Q1 2023 Amphenol Corp Earnings Call

Speaker 2: and welcome to the first corner 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.

Speaker 3: Introduce today's conference host, Mr. Craig Lampeau. Sir, you may begin. Thank you very much. Good afternoon, everyone. This is Craig Lampeau, Amphenol CFO , and I'm here together with Adam Norwood, our CEO . We would like to welcome you to our first quarter of 2023 conference call. Our first quarter of 2023 results were released this morning. I will provide some...

Speaker 3: The company closed the first quarter with sales of $2.974 million and GAAP and adjusted to the EPS of $0.71 and $0.69 respectively.

Speaker 3: First quarter sales are up 1% in US dollars and organically and up 3% in local currencies compared to the first quarter of 2022.

Speaker 3: Equentially, sales were down by 8% in US dollars, 9% in local currencies and 10% organically. One more comment further on trends by market in a few minutes.

Speaker 3: Orders in the quarter were $2,896,000,000 which was down 16% compared to the first quarter of 2022 and flat sequentially resulting in a book to bill ratio of.97 to 1.

Speaker 3: The lower book to bill was driven by lower bookings in the communications related markets which continue to experience a decline in demand.

Speaker 3: Gap in adjusted operating income were $592 million and $597 million respectively in the first quarter of 2023.

Speaker 3: Gap and adjusted operating margins were 19.9% and 20.1% respectively in the first quarter.

Speaker 3: On a GAAP basis, operating margin decreased by 10 basis points compared to the first quarter of 22 and decreased by 70 basis points sequentially. And GAAP operating margins for the first quarter included $5 billion of acquisition-related costs.

Speaker 3: On an adjusted basis, operating margin increased 10 basis points compared to the first quarter of 22 and decreased by 80 basis points sequentially.

Speaker 3: The year over year increase in adjusted operating margin was driven by strong operating leverage on the modestly higher sales volumes.

Speaker 3: And on a sequential basis, the decrease in adjusted operating margin reflected normal downside conversion on the lower sales levels.

Speaker 3: Our team continues to execute strongly in the quarter and we are proud to have sustained these strong levels of profitability despite the continued range of challenges around the world including the moderating conditions in several of our communications related markets.

Speaker 3: In particular, we truly appreciate the quick reactivity of our teams working in the communications markets. We took appropriate actions to preserve strong profitability in the face of downturns in customer demand.

Speaker 3: Breaking down first quarter results by segment, in the harsh environment solution segment, sales were $854 million in the first quarter, which was an increase of 17% in US dollars and 15% organically versus prior year. And operating margin was 26.5%.

Speaker 3: In the communication solution segment, sales were $1,127,000,000 in the quarter, which was a decrease of 15% in US dollars and 13% organically versus the prior year. The operating margin was 20.5%.

Speaker 3: In the interconnect and sensor system segment, sales were $993 million in the first quarter, which was an increase of 10% in US dollars in organically versus the prior year.

Speaker 3: Segment operating margin was 18%.

Speaker 3: The company's gap effective tax rate for the first quarter was 20.9% and the adjusted effective tax rate was 24.0% which compared to 23.8% and 24.5% in the first quarter of 2022 respectively.

Speaker 3: The Aptiluted EPS increased 4% to $0.71 compared to $0.68 in the prior year period. And the Just Aduited EPS increased 3% to $0.69 compared to $0.67 in the first quarter of 2022.

Speaker 3: Operating cash flow in the first quarter was $532 million or 125% of adjusted debt income. And net of capital spending or free cash flow was $436 million or 102% of adjusted debt income.

Speaker 3: We are pleased to continue to deliver a strong cash flow yield.

Speaker 3: From a working capital standpoint, inventory days, days sales outstanding and payable days were 93, 72 and 52 days respectively.

Speaker 3: The higher inventory days were primarily driven by the lower sales level in the first quarter together with some continued impacts from the supply chain disruptions that our industry experienced over the past year.

Speaker 3: Our management team is focused on bringing the inventory days back down to a more normal range over the coming quarters.

Speaker 3: During the quarter, the company repurchased 2.1 million shares of common stock at an average price of approximately $79. And when combined with our normal quarterly dividend, total capital return to shareholders in the first quarter of 2023 was more than $290 million.

