Q2 2024 Amphenol Corp Earnings Call
Hello, and welcome to the second quarter earnings Conference call for Amphenol Corporation. Following today's presentation. There will be a formal question and answer session. Until then all lines will remain in a listen only mode at the request of the company today's conference is being recorded if anyone.
Has any objections you may disconnect at this time I would now like to introduce today's conference host Mr. Craig Lampo, Sir you may begin.
Thank you.
Good afternoon, everyone. This is Craig Lampo, Amphenol, CFO and I'm here together with Adam nor with our CEO, we would like to welcome you to our second quarter 2024 conference call.
Our second quarter 2024, our results were released this morning, I will provide some financial commentary and then Adam will give an overview of the business and current market 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.
In our press release for further information.
In addition, as a result of our recently announced two for one stock split effective on June 11th of 2024, all share and per share data discussed on this earnings call is on a split adjusted basis.
The company closed the second quarter with record sales of $3 $610 million and GAAP.
Record adjusted diluted EPS of <unk>, 41, and 44 cents respectively.
Second quarter sales were up 18% in U S dollars, 19% in local currencies and 11% organically compared to the second quarter of 2023.
Sequentially sales were up 11% in U S dollars and in local currencies and up 8% organically.
Adam will comment further on trends by market in a few minutes.
Orders in the quarter were a record $4.061 billion up 33% to the prior year and up 21% sequentially, resulting in a strong book to bill ratio of 1.12 to one.
GAAP operating income and operating margin were $699 million and 19, 4%, respectively, which included $70 million of acquisition related costs, primarily associated with the Citi acquisition.
Excluding these costs adjusted operating income was $6 $769 million, resulting in record adjusted operating margin of 21, 3% in the second quarter of 'twenty four.
On an adjusted basis operating margin increased by 90 basis points from the prior year quarter, and 30 basis points sequentially.
The year over year increase in adjusted operating margin was primarily driven by strong operating leverage on higher sales volumes, which was partially offset by the dilutive impact of acquisitions completed in the prior 12 months.
On a sequential basis, the modest increase in adjusted operating margin, reflecting strong conversion on the higher sales levels, partially offset by the dilutive impact of acquisitions made in the second quarter of particular C. I T, which is currently operating well below the company's average profitability levels.
We're very proud of the company's operating margin performance in the second quarter, which reflects continued strong execution by our teams.
Breaking down second quarter results by segment compared to the second quarter of 23 sales in the harsh environment solutions segment were $1 $46 million and increased by 18% in U S dollars and 1% organically and segment operating margin was 24, 8%.
Sales in the Communications solutions segment were 1 billion enforcer and $45 million and increased by 24% in U S dollars and 23% organically segment operating margin was 24, 3%.
Sales in the interconnect and sensor systems segment, where $1.119 billion and increased by 12% in U S dollars and 7% organically and segment operating margin was 18, 2%.
The company's GAAP effective tax rate for the second quarter of 'twenty was 24% and the adjusted effective tax rate was 24%, which compared to 21, 9% and 24% in the second quarter of 23, respectively.
We continue to expect our adjusted effective tax rate to be at 24% in the third quarter and for the full year of 24.
GAAP adjusted EPS was <unk> 41 in the second quarter up 11% compared to the prior year period.
Adjusted basis diluted EPS increased 22% to a record 44 cents compared to 36 cents in the second quarter of 'twenty three.
Operating cash flow in the second quarter was $664 million or 120% of adjusted net income and net of capital spending our free cash flow was $528 million or <unk>, 95% of adjusted net income.
We are pleased to have continued to deliver a strong cash flow yield in the quarter. Despite a slightly increased levels of capex I would note that while our second quarter capital spending was higher than the first quarter. It was still within our normal range. We continue to expect somewhat elevated levels of capital spending in the coming couple of quarters as we invest to support the growth we are.
Seeing in the defense and a T datacom markets.
From a working capital standpoint inventory days days sales outstanding and payable days were 80, 469, and 56 days, respectively, all within normal levels.
During the quarter the company repurchased three 1 million shares of common stock at an average price of approximately $62.
When combined with our normal quarterly dividend total capital returned to shareholders in the second quarter of 2024, it was more than $320 million.
Total debt at June 30th was $5 $4 billion in net debt was $4 $1 billion.
Total liquidity at the end of the quarter was $4 $3 billion, which included cash and short term investments on hand of $1 3 billion plus availability under our existing credit facilities.
Excluding acquisition related costs second quarter, 2024, EBITDA was $900 million and at the end of the second quarter of 2024, our net leverage ratio was one two times.
