Q3 2022 Amphenol Corp Earnings Call
Hello, and welcome to the third quarter earnings Conference call for Amphenol Corporation.
Following today's presentation, there will be a forum and answers session until they remain in a listen only mode at the request of the company today's conference is being recorded.
Okay.
Any objections you may at this time I would now like to introduce today's conference host Mr. Craig Lampo, Sir you May <unk>.
Good afternoon, everyone. This is Craig Lampo, Amphenol, CFO and I'm here together with Adam nor at our CEO .
We would like to welcome you to our third quarter 2022 conference call. Our third quarter 2020 results were released this morning, I will provide some financial commentary and then Adam will give an overview of the business and current trends.
And 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 prior year comparative data discussed during this year during.
During this call is on a continuing operations basis.
The company closed the third quarter with record sales of $3.295 billion and record GAAP and adjusted diluted EPS of 80 cents.
Third quarter sales were up 17% in U S dollars, 21% in local currencies and 18% organically compared to the third quarter of 2021.
Sequentially sales were up by 5% in U S dollars, 7% in local currencies and 6% organically.
Adam will comment further on trends by market in a few minutes.
Orders in the quarter were $3.151 billion, resulting in a book to bill ratio of <unk> 96 to one.
Year to date, our book to Bill remained strong at 1.17 to one and the company continues to have a robust order backlog.
GAAP and adjusted operating income was $681 million and $693 million, respectively in the third quarter of 2022.
GAAP and adjusted operating margin were 27% and 21% respectively in the third quarter.
On a GAAP basis operating margin increased by 40 basis points compared to the third quarter of 'twenty, one and was flat sequentially.
GAAP operating margin for the third quarter included $12 million of acquisition related costs.
On an adjusted basis operating margin increased by 70 basis points compared to the third quarter of 'twenty, one and 30 basis points sequentially.
The year over year increase in adjusted operating margin was driven by strong operating leverage on the significantly higher sales volumes as well as the benefit of ongoing pricing actions.
On a sequential basis, the increase in operating margin, reflecting strong operating leverage on the higher sales volumes.
Given the continuing 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 challenges around the world is a direct result of the Companys entrepreneurial culture, which continues to foster a high performance action oriented management team.
Breaking down third quarter results by segment relative to the third quarter of 21 sales in the harsh environment solutions segment were $794 million and increased by 12% in U S dollars and 14% organically and segment operating margin was 26, 1%.
Sales in the Communications solutions segment were $1 five is around $18 million and increased by 19% in U S dollars and 17% organically.
Operating margin was 22, 5%.
Sales in the interconnect and sensor systems segment were $983 million and increased by 17% in U S dollars and 23% organically.
Segment operating margin was 18, 8%.
The company's GAAP effective tax rate for the third quarter was 23, 1% and the adjusted effective tax rate was 24, 5%, which compared to 22, 2% and 24, 5% in the third quarter of 'twenty one respectively.
GAAP diluted EPS from continuing operations was a record 80 in the third quarter an.
An increase of 19% compared to 67 cents in the prior year period.
Adjusted diluted EPS was a record 80 cents, an increase of 23% compared to 65 cents in the third quarter of 2021.
This was an excellent result, especially considering the variety of challenges that the company continues to face during the quarter.
Yeah.
Operating cash flow in the third quarter was a record $576 million or 107 hundred 16% of adjusted net income.
Net of capital spending our free cash flow was a record $457 million or 92% of adjusted net income.
Given our continued strong top line growth. We are pleased to see cash flow yield remain at strong levels in the third quarter.
Yeah.
From a working capital standpoint days sales outstanding and payable days were 71% to 56 days, respectively, both with our normal range and despite the continued challenging supply chain environment. Our inventory days were 83 days, which came down in the third quarter and were also within our normal range. We are very pleased with our <unk>.
Organization is strong management of working capital.
As mentioned in today's earnings release, the company's board of Directors has approved a 5% increase in the company's quarterly dividend to <unk> 21 from the previous <unk> 20 per share.
Effective for payments beginning in January 2023.
During the quarter the company repurchased two 4 million shares of common stock at an average price of approximately $72.
When combined with our normal quarterly dividend total capital returned to shareholders in the third quarter of 2022 was $289 million.
Yeah.
Total debt at September 30th was $4 $8 billion in net debt was $3 5 billion.
Total liquidity at the end of the quarter was $3 $6 billion, which included a cash cash and short term investments on hand of $1 3 billion plus availability under our existing credit facilities.
Third quarter 2022, EBITDA was $806 million and at the end of the third quarter of 22, our net leverage ratio was one one times.
I also wanted to make a few comments on interest expense and currency impacts due.
Due to the rising interest rate environment. Our interest expense has increased primarily as a result of our floating rate commercial paper, which had a balance of $904 million and represented approximately 19% of our total debt outstanding at the end of the quarter.
Due to the significant increase in interest rates over the last several months, we expect fourth quarter interest expense to be approximately $38 million, which is reflected in our fourth quarter guidance.
Based on current debt balances as well as current and near term projected rate increases, we expect quarterly 2023 interest expense to be approximately $40 million.
Regarding regarding currency and the significant continued appreciation of the U S. Dollar in the fourth quarter, we expect currency to have a negative sequential sales impact of approximately one percentage point in a year over year negative impact of five percentage points assuming current rates.
I will now turn the call over to Adam who will provide some commentary on current market trends well. Thank you very much Craig.
Now me to extend my welcome to all of you on the phone here today and I certainly hope that all of you are having an enjoyable fall here, we are in beautiful Wallingford, Connecticut with the leaves turning a wonderful autumn Hugh.
I'm going to highlight our third quarter achievements I'll, then spend a little time to discuss the trends and our progress across our served markets and then finally I'll comment on our outlook for the fourth quarter and the full year of 2022 and of course, we will have time for some questions at the end.
Turning to the third quarter our results in the third quarter were much stronger than expected and exceeded the high end of our guidance in sales and adjusted diluted earnings per share.
Sales grew a very strong 17% in U S dollars and 21% in local currencies, reaching a new record of just under $3 $3 billion.
