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 turn – introduce today's conference host, Mr. Craig Lampo. Sir, you may begin.

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 2023 conference call. Our first quarter 2023 results were released this morning. I will provide some financial commentary, and then Adam will give an overview of the business and current trends, and then we will take questions. As a reminder, during the call, we may refer to certain non-GAAP financial measures and make certain forward-looking statements. So please refer to the relevant disclosures in our press release for further information. The company closed the first quarter with sales of $2.974 billion and GAAP and adjusted diluted EPS of $0.71 and $0.69, respectively. First quarter sales were up 1% in U.S. dollars and organically and up 3% in local currencies compared to the first quarter of 2022. Sequentially, sales were down by 8% in U.S. dollars, 9% in local currencies and 10% organically. Adam will comment further on trends by market in a few minutes. Orders in the quarter were $2.896 billion, which was down 16% compared to the first quarter of 2022 and flat sequentially, resulting in a book-to-bill ratio of 0.97 to 1. The lower book-to-bill was driven by lower bookings in the communications related markets, which continue to experience a decline in demand. GAAP and adjusted operating income were $592 million and $597 million, respectively, in the first quarter of 2023. GAAP and adjusted operating margins were 19.9% and 20.1%, respectively, in the first quarter. On a GAAP basis, operating margin decreased by 10 basis points compared to the first quarter of 2022 and decreased by 70 basis points sequentially, and GAAP operating margins for the first quarter included $5 billion of acquisition-related costs. On an…

Well, Craig, thank you very much, and allow me to extend my welcome to all of you on the phone here today. And I hope you all are all enjoying a lovely spring so far. As Craig mentioned, I'm going to highlight some of our achievements here in the first quarter. I'll then discuss our trends and progress across our served markets, and then make some comments on our outlook for the second quarter. And then, of course, we'll have time for some questions at the end. With respect to the first quarter, our results were stronger than expected, exceeding the high end of guidance in sales and adjusted diluted earnings per share. Our sales grew from prior year by 1% in U.S. dollars and 3% in local currency, reaching $2.974 billion. On an organic basis, our sales increased by 1%, with growth in commercial air, broadband, military, automotive and industrial markets, largely offset by declines in the IT datacom, mobile networks and mobile devices markets. The company booked just under $2.9 billion in orders in the quarter, representing a book-to-bill of 0.97:1. Our operating margins, adjusted operating margins in the quarter reached 20.1%, and that was a 10 basis point increase from last year's levels. As Craig just mentioned, we achieved a still very robust level of profitability despite the ongoing cost challenges around the world, as well as declining volumes in many of our communications markets, and this is just an excellent reflection of the strength of our company's execution in these very dynamic times. Adjusted diluted EPS grew 3% from prior year to $0.69, and we generated strong operating cash flow of $532 million and $436 million, respectively, in the quarter, all clear demonstrations of the high quality of Amphenol's earnings. I'm just extremely proud of our…

Thank you. The question-and-answer period will now begin. Please limit to one question per caller. Our first question comes from Amit Daryanani with Evercore. You may go ahead.

Yes. Thanks a lot. Good afternoon, everyone. Adam, I hope you could expand a bit more on the communication segment softness that you’re seeing. I think we’ve talked about the IT datacom softness for a few quarters, now it sounds like maybe it’s incrementally there on the mobile network side as well. Would love to get your perspective if you think this is more demand driven or inventory driven issue, and then from your vantage point, what do you think is the duration of this softness of correction as you go forward? Thank you.

Well, thanks very much, Amit. And for sure, I mean, our team working in the communications market has been wrestling with quite some vacillations in demand. And if you just look back over the prior couple of years, we had just fabulous, fabulous growth in all the communications market, in particular in IT datacom, but we also had strong growth in mobile networks and decent growth in the mobile devices. And I think what we’ve seen as we came into the end of last year and certainly coming into this quarter that in particular in the IT datacom market, there is a significant – there was a significant degree of overbuying of components. Not because we had disappointed our customers, quite the contrary. We were constantly coming to the rescue of our customers over the course of their boom and demand with the agility that they’ve come to expect from Amphenol. But regardless, they seem to have opened their aperture of procurement across virtually everything that they buy in light of the supply chain crisis. And that included building up inventory of our products certainly, which we saw with hindsight. Relative to the mobile networks market, I’d say this is not as much an inventory issue as it is the dynamics of service provider spending. And I think it’s kind of well reported the ups and downs of the various service providers and their capital plans. And I think what we’ve seen in particular in mobile networks as we’ve seen the early stages of operators building out their 5G networks and we benefited no doubt about it from that build-out with the long-term efforts that we put in to build our position across those next generation systems. And sometimes what you see is initial build-outs and then they digest it…

And our next question comes from Wamsi Mohan with Bank of America. You may go ahead.

