Amphenol Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
January 25, 2023

There are 9 speakers on the call.

Operator

Hello, and welcome to the 4th 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.

Operator

I would now like to introduce today's conference host, Mr. Craig Lampo. Sir, you may begin.

Speaker 1

Thank you. Good afternoon, everyone. This is Craig Lampo, Amphenol's CFO, and I'm here together with Adam Norwood, our CEO. We would like to wish everyone a Happy New Year and welcome you to our 4th quarter 2022 conference call. Our Q4 and full year 2022 results were released this morning.

Speaker 1

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 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, all prior year comparative data discussed during this call is on a continuing operations basis.

Speaker 1

The company closed the 4th quarter with sales of $3,239,000,000 and GAAP and adjusted diluted EPS of $0.82 and 0 point 7 4th quarter sales were up 7% in U. S. Dollars, 11% in local currencies and 8% organically compared to the Q4 of 2021. Sequentially, sales were down by 2% in U. S.

Speaker 1

Dollars,

Speaker 2

we will be conducting a

Speaker 1

few questions. Adam will comment further on trends by market in a few minutes. For the full year 2022 sales were a record $12,623,000,000 which were up 16% in U. S. Dollars, 19% in local currencies and 15% organically compared to 2021.

Speaker 1

Orders in the were $2,884,000,000 which was down 12% compared to the Q4 of 2021 and 8% sequentially, resulting in a book to bill ratio of 0.89 to 1. This was driven by lower bookings in the communications related markets. For the full year, orders were $12,925,000,000 resulting in a book to bill ratio of 1.02:one. GAAP and adjusted operating income were $666,000,000 $676,000,000 respectively in the Q4 of 2022. GAAP and adjusted operating margin were 20.6% and 20.9%, respectively, in the 4th quarter.

Speaker 1

On a GAAP basis, operating margin increased by 100 basis points compared to the Q4 of 2021 and decreased by 10 basis points sequentially. GAAP operating margin for the 4th quarter included approximately $10,000,000 of acquisition related costs. On an adjusted basis, operating margin by 80 basis points compared to the Q4 of 2021 and decreased by 10 basis points sequentially. The year over year increase in adjusted operating margin was driven by strong operating leverage on the higher sales volumes as well as the benefit of ongoing pricing actions. On a sequential basis, the slight decrease in adjusted operating margin reflected normal downside conversion on the lower sales levels.

Speaker 1

For the full year 2022 GAAP operating margin was 20.5% and adjusted operating margin was 20.7%. When compared to 2021, adjusted operating margin increased by 70 basis points, which is primarily driven by normal operating leverage on the higher sales volumes as well as the benefit of pricing actions. Given the overall cost and supply chain headwinds we experienced in 2022, we are very proud that our adjusted operating margin equaled our previous full year record operating margin set in 2018. Breaking down 4th quarter and full year results by segment. In the Harsh Environment Solutions segment, sales were $795,000,000 and $3,107,000,000 in the 4th quarter and full year of 2022 respectively.

Speaker 1

Compared to the prior year Q4, segment sales increased 10% in U. S. Dollars and 12% organically. Compared to the full year 2021, segment sales increased by 13% in U. S.

Speaker 1

Golf dollars and 15% organically. Segment operating margin was 25.7% 25 point we expect to be in the Q4 and full year of 2022 respectively. In the Communication Solutions segment, sales were $1,436,000,000 $5,652,000,000 in the 4th quarter and full year of 2022. Compared to the prior year Q4, segment sales increased 1% in U. S.

Speaker 1

Dollars inorganically. Compared to the full year 2021, segment sales increased we increased by 17% in U. S. Dollars and 13% organically. Segment operating margin was 22.2% and 22% in the Q4 and full year of 2022.

Speaker 1

In the Interconnect and Sensor Systems segment, sales were $1,800,000,000 $3,863,000,000 in the 4th quarter and full year of 2022. Compared to the prior year Q4, segment sales increased 14% in U. S. Dollars 17% organically. Compared to the full year 2021 segment sales increased by 17% U.

Speaker 1

S. Dollars 18% organically. Segment operating margin was 19.2% 18.5% in the 4th quarter and full year 2022. The company's GAAP effective tax rate for the 4th quarter was 19.2% and the adjusted effective tax rate was 24.5%, which compared to 18.8% and 23.8% in the Q4 of 2021 respectively. For the full year 2022, GAAP effective tax rate was 22.3% an adjusted effective tax rate was 24.5 percent, which compared to 20.6% 24.3% in 2021.

Speaker 1

In 2023, we expect our adjusted effective tax rate to be approximately 24%. GAAP diluted EPS from continuing operations was $0.82 in the 4th quarter, an increase of 14% compared to $0.72 in the prior year period. Adjusted diluted EPS was $0.78 an increase of 11% compared to the $0.70 in the Q4 of 2021. This was an excellent result. For the full year, GAAP diluted EPS from continuing operations was $3.06 a 22% increase from $2.51 in 2021.

Speaker 1

Adjusted diluted EPS was $3 in 2022, a 21% increase from $2,048 in 2021. Operating cash flow in the 4th quarter was a record $705,000,000 or 147 percent of adjusted net income. And net of capital spending, our free cash flow was a record $613,000,000 or 127 percent of adjusted net income. We are pleased to have delivered a cash flow yield at these strong levels. For the full year 20 22 operating cash flow was a record $2,175,000,000 or 117 percent of adjusted net income.

Speaker 1

And net of capital spending, our free cash flow for 2022 was a record $1,796,000,000 are 96% of adjusted net income, a very strong result. From a working capital standpoint, inventory days, days sales and payable days were 86, 73 and 54 days respectively. During the quarter, the company repurchased 2,300,000 shares of common stock at an average price of approximately $75 bringing total repurchases during 2022 to 9,900,000 shares or $731,000,000 when combined with our normal quarterly dividend, total capital return to shareholders in 2022 was more than $1,200,000,000 total debt on December 31 was $4,600,000,000 and net debt was $3,100,000,000 total liquidity at the end of the quarter was a very strong $4,100,000,000 which included cash and short term investments on hand of 1,400,000,000 plus availability under our existing credit facilities. 4th quarter and full year 2022 EBITDA was $798,000,000 $3,100,000,000 respectively. And at the end of the Q4 of 2022, our net leverage ratio was 1.0 times.

