Amphenol Corporation

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

Thank you very much. Good afternoon, everyone. This is Craig Lampo, Amphenol CFO, and I'm here together with Adam Norwood, our CEO. We would like to welcome you to our third quarter 2024 conference call. Our third quarter results were released this morning, and I will provide some financial commentary, and then Adam will give an overview of the business and current market trends. And then, of course, 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 previously announced two-for-one stock split completed in June of this year, all share and per share data discussed on this earnings call is on a split-adjusted basis. The company closed the third quarter of 2024 with record sales of $4 billion and $39 million and record gap in adjusted diluted EPS of $0.48 and $0.50, respectively. Third quarter sales were up 26% in U.S. dollars and in local currencies and 15% organically compared to the third quarter of 2023. Sequentially, sales were up 12% in U.S. dollars, 11% in local currencies, and 8% organically. Adam will comment further on trends by market in a few minutes. Orders in the quarter were a record $4,412,000,000, up 39% compared to the prior year and up 9% sequentially, resulting in a strong book-to-bill ratio of 1.09 to 1. DAP operating income was $819 million and included $64 million of acquisition-related costs in the quarter, primarily related to CIT. Gap operating margin was 20.3%. Excluding these costs, adjusted operating income was $883 million, resulting in a record adjusting operating margin of 21.9% in the third quarter of 2024. On an adjusted basis, operating margin increased by 110 basis points from the prior year quarter and 60 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 increase in adjusted operating margin reflected strong conversion on the higher sales levels, partially offset by the dilutive impact of acquisitions, in particular CIT, which closed during the second quarter. I am very proud of the company's operating margin performance in the third quarter, which reflects continued strong execution by our teams. Breaking down the third quarter results by segment compared to the third quarter of 2023, sales in the harsh environment solution segment were $1,194,000,000 and increased by 35% in U.S. dollars and 3% organically, and segment operating margin was 23.8%. Sales in the communication solution segment were $1,685,000,000 and increased by 32% in U.S. dollars and 30% organically, and segment operating margin was 25.6%. And sales in the interconnect and sensor system segment was $1,160,000,000 and increased by 12% in U.S. dollars and 6% organically. Segment operating margin was 18.8%. The company's GAAP effective tax rate for the third quarter was 21.4%, and the adjusted effective tax rate was 24%, which compared to 18.2% and 24% in the third quarter of 23. GAAP diluted EPS was a record $0.48 in the third quarter, up 17% compared to the prior year period. And on an adjusted basis, diluted EPS increased 28% to a record $0.50 compared to $0.39 in the third quarter of 23. Operating cash flow in the third quarter was $704 million, or 117% of net income. And net of capital spending, our free cash flow, was $476 million, or 79% of net income. And as expected, our capital spending was somewhat elevated in the quarter due to investments we are making to support the strong growth we are seeing in the IT Datacom and defense markets. In the fourth quarter, we expect to continue to have somewhat elevated levels of capital spending to further support our growth in these markets. From a working capital standpoint, inventory days, day sales outstanding and payable days were 87, 69, and 59 days respectively, all within normal levels. During the quarter, the company repurchased 2.7 million shares of common stock and an average price of approximately $65. And when combined with our normal quarterly dividend, total capital return to our shareholders in the third quarter of 2024 was $308 million. Total debt on September 30th was $5.5 billion and net debt was $3.9 billion. And total liquidity at the end of the quarter was $4.6 billion, which included cash and short-term investments on hand of $1.6 billion, plus availability under our existing credit facilities. In addition, we expect quarterly interest expense net of interest income earned on cash on hand to be approximately $45 million in the fourth quarter of 24. Adam L. Excluding acquisition related costs third quarter 2024 EBITDA was 1 billion and 30 million and at the end of the third quarter of 2024 net leverage ratio is 1.0 times. Adam L. I will now turn the call over to Adam, who will provide some commentary on current market trends.

