Amphenol Corporation held a Second Quarter Earnings Conference Call, hosted by CFO Craig Lampo and CEO Adam Norwitt. The company reported sales of $3,054 million and GAAP and adjusted diluted EPS of $0.74 and $0.72 respectively. Orders for the quarter were $3,044 million, resulting in a book-to-bill ratio of 1:1. GAAP operating income was $620 million, including $4 million of acquisition-related costs. Excluding these costs, adjusted operating income was $624 million.

In the second quarter of 2023, GAAP and adjusted operating margins were 20.3% and 20.4%, respectively, which decreased year-over-year but increased sequentially. This was attributed to lower sales volumes and dilutive acquisitions, but was partially offset by strong conversion on higher sales levels. The company closed on the acquisition of RFS, which resulted in a noncash gain of $5 million. In the third quarter, restructuring costs associated with RFS are expected to be in the range of $5 million to $10 million. The Harsh Environment Solutions segment saw a 12% increase in U.S. dollars and 9% organically, with a segment operating margin of 27%, while the Communications Solutions segment saw a 16% decrease in U.S. dollars and organically, with a segment operating margin of 20.5%.

In the second quarter of 2023, sales in Interconnect and Sensor Systems segment increased by 4% in U.S. dollars and 1% organically and segment operating margin was 18.5%. GAAP diluted EPS decreased 3% to $0.74, and on an adjusted basis, diluted EPS decreased 4% to $0.72. Operating cash flow was $536 million or 120% of adjusted net income, and net of capital spending, free cash flow was $442 million or nearly 100% of adjusted net income. The company repurchased 2 million shares of common stock at an average price of approximately $77 and total debt on June 30th was $4.3 billion and net debt was $2.8 billion. Total liquidity at the end of the quarter was $4.8 billion. Second quarter 2023 EBITDA was $736 million and at the end of the second quarter, net leverage ratio was 0.9 times.

Adam Norwitt welcomed all the participants on the call and discussed the second quarter results, which exceeded expectations. Sales declined 3% in U.S. dollars and 2% in local currency, while orders booked in the quarter were $3.44 billion. Margins for the quarter improved by 30 basis points from the previous quarter and adjusted diluted EPS was $0.72, a 4% decline from the prior year.

Amphenol closed the acquisition of the North American cable and global base station antenna business of RFS and the acquisition of EBY Electro, which is based in the US and has annual sales of $15 million. The acquisition is expected to generate roughly $30 million of sales in the second half of 2023 and will expand Amphenol's offering of high technology interconnect products into the diversified industrial market. Amphenol's end market diversification continues to create great value for the company.

In the second quarter, the military market represented 12% of sales and grew by 21% in U.S. dollars and 19% organically, while the commercial aerospace market represented 4% of sales and grew by 40% in U.S. dollars and organically. Sales in both markets increased sequentially, with the commercial air business reaching its highest ever level of quarterly sales. For the third quarter, sales in both markets are expected to remain at robust levels, though the commercial air market is expected to moderate slightly. Amphenol is investing in expanding capacity to meet increased demand for its high technology interconnect products.

The industrial market accounted for 26% of sales in the quarter, but sales declined 3% sequentially due to slowing demand from certain customers. The automotive market accounted for 23% of sales and grew 9% in U.S. dollars and 11% organically. Despite this positive demand, the company is confident that their strategy to expand their high technology interconnect antenna and sensor offering will position them to capitalize on the many revolutions occurring across the industrial electronics market.

Amphenol experienced broad-based strength across automotive applications in the second quarter, with sales increasing by 7% from the first quarter. They anticipate sales to remain at the same level for the third quarter. The mobile device market saw a 8% decline in U.S. dollars and 6% organically in the second quarter, but they expect a mid-teens increase in the third quarter. The mobile networks market represented 4% of their sales in the quarter. Amphenol's team is well-positioned to capture any opportunities for incremental sales in the second half of 2023.

Amphenol experienced a decline in sales of 24% in U.S. dollars and 32% organically in the second quarter due to decreased spending by network operators and wireless equipment manufacturers. However, sales increased 6% sequentially and were better than expected. Third quarter sales are expected to remain at similar levels or increase modestly. The IT datacom market represented 18% of sales in the quarter and saw a 24% decline in U.S. dollars and organically from prior year, but was better than expected. Demand for AI-related applications was robust, indicating the success of Amphenol's positioning as a leader in interconnect systems for AI.

Amphenol is encouraged by its position in the broadband market, despite a mid-single-digit sequential decline in sales for the third quarter due to operators moderating their spending. Amphenol is confident in the future of the market due to government funded initiatives and expects sales in the range of $3.040 billion to $3.100 billion and adjusted diluted EPS in the range of $0.72 to $0.74 for the third quarter.

