Hello, and welcome to the Fourth 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 introduce your conference host, Mr. Craig Lampo, 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 wish everyone a Happy New Year, and welcome you to our fourth quarter of 2023 conference call. Our fourth quarter and full year 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. 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 fourth quarter with sales of $3,327 million and record adjusted diluted EPS of $0.82. Fourth quarter sales were up 3% in U.S. dollars, 2% in local currencies and down 1% organically compared to the fourth quarter of 2022. Sequentially, sales were up 4% in U.S. dollars, 4% in local currencies and 2% organically. Adam will comment further on trends by market in a few minutes. For the full year of 2023, sales were $12,555,000,000 down 50 basis points in U.S. dollars, flat in local currencies and down 3% organically compared to 2022. Orders in the quarter were $3,164,000,000, up 10% compared to the fourth quarter of 2022 and flat sequentially, resulting in a book-to-bill ratio of 0.95:1. For the full year, orders were $12,267,000,000, down 5% compared to 2022, resulting in a book-to-bill of 0.98:1. GAAP operating income and operating margin was $690 million and 20.7%, respectively, in the fourth quarter of 2023 which increased 10 basis points compared to both the fourth quarter of 2022 and the third quarter of 2023. Adjusted operating income was $706 million, which excluded $16 million in acquisition-related…

Well, Craig, thank you very much and I'd like to extend my welcome to everybody on the phone here today. And I hope it's not too late to wish all of you a happy New Year here from Wallingford, Connecticut. As Craig mentioned, I'm going to highlight some of our achievements in the fourth quarter and also for the full year of 2023. I'll then discuss our trends and progress across our served markets. I'll make some comments on our outlook for the first quarter, and then, of course, we'll have time for questions. Our results in the fourth quarter were stronger than expected, exceeding the high end of our guidance in sales and adjusted diluted earnings per share. Sales grew by 3% in U.S. dollars, 2% in local currencies, reaching $3.327 billion. On an organic basis, our sales did decline by just 1%, with growth in commercial air, defense, automotive and IT Datacom markets offset by declines across our other end markets. The company booked $3.164 billion in orders in the fourth quarter. This was a 10% growth versus prior year and flat to last quarter, but did represent a book-to-bill of 0.98:1. We're very pleased to have delivered record adjusted operating margins of 21.2% in the quarter, a clear reflection of our team's outstanding execution and these margins increased 30 basis points from prior year and 40 basis points sequentially. Adjusted diluted EPS reached $0.82 in the quarter, representing a growth of 5% from prior year. I have to say that we were especially pleased that the company generated record operating and free cash flow of $842 million and $739 million, respectively, in the fourth quarter both just really clear reflections of the quality of the company's earnings. I come out of the fourth quarter, extremely proud of…

[Operator Instructions] The first call is to Amit Daryanani with Evercore. You may go ahead.

Thanks. Good afternoon everyone. One question for me would be, can you sense on the weakness on the industrial market space you talked about seeing softness there, a little bit of inventory sell, I'm curious, is that stable versus what you saw like do you feel like it's getting worse as you head into 2024? And then you can talk about it, do you see the [technical difficulty]

Yes, Amit, I didn't perfectly hear the second part of your question. There's a little bit of a connection issue. But I think relative to your question, which was, is industrial stable versus 90 days ago. I mean, look, I think we came into the quarter with an expectation of kind of a modest reduction in sales, our sales -- we're essentially in the line with that. So I think it was kind of what we expected it to be. I would say that the book-to-bill in industrial was a bit weaker. I mean, if we think about why our book-to-bill was 0.95:1. I mean, the real driver for that was industrial on 1 side. And we did see in the IT Datacom market a little bit of a softer book-to-bill. But that that is really just a little bit more of an equalization from very high books to build that we've seen over the prior couple of quarters. So I don't think the IT data come book-to-bill is at all representative of the demand environment. But I think -- in the industrial market, we did see bookings a little softer than we had anticipated. I'm going to assume that your second question is how do we see that going forward? And where do we see that kind of cycle in industrial. And I think it's early to tell. I mean the beauty of our industrial business is it so broad. And so we're not levered on to one or another of the individual segments. And you know there are so many segments across the industrial market that we participate in. And we don't have any of those that are really disproportionate to our overall business. And we continue to see some of those segments areas like marine and oil and gas, rail mass transit, medical during the course of this year. They still had very robust demand. But no doubt about it, areas like factory automation, instrumentation, those are areas where we've seen more market reductions in demand and also more impact from the distribution channel. When is that going to be worked out in the distribution channel, the inventory, when does some of that demand return in some of those segments. I think it's a little too early to tell. And as we go through the course of this year, we'll try to give you a really good read on that. I mean as we look into here now in the first quarter, as I said in my prepared remarks, we do anticipate in the first quarter, a kind of a modest level, but really supported by the acquisitions that we've made. And on an organic basis, we see the first quarter, again, modestly down from our current levels.