On an organic basis sales increased by 18% with broad based growth across most of our served markets as well as contributions from the company's acquisition program.
The company booked orders of $3.151 billion, representing a book to Bill as Craig mentioned, the 96 to one.
I would say that despite the slightly negative book to Bill the company's order backlog remains very robust.
We are pleased to deliver strong profitability in the quarter with adjusted operating margins, reaching 21.0% of.
A 70 basis point increase from prior year, and a 30 basis point increase from prior quarter. We achieved these results. Despite the continued wide range of operational inflationary and supply chain challenges around the world.
Adjusted diluted EPS grew strongly from prior year, increasing by 23% to a new record of 80, and just really an excellent reflection of our organization's continued strong execution here in 2022.
Finally, the company generated record operating and free cash flow of $576 million and 457 million respectively here in the third quarter.
Yes, I just wanted to say how proud I am of our entire organization around the world. Our results. This quarter once again reflect the discipline and agility of Amphenol entrepreneurial teams as we continued to perform well amidst what is no doubt a very dynamic and challenging environment.
We're also pleased to announce that we closed the acquisition of integrated cable Assembly holdings, our ICA in September based in North America, and with annual sales of approximately $90 million ICA manufactures a broad array of cable assemblies for diverse diversified range of applications, particularly in the <unk>.
Industrial market this.
This acquisition further expands our offering of high technology value added interconnect products in the industrial market.
As we welcome this outstanding New team to the company, we remain confident that our acquisition program will continue to create great value for amphenol.
In fact, our ability to identify and execute upon acquisitions and successfully bring these new companies into the Amphenol family remains a core competitive advantage for the company.
Now turning to the trends and our progress across our served markets I would just comment that we're very pleased that the company is broad and balanced end market diversification continues to create value for Amphenol importantly, and I've mentioned this many times before our diversification mitigates the.
Fact of the volatility of individual end markets, while also exposing us to leading technologies wherever they may arise across the electronics industry and these are both very important benefits in particular in today's dynamic market environment.
I would also just mentioned that in the third quarter each of our eight end markets grew organically and seven of them in double digits organically.
So starting with the military market that market represented 9% of our sales in the third quarter.
<unk> in this market grew 1% in U S dollars, and 3% organically, which was a bit lower than our expectation heading into the quarter.
On an organic basis growth in space related ground vehicles, and avionics applications was offset by a moderation of sales of products used in communications rotorcraft and engine applications.
Sequentially sales declined by just the just about 1%.
As we look into the fourth quarter, we expect a high single digit sequential sales increase in the military market and for the full year 2020. Two we now expect a low single digit increase in sales from last year's levels.
We continue to be very pleased with the strength of the company's broad position in the defense electronics market.
As militaries around the world increased their adoption of a wide array of next generation technologies in the face of what is no no question, an increasingly volatile geopolitical landscape.
Our team managing our leading range of interconnect and sensor products continues to position the company strongly for the future.
The commercial aerospace market represented 2% of our sales in the quarter sales grew a very strong 36% versus prior year, and 42% organically driven by broad based strength across all aircraft applications.
Compared to the second quarter, our sales just declined just a slight 1%, which was actually better than our expectation coming into the quarter.
As we look to the fourth quarter, we expect a modest decline in sales versus the third quarter levels, but for the full year 2022, we expect sales to increase a very strong 30% compared to prior year.
Our team is justifiably proud to have now realized four consecutive quarters of strong growth in the commercial air market, a clear sign of their resilience and of the continued recovery in the global air travel industry.
Going forward, we look forward to benefiting from the company's strong interconnect and sensor technology positions across a wide array of aircraft platforms and next generation systems being integrated into those airplanes.
The industrial market represented 25% of our sales in the third quarter sales increased by 11% in U S dollars and 13% organically.
Our growth was broad based across most segments of the worldwide industrial market, including battery and heavy electric vehicles factory automation and alternative energy heavy equipment medical oil and gas and building automation.
Sequentially, our sales actually increased by 2% from the second quarter, which was a bit better than our expectations coming into the quarter.
Looking to the fourth quarter, we expect a modest sequential sales decline and for the full year 2022, we expect a mid teens increase in sales from prior year.
Our results in the industrial market this quarter confirm once again that our outstanding global team working in this important market continues to find new opportunities for growth across the many segments of the exciting industrial electronics market.
I remain 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 technology revolutions happening across the industrial market.
To that end. The addition of ICA further strengthens our position across a number of exciting segments. Within this important end market and we look forward to realizing the benefits of this strategy for many years to come.
The automotive market represented 20% of our sales in the quarter and sales in the third quarter grew by a very strong 27% in U S dollars and 37% organically driven by broad based strength across most automotive applications and particularly strong growth once again in sales to <unk>.
Electric and hybrid electric vehicle applications.
Sequentially, our sales increased by 4% from the second quarter, which was much better than our expectations.
For the fourth quarter, we expect sales to remain roughly at these levels and for the full year 2022, we expect sales to increase by approximately 20% compared to last year driven by our expanded position in next generation electronics and electrical systems being integrated into cars.
I remain extremely proud of our team working in the automotive market. They continue to manage well through a challenging overall environment all while remaining focused on driving new design wins with customers, who are implementing a wide array of new technologies into their vehicles.
Our continued outperformance is a direct result of their excellent efforts.
The mobile devices market represented 12% of our sales in the quarter and our sales to customers in this market increased by 13% in U S dollars and 15% organically.
And this was driven by strong growth in sales of products incorporated into smartphones Wearables and laptops.
Sequentially, our sales increased by much stronger than expected, 43% driven by higher sales across virtually all product categories that we serve.
As we have seen periodically in the past we do believe that some small portion of this robust demand in the third quarter may have been pulled forward from the fourth quarter.
Accordingly, we expect a low double digit sequential decline in sales from these strong third quarter levels.
For the full year, we anticipate sales to grow modestly from our strong 2021.
