Q4 2020 Amphenol Corp Earnings Call
Hello, and welcome to <unk> 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.
Anyone has any objections you may disconnect at this time.
I would now like to introduce today's conference host Mr. Craig Lampo, Sir you may begin.
Good afternoon, everyone. This is Craig Lampo, Amphenol, CFO and I'm here together with Adam Norway to our CEO, we would like to welcome you to our fourth quarter 2020 conference call.
Fourth quarter and full year 2020 results were released this morning, I will provide some financial commentary and then Adam will give an overview of the business as well as current traffic trends.
We will take questions.
As a reminder, during the call we may refer to certain non-GAAP financial measures and May 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 record sales of $2.426 billion and record GAAP and adjusted diluted EPS of $1.15 and $1 13, respectively.
Sales are up 13% in U S dollars and up 11% in local currencies and organically compared to the fourth quarter of 2019.
Sequentially sales were up 4% in U S dollars and 3% in local currencies and organically.
Breaking down sales into our two segments, the interconnect business, which comprised 96 per cent of our sales was up 14% in U S dollars and 11% in local currencies compared to the fourth quarter of last year.
Our cable business, which comprised four per cent of our sales.
One four per cent in U S dollars and 2% in local currencies compared to the fourth quarter of last year.
For the full year 2020 sales were $8.599 billion, which was up five per cent in U S dollars four per cent local currencies and 2% organically compared to 2019.
Adam will comment further on trends by market in a few minutes.
From a segment standpoint in the interconnect segment margins were 22 five per cent in the fourth quarter of 2020, which increased from 22.0% in the fourth quarter of 2019 and 22, 4% in the third quarter of two trials in 2020.
In the cable segment margins were 10, 3%, which increased from 10% in the fourth quarter of 2019 and decreased from 10, 7% in the third quarter of 2020.
For the full year 2020, adjusted operating income was $1.650 billion, which was slightly up from 2019 and resulted in a full year 2020, adjusted operating margin of 19, 2% compared to 20% in 2019.
This 80 basis point decline reflects the challenges and the results are resulting impacts related to the COVID-19 pandemic, primarily in the first half of the year.
Given the unprecedented challenges we saw this year, we are extremely proud of the company's performance our teams ability to effectively manage through this crisis is a direct result of the strength and commitment of the company's entrepreneurial management team, which continues to foster high performance action oriented culture, which has enabled us to capitalize.
On opportunities and maximize profitability in an uncertain market environment.
The company's GAAP effective tax rate for the fourth quarter was 21, 7%, which compared to 23% in the fourth quarter of 2019.
On an adjusted basis, the effective tax rate was 24, 5% for both the fourth quarter of 2020 and 2019.
For the full year, the company's GAAP effective tax rate for 2020 in 2019 was 25% in 2002% respectively.
On an adjusted basis, the effective tax rate for both the full year 2020, and 2019 was $20 524 five per cent.
On a GAAP basis diluted EPS increased by 12% to $1 15 in the fourth quarter compared to $1.03 in the prior year period.
Adjusted diluted EPS increased by 15% to $1 13 in the fourth quarter of 2020 from 98 in the fourth quarter of 2019.
For the full year GAAP diluted EPS was $3 91.
A 4% increase from 2019, GAAP salute EPS of 3075.
Adjusted diluted EPS was $3 74 sets for two to $3 74 for 2020, which was unchanged compared to 2019.
This was a strong performance considering the significant challenges related to incremental costs related resulting from the pandemic.
Orders for the quarter were $2.512 billion, which was up 14% compared to the fourth quarter from 2019 and up 10% sequentially, resulting in a book to bill ratio of one four to one.
The company continues to be an excellent generator of cash we are proud that operating and free cash flow for both the fourth quarter and full year 2020 were all records for the company.
Cash flow from operations was a strong $441 million in the fourth quarter or 124% of net income.
Net of capital spending our free cash flow was the range of $71 million or 104 per cent of net income.
Cash flow from operations for the full year was $1.592 billion or approximately 132% of net income and net of capital spending our free cash flow for 2020 was $1 $328 million per 110% of net income.
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From a working capital standpoint inventory days days sales outstanding and payable days were $79 72, and 61 days, respectively, all within our normal range.
During the quarter the company repurchased one 5 million shares of common stock for approximately $182 million under the $2 billion open market stock repurchase plan, bringing total repurchases for the year to 6 million shares or $641 million.
Total debt at December 31 was $3 9 billion and net debt at the end of the year was $2 1 billion.
Total liquidity at the end of the quarter was $4 2 billion, which included total cash and short term investments on hand at $1 7 billion plus the availability under our credit facilities.
Fourth quarter and full year 2020, EBITDA was approximately $600 million and 2 billion, respectively and at December 31, 2020, our net leverage ratio was one one times.
Lastly, the company announced a two for one stock split which will be effective as of March 4th of 2021.
I will now turn it back to Adam who will provide some commentary and current trends well Craig.
Thank you very much and I'd like to extend my welcome to everyone here on the phone today and I hope, it's not too late to wish everybody a happy new year as we are still here in the month of January.
First I just wanted to express my hope that all of you on the call here today that you your family your friends and colleagues are all staying safe and healthy throughout the pandemic.
I'm going to highlight our achievements in the fourth quarter and the full year as Craig mentioned I will discuss our trends and progress across our served markets.
I will then make some comments on our outlook for the for the first quarter and then of course, we will have time at the end for questions.
Now with respect to the fourth quarter and amidst what has no doubt been an unprecedented and volatile year I'm truly proud that we finished 2020 with record sales and adjusted earnings per share in the fourth quarter, both of which were significantly above our guidance sales.
Sales grew 13% in U S dollars, and 11% organically, reaching a new record 2 billion $426 billion.
This organic growth, which was very strong was driven by growth in mobile devices industrial and automotive end markets in particular.
The company booked a record of $2.512 billion in orders in the fourth quarter and Thats, a strong book to Bill of 104 to one.
Despite continuing to face some operational challenges related to the ongoing pandemic adjusted operating margins were strong in the quarter, reaching 26% a.