Next question comes from Asiya Merchant from Citigroup. You may go ahead.

Great. Hopefully, you can hear me clearly, and I don't have an echo, I will try. On IT Datacom market, if you guys on share some insight? Looks like this market is ramping up quite nicely for you guys. If you could elaborate a little bit on how you think about your wins in the AI segment and how you're able to ramp that into revenues going forward, especially given constraints on supply on the GPU side, how do you guys think you can ramp for AI for the remainder of the year? Thank you.

Yes. Well, thank you very much, and welcome to our call. I look forward to getting to meet you in person. We're really excited about the progress that the company has made in AI. And I just want to reflect on one aspect, which is that AI is not new to us. While the world over the course of the last year has sort of woken up to AI with the advent a year ago, November of ChatGPT and the sort of revolution of generative AI. Our team has been working on the interconnect architecture surrounding AI for a long, long time. And so it is only now that maybe there is this acceleration almost, you could call it even a kind of revolution or a goldrush around AI, but we've been building the capability, building the product capability, building the manufacturing capability and capacity to support that for a long time. And I think this year, one of the ways that we were able to maybe even get a disproportionate share of some of the more urgent demand was that we were very quick to flex our capacity in favor of customers who needed products and when they needed it. And I think our team has always showed the ability to have that agility in reacting to upticks of demand. And I think that this AI is no different. I'm really proud of our team and how they've done that. Looking forward, it's still too early to say, what does that, look like over the long-term. But there's no question in my mind that AI seems like something that is not such a small deal. It seems like something where there are real economics behind it, where large companies are making significant investments into AI and where ultimately our…

Our next caller comes from Luke Junk with Baird. You may go ahead.

Great. Thanks for taking the question. Adam, just hoping you could comment on pricing dynamics into 2024, especially in which parts of the portfolio might look at as more normal with respect to price downs this year versus areas of the business that could be a laggard in that respect? And then the related question would just be, how you're feeling about delivering productivity of your supply chain and your operations to offset any price downs you might face this year. Thanks Adam.

Hi Luke, its Craig. I'll take that one for Adam. I think as we think about pricing, 2023, certainly, we talked about the fact that we didn't necessarily -- we saw pricing coming back to normal. I mean, 2022 we talked a lot about pricing adjustments we are making to try to catch-up to inflation -- inflationary increases on costs that we saw. And I think that as we came into 2023, sequentially, we did a great job on the profitability, but that wasn't necessarily the pricing dynamics. That was more really just operational execution. And I think the pricing in 2023 and as we look into 2024 is, certainly a more normalized and that the price and cost environment is more balanced. I wouldn't say that the cost environment necessarily has decrease at all. I think there is certainly an elevated level of cost, but they're just not increasing at the pace that we saw a year ago. So from that perspective, I think the pricing environment is in more of a normal situation. And as we move into 2024, I don't necessarily think we're going to get necessarily the benefit of price. And historically, that's not something that we would see anyways. And typically, if you have a normal cost environment and normal price environment, I think you'll see kind of typical kind of margins and margin increases from a profitability perspective, we talk about 25% as being a typical target that we have in a normal environment. And I think as we move into 2024, I would expect that to be the case kind of sequentially as we move into it. So really happy with where we actually ended the year here at record operating levels. So we're really well positioned, I think, as we move into 2024. I mean if you look at our -- our margin improvements, I think that that's something that I'm really proud of the team to be able to actually execute so well during the year to get to these profitability levels. So, as we move into 2024, I expect that overall environment to be the same, and I certainly expect the team to be able to execute at a similar level.

Next question comes from Wamsi Mohan from Bank of America. You may go ahead.

Yes. Thank you. Adam, you called out the weakness in 2023 in the communication-related markets, but you did exceed your expectations in the fourth quarter. Do you see a greater than normal organic growth rate over the next two years in these markets given the historically easier compares here? And if you could also just talk about the environment in China, that would be really helpful? Thank you.