I'm very proud of our team working in the mobile devices market as they continue to execute strongly in the face of an ever dynamic demand for our leading array of antennas interconnect products and mechanisms that are integrated into a wide range of next generation mobile devices and no question that this team remains poised as always to capture any.
<unk> for incremental sales that may arise here in 2022 or beyond.
The mobile networks market represented 5% of our sales in the quarter and sales increased by a strong 19% versus prior year and 15% organically as growth in our sales to mobile service providers was only partially offset by a moderation of sales to equipment manufacturers honest.
Sequential basis, our sales increased by 9%, which was better than our expectations.
For the fourth quarter, we expect a low double digit sequential sales reduction after a very strong third quarter and.
And for the full year 2022 sales are expected to grow in the high single digits.
We're encouraged by our strengthening performance in the mobile networks market.
As operators continue to 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 22% of our sales in the quarter.
Sales in the third quarter rose from prior year by 16% in U S dollars and 11% organically. This was driven by increased demand for products in servers and networking applications and that was only partially offset by some declines in storage related products.
Sequentially, our sales did decline by 3%, albeit better than our expectation coming into the quarter.
We believe that this begins to reflect some of the expected inventory corrections that we've discussed in the past by our it datacom customers.
As we look towards the fourth quarter, we expect a low double digit decline in sales from the third quarter levels as customers continue to moderate their demand and adjust their inventory levels.
For the full year of 2022, however, we expect very strong high teens sales growth compared to prior year.
We remain encouraged by the company's outstanding position in the global it Datacom market. Our team has done just an outstanding job of developing leading high speed power and fiber optic interconnect products that are enabling our OEM and web service provider customers, who continued to drive their equipment and.
Network towards ever higher levels of performance.
We look forward to realizing the benefits of that leading position in this important market for many years to come.
And finally, the broadband market represented 5% of our sales in the third quarter sales in this market increased by a very robust 65% in U S dollars and 46% organic as we experienced strong demand from cable operators for a wide range of our products.
On a sequential basis sales increased by 2%, which was better than our expectation coming into the third quarter.
Looking towards the fourth quarter, we expect sales to increase moderately from these strong third quarter levels and for the full year 2022, we expect sales to increase by more than 50% from prior year and that includes both robust organic growth as well as the benefit of acquisitions.
We look forward to continuing to support our broadband service provider customers around the world with our expanded range of high technology products.
These products have become even more critical as our customers increase the bandwidth and capacity of their networks to support the expansion of high speed data applications to homes and businesses and this is in certain cases and further in some government funded programs to expand broadband.
Now turning to our outlook there is no doubt that the current economic environment remains highly uncertain and increasingly dynamic.
Assuming market conditions did not meaningfully worsen and also assuming constant exchange rates for the fourth quarter. We expect sales in the range of $3 billion $90 million to $3 billion $150 million and adjusted diluted earnings per share in the range of 73.
The 75 cents.
This would represent sales growth of 2% to 4% and adjusted diluted EPS growth of 4% to 7% versus the fourth quarter of 2021.
Our fourth quarter guidance represents also an expectation for full year sales of $12 474 million to $12 $534 million and full year adjusted diluted EPS of $2 95 to $2 97.
This outlook would represent full year sales and adjusted EPS growth of 15% and 19% to 20% respectively.
I remain confident in the ability of our outstanding management team to adapt to the many opportunities and challenges in the current dynamic environment and to continue to grow our market position, while driving strong profitability.
In addition, I just have to say that the entire amphenol team around the world.
<unk> committed to delivering long term sustainable value and I'd be remiss if it doesn't if I did not take this opportunity here to thank each and every one of our amphenol in team members around the world for their truly outstanding efforts here in the third quarter and with that operator, we'd be very happy to take any questions.
Thank you.
And answer period will now begin please limit to one question per caller.
Our first question is from Mark Delaney with Goldman Sachs. You May go ahead.
Yes, good afternoon, and thank you very much for taking the question in terms of the comments about a more challenging and dynamic environment that the company is a it is.
Expecting is that more observing that there's the potential for business conditions due to deteriorate given macroeconomic factors or is that consistent with our recent moderation in incoming orders that amphenol has already seen in the third quarter and perhaps has continued or even accelerated in the fourth quarter to date. Thank you.
Yes, thanks, very much Mark look I think that we've talked before first about orders that positive book to bills don't always go to the Sky and so it was not surprising it wasn't certainly surprising to us that that our orders moderated a bit in the quarter and we had a slightly negative book to Bill we still.
Built tremendous backlog over over the recent quarters at the same time I think it's a.
It's it's fairly.
It's fairly clear that we are in a world where economically there are more cross currents and and those cross currents can always have an impact on markets.
We serve and I think some of our customers in particular in places like Ikea Datacom, who are a little bit reacting too as I talked about the inventory position that would be an example of a place where maybe customers have put a little more conservatism in their balance sheet. I think we saw also in industrial with our guidance we've had very.
Very strong performance in industrial and you know maybe theres a little bit a few signs of some hesitation across a few customers in that area, but it's not like we're seeing anything that anybody else isn't seeing here, we're not projecting anything but I think the world is volatile just look how it's reflected in the interest rate environment the currency markets.
<unk> discussed earlier.
As always in a market like that it's not our job at amphenol to try to guess, whether there is going to be a recession, one day or otherwise, but it is our job and it's our track record to always be prepared regardless and I've talked about this in the past you've heard me say the term that we drive with one foot on the gas and one.
But on the break and I can tell you you know we were driving hard in both respects doing everything we can to make sure that we're there for our customers satisfying their demand and we did that in a big way here in the third quarter shipping nearly $3 3 billion in sales, but for those areas, where we have seen you know real time feedback from customers that they may need.
A little bit less of our product you can bet that those 130 Amphenol general managers are the ones, who may see some some some softening of demand that they are rapidly adjusting their resources their rapidly taking all the steps that are in amphenol in general manager does take to be prepared to preserve the company's financial strength in that environment.
So we were never going to try to guess when that recession is coming.
Lots of people, who are much more experts with us and we are to do that but we will always be prepared and theres. No question that we are today.