10 basis point increase from third quarter levels, and 60 basis points from prior year.
Craig I already highlighted the operating and free cash flow of the company very strong at 441 and $371 million, respectively in the fourth quarter bolster.
Both just excellent reflections of the quality of the company's earnings.
What I'll say with this fourth quarter, how proud I am of our team around the world and our results. This quarter once again reflect the discipline and agility of our entrepreneurial organization as we continued to perform well amidst an environment that still has continued challenges.
Our small acquisition team was also very busy in the fourth quarter and here in the last few weeks of January.
As we announced on December 9th we're very pleased to have signed an agreement to acquire MTS systems, a leading supplier of advanced test systems motion simulators and precision sensors for $58 50, a share the MTS acquisition continues to be subject to MTS shareholder approval certain regulatory approvals as well as <unk>.
Customary closing conditions and.
In addition last week, we announced that we had entered into an agreement with Illinois tool works under which ITW will acquire MTS is test and simulation segment. Following the closing of our acquisition of MTS.
This sale is also subject to certain regulatory approvals and other customary closing conditions.
We continue to expect that both the acquisition of MTS as well as the follow on sale of the test and simulation business to ITW will bolt occur approximately in the middle of 2021.
I can just say that we've long been attracted by the outstanding technology and deep entrepreneurial culture of MTS sensors and look forward to welcoming this wonderful team of people into the Amphenol family.
This acquisition, which is highly complementary to our current sensor offering represents a further broadening of our high technology sensor offering to customers across the automotive industrial military and commercial air industries.
We expect the addition of MTS sensors to add approximately $350 million in revenues and to generate approximately <unk> <unk> per share of earnings accretion in the first year post closing.
Now here in the last few weeks of January were also pleased to have closed two additional acquisitions of outstanding entrepreneurial companies, which we purchased for a combined price of $160 million.
First positronic as a provider of high reliability harsh environment connectors for customers primarily in the military aerospace.
Datacom and industrial markets.
In Springfield, Missouri, and with also operations in France, India, and Singapore, and with annual sales of approximately $80 million Positronic represents a great addition to our harsh environment product offering.
Next <unk>, which is based in Poland is a manufacturer of cable assemblies and related interconnect products, primarily serving the industrial market and with annual sales of approximately $55 million.
I'm very pleased by is that both poses positronic, an L cab or private family owned companies with rich histories, leading technologies and excellent positions with customers in their target markets.
As we welcome the outstanding Positronic Enel cab teams to the Amphenol family and as we look forward to eventually welcoming the talented MTS sensors organization in the coming months, we remain confident that our acquisition program will continue to create great value for amphenol.
Our ability to identify and execute upon acquisitions and successfully bring these new companies into Amphenol remains a core competitive advantage for the company.
Now if we just look back on 2020.
Some of the highlights from the year. Despite the many challenges we all faced in 2020 from both a personal and professional standpoint amphenol dedicated entrepreneurial team performed just incredibly well and I just could not be more proud of our performance this year.
Sales reached a record $8 6 billion growing 5% in U S dollars, and 2% organically and actually surpassed our pre pandemic outlook that we had given back a year ago.
Our full year adjusted operating margins of 19, 2% did declined 80 basis points from prior year, but this decline was due to the significant cost challenges we experienced in the first half of 2020.
After which our team was able to return to more typical profit levels in the second half and that enabled us to achieve adjusted diluted EPS of $3 74.
Which was the same level as we achieved in 2019 no question an impressive result, given the circumstances.
We generated record operating and free cash flow of $1, $5, 92, and $1 $328 million, respectively excellent confirmations of the company's superior execution and disciplined working capital management, even in these most unprecedented times.
Our acquisition program remains strong despite the challenges related to the pandemic with two new companies added to the Amphenol family in 2020 extra thermal metrics and on and on as well as <unk> and <unk> here in January and the signing of MTS that we already discussed.
These acquisitions expand our position across a broad array of technologies and markets, while bringing outstanding and talented individuals into the Amphenol organization.
We're particularly excited that these acquisitions represent expanded platforms for the company's future performance.
In addition in 2020, we bought back over 6 million shares under our buyback program and increased our quarterly dividend to <unk>, 16% and as Craig mentioned, we're announcing today a two per one stock split of the company's shares.
While the overall market environment in 2020 was highly uncertain. Our agile entrepreneurial management team is confident that we have built further strength from which we can now drive superior long term performance.
Now turning to our trends and our progress across our served markets I would just comment that we remain very pleased that the company's balanced and broad end market diversification continues to create value for the company with no single end market, representing more than 22% of our sales in the year 2020.
We believe that this diversification mitigates the impact of the volatility of individual end markets that was particularly important here in 2020, but while also exposing us to leading technologies wherever they may arise across the electronics industry.
The military market represented 11% of our sales in the fourth quarter and 12% of our sales for the full year sales.
Sales in the quarter grew modestly from prior year, increasing by approximately 1% in the fourth quarter with growth in naval space and avionics applications offset in part by moderations in ground vehicles rotorcraft and airframe.
Sequentially, our sales increased as we had expected coming into the quarter by 3%.
For the full year 2020, our sales grew by 3% in U S dollars, 2% organically.
Reflecting our leading market position and strong execution across virtually all segments of the military market.
Offsetting part by the impact of the pandemic related production disruptions that we experienced in the first half of 2020.
Looking ahead, we expect sales in the first quarter to decrease modestly from these fourth quarter levels.
I just want to say that our organization working in the military market.
Has worked long and hard for many years to strengthen our broad technology position, while increasing our capacity to serve customers across all segments of this important market.
Our performance in 2020, especially given the many disruptions related to the pandemic is a great reflection of the results of those efforts.
Given the ongoing favorable military spending environment. Our team continues to solidify our leadership position by ensuring that we execute on the demands of our customers by supporting the many next generation technologies that are required for modern military hardware.
The commercial air market represented 2% of our sales in the fourth quarter and 3% of our sales for the full year not surprisingly fourth quarter sales were down significantly reducing by approximately 50% as the commercial air market continued to experience unprecedented declines in demand for new aircraft.
