Q1 2021 Amphenol Corp Earnings Call
Hello, and welcome to the first quarter earnings Conference call for Amphenol Corporation.
Following today's presentation, there will be a formal question and answer session until then all lines will remain in a listen only mode.
At the request of the company today's conference is being recorded if anyone has any objections you may disconnect at this time.
I would now like to introduce today's conference host Mr. Craig Lampo, Sir you may begin.
Thank you.
Good afternoon, everyone. This is Craig Lampo, Amphenol, CFO and I'm here together with Adam <unk> our CEO.
I'd like to welcome you to our first quarter 2021 conference call in our first quarter 2021 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 trends then.
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. Please refer to the relevant disclosures in our press release for further information.
In addition, as a result of our previously announced two per one stock split effective on March 4th of 2021, all share and per share data discussed on this earnings call is on a post split basis.
The company closed the first quarter with sales of 2.377 billion on GAAP and adjusted diluted EPS of <unk>, 53, and 52 cents respectively.
Sales were up 28 per cent in U S dollars 25 per cent little currencies, and 23% organically compared to the first quarter of 2020.
Sequentially sales were down 2% in U S dollars three per cent in local currencies and 4% organically.
Orders for the quarter were $2.734 billion, which was up 27 per cent compared to the first quarter of 2020 and up 9% sequentially, resulting in a very strong book to bill ratio of 1.15 to one.
Breaking down sales into our two segments, the interconnect business, which comprised 96 per cent of sales was up 28 per cent in U S dollars and 25 per cent in local currencies compared to the first quarter of last year.
Our cable business, which comprise four per cent of our sales was up 17% in U S dollars and 18% in local currencies compared to the first quarter of last years.
Adam will comment further on trends by market in a few minutes.
Operating income was $465 million in the first quarter of 2021.
Operating margin of 19, 6% was down 100 basis points sequentially compared to the fourth quarter of 2020, adjusted operating margin and up a strong 260 basis points compared to the first quarter of 2020.
The year over year improvement on operating margin was primarily driven by normal operating leverage on the higher sales volumes combined with the benefit of a lower cost impact, resulting from the COVID-19 pandemic, partially offset by the impact of a more challenging commodity and supply chain environment.
The sequential decline in operating margin was driven by normal normal conversion on the reduced sales levels as well as a more challenging commodity and supply chain environment.
From a segment standpoint, the interconnect segment in the interconnect segment margins were 21, and a half per cent and the first quarter of 2021, which increased from $19 one per cent in the first quarter of 2020 and decreased 100 basis points sequentially.
In the cable segment margins were eight 8%, which increased from seven 6% in the first quarter of 2020 and decreased from 10, 3% in the fourth quarter.
Given the continuing challenges posed by the COVID-19 pandemic, we are very 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 Companys entrepreneurial management team, which continues to foster high performance action oriented culture, which.
Has enabled us to capitalize on the many opportunities for incremental sales.
All driving strong operating performance in this very.
Dynamic market environment.
Yeah.
The company's GAAP effective tax rate for the first quarter was 23, 9%, which compared to 15, 9% in the first quarter of 2020.
On an adjusted basis.
The effective tax rate was 24, 5% in the first quarter of both 2021 and 2020.
On a GAAP basis diluted EPS increased by 33 per cent to 53 cents compared to 40.
In the prior year period.
Adjusted diluted EPS increased by 49% to 52 cents from 35% 35 cents in the first quarter of 2020.
The company continues to be an excellent generator of cash cash.
Cash flow from operations was $321 million in the first quarter or <unk> 97 per cent of GAAP net income and net of capital spending our free cash flow was $242 million or 74% of net income.
From a working capital standpoint inventory days day sales outstanding and payable days were $85 73 at 59 days, respectively, all within our normal ranges.
During the quarter the company repurchased two 4 million shares of common stock for approximately $153 million and during the month of April the company repurchased a small amount of remaining stock authorized under our existing stock repurchase plans.
As a result, and as mentioned in today's earnings release yesterday, the company's board of directors approved a new three year open market stock repurchase plan for the purchase of up to $2 billion of the company's common stock.
At March 31, cash and short term investments were $2 $4 billion of which $963 million was held in the U S. With the remainder held outside of the U S.
The elevated level of cash on hand at the end of the first quarter was driven by borrowings under the company's COVID-19 U S. Commercial paper program in anticipation of the MTS closing in early April.
Total debt was $4 $6 billion on net debt was $2 $3 billion.
Total available liquidity at the end of the quarter was $4 1 billion, which included total cash and short term investments on hand.
First quarter 2021, EBITDA was $559 million and our net leverage ratio was one point on times.
Following the close of the quarter on April 7th we completed the acquisition of MTS, which Adam will discuss in more detail on the moment.
The MTS acquisition was funded by a combination of cash and cash equivalents on hand, as well as additional borrowings under the company's U S commercial paper program.
On a pro forma basis, including the MTS acquisition in the anticipated divestiture of the test and simulation business total available liquidity and net leverage at March 31, 2020 would be $3.2 billion on one four times respectively.
Until the Divesture of the MTS test and simulation business is closed we will account for and report the test and simulation business as a discontinued operation.
As such we expect our sales and earnings of the test and simulation business are not included in our guidance.
Our guidance also excludes cash and noncash expenses that will be expense in the second quarter related to the MTS acquisition.
These expenses, which we expect total approximately $85 million or <unk> 12 per share include costs related to the early extinguishment of debt noncash purchase accounting related expenses external transaction expenses severance and other costs.