Speaker 1

I also wanted to make a few comments on interest expense. As I mentioned last quarter, due to the rising interest rate environment, our interest expense has increased primarily as a result of our floating rate commercial paper, which represents approximately 14% of our total debt outstanding at the end of the year. And based on current and near term expected interest rates and debt levels, we expect 2023 quarterly interest expense to be approximately $40,000,000 which is reflected in our Q1 guidance. I will now turn it over to Adam, who will provide some the commentary on current market trends as well as the recently completed acquisition this month.

Speaker 3

Well, thank you very much, Craig, and welcome to all of you to our first earnings call of 2023, and I hope it's not too late to wish as well all of you a Happy New Year. And to those of you who celebrate the Lunar New Year, I wish you all a happy year of the rabbit. As Craig mentioned, I'm going to highlight our Q4 and full year 2022 achievements, including some discussion about the acquisitions that we mentioned in our press release, I'll then discuss our trends and progress in our served markets and then make some comments on our outlook for the Q1. And then of course, we'll have time for questions at the end. Turning to the Q4, our results in the Q4 were stronger than expected, exceeding the high end of our guidance in sales and adjusted diluted earnings per share, sales grew by 7% in U.

Speaker 3

S. Dollars and 11% in local currencies, reaching $3,239,000,000 On an organic basis, our sales increased by 8% and that was driven by robust growth in the broadband, commercial air, automotive and military end markets, and I'll give some more details about those markets in a few moments. The company booked $2,884,000,000 in orders in the 4th quarter, representing a book to bill of 0.89 to 1 and this negative book to bill was driven by order reductions in several of the communications related markets, a certain customer's adjusted demand in light of excess inventory that they had built up throughout 2022. We're especially pleased to have delivered another quarter of resilient and strong profitability with adjusted operating margins reaching 20.9 percent, an 80 basis point increase from prior year, we achieved these results Despite the continued wide range of challenges around the world. Adjusted diluted EPS, as Craig mentioned, was $0.78 representing robust growth of 11% from prior year, and that's just another excellent reflection of our organization's continued strong execution.

Speaker 3

Finally, the company generated record operating and free cash flow in the quarter of $705,000,000 $613,000,000 respectively, are clear reflections of the quality of the company's earnings. I'm extremely proud of our team around the world and 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 to announce that we closed the acquisition of Control Measure Regulation Group or CMR just here in January, CMR is based in France and has annual sales of approximately $75,000,000 and they're a manufacturer of a broad array of cable assemblies and complex interconnect assemblies for the industrial market with a particular focus on heavy equipment engine applications. This acquisition further expands our offering of high technology value added interconnect products in the diversified industrial market. In addition, we're pleased to have signed an agreement for the acquisition of the North American Hybrid and Fiber Optic and Cable Assembly as well as the Global Infrastructure Antenna Business of RFS at the end of the 4th quarter.

Speaker 3

Based just down the street from us here in Meriden, Connecticut, RFS is a provider of interconnect and antenna products for the mobile networks market with expected sales of approximately $100,000,000 in 2023. This acquisition, which we anticipate will close by the end of of the Q2 and thus is not included in our guidance expands Amphenol's product offering and presence with mobile network service providers who are continuing to invest in their next generation 5 gs networks. As we welcome the outstanding CMR team to Amphenol and look ahead to welcome the RFS team once that transaction closes, we remain confident that our 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. I just want to make a few comments about 2022.

Speaker 3

And I will just say that 2022 was another very year for Amphenol. We expanded our position in the overall market, growing sales by 16% in U. S. Dollars, 19% in local currencies and 15% organically, reaching a new sales record of $12,623,000,000 In fact, over the past 3 very dynamic years, we're proud to have grown our sales by more than 50% from our 2019 levels, actually 53% to be exact, a great reflection of the company's diversification and agility in these truly dynamic times. Our full year 2022 adjusted operating margins reached 20.7% and that was an increase of 70 basis points from 2021.

Speaker 3

The strong level of profitability enabled us to achieve record adjusted diluted EPS of $3 Finally, we generated record operating and free cash flow of execution and disciplined working capital management. Our acquisition program again created value this year with 2 new companies added to the Amphenol family in 2022 and one added here already in 2023. CMR, NPI and ICA Holdings have expanded our position across a broad array of technologies, particularly in the industrial market, while bringing outstanding and talented individuals into the Amphenol family. We're excited that these acquisitions as well as the RFS acquisition, which we expect to close at the end of the second quarter, represent expanded platforms for the company's future performance. We also bought back in 2022 almost 10,000,000 shares under our share buyback program and increased our quarterly dividend by 5%, representing as Craig detailed a total return of capital to shareholders of just over $1,200,000,000 for the year.

Speaker 3

Finally and really importantly, especially in this today's dynamic environment, we come out of 2022 in a uniquely robust financial position with the lowest leverage and highest liquidity and availability we have seen really in modern times. And while there continued to be a high level of volatility in the overall market environment in 2022, as we and the overall market environment in 2022, as we enter 2023, our agile entrepreneurial management team is confident that we have built further strength from which we can drive superior long term performance. I'd like to spend a little bit of time to talk about our trends and progress across our served markets. And I would just comment that we remain very pleased that our balanced and broad end market diversification continues to create real value for the company with no single end market representing more than 25% of our sales in the year of 2022, we believe this diversification mitigates the impact of the volatility of individual end markets, while continuing to expose us to leading technologies wherever they may arise across the electronics industry. Turning first to the military market, this market represented 10% of our sales in the 4th quarter and 9% of our sales for the full year.

Speaker 3

Sales in the quarter grew strongly from prior year, increasing by 11% in U. S. Dollars and 13% in local currencies. And on an organic basis, sales increased by 12% with broad based growth across virtually all applications, but particularly military vehicles, in Space and Airframe. Sequentially, our sales increased by a better than expected 11%.