Due to the pandemic related disruptions to the global travel industry.
Sequentially, our sales were a little bit better than expected declining 10% from the third quarter and for the full year 2020 sales declined by 34%, reflecting the significant impact of the pandemic on travel and aircraft production.
Looking into the first quarter of 2021, we expect a sequential moderation in sales from these levels.
Look there's no doubt that these are difficult times for the entire travel industry, which is seriously impacting the market for our commercial airplanes. Nevertheless, our team who has just been so resilient over the course of this year remains committed to leveraging the company's strong technology position across a wide array of aircraft platforms.
As well as next generation systems that are integrated into those airplanes, and we remained well positioned when this market ultimately returns to growth.
The industrial market represented 22% of our sales in the quarter and in the full year 2020.
Our sales in this market significantly exceeded expectations that we had coming into the quarter increased by a very strong 29% in U S dollars and 24% organically from prior year.
This robust growth was driven especially by the battery and electric vehicle instrumentation heavy equipment factory automation and medical segments of the industrial market.
On a sequential basis sales increased by 4% from the third quarter.
We're really pleased with our results in industrial for the full year with sales growing 15% in U S dollars and 11% organically as we saw strong demand and really those same markets battery and EV instrumentation heavy equipment also alternative energy and of course medical which was a very strong segment in the year.
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Looking into the first quarter, we expect a slight moderation from the strong fourth quarter sales levels.
I'm truly proud of our team working in the industrial market, whether enabling the growth in volumes of a wide array of medical equipment or managing through significant increases in demand for semiconductor capital goods and next generation batteries are global organization has reacted quickly to ensure that our customers are fully supported regardless.
Of the many operational challenges that have arisen during the pandemic.
The automotive market represented 20% of our sales in the fourth quarter and 17% of our sales for the full year of 2020.
Sales in this market were also much stronger than we had expected coming into the quarter with revenue growing by 20, 24% in U S dollars and 19% organically in the fourth quarter and that was really driven by broad based growth across all geographies in the automotive market.
Sequentially, our automotive sales increased by a very strong 22% as we continued to benefit from the broad recovery in the global automotive market.
For the full year 2020, our sales declined by 6% in U S dollars and 8% organically and that really reflected the significant challenges and factory shutdowns experienced by the auto industry in the first half of the year related to the pandemic, but was partially offset by our strong recovery there.
We drove in the second half.
Looking into 2021, we do expect a sequential moderation from these high sales levels in the first quarter.
Look no doubt about it the automotive industry faced one of the most difficult periods in recent memory. During the first half of 2020 in particular in the second quarter and that was followed by an unexpectedly robust recovery here in the second half.
I'm just so proud of our team working in this important market, who has clearly demonstrated their agility and resiliency through these most turbulent times and thereby secured the company's position with our customers across the automotive market.
Regardless of this most dynamic of years, we have continued to expand our range of interconnect sensor and antenna products, both organically and through acquisitions to enable a wide array of onboard electronics across a diversified range of traditional fuel and electric powered vehicles made by auto manufacturers around the world.
This consistent strategy will continue to benefit us long into the future.
The mobile devices market represented 18% of our sales in the fourth quarter and 15% of our sales for the full year, our sales in the quarter to mobile device customers increased by a much stronger than expected, 32% from prior year with strength in all product types, but particularly.
In Wearables and laptops.
Sequentially, our sales increased by 15% and that was driven by higher sales to smartphones and wearable devices.
For the full year 2020 sales in the mobile devices market increased by a very strong 16% as we continued to benefit from our agility and reacting to changes in demand in this dynamic market.
For the full year, we saw particularly strong sales growth and products incorporate into laptops tablets, wearables and other accessories as well as production related products and that was offset in part by a slight moderation of sales of products incorporated.
Incorporated into smartphones.
Looking into the first quarter, we anticipate that typically significant seasonal sequential decline of approximately 40%.
While mobile devices will always remain one of our most volatile markets.
Outstanding an agile team is poised as always to capture any opportunities for incremental sales that may arise in 2021 and beyond our leading array of antennas interconnect products and mechanisms continues to enable a broad range of next generation mobile devices, all positioning us well for the long term.
The mobile networks market represented 5% of our sales in the quarter and 6% of our sales for the full year 2020.
Sales in the quarter decreased from prior year by 8% in U S dollars and 9% organically with declines in sales to both the equipment manufacturers as well as operators.
Sequentially, our sales did increase by a bit less than we had expected 12%.
For the full year 2020 sales declined by 16% from prior year, which reflected the impact of the U S government restrictions on certain Chinese customers that had been imposed in 2019 as well as other impacts related to the COVID-19 pandemic.
Looking ahead, we expect sales in the first quarter to increase from this quarters levels as operators expand their investments in next generation mobile networks.
Regardless of the challenging demand environment in the mobile networks market in 2020, we're confident in the company's long term position in this important and exciting industry.
Our team continues to work aggressively to expand our opportunity with next generation equipment and networks and as customers ramp up investment of these advanced systems. We look forward to benefiting from the increased potential that comes from our unique position with both equipment manufacturers and mobile service providers around the world.
The information technology and data communications market represented 18% of our sales in the quarter and 21% of our sales for the full year 2020.
Sales in the quarter were stronger than expected rising by 3% in U S dollars and 2% organically from prior year as stronger sales of networking equipment and server related products were offset by lower sales of storage related products.
Sequentially, our sales declined by 8% from our very robust third quarter.
We're very pleased with our performance for the full year for it datacom with our sales growing a very strong 15% in U S dollars and 11% organically as we capitalized on increased demand from our OEM and.
Service provider customers as they work to accelerate bandwidth capacity expansions in particular to support home based work school and an entertainment.
Our team working in support of these customers is clearly distinguished themselves this year.
Reacting quickly to capitalize on unprecedented demand for our industry, leading high speed and power products at the same time, we've not slowed down our efforts to further develop that broad range of leading interconnect products in support of data communication networks around the world.
