Amphenol Corporation (NYSE:APH) Q1 2024 Earnings Call Transcript

Amphenol Corporation (NYSE:APH) Q1 2024 Earnings Call Transcript April 24, 2024

Amphenol Corporation beats earnings expectations. Reported EPS is $0.8, expectations were $0.74. APH isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello, and welcome to the First 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.

Craig Lampo: Thank you very much. Good afternoon, everyone. This is Craig Lampo, Amphenol’s CFO, and I’m here together with Adam Norwitt, our CEO. We would like to welcome you to our first quarter of 2024 conference call. Our first quarter 2024 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. Then we will take questions. As a reminder, during the call, we may refer to certain non-GAAP financial measures and make certain forward-looking statements. So please refer to the relevant disclosures in our press release for further information. The company closed the first quarter with sales of $3,256 million and adjusted diluted EPS of $0.80.

First quarter sales were up 9% in U.S. dollars, 10% in local currencies and 6% organically, compared to the first quarter of 2023. Sequentially, sales were down 2% in U.S. dollars, 2% in local currencies and 4% organically. Adam will comment further on trends by market in a few minutes. Orders in the quarter were $3,348 million, up 16%, compared to the first quarter of 2023 and 66% sequentially, resulting in a book-to-bill ratio of 1.03:1. GAAP and adjusted operating income was $685 million, and operating margin was 21% in the first quarter of 2024. On a GAAP basis, operating margin increased by 110 basis points compared to the first quarter of 2023 and 30 basis points compared to the fourth quarter of 2023. On an adjusted basis, operating margin increased by 90 basis points from the prior year quarter and decreased by 20 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 decrease in adjusted operating margin reflected better-than-typical conversion on the lower sales levels, partially offset by the dilutive impact of acquisitions made in the fourth quarter. We are very proud of the company’s operating margin performance, which reflects the continued strong execution of our teams. Breaking down the first quarter results by segment, relative to the first quarter of 2023, sales in Harsh Environment Solutions segment were $916 million and increased by 7% in U.S. dollars and 3% organically and segment operating margin was 26.7%.

Sales in the Communications Solutions segment were $1,266 million and increased by 12% in U.S. dollars and 11% organically. Segment operating margin was 22.6%. Sales in the Interconnect and Sensor Systems segment were $1,075 million increased by 8% in U.S. dollars and 2% organically, and segment operating margin was 18.2%. The company’s GAAP effective tax rate for the first quarter was 16.7%, and the adjusted effective tax rate was 24%, which compared to 20.9% and 24% in the first quarter of 2023, respectively. GAAP diluted EPS was $0.87 in the first quarter of 2024, up 23% compared to the prior year period. And on an adjusted basis, diluted EPS increased 16% to $0.80 compared to $0.69 in the first quarter of 2023. This was an excellent result.

Operating cash flow in the first quarter was $599 million or 120% of adjusted net income. And net of capital spending, our free cash flow was $506 million or 101% of adjusted net income. We are pleased to have continued to deliver a strong free cash flow yield in the quarter. I would note here that we may see slightly elevated levels of CapEx in the coming couple of quarters as we invest to support some of the growth that we are seeing in certain markets. From a working capital standpoint, inventories days, days sales outstanding and payable days were 89, 70 and 53 days, respectively, all within the normal levels. During the quarter, the company repurchased 1.4 million shares of common stock at an average price of approximately $108. When combined with our normal quarterly dividend, total capital returned to shareholders in the first quarter of 2024 was $286 million.

During the month of April, the company repurchased the remaining authorized amount of stock under its existing $2 billion stock repurchase plan, thus completing the plan. And as noted in today’s earnings release, the company’s Board of Directors has approved a new $2 billion three-year open-market stock repurchase plan. Total debt on March 31 was $4.3 billion, and net debt was $2.3 billion. Total liquidity at the end of the quarter was $5.7 billion, which included cash and short-term investments on hand of $2 billion plus availability under our existing credit facilities. First quarter 2024 EBITDA was $810 million. And at the end of the first quarter of 2024, our net leverage was 0.7 times. Following the close of the quarter in April, the company used $350 million in cash on hand to repay its maturing 3.2% U.S. senior notes and our $750 million undrawn term loan matured and was not renewed.

In addition, in early April, we completed a $1.5 billion U.S. bond offering, and the company intends to use the net proceeds from the bond offering, together with cash on hand and other debt financing to fund the company’s pending acquisition of Carlisle Interconnect Technologies, which we continue to expect to close by the end of the second quarter of 2024. As a result of the U.S. bond offering, we do expect quarterly interest expense to increase to approximately $55 million, although until CIT is closed, we also expect interest income generated from the increased cash balance to offset the increase in interest expense. As such, the impact on earnings will be relatively mutual until the CIT closing occurs. The company is in a very strong financial position, and we are well-positioned to fund future opportunities as they arise.