In conjunction with the divestiture of the test and simulation business. The company will also incur certain additional cash tax related and other acquisition related costs, which will not be included in income from continuing operations.
Our guidance does incorporate the expected results of the MTS sensors business, which as previously announced is expected to generate $350 million in sales and five <unk>.
Yes in the first 12 months after closing.
And now I'll turn it over to <unk> now turn it over to Adam who will provide some commentary on current market trends as well as our recently completed acquisitions.
Thank you very much Craig and I would like to also extend my welcome to everybody on the call here today and I certainly hope that you your family or friends on all of your colleagues are continuing to stay safe and healthy.
As Craig mentioned I'm going to highlight some of our achievements in the first quarter. I'll, then discuss our trends on our progress across our diversified served markets and then finally I'll make a few comments on our outlook for the second quarter and of course, we'll have time for Q&A at the end.
Our results on the first quarter were substantially better than we had expected coming into the quarter as we exceeded the high end of our guidance on sales as well as adjusted diluted earnings per share.
Sales grew a very strong 28% in U S dollars and.
<unk> 25 per cent in local currencies and on an organic basis sales increased by 23% and we had organic growth in nearly all of our end markets and driven particularly by growth in the automotive mobile devices industrial and it datacom markets and I'll talk about each of those markets in a few moments.
Craig mentioned, we booked record orders in the quarter of 2.734 billion and that represented a very strong book to bill of $1 15 to one.
Despite continuing to face a range of operational challenges are related to the ongoing pandemic as well as increased costs related to commodities and supply chain pressures. Our operating margins were very healthy in the quarter, reaching 19, 6%, which was a 260 basis point increase from last year's level.
<unk> Craig.
Craig mentioned, our adjusted diluted EPS grew a very robust 49% from prior year, which is again, an excellent reflection of the Amphenol organization strong execution.
We generated operating and free cash flow of $321 million and $243 million in the first quarter, respectively are both clear reflections of the high quality of the company's earnings.
I just wanted to say how proud I am of our team this quarter.
And our results once again reflect the discipline and agility of our entrepreneurial organization as we continue to perform well amidst a very dynamic and challenging environment.
Now I'd like to make a few comments on our acquisitions in the quarter as you can tell our small acquisition team here in Wallingford was very busy in the first quarter.
Closing three additional acquisitions since since our last earnings release, and bringing our total number of acquisitions closed this year to five.
First as we announced on April 7th we were very pleased to close on the acquisition of MTS systems earlier than originally anticipated.
Also as previously announced we had signed an agreement to sell the MTS test and simulation business to Illinois tool works for a sale price of $750 million and that is that remains subject to certain post closing adjustments and.
And excludes transaction related expenses.
We expect this sale to close following the receipt of all required regulatory approvals.
We're really excited to welcome the talented MTS sensors teams to the Amphenol family.
We especially look forward to the strength of the combined breadth of our companies highly complementary sensor product portfolios, which we believe will enable us to offer our customers an expanded array of innovative technologies across multiple end markets.
We expect the MTS sensors business to add approximately $350 million of sales and five and adjusted diluted earnings per share in the first 12 months after closing.
More importantly, though we look forward to realizing the long term benefits of the opportunities created by the collective strengths of Amphenol and MTS sensors for many years to come.
We're truly excited about the significant acquisition, which ultimately has positioned amphenol is one of the broadest and most diversified sensor companies in the industry.
In addition to the MTS acquisition. We also closed on two other small acquisitions during the first quarter in February we acquired Euro Micron a manufacturer of highly engineered fiber optic interconnect solutions for the mobile networks and it Datacom markets base.
Based in Germany with annual sales of approximately $25 million Euro Micron represents a great addition to our interconnect product offering for customers across the European communications market.
And then in March we completed the acquisition of cable Khan from Corning incorporated.
Cable Con, which also has sales of approximately $25 million is a Denmark based designer and manufacturer of high technology connectors and interconnect assemblies, primarily for customers in the European broadband market.
As we welcome these outstanding companies to the Amphenol family I remain confident that our acquisition program will continue to create great value for amphenol.
Our ability to identify and execute upon acquisitions and then to successfully bring these new companies into Amphenol remains a core competitive advantage for the company.
Now turning to our trends 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 great value.
We believe this diversification mitigates the impact of the volatility of individual end markets, while continuing to expose us to leading technologies wherever they may arise across the electronics industry.
This diversification has become ever more valuable given the many market dynamics related to the COVID-19 pandemic.
Now turning first to the military market the military market represented 11% of our sales in the quarter and as we had expected coming into the quarter sales grew by 3% from prior year and were essentially flat organically with growth in naval unmanned aerial vehicles communications and vehicle ground systems on.
Set by declines or flat performance in other applications.
Sequentially, our sales were modestly down by about 3%.
Looking into the second quarter, we expect sales to grow in the low double digits from these first quarter levels as we benefit from the addition of MTS sensors together with the increased demand for interconnect products.
We're especially excited by the addition of the sensors products of MTS to our military product offering today.
Whether with our already leading interconnect products as well as our broad exposure across virtually all defense programs.
We look forward to supporting the continued adoption of next generation electronics into a wide array of military hardware.
The commercial aerospace market represented 2% of our sales in the quarter and not surprisingly and as expected sales were down significantly declining by 47%.
From prior year as the commercial aircraft market continued to experience unprecedented declines in demand for new aircraft due to the ongoing pandemic related disruptions to the global travel industry.