Looking into the first quarter of 2021, we expect a typical seasonal moderation of sales here in the quarter.
But nevertheless, we remain very encouraged by the company's strong technology position in the global it Datacom market.
Our customers around the world continue to drive their equipment to ever higher levels of performance in order to manage the dramatic increases in bandwidth and processor power in turn our team remains singularly focused on enabling this continuing revolution in it datacom.
The broadband communications market represented 4% of our sales in the quarter and 4% for the full year sales increased by 3% in the fourth quarter from prior year, driven by stronger demand for home installation related equipment from our broadband operators.
On a sequential basis sales decreased as expected by 9% from the third quarter.
For the full year 2020 sales were flat and thats. Despite the significant disruptions to production and demand that we experienced in the first quarter offset by the accelerated investments in support of bandwidth later in the year.
Looking into the first quarter, we expect sales to moderate from these levels and we remain encouraged by the company's position in the broadband market.
With our expanded range of products together with strong relationships with customers around the world. We look forward to benefiting as operators increase their network investments in the future.
Now just to summarize there is no question that 2020 was one of the most challenging years, we've all experienced but in the face of these challenges I am just so proud of the entire team of Amphenol and around the world, who have managed extraordinarily well throughout the pandemic and the related disruptions to the economy.
Through our dual pronged approach of growing both organically and through our acquisition program. The company continues to expand our market position, while strengthening our financial performance.
Amphenol Superior performance is a direct reflection of our distinct competitive advantages, our leading technology, our increasing position with customers across our diverse end markets worldwide presence, a lean and flexible cost structure, a highly effective acquisition program and I can say most.
<unk> in this pandemic impacted 2020, and agile and entrepreneurial management team.
Now turning to our outlook and regardless of our strong performance in the fourth quarter. There still remains significant economic uncertainties related to the COVID-19 pandemic. Accordingly, we will not be providing full year guidance at this time.
Assuming no new material disruptions from the pandemic as well as constant exchange rates for the first quarter. We now expect sales in the range of $2 billion $120 million to $2 billion $180 million and adjusted diluted EPS in the range of 90 to 94.
I would just note that on a post split basis. This adjusted diluted EPS guidance would be 45 to <unk> 47.
This guidance represents sales growth in the first quarter of 14% to 17% year over year and adjusted diluted EPS growth of 27% to 32% again compared to the first quarter of 2020.
I remain confident in the ability of our outstanding management team to adapt to the continued challenges in the marketplace and to capitalize on the many future opportunities to grow our position and expand our profitability.
Our entire organization remains committed to delivering strong financial results.
All while prioritizing the continued safety and health of each of our employees around the world.
Most importantly, I'd like to take this opportunity to thank the entire amphenol team for their truly heroic efforts here in the fourth quarter and throughout the entirety of 2020.
And with that operator, we'd be very happy to take any questions that there may be.
Thank you.
Question and answer session will now begin.
Please be reminded that questioners are only allowed to ask one question.
Our first question is from Mark Delaney from Goldman Sachs.
So much for taking the question I have.
To better understand the orders that the company reported and the strong book to Bill of one four to to what extent do you think those orders are to help us sort of true end demand and do you think any of the orders that the company is receiving or potentially.
Customers, placing longer dated backlog because of some of the supply chain challenges that have.
Really impacted semiconductors, but perhaps is impacting orders to electronics companies more broadly potentially including amphenol or any other factors that may be.
Influencing the orders other than.
Some of the more typical drivers like increasing content per <unk> per unit.
Thanks, so much mark.
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Customers place orders to us and we can't always exactly pinpoint what the demand is except we know that when when they tell us they want the product and I I wouldn't tell you that we've seen any dramatic lengthening of lead times are longer dated orders per se.
You mentioned the widely reported discussions around semiconductor availability in a variety of markets.
Our customers are pretty smart and well, while they may be chasing lots of semiconductors are trying to put orders on those kind of products.
They know that our products are available for them and we haven't disappointed them throughout this throughout this year, even with the disruptions early in the air even with the significant increases in certain of our markets in the second half. So I wouldn't necessarily say that customers are lumping us into that kind of semiconductor category.
I think that.
Customers are looking to US no question about it on the basis of the fact that we were there for them when they needed us most in particular as many of our customers coming out of the pandemic had certain some parts of their supply chain, which still had a lot of disruptions and the excellent job that our team did.
Good.
In recovering from from those disruptions whether that was early on in the year.
With bringing all of our factories in China back to full production substantially earlier than many.
We're continuing in through later later part of the year with the recoveries that we saw for example in automotive and industrial and other markets. So I think that our team is doing a good job of making sure that we get more than our fair share of our customers' bandwidth.
And orders and we're going to keep keep driving for that.
Thank you. Our next question is from Amit <unk> of Evercore.
Thanks for taking my question.
Wanted to follow up on what Mark was talking about and maybe more specifically item on the industrial and automotive kind of the non tech markets where growth rates have been extremely strong.
I think the concern is starting to become that RV side into ownership versus end demand and suddenly 2024% organic growth is much better than what the underlying end demand is.
Just on those two segments I'd love to understand how does one get conviction, how do you get conviction that.
A strong first half may not result in a bigger correction that half of the year.
Yeah, I mean look it's a fair question Amit I think we had just outstanding performance in the fourth quarter in both of those markets as you know, 29% and 24% organic growth in industrial.
94% and 19, respectively in automotive.
I think that we are outperforming by any measure I would say the various markets.
But does that mean that they are taking our product and putting it on the shelf.
No I mean, we don't see that whatsoever.
But.
At the same time.
There is still uncertainty in the marketplace, we're not giving guidance for the full year.
We have done an outstanding job of supporting our customers when they needed us in the ramp up after the various disruptions and.
Regardless of what happens and then demand I believe that our position with customers is stronger than ever now I should also mention that whether it's an industrial or an automotive and obviously industrial has a lot of different segments within it.
We see continued content gains in both of those areas, which which are greater than just the end unit demand and that's the trend of adoption of electronics.
