Q2 2022 Amphenol Corp Earnings Call
Hello, and welcome to the second 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.
Thanks.
Afternoon, everyone. This is Craig Lampo, Amphenol, CFO and I'm here together with Adam <unk>.
We would like to welcome you to our second quarter 2022 conference call.
Our second quarter 2022 results were released this morning, and I'll provide some financial commentary and then Adam will give an overview of the business and current trends then we will take questions.
As a reminder, during the call we may refer to certain non-GAAP financial measures and make certain forward looking statements. So please refer to the relevant disclosures in our press release for further information.
In addition, all data discussed during this call is on a continuing operations basis, including prior year comparative information.
Yeah.
The company closed the second quarter with record sales of $3 billion $137 million and record GAAP and adjusted diluted EPS of <unk> 76, and 75, respectively.
Second quarter sales are up 18% in U S dollars, 21% in local currencies and 18% organically compared to the second quarter of 2021.
Sequentially sales were up 6% in U S dollars, 8% in local currencies and 8% organically.
Adam will comment further on trends by market in a few minutes.
Orders in the quarter were a record $3 billion $449 million, which was up 11% compared to the second quarter of 2021 and relatively flat sequentially, resulting in a strong book to bill ratio of one one to one.
Both GAAP and adjusted operating income were $649 million in the second quarter of this year.
And GAAP and adjusted operating margin were both 27% in the second quarter.
On a GAAP basis operating margin increased by 280 basis points compared to the second quarter of 2021, and 70 basis points sequentially.
As a reminder, GAAP operating margin for the prior year quarter included $55 million of acquisition related costs as a result of the MTS acquisition.
On an adjusted basis operating margin increased by 70 basis points, both year over year and sequentially.
The year over year increase in adjusted operating margin was driven by operating leverage on the significantly higher sales volume as well as the benefit of ongoing pricing actions, which we believe have offset a meaningful amount of the inflation related cost increases.
On a sequential basis the increase in operating margin reflected operating leverage on the higher sales volumes as well as the benefit of ongoing pricing actions.
Given the dynamic overall cost and supply chain environment. We are very proud of the company's operating performance our teams ability to effectively manage through the myriad of operational and supply chain challenges around the world as a direct result of the Companys entrepreneurial culture, which continues to foster a high performance action oriented management team.
Breaking down second quarter results by segment relative to the second quarter of 2021 sales in the harsh environment solutions segment were $790 million and increased by 14% in U S dollars and 16% organically.
Segment operating margin was 26, 1%.
Sales in the Communications solutions segment was $1 378, $1.378 billion and increased by 24% in U S dollars, 19% organically segment operating margin was 22%.
Sales of interconnect and sensor systems segment were $968 million, an increase by 15% in U S dollars and 19% organically and segment operating margin was 18, 3%.
The company's GAAP effective tax rate for the second quarter of 2003 was 23, 3% and adjusted effective tax rate was 24, 5%, which compared to 17, 5% and 24, 5% in the second quarter of 'twenty one respectively.
GAAP diluted EPS was a record 76 cents in the second quarter, an increase of 29% compared to 59 in the prior year period and adjusted diluted EPS was a record 75, an increase of 23% compared to 61 in the second quarter of 2021.
This was an excellent result, especially considering the significant cost supply chain and other operational challenges that the company continued to face during the quarter, including certain COVID-19 related shutdowns in China.
Operating cash flow in the second quarter was a record $543 million or 117% of adjusted net income.
And net of capital spending our free cash flow was a record $452 million or <unk>, 97% of adjusted net income.
Given the continued supply chain challenges, we were pleased to see cash flow yield recover back to normal leverage levels in the second quarter.
From a working capital standpoint, days' sales outstanding and payable days were 72% and 58 days, respectively. Both within our normal range and inventory days were 86.
Which was slightly elevated due to the challenging supply chain environment that continued in the second quarter.
During the quarter the company repurchased two 7 million shares of common stock at an average price of approximately $70 and when combined with our normal quarterly dividend total capital returned to shareholders in the second quarter of 2022 was $305 million.
Total debt at June <unk> was $4 9 billion and net debt was $3 5 billion total liquidity at end of the quarter was $3 7 billion, which included cash and short term investments on hand of $1 3 billion plus availability under our existing credit facilities.
Second quarter, 2022, EBITDA was $759 million and at the end of the second quarter, our net leverage ratio was one two times.
I will now turn the call over to Adam who will provide some commentary on current market trends.
Well, Craig Thank you very much and.
Hope that all of you in the call here today are enjoying the summer so far and most importantly, your family your friends and your colleagues are all still managing to stay safe and healthy.
As Craig mentioned I'm going to highlight some of our achievements in the second quarter I'm, then going to discuss our trends and progress across our served markets. I'll then make a few comments on our outlook for the third quarter and then finally, we'll of course of time for questions.
As Craig just went over our results in the second quarter were much better than expected we exceeded the high end of our guidance in sales and adjusted diluted earnings per share sales grew a very strong 18% in U S dollars and 21% in local currencies, reaching a new record of $3 billion $137 million on an organic.
Ganic basis, our sales increased by 18% supported by robust growth across nearly all of our end markets as well as contributions from our acquisition program, which was partially offset by the strengthening U S. Dollar.