Speaker 3: Total debt on March 31 was $4.6 billion and net debt was $3.1 billion.

Speaker 3: Total liquidity at the end of the quarter was $4.5 billion which included cash and short-term investments on hand of $1.5 billion plus availability under existing credit facilities.

Speaker 3: First quarter EBITDA was $708 million. And at the end of the first quarter of 2023, our net leverage ratio was 1.0 times. We are very pleased that the company's financial condition remains extremely strong by any measure.

Speaker 3: I will now turn the call over to Adam who will provide some commentary on current market trends.

Speaker 4: Well Craig, thank you very much and allow me to extend my welcome to all of you on the phone here today and I hope you all are all enjoying a lovely spring so far. As Craig mentioned, I'm going to highlight some of our achievements here in the first quarter. I'll then discuss our trends and progress across our served markets.

Speaker 4: and then make some comments on our outlook for the second quarter. And then of course we'll have time for some questions at the end.

Speaker 4: With respect to the first quarter, our results were stronger than expected, exceeding the high end of guidance in sales and adjusted diluted earnings per share.

Speaker 4: Our sales grew from prior year by 1% in US dollars and 3% in local currency, reaching 2.9 billion.

Speaker 4: On an organic basis, our sales increased by 1% with growth in commercial, air, broadband, military, automotive, and industrial markets largely offset by declines in the IT data to become mobile networks and mobile devices markets.

Speaker 4: The company booked just under $2.9 billion in orders in the quarter, representing a book to bill of 0.97 to one.

Speaker 4: Our operating margins, adjusted operating margins in the corridor, reached 20.1% and that was a 10 basis point increase from last year's levels. As Craig just mentioned, we achieved this still very robust level of profitability despite the ongoing cost challenges around the world.

Speaker 4: as well as declining volumes in many of our communications markets. And this is just an excellent reflection of the strength of our company's execution in these very dynamic times.

Speaker 4: Adjusted diluted EPS grew 3% from prior year to $0.69 and we generated strong operating cash flow of $532 million and $436 million respectively in the quarter, all clear demonstrations of the high quality of Amphenol's earnings.

Speaker 4: I'm just extremely proud of our global team of amphenolians around the world. The company's results this quarter once again reflect the discipline and agility of our uniquely entrepreneurial organization as we continue to perform well in a very dynamic and challenging environment.

Speaker 4: Now turning to our progress across our various served markets, I would just comment that we remain very pleased that our end market exposure is still highly diversified, balanced and broad.

Speaker 4: This diversification continues to create great value for Amphenol because it enables us to participate across all areas of the worldwide electronics industry while not being disproportionately exposed to the risk associated with any given market or application. So with that said, the military market represents 11% of the world's largest market in the world.

Speaker 4: sales increased by 2%, which was in line with our expectations coming into the first quarter.

Speaker 4: And as we look into the second quarter, we expect sales to increase modestly from these first quarter levels. And as we look into the second quarter, we expect sales to increase modestly from these

Speaker 4: We remain very encouraged by the strength of the company's position in the defense market, where we continue to offer the industry's broadest range of high technology interconnect products.

Speaker 4: As the geopolitical environment has become certainly more dynamic, nations around the world are expanding their investments in next generation defense technologies, thereby increasing the long-term demand potential. We look forward to supporting this increased demand with our wide array of interconnect and sensor products, together with our expanded capacity to address the challenges of the city.

Speaker 4: resulting from the investments that we've made in recent years.

Speaker 4: The commercial aerospace market represented 4% of our sales in the quarter and sales increased by a strong 42% from prior year and 44% organically as we benefited from the continued recovery in global aircraft production.

Speaker 4: And while aircraft production may not yet be back to the levels that it was before the pandemic, we are very pleased that after several very challenging years in this market, our team has driven our sales essentially back to pre-crisis levels, a really great achievement.

Speaker 4: Sequentially, our sales grew by a much better than expected 15% from the fourth quarter. And as we look into the second quarter, we expect sales to remain at these first quarter levels.

Speaker 4: I'm just so grateful to our team who works in the commercial air market. You know, with the ongoing recovery and travel and thus demand for jetliners, our efforts to strengthen our breadth of high technology interconnect products while diversifying our market position into next generation aircraft are paying real dividends. And we look forward to realizing the benefits of these initiatives.