<unk> all types of systems, all types of equipment all types of products.
And if anything we've seen that adoption accelerate over the course of this year for a variety of reasons and much has been reported about the acceleration for example of electric Drivetrains and cars, where we benefited greatly from that but we've seen a lot of very similar dynamics across the <unk>.
Multiple segments within the industrial market.
Look what what does this mean for the second half of 2021 again, we're not giving guidance for the year Theres a lot of there's a lot of uncertainty related to the pandemic.
But I think our position with our customers is stronger than ever before.
Okay.
Thank you. Our next question is from Joe Giordano from Cowen.
Yes, good afternoon.
Hello, Joe.
So there's a lot of debate and auto line longer term about like.
What applications should be.
It needs to be hard wire versus when wireless is most appropriate I mean I know your portfolios.
It seems to be intentionally structured to benefit kind of no matter what the answer to that question is that trend is but can you talk about it.
How do you think that plays out what are your customers thinking is.
Is there like a limitation on what can be wireless.
Yeah, I mean without getting into too deep of a technical discussion here I think you already kind of answered the question as I would answer it which is we're agnostic.
The fact is we're a significant supplier of interconnect products antennas and sensors into the automotive market and to the extent that there is next generation developments new architectures in the car that create.
Of an open field to to help enable that that's always been a benefit for amphenol.
In the long term and so I would expect the same.
The extent that things become.
How would you say more or less wired or more wired or wireless.
That we are a manufacturer of interconnect antennas and sensors positions us very well regardless of what that what that outcome is.
Thank you. Our next question is from Craig headed back from Morgan Stanley.
Yes. Thank you and can you just touch on will follow up on the MTS acquisition, I mean pretty unique in terms of size.
And is that you're acquiring here and also maybe expand on just you talked about some of the complementary nature of kind of what it does to your portfolio.
As you go out in time.
Yes, thanks, very much Craig I mean look I think the only thing that I would say is really unique about MTS is the fact that it's a public company.
It's our first public company acquisition, but in terms of scale of the acquisition you'll recall that.
We made the acquisition of <unk> I think it's been what Craig six years or so.
Since that acquisition at the time, when we were substantially smaller company <unk>.
<unk> was about a $1 $2 billion purchase price and this is one seven.
Yes.
Proceeds from the test and Sim business. So I wouldn't say that the size is unique but the process is a little bit more unique with the public company process and then with the strategic review that we did that ultimately resulted in an outstanding outcome of us.
Negotiating together with with Illinois tool works or ITW the.
The disposition of the test and simulation segment to ITW and ITW is just an outstanding company MTS is an outstanding company and you know how we feel about amphenol. So I think this is just three really outstanding companies ending up in a real win win win for all parties, whether that's the shareholders of MTS, whether that's amphenol or whether that is.
In fact ITW.
From our position the MTS sensors business, which is what ultimately attracted us to MTS is just extraordinarily complementary I mean, I'd say virtually no overlap with our own sensor offering extremely harsh environment products used in a variety of really high technology.
<unk>. These are sensors that are used in force and vibration pressure position really at the highest level of reliability with also complex interconnect systems associated there with and so from a when we talk about the complementary aspects of the MTS sensors business.
It is really just that unique uniquely.
Complementary set of products across the end markets, where we're very excited by and then you add to all of that.
A wonderful wonderful management team across the business by the way all of MTS. We've just been so impressed with the people at MTS.
But particularly with the MTS sensors team were just so excited by this entrepreneurial organization and it's a team that we've known for a long time.
This was not a kind of last minute thing here far from it we've known this organization for a very long time, and we're very excited subject to shareholder approval subject to the regulatory and other closing conditions were very excited one day to welcome them into the Amphenol family.
Yes.
Thank you. Our next question is from Sami Chatterji from JP Morgan.
Oh, hi, Thanks for taking my question Adam I wanted to use the last question here on MTS as an excuse to ask you about cable products.
I think you didn't want to be in the business and that day because of it.
I should know this.
Selling that MTS asset to E W.
I mean on the same line, how should I think about the longer term reasons to be in cable products and solutions, which you reported as a separate segment I can see kind of the margins are quite a bit below your auto segments, and we havent seen like strong growth for a while here or what's the longer term opportunity you how does it fit in.
Good day, and with the rest of the business or do you see it as a core part of your portfolio overall.
Yes, I mean, the simple answer to you said it at the end do we see it as a core part of our portfolio for sure and it's very different than the situation with MTS in the case of MTS, we were drawn to MTS because of the sensor business. We were impressed by the way very impressed with the team and with the business of testing.
Emulation, but it's a different business for us really categorically different and that was why we talked about having a strategic review and in the end I think a great outcome for all parties with the agreed sale to ITW in the case of our cable products cable products are an integral part of an interconnect system that is used in particular for <unk>.
Setting high speed bandwidth to customers and to companies and what we've said all along is yes. The cable products segment may underperform.
From from an operating margin perspective for the moment.
We don't want to be in the business of picking the winners and losers of how people and companies are going to get internet connectivity to their homes to their businesses to their universities to the government.
Want to be betting really on every possible way of doing that and thus our position with the cable operators with the Msos is a very important strategic position for amphenol and that important by the way it carries over into our interconnect segment, where the strength that we have the reputation that we have our.
To service these service providers as opposed to Oems has been a fabulous fabulous value to the rest of the company in particular as we've seen other markets move more towards the service provider market and let me just give you. An example of that you take the it datacom market, which traditionally we were selling products that go.
Directly to equipment manufacturers, well as I think everybody on the call knows over the recent five or more years, maybe even a little bit more than half a decade, we've seen increasing strength and increasing demand from web service providers. How you work with the service provider is very very different than how you work with an OEM who will.
Ultimately is making in a piece of equipment in a factory and our experience in the cable products has been invaluable to our team and making sure that we can react to the demand and the volatility of the demand that is really.
<unk> and any service provider business when I look at our results. This year in particular in it Datacom, where we did see extremely strong demand from service providers, our ability to react on a moment's notice the mindset of that is a mindset that we develop that we incubated originally in.