Company booked record orders of nearly $3 billion $450 million and that represented a continued positive book to bill of one one to one.
We were especially pleased to deliver strong profitability in the quarter with operating margins, reaching 27% and that's a 70 basis point increase from both prior year and prior quarter and we achieved these operating results despite facing a wide range of operational inflationary and supply chain challenges.
As well as the Covid shutdowns in China that Craig mentioned.
Adjusted diluted EPS grew a strong 23% from prior year to a new record of 75.
Another excellent reflection of our continued strong execution.
And finally, we're very pleased that the company generated record operating and free cash flow in the quarter of $543 million and $452 million respectively.
Just wanted to say how proud I am of our team around the world. Our results. This quarter. Once again reflect the strength of Amphenol entrepreneurial organization, who has continued to perform very well amidst a highly dynamic and challenging environment.
We're very pleased to have announced in the quarter that we closed on the acquisition of NPI solutions.
Based in Morgan Hill, California, with annual sales of approximately $65 million NPI is a manufacturer of cable assemblies and complex interconnect assemblies for the industrial market with a particular focus on customers in the semiconductor equipment and test and measurement markets.
The addition of NPI expands our already broad position in value add interconnect for these important and high potential markets.
As we welcome this outstanding new team to Amphenol I remain confident that our acquisition program will continue to create great value for the company.
In fact, our ability to identify and execute upon acquisitions and successfully bring those companies into amphenol remains a core competitive advantage for the company.
Now turning to our progress across our served markets I would just note. Once again, how pleased we are that our end market exposure remains highly diversified balanced and broad.
No doubt about it during these very dynamic times that market diversification continues to create great value for the company.
The military market represented 9% of our sales in the quarter sales declined by 2% from prior year, but were flat organically with the moderation in our sales into naval and military vehicle applications offset by growth in space avionics and Uavs.
Sequentially, our sales increased by 3%, which was in line with our expectations coming into the quarter.
As we look into the third quarter, we expect sales to increase modestly from these second quarter levels and we continue to be very pleased with the strength of the company's broad position across the military market.
As militaries around the world continue to adopt a wide array of next generation defense technologies, our industry, leading breadth of high technology interconnect and sensor products positioned the company strongly across all major defense programs. This gives us great confidence for our long term performance.
The commercial aerospace market represented 3% of our sales in the quarter and our sales increased by a very strong 32% from prior year and 36% organically as we benefited from the continued recovery in global aircraft production.
Sequentially, our sales grew 11% from the first quarter, which was actually much better than the expectations that we had coming into the quarter.
Looking into the third quarter, while we do expect a seasonal low double digit sequential decline in sales, we anticipate continued and substantial growth from prior year.
We're very encouraged to have driven another quarter of strength in the commercial air market, which is a quite a welcome development. After two extremely challenging years in the air travel industry as personal and business travel continues to recover we look forward to benefiting from the Companys strong interconnect and sensor technology position across a wide array of air.
Aircraft platforms and next generation systems integrated into those planes.
I'm, particularly proud of our team working in commercial air who really have persevered throughout the downturn and who are now once again, realizing the fruits of their long term labors.
The industrial market represented 26% of our sales in the second quarter sale.
Sales in the quarter grew 13% in U S dollars, 15% organically and this was driven by broad based strength across most of our industrial end markets, including especially the battery and electric electric heavy vehicle applications oil and gas medical and rail mass transit.
On a sequential basis, our sales increased by a better than expected, 8% from the first quarter.
Looking into the third quarter, we expect sales to roughly remain at these very robust second quarter levels.
I have to say that our results this quarter confirm once again that our outstanding global team working in the industrial market continues to find new opportunities for growth across the many segments of this exciting market I remain confident.
Confident that our long term strategy to expand our high technology interconnect antenna and sensor offering both organically and through complementary acquisitions has positioned us well to capitalize on the many revolutions happening across the industrial electronics market.
To that end. The addition of NPI solutions further strengthens our position in the important semi semiconductor and test and measurement equipment interconnect markets.
We look forward to realizing the benefits of this long term strategy for many years to come.
The automotive market represented 20% of our sales in the quarter.
Sales in the second quarter grew 23% in U S dollars and 29% organically.
And this was driven by broad based strength across most automotive applications with particular strength once again in sales into electric and hybrid electric vehicle applications.
Sequentially, our sales increased by 6%, which was much better than our expectations coming into the quarter. When we had anticipated a modest sequential decline.
For the third quarter, we now expect a moderate sequential decline in sales as customers continue to manage through a wide array of supply chain challenges in the global automotive market.
I remain extremely proud of our team working in the important and dynamic automotive market. They continue to manage through a difficult supply chain environment. All while remaining focused on driving new design wins with customers, who are implementing a wide array of new technologies into their vehicles are continued outperformance is a direct result of their X.
<unk> efforts.
The mobile devices market represented 9% of our sales in the quarter, our sales increased by 7% in the second quarter as strength in smartphones and laptops were somewhat offset by a moderation of sales of products incorporated into tablets.
Sequentially, our sales declined by a better than expected, 6% versus the first quarter.
Looking now into the third quarter, we anticipate sales to increase by more than 20% compared to the second quarter levels on typical seasonal strength.