I will now turn the call over to Adam, who will provide some commentary on market trends.

Adam Norwitt: Well, thank you very much, Craig, and I’d like to extend my warmest welcome to all of you here from beautiful Wallingford, Connecticut, where spring is certainly in the air. As you know, as is typical, I’m going to highlight some of our achievements in the first quarter. I’ll then discuss our trends and our progress across our diversified markets. Finally, I’ll comment on the outlook for the second quarter. And of course, we’ll have time for questions. Our results in the first quarter were stronger than expected, exceeding the high end of guidance in sales and adjusted diluted earnings per share. We’re very pleased that our sales grew from prior year by 9% in U.S. dollars and 10% in local currencies, reaching $3.256 billion.

On an organic basis, our sales increased by 6% with growth in IT datacom, commercial air, automotive, defense and mobile devices markets, somewhat offset by declines in the mobile networks, broadband and industrial markets. And I’ll talk about each of those markets here in a few moments. We’re very pleased that the company booked $3.348 billion in orders in the first quarter and that that represented a positive book-to-bill of 1.03:1. Our profitability was very strong in the quarter, and adjusted operating margins reached 21% even in the quarter, a robust 90 basis point increase from last year’s levels. And from that profitability, we generated adjusted diluted EPS, which grew 16% from prior year to $0.80. Finally, we generated strong operating and free cash flow of $599 million and $506 million, another clear demonstration of the high quality of the company’s earnings.

As Craig mentioned, we’re very pleased that the Board of Directors has approved a new $2 billion three-year stock repurchase program, and this represents another important component of the company’s balanced capital deployment. I’m extremely proud of our global team of Amphenolians. The company’s results this quarter once again reflect the discipline and agility of our entrepreneurial organization, who continued to perform very well in the most dynamic of environment. Now, as we announced on January 30, just after our Q4 earnings, we’re very pleased to have signed an agreement to acquire Carlisle Interconnect Technologies business for $2 billion in cash. CIT, as it is known, is a leading global supplier of harsh environment interconnect solutions, primarily to the commercial air, defense and industrial end markets, with approximately 6,000 employees worldwide.

The company’s wide range of products, including wire and cable, cable assemblies, contacts, connectors and sensors are highly complementary to Amphenol’s existing interconnect and sensor solutions. As previously announced, CIT is expected to have annual sales of approximately $900 million in 2024 with an EBITDA margin of approximately 20%. We do continue to anticipate that the transaction will be completed by the end of this second quarter. Accordingly and based on CIT’s current operating performance, we do expect this acquisition to add roughly $0.02 to earnings in the second half of 2024, excluding acquisition-related costs. As we look forward to welcoming the outstanding CIT team to Amphenol, I remain confident that our acquisition program will continue to create great value for the company.

Our ability to identify and execute upon acquisitions really of all sizes, and to successfully bring these new companies into Amphenol 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 our progress across our served markets. I would just comment that we continue to be 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 starting out with the defense market. This important market represents 11% of our sales in the quarter and sales grew from prior year by a strong 13% in U.S. dollars and 11% organically, and this was really driven by broad-based growth across most segments within the defense market. Sequentially, our sales were down by 2%, and this was modestly better than our expectations coming into the quarter. Looking into the second quarter, we expect sales to increase modestly from these first quarter levels. 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 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 while also increasing our capacity to support this demand long into the future. The commercial aerospace market represented 4% of our sales in the quarter. Sales increased by a strong 20%, both in U.S. dollars and organically and that was really driven by broad-based strength across virtually all aircraft applications. Sequentially, our sales grew much better than expected, 11% from the fourth quarter. As we look into the second quarter, we do expect a modest reduction in sales versus these very strong first quarter levels. I’m just really proud of our team working in the commercial air market. With the ongoing growth 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 for the company.

We continue to see great, long-term opportunities for expansion of our technology offering to this important market, including with the CIT acquisition and look forward to realizing the benefits of our growth initiatives for many years to come. The industrial market represented 25% of our sales in the quarter and our sales in this market did decline by 1% in U.S. dollars and 10% organically. During the quarter, we did see some growth in marine, public safety, rail mass transit and oil and gas applications, but that was more than offset by moderating performance, particularly in battery and electric heavy vehicles, instrumentation and factory automation. On a sequential basis, we were pleased that sales were up 6% from the fourth quarter a bit better than our expectations, but that growth was really driven by our acquisitions completed in the fourth quarter.