Speaker 4: here in 2023 and beyond. The industrial market represented 28% of our quarter of our sales in the quarter. And our sales in this market grew from prior year by 11% in US dollars, 14% in local currency and 5% organically.

Speaker 4: This growth was driven in particular by sales into traditional and alternative energy generation, heavy equipment, rail mass transit, factory automation, and medical applications together with contributions from our acquisition program.

Speaker 4: On a sequential basis, sales were up 2% from the fourth quarter, which was a bit better than our expectations.

Speaker 4: And as we look into the second quarter, we expect sales in the industrial market to remain at similar levels as we saw here in the first quarter.

Speaker 4: Our outstanding global team working across the industrial market continues to find new opportunities for growth across the many distinct segments of this exciting and truly diverse deceiving market.

Speaker 4: 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 to capitalize on the many revolutions that are happening around the industrial electronics market.

Speaker 4: We look forward to realizing the benefits of this strategy for many years to come.

Speaker 4: The automotive market represented 22% of our sales in the quarter.

Speaker 4: And sales in the first quarter grew 9% in US dollars and 14% organically with our growth supported once again by strength of our sales into electrified vehicle applications together with other products sold into a wide array of new electronic systems in cars.

Speaker 4: While sales in Asia were slightly down from prior year, we realized strong growth in North America and Europe in the automotive market.

Speaker 4: Sequentially, our sales declined by 5% from the fourth quarter, which was a bit better than our expectations coming into the quarter. And that just reflected strong execution by our team in reacting to opportunities with customer demand. For a lifetime, we saw the fusion of positive and positive trends in the pinch time scale.

Speaker 4: For the second quarter, we expect a modest sequential increase in sales from these levels.

Speaker 4: And I just have to say that I remain truly impressed by our team working in the automotive market. They continue to grow our global position by remaining focused on driving new design wins with customers who are implementing a wide array of new technologies into their vehicles."

Speaker 4: In particular, our long-term efforts at expanding our now comprehensive range of next generation interconnect products that are incorporated into electrified vehicles.

Speaker 4: has enabled us to expand our position with a wide range of customers, all of whom are pursuing carbon neutral driving solutions. And that creates further potential for the business.

Speaker 4: The mobile devices market represented 9% of our sales in the quarter and sales declined by 15% from prior year as growth in smartphones was more than offset by declining sales into laptops, tablets, and wearables.

Speaker 4: Sequentially, our sales declined by a slightly better than expected 31% from the fourth quarter. And as we look into the second quarter, we do expect a further mid-team sales decline from these first quarter levels.

Speaker 4: There's no question that the mobile devices market remains one of our most volatile.

Speaker 4: Nevertheless, our outstanding and agile team has adjusted their resources in real time with the changing levels of demand and stands poised as always to capture any opportunities for incremental sales that may arise in 2023 and beyond.

Speaker 4: Our leading array of antennas, interconnect products, and precision mechanisms continues to enable a broad range of next generation mobile devices, which positions us well for the long term.

Speaker 4: The mobile networks market represented 4% of our sales in the quarter.

Speaker 4: Sales declined from prior year by 19% in US dollars and 17% organically as operators and equipment manufacturers reduced their demand after several quarters of stronger consumption.

Speaker 4: Sequentially, our sales in the first quarter were down by 11% from the fourth quarter, which was a bit more than we had expected coming into the quarter.

Speaker 4: And now as we look into the second quarter, we do expect a further low double-digit sequential decline in sales as operators further moderate their spending.

Speaker 4: Our team continues to work aggressively to realize the benefits of our efforts to expand our position in next generation 5G equipment as well as the networks being constructed around the world.

Speaker 4: And while there is currently seemingly a pause in the investment cycle, when customers once again drive renewed construction of these advanced systems, we look forward to benefiting from the increased potential that comes from our unique position with both equipment manufacturers and mobile service providers.

Speaker 4: The information technology and data communications market represented 17% of sales in the quarter and sales did decline by 21% in U.S. dollars and organically. As both service providers and equipment manufacturers, the information technology and data communications market represented 17% in U.S. dollars and organically.

Speaker 4: moderated their demand in light of still significant levels of inventory across the market. On a sequential basis, sales declined 17% from the fourth quarter, which was a touch better than our expectation of 20% down coming into the quarter.