Well, thank you very much, Craig. And thank you all for joining our call here on a very beautiful fall day in Wallingford, Connecticut. And I hope that all of you are enjoying a very nice fall so far. As Craig mentioned, I'm going to highlight our achievements here in the third quarter. And in particular, we'll discuss the trends and progress across our served markets. And then I'll comment on our outlook for the fourth quarter and the full year, year 2024. And of course, we'll have some time at the end for questions. Our results in third quarter were really strong and actually stronger than expected and exceeding the high end of our guidance in sales and adjusted diluted earnings per share. Sales grew from prior year by a very strong 26% in U.S. dollars and in local currencies, reaching a new record of $4,039,000,000. We're very proud to have that new sales record. On an organic basis, our sales did increase by 15%. driven by growth in the IT Datacom, mobile networks, mobile devices, commercial air, and defense and markets. And I'll talk about those details in a few moments. The company also booked record orders of $4,412,000,000, representing a robust book-to-bill of 1.09 to 1. This was also driven especially by continued strength in the IT Datacom market. Our just operating margins reached a new record, 21.9% in the quarter, and this represented 110 basis point increase from last year's third quarter. Adjusted diluted EPS grew 28% from prior year to reach a new record $0.50 in the third quarter. And then finally, we generated operating and free cash flow of $704 million and $476 million respectively in the quarter, And this is yet another clear demonstration of the high quality of the company's earnings. I just have to say I'm extremely proud of the Amphenol team. Our results this quarter once again reflect the strength of our entrepreneurial organization as we continue to outperform in any environment. Now, just here in early October, we're very pleased to have closed on the previously announced acquisition of Luce Europe. Lutze is based in Germany with annual sales of approximately $100 million, and it's a leading provider of harsh environment cable and cable assembly solutions for diverse applications in the industrial markets. The Lutze Europe acquisition is a great complement to our broad offering of high-technology interconnect products. for the worldwide industrial market, and together with LuceUS, it strengthens our range of value-add interconnect products for this very important market. In addition, we remain excited about the pending acquisition of the Andrew businesses from CommScope, and we now expect that transaction to close in the first quarter of 2025. We remain confident that our acquisition program will continue to create great value for Amphenol. Our ability to identify and execute upon acquisitions and then to successfully bring these new companies into the Amphenol family remains a core competitive advantage for the company. Now, turning to our served markets, we're once again pleased that the company's end market exposure remains highly diversified, balanced, and broad. This diversification, no question, continues to create great value for Amphenol. Because it enables us to participate across all areas of the global electronics industry, while not being disproportionately exposed to the volatility of any given market for application. Now, starting out with the defense market, it represented 11% of our sales in the quarter and sales grew from prior year by a strong 16% in US dollars and 8% organically. This was driven by growth across really most segments of the defense market with contributions, especially from space, aircraft and avionics, communications, and ground vehicle applications. Sequentially, our sales grew by 4%, which was in line with our expectations coming into the quarter. As we now look into the fourth quarter, we expect sales in the defense market to increase moderately from these third quarter levels And for the full year 2024, we expect a mid-teens increase in sales. We remain encouraged by the company's strengthening position in the defense market, where we continue to offer the industry's widest range of high technology interconnect products. Amidst the current dynamic geopolitical environment, countries around the world are expanding their spending on both current and next generation defense technologies. With our investments in the development of a broad array of new products, as well as very importantly, the capacities to build those products were well positioned to capitalize on this long term demand potential. The commercial air market represented 6% of our sales in the quarter. And we had another strong quarter in commercial air, with sales increasing by 123% from prior year in U.S. dollars and 12% organically, as we benefited from the addition of CIT, which we closed back in the second quarter, as well as continued progress in expanding our content on next-generation commercial aircraft. Compared to the second quarter, sales increased by 37% sequentially and were up slightly on an organic basis, and this was modestly lower than our expectations coming into the quarter. Looking to the fourth quarter, we expect a high single-digit increase in sales, and for the full year of 2024, we expect sales to increase by more than 80% from last year, driven by the addition of CIT as well as robust organic growth. I'm truly proud of our team working in the commercial air market. With the ongoing growth and 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 the expansion of our technology offering into this important market and look forward to realizing the benefits of our growth initiatives for many years to come. The industrial market represented 23% of our sales in the quarter. And sales in the quarter grew by 24% in US dollars from prior year as we benefited from acquisitions. On an organic basis, our sales were flat as growth in alternative energy, instrumentation, medical, and rail mass transit solutions was offset by reduced demand in factory automation, heavy equipment, transportation, and oil and gas. Sequentially, our sales did increase by 9% from the second quarter and were up by 3% organically, which was somewhat better than our expectations coming into the quarter. While we are encouraged to see stronger growth in North America and Asia, demand in Europe did again slow this quarter. Accordingly, looking into the fourth quarter, we do expect sales to moderate from these third quarter levels. And for the full year 2024, we expect sales to grow in the low double digits, with the benefit of acquisitions