Yes, thank you. Adam, curious as to why you think this weakness is contained within communications. I mean, you are so diversified even within communications, radio, consumer exposure and mobile. You have enterprise and cloud exposure and IT datacom, carrier exposure and mobile networks. Given that, like why is this – it sounds like it’s a very broad macro kind of slowdown. Is this just more early cycle given some of the inventory things that you noted and we should expect some moderation even in industrial and auto and other areas as we go through the course of the year. Is that the right way to think about it? And if I could, would love to get your perspective on trends in China as well I’m not sure if you had a chance to get over there, but you typically do. And now that it’s opened up if you have or even if you’re not, it would be great to get some perspective on what you’re seeing on the ground in China. Thank you.

Yes. Thanks very much, Wamsi. Look, I don’t think that the communications markets and the dynamics that I just discussed, which are quite unique in each of them. We’re talking about one dynamic in IT datacom and different in mobile networks, a different again in devices, and yet again in broadband. I wouldn’t say that that is an indicative or leading indicator for a broad economic situation. Quite contrary, we’ve given guidance for next quarter for all of our markets. And I don’t think that that guidance reflects a kind of a broad economic slowdown, quite the contrary. Relative to China, I mean, I’m glad you asked the question. It was just early last month when China changed its visa policies and as soon as the news came out that visas were reenacted literally that day we booked our flights and Craig and I were in China at the very first day of April, and what a pleasure it was. I can’t tell you to be three years away from our team in China who just did such a phenomenal, phenomenal job over these three very challenging years. In particular, over last year, which was particularly challenging in certain places, including in Shanghai. I tell you, I had the opportunity to meet some of our factory workers who went into a bubble in Shanghai for more than six weeks in one case. And just to be able to see them and to be honest, to like hug them and thank them for all what they did on behalf of the company during that time period was just a tremendous, tremendous satisfaction for me. Not to mention Craig and I, somehow we didn’t gain weight with all the food that we ate over that week of visiting 21 of our operations…

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

Hi thanks for taking my question. Adam, just wanted to see if I can get some of your thoughts about how you’re thinking sort of for the second half of the year with the guidance that you have for 2Q, the first half, you’re going to be down a bit year-over-year. But the orders have now stabilized. Is that giving you a bit more visibility into the opportunities for growth or the opportunity for the aggregate company to grow in the second half or maybe even for the full year, any thoughts there? Thank you.

Yes. Thank you very much, Samik. Look, I mean, we’re not giving full year guidance because it does remain a very volatile environment. And so as much as I would love to sort of get out ahead of my skis and tell you that the second half is going to give growth or not give growth, I’m going to refrain from doing that here today. But I can tell you this that the company remains strong. The base of our strength with customers, the financial condition of the company, I mean just look at the margins that we were able to secure in the first quarter despite real volatility that we saw in our communications market. And Craig mentioned that very specifically. I mean it’s just another testament to the underlying strength of the company. So to the extent that in the second half, customers want more product from us, for sure, we’re going to support them with that. But I think today, sitting here just on the 26th of April, it’s premature given how dynamic it is for me to give a sense of what Q3 and Q4 and, ultimately, the full year is going to bring. You can bet our team has high aspirations, but we’re also realistic to the environment that’s in front of us, and we’re going to manage through whatever comes our way.

And our next question is from Steven Fox with Fox Advisors. You may go ahead.

Hi good afternoon. Adam, I was just looking back at your earnings track record for the long period of time. If I take out the COVID period, the early COVID period, you’re experiencing a down year of earnings for the first time since 2009. And I was just curious what you think about this cycle relative to prior cycles where your earnings are down, and what steps you’re going to take to maybe sort of mute that earnings decline in coming quarters? Thank you.

