconnect Technologies. I'm very excited to welcome the talented CIT team to the Amphenol family, and we really look forward to realizing the benefits of the combined breadth of our company's highly complementary product solutions, which will enable us to offer our customers an expanded array of innovative technologies across the important commercial air, defense, and industrial markets. In addition, we're pleased to have signed a definitive agreement to acquire Lutze. Lutze is a leading provider of harsh environment cable and cable assembly solutions for high technology applications in the industrial markets. This acquisition includes two businesses, Lutze US, based in North Carolina, and Lutze Europe, based in Germany. In May, we did close on the acquisition of Lutze US, which has annual sales of approximately $75 million. And we expect to close on Luce Europe, which has annual sales of approximately $100 million by the end of the third quarter of 2024. That's this quarter here. Luce acquisition is a great complement to our broad offering of high technology interconnect products for the worldwide industrial market. And in particular, strengthens our range of value add interconnect products. Finally, just last week, we announced an agreement to acquire the mobile networks related businesses of CommScope for a purchase price of $2.1 billion. We're really excited to be acquiring CommScope's outdoor wireless networks, or OWN, and distributed antenna systems, or DAS, businesses. These businesses provide exciting mobile network solutions with advanced technologies in the areas of base station antennas and related interconnect solutions, as well as distributed antenna systems. I just want to mention that we're especially encouraged that the businesses that we're acquiring really make up the former Andrew Corporation portfolio of products, a company with a rich history of innovation and technology in the wireless industry. These businesses are expected to generate revenues of approximately $1.2 billion with EBITDA margins of approximately 25% in 2024. This represents operating margins in the high teens, including our current estimate of post-acquisition related amortization. We really look forward to supporting customers who are developing next-generation wireless networks around the world with these advanced solutions as well as with our own existing complementary interconnect products. Most importantly, we look forward to welcoming the approximately 4,000 employees of these businesses around the world. There's no doubt in my mind that these talented individuals will make great future Ampanolians. As we welcome these outstanding new teams to Amphenol and we look forward to the future closings of Lutz Europe and CommScope OWN and DAS, we remain confident that Amphenol's acquisition program will continue to create great value for the company. Our ability to identify and execute upon acquisitions and successfully bring these new companies into Amphenol remains a core competitive advantage for the company. Now, turning to our trends across our served markets, I would just comment that we're very pleased that the company's end market exposure remains highly diversified, balanced, and broad. This diversification continues to create great value for Amphenol, enabling us to participate across all areas of the global electronics industry while not being disproportionately exposed to the risks associated with any given market or application. So, with that said, the defense market represented 11% of our sales in the quarter. Sales in this market grew from prior year by a strong 14% in U.S. dollars and 10% organically, driven by broad-based growth across most segments within the defense market. Sequentially, our sales increased by 9%, which was a bit better than our expectations coming into the quarter, driven in part by the earlier than anticipated closing of CIT. Looking to the third quarter, we expect sales to increase in the mid-single-digit range from these second-quarter levels, including the benefit of acquisitions. And we remain 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 highly dynamic geopolitical environment, countries around the world are expanding their investments in both current and next-generation defense technologies, thereby increasing the long-term demand potential for Amphenol. With the addition now of CIT's highly complementary products to our portfolio, we're better positioned than ever to support our customers with new products and the capacity to supply them wherever they may be needed. The commercial aerospace market represented 5% of our sales in the quarter. We had another strong quarter with sales increasing by a robust 60% in U.S. dollars and 9% organically from prior year, as we benefited from the addition of CIT during the quarter, as well as continued progress in expanding our content on next-generation commercial aircraft. Sequentially, our sales grew by 46% in U.S. dollars from the first quarter as we benefited from the addition of CIT. On an organic basis, our sales were flat sequentially, which was a bit better than we had anticipated coming into the quarter. Looking into the third quarter, we expect sales to increase in the mid-40% range as we benefit particularly from a full quarter of CIT sales. I'm truly proud of our team working in the commercial air market. Now with the addition of CIT, we offer the broadest range of high technology interconnect products to our customers in this important area. With the ongoing growth in travel and thus the demand for jetliners, our efforts to strengthen our product offering 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 our growth initiatives for many years to come. The industrial market represented 24% of our sales in the quarter, and sales in the second quarter did grow 9% in U.S. dollars from prior years we benefited from acquisitions. On an organic basis, sales declined by 5% as we saw moderations in most segments on a year-over-year basis of the industrial market. Sequentially, sales grew by a better than expected 7% from the first quarter, driven primarily by acquisitions, but our organic sales were up slightly on a sequential basis. Looking into the third quarter, we expect sales to grow in the mid-single-digit range sequentially, driven by the benefit of our recent acquisitions. While the industrial market certainly has been experiencing a pause as customers and distributors have adjusted their demand levels, We are encouraged to see some early signs of momentum growing in certain areas of the industrial market. In addition, with the additions this quarter of CIT and Lutsa US, we now have an even broader range of products and capabilities to offer customers across the diversified