partially offset by an organic moderation of sales. With the additions this year of CIT and Luce, 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. And this creates exciting opportunities for outstanding teams working around the world. The automotive market represented 19% of our sales in the quarter, and sales grew by 4% in U.S. dollars and were flat organically. Similar to the industrial market, while we did grow in North America and Asia in the automotive market, our sales in Europe declined from prior year. Sequentially, our sales increased by 4% from the second quarter, which was a bit better than our expectations coming into Q3. For the fourth quarter, we expect sales to decline modestly from these third quarter levels. And for the full year 2024, we expect sales to increase in the mid single digit range compared to prior year. I remain proud of our team working in the automotive market. While there are some areas of the automotive market that have shown some signs of slowing, our team remains focused on driving new design wins with customers who are implementing a wide array of new technologies into their vehicles. These include electrified drive trains as well as a multitude of other exciting applications. And we look forward to benefiting from our strong position in the automotive market for many years to come. The mobile devices market represented 10% of our sales in the quarter. Sales increased by 18% in U.S. dollars and 17% organically. And this was really driven by broad-based strength across applications in the mobile devices market. Sequentially, our sales increased by a much stronger than expected 38%. And that was driven also by higher sales across all segments of the mobile devices market. Looking into the fourth quarter, we expect our sales to remain at these higher levels. And for the full year, we anticipate sales to be up in the high single digit range compared to 2023. I'm very proud of our team working in the always dynamic mobile devices market as their agility and reactivity have once again enabled us to capture incremental sales in the quarter. I'm confident that with our leading array of antennas, interconnect product and mechanisms designed in across the broad range of next generation mobile devices, we're well positioned for the long term. The mobile networks market represented 3% of our sales in the quarter and sales grew by a strong 22% in US dollars and 19% organically. as we continue to see a recovery in demand from both mobile network operators as well as wireless equipment manufacturers. On a sequential basis, our sales increased by 1%, which was a bit better than our expectations coming into the quarter. For the fourth quarter, we now expect sales to decline seasonally in the mid-teens, and for the full year, we anticipate sales to grow in the high single-digit range versus last year. 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. With the pending acquisition of the Andrew businesses from CommScope, we look forward to participating even more strongly in these networks for many years to come. The IT Datacom market represented 25% of our sales in the quarter. Sales in IT Datacom grew in the quarter by a very strong 60% in US dollars and 59% organically. And this was driven by the continued acceleration of demand for our products used in artificial intelligence applications, together with robust growth in our base IT Datacom business. On a sequential basis, sales increased by 15% from the second quarter, substantially better than our expectations coming into the quarter. As we look towards the fourth quarter, we do expect a further mid-single-digit sequential increase from these third quarter levels. And for the full year 2024, we expect sales in IT Datacom to grow by more than 50% compared to 2023. I have to say that we're more encouraged than ever by the company's position in the global IT Datacom market Our team is just doing an amazing job around the world in securing future business on next generation IT systems, particularly those enabling AI. There's no doubt that this revolution in AI has created a unique opportunity for the interconnect industry and for Amphenol, given our leading high speed and power interconnect products. Whether high speed, power, or fiber optic interconnect, Our products are critical components in these next-generation networks, and this continues to create a long-term growth opportunity for Amphenol. Finally, the broadband market represented 3% of our sales in the quarter, and sales were down by 15% in U.S. dollars and 14% organically as broadband operators continued to moderate their procurement levels. On a sequential basis, sales were down 3%, which was roughly in line with our expectations coming into the quarter. For the fourth quarter, we expect a further high single-digit reduction in sales, and for the full year 2024, we expect a mid-teen sales decline from prior year. Regardless of this current, more muted demand environment, we remain encouraged by the company's position in the broadband market, and we look forward to continuing to support our service provider customers around the world when they resume growing their investments to expand bandwidth and coverage to their enterprise and consumer customers. Now, turning to our outlook, and obviously assuming the continuation of current market conditions, as well as constant exchange rates. For the fourth quarter, we expect sales in the range of $3,950,000,000 to $4,050,000,000, and adjusted diluted EPS in the range of 48 cents to 50 cents. This would represent a sales increase of 19 to 22% and an adjusted diluted EPS increase of 17 to 22% compared to the fourth quarter of 2023. Our fourth quarter guidance represents an expectation for full year sales of $14,855,000,000 to $14,955,000,000 as well as full year adjusted diluted EPS of $1.82 to $1.84. This outlook would represent full year sales and adjusted EPS increases of 18 to 19% and 21 to 22% respectively. This has been a very strong year for Amphenol thus far in 2024, and I remain confident in the ability of our outstanding management team to adapt to the many opportunities and challenges in the current environment and to continue to grow our market position while driving sustainable and strong profitability through this year and into the long term. And finally, I'd like to take this opportunity to thank our entire global team for their truly outstanding efforts here in the third quarter. There's no doubt that they worked extremely hard to deliver, especially this level of growth, and I'm truly grateful to them. And with that, operator, we'd be happy to take any questions.