Speaker 3

For the full year 2022, sales grew by 4% in U. S. Dollars, 6% in local currencies and 4% organically, reflecting our operational execution as well as strength in space related, unmanned aerial vehicles, ground vehicles and avionics applications. Looking ahead, we expect sales in the Q1 to grow slightly from these 4th quarter levels, and we continue to be excited by the The company's position in the defense market, where we offer the industry's broadest array of high technology interconnect products. As the geopolitical environment has become more dynamic, militaries around the world are expanding their investments in next generation technologies, thereby increasing the demand potential.

Speaker 3

We look forward to supporting this increased demand with our expanded range of interconnect and sensor products as well as our significant investments in new capacity that we have made in recent years. The commercial aerospace market represented 3% of our sales in the Q4 as well as for the full year 2022. And in the quarter, our sales grew by a very strong 33% in U. S. Dollars and 38% in local currency and organic as we benefited from the continued recovery in the commercial air market.

Speaker 3

Sequentially, our sales grew by 13% from the 3rd quarter, which was well ahead of our coming into the quarter. For the full year 2022, sales increased by 36% in U. S. Dollars, 40% in local currency and 36% organically, reflecting our strong design and positions on a broad range of platforms as well as the ongoing recovery and demand for aircraft. Looking into the Q1 of 2023, we expect now a modest sequential moderation in and sales, I just want to say how grateful I am to our team that's working in the commercial air market.

Speaker 3

Over the last 3 years, they've performed really well amidst to strengthen our breadth of high technology interconnect and sensor products, while diversifying our market position, including into next generation aircraft are now paying real dividends. We look forward to realizing the benefits of this in 2023 and beyond. The industrial market represented 25% of our sales both in the 4th quarter and for the full year and sales in the quarter grew by 7% in U. S. Dollars, 12% in local currency and 7% organically from the prior year Q4.

Speaker 3

This growth was driven in particular by sales into alternative energy, battery and electric heavy vehicle, factory automation, oil and gas and medical applications. On a sequential basis, sales were down by just 1%, which was a bit better than our expectations. For the full year 2022, sales grew by a strong 14% in U. S. Dollars, 19% in local currency and 13% organically.

Speaker 3

And we really had broad based growth across virtually all segments of the global industrial market. And looking into the Q1, we expect sales in the industrial market we will be roughly at the same level as we achieved here in the Q4. Our outstanding global team working in the industrial market continues to find new opportunities our high technology interconnect antenna and sensor offering, both organically and through complementary acquisitions, has positioned us to capitalize on the many revolutions happening across the industrial electronics market. To that end, the addition of CMR further strengthens our position, particularly in the important heavy equipment segment, and we look forward to realizing the benefits of this strategy for many years to come. The automotive market represented 21% of our sales, both in the 4th quarter and for the full year, And we had another great quarter in automotive with sales growing by a strong 21% in U.

Speaker 3

S. Dollars and 31% in local currency and organic. Our growth was broad based, but was once again particularly robust in hybrid and electric vehicle applications. On a sequential basis, our automotive sales increased by 5%, which was above our prior expectations. For the full year 2022, I'm very pleased that our sales increased by a strong 22% in U.

Speaker 3

S. Dollars and 29 are in local currency and organic, reflecting broad strength across our automotive markets, including in particular in next generation electronics, including electric and hybrid drivetrains. Looking into 2023, we expect a high single sequential moderation of sales in the Q1 from these high levels, driven especially by seasonal moderation of sales in Asia. I remain extremely proud of our team working in the automotive market. They continue to manage through a dynamic overall environment, all while remaining focused on driving new design wins with customers who are implementing a wide array of new technologies into their vehicles.

Speaker 3

In particular, our long term efforts at expanding our range of next generation interconnects incorporated into electric and hybrid electric vehicles has enabled Amphenol to expand our position with a broad range of customers and thereby created further potential for the future. The mobile devices market represented 12% of our sales in the quarter and 11% of our sales for the full year 2022. Our sales in the quarter declined from prior year by 11% in U. S. Dollars and 7% in local currency and organically.

Speaker 3

And this is driven by reduced sales of products incorporated into smartphones, laptops, tablets and wearables. Sequentially, our sales declined as we had expected by 10% as demand was impacted by a pull forward of demand into 3rd quarter as we previously discussed 90 days ago. For the full year 2022, sales in This market increased by 3% in U. S. Dollars and 5% organically as growth in smartphones and wearables was somewhat offset by a moderation in tablets coming off the high levels of the pandemic.

Speaker 3

We are pleased with this performance amidst the market with generally muted demand in 2022. As we look into the Q1 of 2023, we anticipate a 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 2023 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 4% of our sales in the quarter and 5% for the full year 2022.

Speaker 3

Sales in the quarter declined from prior year by 8% in U. S. Dollars, 6% in local currency and 12% organically, as we experienced a pause in demand from operators after a number of quarters of strong growth. Sequentially, our sales declined by a higher than expected 17%. For the full year 2022, sales grew by 8% from prior year and 3% organically as we saw increased demand for products used in next generation 5 gs equipment.

Speaker 3

Looking ahead, we expect a high single digit sequential reduction in sales in the Q1 as operators continue to moderate their investments. Our team continues to work aggressively to realize the benefits of their efforts to expand our position in next generation 5 gs equipment and networks around the world. And as customers continue their investments in these systems, 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 also excited by the pending acquisition of the hybrid and fiber optic cable and antenna assets of RFS, which will further broaden our product offering for this important market. The information technology and data communications market represented 19% of our sales in the quarter and 21% of sales for the full year, sales in the 4th quarter declined by 6% in U.

Speaker 3

S. Dollars, 5% in local currency and 8% organically from prior year, as many customers reduced their demand after 5 consecutive quarters of robust double digit growth. Sequentially, our sales declined by 11% as we had expected coming into the quarter. For the full year 2022, our sales in the IT datacom market grew by a strong 18% in U. S.