I remain very proud of our team working in the mobile devices market and particular amidst the COVID-19 related disruptions in China that occurred early in the quarter are outstanding and agile team. Once again delivered strong results. Most importantly, they continue to design, our leading array of antennas and interconnect products and mechanism.
Ms into a wide range of next generation mobile devices and they remain as always poised to capture any opportunities for incremental sales that may arise this year and beyond.
The mobile networks market represented 5% of our sales in the quarter and sales grew from prior year by 9% in U S dollars and 6% organically.
As as strength from products sold to network operators together with the benefit of acquisitions more than offset a moderation of our sales to wireless equipment manufacturers.
Sequentially, our sales in the second quarter grew by a slight 1%, but that was better than our expectations coming into the quarter.
Looking to the third quarter, we now expect to grow moderately from these second quarter levels.
We are encouraged by the company's continued strength in our sales into the mobile networks market.
As operators ramp up their investments in next generation systems. Our team remains focused on realizing the benefits of our long term efforts to expand our position in next generation <unk> equipment and networks around the world.
The information technology and data communications market represented 23% of our sales in the quarter.
Sales were stronger than expected rising by a very robust 31% in U S dollars and 26% organically from prior year.
Our team really just executed well and fulfilling broad based strength across server and networking applications.
<unk> with web service providers.
Sequentially, our sales increased by 11% in the second quarter, which was better than our expectations.
Looking to the third quarter, we expect sales to moderate from these very strong second quarter levels. Nevertheless, we remain encouraged by the company's outstanding position in the global it Datacom market.
Both our OEM and web service provider customers continue to drive their equipment and networks to ever higher levels of performance really in order to manage the dramatic increases in demand for bandwidth and processor power.
I look forward to realizing the benefits of that leading position in this important market for many years to come.
Finally, the broadband market represented 5% of our sales in the quarter sales grew by a very strong 57% in U S dollars and 28% organically as broadband spending levels increased and as we benefited from our recent acquisitions.
Our growth in broadband was particularly strong in North America.
On a sequential basis sales increased by a much better than expected, 14% from the first quarter.
As we head into the third quarter, we do expect sales to the broadband market to decline moderately from from these levels.
But we look forward to continuing to support our broadband service provider customers around the world with our expanded range of high technology products.
As our customers increase the bandwidth and capacity of their networks to support the expansion of high speed data applications to even more homes and businesses. These products have become even more critical.
Now turning to the company's outlook. There is no doubt that the current market environment remains highly uncertain with ongoing supply chain and inflationary challenges as well as some continued disruptions from the COVID-19 pandemic.
Assuming those conditions do not meaningfully worsen and also assuming constant exchange rates for the third quarter. We expect sales in the range of $3 $40 million to $3 billion $100 million and adjusted diluted EPS in the range of 73 to 75.
This would represent strong sales growth of 8% to 10% and adjusted diluted EPS growth of 12% to 15% compared to the third quarter of 2021.
I just wanted to say that I remain confident in the ability of our outstanding Amphenol management team to adapt to the many opportunities and challenges in the marketplace and to continue to grow our market position, while expanding the company's profitability.
In addition, our entire organization remains fully committed to delivering long term sustainable value all while prioritizing the continued well being of each of our employees around the world and.
And finally, and most importantly, I would like to take this opportunity to thank that entire amphenol team for their truly outstanding efforts here in the second quarter and with that operator, we'd be very happy to take any questions that there may be.
Thank you the question and answer period will now begin please limit to one question per caller.
Our first caller is mark Delaney with Goldman Sachs. You May go ahead.
Yeah. Good afternoon. Thank you very much for taking the question and congratulations on the strong results I was hoping to better understand the guidance I think <unk> revenue is typically up sequentially and the company guided it down just a touch at the midpoint of guidance I'm, hoping to better understand are you seeing any slowdown in customer.
<unk>, perhaps because of some of the macroeconomic conditions or is this more of our sales coming off of a very high base and still being in a very good overall level. Thanks.
Yes, thanks, so much mark.
I mean look this is a very unique year theres no doubt about it there's a lot of things going on I talked about the uncertainty that is in the market and I won't go through each of the each of the end markets I think I just went pretty fulsome laid through through our expectations.
I think we have a really strong outlook here given the real strength that we saw in the second quarter given the continued momentum that we have across the company.
We see growth in a number of our end markets and a number of our end markets. We view as having at this point at least the potential that they may moderate slightly but I feel that this is very strong guidance from a topline perspective, we have great momentum both order momentum as well as continued strong.
<unk> with our customers.
And I think that overall, given the environment given all what is happening.
The global economy I think this is a very strong guidance.
Our next question is from Amit <unk> with Evercore you May go ahead.
Yes.
Congrats on a great quarter for mind as well.
Adam question for you all love to give you a perspective that seems to be a lot of concerns around the macro had been impacting in demand you talk a little bit about that as well.
Thank you have a very broad perspective, you talked a lot of customers.
The softness of customers holding back orders and demand at this point given what we're speaking at the macro side anything you can tell.
But beyond discussing with customers and anything you're seeing differently the channel within the OEM would be really helpful.
Yeah. Thanks, Thanks, so much Amit.