Sequentially, our sales were a bit better than expected moderating by just 3% from the fourth quarter.
And looking into the second quarter, we do expect a sequential improvement in sales as we benefit from our recently completed acquisitions.
Regardless of the ongoing challenging environment in commercial air our team working on this market remains committed to leveraging the company's strong interconnect and sensor technology position across a wide array of aircraft platforms and next generation systems integrated into those airplanes.
The industrial market represented 24% of our sales in the quarter.
Sales in industrial in the first quarter were but were better than expected going on very strong 43% in U S. Dollars on 33% organically. This was driven by robust growth in battery and electric heavy vehicle applications rail mass transit heavy equipment instrumentation factory automation alternative enter.
<unk> and medical really a broad performance across many of the segments.
On a sequential basis sales grew by a better than expected, 6% versus the fourth quarter.
Looking into the second quarter, we expect the industrial market to once again grow in the low teens versus the first quarter and as we benefit from the addition of MTS sensors, while continuing to gain momentum in many segments of the industrial market.
The acquisition of MTS sensors has expanded our range of sensors sold into the industrial markets, adding position vibration force in shock sensors that are used in a wide array of industrial applications.
Together with our existing sensor operations, we now have a diversified range of sensors supporting virtually all of the segments of the industrial market that we serve.
I remain truly proud of our team working across the industrial market around the world Our high technology interconnect antenna and sensor offering positions us strongly with customers who are accelerating their adoption of electronics no matter the application.
The automotive market represented 22% of our sales in the quarter and sales in this market were also much stronger than we expected growing 52% in U S dollars on 44% organically as our team was able to execute strongly in the face of a robust and broad recovery.
In the automotive market.
In particular, we saw very strong growth of our products that are used in electric and hybrid electric vehicles in the quarter a great confirmation of our global teams long term efforts at designing and high voltage and other interconnect and sensor products into these important next generation platforms.
Sequentially, our sales increased by 6% from the fourth quarter.
No assets as has been widely reported there are a variety of supply chain challenges facing the automotive industry. Accordingly, as we look towards the second quarter. We do expect a modest sequential decline in sales as the global supply chain disruptions temporarily impact a certain pockets of new vehicle production.
I'm extremely proud of our team working in the automotive market. They have really demonstrated their agility and resiliency through these most turbulent times and thereby have secured the company's position with our customers across the automotive market.
We look forward to benefiting from their efforts long into the future.
The mobile devices market represented 12% of our sales in the quarter sales in this market increased by a better than expected, 51% from prior year with strength across all product types, including particularly in Wearables and laptops.
Sequentially, our sales declined by 35%, which was a bit better than our expectations coming into the quarter and is within the typical range of first quarter seasonality that we have seen traditionally in the mobile devices market.
Looking into the second quarter, we anticipate a further high single digit sequential sales decline, which is also not a typical for this market in the second quarter.
While mobile devices will always remain one of our most volatile markets are outstanding and uniquely 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 <unk>.
Rod range of next generation mobile devices, thereby positioning us well for the long term.
Now turning to the mobile networks market. This market represented 6% of our sales in the quarter on sales did grow from prior year by 4% in U S dollars and 1% organically.
As strength from products sold to Oems was offset in part by a moderation of our sales to network operators.
We were encouraged though to realize a better than expected sequential growth of 19% in the mobile networks market in the quarter.
As as mobile network operators increased their spending on next generation networks.
Looking to the second quarter, we do expect a modest increase in sales from these first quarter levels helped by the addition of your own micron, which expands our offerings for mobile network operators in Europe and positions us well to support future network upgrades.
Our team continues to work aggressively to expand our position in next generation equipment and systems around the world and as our customers ramp up the investment of these advanced networks. We look forward to benefiting from the increased potential that comes from our unique position with both original equipment manufacturers as well as mobile networks.
Service providers.
The information technology and data communications market represented 19% of our sales in the quarter.
Sales in the quarter was stronger than expected rising 25% in U S dollars and 24% organically from prior year really on broad based strength across networking storage and server applications.
While we had expect sales to decline coming out of the fourth quarter. We were pleased to realize actually a sequential growth of 6% as customers continued to increase their demand for our high technology products.
Used by web service providers and data centers around the world.
Looking to the second quarter, we expect a further increase of sales in the mid single digits from these levels as customer demand continues to accelerate.
We remain very encouraged by the company's outstanding technology position in the global it Datacom market.
Our customers around the world no doubt about it are continuing to drive their equipment to ever higher levels of performance in order to manage the dramatic increases in demand for bandwidth and processor power in turn our team remains singularly focused on enabling this continuing revolution in it datacom with our unique high speed.
Power and other interconnect products.
Finally, the broadband market represented 4% of our sales in the quarter and sales grew by a very strong 16% from prior year as broadband spending levels remained elevated on a sequential basis sales grew slightly from the fourth quarter.
We do expect a high teens sequential sales increase in the second quarter as customers continue to upgrade the capacity of their networks to support the significant increase in demand for bandwidth and as we benefit from our recent acquisitions, including cable com.
The addition of cable con expands our offering for broadband customers in the European market, which enables us to provide a more diversified range of products for their next generation networks and their related upgrades.
We look forward to continuing to offer this expanded product offering to broadband service operators around the world all of whom are working to increase bandwidth to support the expansion of high speed data applications to homes and businesses.
Now turning to our outlook and given the current still dynamic market environment as well as assuming no new material disruptions from the COVID-19, pandemic and constant exchange rates.