Speaker 4: And as we look towards the second quarter, we expect sales to remain roughly at these first quarter levels.

Speaker 4: Regardless of this current correction in demand, largely due to inventory, we remain encouraged by the company's outstanding position in the global IT data com market.

Speaker 4: Our team's just done an outstanding job developing leading high-speed, power, and fiber optic interconnect products that are enabling our OEM and web service provider customers to continue to drive their equipment and networks to higher levels of performance.

Speaker 4: With exciting new applications, including in particular alternative intelligence or AI, together with the continued growth in overall data traffic, we're confident that we'll be able to realize the benefits of our leading position in this important market for many years to come. And finally, the broadband communication...

Speaker 4: This growth was driven by increased network build-outs as well as our customers preparing for new government supported spending on expanded broadband coverage particularly here in North America.

Speaker 4: On a sequential basis, sales declined by 15%, slightly worse than our expectations coming into the quarter.

Speaker 4: As we look into the second quarter, we anticipate a mid-single digit sequential moderation of sales from these first quarter levels as broadband operators temper their procurement levels.

Speaker 4: Nevertheless, we remain encouraged by the company's strong and expanded position in the broadband market, and we look forward to continuing to support our service provider customers around the world, all of whom are working to increase their network coverage and bandwidth to support the proliferation of high-speed data applications.

Speaker 4: to homes and businesses.

Speaker 4: Now turning to our outlook, the current economic environment remains for sure dynamic and highly uncertain.

Speaker 4: In addition, we do expect reduced demand to continue in the second quarter across the communications related markets.

Speaker 4: Assuming market conditions do not meaningfully worsen and also assuming constant exchange rates.

Speaker 4: For the second quarter, we expect sales in the range of $2,890,000,000 to $2,950,000,000 and adjusted diluted earnings per share in the range of 66 to 68 cents.

Speaker 4: This would represent a year-over-year sales decline of 6% to 8% and adjusted diluted EPS decline of 9% to 12% again compared to the second quarter of prior year.

Speaker 4: Nevertheless, I remain confident in the ability of our outstanding management team to adapt to the many opportunities and challenges in the current environment and to continue to grow our market position while driving sustainable and strong profitability over the long term.

Speaker 4: Finally, I would be remiss if I didn't take this opportunity to offer my true gratitude to our entire global team around the world for their outstanding efforts here in the first quarter. And operator, with that, we'd be very happy to take any questions.

Speaker 2: The question and answer period will now begin. Please limit to one question per caller.

Speaker 2: Our first question comes from Amit Darianani with Evercore. You may go ahead.

Speaker 5: Thanks a lot. Good afternoon everyone. Adam, I was hoping you would expand a bit more on the communication segment softness that you're seeing. I think we've talked about the IT data com softness for a few quarters now. It sounds like maybe it's incrementally there on the mobile network side as well. I would love to get your perspective on if you think this is more demand driven or inventory driven issue.

Speaker 5: And then, from your advantage point, what do you think is the duration of the softness? Is correction as you go forward? Thank you.

Speaker 4: Well, thanks very much Amit. And for sure, I mean, our team working in the communications market has been wrestling with quite some vacillations in demand. And if you just look back over the prior couple of years, we had just fabulous, fabulous growth in all the communications market, in particular in IT DataComm, but we...

Speaker 4: there was a significant degree of overbuying of components, not because we had disappointed our customers, quite the contrary. We were constantly coming to the rescue of our customers over the course of their boom in demand with the agility that they've come to expect from Amphenol, but regardless, they seem to have opened their aperture of procurement across virtually everything that they buy in light of the supply chain crisis, and that included building up.

Speaker 4: And I think what we've seen in particular in mobile networks is we've seen the early stages of operators building out their 5G networks, and we benefited, no doubt about it, from that build out with the long-term efforts that we put in to build our position across those next generation systems.

Speaker 4: are certainly not fully built out, quite the contrary. But they've built out the rough framework of them. It allows them to get a certain amount of coverage, start to realize a certain amount of economic return for their investments, and then as typically happens, they would at a certain point start to do further investments to build up more capacity in those networks. And when that happens, we'll be well equipped to deal with that.