Look I think we read the papers.
The news like everybody does but what we really listened to us our customers and I think you saw in the second quarter, our customers gave us still very robust orders and we executed on the orders that we had and thereby we are able to deliver the upside that we did here in the second quarter.
I think if I, if I look across the end markets.
Any market has some customers who are saying, maybe there is a little bit of a breathing.
Taking a breath for example, I mean, we have a very strong demand in the it datacom market I talked about the fact that night to Datacom, we expect to see a little moderation.
In the third quarter, and I think thats a bit of a reflection of some customers taking some breathing so to speak after really really strong demand, but have we seen broadly across areas like industrial automotive aerospace impacts of the macroeconomic I mean, we really haven't at this stage.
I will say this the amphenol team, we're not in the business and we don't view it as our business to try to guess where the economy is going.
Can there be one day, a recession I mean, there's lots of people who are much more expert than I am who are probably going to make prognosis is about that and we won't get in the business of doing so but what we are doing always inside our company is making sure that we're prepared either way and I've used that term before in this forum of driving with one foot on the.
And one of the foot on the brake and Thats just the amphenol lean way, we're going to have our foot heavy on the accelerator capitalizing on this great backlog that we have capitalizing on the wonderful position, we've built with customers capitalizing on the new technologies that we're enabling next generation applications with our customers, but we're always going to have a.
Foot covering the break in case, we see something different coming our way and then our general managers 130 of them around the world will quickly take action to adjust our resources to react to whatever dislocations can come in the marketplace and thereby to both preserve the financial strength of the company, while ensuring that we can continue.
To grow our market position in any economic environment, and Thats, where we stand today is there going to be because of the fed or because of whatever geopolitics or because of whatever reason some macroeconomic slowdown or some shock.
We don't know.
In all honesty, we don't try to spend a lot of time wondering about that we've talked to our customers and when we see something change we'll react with the type of speed that everybody has been accustomed to from the Amphenol organization.
Our next question is from <unk> Mohan with Bank of America, You May go ahead.
Yes. Thank you Adam I was wondering if you might be able to comment on what youre seeing on the ground in China clearly in the second quarter. They were locked down for a couple of months and then a recovery from there, but just from a demand perspective could you maybe share any color on how those months transpired from a demand.
And if you're seeing any any real snapback in demand, especially in light of the view that there are some stimulus programs underway and maybe if you can share some context on what you've seen in the past from such initiatives how that might have benefited amphenol. Thank you.
Sure. Thanks, so much <unk> I mean look first and foremost I just have to have to credit our team in China.
In particular, those who work in and around Shanghai now as you know <unk>, we have facilities all over we don't concentrate them in one or another city and I have to say that that manufacturing strategy that we have of having it be quite fragmented has been very very big asset for the company.
As these COVID-19 lockdowns have occurred because it never happened that were impacted in our totality or in any material sense.
But we do have several operations that operate around Shanghai and some of our team members there.
We had several of our general managers, who were locked in their apartment for the better part of three months and we had to operate factories and bubbles and things like that and it was just an extraordinary extraordinary effort and drive and ultimately success by our team and I'm, just so grateful to each and every one of them for.
Making the sacrifices that they did and continuing to have the commitment to the company and to our customers that was clearly reflected in this quarter.
All that being said I think that ultimately the impact of those shutdowns on our business in the second quarter was very modest if anything.
Because our team was able to execute through the shutdowns and then to the extent that any catch up with necessary. They were able to do that over the course of the quarter.
Some of them are some of the more severe shutdowns abated.
We have seen strong demand, especially in areas like like automotive and the mobile market.
Some of the other communications markets in China, and also in industrial where we have a very strong position and in particular, we see strength in China.
Anything thats being electrified.
And that's been a great progress for the company and I think we have seen some pickup in demand coming out of those shutdowns in certain of those areas with respect to the stimulus.
I can tell you that I still remember my very first quarter as CEO and this is taking us all back in time now because I've been CEO since January of 2009, but that was a really tough time period, everybody will recall I became CEO in January of 2009 that the depth of the beginning of the <unk>.
<unk> crisis.
And that was when China decided to build a <unk> network and it was effectively a stimulus program that accomplished also the goal of expanding the ability of people to have mobile broadband.
And I think as they talk about stimuli today in today's economy, a lot of that also does revolve around new technologies things like electrification of vehicles of heavy vehicles.
The build out of other infrastructure.
And so to the extent that those kind of stimulus is due do in fact come our position across all of those end markets is a very strong one and I would expect our local team to be well poised to take advantage.
And our next question is from Matt Sheerin with Stifel. You May go ahead.
Yes, Thank you and good afternoon, Adam I wanted to just ask.
You had a little bit more color on that really strong margin expansion that you saw 70 basis points.
Quarter on quarter, you talked about pricing you also talked about leverage and where do we stand on pricing right now in terms of.
Continuing to increase Asps.
Put Cogs go up or should we just expect sort of the normal.
The margin contribution that you typically see in the business.
Hey, Matt This is Craig Thanks for the question, Yes, it's a great question I mean, we're really proud.
The achievement, we had here in the second quarter or 27% really strong operating margins and obviously, we capitalized on the strong demand environment, but the team really did an outstanding job really navigating I think the environment around cost and inflation solid supply chain. All these things that clearly.