Well, thank you very much, Wamsi. Well, you're asking me to do a tough thing, which is to talk about the next two years, in a very volatile space, which is communication. I think that's hard to say what will be the overall growth across communications. I would tell you, we see great opportunities across each of those areas with different things going on because remember, communications, not just IT datacom, it includes mobile networks. It includes mobile devices and obviously, broadband and I think there's different stuff going on in each of those areas. If you talk just about IT datacom, which is the biggest part of our communications business, I mean there is no doubt that, as I mentioned earlier, these investments in AI, I think we're in early days on this. I think that there are going to be more and more developments around the real kind of creation of new economic models around AI and then the investments to support that. That's already been broadly talked about. You've heard folks talking about pretty significant investments in these next-generation systems. And again, the interconnect products are a really integral part of those systems. So, I think on that front, I'm not getting out too ahead of my skis to say that I think at least specific to AI in IT datacom, I would expect over the coming couple of years. to see some great opportunities. I don't know about the base of IT Datacom over the next two years. I couldn't -- I can barely give you a 90-day kind of a very inaccurate guidance for mobile devices. I think that on wireless, we're going through a cycle, which is a typical cycle where they invest in a new type of a standard they wait to see…

And our next caller is Samik Chatterjee with JPMorgan. You may go ahead.

Hi. Happy New Year, and thanks for taking my question. I guess, Adam, I wanted to see if you can share your thoughts around organic growth opportunities for the company in 2024 related to inorganic growth. You have a strong pipeline of revenue from the acquisitions you've closed that you're on boarding, maybe share your thoughts about how you think about the rest of the business growing, whether they are more positive related to negatives in 2024. And what is the average sort of growth average expected of the acquisitions that you closed more recently for 2024? Thank you.

Yes. Thank you very much. Again, there seems to be a little bit of a cut out of the sound there. But I think your question is, how do I see the organic growth prospects as opposed to just the acquisitions. And I think we feel good about the organic prospects of the company, given all what I talked about each of our individual markets, and I'm not going to go through each of them once again. But I will just tell you that the investments that we've made in next-generation technologies, the work that we've done to support customers when they need us the most over the last two, three, four years, has positioned us very, very strongly organically to have a strong, robust performance in the years to come. And the other thing I would say as well is we think about acquisitions and obviously, in the first year that you own a company that's considered acquired growth. But we're focused much more on what happens thereafter. And are we acquiring companies that become platforms of future organic growth for the company. And I would tell you, all these 10 companies that we acquired this year, the nearly 30 companies that we've acquired since 2019. To me, these companies all represent expanded platforms for future organic growth for the company which makes me feel confident that over time, we will have subject to all of the market dynamics that, for sure, we are not immune to that the company is positioned to have really great organic growth potential.

And our next caller is Andrew Buscaglia with BNP. You may go ahead.

Hi, guys. I just wanted to ask on IT datacom, again, with AI, the past couple of quarters, you called out sequential -- attributed sequential improvements to AI. What would you say the same thing took place in Q4? And then that plus your guidance, would you imply -- is this -- because we can't see that AI piece in that business. Would you say it's continuing to accelerate on a sequential basis?

Thank you very much, Andrew. Yes, I think what I said in my remarks is that we saw growth in AI, and we saw also growth in the underlying business. So I think over the last couple of quarters, I've described that are all of our upside, all of our sequential growth really did come from AI. I think that this quarter, it's some of each, which is actually really encouraging for us that we've seen maybe what 1 could call a bottoming of the underlying IT demand. Are we continuing to make progress in AI? Do we see continued acceleration opportunities? Yes, I wouldn't say that every quarter, it's going to accelerate in lockstep like it did over the course of Q2 and Q3 but for sure, we see opportunities long-term to be generating sales related to AI that are greater than we are today.

And our next caller is Mark Delaney with Goldman Sachs. You may go ahead.

Yes. Good afternoon. Thanks very much for taking my question and Happy New Year to all of you as well. Automotive has been a fast-growing market for the company. However, several auto OEMs have been seen EV sales and they said they're going to rethink how fast they want to shift their production towards EVs. And so I'm hoping to better understand if you think that will create any meaningful near to intermediate-term challenges for Amphenol that could limit the company's growth of market or perhaps lead to some inventory destocking? Thanks.