For the second quarter, we now expect sales in the range of $2 billion $415 million to $2.475 billion and adjusted diluted EPS in the range of 53 to 55.
This would represent strong sales growth of 22% to 25% and adjusted diluted EPS growth of 33% to 38% compared to the second quarter of last year and I would just note that the second quarter of last year. As you will recall was already a strong recovery quarter for the company coming out.
The first quarter.
I remain confident in the ability of our outstanding management team to adapt to the ongoing challenges that are in the marketplace and to capitalize on the many future opportunities to grow our market position and expand our profitability.
The entire Amphenol organization remains committed to delivering long term sustainable value all while prioritizing the continued safety and health of each of our employees around the world.
And most importantly, I'd like to just take this opportunity to thank the entire amphenol team for their truly outstanding efforts here in the first quarter and with that operator, we'd be happy to take whatever questions. There may be.
Yes.
Thank you.
A question and answer we'll begin please.
Please be reminded that questions are only.
I'll ask one question per participant.
Now our first question is from Chris Snyder of EPS.
Thank you I guess my question is on on supply chain. You know if you look across the end markets just given the really or the stronger than expected growth did you see any inventory building across any of your end markets and then kind of staying on that supply chain as we look into Q2 the top.
<unk> guidance.
Screens, a bit light relative to the Q1 orders on the 1.15 book to Bill on was there any implication here that deliveries.
Maybe pushed out to the right a little bit just given all the supply chain disruptions were saying.
Yeah, well. Thanks, Thanks, very much Chris I mean first relative to the supply chain and our robust results in the first quarter I mean, it I would tell you that across the board you know customers want our products because their end customers.
By and large are also need the products, whether that's delivering it datacom connectors that go into web service providers to satisfy the demand for bandwidth that is happening whether its automotive customers scrambling to build as many cars as they can given the low inventory low dealer inventories that are out there.
We really saw customers, taking product and converting that product into into their end systems and and we don't obviously don't get full visibility into the warehouses of our customers, but we do get some visibility into the distribution channel and there we did not see any material increases in inventory on.
On the noticeable inventory builds I mean actually to the contrary, our our growth and distribution on our book to Bill and distribution was not meaningfully higher than what we saw across the total company realm.
Relative to the second quarter look we think there's a very strong guidance from several perspectives first and foremost there are these supply chain challenges and I think some of these have been widely reported in particular in places like the automotive market, where I talked about that we do see the automotive market, having a slight downtick in demand in the second quarter.
As certain customers have had to take factories offline or otherwise curtail production because of supply chain challenges. So so theres no doubt that we see that as well when you look at our on a year over year basis, our second quarter guidance as I mentioned, just a few moments ago. This is a very strong guidance 25.
Rent growth at the high end of guidance and Thats on top of the second quarter last year, where we had grown already 7% sequentially from the first quarter.
You'll also remember that on our mobile devices business, we had a very strong come back last year in the second quarter, and so that 25% comparison when when seen in the context of last year I think is a very very robust demand.
In terms of the orders yes. These are very strong orders that we received in the quarter and could there be some customers who are maybe opening up the operator of their order scheduling ordering a little bit longer out there there could be some of that I think we have some customers that there are many across the supply chain, who are a little skittish because of some.
The challenges that are so widely reported and that I'm sure. All of you know even better than I do.
And that can cause some customers to maybe order a little bit more in advance not to build inventory per se, but to get it on the books.
But look all that being said if you look at our orders on a year over year basis. They also grew at a similar rate to what our sales grew about 27% I think was the order growth.
And I think they are reflective of strong demand on our products from our customers, who we have consistently supported through all cycles of this crisis and when you look at our performance across each of the individual markets. It's clear that customers are coming back to us because we were there for them when they needed us the most.
Thank you now our next question is from.
Bank of America.
Oh, yes. Thank you.
I was wondering if we could just step back perhaps given your really broad.
Diversified portfolio, how should investors think about the areas in which amphenol can benefit from this proposed infrastructure plan.
Well as long as it's a great question and you know it's still a proposed infrastructure plan. Obviously, so you know I'd say.
Everything with a grain of salt in particular with the with the political system that we have now in the U S.
But look I think we have a lot of our businesses that do stand to play a role in upgrading the infrastructure of the U S, especially because the infrastructure is being defined as I would think it should be in a very broad sense, its not just roads and highways and bridges and tunnels and airports, which which would stimulate.
Demand for a wide variety of products that we sell into heavy equipment and otherwise, but infrastructure means the domestic capacity to produce electronic components in certain cases infrastructure means bandwidth.
Infrastructure means access to data.
Access to devices and I think that all of these things ultimately today.
A common threat and that is that the adoption of electronics and in turn our ability to enable that adoption of electronics plays a significant role in the upgrade of those various quote unquote elements of infrastructure.
And so whatever the ends up coming out of the kind of the sausage factory of Washington, If you will.
There's no question to me that electronics is going to play a significant role in helping this country to upgrade its infrastructure on the broadest sense and I think we're very well positioned across our end markets two to play some to play some constructive role on that.
Thank you now on.
Our next question is from Amit <unk> of Evercore.
<unk>.
Thanks, a lot good afternoon, everyone. I guess my question is really around you know Adam when I look at your growth rates for the folks on the SKU or thereabout.
25% or so.
Much of this as humans are cyclical market recovery, but I'm wondering if you could actually talk about amphenol is seeing share gains pick up is one on the force up of D. R.