Thank you. The next question is from Cemig chatter G with J P. Morgan you May go ahead.
Great. Thank you. Thanks for taking my question I guess, Adam I had to sort of a similar question, but more creative New York sort of before them and seals.
When I go back and look at the last four quarters or so every time you've reported a revenue number you've guided sequencing at the next quarter it could be slightly slower or slightly lower in terms of revenue.
Nevertheless, you sort of execute to execute or double that number and particularly through this year you could do it yourself revenues secret Chile as well.
What's changing now when we look into December we'll be seeing a similar trend in terms of you trying to probably peak in some of the macro it jumps off the guidance for the December quarter again being sequentially lower in terms of revenue than September .
What's changing probably relative to the first three quarters of the yield when we've seen sort of the execution being very different or maybe the industry conservatism that you've baked in hasn't really come through maybe help me understand that.
Yeah, no. Thank you very much stomach listen we always come out of the quarter and we tried to give our best estimate of what the next quarter is going to be on behalf of everybody here and it's a.
Credit to our team that we've been able to outperform that and you can bet that we're always going to try to outperform that but it's not I mean, we do our best job here of doing that and we shouldn't you shouldn't just say well you know amphenol is conservative and they're they're naturally going to beat it I mean, there's no doubt that the world is as we see it from a macro market standpoint.
Yes, there is more dynamic there are pockets more pockets of uncertainty there are macro dynamics that are going on now, but all that being said.
The underlying electronics Revolution that has for us always been a great platform for our outperformance. This continues to go unabated our position our technology position continues to be broader than ever before we've made 20 acquisitions since the beginning of 2019, each of which have added to our.
Company, new capabilities, and new breath, new access to customers in new geographies. So our company is well positioned to capitalize if there are opportunities for upside and we will certainly seek to take advantage of any of those that do come but in the context that it is a world today that is clearly.
A more uncertain than it than it was before and I don't have to I think tell everybody here on the phone that you can get that by looking just at the front page of the Wall Street Journal on a daily basis.
Or are we always going to try to outperform what we are but I'm not going to tell you that you know this quarter is is the same as every other quarter that we're always going to outperform and we're gonna beat our guidance by as much as we did last quarter, we're going to work really hard to do that all the time and we're going to navigate whatever environment comes our way.
Thank you. The next question is from Chris Snyder with UBS you May go ahead.
Thank you so margins have realized a pretty nice sequential improvement both of the last two quarters I know at least a part of that is price cost catch up on what is the expectation on price costs into Q4, and early 2023 to the extent you have visibility on price in the backlog and where inventory costs are running at and you know kind of with that.
Does the guide is drop in Q4 operating margin.
Just reflecting volume deleverage and keep a fourth quarter. Thank you.
Thanks, Chris I. Appreciate the question no. We're you know we're really proud actually of the of the performance you know both obviously here in the second quarter from a profitability, but certainly in the third quarter here, reaching 21% matching our previous record that we had in the fourth quarter of 2018 and.
And clearly a very different cost environment I mean since the fourth quarter of 18, we've kind of had a pandemic. We've had supply chain challenges. We had a lot of inflation, we have energy cost I mean, you name it and regardless of all that you know I think we've been able to navigate that you know very well and just you know capitalize also on the strong demand environment.
Ironman and ultimately be able to get our our margins back up to kind of this this level I think is just a testament to the overall management team I would say that you know as we finished the third quarter and you know kind of similar so that's similar to last quarter. I think we have offset them you know a meaningful amount of kind of just inflation in supply chain related cost pressures as well.
Certainly the management team has done a great job with that and managing kind of all elements of cost.
While continuing to kind of adjust price commensurate to the cost inflation you know when we can't offset these and you know with other actions clearly that's that's a priority there'll be able to do that.
Within the within the bounds in the walls of the.
Of our facilities, but you can't always do that so you have to raise prices sometimes to get to your customers and I think we've done a good job of all of that and in addition, I would tell you that I'm really proud that our team has continued to manage.
Our cost structure, even in these periods of robust growth that you can see in our operating expenses and others that we've been able to really leverage that you know as we continue to grow in and not necessarily just add resources and add costs. It with that robust robust growth and I think that also puts us in a very strong position regardless of what the demand environment.
It might be whether it be robust or not robust.
You know as we look into the fourth quarter, I would say that the incremental or the decrementals that we see kind of coming into the fourth quarter is based on our guidance.
Is generally normal I'd say, it's within the range of our Decrementals. It isn't anything you know more than that so I wouldn't read anything into kind of those decrementals at all I think we still expect strong profitability given the revenue levels here in the fourth quarter, which is reflected in our guidance and you know obviously interest expense is having a little bit.
Depending a little bit of pressure from an EPS perspective, you know into the fourth quarter sequentially, but but ultimately operating margins I think continues to be a very strong you know I'm not going to necessarily kind of guy adhere to 'twenty three in terms of operating margins, but what I could tell you is I do feel good about you know again as I said before the overall.
Performance of the team and being able to ultimately draw.
Drive.
Our our incrementals at that 25% plus kind of operating leverage that would that we talk about and then ultimately also being able to protect the bottom line. If the case, maybe that demand does it does drop in certain areas and but ultimately I feel pretty good about the profitability and certainly very proud of the team.
And their ability to achieve these record levels again.
Yeah.
Thank you. The next question is from David Kelley with Jefferies. You May go ahead.
Hi team. This is Gavin Kennedy on for David Kelly Your.
Your growth in the auto end market continues to be robust can you tell us how you're thinking about order demand in the next 12 months and are you seeing any signs of customers changing their buying habits, and then any insight into the inventory dynamics here would be great. Thank you.
Thanks, very much Kevin.
We're really proud of the automotive performance here I mean, if you just look over over a several quarters, we've had real strong double digit organic growth in automotive now for eight quarters in a row, which is.
Really excellent and clearly outperforming.
I think that as I mentioned in my prepared remarks, we've seen strong growth being driven by in particular everything related to electrification, but not exclusively that we've also seen a robust growth in everything related to passenger connectivity to safety a new electronic systems in cars all of this.