Speaker 4: I mean, the other communications market, mobile devices, this is one that is very volatile. We saw in particular last quarter still really robust strength in smartphones, but that was offset or more than offset by fairly dramatic declines in the overall demand for computing devices like laptops and tablets.

Speaker 4: as Craig and I come into the office, the parking lot is full, the cubicles in the offices are quite full here, and so I think that mad rush to equip people for working from home with those various devices has a little bit changed the cycle of replacement of them and maybe bunched a bit more into the prior two years. And then last I'll talk about is broadband, which is in our kind of fourth of the communications markets.

Speaker 4: We had just outstanding performance in broadband last year and that continued here into the first quarter And that was really supporting our customers with a really broad array of products We've dramatically expanded the range of products that we sell into the broadband market

Speaker 4: And that resulted in us taking significant position with our customers. I mean, we grew, as you'll recall very well, last year by 38% organically and 62% in US dollars with the variety of acquisitions that we've made in recent times.

Speaker 4: and still robust double-digit organic growth here in the first quarter. And I think now we see a little bit of digestion of those customers as we look into the second quarter. But no doubt about it, the position that we built over the last couple of years in broadband is something that we think long term is going to create great value for the company.

Speaker 5: And our next question comes from Wamsi Mohan with Bank of America. You may go ahead. Yes, thank you. Adam, I'm curious as to why you think this weakness is contained within communications. I mean, you were so diversified even within communications, right, your consumer exposure and mobile. I'm curious as to why you think this weakness is contained within communications, right, your consumer exposure and mobile.

Speaker 5: enterprise and cloud exposure and ID data, comm carrier exposure and mobile networks. Given that like, why is this, you know, it sounds like it's a very broad macro kind of slowdown is this just more early cycle given some of the inventory things that you noted and you know, we should expect some moderation even in industrial.

Speaker 5: if you have or even if you're not, it would be great to get some perspective on what you're seeing on the ground in China. Thank you.

Speaker 4: Yeah, thanks very much, Wamsi. Look, I don't think that the communications markets and the dynamics that I just discussed, which are quite unique in each of them, we're talking about one dynamic in IT Data Comma, different in mobile networks, different again in devices and yet again in broadband.

Speaker 4: I wouldn't say that that is an indicative or leading indicator for a broad economic situation. You know, quite the contrary. We've given guidance for next quarter for all of our markets, and I don't think that that guidance reflects a kind of a broad economic slowdown. Quite the contrary.

Speaker 4: Relative to China, I mean, I'm glad you asked the question. You know, it was just early last month when China changed its Visa policies and as soon as the news came out that Visas were reenacted, literally that day we booked our flights and Craig and I were in China at the very first day of April and what a pleasure it was. I can't tell you. To be three years away.

Speaker 4: from our team in China who just did such a phenomenal, phenomenal job over these these three very challenging years in particular over last year which was particularly challenging in certain places including in in Shanghai. I tell you I had the opportunity to meet some of our factory workers who went into a bubble.

Speaker 4: in Shanghai for more than six weeks in one case. And just to be able to see them and to be honest, to like hug them and thank them for all what they did on behalf of the company during that time period was just a tremendous, tremendous satisfaction for me.

Speaker 4: Not to mention Craig and I, somehow we didn't gain weight with all the food that we ate over that week of visiting 21 of our operations in China. But the trends in China, I tell you being there on the ground, this does not seem like a place that is going into deep recessions. Infrastructure investments continue apace. You see new rails for high-speed trains next to virtually every highway you go on.

Speaker 4: entrepreneurial organizations like we do around the world run by general managers and their teams and what amazing work they did over this time. Driving growth in technology, developing new products for the China market, not relying on Western countries or engineers who may be subject to government restrictions that can be applied from anywhere that you think of.

Speaker 4: but rather developing native capabilities inside of Amphenol. Also, many of our Chinese operations had during that time, for a variety of reasons, the incentive to set up operations outside of China. And doing that while still not being able to travel, going to a place like Vietnam, or to India, or to Thailand, or even Mexico.

Speaker 4: and setting up satellite factories on behalf of their customers who wanted to have China plus one or something like that. It was just really exceptional to see that. And another reminder of what really makes this company special. You know, are there trends in China? Are there macro issues?