As a result of the $1 5 billion dollar U S bond offering completed earlier in the second quarter and the subsequent closing of city in May We expect quarterly interest expense net of interest income earned on cash on hand to be approximately $45 million in the third quarter.
The company is in a very strong financial position and we continue to be well positioned to fund future opportunities as they arise in particular, we are well positioned to fund the pending acquisition of the one in das businesses of Commscope for a purchase price of $2 $1 billion, which we expect to close by the end of the first half of two.
And in 'twenty five.
We will fund this acquisition through cash on hand and debt.
Finally as mentioned in today's earnings release, the company's board of Directors has approved a 50% increase in the company's quarterly dividend to <unk> 60 in the half cents per share effective for payments beginning in October of 2024.
I will now turn it over to Adam who will provide some commentary on current market trends well. Thank you very much Craig and I'd like to extend my welcome to all of you here on the phone today and I hope that you and your family friends and colleagues are enjoying a very nice summer so far.
Craig mentioned I'm going to highlight a few of our achievements in the second quarter I will spend a few moments to review, our recently closed and announced acquisitions I'll talk about our trends and progress across our served markets and then we'll make some comments on our outlook for the third quarter and of course, we will have some time for questions at the end.
Our results in the second quarter were stronger than expected exceeding the high end of our guidance in sales and adjusted diluted earnings per share sales.
Sales grew from prior year by 18% in U S dollars and 19% in local currencies, reaching a new record $3 $610 million I.
On an organic basis sales increased by a strong 11% with growth in Datacom defense commercial air mobile networks mobile devices, and automotive only slightly offset by moderations in the broadband and industrial markets.
Importantly, the company booked record orders of $4 billion 61 million, representing a robust book to bill of 112 to one.
I would just note here that our bookings were particularly strong from it datacom customers focused on artificial intelligence or AI.
Adjusted operating margins reached a record 21, 3% in the second quarter, a strong 90 basis point increase from last year's second quarter.
And adjusted diluted EPS grew 22% from prior year to a record 44 cents.
We also generated strong operating and free cash flow in the quarter of $664 million and $528 million, respectively. Both clear demonstrations of the high quality of the company's earnings.
And finally as Craig mentioned, we announced this morning, a 50% increase in the company's quarterly dividend to <unk> 16, and a half cent per share effective with our October dividend payment.
I want to say, how proud I am of our team here. This quarter is as the results that they drove once again reflect the strength of our entrepreneurial organization as we continued to perform well amidst a very dynamic environment.
As you know our M&A team has once again been very busy of late I'm very pleased to announce that on May 21, we closed the previously announced acquisition of city previously called Carlisle interconnect technologies.
I'm very excited to welcome the talented <unk> team to the Amphenol family and we really look forward to realizing the benefits of the combined breadth of our company is highly complementary product solutions, which will enable us to offer our customers an expanded array of innovative technologies across the important commercial air.
Defense and industrial markets.
In addition, we're pleased to have signed a definitive agreement to acquire <unk>.
Let's say as a leading provider of harsh environment cable and cable assemblies solutions for high technology applications in the industrial markets.
This acquisition includes two businesses, let's say U S based in North Carolina in let's say Europe based in Germany in.
In May we did close on the acquisition of let's say U S, which has annual sales of approximately $75 million and we.
To close on let's say Europe, which has annual sales of approximately $100 million by the end of the third quarter of 2024, that's this quarter here.
The <unk> acquisition is a great complement to our broad offering of high technology interconnect products for the worldwide industrial market and in particular strengthens our range of value add interconnect products.
Finally, just last week, we announced an agreement to acquire the mobile networks related businesses of Commscope for a purchase price of $2 $1 billion.
We're really excited to be acquiring commscope outdoor wireless networks, or OWS and distributed antenna systems or D. I S businesses.
These businesses provide exciting mobile network solutions with advanced technologies in the areas of base station antennas and related interconnect solutions as well as distributed antenna systems.
I just wanted to mention that we're especially encouraged that the businesses that we're acquiring really make up the former Andrew Corporation portfolio of products a company with a rich history of innovation and the technology in the wireless industry.
This business or businesses are expected to generate revenues of approximately $1 2 billion with.
With EBITDA margins of approximately 25% in 2020 for.
This represents operating margins in the high teens, including our current estimate of post acquisition related amortization.
We really look forward to supporting customers, who are developing next generation wireless networks around the world with these advanced solutions as well as with our own existing complementary interconnect products. Most importantly, we look forward to welcoming the approximately 4000 employees of these businesses around the world.
No doubt in my mind that these talented individuals will make great future Amphenol lands.