Actually as I imagine that your peers have not been able to ramp up capacity as quickly as demand has come back and if that's true then going forward you know.
Could that enable you to grow at a larger premium to the underlying industry growth rate given share gains because they can see hopefully.
Well, thank you very much Amit and greetings to you as well.
Look I think the numbers here a little bit speak for themselves. When you look at our overall growth growing 28 per cent or 23% organically in the quarter or when you look at some of the individual markets, where we had significant growth in a number of our markets clearly outpacing whatever the industry growth rate.
We'll be in that you know I am not an expert in exactly what various industry growth rates are but clearly growing in industrial by 33% organically on automotive by 44% organically and mobile devices by 51% organically and it datacom by 25%. Those are clearly ahead of the overall <unk>.
Growth rates in and you are correct I think there is a meaningful component of that growth, which is our ability to react quickly. Despite a very challenging environment should not be understated. There still remains many challenges today in the world, both with COVID-19 and with the supply chain.
But our ability to react quickly in an entrepreneurial and agile fashion to satisfy the demand of customers when they need it has been I think through this whole cycle, an extraordinary advantage that we brought to bear and its customers zinc for the long term about with whom do they want to partner.
It's going to be very hard to forget who was there for you when the chips were down at the greatest moments who was there for you during the depths of the pandemic. When bandwidth was was it such a premium and factories were closing all over the place because of shutdown orders in and.
And the spread of the virus and who was there to react when you needed to help US support your end customers and I think that that is something that our customers reflect on integrate into their buying behavior incorporated into their decisions about who should be their partner going forward.
And so does that mean that we have a high potential to continue to outpace the market and we've outgrown the market for now two decades.
And I think that this just reinforces for our customers why having amphenol as your first phone call.
It is a really important principle on a very helpful way to run your supply chain.
Thank you. Our next question is from James Suva Citigroup investment research.
Thank you and nice to see on <unk>.
I'll continue.
Acquisitions in the past history, sometimes acquisitions had been companies really needed a global footprint per sales.
Manufacturing footprint are helping to power their operations and others had been strategic to help the company growth in the future.
Announced acquisitions that you just talked about today can you just.
On which bucket they are for the growth.
On the operations and you can really improve their profitability or total markets, how do they fit into the amphenol family.
Thank you very much Jim I mean look our criteria for acquisitions is always started with two things and that's people and the products in other words the technologies that those companies have and so the very first test for US is are we acquiring a company that has people who have passion drive.
<unk> integrity and entrepreneurial spirit that we think will fit into the Amphenol organization and then second do they have unique enabling technologies that ultimately solve real problems for their customers and then when we found those companies, we don't focus on either growth or on improvement in operating performance, we try to do both of them.
Those things and our acquisition program, which has been so successful over so many years has really been successful because we were able to find ways to accelerate the growth of those companies and find ways to improve their operating performance since I would say that the the three acquisitions that we're talking about today of course.
Being a far and away bigger than than euro micron or cablecom. They all share that great potential both from a topline growth perspective, taking advantage of being part of Amphenol.
Taking advantage of being part of a global company with strong partnership preferred supplier relationships with customers across all of our end markets, but also being part of a company that has access to low cost manufacturing when appropriate who has access to two collaborative initiatives across the company from a technology.
<unk> is sourcing perspective that ultimately can help to drive better operating performance and so I would say with these three companies, we think that they all have great growth and profitability improvement potential there.
Despite their very different scales.
Thank you.
Now our next question is from Matt Sheerin from Stifel.
Yes, Thanks, good afternoon, everyone Craig.
Craig regarding your commentary about some cost headwinds are weighing somewhat on on your your margins could you quantify that in terms of maybe what in terms of basis points you've seen.
Alrighty and supply chain environment, I think is really just a a great achievement and I I really you know and I'm happy with the performance of the general managers to be able to offset you know some of these costs that that they're saying you know the reality is is that we do we have seen you know increasing in challenging environment as we come into the first quarter.
[noise] to to quantify that is a little bit difficult, but I think the way I would think about it is that if you you know as we kind of came into the first you know first quarter from from the fourth quarter sequentially. We would expect of it you know a typical.
Close to 30% kind of sequential downside conversion. So so really the gap between that is the vast majority of that I think is really the pressures from the from the commodity and supply chain environment. I mean, there is some small component related to some of the acquisitions on positronic.
You know as well as your micron that'd be closed earlier in the quarter, but the the vast majority really would be would be that you know kind of cost environment that we're seeing some headwinds from you know in terms of how long that will last I mean, there's certainly we're doing you know I think the teams again doing a good job of trying to offset some of that I think it was through taking some cost.
Action and over time, maybe also through through passing on some of those increases the customers to the extent you can't do it within the factories, but you know I don't think this isn't necessarily something that we're gonna be able to necessarily get through and a quarter. So that's certainly is still included in kind of our second quarter guidance that we gave us expect to still have some of those headwinds we haven't guided to the rest of the year. So I guess.
I won't comment on on that but but certainly I think that you know at this environment that we find ourselves and now I'm very happy with kind of what we've been able to achieve in terms of offsetting a certain level of those costs, but I think that the reality is is that the you know we're probably sitting here at least for another quarter here with some of those those costs headwinds that that we see today and.
I would just add to the a little color.
There are certain parts of this which are pretty significant cost differences in commodities. For example, I mean, you're they're all very well reported.
And you know the way that Amphenol operates as we have.
Close to 125 general managers around the world and each of them is really tuning their operation in light of the costs that are hitting them in particular, so you've taken example, general manager in our cable business, which has a very high component of material cost.