Our cable business and I think that that's just a great reflection of the broad value that we see in that business beyond just the fact that it does have today, a little bit lower margins. It's a much smaller piece of our business that it once was but it's still an important part of amphenol strategy.
Thank you.
Just a quick question is Nick Todorov from Longbow Research.
Yeah, Thanks, Hi, Adam Hi, Jim.
I wanted to touch upon the outlook on the mobile device.
Adam I think you mentioned you didn't know about down 40% can you maybe give us a little bit more color because we were looking at the data points smartphone sales with strong <unk> sales remain strong as well as all the articles.
Electronics. So maybe you can talk what are you seeing that.
The first quarter is going to be more seasonal than anything else.
Yeah, well, thanks, very much Nick I think this is not an abnormal guidance that we see look we had very very strong performance in mobile devices. This year, we came into the year with.
With an expectation of the market being flat I will tell you I mean, we we didn't give guidance at the time, but had you asked me at the end of Q1, what with mobile devices be for the year I, probably would have thought it would be even down given the disruptions that we saw in the first quarter to our China facilities and the vast majority if not all of our mobile device production is.
In China and all of those factories were shut down as you know for the better part of three weeks due to the early stage of the Corona virus.
And then our team just did an unbelievable job of reacting to the strength in the market and the strength. This year well there was on a sequential basis in the fourth quarter strength in smartphones, where we really saw a lot of strength. This year was maybe not surprisingly in devices that.
Our needed by people when they're working when Theyre learning when theyre being entertained at home so things like laptops things like tablets, we saw a lot of strength in Wearables I know a lot of people got unhealth kicks in maybe these wearables can be very useful there.
A lot of strength in things that go into your ears here payable devices as we call them and probably because you have a lot of people doing work and school from home and they might have other people in the same house and they wanted to have some privacy whatever the reason is there was just a great amount of strength and our team was able to react to.
Unexpected demand.
And so as you go into the first quarter I think that we would expect normally some relaxation of that demand I mean look anecdotally I tried to buy a Christmas present for my wife, and my daughter of a computer because theyre. Both have really old computer then I totally failed as a father and a husband and they each got there.
Our present, one got it about a month late in the other ones still hasn't gotten hers. So there was a real demand.
Back in.
The fourth quarter in particular for these devices.
And I think we wouldn't expect such a such a continuation here in the first quarter.
Thank you well go next to your questions with Bill <unk> from Baird.
Good afternoon, everyone. My question I was wondering about the company's ability to I guess, you could say cross pollinate between the strength that you cited in industrial as it relates to batteries in electric vehicles and your core auto business I guess I'm wondering does that sort of a two pronged approach open additional doors for him.
No.
Yes actually looks great question. The simple answer is yes.
Our team working in industrial our team working in automotive and Theres a lot of crossover by the way and those teams.
There is an enormous amount of interaction from a technology from a customer perspective to ensure that we're maximizing our position with customers, whether they're making an electric bus or an electric sportscar and so that interaction.
Call. It cross pollination, we call it inside of Amphenol collaboration.
It is something that we're doing all the time and Thats collaboration from a product development, making sure that we're bringing a full suite of products to customers in each of those markets and really capitalizing on that trend of electrification that we're seeing again not just in automotive, but we're seeing that trend very significantly in the industrial market as well.
I'd say that when you look at our performance in both of those end markets, which we talked about with one of the earlier questions.
Totally coincident that we're seeing those strong content growth in both of those markets some of which is being driven by this by this trend of electrification.
Thank you.
Our next question one female line from Bank of America.
Yes. Thank you.
Adam if we step back a couple of years over here.
<unk> was operating north of 20% operating margins.
Youre slightly below that.
Annual guidance over here on slightly higher revenues versus <unk> 19 per.
These are unprecedented times, there's been a lot of cost.
Inefficiencies that have crept in because of Covid.
Can you maybe characterize if that is the reason why the margins are where they are I mean.
Clearly very strong in the face of what what has actually transpired, but.
Still below a couple of years ago I was wondering if he.
You could you could help us think through what the reasons are if it is truly COVID-19 inefficiencies and if it is how large are these and how long do you expect them to persist after which we should start to see sort of back to historical levels of margin.
Yeah <unk>.
Thanks for the question Yeah, I think if you look about look back the first quarter of 19.
We were certainly operating at very strong profitability at that point. It honestly and we finished the fourth quarter at very strong profitability levels. So I guess I wouldn't necessarily just kind of look back into 19 to kind of ex this to see a time, where we are we're operating a strong profitability levels. If you look at the fourth quarter, we already reached 20.
6% here in the quarter, we certainly still see some disruption related to the pandemic and that certainly embedded in those numbers may be slightly offset by some other benefits we have in things like <unk>. So I think I said last quarter that we kind of see a relatively neutral impact in the.
Half of the year.
You know as we kind of go into the first quarter.
Our guidance really reflects I would say sequential seasonal decline and we talked about approximately 10% kind of seasonal seasonal decline in sale and that does as you mentioned kind of imply.
Our conversion rate may be slightly higher than our normal, 30% downside, which would maybe get to.
The profitability level in the 19 kind of.
Little above 19% range.
So I think that that's probably the basis of your question I mean, I wouldn't say this.
Version isn't certainly isn't so significant given the level of sequential decline, we're seeing kind of going into the first quarter.
In addition, combined with a continued challenging cost environment, we are seeing still COVID-19 related inefficiencies.
And I think that the company has really done a great job. Thus far as you saw in 2020 of dealing with those inefficiencies and really snapping back into profitability level, but we are seeing a little bit of a decline going into the first quarter from a sales perspective, which is going to have some impact and I think the team has done a great job dealing with that and we'll continue to deal with that and so umbrella proud of kind of.
Where we ended up in 2020, and and I have no doubt that we'll get back to those levels I think the other thing that's happening in the first quarter.
Certainly as the acquisitions, we just closed on here in January are having some small effect on on a conversion if you look sequentially into the first quarter.