Adam Norwitt reported that Amphenol's overall sales are expected to decline 6-8%, and their adjusted diluted EPS to decline 8-10% compared to the third quarter of 2022. He is confident in the management team's ability to adapt to the current environment and grow their business. He also thanked the Amphenol team for their hard work in the second quarter. Finally, he did not provide quantitative information on the materiality of AI to Amphenol, but noted that it was a factor in their 6% sequential growth in the second quarter.

Amphenol has a strong leadership position in the industry when it comes to interconnects for AI systems, which require high speed, low latency, and power-efficient interconnects. The company has seen strong bookings in the IT datacom market, leading to a book-to-bill ratio of 1.1:1. While the potential of AI is still unknown, Amphenol is confident that it will be a significant dynamic for the company in the near-term and future.

Adam Norwitt discusses how Amphenol stands ready to react to customers in real time to make sure they can stay competitive. He also notes that the industrial segment has seen some inventory digestion by distributors, leading to a 7% organic decline in the second quarter.

The speaker notes that there is some softness in areas such as factory automation and instrumentation in terms of year-over-year CapEx, but that there is still long-term optimism for semiconductor equipment. They also mention that their position in industrial remains strong with growth in areas such as rail mass transit, alternative energy, oil and gas, and medical. They cannot predict how long the current cycle will last, but they will let investors know as soon as they have a better view.

Craig Lampo discussed the company's impressive profitability in the second quarter, with a sequential conversion rate of 35% and a year-over-year conversion rate of 30%. He attributed the profitability to the management team's agility in protecting the bottom line in the face of significant declines in the communications market. Gross margins were higher than in the recent past, and the company measures itself on operating margin, which takes into account all aspects of cost.

In the second quarter, the company's markets such as military and commercial air were very strong. The company is focused on making sure that their operating margins continue to drive good, robust leverage on higher sales, and their guidance implies strong conversion and leverage going into the third quarter. Pricing has helped a bit, but is relatively neutral at this point. The company is very happy with their overall margins and will continue to march forward.

Adam Norwitt does not have a good read on auto OEM inventory, whether it is overbuilt or being taken down. However, the company had a strong quarter in automotive, growing by 9% in U.S. dollars and 11% organically. This is due to the team's success in developing new products for new car applications, such as advanced safety, communication, and electrified drivetrains. There is explosive growth in the content of cars, with many new systems and applications being added.

Adam Norwitt explains that the company was expecting the market to be down in the mid-teens in the second quarter, but ended up achieving 3% growth sequentially, which was 20 points better than expected. This was largely due to stronger smartphone performance.

The company's guidance for the third quarter is 17% sequential growth, which is slightly lower than in past years. This is due to a robust expectation for sales into smartphones, offset by a more modest expectation for tablets and laptops. This is likely because of the surge in demand for these products due to the COVID-19 pandemic, which has caused a hangover in the overall demand for these devices. The company's position on smartphones remains strong and they expect mid-teens growth in the third quarter. The company does their best to give an outlook for the mobile device market, but they are still working hard to ensure growth.

Amphenol is doing well in the military aerospace market, with eight out of ten sub-segments growing in double digits in the last quarter. This is due to the investments countries are making in new defense technologies, which Amphenol is helping to ensure the freedom of the world.

Adam is proud of the 19% organic growth of the team in a difficult market. The products they manufacture are complex and require a lot of qualifications and standards. Nations are investing more in defense technologies, and the company is ready to support them. They are guiding to similar levels in the third quarter, and they are proud to help people stay free.

Adam Norwitt discussed the decline in factory automation sales, but believes it is only temporary and the long-term prognosis for factory automation is positive. He believes the adoption of electronic automation, robotics, and factory management systems is accelerating and will continue to do so due to labor shortages and labor strikes. Norwitt also believes AI is an opportunity for the company and has already had a meaningful revenue impact.

Adam Norwitt discussed the competitive landscape for high power, low latency data center applications and Amphenol's competitive positioning within that. Norwitt noted that these products are difficult to make and require decades of investment in engineering, testing, and validation, and that Amphenol is a world leader in high speed interconnect technology. Joe Giordano asked about the shift in Amphenol's auto region mix over the years, to which Norwitt responded that production is expected to be down 5% sequentially in the third quarter.

Adam Norwitt, CEO of the company for 15 years, explains that the company's auto business has changed significantly since he first became CEO 25 years ago, becoming more balanced between Europe, Asia, and North America. Last quarter, the company saw growth in all three regions, with Europe growing the strongest. The company has done a good job taking advantage of the electrification revolution, and is confident that it will be able to benefit from any changes in other regions.

Adam Norwitt discussed the growth of broadband in the past year, and the anticipated performance over the next few quarters. He also noted the importance of government funding initiatives like RDOF and BID to bring broadband to more rural areas, as access to the internet is increasingly essential for many activities.

Adam Norwitt thanked the participants for their time on the call and expressed his hope for them to enjoy some downtime over the summer. He also discussed the importance of government spending and private sector involvement in the broadband revolution and looked forward to speaking to them again in the fall.

This summary was generated with AI and may contain some inaccuracies.