Speaker 3

Dollars, 19% in local currency and 14% organically, as we continue to benefit from our leading technology solutions and design in positions across a wide array of applications. Looking ahead, we expect a roughly 20% sequential decline in sales in the Q1, as our OEM and web service customers we continue to moderate their demand levels. Regardless of this current demand pause, we remain encouraged by the company's outstanding position in the global IT Our team has done an excellent job developing leading high speed power and fiber optic interconnect products that are enabling our OEM and web service provider customers to continue to drive their equipment and networks to higher levels of performance. We look forward to realizing the benefits of that leading position in this important market for many years to come. Finally, the broadband market represented 6% of our sales in the quarter and 5% of our sales for the full year 2022.

Speaker 3

Sales increased by a very strong 79% in U. S. Dollars, 82% in local currencies and 64% organically as we experienced a significant increase in demand from cable operators for a wide range of our products. On a sequential basis, sales grew by a much better than expected 19%. For the full year 2020 Sales grew by 62% in U.

Speaker 3

S. Dollars 38% organically as we benefited from strong demand from broadband service operators who are both upgrading and expanding their data networks as well as from the HALO acquisition completed last year. Looking ahead, we expect sales to decline in the low double digits from these levels due to seasonal adjustments from customers. We remain encouraged by the company's expanding position in the broadband market, and we look forward to continuing to support our service provider customers around the world, all of whom are working to increase their bandwidth to support the proliferation of high speed data applications to homes and businesses, and in certain cases, in furtherance of government programs to expand broadband. Now just in summary, I want to comment on our outlook.

Speaker 3

The current economic environment remains highly uncertain. And in addition, as we did discuss earlier, we have seen certain customers in the communications markets reduce their demand as they normalize inventory levels. Assuming market conditions do not meaningfully worsen and also assuming constant exchange rates. For the Q1, we expect sales in the range of $2,840,000,000 to $2,900,000,000 and adjusted diluted EPS in the range of $0.65 to $0.67 this would represent a sales decline of 2% to 4% and adjusted diluted EPS of flat to down 3% compared to the Q1 of 2022. 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 robust profitability over the long term.

Speaker 3

And finally, I'd like to take this opportunity to thank our entire team around the world for their truly outstanding efforts here in the Q4 and for the full year of 2022. And with that, operator, we'd be very happy to take any questions.

Operator

Thank you. The question and answer period will now begin. Please limit to one question per caller. Our first question is from Guy Hardwick with Credit Suisse. You may go ahead.

Speaker 4

Hi, good afternoon.

Speaker 3

Good afternoon.

Speaker 4

I think I'll leave the questions and guidance to callers after me. But Adam, just when I speak to investors about Amphenol, they push back initially if they don't know the company that well that's why isn't this company exposed to commodity price deflation If it's selling components to the electronics industry, what was your what would be your pushback on that? And maybe if you could talk about some of the content drivers in connectors and are the products.

Speaker 3

Yes. Well, thanks so much, Guy. And I think what you're referring to is kind of Moore's Law, which says that over time, whether it's every 18 months or some approximation thereof, that electronics tend to get a doubling of the performance for the given price. And I think that that is true in electronics That if you look at what we the devices that we use today, the networks that we use today, we get so much more out of those things given the increase or even in certain cases not increase of what we pay for those things today. And so it comes down then to innovation.

Speaker 3

And are we as a company innovating, developing products that are enabling our customers' applications and allowing our customers to sell value. And so you mentioned commodity and we don't view our products as a commodity. Actually, we view them as a very precious piece of jewelry almost that the interconnect products that we make from connectors to value add interconnect, sensors, antennas, these are highly critical components that go into very complex systems, everything from mobile devices all the way up to fighter jets and everything in between. And they represent also a very high risk and relatively low value as a percentage of the total bill of materials. And thus if you can embed technology, if you can embed value, if you can be there for your customers, well then your customers will be willing to share with you some of the value that they're able to realize on the sale of the end product.

Speaker 3

And so the difference between kind of Standard commodity, something that you see the price trading on an exchange somewhere and ours is just a chasm of distance between them Because our products are enabling technology, they're very much application specific. We're selling 100 of 1000, if not millions of different product to Tens of thousands of customers and millions of different applications around the world. And if our product doesn't work, that small little thing in the system, then ultimately the system itself doesn't perform for its customers. And so it's up to us to develop innovative new technologies on a consistent basis to be able to execute on behalf of our customers to do that with high quality, High reliability with a breadth of products so customers can come to us all at once. And if we can do that consistently, then we're able Realize good margins while also controlling the cost on our side.

Speaker 3

And that's another piece of this, which is that At the end of the day, margin is price minus cost. And so we have to control the price by selling value to our customers. We have to control the cost by ensuring that every element of cost is controlled and treated as if it was coming out of our own pockets. And that comes really from the entrepreneurial organization, the 130 General Managers around the world who all treat the company's money as if it were their own. And the fact that we don't have cost centers in the company, we have a tiny little headquarters.

Speaker 3

And so that control on cost together with selling value through technology ultimately allows us to realize robust margins on a consistent basis.

Operator

Thank you. Our next question is from Amit Daryanani with Evercore. You may go ahead.

Speaker 5

Thanks a lot for taking my question. I guess, Adam, I'm hoping you can just maybe talk a little bit more about the March quarter guide. You folks are talking about revenue has been down double digits sequentially. And I don't want you to repeat all your segment discussion with you started talking about 2 times normal seasonality. Perhaps you just talk about what are the 1 or 2 segments you think that are performing worse than what you would expect them to expect them to do in a normal seasonal environment.

Speaker 5

And then to the extent this weakness that you see in March, do you think it's more demand weakness or is it more inventory adjustment by your customers? Thank you.

Speaker 3

Thanks so much, Amit. There's a little bit of static on the line, but I think I heard the question well. Look, our guidance that we've given here and I think I talked a lot about by each segment, but let me just put a finer point on this. If you just take 2 of our end markets and the guidance that I And that's Mobile Devices and IT Datacom, which are 2 of our largest communications markets. Those represent about 2 thirds collectively of the implied sequential reduction in sales from the Q4 to the Q1.