Looking into the second quarter, we expect sales in the industrial market to remain at similar levels as here in the first quarter. And despite this near-term positive demand, I remain proud of our outstanding global team working in the industrial market. 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 electronic revolutions that will no doubt continue to occur across the industrial market. The automotive market represented 24% of our sales in the first quarter. And sales in the first quarter grew 18% in U.S. dollars and 17% organically. That was really driven by broad-based strength across most automotive applications, including especially communications-related applications as well as electric and hybrid electric vehicle drive trains.

Sequentially, our sales declined by 3% from the fourth quarter, which was better than our expectations, and that reflected strong execution by our team working in the automotive market. As we head into the second quarter, we do expect a modest sequential decline in sales. But I’m just so proud of our team working in the automotive market. Our continued and clear 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 while that includes electrified drive trains, it also includes a multitude of other exciting applications. And we look forward to benefiting from that strong position for many years to come.

The mobile devices market represented 8% of our sales in the quarter. Our sales were flat from prior year in U.S. dollars, but grew 2% organically as growth in laptops and smartphones was offset by declines in tablets, wearables and other products. Sequentially, our sales declined by a better-than-expected 29%, compared to the fourth quarter. As we head into the second quarter, we now expect a mid-single-digit sales decline from these first quarter levels, as customers prepare for new model launches in the second half of 2024. While mobile devices will no doubt always remain one of our most volatile 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 sales did decline from prior year by 13% in U.S. dollars and 25% organically, as we continue to manage through a broad-based reduction in spending by network operators and wireless equipment manufacturers. Sequentially though, we were pleased to see that our sales did grow by 5% from the fourth quarter, as we had expected, coming into Q1. And as we look into the second quarter, we now expect a high single-digit increase in sales, which does reflect some increased demand that we are seeing from our mobile operator customers.

While no doubt the short-term investment environment in the mobile networks market has been challenging, I can just tell you that 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 unique position with both, equipment manufacturers and mobile service providers. We’re poised to build on that position as wireless technology continues to accelerate long into the future. The Information Technology and Data Communications market represented 21% of our sales in the quarter. Sales in the first quarter grew by a very strong 29% in U.S. dollars and 28% organically, and this was driven by accelerating demand for our products used in Artificial Intelligence data centers.

On a sequential basis, sales increased by 1% from the fourth quarter, which was substantially better than our expectation for a mid-single-digit decline. We continue to experience strong orders for AI-related interconnect products. And accordingly, as we look into the second quarter, we expect sales to grow in the low double-digit range from these first quarter levels. I can tell you that we’re more encouraged than ever by the company’s position in the global IT datacom market. Our team continues to do a really outstanding job securing future business on next-generation IT systems, particularly those enabling AI. Indeed, this revolution in AI that we’re all living through right now 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 interconnect products, we’re very well-positioned for the future. And whether it’s high-speed power or fiber optic interconnect, our products are critical components in these next-generation networks, and that just creates a continued long-term growth opportunity for the company. The broadband market represented 4% of our sales in the quarter. Sales declined by 19% 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, which was slightly worse than our expectations coming into the quarter. And as we look into the second quarter, we anticipate sales to remain roughly at these first quarter levels.

Yes, regardless of the current demand dynamics in broadband, we do remain encouraged by the company’s strengthened position. 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. Now turning to our outlook and of course, assuming current market conditions as well as constant exchange rates, for the second quarter, we expect sales in the range of $3.24 billion to $3.30 billion and adjusted diluted EPS in the range of $0.79 to $0.81. This would represent sales growth of 6% to 8% and adjusted diluted EPS growth of 10% to 13% compared to the second quarter of last year.

I just wanted to note that as is our usual practice, this guidance does not include acquisitions, which have not yet closed, including CIT. 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 over the long-term. And finally, I’d just like to take, again, this opportunity to thank the entire global team of Amphenolians around the world, nearly 100,000 of them worldwide for their truly outstanding efforts here in the first quarter. And with that, operator, we’d be very happy to take any questions.

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Q&A Session

Operator: [Operator Instructions] Our first question is from Amit Daryanani with Evercore. You may go ahead.

Amit Daryanani: Good afternoon. Thanks for taking my question. I guess, Adam, AI, you talked a little bit about AI as well, but it’s only a big focus for everyone, including investors. So I’m hoping you could maybe, perhaps, help us understand what solutions, what products does Amphenol really sell to the customer base right now when it comes to AI infrastructure and how does that really differ from what you sell to processor companies versus the cloud providers that are running their own infrastructure? I’d love to just understand that and if there’s any way to put dimensions around how big this business can get for you folks over time would be really helpful. Thank you.