Sort of extraordinary array of content, that's being put into this generation and next generation of cars has created a great opportunity for amphenol bolt on.
With our interconnect products, our sensors, our antennas and that entire array of what we broadly referred to as interconnect products.
In terms of the behavior of the customers and the outlook over the next 12 months I mean hard for me to give you know kind of an outlook for the next 12 months.
I think others have a better sense of what.
Whatever the industry outlooks will be.
What inventories are both at dealerships and in the supply chain.
But and for US what's more important is the content that we see with customers which continues to grow.
In terms of inventories I couldn't tell you that we have a perfect sense of what the inventories are at our customers either at the end customers and the Oems or in the supply chain, but we haven't seen real indications of abnormalities.
Orders continued to be at a good level, we continue to have strong performance and customers seem to want really a lot of our products as we saw in the third quarter and as would be implied in our guidance also in the fourth quarter, which would make the full year of 2022, just a really exceptional year in automotive.
On the back of a year end 2021, which was itself also quite strong.
Thank you. The next question is from Amit <unk> with.
With Evercore you May go ahead.
Yep.
Thanks for taking my question I guess.
My question is really around the calendar 'twenty two performance off the midpoint that cheap in December .
Would end up being about 15% of topline growth give or take organically.
What are the items when it has a lot of this growth is driven by inventory build that we'll talk to you before the more pronounced manner into 'twenty three.
I know you don't practice quantitatively, but maybe quantitatively qualitatively if you could talk about when you think about the growth you achieved in 2000, and how much of anything and market share gains driven inventory build.
I thought the rewards.
It won't happen. Thank you.
Yeah. Thanks, Thanks, very much Amit listen I think we've talked about inventory in the datacom market and that's already having some some impact here in the third and fourth quarter.
If I if I look at the overall interconnect market, taking really broadly our position I mean, it's clear that we're outperforming and that's just outperforming the sort of GDP or end market, but outperforming our peers.
So when you think about the question of inventory.
Unless you are giving your customers a specific reason.
A specific reason to build more inventory of your products.
Then your outperformance should certainly not be a reflection of of that inventory and so I don't know what inventories we have in our amongst our.
Customers, we have a sense of it in distribution in there I will tell you that it's relatively healthy there nobody is ring alarm bells in our distribution channel about inventory levels, but if you look at our outperformance unless we had created specifically problems that customers were trying to remedy by building buffers talk about problems that would certainly not be a result of inventory and I.
Tell you that over the course of the last four quarters, if not more we've been solving problems for customers not creating them.
And so I personally think in a qualitative fashion as you said you asked a question qualitatively.
It doesn't sit with me that our outperformance would be at all related to an inventory build now is the overall market, having some piece of inventory build and it may very well be but I think that when you look at our overall performance that roughly 15% as you as you say organic growth expectation for the year.
Compared to an industry and industry peers, who are quite quite a bit below that you would probably come away thinking that quite a bit of that is share gains.
But you know that's not a scientific answer.
But because you didn't ask for why don't I couldn't give you one but I think qualitatively I feel like we've made a lot of progress as a company.
Thank you. The next question is from Steven Fox with Fox Advisors, You May go ahead.
Hi, good afternoon.
Had a question on the order of cute, but I'll save them for offline I was wondering if you could talk about the acquisition a little bit more in terms of.
How it fits in with all the other cable assembly acquisitions, you've done and specifically this one.
You know, how you expect to grow it and where the margins are versus where you like we'd like to see them. Thank you.
Thanks, so much Steve.
I'm glad you asked about Ics, it's really a great company and you mentioned all the cables some of the acquisitions. We've done I mean, if I if I think back since 2019, we've done 20 acquisitions since that time.
About five of those acquisitions were kind of diversified cable assembly acquisitions I think we've made like three sensor acquisitions. We've made for fiber optics acquisitions. We've made six acquisitions of I've just connector companies. We've had one mil Aero a value add company, one automotive and that sort of makes up for 'twenty.
And each of those really helps us to broaden our position with customers expanding our capability and making sure that we can cover every corner of the electronics industry on a worldwide basis in ICA really goes towards all of those items in North America based company.
Which I think is a very opportune thing right now there are factories across the U S as well as in Mexico servicing a real diversified range of applications across primarily the industrial market you know.
Everything from you know electrified electrified industrial vehicles to two types of things that are used in factories and factory automation.
To instrumentation and I could go on and on non because it's a very fragmented diversified customer base and what they bring us really as a real local presence.
Close to customers, where we're sometimes value add interconnect proximity can be a real asset actually because if you're in an area, where theres a lot of companies building things designing things and you can be there sort of neighbor and supporter and partner that allows you to get in very early in the design cycle.
And then if you have the breadth of Amphenol. If you have the access to low cost manufacturing low cost sourcing of Amphenol all of a sudden you can turn that early involvement into perpetuity and a strong long term partnership and that that's something that we had ethanol have been very successful in the past whenever we bought companies that then.
Maybe you have a really nice proximity to a certain customer base, but our customers base who themselves is also globalizing.
Not to mention you know the last thing I'll say about ICA does it just great people I mean, you know our company is made up of individuals' general managers around the world who are entrepreneurs and every time, we bring in a company like an ICA I'm, just really amazed by the strength in the character and the entrepreneurship of the individuals that have joined as part of Amphenol.
And I think a 90 day there that's certainly the case and we look forward to growing with customers, where they're a little stronger than we were to bring them into new customers to helping them on connector technology, where we have a lot more to offer to give them a more total solution to customers and on and on I mean, there's so many.
Levers of value that you have in these acquisitions and we fully intend to take advantage of as many of them as possible with the team at ICR.
Thank you. The next question is from Luke Young with Baird. You May go ahead.
Good afternoon, and thanks for taking the question, maybe a bit of a bigger picture structural question and I'm. Just wondering is there anything inherent in the new segment structure of the company that could help at the margin and thinking versus past cycles. If we do in fact go into a broader macro downturn, especially anything anecdotally I think we'd.