Speaker 3

And I think we talked about in IT Datacom that we clearly see a sort of reduction in orders from customers because of elevated inventory levels. And there may be some demand layered into that as well as our customer as the end customers kind of pause their build outs. But we shouldn't forget one thing about IT Datacom. We shouldn't forget that this is a market, first of all, that since 2019, we've grown that market by more than 70% during that time period that our customers have had to increase their output and their construction of their networks in order to satisfy a true explosion of demand for the Internet. And I think the underlying drivers of that, whether that be video over the Internet or the use of certain tools that we didn't ever use Before, the data traffic on the Internet is not dropping.

Speaker 3

I think what we are seeing is maybe a pause and kind of realignment because these companies went real gangbusters for a number of years. But the structural increase of data traffic over the Internet in the broadest sense, that's something that we believe and I think we're in good company believing that will continue for a long time to come. On mobile devices, I think we talked about the fact that during the course of the pandemic, there was a real surge in mobile device demand as people had to detach from their offices and go home, things like tablets, things like computers, upgrades of phones and the like, let alone the fact that everybody had a lot of disposable income to buy new things in their ears and on their wrists and otherwise. And I think there's been some relaxation of demand that's well reported and you yourself have talked a lot about that in a variety of reports here in 2022. And regardless of that, Our team did a fabulous job this year driving 5% organic growth in 2022.

Speaker 3

But we're reacting to the demand that we hear from our customers, we're not losing share, quite the contrary, but the demand expectations of our customers here in the Q1 really results in the guidance that we've given. So I would maybe point to those 2 markets most particularly, which represent just roughly 2 thirds of the sequential decline in our outlook.

Operator

Thank you. Our next question is from Matt Sheerin with Stifel. You may go ahead.

Speaker 6

Yes. Thanks and good afternoon and happy New Year everyone.

Speaker 2

Adam, it's

Speaker 6

just a question regarding the industrial markets. In addition to your acquisitions, you've been growing really well organically. And there was some concern that those industrial markets typically lag some of the other markets like consumer and datacom. There's also concerns about inventory build, but it sounds like you're relatively optimistic in terms of the drivers across those diversified markets. So Any color you can give on your outlook there would be great.

Speaker 3

Yes. Thanks so much, Matt, and happy to hear back to you. No, look, our industrial market has been a real bright spot for us over these 3 years. And I just mentioned how IT data comp since 2019 has grown by 70%. Our industrial business has actually grown by more than 90% and we've added some amazing acquisitions across interconnect and sensors, but we've also driven really strong organic growth.

Speaker 3

And I think last year, we grew by 13% organically. In 21%, we grew by 27% organically. And really on a wide swatch of the industrial market, which is very, very diversified inside it. Yes, does industrial lag consumer and datacom, I don't have a really good opinion about that. I think they're quite different markets.

Speaker 3

You have a lot of very different demand drivers. And if you think about what are the underlying drivers of demand in industrial, well, think about the things that are in the headlines today, things like investments in infrastructure, things like electrification, things like decarbonization, which includes everything from infrastructure to support electrification, which includes things like alternative energy generation, which performance in both our alternative energy business, but also our oil and gas business. Both of those are really showing really strong momentum right now. And I wouldn't think that any of those correlate necessarily to a consumer or a datacom world. Is there inventory in the Supply chain of industrial, I don't have good evidence to say yes or no to that.

Speaker 3

I'm sure if you looked at a variety of publicly traded balance sheets, you may see some evidence of and some evidence of not. We do look in our distribution channel and there I think inventories are healthy. They're not crazy. I mean they may be up a touch or 2, But not out of whack to the overall demand environment. Look, industrial is going through a true revolution.

Speaker 3

And when you think about everything from electrification, electronification, all the underlying drivers that I talked about, I think we've done a fabulous job and our In that area has done a fabulous job both organically as well as identifying and bringing to the Amphenol family great companies like CMR this quarter and many others over the last 3, 4 years that put the company in a strong position going forward.

Operator

Thank you. Our next question is from Samik Chatterjee with JPMorgan. You may go ahead.

Speaker 7

Hi, Adam. Hi, Craig. Thanks for taking the question and Happy New Year. I guess question I had was more on the margins. You had pretty robust margins in the Q4.

Speaker 7

But as you're sort of looking in terms of the end market outlooks and some of this sub seasonal sort of trajectory starting off the year, how should we think about the puts and takes on the margin and also in relation to some of the acquisitions that you've done recently, what sort of impact on the margin will that have? How resilient are these sort of Margin levels at this point. Thank you.

Speaker 1

Thanks, Sam and Happy New Year to you. Yes, I think that if you think Our margin, I mean, I think I'd start off by just saying how proud we are of the margin performance that we've had in 2022. We really have ultimately, I mean, throughout 2022 really done, I think, a great job of just expanding our margins, even sequentially converting kind of higher than a normal conversion with the cost actions, with the pricing actions we've had to take and thus and really hitting our 21% in Q3, which is kind of a tying of record and really 20.9% in Q4 and then 20 7 which matches the record for 2018. So I'm really happy certainly achieving those. And as we guide here into the Q1, we're guiding down and it's above seasonal and then we talked about that and just talked about that in response to a previous question.

Speaker 1

And I think if you kind of look at the markets, we've always said that our markets don't really drive Our margins, we don't have significant margin differences of a significant range within our markets, except for broadband we've talked about before, which was our old cable business, but other than that, I think the markets are similar operating margins and It will drive similar conversion levels. So I wouldn't really talk about that as being a place where it's driving a change in the way our overall conversions would look. We talk about decrementals in kind of that close to 30% range. We're kind of seeing a little even slightly less than that as we're guiding here into the Q1. And I think that just goes to the management team and how well they have done in regards to responding to some of these areas where we have seen some headwinds from a demand perspective in IT data, which is declining at above normal rate typically and in the Q1 they're taking great actions that obviously are reflected in our guide and not necessarily impacting our normal conversion in mobile devices, they're used to these types of decrementals and headwinds in terms of Their Q1 and certainly they're taking them.