As we welcome these outstanding new teams to Amphenol, and we look forward to the future closings of Loots, Europe, and Commscope O N O W N and dust.
We remain confident that Amphenol is acquisition program will continue to create great value for the company.
Our ability to identify and execute upon acquisitions and successfully bring these new companies into Amphenol remains a core competitive advantage for the company.
Now turning to our trends across our served markets I would just comment that we're very pleased that the company's end market exposure remains highly diversified balanced and broad.
This diversification continues to create great value for amphenol, enabling enabling us to participate across all areas of the global electronics industry, while not being disproportionately exposed to the risks associated with any given market or application.
So with that said the defense market represented 11% of our sales in the quarter sales in this market grew from prior year by a strong 14% in U S dollars and 10% organically driven by broad based growth across most segments within the defense market.
Sequentially, our sales increased by 9%, which was a bit better than our expectations coming into the quarter driven in part by the earlier than anticipated closing of C. I T.
Looking to the third quarter, we expect sales to increase in the mid single digit range from these second quarter levels, including the benefit of acquisitions and we remain encouraged by the company's strengthened position in the defense market, where we continue to offer the industry's widest range of high technology interconnect products.
Amidst todays highly dynamic geopolitical environment countries around the world are expanding their investments in both current and next generation defense technologies, thereby increasing the long term demand potential for amphenol.
With the addition, now of Cit's highly complementary products to our portfolio, we're better positioned than ever to support our customers with new products and the capacity to supply them wherever they may be needed.
The commercial aerospace market represented 5% of our sales in the quarter, we had another strong quarter with sales increasing by a robust 60% in U S dollars and 9% organically from prior year as we benefited from the addition of city during the quarter as well as continued progress in expanding our content.
On next generation commercial aircraft.
Sequentially, our sales grew by 46% in U S dollars from the first quarter as we benefited from the addition of city.
On an organic basis, our sales were flat sequentially, which was a bit better than we had anticipated coming into the quarter.
Looking into the third quarter, we expect sales to increase in the mid 40% range as we benefit, particularly from a full quarter of Cit's sales.
Speaker Change: I'm truly proud of our team working in the commercial air market.
Now with the addition of city, we offer the broadest range of high technology interconnect products to our customers in this important area.
With the ongoing growth in travel and thus the demand for jetliners, our efforts to strengthen our product offering while diversifying our market position into next generation aircraft are paying real dividends.
We continue to see great long term opportunities for expansion of our technology offering to this important market and look forward to realizing the benefits of our growth initiatives for many years to come.
The industrial market represented 24% of our sales in the quarter.
Sales in the second quarter did grow 9% in U S dollars from prior year as we benefited from acquisitions.
On an organic basis sales declined by 5% as we saw moderation in most segments on a year over year basis of the industrial market.
Sequentially sales grew by a better than expected, 7% from the first quarter, driven primarily by acquisitions, but our organic sales were up slightly on a sequential basis.
Looking at the third quarter, we expect sales to grow in the mid single digit range sequentially driven by the benefit of our recent acquisitions.
While the industrial market certainly has been experiencing a pause as customers and distributors have adjusted their demand levels. We are encouraged to see some early signs of momentum growing in certain areas of the industrial market.
In addition, with the additions this quarter of city and Lutz. The U S. We now have an ever brought in an even broader range of products and capabilities to offer customers across the diversified industrial market.
I'm confident that our long term strategy to expand our high technology interconnect antenna and sensor offerings, both organically and through complementary acquisitions has positioned us to capitalize on the many electronic revolutions that will no doubt continue to occur across the industrial market.
This creates opportunities long term for outstanding team working in this market.
The automotive market represented 21% of our sales in the quarter and sales grew 6% in U S dollars and 5% organically driven by strength across newer automotive applications.
Sequentially, our sales moderated by 4% from the first quarter, which was in line with our expectations coming into the quarter I would note that we did see some incremental softening of demand in Europe in the quarter as vehicle manufacturers. They are moderated their production volumes and that was offset.
By more favorable performance in North America and Asia.
For the third quarter, we do expect sales to be slightly down from these levels as certain automakers have slowed their summer production schedules.
I'm truly proud of our team working in the automotive market. Our continued outperformance is yet another confirmation of the benefit of our team's focus on driving new design wins with customers, who are implementing a wide array of new technologies into their vehicles and this includes electrified drivetrains as well as the multitude of other exciting applications.
We look forward to benefiting from our strong position in the automotive market for many years to come.
The mobile devices market represented 8% of our sales in the quarter and sales grew by 6% in U S dollars and 7% organically as strength in smartphones and wearables more than offset moderations in sales related to laptops.