Well, thank you very much, Mark, and Happy New Year to you as well. Look, we read all the same papers, and we hear about the sort of discussions about slowdowns in EV sales. And I think we shouldn't forget that this is a fairly western dynamic. I don't think we hear, for example, in Asia and specifically in the largest car market in the world, China, about folks turning their back on EVs and going back to internal combustion engine. But we do hear a little bit about that, I think, here and in Europe. And as I've described, I mean, we don't care if a car has an EV drivetrain or not. What we care about, does a car have a lot of electronics in it and new electronic systems. Among those systems are certainly electrified drivetrains or hybrid electric drivetrains. And I think that what we've seen in Asia, what we've seen in Europe, what we've seen in North America is that there is a real acceleration of the adoption of electronics in cars period. And some of that may actually be related to the fact that EVs tend to be a little more fancy electronically. And I think car companies are seeing that and upgrading their standard companies to incorporate more electronic functionality. And whenever you have electronic functionality in a car, regardless of the drivetrain, you're going to have new interconnect solutions. You're going to have new sensor solutions. You're going to have new antenna solutions. And those are the three areas of our participation in the automotive market. For sure, if I go to like the largest EV market, China, for example, I mean, there continues to be unabated a real adoption. And I would almost say that EVs in that market have kind of reached a sort of escape velocity, where they're just really normal. I mean you see them all over the place. And I think our team there just did a fabulous job of getting a breadth of penetration across both domestic and international EV manufacturers, whereby we really are able to enjoy the benefits of that. And I think in Europe and in North America, we've done a great job, but we've also done a really great job on capitalizing upon some of these new electronics. And so, I wouldn't put any dynamic here in the category of something that we view as a real near or medium-term challenge. I think quite the contrary, as car companies struggle to figure out how they can sell their products and make more money from doing it, they're always going to fall back on electronics as the way to do that. And that's a good thing for Amphenol.

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

Great. Thanks. Adam, I'm hoping you can comment on the aperture for M&A and products within it. I think historically, you've talked about not wanting to acquire system-level solutions. And I think at least one of the acquisitions you've done recently has such products. And I wonder if that could potentially be something you'll grow into and expand or if we should see you perhaps shy way of that business going forward? Thank you.

Well, thank you so much. I think what you're alluding to is PCTEL and the fact that they have a very small test and measurement business and really wonderful people, wonderful products, but that's not why we bought PCTEL. And just -- you'll recall, we've acquired companies in the past, some of which are not purely the things that we were looking to acquire. And we're always very sensitive that we're never going to put ourselves in a competitive situation with our customers. And really PCTEL is known for their antenna technologies, which are fabulous. Not to say a bad word about their team that works in test and measurement, but we're not adopting a strategy to go after system-level products. In terms of our aperture for M&A, I mean we just see fabulous opportunities. I mentioned it in my prepared remarks. I think we have demonstrated an ability to acquire companies really across the board from a size perspective. We've demonstrated the ability to acquire a lot of companies and to process those effectively. And our small little headquarters team here, they may have been a little bit busier than normal over the last year with these 10 acquisitions. But the beauty is because of our organizational structure now having 14 groups across three global divisions, we have the wherewithal to make sure that those acquisitions get really their due attention when they become part of Amphenol. And I think the near-term pipeline remains a very robust pipeline, and we look forward to taking advantage of that. We will always remain a very disciplined buyer as we have forever. I am willing to walk away at the very last moment, if I have to, if something we find is not to our liking. We'll always pay a reasonable price,…

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

Thank you. I wanted to follow up on some of the earlier conversation on AI. So it sounds like book-to-bill for AI moderated sequentially, maybe after some early outsized orders just given the company's foundation in that market. So I guess the question is, do you think that this moderation is a single quarter phenomenon? Or would you expect that to persist for multiple quarters? Because it does seem like the top line is still continuing to grow sequentially? Thank you.

Thanks very much, Chris. Yes. I mean, look, I don't usually talk about book-to-bill by submarkets. But I will tell you that, for sure, I mean, we had very strong bookings in AI-related applications in Q2 and Q3. And so it's not surprising that here in Q4, our IT Datacom book-to-bill was a bit below zero and -- sorry, a bit below one and because of those significant orders that we received, which customers wanted to place because they need the product and then we're executing upon those orders. And yes, I think that our IT Datacom business is in a good position looking forward. I mean our guidance for the first quarter is to have a little moderation, which is not abnormal this time of year, actually quite normal. Let me say that. And layered on top of that, I think the AI is a good thing to have. So no, I think you characterized it quite well.