<unk> put pressure on margins and we talked about coming into the year. How we started have been starting to see some some impact of the pricing actions that we have been taken we had strong margins in the first quarter.
We talked about coming into the second quarter here expecting some additional.
Traction related to pricing and as I mentioned in my prepared remarks, I think at this point coming into the second quarter, we really have.
We believe had a meaningful meaningful progress on on really offsetting a good portion of the inflation in supply chain and other cost that we've seen over the past year.
We do expect actually some additional progress here in the third quarter and I think our guidance does reflect that on our guidance at the revenue line and being a little bit lower sequentially than in our Etfs being kind of basically flat, which which would represent a implied.
Progress on margin in which which is partially due to continued pricing actions.
Continuing to take well, where we are in that journey in terms of will we be at the end of it at the end of the third quarter I don't necessarily know that I would say that but.
I'm not sure.
What's going to happen with inflation I mean that continues to be a big question Mark I mean, the cost environment continues to be very dynamic. So I think as we have done is we will continue to do our general managers have done an outstanding job at just.
Raising prices commensurate with the cost environment, and and we will continue to do that and I'm really proud of the team for the progress we've already made.
Yeah.
Your next question is from Steven Fox with Fox Advisors, you May go ahead.
Hi, Good afternoon could you talk a little bit more about the wireless device markets. I know you mentioned, it's looking seasonal it sounded like its on the low end of seasonal.
So from an end market standpoint, and also can you touch on.
How are you looking at content this year versus maybe last year, where maybe you're doing better or different types of technologies that youre leveraging into new phones or tablets et cetera. Thank you.
Thanks, So much Steve yes.
Yes look I think we've guided it to be up at least 20% here in the third quarter of the mobile devices market.
A very hard market to predict as you know with any certainty one quarter out let alone a month out or sometimes even a week out.
There's no doubt about it it's our most volatile of markets and I think thats, a strong guidance given the inherent volatility in the market I think relative to our content.
This continues to be a market, where there is a lot of different devices, where every one of those devices is a bit of a jump ball and we when we tried to win more than we lose of the content on those devices and I think over time, we have successfully broadened the range of products that we sell into mobile devices to to be not just <unk>.
It is an interconnect, but also a wide range of mechanisms and the like and we've also broadened the range of products that we sell into so today, when we think about mobile net mobile devices.
It's not just about smartphones and mobile computing devices, like laptops, and tablets, Wearables and <unk> and all these various things and lots of lots of just new devices that are technically mobile devices.
It's unbelievable actually the continued spread of these devices and hopefully we can have next year, a kind of a normal consumer electronics show and we can go go to something and just see the extraordinary array of things that are there. It's actually just a really exciting market.
And so I think from a content perspective, I'd say that our team continues to to accomplish their goal of maximizing their content well never being able to win everything on every platform and I think we remain in a very strong position and the team remains just so agile and reactive to the inherent.
Volatility thats in that market, which gives me confidence that whatever comes along if there is an uptick in demand or or vice versa that our organization, who works in mobile devices is going to be prepared for it.
Our next question is from stomach Chatterji with Jpmorgan you May go ahead.
Oh, great. Thank you. Thanks for taking my question I guess I wanted to dig in feet industrial.
Segment, a bit Adam if you can I know you have a collection of different end markets and better than you had strong growth. If you can just dig into sort of the difference.
And markets there and if you are seeing sort of broad based trend or are there any buckets way, you're still sort of see your recovery, where it might be below sort of pre pandemic levels and just curious now.
Segment is tracking more than 25 boost in fuel revenue mix on a more consistent basis is there any change in thinking relative to sort of acquisitions, particularly if it adds exposure to end up.
Industrial broader industrial market. Thank you.
Thank you very much.
<unk>.
Look industrial has been a really strong market for us here for quite some time period I'm, just so proud of our team and industrial if I. If I look back I mean, this is I think something like our ninth consecutive quarter of double digit growth in industrial.
And that has included some really wonderful acquisitions that we've made bolt on interconnect and sensors and antennas.
And today, the breadth of where we sell industrial products per se is broader than it's ever been before.
If you think about where kind of industrial is it can be everything from a high speed train two in offshore oil oil platform to an alternative energy solar farmer or windmill.
It can be in heavy equipment. It can be in building architecture and HVAC systems. It can be sensing for a wide variety of things I mean, you can imagine where you can put like a sensor in an antenna and a connector to like to check. The weather you can put these things on tall buildings, all the way down to tiny birdhouse.
I mean, you name it there can be so many different places where industrial products can go and all along with ties them. Together is this unique harsh environment packaging of the products be the interconnect be the sensors be the antennas.
We think it's a great place to make acquisitions and the fact that industrial is today, something like 26, or so percent of our sales it doesn't at all give us pause because it's also our broadest most diversified market.
Of all of our end markets in terms of the applications and the variability of those applications.
Far from it I mean, we just completed the acquisition of NPI.
This last quarter NPI cells harsh environment complex interconnect assemblies that are used in a very specific part of the industrial market in particular, which is the semiconductor capital equipment and the test and measurement equipment market.
It's a great space to be for the long term I mean, just look at some of the legislative priorities in our country and many others.