And the ones we did in 2019, certainly wouldn't haven't made necessarily that.
The progress that maybe we would have expected in 2020 for very understandable reasons, I think with dealing with the pandemic. During during 2020. So so I think there's a few reasons, but but all in all we're real happy with where we are at profitability certainly.
In the second half year of 2020 and be quite honestly, even in the first half given the challenges we had in and certainly we are really confident that as we go into 2021, you'll you'll see those levels of a snap back to normal levels. Once COVID-19 is behind us.
Thank you.
Next two questions Steve.
David Williams from loop capital.
Hey, good afternoon, and thanks for letting me ask a question, but just wanted to touch a little bit on the automotive market, maybe and what your outlook is there I know you are not providing full year guidance, but if youre kind of thinking about the automotive market in terms of the total growth. This year and then maybe the mix of EV versus the traditional vehicles what are your thoughts around that perhaps.
Yes.
Set of David we're not giving an outlook for the year.
And I Couldnt actually quote for you exactly how much of our business is related to EV versus traditional.
I don't have the number is close at hand.
But what I can tell you is that we're seeing higher growth from EV applications over the last several years and so <unk> definitely represent a higher proportion today than they did a year ago, two years ago, and three years ago, and we would expect in the coming year or two to for that trend to continue.
<unk> not only do they tend to have potentially a little more content, but the nature of the content can be a more attractive and more interesting for a company because of the high reliability the harsh environment the high power aspects.
Of those vehicles, so look we'll see how the year progresses.
Not giving again guidance, but we have seen good strength in <unk>, and we would expect to see that going forward.
Thank you next question with Chris Snyder from UBS.
Thank you I have a follow up on auto can you talk a bit about the EV versus ice's competitive environment are you seeing new entrants just given the different product mix and high voltage focus and Conversely does this shift carry any implications from maybe some of the smaller competitors, who could struggle to invest in EV solutions at least.
From the early days.
And I just asked because the company's outperformance on the auto side has been very strong. The last couple of quarters I just wanted to see if there are any share shifts going on.
Yes, I mean look I don't know specific share shifts what I do know is we're outperforming the market.
So just I guess by definition, we're taking some share and.
And part of the reason for that is <unk> and part of the reason as other applications.
Are there different competitors.
In an EV versus our internal combustion engine that there may be I mean, there's different competitors for all different systems in the car you have to remember in our industry. There is not a monolithic competitive landscape. There are obviously some companies that are publicly traded and well known which are excellent companies, but there is a.
Our whole diaspora of competition in the interconnect industry and each application may have a different landscape of competitors then the application before it so I guess by definition, yes, youre going to have some different competitors.
I think our strength in EV in part.
Stretches back to the fact that we've been making high power high voltage connectors.
For really the entire history of Amphenol.
That is our legacy.
I would call it even a birthright of amphenol with our military our industrial business and our ability to collaboratively share some of those underlying core technologies across our team a little bit like we discussed just a few moments ago.
Has really positioned the company well to be an enabler of those next generation systems, which are really mission critical so I think.
We're very happy to have a whole diaspora of competition across all our markets and that includes within automotive.
Thank you. Our next question is from Steven Fox from Fox Advisors.
Good afternoon.
Adam I was wondering if you could just dig into the weeds on the two acquisitions you just closed in January you had mentioned one was <unk>.
Around harsh environment, and we know Youre already a leader in that area and then the other one was tied to cable assemblies and we know you have a pretty broad offering there. So can you just sort of get into what what attracted you to the businesses from our products standpoint. Thank you.
Sure. Thanks, so much Steve look these are both outstanding companies, we've known them both for a long time I mean, the the family who founded and still until we just closed recently positron ex I've known that family for I don't know a decade and a half I mean, it's an outstanding company positron ex just a rig.
We'll marquee brand in the interconnect industry known for harsh environment, and particular board level.
Power connectors and some data connectors these or I O connectors. These go on the board there.
Used in a wide variety of systems and the military as well as in Datacom for power.
In industrial applications, and it's very complementary actually a lot of the products that they have positron ex they have just a real proprietary position.
Across their customer base and sometimes you you look in admiration at the strength of a company's position because of the uniqueness of their technology and that that's something that we have done for many years with positron ex <unk> is a little bit of a different story L cab.
First of all is our is our first company, that's really fully based in Poland, Poland is an outstanding.
Location for low cost manufacturing with proximity to all of Europe.
And they have an excellent position in cable assemblies for industrial applications and in particular next generation electric powered industrial vehicles, and whether thats buses, whether thats trucks delivery vehicles. They are also involved in marine related cable assemblies, but what really attracted.
To this to them as they're just leading position in this sort of EV Revolution, industrial EV Revolution, and Thats something we have done a great job of in Asia, We've done a great job of it in North America, we've done a really good job in Europe, but this accelerates our position in those in that electrification of <unk>.
Industrial vehicles in Europe, and again, a fabulous team family owned company, Great management, Great products, great position. Those are the factors that we always look for in acquisitions and I think both positron ex in El cap deliver.
Full of wholeheartedly and all of those and all of those areas.
Thank you. Our next question is from Joseph Spak from RBC capital markets.
Thank you very much Adam you mentioned battery factories, a couple of times in their.
They're likely to be trillions of dollars of Capex spend to build terawatts of capacity not only for electric vehicles per storage and other uses so it's probably one of the faster growing mark to market opportunities out. There is there anything you can tell us about amphenol opportunity and positioning in the market and are there some regional differences because I think a lot of the capacity right now is in Asia, but they are probably going to be fact.
<unk> all over the globe.
Yes, I think so.
Maybe.
Conflated a little bit Joe I think what I'd talked about was battery and EV in factory automation, but not necessarily together, but the fact is you raise a very good point, which is for sure whenever you have a massive build out of factories be that for batteries, where theres a lot of automation next generation vehicles.
And we've seen a lot of build out of factories by the way semiconductor factories as well you've seen the strength that we've had in instrumentation.
Our position in factory automation and instrumentation test equipment, and otherwise interconnect for all of those puts us in a very strong position to benefit from the expansion of these facilities, but when we talk about our sales of industrial products into.