Very significant in our in our cable segment.
Not a choice, but to go and work with customers and to make sure you take a leadership position and and adjusting price to account for those commodity prices and we would certainly expect that others in the industry would have that same dynamic and that's just one example of how it goes but the beauty is is that day.
Just general managers have every tool available to them to a job whether it's from from the price yourself to the customer to every element of costs are all in the power of the general managers and when you see a sudden increase in some of these things it can take a short while to work through it but Craig and I are confident that over time on our team is.
Going to Memphis as they always have.
Thank you know on our next question is from Marceline of Goldman Sachs.
Yeah. Good afternoon, and thanks for taking my question is this quarter was certainly a good illustration of amphenol leadership and operational flexibility, but it's still be interested in understanding if you're thinking of many making any changes in how the company operates going forward you know in terms of things like how he or she material where you locate manufacturing.
Or inventory management. Once you have some time to fully reflect on how COVID-19 and and and some of the the trade issues and stretched global supply chains or or even just because amphenol is becoming a bigger company with the emanated that you've done you, including most recently with M. T S.
Thanks, So much Marc I mean look on the answer I'll give you is is really two sides. The answer is no we think that our approach on.
Our culture the unique entrepreneurial organizational structure that we have had an amphenol for many decades is uniquely tailored to an environment like we've been in into an environment like we're headed into.
But the other answer is yes every day, meaning where making changes every day, we're not making those changes from here at headquarters, we're not deciding on a blanket approach like we're going to go out of one country and go into this country or we're going to increase our inventory. This macho, we're going to change our sourcing things but.
Those general managers around the World are every day, making course corrections and some of them pretty significant course corrections in the moment to react to the environment that is around them. So when when tariffs came and you'll remember this already it seems like so long ago that that there was this thing called tariffs several years ago, but our team.
<unk> reacted to that in every way possible for moving production to changing logistical flow to doing lots of other things to 222, passing on the price to customers. When there was no other option and that was a real time in the moment kind of transformation, but not at a corporate level rather it was at the individual operating and.
Levels and I think as we've gone through the pandemic as we see the very robust demand coming out of this part of the cycle.
We're making lots of changes every day to make sure that we remain the most competitive that we are able to outperform the market at the highest degree possible and that we are able to deliver to the bottom line superior operating profitability and ultimately convert that to cash and and those those are just day to day decisions that are.
Made by our general managers, obviously in some consultation with us, but ultimately the proof I think is really into putting of that approach.
Thank you now our next question is from Craig heading back on Morgan Stanley.
Yes. Thanks, I just questions on M. T. I think I think they're operating margins are roughly in in the mid teens and I know other acquisitions, you've done in the past where they've been lower there's a path to kind of get them to corporate average. So just curious if there's any similar similarities or differences in terms of that that approach to this this deal and then on.
You mentioned the number of the key markets for M. T S where they play any of those stand out in particular from a growth perspective that you're most excited about.
Thanks, very much Craig.
I think you're you're roughly accurate about the operating margins with empty us obviously there'll be some amortization and we include amortization on our numbers. So that they can have a little bit of downward impact on the operating margins, but you're right. I mean every company who comes into Amphenol thinks about how are they going to achieve.
Leave ultimately that growth and margins to get up to the amphenol corporate average or above obviously on average is just an average on there are some above on some below.
And I would tell you that the management team in the MTS censors businesses are extraordinarily capable team of individuals the gentleman, who leaves that business, who led the business inside of empty as to who by the way to lead the predecessor family owned company that was required by M. T. S. I mean this is.
Just truly outstanding individual who also.
Like to see that his company is doing as well as his sister companies and there there's no doubt about it that there's a little bit of peer pressure inside of Amphenol when you come in and see the the margins of your peers and something tells me that that's an organization that that does not want to be below the average and how long is that going to take you know that's always that's always a question, but there.
When there's a will there's a way and I think this is a team that has an extraordinary will to make that happen in terms of the markets with the MTS censors business.
Talked to already that they have a strong position and industrial and military and then in commercial air on automotive roughly in that order I would say in terms of magnitude and they participate in just some of the most exciting applications within those MTS mix products that are really at the <unk>.
Cutting edge of of the harsh environment high performance requirements of some of these systems, so when you're making like a turbine and that turbine be at a gas turbine or a windmill and you Wanna know that that thing is operating with good function and smoothed.
And that there's no issues.
Inside the turbine.
You're gonna use a sensor from M. T. S. A number of sensors, let me say that are gonna be in the most harsh of environments Hot out in the middle of the Ocean you name it that.
That are going to ultimately tell you is is your system working or not and do you need to go maintain that that's just one example of these extraordinary harsh environment vibration force pressure and position sensors that they that they sell.
I had the good fortune to go round to several of the factories just in the last couple of weeks and had been there of course before but going now is the on or has a little bit different and and not only do you see products that are truly at the high leading edge of sensor technology, but these are censor products, where the the harsh environment.
Interconnect packaging.
Those sensors is almost have equal important to the to the good functioning of the product and the systems, where where they participate in so we we say just great opportunities in the industrial market across many segments of the industrial market in the military market as I spoke earlier, where we have already a leading position in military interconnect.
We're just really excited to now have a significant position also and sensors in the military market.
As well, an automotive and and commercial air and so we see great opportunities really across the market's of M. T S and look forward to taking full advantage for many years to come.
Thank you. Our next question is from William sign of Jewish Securities.