And the trends for many years into the future that seems like a very good place to be but so does electrification of heavy equipment. So does something like alternative energy and all what that is all with that has entailed and so we're very committed to the industrial market. If we see great acquisitions that come along.
Along that expand both our product technology and our position across some of these segments, we're not going to shy away from them.
Our next question is from Luke Young with Baird. You May go ahead.
Hi, Good afternoon. Another question the broader business, but more of a company specific standpoint, so you're not seeing in the business. Yet there are of course these broader signs of rising economic Chris overall as other callers have highlighted what I'm wondering Adam is if you could comment on your conversations with your general managers right now given the backdrop.
And specifically any contingency planning they might be doing a present for their businesses to find growth and protect earnings and what could be a more challenging environment from here in other words, the brake side of the chasm breakdown that you spoke to earlier.
Yes, well. Thank you very much I mean look we we have a lot of conversations with our management team, including directly with our general managers.
And all of the people in the organization and you can bet. We're always talking about this concept of one foot on the gas and one foot on the break even just this morning, we have always have a discussion with our whole team on at the time of our earnings that's by the way why we do this call in the afternoon is because we have all of our management team together.
At eight in the morning, and Thats, a better time for people around the globe.
And you can bet that we're always reinforcing that idea that.
We have a strong momentum right now our customers want a lot of product from us, let's execute on that but let's keep the windshield clear. So that you see ahead of you. If there is a problem and if a problem comes I can tell you nobody's faster to react in the Amphenol and general managers I mean I use this analogy like a race car you have.
A foot on the gas and a foot on the brake and you've got your eyes staring out the windshield just in case something Pops along.
And when that thing comes whatever it may be it's not for us to guess what it is it's not for us to do something differently because of our guests work is to be ready, regardless and I can tell you that all of our 130 General managers. This is second nature to the Amphenol lean culture and.
And all of them are prepared for whatever may come along but at the same time, we are not sitting here, saying Hey, you know the fed is raising interest rates. The world is going to and that's just not how we run the company. We don't sit back and just reflect on macro things and just say to them.
Well the macro said this so we better do that we listen to our customers and then we take action and that's what our team is going to do.
Our next question comes from Nick Todorov with Longbow Research you May go ahead.
Yeah. Thanks, and then congrats from me as well on the strong results.
Adam a question on bookings and maybe bookings linearity if I look at your books bookings they are stronger than your peers I Wonder if you can comment if you're seeing broad based trends or maybe there are certain markets that are driving.
Such a strong bookings.
At this point and any color there would be helpful. Thanks.
Yes, well look I think our peers are doing very well too.
Relative to our bookings actually bookings across the quarter were fairly linear.
It wasn't that we saw a big spike early and it tailed off later or vice versa actually orders were pretty consistent across the three months of the corridor.
Was which was encouraging to see actually and relative to our end markets and the booking trends of the end markets without going sort of one by one again I would say that we had good strength across virtually all of our markets, especially our kind of what I refer to as our longer cycle markets, where we saw still great books.
<unk>.
Military commercial air industrial automotive, we saw really strong bookings in broadband as well.
And I think Thats, a great reflection of some of the planning of broadband customers right now, we're really working on expanding the capacity and also the breadth of the networks. There's a lot going on around the opening up the opportunities in Rural America. For example, with broadband access and our team is really on the front lines of supporting our customer.
And those initiatives I think the one market, where again bookings were still strong, but where maybe we started to see towards the end of the quarter.
Slight moderation as it datacom and I talked about that earlier I think we are seeing some maybe in the third quarter, a little bit of digestion of the strong consumption that some of our customers have out there we hear a little bit about touches of inventory in that space as well, which is not surprising given the <unk>.
Stream with strong demand that we've seen in that space, but nothing nothing of any cataclysmic variety here I mean.
The it Datacom market remains very very strong, but as we said in our guidance, we would anticipate in the third quarter to see a little bit of a moderation. There. So overall I think just really strong bookings and I got to give a call out to our salespeople around the world. They do the toughest job. There is there and it's just amazing how they continue to support cut.
<unk> and ultimately generate the bookings that we've seen.
Our next question is from Jim Suva with Citigroup you May go ahead.
Thank you Adam on your prepared comments, you mentioned the auto sector, how it outperformed this.
Quarter, which is great. But then you mentioned that you expect it to decline I think you said moderately for the Q3 outlook has something changed there because of the supply constraints, we've kind of been ongoing for a long time and you would think that maybe we've stabilized or gotten a little bit better with those but I'm just kind of wondering about the <unk>.
Outperformance was fantastic, but kind of why it kind of a little bit of a downtick for the outlook. Thank you.
Well, thanks, very much Jim I mean, one thing I would just clarify we talked about the fact that we see in the second quarter. Some moderation on a sequential basis that would still reflect very strong year over year growth in the auto market on a year over year basis, I think it would be still very strong double digit organic growth at the levels that we've guided to.
So I don't think that represents at all a slowdown in our momentum in automotive.
Some seasonality, sometimes that we'll see in the automotive market.
I think there are still supply chain constraints that customers are seeing I think there were some announcements in recent days that from some of the Oems that I think reflected that and you add all that together and it ultimately results in the outlook that we have and if theres better opportunities you can bet that our team is going to try to exceed that outlook.