Battery applications, it's really actual interconnect sensors that get integrated into these high technology high voltage battery systems, both to allow the signal of the battery the power to come in and out of the battery and also the control systems for these batteries, which is a one.
<unk> opportunity, where there's a lot of kind of interconnect and sensor applications, where you're selling to customers. Just a complete solution to allow them to manage these batteries and thereby get more efficiency and safety out of them. Once they are integrated into vehicles.
Thank you next question would be William Stein from true Securities.
Great. Thanks for taking my question Theres always been quite a focus on the trend to EV, but when we think about U S. Federal energy policy. It looks like there is.
Perhaps a shift in the works to favor more renewables versus.
Carbon based and I wonder.
Adam if you can.
Sensitize us two the potential impact of your business or our renewables a good market for amphenol relative to downhole, which I understand is very harsh and typically high margin high ESP sorts of connectors. Thank you.
Yeah, I mean look we're agnostic will to whatever that may be if its traditional oil and gas.
Versus renewables versus all of that's related to renewables battery storage that Joe just asked about and otherwise.
We're really agnostic I mean, if you look you know as an example last quarter.
We had last quarter, a strong growth in alternative energy and that was offset by relatively strong decline in oil and gas and I think that's a good indication of the value and the strength of the diversified position that we have really across all areas of whether that'd be power generation power consumption power storage.
We've made sure to not place a bet on kind of one trend or another but rather to be present supporting customers across the board and we are still supporting our oil and gas customers for sure I mean, that's an important market and I don't think the world is totally detaches from fossil fuels, but if the trend is away from them.
We're well positioned either way.
Thank you. Our next question is from Jim Suva from Citigroup.
Thank you very much Adam and Craig you've seen a lot of success with your company and automotive.
He used to be about 5% of the company and now it's 20% of the company is most of that success coming from like the infotainment in the cabin the safety along the bumper or the batteries and HRD electronic motors I'm, just trying to see because there's some big trends that are going on I am trying to see where he has been.
Most part of your strength in automotive.
Well, Jim Thank you very much.
You you listed a lot of the I mean, the fact is if I look over the long term and you know you've followed us for a very long time and so you have a you have a great sense of the arc of the progress of our automotive business over these many years, we started out in automotive many many years ago as the innovator.
Airbag connectors and that was kind of our first thing we did and we're talking a long time ago. I think I think the first airbag was like in 1990 or something like that.
So we're talking a 30 year time period and over time, we developed into interconnect products for four satellite radio in GPS and other infotainment.
We built through acquisitions and other.
And organic means presence in emissions control and engine control.
Other electronics and essentially as the car adopted new electronic systems.
We're positioning ourselves either organically or through acquisition to participate in those next generation systems. Our growth in automotive was never a question of kind of taking someone else's business that was a legacy business rather it was positioning ourselves as these new systems were developed to be there for customers.
<unk> for tier ones for tier twos whomever and.
And I think that's been very successful over all these years.
We believe there is still a lot more potential left in our automotive business the growth in content in the car is really outstanding and we're not the only one to to talk about that in many ways to me a car is becoming kind of a data center on wheels, its becoming an electric powertrain on wheels, you name it and each of those new systems.
As many of which you mentioned are contributors to the growth of the company, but what I wouldn't say is it any of them are disproportionate to our long term success in that market I think it's been actually a relatively balanced.
Contribution to that long term success.
That in particular, we've seen over really the last decade.
Thank you.
Next question on <unk> will be from David Kelley from Jefferies.
Good afternoon, Adam and Craig.
Just wanted to ask about the industrial trajectory.
<unk> highlighted several secular opportunities it feels like.
From a broad cyclical standpoint, industrial equipment seems to be ramping back up but we're also going to be comping against some difficult medical comps through the year. So could you just talk about what youre seeing or what you do see as the biggest drivers for industrials in 2021.
Yes, I mean look again, we're not giving guidance for 2021.
But when I look at the breadth of our performance here at the end of the year as we closed out the year and also throughout the course of the year.
It's just there's no single story to the strength I mean, yes, great performance and battery EV, great performance and instrumentation, great performance in medical again, I could give you a long list of the positive contributors to our industrial market.
There'll be some areas, where there'll be a little bit of a tougher comparison, obviously the second quarter was was a particularly acute quarter.
For medical where our team I mean, I, just I can't I cannot emphasize enough how proud we were to be a contributor to the fight against Covid through our reactivity to the demand for new medical equipment, whether that be respiratory therapy devices and sensors.
Connect products that are contained there in whether that be hospital equipment to outfit ICU and other patient care devices.
That is something that we at Amphenol will forever be proud of the contributions that our team made to the fight against Covid to protect lives and to enable countries around the world to have a fighting chance against this virus. So yes will there be a little bit less maybe of some of those more acute care things there could be but.
Who knows there was also as many have talked about reductions in elective procedures, which actually reduced demand for certain medical equipment.
In some areas too and so maybe that that has the chance to come back I think there is not the visibility today and thus why we're not giving the guidance for the year for me to say, which of those segments. As we go through the course of the year are going to have the stronger or weaker performance, but for sure we are.
Positioning ourselves with our customers by being there for them when they needed us most in there and really the most critical of time periods.
Such that to the extent that they have business to give I would expect that they will give at least if not more than our fair share to amphenol.
Thank you.
We don't have any further questions on queue.
I'll turn the call back to Mr. Lampo for his closing remarks.
Well this will be Mr. Norway for one last remark here.
Thank you all for all of your great interest in the company.
We really appreciate everybody's support through this 2020, we know this was not an easy year for all of you working from home and you know cooped up and not being able to come visit US for example, and we for sure Craig and I. The two of US no doubt about it look forward to the day, where we get to meet you.
In person again host due here in our modest headquarters in Wallingford, Connecticut, where we are today and.
And we look forward to great success and wish you all good health as we continue into 2021. Thank you. So much. Thank you.
Okay.
Thank you for attending today's conference and have another day.