Speaker 1

So I think that this is really not a different story we've had over many years where we're able to manage regardless of the demand environment, we're able to manage their operating margins and really do a great job of expanding our margins when we see demand increases, which we've done here in 2022 and then here in Q1 where we see a little bit of headwind in certain of our markets taking the actions that really need to be taken in regards to protecting our bottom line and I think that agility of the organization is really going to shining through again and I think that's just no different from what we've Historically, I wouldn't expect any difference in terms of whatever comes here in 2023. And regardless, I think I feel very comfortable with how the team will perform.

Operator

Thank you. Our next question is from Mark Delaney with Goldman Sachs. You may go ahead.

Speaker 8

Yes. Good afternoon and thank you very much for taking the question. Could you speak please to what Amphenol is seeing in the China market, both how Been tracking recently given the COVID dynamics and also whether you're expecting demand in China to pick up materially over the course of this year given reopening?

Speaker 3

Yes. Thanks very much, Mark. And look, I'm glad you bring up China because I want to just give a real Shout out to our team in China. Q4 in China was a funky quarter. You came in with 0 COVID and you left with 100 percent COVID.

Speaker 3

And that created a lot of challenges operationally. And the fact that we were able not only to deliver on our commitments in the quarter, but to actually exceed our guidance in the quarter, was just a real testament to our entire global organization, But in particular to our team in China who just managed through this well, while protecting our people as best you can in a country where basically everybody got COVID, it was really phenomenal, and I'm just so proud of what they were able to do during that time period. Look, our business in China, we have a great business in China. Our China business is very much a business for the local region, for the customers who want to buy in those regions, and we've done such a great job over the years despite geopolitics and all of that of being a truly local company and this gets to kind of our organization, which I think I've used the term before that we have an organization that's really purpose Built for whatever the world order is going to be and that's an organization of people who are made up of local nationals all over the world, people from India in India, people from China in China, people from France in France.

Speaker 3

And that allows us to really tailor our operations to the requirements of that region and of that country, and we've certainly done that in China over these last several very dynamic years. In terms of whether we expect a kind of a demand rebound in China, I don't know, I think it's a little early To say that, but whatever comes will come. And I think we're poised and positioned that if there is some rebound, if there is an increase in consumer spending or whatever on whatever kind of products, there's no doubt in my mind that our team will be there to capture more than our fair share if that should so occur. I mean, they demonstrated here in the 4th quarter That nothing can stop them. And I'm very confident that whatever comes along, we'll take full advantage.

Speaker 3

And if risks materialize, if some impediment Come along, I mean this is a team that's pretty battle hardened, so I'm pretty confident they'll do a great job.

Operator

Thank you. Our next question is from Steven Fox with Fox Advisors. You may go ahead.

Speaker 5

Hi, good afternoon and happy New Year. I was just wondering, Adam, if you could talk a little bit more about the business you're acquiring from RFS. Seems like it's a bit of a game changer for you guys in terms of product and how you might be able to compete against some larger players and antennas, etcetera.

Speaker 3

Yes. Well, thanks so much, Steve, and Happy New Year to you as well. Look, we're really excited about this business. I mean, we have a business in fiber optics, we have a business in hybrid cable, we have a business in antennas, but no doubt about it, RFS brings us a much, much stronger position from a technology perspective, from a capacity perspective and from a channel into certain markets. And We've always been really excited about the mobile networks market.

Speaker 3

And one of the unique things about Amphenol is I think I've said this many times is that we sell to the OEMs. We're one of the leading interconnect suppliers to the world's leading OEMs, who make mobile network equipment, but we also sell to the service providers and to the operators and that actually is an evolution of our long term position with the broadband service providers we know how to work with service providers. And today, we work with service providers in broadband, we work with them in the IT datacom market, we work with them in broadband, I mean in mobile networks and anywhere where now providers are our customers and not just OEMs making equipment. And I think RFS really allows us to take a step function growth in the strength of our position there with service providers and doing that at a time where we're still, I believe, in the early innings of the 5 gs investments, in the network, let alone what happens when 5 gs exists for all of our other markets. And we're big believers on the kind of structural potential of both the build out of the 5 gs networks that are happening around the world as well as what it means to have low latency, ultra high bandwidth, ubiquitous data traffic for all of our end markets.

Speaker 3

And after 5 gs, we'll come 6 gs and then there will come 7 gs and you You and I will probably still be floating around when we're talking about 10 gs one day, Steve. But no, we're really excited about RFS and look forward we look forward to getting through the regulatory process. And again, we expect to close it at the end of the second quarter. And thus, It's not in our guide here in the Q1, but it is certainly in our long term strategy.

Operator

Thank you. Our next question is from Jim Suva with Citigroup. You may go ahead.

Speaker 5

Hi, Adam. You and your team have been through many Similar cycles and I wanted to focus a little bit on the communications commentary you gave about a little bit of inventory digestion or Some pauses or things like that. Just curious, in past cycles, have you seen these last kind of 1 to 2 quarters or multiple, multiple quarters from when you There it seems like this is one segment that is taking a little bit of a downshift, not that structurally you're losing share or structurally there are problems with it, but more of cyclical nature, if I understand your comments correctly. Thank you.

Speaker 3

Well, thanks so much, Jim. I would love to be able to which is by the way 25 years this year in the company, to lift through a time period like we've just gone through in the last 3 years and what that has done to the dynamics of the market from a pandemic to a supply chain crisis to an explosion of data traffic We'll consume entertainment and media and information. So I don't know that there is a good template for kind of the what has happened in the IT datacom market over the last 3 years. And thus it'd be hard for me to say, do I expect this to be a 1 quarter, 2 quarter or whatever kind of an adjustment. And thus we don't run our business that way.

Speaker 3

The fact is, is it is what it is right now and we adjust in real time our resources We have 131 operations around the world right now roughly And each of them have their own set of customers, some of whom have demand that is growing and others of whom, and that includes those who work in this market, or maybe demand is moderating somewhat, they don't make a guess and say, well, is that going to be a 1, 2, 3 quarter thing and thus what should I do? They just say my customer needs this much and I'm going to go out and adjust my resources in real time. And that real time reactivity and agility that Craig mentioned earlier, which by the way was reflected in our margins in the Q4 and is also reflected in our margins in the Q1, that's how we run the business. We'll react to whatever the demand environment is and we're not going to try to trip over ourselves trying to guess how long it is. But what I know is this, Long term, the demand for data, the demand for our products, leading edge high speed fiber optic power products, that's going to be a very robust demand long term.