Our next question is from William Stein with Suntrust.
You May go ahead.
Thanks for taking my question and congrats on the great results and outlook and I want to address one.
Aspect of the P&L since at least one question about it already but the conversion margins were very strong in the quarter, which is pretty surprising given.
We would expect some headwinds from FX and.
Input cost completion, which continues and I understand okay.
Kind of constantly in the proxy.
Responding to these market dynamics, but.
Did the company somehow.
Get more ahead of these changes in the current quarter than it typically does or <unk>.
The converse of that is if you have it and we see FX and.
Material input cost stabilize shouldnt, we expect.
Somewhat elevated level of contribution margin in the next couple of quarters. Thank you.
Yeah. Thanks, Thanks, Lou I appreciate the question I.
Listen I as I mentioned before we're certainly super proud of the results here in the second quarter in regards to the.
Profitability in regards to.
Part of this question out into a couple of different pieces in regards to FX.
So clearly there is translation impacts.
On both the top and bottom line in regards to <unk>.
Currency, we typically doesn't have a meaningful impact on our on our margin. So certainly there could be some small impacts here or there, but nothing nothing that we'd call out as being a meaningful impact. So so I would say currency hasnt really impact doesn't really impact our conversion as you think about it in any meaningful way.
As it relates to our pricing and input cost inflation, we have been we certainly had pressure last year.
As you remember Q1 of 'twenty, one that was kind of kind of a step down a bit certainly a larger negative conversion in the first quarter of 'twenty, one and as the year progressed.
As we kind of were chasing that with pricing, we were able to neutralize the incremental worsening of the inflationary environment.
And tell you that we ever kind of got back to neutral from our Q1, 'twenty one perspective, and I think what we're seeing is that we're seeing in the first half of this year a bit of a.
Catch up from the first half of last year and Thats why when I said I think that at this point, we've been able to kind of offset a meaningful amount of that inflation I mean, a meaningful amount that's happened over the last 12 months. So the conversion the stronger sequential conversion you see here in the second quarter is really kind of.
Kind of catch up I would say for pricing for inflation that we've seen over the course of the last year and that will continue to hopefully catch up on as we expect to hear in the third quarter. So it's kind of been a journey and pricing typically is behind cost a bit and that's what that's what we've seen here and into 'twenty one.
And coming in here into 'twenty, two but I think at this point pricing is starting to catch up the cost and Thats really reflective of the strong conversions that you see now we are not guiding here into the fourth quarter and full year. I mean, we don't know what inflation is going to do and all that but you can guarantee that our general managers or are close to their cost and they're continuing to have conversations with them.
Customers in FD environment.
<unk> continues to level out or ultimately the inflation continues to increase we're going to take the appropriate action both on the cost and on the top line.
And our next question is from David Kelley with Jefferies. You May go ahead.
Hi, good afternoon, Adam and Craig.
Thanks for taking my question you noted touches of inventory build in it Datacom just curious if youre seeing any signs of a build in any of the pockets of industrials lander.
The end demand appetite there is still strong enough to absorb the incremental order strength youre seeing.
Yes, thanks very much David.
Honestly, if I look at it and does it industrial it's very hard to get great visibility because the range of customers is just so broad where we do have some visibility and obviously at some portion of our industrial businesses through distribution and there I would tell you that inventory levels are not really access.
In fact, we've continued to see good strength good pull through from our distributors.
And healthy inventory levels across our distributors, who are who have a little bit higher percentage of industrial than they would for example of datacom or mobile networks or automotive.
And so from that perspective, I would say, we see it as healthy, but I can't tell you that we have perfect visibility to the thousands and thousands of customers that we ultimately sell to across the industrial market.
What we do see in industrial is just really continued strong demand.
As well as in in many pockets the inability of some of our some of our competitors to satisfy that demand and thus our ability to get.
To get a little bit more than our fair share of the business and so I think our team working in industrial across all those segments.
<unk> talked about those earlier I think they've done a great job of executing.
When demand is really strong and we continue to do so and that doesn't really give me a feeling that there is a lot of inventory buildup or excessive inventory buildup given that customers continue to want to take product from us what we're always on the lookout for is order cancellations or push outs and things like.
We just haven't seen that.
In any real meaningful way.
If at all and so I think.
Right now we feel very good about the prospects of continued momentum in industrial.
Our next question is from Joseph Spak with RBC capital markets. You May go ahead.
Thanks, so much.
Adam you used the race car analogy a couple of times and how you keep an ear to the to the <unk>.
Customer to react so I'm curious if you could just give us a little bit of color about what some of your customers in your industrial machinery auto end markets, you are saying about the energy issues in Europe .
One of the things we've sort of started to hear ironically is that.
They may try to sort of produce as much as they can or is it a bunch of the supply chain will allow them to nearer term in advance of maybe some potentially larger issues in the winter or are you seeing any evidence of that or what are they telling you.
Yes. Thanks, so much so look we're very sensitive to the all the geopolitical issues around that includes the potential energy issues that are coming in Europe and no doubt about it.
We're putting a lot of real time thought into what that means for ourselves and also what it means for our customers and for the end demand.