Would be helpful to illustrate that dynamic I'm thinking enabling shared resources are identifying growth opportunities or things similar to that thank you.
Well, thanks, so much Luke.
I talked about this early in the year when we announce the evolution of our organization into the three divisions and which are now our reportable segments with three division presidents and it's for US. It's all about the scalability of that unique entrepreneurial culture of amphenol whereby today, we have 100.
Third 30 general managers around the world and what's really important in times of crisis.
And also in good times by the way is those 130, they don't just operate in a vacuum.
Yes every day you have a general manager who's running his or her business reacting in real time to what customers are telling them reacting in real time to what's happening in the environment, whether it be the supply chain or how technology is evolving or whatever but also they're working closely with our group general managers.
<unk>, who now we have 12 of those group General managers, who then work today with those division presidents to make sure that were stimulated and collaboration and real time to make sure that we're sharing best practices and information in real time to make sure that we're cooperating with customers in real time to bring to those customers the full suite of.
Products. So in a time like this the fact that now instead of just having one CEO doing that last year that today, we have three division presidents, who are doing that on a much more active basis. They have three times as much time in their day by definition as I have in my day.
It means that we can have an even richer real time reactivity to changes in dynamics that come in the marketplace and that means opportunities our ability to capitalize on them our ability to migrate resources quickly towards those opportunities. It also means when there are challenges how do we quickly react how do we give support.
To those who sometimes have to do really tough things. They are cutting cost is not a hard thing it requires an enormous amount of moral and moral support in time in discussion.
And that kind of iteration and the debt that interaction is just much more rich today with our three divisions than it was when it was just me with you know the seven groups that we had going into the end of this year and so you know it's part of scaling the company, which has always been as you know one of my greatest.
<unk> is to preserve the culture of amphenol and to ensure its scalability what part of that scalability is making sure that when the next downturn comes along we're just prepared for it and we have just the same ability to react positively as we've done in the past and I think we've demonstrated for more than two decades that in.
Difficult times Amphenol ins rise to the occasion immediately and deliver superior results whether that was in the bursting of the Internet bubble 20 years ago, plus whether that was in the global financial crisis, whether that was during the pandemic and each of those times. The fact that our margins were down by just 300 basis points was a distinct and.
Clear reflection of the culture manifesting itself in that reactivity and so the perpetuation of that culture. The scaling of that culture is really what this is all about and so no doubt about it I think in the big picture that new divisions.
Segments as we've talked about them publicly that will clearly support the company to continue to do what we've always been known for.
Thank you. Our next question is from <unk> Mohan with Bank of America. You May go ahead.
Yes. Thank you so much.
I was wondering Adam if you could elaborate maybe a little bit on the on the pull forward comment you made on mobile devices.
Yeah, you would expect that obviously to grow sequentially at a much lower weight you you did report very strong sequential growth.
Maybe talk about the cadence of orders and why do you think that happened.
In the quarter and if I could if you could just maybe give us some sense of what youre seeing in China and since you have such a good view into into the region.
If you would characterize it maybe as things being stable or getting worse or getting better that'd be great. Thank you.
Sure. Thanks, so much miles do well, it's two questions, but I will say there are a little bit related and let me say why.
Look if you look at our mobile devices market its been as always one of our most volatile markets.
If you go back over the last decade, we've had at least two fourth quarters, which were down in the kind of mid to high teens on a sequential basis. So you know our outlook for this quarter being down sequentially in low double digits is not a foreign concept to us that once in a while you'll have a fourth quarter that will be done I mean, what we always think of.
And mobile devices, the one sure thing.
That's in a market where there are very few sure things is that the second half typically is quite significantly above the first half and here our guidance would imply that in the second half were still up north of 30%.
In the second half compared to the first half so very robust and relatively normal kind of kind of feel between the first and the second semester of 2022 I did mention that there. We saw at the end of the corridor really a very strong demand in mobile devices pulls from customers.
<unk>.
And why was that.
Could come up with a number of different theories I mean my own theory is that you know if you think about mobile devices, which are still today, primarily manufactured in China and there was not only just holidays in China, but there were some other events going on over the last over the first few weeks of October in China.
And it wouldn't surprise me if maybe some customers were preparing for for both of those holidays as well as the various political meetings that happens in the country and that may have led to a little bit of pull forward is as I alluded to and that is also reflected in this in this guidance I mean look relative to.
I think it's a tale of two cities here. One is you know if you read the papers and if you watch everything obviously at the highest levels of the government. There's a lot of attention and you know you would be blind not to recognize that there's a lot of political tension.
Theres various policies being enacted by the U S and there's various things that are happening in China that are all interpret it in that way.
There is some tension at the same time on the street on the ground you know it is pretty stable and kind of business as usual, we havent seen funding things happening that one would sort of fear over the last few years. Our operations are running really great and we continue to make great progress with local customers who need.
Our technologies and I think it comes back to something I've talked about in the past.
Which is that we operate globally as a local company everywhere that we operate if you think about it we're in 40 or more countries around the world and each of each of our operations of those countries is run by general managers, who are from that place and they run their business as if it was a local business, albeit with the backdrop.
To support the resources and the capabilities and the.
The breadth of our global Amphenol and nowhere is that more true than in China, where our entrepreneurial management team. There has just done a phenomenal phenomenal job of making sure that customers know that they get local support from local teams local engineers local quality engineered. So this is not ex Patriots. This is not us.
Taking a American technology and putting it over there to support it is all locally developed and locally supported and thus in their times of need our customers come to us when we can solve their problems and that's what they do the world over.
And so you know while the headlines in the papers are what they are I can tell you that on the ground. Our team continues to operate very effectively and successfully across China.
The one last thing I'll say I'm sure in your question about China's embedded a question maybe about how COVID-19 is going there.
Just so proud of how our team has navigated the restrictions that were associated with zero COVID-19 over the course of this year those were much more acute towards the end of the first quarter and into the second quarter in particular in Shanghai, where our team just did a fabulous job, but there are still occasionally some little restrictions that are popping up and our team has a fabulous playbook.