Speaker 3

And so we will come through this adjustment that our customers are going through and we will come out of it a stronger company than ever and we will continue to have a very robust technology position in the future.

Operator

Thank you. Our next question is from Luke Young with Baird. You may go ahead.

Speaker 2

Good afternoon. Thanks Thanks for taking question and happy New Year for me as well. Adam, your auto business has outgrown underlying production now by an extremely strong level each of the past 2 years. And I know it's always hard to parse out, but do you get the sense that channel inventory of your products has influenced the outgrowth at all? And maybe just more importantly, as you look forward, what do you see as the key factors, plus or minus versus history that could influence your ability to grow Strongly above market again in 2023.

Speaker 2

Thank you.

Speaker 3

Well, thanks, Luke, to you and Happy New Year as well. Look, you said it, I mean, we have definitely out performed in the automotive market for a pretty long time period here, quite a number of quarters. And I'm just really proud of our team. No, they weren't always easy years. I mean, clearly 2020 was a tough year, even 2019 was a challenging year.

Speaker 3

But we never kind of threw in the towel during that time period. We never said let's go cut back on new product investment or let's retrench, let's reorganize, Quite the contrary. In fact, we continue to work with customers around the world on next generation applications. And those next generation applications, everything from passenger connectivity and power applications to high voltage In the car to communications around antennas and the like, we are now really realizing the benefits of that over the last couple of years. And in terms of the channel, we don't really see the channel and the inventory in the channel is being a big driver of the demand.

Speaker 3

I think the driver of the demand has been the rapid adoption of new electronic systems, in particular, of cars, but not exclusively electrification. And so when I think about the key factors that can be plus or minus in the future, well, sure, at some level, the number of cars being sold matters, but more importantly is the content of electronics and the content of new systems in those cars in the future. And if that content continues to move up into the right and if we continue to do a pretty decent job of getting some or more than our fair share of that, Then I think there's good potential for automotive business in the long term. I would not get out in front of my skis here and tell you that 29% organic growth is going to be our perpetuity or 41% that we achieved in 2021, but we're very confident in the strength of our position.

Operator

Thank you. Our next question is from Will Stein with Truist Securities. You may go ahead.

Speaker 5

Great. Thanks. I'd love to hear about how the backlog changed during the quarter In particular, the duration of the backlog and perhaps it relates to lead time somewhat, whether you're seeing customers still place orders in excess of lead times to the degree that has been a pattern? Thank you.

Speaker 3

Thanks so much, Will. I mean, look, we obviously had in the 4th quarter a lower book to bill at 0.89. But I would just point out that over the course of this year, we still have a positive book to bill of $102,000,000 And if you look over the last two years, we've actually booked in the last 2 years $25,000,000,000 in orders and we've shipped $23,500,000,000 in sales. So we've added $1,500,000,000 to our backlog during that time and we have today still a very robust backlog. I think we talked about last quarter that we probably saw about a 3 week expansion of our backlog.

Speaker 3

And I think we're probably still roughly in that ballpark right now, somewhere around a 3 week or so beyond what maybe it was in the past. And when I say the past, like 2020, maybe year end. And that's a really strong position. At the same time, there's no doubt about it that the kind of acute phase Of the supply chain crisis and the kind of multiplicity of pressures that was put on our customers across really all of our markets, I think we're beyond the acute phase of that supply chain I'm not going to tell you like it's totally in the rearview mirror like there's still little things that people have to deal with. But I would not be surprised if our customers kind of normalize a little bit more their lead times across the board.

Speaker 3

And one of the things that happened during the course of the pandemic and the supply chain crisis that came thereafter is we were doing a great job. I mean, we support our customers through the time. We did not meaningfully have But customers were sort of taking a one size fits all approach in several of the markets. And that led I think them to certainly in the communications market to maybe end up ordering a little bit more Than they were going to do. I would also point one other thing out here just in the Q4 with our relatively low book to bill compared to historical levels, actually that was really concentrated in our communications markets.

Speaker 3

And we saw book to bill outside of the communications markets, which was basically 1 to 1 in the Q4, which also gives us some confidence that There's still a robust demand for our products. But I don't think in terms of the normalization, I would expect some normalization. That whole cliche of just in time versus just in case, maybe customers long term will have a little bit more order windows. But I think we sit in a really good position here.

Operator

Thank you. Our next question is from Chris Snyder with UBS. You may go

Speaker 8

ahead. Thank you. So the company has taken a lot of share coming out of the pandemic, and there has Been a heightened focus on resiliency and connectivity from the customer base, again coming out of the pandemic. I would just be interested to hear how you think about those two drivers as the macro seemingly will normalize here at some point? Thank you.

Speaker 3

Yes. Thanks very much, Chris. I mean, look, resiliency connectivity, I think there's been a lot of things that have shifted. We've just been through a once in a several generation pandemic. Hopefully, we are sort of at the tail end of it.

Speaker 3

I know our Team in China certainly hopes that in the Q4. But I think it has changed everything. It's touched everything. Let me say that whether it's dramatically changed everything. But no doubt resiliency and ability of a company to be there for its customers regardless of what comes along, that is definitely more in the consideration of our customers than ever before and that plays very well into our approach.

Speaker 3

Our approach has never been to put all our eggs in one basket to build these massive campuses. We have 250 facilities around the world. Some people think we're crazy to of that many factories, but part of it is risk. Part of it is making sure that we're close to our customers and we're not putting all of our eggs in one basket. And we have a pretty fragmented manufacturing footprint all over the world with low cost operations in all three of the major regions and continents.

Speaker 3

And I'll tell you that that enabled us during this time period to take share from maybe some of our competitors who are either smaller or more concentrated and thus we're stricken by these kind of unpredictable impediments that came along during the pandemic and the Supply Chain Crisis. And relative to connectivity, and I'm going to sort of put a little stab on what your implication is there. I mean, communications, the Internet, the ability to stay in touch with people, that has clearly been a dramatic shift in this pandemic. And we look at our position in our communications markets and the phenomenal growth that we've had. And I mentioned the IT datacom market for us growing 70% during that time period, but also mobile devices grew by nearly 25% over those same 3 years.