Our next call is Joseph Giordano with TD Cowen. You may go ahead.

Hi, guys. This is Michael on for Joe. So earlier, you had mentioned commentary regarding orders and specific markets. Can you just provide like a high level, maybe book-to-bill on a consolidated basis for the quarter? Or any color there?

About earlier that our book-to-bill was 0.95:1 for the quarter. Operator do we have another question.

Our next caller is Steven Fox with Fox Advisors. You may go ahead.

Hi, good afternoon. I guess broadly speaking, the latest round of acquisitions were around sensors, antennas and assemblies I was just curious, like, Adam, your updated thoughts on your M&A focus by technology, especially in the context of what looks like gross margins that are now at the 33% level. I guess some of these products have lower gross margins, some have higher. I don't know if there's a mix impact that's influencing the gross margin now with the M&A. But just broadly speaking, when you -- the general buckets of technology that you look at, what is your thinking of what you've done and where you need to go now? Thanks.

Well, thanks very much, Steve. Yes. I mean, look, in the quarter, we acquired companies who make sensors, antennas, cable and cable assemblies and really high-technology cable actually that has really great value for its customers. And we continue to see acquisition opportunities across really all of our interconnect products from discrete connectors to cable assembly, value-add, complex value-add interconnect products sensors, complex sensor interconnect assemblies, antennas and the like. And we're really pleased to continue to find companies across all of those products. I wouldn't tell you that we think so much about gross margin by product. We see great margin opportunities as you know. And Craig has said it so many times, we're very much focused on operating margins. And yes, I mean, some of these companies do operate below our corporate average, not all of them, by the way, but some of them do. And I think we -- that doesn't relate at all to their product type. We don't believe that there is a correlation between whether someone makes a connector, a sensor and antenna a cable or a cable assembly that, that is necessarily going to put them in a certain bucket of profit potential. We actually see great profit potential for all companies. And that's one of the ways we screen for acquisitions. I mean we're not going to buy a company if we don't see the long-term potential for that company to elevate its profitability to at or above our corporate average. Now, we do have industry-leading margins and so most of the companies that we do acquire tend to be lower than we are. And then it's our job and their job becoming part of the Amphenol family to bring those margins up over time. But it's really not at all correlated to the type of products that they sell.

And our last question comes from Matt Sheerin with Stifel. You may go ahead.

Yes. Thank you. Good afternoon. Adam, in your commentary on mobile devices, you mentioned that tablets and notebook PCs continue to be weak. But we are hearing some chatter about expectations for a potential refresh PC refresh cycle playing out in the next year or two. So wondering if you have any visibility into that? And can you give us a sense of the content opportunity for Amphenol within notebooks, particularly in the next-generation so-called AI-enabled PCs?

Great. Thanks so much, Matt. Look, I hope what you say is the case. We certainly hope that there is a refresh. Look, I think we've talked about this year and even a little bit last year, that the strength that we've seen in phones this year, which was more than offset, in particular, by things like laptops and tablets. It had to do with the clear fact that during the pandemic and when everybody went to work from home and study from home, there was an enormous rush to buy new devices, which caused a surge and really kind of upset the normal replacement cycle of those products. And so I guess that one could expect that if everybody bought a bunch of stuff in 2020 and 2021 and if those things tend to last three, four, five years, that eventually you would hope to see a little bit of a refresh. I don't know -- I can't tell you I have any information to support that. I'm sure you're getting your information from even wiser sources than I would have. Relative to the content, we do see great content opportunities in these devices as they get more complex, as they get more different wireless standards that they have to support as they have higher speeds, as they have more fine pitch and more precision inside of them, all of these create opportunities for Amphenol long term. We've always said about the mobile device market, and that includes tablets and laptops and the like, that to the extent that there is a premium on the hardware of the product, that can create opportunities for Amphenol over the long-term. And I think that will. Whether that's related to AI or not, that I can't necessarily connect those dots, but for sure, people are going to need new devices in the future, and we'll be happy to enable the interconnect products across those devices. Well, operator, if that was our last question, I guess I'd like to take this opportunity to thank everybody here today for spending a little bit of your time with us. I wish that you all have a good continuation of your winter wherever you may be. And we look forward to talking to all of you just 90 days from now. Thanks so much.

Thanks, everybody.

And this concludes today's conference. Thank you for participating. You may disconnect at this time, and have a great rest of your day.