Sequentially, our sales increased by 9%, which was much better than our expectations for a mid single digit decline and we really did see sequential growth across all segments of the mobile devices market, which was encouraging.
Looking into the third quarter, we anticipate sales to increase by approximately 20% from the second quarter levels as customers prepare for your year end new product launches.
While mobile devices will always remain amphenol is most volatile of end markets are outstanding and agile team remains well positioned to capture any opportunities for incremental sales that may arise in 2024 and beyond our leading array of antennas interconnect products and mechanisms continues to enable.
Broad range of next generation mobile devices, thereby positioning us well for the long term.
The mobile networks market represented 4% of our sales in the quarter and sales grew by 13% in U S dollars and 7% organically as we did see the beginning of a recovery in our sales to network operators and wireless equipment manufacturers after a number of quarters of demand moderation.
Sequentially sales in the quarter increased by a strong, 22%, which was much better than our expectations coming into the quarter.
Looking to the third quarter, we do expect some moderation from these strong second quarter levels on traditional summer seasonality.
We're encouraged by the recent strengthening in the mobile networks market.
As operators ramp up their investments in next generation systems. Our team remains focused on realizing the benefits of our long term efforts to expand our position in next generation equipment and networks around the world.
Now with depending acquisition of the OWS and D. A S businesses from Commscope, we look forward to participating even more strongly in these next generation networks for years to come.
The it datacom market represented 24% of our sales in the quarter.
Sales in the second quarter grew by a very strong 57% in U S dollars, 56% organically driven by the continued acceleration in demand for our products used in next generation AI data centers.
While the vast majority of this growth did result from our expanding position in AI interconnect. We were encouraged to also see some improvements in base it datacom demand.
On a sequential basis sales increased by a strong 29% from the first quarter substantially better than our expectations coming into Q2.
Looking into the third quarter, we expect sales to grow modestly from these elevated second quarter levels.
We're more encouraged than ever by the company's position in the global it Datacom market.
Our team continues to do an outstanding job securing future business on next generation it systems, particularly those enabling AI.
Indeed, the revolution in AI has created a unique opportunity for amphenol, given our leading high speed and power interconnect products.
With machine learning driving a more intensive usage of these highest technology of interconnect products were very well positioned for the future and whether high speed power our fiber optic interconnect our products are critical components. In these next generation networks and this creates a continued long term growth opportunity for amphenol.
Finally, the broadband market represented 3% of our sales in the quarter and sales did decline by 17% in U S dollars inorganically from prior year as broadband operators continued to reduce their procurement levels.
On a sequential basis sales were flat as we had anticipated and looking into the third quarter. We expect a further moderation of sales sequentially.
Regardless of this current muted demand environment, we do remain encouraged by the company's continued strong position in the broadband market and.
And we look forward to continuing to support our service provider customers around the world.
As they eventually increase their spending to increase network coverage and bandwidth in support of the Perth proliferation of high speed data applications to homes and businesses.
Now turning to our outlook.
And assuming the continuation of current market conditions.
As well as constant currency exchange rates.
For the third quarter, we expect sales in the range of $3 7 billion to $3 8 billion and adjusted diluted EPS in the range of 43 to 45 cents.
This would represent sales growth of 16% to 19% and adjusted diluted EPS growth of 10% to 15% compared to the third quarter of 2023.
As is our usual practice. This guidance does not include acquisitions, which have not yet closed but does include sit and look to the U S. Both of which are currently operating below the corporate average level of profitability.
I remain confident in the ability of our outstanding management team to adapt to the many opportunities and challenges in the current environment, while continuing to grow <unk> market position and driving sustainable and strong profitability over the long term.
And finally I just wanted to take this opportunity here to thank our entire global team for what we're truly outstanding efforts here in the second quarter and with that operator, we'd be more than 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 <unk> Mohan with Bank of America. You May go ahead.
Hi, yes. Thank you so much Adam really impressive order growth over here, a big big numbers.
Can you just talk about how.
How much of that was driven by AI are you seeing a lot of new programs.
Nick in and how do we square that with your expectation of a moderate increase here and in it datacom for the third quarter. Thank you.
Yes, well. Thank you very much wamsley look we were very encouraged by the orders this quarter and as I mentioned in our 112 book to Bill the far and away. The biggest driver of that was a very significant book to bill that we saw in India. It Datacom market and no doubt about it I mean, there is a.
Difficult portion of that that is being driven by AI and and this is existing programs that we've already won new programs that we are winning.
A really broad array of of momentum that we have across AI and I think.
Just so proud of our team who is leveraging our leading position in high speed and power to really continuing to win in these extraordinarily complex systems.