industrial market. I'm confident that our long-term strategy to expand our high-technology interconnect, antenna, and sensor offerings both organically and through complementary acquisitions, has positioned us to capitalize on the many electronic revolutions that will no doubt continue to occur across the industrial market. This creates opportunities long term for our outstanding team working in this market. The automotive market represented 21% of our sales in the quarter, and sales grew 6% in U.S. dollars and 5% organically. driven by strength across newer automotive applications. Sequentially, our sales moderated by 4% from the first quarter, which was in line with our expectations coming into the quarter. I would note that we did see some incremental softening of demand in Europe in the quarter, as vehicle manufacturers there moderated their production volumes, and that was offset by more favorable performance in North America and Asia. For the third quarter, we do expect sales to be slightly down from these levels as certain automakers have slowed their summer production schedules. I'm truly proud of our team working in the automotive market. Our continued outperformance is yet another confirmation of the benefit of our team's focus on driving new design wins with customers who are implementing a wide array of new technologies into their vehicles. And this includes electrified drive trains as well as a multitude of other exciting applications. We look forward to benefiting from our strong position in the automotive market for many years to come. The mobile devices market represented 8% of our sales in the quarter, and sales grew by 6% in US dollars and 7% organically, as strength in smartphones and wearables more than offset moderations in sales related to laptops. Sequentially, our sales increased by 9%, which was much better than our expectations for a mid-single-digit decline, and we really did see sequential growth across all segments of the mobile devices market, which was encouraging. Looking into the third quarter, we anticipate sales to increase by approximately 20% from these second-quarter levels as customers prepare for year-end new product launches. While mobile devices will always remain Anthemol's most volatile of end markets, our outstanding and agile team remains well-positioned 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, thereby positioning us well for the long term. The mobile networks market represented 4% of our sales in the quarter, and sales grew by 13% in U.S. dollars and 7% organically, as we did see the beginning of a recovery in our sales to network operators and wireless equipment manufacturers after a number of quarters of demand moderation. Sequentially, sales in the quarter increased by a strong 22%, which was much better than our expectations coming into the quarter. Looking to the third quarter, we do expect some moderation from these strong second quarter levels on traditional summer seasonality. We're encouraged by the recent strengthening in the mobile networks market. As operators ramp up their investments in next generation systems, our team remains focused on realizing the benefits of our long term efforts to expand our position in next generation equipment and networks around the world. Now, with the pending acquisition of the OWN and DAS businesses from CommScope, we look forward to participating even more strongly in these next generation networks for years to come. The IT Datacom market represented 24% of our sales in the quarter. Sales in the second quarter grew by a very strong 57% in US dollars and 56% organically. driven by the continued acceleration in demand for our products used in next-generation AI data centers. While the vast majority of this growth did result from our expanding position in AI interconnect, we were encouraged to also see some improvements in base IT datacom demand. On a sequential basis, sales increased by a strong 29% from the first quarter, substantially better than our expectations coming into Q2. Looking into the third quarter, we expect sales to grow modestly from these elevated second quarter levels. We're more encouraged than ever by the company's position in the global IT datacom market. Our team continues to do an outstanding job securing future business on next generation IT systems, particularly those enabling AI. Indeed, the revolution in AI has created a unique opportunity for Amphenol. given our leading high-speed and power interconnect products. With machine learning driving a more intensive usage of these highest technology of interconnect products, we're very well positioned for the future. Whether high-speed, power, or fiber optic interconnect, our products are critical components in these next-generation networks, and this creates a continued long-term growth opportunity for Anthemol. Finally, the broadband market represented 3% of our sales in the quarter, and sales did decline by 17% in U.S. dollars and organically from prior year, as broadband operators continued to reduce their procurement levels. On a sequential basis, sales were flat as we had anticipated, and looking into the third quarter, we expect a further moderation of sales sequentially. Regardless of this current muted demand environment, we do remain encouraged by the company's continued strong position in the broadband market. And we look forward to continuing to support our service provider customers around the world as they eventually increase their spending to increase network coverage and bandwidth in support of the proliferation of high-speed data applications to homes and businesses. Now, turning to our outlook. and assuming the continuation of current market conditions as well as constant currency exchange rates. For the third quarter, we expect sales in the range of 3.7 billion to 3.8 billion and adjusted diluted EPS in the range of 43 cents to 45 cents. This would represent sales growth of 16 to 19% and adjusted diluted EPS growth of 10 to 15% compared to the third quarter of 2023. As is our usual practice, this guidance does not include acquisitions which have not yet closed, but does include CIT and LuceUS, both of which are currently operating below the corporate average level of profitability. I remain confident in the ability of our outstanding management team to adapt to the many opportunities and challenges in the current environment while continuing to grow Amphanol's market position and driving sustainable and strong profitability over the long term. And finally, I just want to take this opportunity here to thank our entire global team for what were truly outstanding efforts here in the second quarter. And with that operator, we'd be more than happy to take any questions.