Yes. Well, thanks so much, Steve. I mean, look, we’ll see how the year goes. As I just said to Samik, I have no idea, and certainly, I’m not going to talk about what the full year earnings will be. But what I did say just now, I think really resonates when you bring up 2009. Because -- whether it was 2009 or even 2001, and you’re probably one of the few people on the call who’s been closely associated and following us since that time, and I certainly have been in the company for that time or longer, the way that Amphenolians manage through dynamics is to just face it up. We don’t kind of punt it. We don’t say, "Well, the good times are going to come," or, "let’s wait another quarter, let’s wait a third quarter and then we have to play catch-up and get behind kind of the curve of the cost." Rather, we see what orders we have, we see what our customers want. And if we have too few or too many resources, we make adjustments rapidly. And that gets reflected then in the profitability of the company. And as you know very well, what distinguished our company, whether it was in 2009, 2001 or in that sort of COVID environment of early in 2020 was from peak to trough, our margins declined just 300 basis points during very, very significant downturns in demand. Now we are certainly not with our guidance in the second quarter, guiding to such kind of cataclysm as we all saw in 2009. But at the same time, it’s a dynamic world. And so our playbook hasn’t changed whatsoever. Even if the size of the company is significantly bigger than it was in 2009 and categorically bigger than it was in 2001, our sort of modus operandi is the same that culture of entrepreneurship, which is, today, represented across 130 general managers, and maybe in 2009, it was like 50 and in 2001, it was like 20, it’s still the same way to deal with it. These GMs are out with customers every day. They’re listening to them. They’re immediately coming back, reacting in real time to adjust resources accordingly. And then once -- if you have less orders, less demand, you take out cost, but then you go out and you take market share. And that’s the approach of Amphenol. It has been my entire 25 years in this company, and it will be for as long as I can secure that. So who knows what it’s going to be this year. We certainly don’t aspire to have a reduction in our EPS. But if demand is softer than it was last year, we’ll manage through it.

Hey, Steve, this is Craig. And I think I just would add just one thing to that. I think that if you look in the first quarter results, and we’ve said this a couple times. But if you look at the first quarter results and you take into account that we have three or four markets that are reducing sequentially by double digits. You really just see that resiliency from a margin perspective and the ability for the company to kind of react to those kind of reductions. I mean, the mobile devices market is certainly normally used to having kind of reductions like that. But places like IT, data, mobile networks, broadband, these are not markets that typically have that type of volatility from a quarter-to-quarter basis. And I think that you really as that kind of shows through just in the results for the first quarter. And as Adam said, I don’t think that would be any different in the future. But the bottom line is we’re driving for continued growth and we will react to demand reductions where that may be.

Our next question is from Luke Junk with Baird. You may go ahead.

Yes. Thank you for taking the question. Adam, hoping you could just comment on the focus areas specifically for the IT datacom group right now, as the market goes through this consolidation period, is the fact that you’re able to catch your breath after what you already referenced today as a very busy multi-year period. In some respects, is that actually a positive relative to the longer-term positioning of the business? I guess, if I look at the margin side, 27% decremental margins for communication solutions could have been worse. And then on the demand side, looks like there’s some interesting AI related opportunities that are emerging on the horizon. If you could speak to both those things? Thank you.

Luke, well, thank you very much. I’m glad you emphasize this. I mean, this 27% downside conversion margin for an organization that is already making pretty robust margins is really phenomenal. And by any measure, it’s a reflection of that quick reactivity that I was discussing earlier. Luke, I would be lying if I told you our folks working in that market are happy to have a little bit of a downturn to kind of to use your phrase, catch their breath. Nobody likes dealing with this. But we do it. It is what it is. Like it’s – we don’t sort of punt reality. It just is what it is. At the same time though, what’s interesting is while we’re making sure that the financial strength of the company is stays as robust as it did, and again, the 27% convergent margin that you mentioned is a great indicator of that. We are working on an extraordinary array of next generation technologies. Just because customers have some extra inventory doesn’t mean they don’t have an enormous amount of next generation things that they’re trying to achieve. And you mentioned, and I think I alluded to, AI as one of those, I mean, these are the kind of revolutions that drive kind of quantum leaps in the demands of our customers for processor power, for speed as it relates to data transmission and networking, all of which creates demands on the equipment for next generation high speed interconnect for the fiber optics and for the high efficiency power interconnect that’s so important to sustaining the operating expenses and let alone the carbon footprint of these massive processors that are going into these enormous data centers. And so we haven’t slowed down at all as it relates to developing and designing next generation products together with our customers. And you could actually argue that in certain cases we’ve had to accelerate those efforts as customers have gotten into competitive situations with others on things like AI, machine learning and alike. And that’s the kind of carrying water on both shoulders that is an Amphenol in trait as well. It’s not something necessarily. I emphasize so much. But we talk a lot in the company about driving with one foot on the gas, one on the brake, carrying water on both shoulders. Sometimes you got to go out and cut costs at the very same time as you’re ramping up engineering support for next generation systems. And being able to do that, having the mindset and the agility to do that is I think a very unique trait that is resident inside our organization. And that includes within all of those working across IT datacom.