And you know as it relates to your question on the third quarter and the guide related to our sales we shouldn't forget. These are some of the most complex interconnect products ever built.
That we are making and in many cases and they have to be that because what what our end customers are trying to achieve with AI is really phenomenal phenomenal array of Av.
Growth of of these next generation models that are being trained.
The intensity of the interconnect the requirements of both speed highest ultra high speed ultra low latency. The complexity of these systems, because you're effectively having to connect every GPU or CPU or whatever it may be to every other one in order to create this sort of fabric like network.
There is an enormous amount of technology involved in these things and we've talked about also in the past that for some of these these systems that requires also some meaningfully meaningful investments upfront and you know while our Capex last quarter was was kind of in line with our normal historical.
I think Craig did mention that we continue to expect some elevated capex you know here in the second half and so I would say that the orders that we're getting from customers in many ways. They are slightly opened the order aperture to maybe give us more confidence in kind of extending ourselves in those investments.
And as well in order to make sure that this these significant new products with all the challenges associated with them.
But we're building the right capacities in order to do that and I'm not talking about massive extensions in these order apertures, but these are not necessarily just orders for the next quarter alone.
And so you know as we look at our order book, we look at our backlog related to I mean, it gives us confidence not just for the quarter ahead, but for for a long term to come.
Amit Jawaharlaz Daryanani: Thank you. Our next question is from Amit <unk> with Evercore you May go ahead.
Good afternoon, everyone. Thanks for taking my question I guess I'll stick to the AI team Yeah. I mean, there's obviously a lot of focus on you know what does the AI opportunity the opportunity really mean for amphenol. So I'm wondering if you could spend some time just screaming on how do you see this opportunity may not be U is it bigger with hyper scaler or with semiconductor company.
For you and is there a way to think about maybe how much of the incremental let's say 300 million of revenues you had in June was AI driven versus not thank you.
Thank you very much I mean look the answer is all of the above I mean at the end of the day. There are folks who are spending money to build AI data centers and you know those those tend to.
We're down to the chip companies and I think what's unique about AI is these systems are so much more complicated there is so much more technology embedded in them that in fact, we are working through the <unk>.
<unk> of that entire chain.
And making sure that our products are doing the right thing at each level.
So I think from that perspective, it's a little bit unique compared to traditional IC Datacom, where we worked with just Oems or just service providers I say here, we work with companies up and down the stack and you know in any significant ways. Let me say that in terms of the growth over prior year I mean, you characterized R. R.
Growth, which as you know just over $300 million on a year over year basis, and I think what I. How I described it was the vast majority of that growth really came out of AI and you know we've been careful not to just put specific numbers.
And in fact, it's not always easy to tell what is exactly AI and what is exactly not AI and so we've tried to be a little bit more directional about those numbers.
And I think we've been consistent about that from really at the beginning of those sort of advent of this revolution, but but I think you can safely say that the vast majority of our growth on a year over year basis, and then on a sequential basis. You know just to give another data point I would say that you know the strong majority of our growth on a sequential basis, but not all of it and we.
We're encouraged on a sequential basis as well to see some growth in the base.
Man, which which has been a longtime coming I think we all know I mean that was not the easiest of markets.
Over the last you know I don't know six to eight quarters.
And it's encouraging for us to finally see meaningful growth from from that sort of base I T investments, which we always expected it would when they come but no doubt about it.
Asked majority of year over year, the strong majority of our sequential growth has come out of AI.
Thank you. Our next question is from stomach Cheddar <unk> with J P. Morgan you May go ahead.
Oh, hi, Thanks for taking my question, Adam I'm actually going to switch gears here and ask you about the acquisition of homeschool, particularly in them. So when you think about mobile networks and you mentioned, you're starting to see somewhat of a cyclical sort of spending recovery from your customers, but I think investor perception generally for that book.
Mobile networks business has been that service providers don't really need to spend massively till we get to six G. So maybe if you can sort of outline why now why you know the acquisition. How are you thinking about sort of the outlook for the next few years and what drove sort of.
What drove the decision halo to.
Double down on this mobile networks business. Thank you.
Yeah, well. Thank you very much stomach look and I'm just going to have from a vernacular perspective, we'll we'll call. This andrew so as not to confuse anybody because we're not buying olive commscope for buying the mobile networks business from Commscope, which is essentially Andrew that was acquired by them in 2007, and Andrew is just a fabulous fabulous come.
I mean.
As I mentioned in my prepared remarks, a rich rich legacy of technology and outstanding enabler of all the generations I mean, they go back all the way to one GE and <unk> and <unk> and <unk> and now five G. As a core partner in enabling those next generation networks.