Speaker 4: long-term things like population growth or lack thereof. Sure, are there geopolitics that are sitting kind of at the highest levels between Beijing and Washington? Sure they are. But I can tell you when you go on the ground, you meet with the people, there you get really encouraged as I do.

Speaker 4: everywhere that I go around Amphenol, from the US to Mexico to India to Western Europe and now finally being able to go back to China. And I look forward to going back again soon.

Speaker 5: Our next question is from Samik Satterjee with JP Morgan. You may go ahead. Hi. Thanks for taking my question. I just wanted to see if I can get some of your thoughts about how you're thinking sort of for the second half of the year with the guidance that you have for two years. Two years, for aThe ASE ancient hundred years.

Speaker 6: Q, the first half you're going to be down a bit year over year, but the orders have now stabilized. Is that giving you a bit more visibility into the opportunities for growth or the opportunity for the aggregate company to grow in the second half or maybe even for the full year? Any thoughts there? Thank you.

Speaker 4: Yeah, thank you very much, Sumik. Look, I mean, we're not giving full year guidance because it does remain a very volatile environment and so as much as I would love to sort of get out ahead of my skis and tell you that, you know, the second half is going to give growth or not give growth, I'm going to refrain from doing that here today.

Speaker 4: But I can tell you this, that the company remains strong. The base of our strength with customers, the financial condition of the company, I mean, just look at the margins that we were able to secure in the first quarter, despite real volatility that we saw in our communications markets, and Craig mentioned that very specifically,

Speaker 4: it is for me to give a sense of what Q3 and Q4 and ultimately the full year is going to bring. You can bet our team has high aspirations, but we're also realistic to the environment that's in front of us and we're going to manage through whatever comes our way. And our next question is from Steven Fox with Fox Advisors.

Speaker 7: I was just curious what you think about this cycle relative to prior cycles where your earnings are down and what steps you're going to take to maybe mute that earnings decline in coming quarters. Thank you.

Speaker 4: Well, thanks so much, Steve. I mean, look, we'll see how the year goes. As I just said to Samak, I have no idea and certainly I'm not going to talk about what the full year earnings will be. But what I did say just now I think really resonates when you bring up 2009. Because 2000, whether it was 2009 or even 2001 and you're probably one of the few people on the call.

Speaker 4: quarter and then we have to play catch-up and get behind kind of the curve of the cost. Rather we see what orders we have, we see what our customers want and if we have too few or too many resources we make adjustments rapidly. And that gets reflected then in the profitability of the company. And as you know very well what distinguished our company whether it was in 09, 01,

Speaker 4: or in that sort of COVID environment of early in 2020, was from peak to trough, our margins declined to 300 basis points during very, very significant downturns in demand. Now, we're certainly not with our guidance in the second quarter.

Speaker 4: guiding to such kind of cataclysms as we all saw in 2009, but at the same time it's a dynamic world and so our playbook hasn't changed whatsoever. Even if the size of the company is significantly bigger than it was in 2009 and categorically bigger than it was in 2001.

Speaker 4: Our sort of modus operandi is the same. That culture of entrepreneurship, which is today represented across 130 general managers, and maybe in 2009 it was like 50, and in 2001 it was like 20, it's still the same way to deal with it. These GMs are out with customers.

Speaker 4: and that's the approach of Amphenol. It has been my entire 25 years in this company and it will be for as long as I can secure that. So you know who knows what it's going to be this year. We certainly don't aspire to have a reduction in our EPS but

Speaker 3: If demand is softer than it was last year, we'll manage through it. Yes, Steve, this is Craig. And I think I just would add just one thing to that. I think that if you look even in the first quarter results, and we've said this a couple times, but if you look at the first quarter results and you take into account that we have, you know, three or four markets that are reducing sequentially by, you know, double digits...

Speaker 3: You really just see that resiliency from a margin perspective and the ability for the company to kind of react to those kind of, you know, reductions. I mean, the mobile devices market is certainly normally used to having kind of reductions like that, but places like IT data, mobile networks.

Speaker 3: You know, broadband, these are not markets that typically have that type of volatility for a quarter to quarter basis. And I think that really that kind of shows through just in the results for the first quarter. And as Adam said, I don't think that would be any different in the future. But the bottom line is, you know, we're driving for continued growth and we'll react to the Godzilla era.