For it and we don't have all our eggs in one basket anywhere in the world and that includes in China, and so we have a very diversified and broad.
Set of facilities around the around the country such that we're not susceptible to a total a total impact of one place has the shutdown or another so I would say, it's very stable I certainly hope that the world's governments can can all get along that's something that I personally hope for all of them.
Our sake, but for Amphenol is positioned in China, we remain very robust and we're very confident in the future.
Thank you. The next question is from Jim Suva with Citigroup you May go ahead.
Thank you I have a question about strategy for either Adam I'll, Craig with interest rates higher and Craig gave some good details about interest expense that we should model for Q4 and going forward I.
I didn't know if that included any additional fed raise next month or not but the bigger strategy question is does this make it. So your use of capital you are looking to pay down all of that a little bit more or higher returns on capital versus how you look at M&A or stock buybacks a little more.
Start with balance seems a little bit differently with higher interest rates, but just let us know about strategically if it impacts things at all in your decision tree. Thank you.
Thanks, Jim.
I would say that I mean, our overall capital deployment strategy, which certainly I've talked about many times in the past and certainly over the last number of years, it's been in a lower interest rate environment, but we've had this similar capital deployment strategy over many different interest rate environments over the years and it really has been consistent and you know it's really.
Resulted in you know what it believes to be great return of investment.
To our shareholders and the strategy kind of advice described before has been flexible in how it's executed over time, depending on the economic and market conditions and balanced in regards to ensuring that we're deploying capital towards our M&A strategy, which you are which we believe provides the best return and a return of capital to <unk>.
Our holders and that's both our dividend program and our and a return of.
Repurchase program share repurchase program and I would say you know given that kind of strong free cash flow generation that we've had over the years that I can say with confidence that the really the rising interest rate environment really won't impact our overall capital deployment strategy and I would say in any real meaningful way I mean, we continue to look to deploy that half of our free cash flow towards M&A.
Over time, and you know that other half towards that return of capital to shareholders and if opportunities there were more significant than acquisitions, we're certainly going to adjust that towards towards those acquisitions in a fast and flexible manner and and I think that we do generate a lot of free cash flow and and you know we certainly expect to continue to do so so I wouldn't say that really.
The interest rate environment is going to change that I think debt Paydown. You know it is certainly something that we would do if some of those other levers just you know certainly M&A and in other ways just isn't available to us and we we have been able to kind of maintain in certain cases pay down debt over time anyways, even giving.
All of those different actions that we take so I wouldn't say that the current environment has really changed in the way we think about that.
Thank you. Our next question is from Joseph Spak with RBC capital markets. You May go ahead.
Ah. Thanks, so much Adam I was I was wondering if you.
You could comment just broadly given given the macro and all of this uncertainty whether you're seeing any widening of the acquisition funnel or maybe any loosening of evaluations as sellers might get more skittish or or does everyone should remain to the world that was or evaluation that was and if I could sneak in just a quick.
Housekeeping, what would the book to Bill have still been negative without FX movements.
Yeah, Joe I think Youre, a little housekeeping question.
I think probably I don't know.
I don't think it would have changed the book to Bill with FX.
Look relative to M&A in the funnel and we have a great pipeline of acquisitions as I mentioned, you know over since the beginning of 2019, we've closed 20 deals through quite a cycle I will say I mean, if you think about the cycle in which we've done that there's been quite a cycle.
And I think the compelling story of joining the Amphenol organization being part of something that is really special and.
It's something that we continue to tell the companies around the world and we continue to find we continued to find good reception to that.
It does it become.
Kind of a quote buyers Mike market for example, our sellers a little more skittish than we're willing to sell I would be I'd be a little careful about kind of overestimating the impact of the macro on the decision making of sellers many of whom are making the one decision into our life to do this.
So in my experience sellers are not kind of looking at what the S&P 500 is doing or looking at what the 10 year Treasury is doing or looking at what what what FX rates are doing in that moment when they think about selling should they sell should they not sell and at what value.
<unk>.
Can it impact you know on the margin the current environment. What you know others are willing to pay for deals and you know, we're a very financially strong company.
Maybe that could I I would hope that there's good reason among among the universe of buyers around around valuations.
But we don't normally see just because macro shifts a dramatic change in the M&A landscape, we have a fabulous funnel a fabulous track record we have a fabulous organizational culture, that's really attractive to companies and I think all of those things will serve us well and will will ensure that over the long term.
<unk> will continue to find great companies become part of Amphenol and you know all continued to be completely unable to predict when that's going to happen, but we're happy to have gotten one deal done here this quarter and I'm confident over the long term, we'll have some more.
Thank you. Our next question is from William Stein with Truest you May go ahead.
Great. Thanks for taking my question.
Adam I don't normally.
Ask about I guess, it doesn't normally get a ton of attention the broadband market.
But the growth is very strong and.
For a while now.
I Wonder if you could comment as to longer term trends here. We've heard some other component suppliers talk about this end market looking strong for.
More than just a couple of quarters.
You hear about cable msos and carriers, making pretty significant spending commitments.
And I wonder, if you're seeing that dynamic and whether that's reflected.
The substantial backlog, there or that might be overstating things. Thank you.
Yeah, well thanks for the question and you know look I'm really happy to talk about the broadband market. It's always been our core for amphenol, even if theres been a few challenging years.
Sort of operators and broadband, we're merging and buying each other than waiting for certain technologies to come and with all of that consolidation and that kind of waiting periods. You know that there was a relatively flat kind of investment in the broadband market and what I think we've seen this year.
With the real Spike up of our performance in this space and you know it can only be determined that if you look at where we are today on a run rate basis, we're more than 50% higher than we were a year ago and and you know over the last kind of three or four years. It was running at a relatively stable pace on a quarterly basis broadband and.
And now it's quite a higher level and I think it's a reflection of really one thing.
Jordan area expansion of data traffic in the world and and the necessity.
<unk> operators to work to support that I mean think about all the things that we do on a given day and theres rarely a minute that goes by where youre not somehow using some data somewhere in creating traffic.