Speaker 3

And that's just a reflection of this kind of now insatiable demand for people to have a multitude of ways of Communicating and connecting with each other and that's something as we seek to sort of enable the electronics revolution, that's the phrase I always use, there's no doubt about it that we're living in revolutionary times and that creates a real structural and long term opportunity for Amphenol.

Operator

Thank you. Our next question is from Wamsi Mohan with Bank of America. You may go ahead.

Speaker 5

Thank you. Hey, Adam, not withstanding the comments you made on ITDatacom earlier that might also apply to mobile devices. You specifically called out mobile device kind of mean reverting from abnormal COVID driven levels. So does that imply we should expect So sub seasonal growth for 2023 and more broadly is visibility maybe ex mobile devices beginning to improve at all in your markets?

Speaker 3

Thanks very much, Wamsi. I am not going to get out in front of my skis on trying to give an estimate of what mobile device What mobile device demand is going to look like this year? You know well I'm bad at guiding it even for the 70 or so days that we try to give guidance in a quarter, let alone to make some estimate of what it's going to look like in the course of the year, it's hard for me to do that. What I do know is there's a lot of new devices. They're wonderful.

Speaker 3

I'm addicted to mine, and we have a strong position. And so I don't take a position otherwise on whether Mobile Devices is going to have a worse or better performance seasonally going through the rest of this year. I mean, we tried to give some guidance here in the Q1. We'll see what happens there and then we'll try to give some guidance on the Q2 90 days from now. Relative to visibility in general, look, it's still a fairly uncertain world.

Speaker 3

And so I don't know that there is a dramatic improvement in visibility. I mean, we're not giving full year guidance. We don't think it's prudent at this time, because there is still a lot of dynamism, a lot of uncertainty in the world today, and So we'll see. I mean, I certainly hope that as we pass the 3 year mark on the anniversary, I think it's actually 3 years from day after tomorrow that Wuhan was shut down. I remember it very, very well.

Speaker 3

And that you hope that after 3 years, it renormalizes. There's a saying in Chinese that a pandemic doesn't last more than 3 years. That's a famous old saying that's, I think, a very Old saying in Chinese and hopefully that is really the case and there can be a little bit more normalization. But no, I think there's still a lot of uncertainty in the world today.

Operator

Thank you. Our next question is from David Kelley with Jefferies. You may go ahead.

Speaker 8

Hey, good afternoon, Adam and Craig. Maybe a question on the input cost environment. We've seen certain commodities pull back in certain areas, energy and labor costs remain elevated and then maybe pricing pass throughs might get tougher in 2023. But if we take a step back, can you just talk about the Amphenol cost opportunities in 2023?

Speaker 1

Yes. Thank you, David, and good afternoon as well. I think that certainly the cost environment is in some ways a little bit different than it Probably was as we kind of entered the year here, I think there are certain places where it has improved. There's other places honestly where it probably hasn't improved. But I mean Certainly on certain commodities, we've seen some level of relief in certain parts of the business without a doubt.

Speaker 1

But places like energy, places like the labor, certainly logistics has gotten a little better, but I would say energy and labor certainly very So it continues to be a headwind in many places. So I'd say on balance, it's probably has made some improvements from a commodity perspective. I think that What does that mean from a cost perspective in 2023? It's tough to tell or a margin perspective. I mean, there's no doubt that in a normal environment, you would some pricing headwinds from your customers and whether or not they will start in certain places to try to come back for pricing, we'll certainly we'll do our best to as we always do to as we add value to our customers to ensure that we're keeping that fair margin.

Speaker 1

But as costs come down, I would expect in some places for pricing to have some headwind. But I would expect that ultimately a balance to happen where we were able to protect our margins and continue to have strong margins. It really wouldn't I wouldn't think change from a profitability perspective, in a normal environment prior to the pandemic when inflation was kind of at a normal pace And the demand environment was normal. That's you did have that kind of normal balance. And I expect that ultimately over time, we'll see that again.

Speaker 1

And whether or not that happens in 2023 and that's a little bit too early to predict. But I think we are in a better place both in the price and the cost perspective than we certainly were a year ago.

Operator

Thank you. Our last question is from Michael Anastacio with Cowen. You may go ahead.

Speaker 8

Happy New Year. Thanks for taking my question. Could you just quantify the impact of price in 2022 overall? And if there's any Areas that were strong in particular and what are your expectations for the upcoming year?

Speaker 1

Yes. I was kind of saying before, I mean, certainly, we did have some pricing kind of momentum in 2022. Honestly, I couldn't even tell you what exactly the impact of price was on our top line. We don't fortunately, our systems aren't capable of even providing that information. I would say it's somewhere kind of in maybe low single digits, but it's a very difficult thing to even have to provide, so and honestly, it really wouldn't provide us with any help in regards to how we run our business.

Speaker 1

So it's not We're necessarily focused on, but certainly there was some pricing in 2022. We talked about that and without a doubt there was. I mean, again, as I mentioned before, in a normal environment, pricing would be, I would say, more of a headwind than a tailwind. In 2022, it was a slight tailwind, I would say and I know it's tough to say whether it will be in 2023 as the cost environment maybe levels off a bit. But ultimately, whatever it is, I know I'm really not so concerned.

Speaker 1

I think that the team has continued to do a great job of managing cost, managing price and

Operator

thank you. And there are no further questions. I'll turn the call back to Mr. Norwit for closing remarks.

Speaker 3

Well, thank you so much. And again, we'd like Craig and I would like to, on behalf of our entire team around the world, express our gratitude to each of you for the confidence you put in us and we wish you all the best and look forward to speaking with you just a short 90 days from now. Thank you everybody. Happy New Year again and stay safe.

Speaker 1

Thank you. Bye bye.

Operator

Thank you for attending today's conference and have a nice day.

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Earnings Conference Call
Amphenol Q4 2022
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