Adam Norwitt: Well, thanks very much, Amit, and really appreciate the question. Look, we’re really excited about the renewed and really revolutionary investments that are being made in AI right now. I mean I have to confess that I am a consumer of these products. I’ve been using them. It’s amazing. Last night, my wife made me tacos because, of course, it’s Tuesday, and she went on ChatGPT. And she said give me a great taco recipe. And it’s just unbelievable what you can do for these things. And the underlying magic of these systems is just extraordinary computations, creating essentially probability models that are based on comparing everything to everything else. And to do that, you need the chips, whether they’d be GPUs or TPUs or tensor or whatever the chips that there are, they need to be connected to each other in essentially a fabric network.

And these calculations and computations and comparisons have to happen virtually at light speed. And thus, that requires an enormous degree of high-speed, low latency interconnect products that are different in their architecture. You have much more use, for example, of cable assemblies than you did in the past using maybe printed circuit boards, you have really direct connecting as close as possible to the chip of those high-speed products. And these are extraordinarily challenging products to build. These are products that we’ve been working on for so many years. I mean, more than a decade of effort in developing these products. And they’re just extremely challenging, extremely high technology and extremely critical to the good performance of those products.

But it doesn’t just start and end with high speed. I think it’s been broadly discussed lately, power and what does power mean for AI. And is there even enough power in the world to energize these AI data centers that people are talking about. And so you can imagine that there’s an enormous focus as well on the efficiency of the power interconnect in these systems. And that’s another area where Amphenol is participating with some of our leading-edge power interconnect, whether that’s connectors, cable assemblies, bus bars and all the like. And then there’s obviously fiber optics and the fact of using optical interfaces, whether those are active or passive fiber optic products, those are all things that we can offer to our customers. And we have the broadest deepest highest technology offering into the data center market.

We’ve been working and preparing for kind of this moment for so many years as we’ve been developing the sort of type of interconnect architecture that needs to be used. And fortunately, over the last kind of five quarters or so, that’s really taken hold. And I think it’s – this AI seems to really have a lot of value for the end users, it seems to draw an enormous amount of investment in capital, maybe, by the way, even a little bit of cannibalizing of capital from more traditional data centers. And it’s not just about having the right products, but it’s also about being able to ramp up those products and being able to react quickly to our customers who are really having, in many ways, kind of an arms race. And when I talked about the IT datacom market, I mentioned all of our growth, and in fact, a little bit more than all of our growth this quarter, which was very substantial growth, 28% organically, came from products that are being integrated into AI data centers.

And it’s something that as we look into next quarter, where we still have a favorable view of that, I think our team is realizing the benefits of really a lot of labors for many years in the past.

Operator: Thank you. Our next question is from Luke Junk with Baird. You may go ahead.

Luke Junk: Hi. Good afternoon. Thank you for taking my question. Just hoping, you could help us unpack a little bit more the up-tick in orders and book-to-bill being positive this quarter, just particular areas of strength that are driving that and maybe areas that are still lagging at this point? Thank you.

Adam Norwitt: Well, thanks so much, Luke. First of all, we’re really pleased to see the positive book-to-bill 1.03. I mean, I know during COVID, there were some funny books to bill at a few points where it was like 1.15:1 and then there were some negative book-to-bill. I mean, traditionally, 1.03 is actually a very strong book-to-bill for us because our lead times are not that long. We’re a very reactive company, and I think that’s a really good sign. It shouldn’t be surprising that maybe the two places where we saw slightly negative book-to-bill would have been in Mobile Networks and Industrial. Otherwise, we saw either flat or positive book-to-bill and probably our strongest bookings on a book-to-bill came out of IT Datacom as well as Commercial Air, which were really good books to bill.

Operator: Thank you. Our next question is from Saree Boroditsky with Jefferies. You may go ahead.

Saree Boroditsky: Hi. Thanks for taking my question. I wanted to dig in more on the Carlisle, CIT, acquisition. It’s relatively large. It was held by a commercial roofing company before. So what’s the opportunity here being under – your ownership? And where do you see potential to improve margins? Thank you.

Adam Norwitt: Well, thank you very much, Saree. I mean first, I just want to complement Carlisle, the corporation we – I work closely with the CEO of Carlisle, who’s a wonderful guy. It’s a fabulous company actually. And it’s true. Their focus and their stated strategic focus is to be in the building materials industry. And they were a wonderful steward of Carlisle Interconnect for many years. But there’s no doubt that Interconnect was not where they were focused strategically. And I’m really pleased and happy for the team. The corporate team at Carlisle, because I think they’ve really been able to realize their vision to be a focused building materials company, at the same time, Carlisle Interconnect is a fabulous company. I’ve known this company for most of my quarter century in Amphenol.