And our next question is from Chris Snyder with UBS. You may go ahead.

Thank you. I wanted to ask on IT datacom, obviously that’s been a segment that’s been I guess the most impacted so far by inventory digestion. I think in Q1 you guys said it was down about 17% sequentially. And if I heard it right, it sounds like the subsegment is going to be actually be flat sequentially in Q2. And I know there’s seasonality involved, but does that indicate that subsegment is moving past maybe the bulk of some of the inventory, digestion headwinds that have impacted the segment over the last three, four quarters now? Thank you.

Thanks. Thanks, Chris. Look, I’ve talked a lot about IT datacom, but to the specific of your question, I mean, I don’t know what the second half is going to bring. I certainly hope that Q2 and the fact that we see sales to be flat is an indication that we've kind of reached a kind of a little bit more of an equilibrium. 90 days from now, I hope to be able to give you a better sense of that as it relates to the second half. But it's certainly a better indication than if we had seen another leg down on a sequential basis. So we'll see what the second half brings. Again, the fact that it's flat in the second quarter gives me some hope, but 90 days from now we'll try to give you a little more certainty about that.

Our next question is from William Stein with Truist Securities. You may go ahead.

Great. Thank you for taking my question. I'd like to just linger on these relatively weaker end markets for a moment, just to get slightly more clarity. And the weakness in comms, in general are you seeing that more pronounced in any particular geography? And within IT datacom specifically, is that more hyperscalers where you're seeing the weakness? Or is it more broad-based across all sizes and shapes of customers? Thanks.

Thanks very much, Will. I wouldn't point out any significant geographical distinction across the communications markets. I mean remember that a lot of these communications products they do get that – a lot of them still get made in Asia, especially on the device side and a good portion of the – at least the OEM products of the IT datacom. So you can imagine that in Asia, that's having a worse situation overall for the company. And sure enough in Asia, our – we did not have as robust performance in the quarter as we did in North America and Europe overall and that's driven a lot by that. But otherwise, I wouldn't say that there's any sort of end customer geographic changes here. Relative to hyperscale versus the equipment manufacturers, again, I don't think there's a real distinction because ultimately the hyperscale people are also customers for the equipment manufacturers in many cases. And I think that that overall inventory position is fairly broad across both areas of that market.

Our next question comes from Mark Delaney with Goldman Sachs. You may go ahead.

Yes. Good afternoon. Thanks for taking the question. I was hoping to touch a little bit more on supply chain and what it might mean for your own free cash flow generation. Given demand softer, do you think supply chain stabilizing enough that perhaps you can take inventory down and lead to better free cash flow here?

Yes. Thanks Mark. Yes, I mean, in Q1 we actually had good cash flow, I mean 100% essentially of our yield on for the first quarter, which for the first quarter actually is probably better than average. But given that, I do recognize that our inventory was even a little bit higher than we would typically wanted to see here in the first quarter from a day's perspective. And the team is – there's many reasons for that. I mean we had certainly a very strong 2022. We had supply chain issues throughout the majority of the year of 2022. And I think that as we came into the first quarter, where days typically get higher. Normally, there certainly is kind of a lag effect or a hangover effect from a supply chain perspective as well. And I do believe that the team certainly will have some impact on that over the coming quarters, and we should see some improvement from a day's perspective on inventory, which just naturally will help from a cash flow. But I think our target cash flow continues to be 100%, or 90% to 100% kind of from a free cash flow perspective. And I think that certainly, that should be achievable here and for the full year, and there may be a quarter or two where we're actually a little higher than that as we kind of bring inventory a bit down.

And our last question today comes from Guy Hardwick with Credit Suisse. You may go ahead.

Hi, good afternoon.

Hi, Guy.

Could you expand a little bit on the industrial segment, which is now by far away your largest segment, I think you had 28% of sales. I know factory automation is probably the largest end market within that, but can you give us a little bit more color on trends within industrial, whether it's medical or energy?