Great. Thanks for taking my questions. Congrats on the very good results today.
Yeah.
Ask you about the commercial aerospace on market, you know that and market was already in a pretty significant downturn because of the 730, Max grounding and then we'd COVID-19, obviously stop traveling demand for planes, but I think I did this segment up sequentially and I Wonder if that's an indication that you think we're past the <unk>.
Bottom here and I wonder what you're seeing in terms of Ah recovery Uhm, what you're seeing an order book and maybe what you're hearing more anecdotally from your customers. Thank you.
Thanks, well, yeah, I mean, it's tough time in the commercial air market, There's no doubt about it I mean, it's hard to think of a market that was not there was more heavily impacted over the last year and a half than the commercial air market. It represents now just two per cent of our sales and we did guided up sequentially in the.
Quarter ahead, although I would say that that's really the impact of the M. T. S sensors acquisition I I I don't know that I would necessarily say that I I'm kind of calling a bottom.
So to speak but clearly the right.
Is declining the rate of decline on a sequential basis is getting smaller is down by just 3% sequentially in the quarter, which is I guess, a green shoot of encouragement, if you will but but the commercial auto market has a tough road ahead of it and our team working in that market.
Is doing everything they can to continue to diversify their business to make sure that the products that they sell which have other applications are are being proliferated in where be devoting resources to designing in those products are into other applications, where they can be very enabling technologies such that when the commercial and market does event.
They come back, which which it will we're not going back to horses and buggies, we will be flying again, one day and I hope to be doing so very soon after I get my second shot Tomorrow morning, together with Craig who that market will come back and when it comes back our operations working in that market will be stronger than ever because they will have taken this opportunity to <unk>.
<unk> themselves diversify their products.
Ah leverage their resources in a broader fashion and I think that's that's the way to deal with the crisis like this and that's always been the Amphenol way.
Thank you know our next question is from you on what your Diana from calling.
Hey, good afternoon guys.
Hello Java.
So we kind of like different strategies in different responses from many companies the season about how they're dealing with sourcing of components that are in scarcity and we've heard some say that the ability to like leverage all day or individual businesses is one big customer it kind of gives them leverage yet at its suppliers I. Thank you.
Probably going the other way you can you can you kind of talk about how the structure of Amphenol is kind of small independent companies essentially gives them an advantage when when sourcing is it because somebody's business are small enough that there <unk> you know, it's not a b quantity that they need you maybe just talk us through that relative to some other maybe ways to accomplish that.
Yeah, Joe we try to have the best of both worlds and sourcing and so at the end of the day sourcing happens under the purview of those 125 general managers around the world and sometimes it's good to be small and sometimes it's good to be big and what we try to do is we we present ourselves as whichever is most beneficial in the moment.
We oftentimes are a few general managers, who by a common material will work together and they may go together to a vendor if that's what gets us the results that we need but in other cases, it's a very local decision where maybe a purchasing person says to a local sales rep pages sneak me what I need here no one's gonna know.
Curtis and and and in between both of those there's a whole spectrum of techniques strategies tactics that our supply chain team around the world will be taking the most important principle those this.
If you have supply chain disconnected.
From the business, it's actually really hard to decide ultimately am I doing the right thing how do I, what if I need to redesign something well if if there's this monolithic engineering team in a monolithic sourcing team and and the the sourcing team says we can't get this part we need to redesign it and it has to go.
Sort of up and down the corporate chain to get that redesign resources to be allocated or to convince the engineer to do so that that can be a very laborious process, whereas in our in our organization. The purchasing person is sitting in the door right next to the engineering person reporting to the general manager Who's two doors down from her and they can just get in a room together and.
They look we can't find this thing let's redesign it right now, let's reallocate the resources, let's make it happen and it's that kind of real time connected to the business approach whether it is dealing with shortages, whether it's dealing with logistical challenges, whether it's dealing with quality issues, whether it's dealing with new design whatever.
We've always found that that approach can be very effective, but we try to be we try to be what will make us be the most successful let's say that.
Thank you. Our next question is from David County from Jeffries.
Good afternoon, Adam and Craig just hoping to follow up on automotive really robust growth versus on their line production in the quarter you referenced electrification when does the contributor.
And then you mentioned broadly you weren't paying channel inventory build but I would assume you delivered can market share gains and then probably benefited from favorable mix as well just hoping you could walk us through some of the drivers on by you really sure on automotive performance in the quarter.
Sure well. Thanks, Thanks, very much David I mean, you you know the underlying market much better than I do you could teach a master class on it for sure, but what I would tell you is our team in all regions really performed very strongly here and we saw great growth.
Really across the board across the region and we saw disproportionate growth from from new programs that were that we've long worked to design ourselves in on relative to E. V is but it wasn't exclusively these we saw growth and lots of other lots of other new platforms.
As well and.
I think our long term share gains in the automotive Martin I referenced. This earlier is really a function of us focusing our efforts on next generation technologies and car next generation systems next generation applications everything from passenger comfort and connectivity to safety to engine management emissions control.
And obviously a high voltage related to E V as in hybrid Ivy's.
And I think all of those things are helping us to outperform the broader market.
And a quarter like like we just had here on the first quarter, but also over a very long time period, where we're really talking about the better part of a decade, where we have had a relatively consistent performance that is a decent amount if not far in excess of of the underlying unit production volume that are out there. So.
There's not like one silver bullet to this I think it's been a collective approach Ah it's been our acquisition program, where we've added new companies, both and interconnect antenna and censor companies.