Speaker 3: you know, demand reductions where that may be.

Speaker 8: Our next question is from Luke Young with Baird. You may go ahead. Thank you for taking the question. Adam, hoping you could just comment on the focus areas specifically for the IT DataCom group right now as the market goes through this consolidation period. Is the fact that you're able to catch your breath after what you already referenced.

Speaker 4: interesting AI-related opportunities that are emerging on the horizon, if you could speak to both those things. Thank you. Luke, well, thank you very much. I'm glad you emphasized this. I mean, this 27% downside conversion margin for an organization that is already making pretty robust margins is really phenomenal.

Speaker 4: And by any measure, it's a reflection of that quick reactivity that I was discussing earlier. Look, I would be lying if I told you our folks working in that market are happy to have a little bit of a downturn, to kind of, to use your phrase, catch their breath. Nobody likes dealing with this, but we do it.

Speaker 4: it is what it is. Like, we don't sort of punch reality. It just is what it is. At the same time, though, what's interesting is while we're making sure that the financial strength of the company is...

Speaker 4: stays as robust as it did and again the 27% conversion margin that you mentioned is a great indicator of that. We are working on an extraordinary array of next generation technologies you know just because customers have some extra inventory.

Speaker 4: doesn't mean they don't have an enormous amount of next generation things that they're trying to achieve. And you mentioned, and I think I alluded to, you know, AI as one of those. I mean, these are the kind of revolutions that drive kind of quantum leaps in the demands of our customers.

for processor power, for speed as it relates to data transmission and networking, all of which creates demands on the equipment for next generation high speed interconnect, for the fiber optics.

and for the high efficiency power interconnect that's so important to sustaining the operating expenses and let alone the carbon footprint of these massive processors that are going into these enormous data centers. And so we haven't slowed down at all as it relates to developing and designing next generation products.

an Amphenolian trait as well. It's not something necessarily I emphasize so much but we talk a lot in the company about you know driving with one foot on the gas one on the brake you know carrying water on both shoulders sometimes you got to go out and cut costs at the very same time.

you're ramping up engineering support for next generation systems and being able to do that having the mindset and the agility to do that is I think a very unique trait that is resident inside our organization and that includes within all of those working across IT Data Comm. And our next question is from Chris

17% sequentially, and if I heard it right, it sounds like the subsegment is going to expect to be flat sequentially in Q2. And I know there's seasonality involved, but does that indicate that that subsegment is moving past maybe the bulk of some of the inventory digestion headwinds that have impacted the segment over the last three...

an indication that we've kind of reached a kind of a little bit more of an equilibrium. 90 days from now, I hope to be able to give you a better sense of that as it relates to the second half. But it's certainly a better indication than if we had seen, you know, another leg down on a sequential basis. So.

We'll see what the second half brings. Again, the fact that it's flat in the second quarter gives me some hope, but 90 days from now we'll try to give you a little more certainty about that. And our next question is from William Stein with Truist Securities. You may go ahead.

Great, thank you for taking my question. I'd like to just linger on these relatively weaker end markets for a moment, but just to get slightly more clarity. In the weakness and comms in general, are you seeing that more pronounced in any particular geography and within IT Data Comm specifically?

that more hyperscalers where you're seeing the weakness or is it more broad-based across all sizes and shapes of customers? Thanks. Thanks very much Will. I wouldn't point out any significant geographical distinction across the

the communications markets. I mean, remember that a lot of these communications products, they do get that a lot of them still get made in Asia, especially on the device side and a good portion of the, at least the OEM products of the IT Data Comm. So you can imagine that in Asia,

you know, that's having a worse situation overall for the company. And sure enough, you know, in Asia, we did not have as robust performance in the quarter as we did in North America and Europe overall, and that's driven a lot by that. But otherwise, I wouldn't say that there's any sort of end customer geographic changes here.

Relative to hyperscale versus the equipment manufacturers, again, I don't think there's a real distinction because ultimately the hyperscale people are also customers for the equipment manufacturers in many cases. And I think that that overall inventory position is fairly broad across both areas of that market. Our next question comes from Mark Delaney.