We have not heard a lot of direct.
Evidence of the behavior that youre talking about I mean, we've heard.
People sort of third hand, forehand like you've just said here.
I can't tell you that we've had.
A big flood of customers coming up and saying, Hey, we're going to try to produce everything while it's still warm outside.
Could that happen.
Would it surprise me I guess I guess, it wouldnt totally surprising I think theres going to be a lot of creative efforts.
People are going to have to take here.
As we head into the winter months in Europe .
Two to offset what may very well be a very challenging energy availability and cost situation and I know that if I look at what our teams are doing today, while it's still hot outside.
There is a lot of efforts ongoing.
To prepare ourselves and to make sure that that we're not caught kind of cold so to speak.
This winter in Europe .
In Germany, that's in eastern Europe to some extent in France and to.
To some extent and even the UK, Scandinavia, where maybe there will be availability, but it might be very very expensive and so what are we doing right now and you can do a lot of things actually it turns out.
Maybe there were some projects that you had to to increase insulation in the ceiling of your buildings, maybe you had some things on the shelf to put in heat exchangers and factories and things like that maybe you had already started construction of solar panels uncertain rooftops in certain countries.
All things that we've been doing and have been doing and maybe you would even accelerated a little bit as we come into this year. So there's a whole host of solutions to this inside our company those are going to be very very site specific under the purview of our general managers not it's not that we're going to make some big dramatic kind of corporate.
And about how are we going to offset the potential risk of energy availability in Europe .
But you can bet that there is a lot of activities going on and so I can extrapolate from that that probably our customers are doing the same.
And does that mean, putting inventory in place or does that mean, taking a lot of the steps internally that one can take to insulate oneself literally.
And and metaphorically from from the challenges I guess that customers are going to be looking at all those options.
The next question is from Joe Giordano with Cowen You May go ahead.
Hey, guys. Thank you.
So just wanted to touch again on price I mean, you had obviously very strong in the quarter.
Driving the leverage year end next quarter guide is for down revenues, a little bit sequentially, but up margin. So I'm guessing that keeps meeting out.
Just curious as to like the runway of the ability to keep driving price.
If we start seeing orders start to kind of like normalized or maybe directionally moderate a bit lead times start to normalize like historically when you look back.
How long have you been able to drive price positive in like what are the conditions that make that harder to do.
Joe look I think Craig talked a lot about this already and what I would just add is this I mean, we are being very thoughtful about pricing with our customers.
This is a tough environment for everybody in our first and foremost thing that we do when there is inflation as we try to offset it with cost and I mean, that's our that's our duty as a partner to our customers around the world and only when we can't do that do we then have to pass it on in price and we do that at very reasonable.
Fashion, so whats the runway to use your term is I mean, it just depends on how the environment goes.
We're not going to take advantage of our customers. We're not we're certainly not in the business of doing excessive measures on price.
We are strong supporters of our customers, but we're also making sure that we're protecting our company and protecting the company's bottom line and taking reasonable measures and will continue to do that to the extent that that's what the environment requires.
And our last question is from Chris Snyder with UBS you May go ahead.
Thank you.
Basically this is nearly 50% bigger than it was back in 2019 before the pandemic.
Given the suddenness and magnitude of the acceleration coming out of Covid.
Led to any capacity constraints.
For you guys as you try to realize all of the demand that is out there in the market. Thanks for squeezing me in.
Hey, Thanks, so much Chris look it's a great question to squeeze in I mean, you pointed out I mean, we are over just a very short time period, nearly 50% bigger than it is just put outstanding Testament to the organization that they have been able to flex the company.
In such a difficult environment, I mean, let's not forget we're 50% bigger which in a normal environment would be a challenge to increase our capacity to expand our footprint to hire the people to put in place whatever equipment is necessary to.
Do all of that but to do it in a pandemic to do it in a supply chain crisis to do it in an inflationary environment. I think is just the best Testament to the Amphenol and entrepreneurs around the world that have made this company special so do we see capacity constraints today.
We battled through the mall I mean have there been challenges over the course of these couple of years like you cannot imagine I mean really like you cannot imagine personal professional for everybody through the pandemic.
I mean, it's not for the faint of heart.
It is right down the pipe for what Amphenol General managers do every day.
Every single day every one of those 130 general managers. They are fighting so many different challenges so many different barriers that.
Pop in front of them and theyre not be mining it they're not hiring consultants to help them manage it theyre not going to some corporate bureaucracy to sort of find the answer theyre looking at their own window, and they're making it happen with their teams and then when they need help that come to US we collaborated across the company we deal with it we work the problem and.
I think the result speaks in my mind for itself.
Through those challenges through all the Tribulation zero of these of these recent years two expanded the company by 50% or close to 50% is something that I think our team is really justifiably proud of and I. Appreciate you, bringing that up here at the end.
Well I think that is our last question.
And so with that I'd really like to wish everybody a great finish to the summer I hope all of you again, a little bit of a chance to spend some time with your family and hopefully enjoying some of this wonderful weather that we've been having here in Connecticut, and we look forward, Craig and I and to speaking with all of you here in just another 90 days. Thanks, so much thanks everybody.
Alright.
Thank you for attending today's conference and have a nice day.
Okay.
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