I'm going to give a little shout out because I have a new baby niece, who my my little brother add his first child at just a few days ago and I have spent more time on face time looking at this beautiful young thing whose name is Chloe I have spent more time looking at this beautiful thing on real time.
Video over the last six days, then I think I have faith timed ever in my life.
It's extraordinary and the fact that you don't you can't sit in Connecticut.
And you can look on an iPad and you can be looking at a baby that was born not very few minutes before that and you can be experiencing that with the richness sure youre not there you don't smell of the baby you don't see everything around it but you can actually see the thing that is there and all of her.
<unk>.
I mean that that is assigned to me of a world that demands a lot of broadband and so you know what is going to be in the future.
Is there is there is some momentum in the spending I think there is some momentum here Theres also a lot of government funding, let's not forget I mean, a lot of this infrastructure bill here in the U S and there are other countries doing the same has focused on the fact that there's a whole subset of the world who doesn't get to do what I just.
Scribes because they live in areas that don't have access to rural broadband.
Broadband is.
Utility it's a necessity it is in many ways of human rights and I think governments of the world have woken up to the fact that if you don't provide that access to people regardless of if they live 10 miles from the nearest paved road in the middle of Kansas or if they live in Manhattan, then youre not really enabling people to.
Live a full life and that we're really proud of what we do in the broadband space and we've always stuck it out even when you know the spending wasn't growing and I'm just so happy for our team and proud of our team.
There today to enable the growth and the investments that are happening with our customers.
Thank you. Our next question is from Joe Giordano with Cowen You May go ahead.
Hey, Thanks for getting me in here good afternoon, everyone.
You know I know, we all appreciate like the beauty of Amphenol, it's like when one part of your business is doing well some are 111.
One part is doing weaker one is doing stronger than you kind of balance each other out but it looks like normalized for the size of that relative to end markets do you have is there.
Can you kind of like.
Which parts are the.
Have the most impact on your margins. If you were to normalize for size. So I guess, there was something to be down which would be the last one you'd want to be down. If you were to kind of think about it that way.
Yeah, Yeah, Yeah, Joe Thanks for the question I actually I wouldn't really call out any market that really has significantly lower margins I mean some have.
Lower gross margins, but then lower SG&A and we talked about the structure being a little bit different and depending on the market, but from an operating margin perspective honestly I wouldn't say that there's much of a significant difference I mean, you see that there are some differences in our operations or our segments have a little bit of a different but from a market perspective, I really well.
Didn't call that out I mean broadband.
Which is really.
Used to be more of the cable business and it really isn't only the cable business anymore. Because you know some of the acquisitions, we've done in that space, that's really broaden our portfolio out in that in that market and is actually somewhat of the reason why we've seen some of this big growth historically was lower margin, but I wasn't even called that out as some of this big growth.
The having lower margins associated with it so.
Long winded answer to your question is I really wouldn't call out any particular markets.
Thank you and our last question comes from Matt Sheerin with Stifel. You May go ahead.
Yes, Thank you and thanks, Adam and Craig for all the details so far.
Your final question here is just on the aerospace market, where you've had some nice momentum over the last few quarters. So we're below where you were pre pandemic.
But it looks like you've got a really strong backlog so could you talk about.
The momentum you're seeing there Adam in the content opportunity going forward.
For sure Matt and thanks, so much it's a great last question.
Look I mentioned in my prepared remarks, just how proud I am of our team work in this market. It is not easy let me tell you. It is not easy to be servicing space and end market and to have that end market dropped by as much as it did in the case of broadband and let alone to do it well.
Of your your fellow your fellow colleagues are are in spaces that aren't dropping by that much. So you don't even have the misery loves company kind of dynamic and what is the playbook for amphenol in times like that it's not to run and hide it's not to just cower and sort of drawn your sorrows you take quick action.
You make sure that your resources that you have deployed are befitting the demand that you have from your customers and then you go out and you build new basis of business and you take the opportunity of the crisis and that's really important that you take the opportunity from that crisis to diversify your business, even further to support the customers who.
You still need you in those difficult times, because then when it comes back you have a much broader more stable more robust and high potential business to run and that's what our team who works in commercial air has done and so yes, we're not quite back to the kind of pre pandemic levels, but the world is also not quite back to pre.
Pandemic levels I mean, certainly there's more travel and airports are more crowded here, but you know you Craig and I went to Asia recently, and I can tell you theres a lot less slides crossing the Pacific than they ever were before so those sort of wide body long haul kind of part of the business travel that was a real big driver.
<unk> of aircraft demand that that is still yet to be fully recovered.
But our team has just done a fabulous job of being there for our customers, making sure that we have the right resources and using the opportunity of the crisis such that when when things do normalize and they are on the path to doing that we'll be in a better position today than we were prior to the crisis.
What we also see in aerospace and one of the areas, where I will tell you. Our team spent quite a bit of time, because they had a little bit of extra time, given the the downturn with the major traditional jetliner manufacturers is this whole world of kind of new aviation electrified aviation.
Kinds of small startups, all over the place doing really innovative and exciting things and our team is working on just dozens and dozens of programs with countless of these these companies large and small who are trying to really change the face of aviation in a world where.
He wants to reduce the amount of carbon that's been put into the atmosphere and we have so much going on around amphenol. That's in support of this de carbonization and I'll tell you that our team and Com Air has really stepped up there and has just really pervasive presence designing new products that really suit the unique applications of <unk>.
Some of these next generation systems that may eventually make it such that we can get on a plane and we won't be just belching carbon in the atmosphere as we're moving across the country and I I personally I'm really hopeful for that for for me and for our next generation.
And you know I'm really proud of what the company is doing in that respect.
Thank you and I'll now turn the call back over to Mr. Norway for any closing remarks.
Well operator, thank you so much and in particular, thank you to everybody who was on the on the call here today and thanks for your great questions and I wish that everybody enjoys a wonderful fall and we'll be back together with you here in 90 days and by then amazingly it'll be 2023, so have a wonderful rest of the year and we look forward.
We're seeing you all soon thanks, so much.
Thank you for attending today's conference and have a nice day.