And I think yes for the last you know year or year and a half we've seen more muted demand in mobile networks. We're encouraged to see that now I'm not going to tell you that we're smart enough to have timed exactly.
The announcement to exactly when we started to see that market turn I think that's more coincidental. This is a company that we have admired for a long long long time, it's a fabulous organization with Fabulous people Fabulous technology. So that's not that it's it's you know we saw the market turning and then we decided to acquire it but.
At the contrary you know these are these are lengthy discussions.
So the why now I think is not necessarily I wouldn't tell you that there is now it just happened that this was the right time for them in the right time for us in how these discussions go but the long term I will say this the long term for mobile networks is something that we do believe in as a can.
<unk> of the broad diversified presence that we have across the entire range of the electronics industry. I mean, the fact is all of these things that we're talking about be the AI, our next generation communications or mobile devices or whatever.
We are accessing these things by and large through mobile networks today, not through fixed line and by the way we cover fixed line, we still have our broadband business as a way to make sure that we're present whenever people are getting internet through through a cable or otherwise, but we've always said we want to be present in the <unk>.
Hi, technology way as a partner to our customers in every way that people are accessing data and over the long term. There's no doubt in my mind that the highest growth way that people are going to access data is through isn't a disconnected fashion through mobile networks and yes, theres five G. Today, where there's still a lot of work to be done.
To build that out there will be a sixth GE there will be a seven G. There will be an eight G. I've been I've been in the company long enough to have watched these generations unfold and we want to be a participant in that.
Doubling down I mean sure. This is this is going to significantly expand our position in the mobile networks market, which I would argue today is somewhat under represented 4% of our sales last quarter, but this is not doubling down for all of amphenol in that respect.
And after we make this acquisition mobile networks may represent you know somewhere in the high single digits are roughly <unk> of our sales and I would also put that into context that over the last 18 months. We've made now we've completed 12 acquisitions.
And we've signed two others looser Europe and now Andrew to be a that will be closing in the future and we've made these acquisitions across the range of amphenol of the served markets that we have but in particular with the acquisition of city and a number of our other industrial markets those kind of slow.
Sure cycle markets of commercial Air Defense Industrial automotive you know those have been a little bit more concentrated there and we do believe that having balance across the faster cycle markets and the slower cycle markets. The communications markets being the faster ones. We think that balance is a very great thing for the company.
Long term and it allows us to continue to have great exposure to every corner of the electronics market, while not having overexposure and thereby being overly susceptible to risk should there be a problem in any given market. So we think this is a great strategic acquisition from a product technology perspective.
It's great from a global customer relationship perspective, and it's great for overall amphenol and what it brings not to mention that the 4000 people that one day will join our organization many of whom have worked for the company all the way back to the time when it was in fact Andrew.
They're gonna make fantastic amphenol in the future.
Thank you. The next question is from Luke Young with Baird. You May go ahead.
Thank you for taking the question, maybe a near term question, but.
You mentioned in your prepared remarks that you know of course, you've been seeing a pause in the industrial markets that we're encouraged by some early signs of momentum in the quarter could you just double click on what you're seeing in some of those areas be it geographically or by end market and maybe if you could frame it up with what Youre seeing in terms of orders is a leading indicator.
That'd be helpful as well thank you.
Yeah. Thanks, Thanks, very much Luke, yes look starting with the orders I mean, we were encourage actually I think I can't tell you how long it's been but you have to have a positive book to bill in the industrial market and you know not just like 101 to one it was like you know a decently positive book to Bill that we that we had in industrial so that I would say is encouraging sign.
One I would say encouraging sign number two is that we saw with our distributors.
Amit Jawaharlaz Daryanani: And in particular on a sequential basis, but even on a year over year basis.
Growth in demand from our distributors the demand they put upon us and that's a great early indication that the kind of inventory corrections that were happening at the end customer and in the distribution channel.
Those seem to be largely behind us and you know I never want to be the guy to call a bottom let me say that.
But I'm encouraged that we actually had no meaningful growth.
On a sequential basis in distribution from from the first quarter, I mean, and when I you know when I say meaningful Im talking about you know high teens kind of growth rate on a sequential basis from distribution and that's broadly from distribution, but also from the distribution that is within industrial so I think those.
Are those are good signs.
If you look at our guide here for <unk> for the third quarter.
Yes, we were kind of on a year over year basis in the second quarter organically down but were actually up slightly sequentially and industrial and then our guide for the third quarter would have us be kind of flattish sequentially on an organic basis, I mean, I talked about the fact that we will grow but that that growth is really.
Driven by our by the new acquisitions.