Yes. Well, thanks very much, Guy. I mean the fact is as industrial is at least this quarter our largest segment, it was 28% of our sales. At the same time, industrial is far and away our most diversified market. I mean there's really not a correlation amongst the various segments within Industrial, except that they all represent harsh environments where our customers are trying to push new electronics deeper and deeper into some of the harshest of environments to an offshore wind mill, into a semiconductor factory, into an operating theater, onto a train going 400 kilometers an hour and everything in between. In terms of the segments, I wouldn't say that necessarily factory automation is the largest. It's a significant segment, but we have strong sales in the areas like heavy equipment and medical, instrumentation, which includes things like semiconductor manufacturing into electric vehicles, heavy electric vehicles and battery. All times of – types of energy generation and that includes both alternative energy, but also traditional energy extraction and generation, rail mass, transit, things like marine and entertainment? I mean, and you can tell these are not markets that correlate with one another. So if we're going to have one of our markets be a little bit bigger than the others, and in this case, still just 28% of sales, this would be the one that you'd want to have that. And we're just really excited by the progress that we've made in our industrial market over a very long time period. If I go back to 20 years ago, I mean this was a relatively small business that we didn't really have a close touch with where it went. It all went through distribution. And we had just fabulous leadership in our industrial business over that time who really drove a very much an application and segment-based approach to developing new products, application-specific, technology-specific products. At the same time, as we made a number of great acquisitions over many years, and we continue to make great acquisitions across the industrial market that have ultimately positioned us for this just multitude of revolutions going on as electronics gets pushed deeper and deeper into harsher and harsher environments. And so it's not just one or another piece of that, and we're just really excited about the ongoing strength of our industrial market, which has just been a fabulous asset for the company for many years, and I believe will remain so for many years to come.

We do have one additional question from Michael Anastasiou with TD Cowen. You may go ahead.

Good afternoon guys. Thanks for taking my question. Looking at the capital deployment side, you had a couple deals announced at the beginning of the year. Can you just describe how CRM and RFS into the overall strategy? And on the broader front, what end markets or adjacencies, do you see the most opportunity inorganically for the year? Thank you.

Thank you very much, Michael. Well, CMR, as we announced, we closed earlier in the year, and that's a fabulous company making harsh environment, value-add interconnect products that go into the industrial market, in particular, in heavy equipment. RFS, we announced that we signed the acquisition, but we have not yet closed it. We – as we said last quarter, we expect to close by the end of the second quarter, and we don't change what we say about that. And RFS really expands our position in the mobile networks market with really high-technology antennas and fiber optic solutions that go into next-generation mobile networks. And we're, again, very excited about that company, and our team continues to work closely with the RFS team as we get closer to bring them into the Amphenol family. In terms of our pipeline of acquisitions and where we see the future, we don't pick and choose our markets and say, well, that's the market where we want to make acquisitions or, that's the market where we don't want to make acquisitions. And the reason for that is when we make an acquisition, we're getting married forever. We're not a trader where we buy companies and sell them and buy and sell and kind of do this portfolio management. We look for companies with great people, with outstanding enabling technologies and robust and complementary market positions across all of our end markets. And in our experience, which stretches over, in my career, more than 75 acquisitions, and I think more than 50 since I've been CEO in these 15 years nearly, that – having that very simple approach leads to really outstanding long-term success and a great return on our capital that we deploy towards the M&A program. Our acquisition pipeline remains very robust today. I remain wholly incapable of predicting when we will close and if we will close certain deals. But I know that long-term, the program is going to continue to support really great growth for the company and a great use of the capital and the cash that we generate so much of. And so we look very much forward to continuing our M&A program, and it really complements the culture of the company as well because every time we bring in one of these new entrepreneurs, it actually strengthens the entrepreneurial culture of Amphenol. And that's something that I look very much forward to as well.

And Michael, just to clarify, just to avoid any confusion, RFS, since we have not closed on it yet, is not included in our guidance and it wouldn't be included in guidance until we close.

Well, very good. I think we have no further questions, operator. And so if that's the case, I would like to take this opportunity to wish all of you a wonderful continuation of your spring and we look forward to talking to you all just 90 days from now. Thank you so much, and best wishes to you all.

Thanks, everybody.

And thank you for attending today's conference, and have a great day.