We actually had, you know, good cash flow, I mean 100% essentially of our, you know, yield on, you know, for the first quarter, which for a first quarter actually is probably better than average. But given that, I do recognize that our inventory was even a little bit higher than we would typically wanted to see it, you know, here in the first quarter from a day's perspective. And you know, the team is, you know, there's many reasons for that. I mean we had a, you know, certainly a very strong.

have some impact on that over the coming quarters and we should see some improvement from a day's perspective on inventory which just naturally will help from a cash flow. I think our target cash flow continues to be 90-100% from a...

from a free cash flow perspective and I think that certainly that should be achievable here for the full year and there may be a quarter or two where we're actually a little higher than that as we kind of bring inventory a bit down. And our last question today comes from Guy Hardwick with Credit Suisse. You may go ahead. Hi good afternoon.

Hi Guy. Hello. Could you expand a little bit on the industrial segment, which is now by far and away your largest segment. I think you said 28% of sales. I know factory automation is probably the largest end market within that. Can you give us a little bit more color of trends within industrial, whether it's medical or energy.

Yeah, well, thanks very much, Guy. I mean, the fact is industrial is, at least this quarter, our largest segment. It was 28% of our sales. At the same time, industrial is far and away our most diversified market. I mean, there's really not a correlation.

and deeper into some of the harshest of environments, you know, to an offshore windmill, into a semiconductor factory, into an operating theater, onto a train going 400 kilometers an hour, and everything in between. In terms of the segments, you know, I wouldn't say that necessarily factory automation is the largest. It's a significant...

and that includes both alternative energy but also traditional energy extraction and generation, rail mass transit, things like marine and entertainment. I mean and you can tell these are not markets that correlate with one another so if we're going to have one of our markets be you know a little bit bigger than than the others in this case still just 28% of sales.

this would be the one that you'd want to have that. And we're just really excited by the progress that we've made in our industrial market over a very long time period.

If I go back to 20 years ago, I mean this was a relatively small business that we didn't really have a close touch with where it went. It all went through distribution. And we had just fabulous leadership in our industrial business over that time who really drove a very much an application and segment based approach to developing new products.

application specific, technology specific products, at the same time as we made a number of great acquisitions over many years, and we continue to make great acquisitions across the industrial market that have ultimately positioned us for this just multitude of revolutions going on as electronics gets pushed deeper and deeper into harsher and...

remain so for many years to come. We do have one additional question from Michael Anastasiou with TD Cohen. You may go ahead. Good afternoon guys. Thanks for taking my question. Looking at the capital deployment side, you had a couple of questions.

details announced at the beginning of the year. Can you just describe how CRM and RFS fit into the overall strategy? And on a broader front, what end markets or agencies do you see the most opportunity inorganically for the year? Thank you.

Thank you very much, Michael. Well, CMR, as we announced, we closed earlier in the year, and that's a fabulous company, making harsh environment value-add, interconnect products that go into the industrial market, in particular in heavy equipment. RFS, we announced that we signed the acquisition, but we have not yet closed it. As we said last quarter, we expect to close by the end of the second quarter, and that's the end of the second quarter.

as we get closer to bring them into the Amphenol family. In terms of our pipeline of acquisitions and where we see the future, we don't pick and choose our markets and say, well, that's the market where we want to make acquisitions or that's the market where we don't want to make acquisitions. And the reason for that is when we make an acquisition, we're getting married forever.

we're not a trader where we buy companies and sell them and buy and sell and kind of do this portfolio management. We look for companies with great people with outstanding enabling technologies and robust and complementary market positions across all of our end markets. And in our experience, which stretches over in my career more than 75 acquisitions and

robust today. I remain wholly incapable of predicting when we will close and if we will close certain deals but I know that long term the program is going to continue to support really great growth for the company and a great use of the capital and the cash that we generate so much of.

And so we look very much forward to continue our M&A program and it really complements the culture of the company as well because every time we bring in one of these new entrepreneurs it actually strengthens the entrepreneurial culture of Amphenol and that's something that I look very much forward to as well. And Michael, just to clarify just to avoid any confusion, RFS since we have not closed

no further questions, operator. And so if that's the case, I would like to take this opportunity to wish all of you a wonderful continuation of your spring. And we look forward to talking to you all just 90 days from now. Thank you so much and best wishes to you all. Thanks, everybody.