So look this is not to say that all is perfect in industrial but I think the combination of the orders and the behavior of distributors. Those are two pretty good early signs and you know as we get into the third quarter 90 days from now and we see how that goes we will certainly try to be able to give everybody a little bit more visibility to whether that is.
In fact happening.
The last thing I would say is you mentioned geographical.
There's no doubt that the industrial trends are diverging geographically. So we actually saw organic growth in the quarter on a sequential basis in North America, and Asia, and we saw continued organic declines in Europe, and so I think you know.
Europe is certainly not out of the woods right now, but it is encouraging that we see this in distribution North America has maybe a little bit more distribution than Europe does and to see also the growth that we've that we're seeing now in Asia.
Thank you. Our next question is from <unk> merchant with Citigroup you May go ahead.
Great. Thank you for taking my question just a real quick on operating margin.
Strong here in the Comm segment.
As you continue to see AI.
Momentum here, how should we think about both incremental operating margin going forward.
Scott if I can go ahead.
Thank you.
Yeah no. Thanks, a lot for the question Yeah, Yeah listen we're really proud.
The operating margins here in the second quarter, and 21, 3% record operating margins and Thats, obviously, including.
Part of the quarter, where we have C. A T, which is well below the company average kind of in that low double digit range and so certainly proud of the of the operating margins and.
Certainly that's driven by a bunch of factors that I wouldn't focus it on one particular area.
A few things happening here certainly in some of the markets that are growing including the it data market and military and some others are certainly those businesses that continues to execute well on on the higher growth rates in the other side of that coin is we have certain markets in certain businesses that are not growing in industrial we talked about.
I'll bet in and they're really doing a good job kind of on the other side of the coin to be able to kind of protect their margins. So overall I wouldn't focus it on say one area, but I think as we continue to grow as we continue to be able to drive volume, we should be able to continue to drive our margins up and into.
And so that kind of 25% or associate targeted conversion margins, we talk about clearly C. I T here and there.
Third quarter sequentially is going to have a bit of an impact and you see that in our in our kind of implied guidance.
From a sequential perspective, but if you look organically coming into the third quarter was stall converting very well, excluding kind of the impact into those margins and we feel real good about the margins.
Expansion potential as we move forward here in the air.
Thank you. Our next question is from Joe Spak with UBS you May go ahead.
Hi, Thanks, so much I wanted to go back to Andrew's so them coming the nomenclature right now.
Just a couple of quick quick things one.
The 25% EBITDA margins, you sort of highlighted on on that deal. It I mean again just looking at him.
Some of the historical it looks a little bit higher I just wanted to understand if you were building in any sort of synergies or anything else into that or that's just a forecast.
And then to <unk>.
I noticed in the release, you said, you know EPS accretive ex transaction costs and I'm sure you're still going through some of the deal amortization. Another another challenge other issues, but E. At you generally run that through so is it also just straight EPS accretive should we expect that.
Yes.
Yeah.
Sure Yeah, No I think this is just to start with the EPS accretion part right.
Haven't called that out because I think it's a little bit far into the future to start calling out EPS accretion is certainly will be EPS accretive it's a very.
Strong profitability Adam mentioned in his prepared remarks. This is high teens operating margin assuming kind of the amortization, we would expect based on our current estimates post acquisition.
So certainly we would expect to deal with this.
Speaker Change: Good good level of EPS accretion after after the acquisition.
In regards to the 25% and EBITDA, there's certainly no synergies we're not.
Anticipating any synergies we don't talk about synergies typically as you know are our approach to acquiring companies and bringing them into the into the Amphenol family as we don't we don't try to make significant changes, we kind of yes, we essentially enable the businesses too to expand margins, while helping them do so and as part of Amphenol.
That will be our continued playbook. In addition to you know as we as we bring Commscope and we ultimately closed the Andrews business. There. So I wouldn't say that there's 25% is our that's what we view. It is right now I'm not going to talk so much about you know its still part of Commscope business and we're not going.
That necessarily talk so much about you know kind of what their what their expectations are and theyre going to continue to report on this business and we'll let them do so.
Thank you. Our next question is from Guy hardware with Freedom capital markets. You May go ahead.
Hi, good afternoon.
Yes.
Hi, good afternoon guys.
Hi, Thanks, Adam for the background on Andrew Cool just a question question why so long to close because I think it's by your timetable is looking like a 10 11 months to close compared to say four months with C. I T.
Yeah.
Yeah, No look I think any company, there's a process of regulatory process and they operate in a lot of countries.
Because they sell to mobile network operators are around the world and so there's a when you have lots and lots of different geographies that can sometimes cause a little bit longer time period, but theres nothing nothing more fancy about it than that.