And it's a lot of work on engineering of next generation systems that go into these cars across all of the region and I think when you put all that together.
Ultimately, we've seen strong performance.
I think you know our next question interest semi cheddar cheese on J P. Morgan.
Great I had him hi, Craig.
Good afternoon wanted to Uhm get your views on mobile networks, you mentioned you hired based on.
Revenue than you expected in the corridor you guiding to seek Richard improvement in revenues and how should I think about a visit great deal. So streaming video this improvement to the rest of the yoga and how cool is that going to be too. So it'd be like five G. Capex plan would that be north American telcos recently outlined how much of a doctor is going to probably help.
[noise] sustains on all of this growth for the rest of the Ya Okay.
Thank you so I mean, well look we're really pleased with the sequential growth that we saw on this market. Obviously, that's a market that over the last a year or two has has not always had the most robust growth as the operators of have somehow struggled there's been a lot of corporate things going on delays and investment last year we.
Also saw some redeployment of of the investment towards really the core of the networks to support the massive growth and bandwidth, but we've always talked about the fact that our team has been working diligently over many years to design in our products into next generation systems and networks.
<unk> G or otherwise and I think we start to see kind of some early progress with that here here in the first quarter and to the extent that operators.
Are expanding their investment we would hope to benefit from that it may not always be in a perfect quarter to quarter correlation we don't have a position with absolutely every operator with the exact same degree of success, but we have a very strong position on the equipment that is really going to enable five G for the long.
Term and so to the extent that five G creates incremental capital spending, which again has has yet to be perfectly articulated.
Then then for sure we would feel like we would be on a good position to be able to benefit from that.
And the medium and long term.
Thank you on my next question is from Newquay on right.
Yeah, good afternoon Adam.
Mention hybrids and electric vehicles, especially as a gross driver on your end market discussion of both auto and industrial trends. This afternoon do you help us better understand the span of E V related products, especially across those two segments and in particular, I'm wondering how that might differentiate the company's opportunities that versus some of your car.
<unk> appears to have any more auto based focus.
Oh, Thanks, very much look yeah. No you you picked up on the very astutely, we participate in the electrification of vehicles, whether those are passenger vehicles or commercial vehicles and and both have been really great drivers for us.
In recent quarters and years and and the industrial we talk about that industrial battery and the and the heavy vehicles. Yeah. There. There's a wide range of vehicles that are undergoing electrification right now from from from Big trucks, and you know there's plenty of news media around that to postal vehicle.
And trash trucks and buses and goods vehicles delivery vans you name it and so all of that is what we classify really in our industrial business or industrial market is that battery heavy heavy vehicle and then when we talk about automotive the hybrid D V. That's really passenger cars and and the related.
Products.
In addition, we think about the charging infrastructure for for electrification.
Is really an infrastructure piece and that we think about in our in our industrial business as well and that's all those are all components of areas, where we've seen strong performance and certainly in the first quarter and on over a number of years and look forward to that because I think if you can fire.
On your view of electrification just to passenger vehicles, you're missing a really exciting area of of the electronics Revolution, which is that electrification more broadly by the way I mean, we're working as well with the the department of defense in certain countries on on the electrification of military.
Vehicles, which I think is going to be a long process, but over the long term, we see that as an area that can also be another benefit in another growth lever along this just real kind of call. It a mega trend. If you will of electrification across kind of all things that move.
Thank you now our next question interest even Fox Fox Advisors.
Alright, good afternoon, Craig I've, just wanted to talk a little bit more about your extra costs and coming quarter. If I applied your analysis uhm for Q1 to queue to it looks like the pressures about $20 million are so similar.
Similar to Q1 I imagine there are some M&A impacting your incrementals, but can you talk about whether that's in the ballpark and what you guys are doing to sort of reduce at 20 million not going forward.
Yeah, Yeah, no actually your your math travel isn't so far off you know certainly in the range of.
What we'd probably quantify.
That as and now if you look on sequentially going from Q on the queue to essentially a lot of that growth is our acquisitions that we just announced so as you can imagine the sequential conversion is gonna be a little bit lower than your typical conversion just because those are you know acquisitions are.
Sure profitability level than the average of the company and clearly as we talked about with M. T. A specifically, but also related to the other two you over time, we would expect to be able to work those up to the company average, but as we were talking about queue to specifically that sequential conversion really mostly has impacted related to the the acquisition.
But essentially the cost impact that you're just quantified and and it kind of is in that ballpark that.
We had an Q1 is essentially we're expecting to still see on queue to as the team continues to work through all those actions to ultimately overtime neutralize those impacts.
Thank you very much.
And I think you as of this time, we don't have any further questions on queue now I'll turn to call back to Mister Lampo for closing remarks.
Well this is Mister Norwood, but anyway. Thank you very much and we truly appreciate everybody's time today on the call and you know I I did want to take a moment just to wish everybody. Good health here and I hope everybody is getting the chance to be vaccinated. Soon wherever you may be and I wanted to make just a special call.
At the note about any of you who may have friends or family in India. We obviously have an organization, India and we're we're very carefully attentive to the ongoing situation with the pandemic there and doing on our part to help the communities in India and I.
Just wanted to send our best wishes to any of you on the phone here today with family or friends in India. It's a it's a fabulous country and I am sure. They are going to work their way through this difficult stage in the pandemic. Thank.
Thank you all to everybody and wish you all good health and we'll talk to you all in the next 90 days. Thank you everybody bye-bye.
Thank you and thank you everyone for attending to these countries have a nice day.
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