Thank you. The next question is from Scott Graham with Seaport Research you May go ahead.
Hey, good afternoon, and thank you for taking my question I wanted to just understand the nature of the restructuring charge and you know maybe the payback on that and if I could squeeze in a second one Adam you commented that you were seeing some of your automotive manufacturer slowing production I'm, hoping you could elaborate on that thanks.
Yeah, I mean, I don't know what Youre, what restructuring charge, you're talking about we did talk about a $70 million acquisition related charge, which is acquisition expenses, which includes the money that we pay to various advisers, who help us do the deal together with some amortization of backlog in <unk>.
Things like that this is not a restructuring charge you usually will not hear amphenol talking about restructuring.
Relative to auto I think what I mentioned is that we do see it in particular I would say in Europe.
That some of the demand expectations for our customers are going to the third quarter are a little bit more muted, but you know are our guide is this is not a severe change in the volumes. It's just a very modest a very modest change here in the third quarter.
Thank you. Our next question is from Andrew Buscaglia with BNP Parable you May go ahead.
Hey, guys I wanted to check on our mobile devices correct me if I'm wrong I think you said, you're guiding that up 5% sequentially.
And presumably there's some renewed optimism around.
Thats being driven by an upgrade cycle devices can you talk about first of all can you confirm that and then secondly, how do you in past cycles tend to participate in.
Grade several cycles. If this were to be one yeah is it earlier on it later on or how does that play out.
Yeah, well, thanks, very much Andrew I mean look I think we had a very strong second quarter in mobile devices is much stronger than we anticipated coming into the quarter.
And now with our guide of 20% sequential growth on a higher than we had anticipated baseline during the third quarter I mean, it's I think that's a fairly positive view.
Is that due to upgrade cycles, I mean, yes, I guess.
Every year, you know mobile devices or there's new releases. These are very short lifecycle products and so there tend to be new products every year, whether there's a more significant upgrade cycle I wouldn't tell you that that's necessarily what what we're sort of discounting for here.
As always we have a team of folks who work in mobile devices, who are extraordinarily agile and we have demonstrated over many many years of participating in this market that when there are additional sales to be had when there is kind of more of a I don't know the term folks use now super cycle of upgrades.
We have always been able to capitalize and get more than our fair share of that so we'll see what happens here. This year I think this is probably a more kind of a normal outlook that we would have.
And.
Gains to be seen.
And to your question of when would we or how would we participate I mean, if people are making more devices. Then we will sell more components that go on those devices. When they build those will depend largely on the type of demand that they see from their customers and that's our job is not to anticipate that but rather to react in real time. When there are changes in the demand and if they are.
Favorable changes, we'll manage through that and I'm sure, we'll do well and if they're not favorable changes our team will adjust in real time to preserve the bottom line and that's how we've always operated.
Thank you. Our next question is from Mark Delaney with Goldman Sachs. You May go ahead.
Yes, good afternoon, and thank you very much for taking my question with the <unk> transaction and the proposed Andrew deals both over $2 billion and I think the largest amphenol has done in its history I'm, hoping you can help us to better understand if a degree of diligence Amphenol does changes for deals of that size, including as you think about cultural fit and how you think about the ability.
City and your confidence in getting the margin performance and execution to more typical amphenol levels over time when taking on these larger businesses. Thank you.
Well. Thanks, Thanks, very much Mark I mean look you can imagine that we are very serious in bolt our diligence, but also in our interactions with the people and the bigger the company. The more people you are going to want to interact with.
It's pretty linear from that perspective, and so we had very very significant review and diligence with both C. I T and these businesses from Commscope, which we which we will just referred to here as Andrew.
And both from a diligence integrity of the numbers, but also from a from a cultural perspective, I mean on one side in terms of integrity Carlisle and Commscope are both great companies that are public companies. They report great numbers. So I think yes, we do enormous financial diligence around.
But I think the starting point is also these are public companies with audited financials from extremely rapid of a big four auditing firms as opposed to sometimes you buy family companies and you almost have to sort of do a ground up audit of them and you don't have to do that kind of where care, but the cultural aspects getting to know.
The people understanding are they passionate about becoming part of Amphenol did they believe in the business did they see.
The potential are they did they feel even liberated by being part of an interconnect company and in the case of city or are being able to be a standalone business and in the case of Andrew. This is really important because we always preserve the management and we're not going to buy a company like this if we hear from the man.
The team that they are not committed to being part of our of our company going forward and I can tell you that both inside C. I T and Andrew the folks are extremely passionate extremely excited to be part of the Amphenol organization now relative to margins I mean, we've been making acquisitions for many many many years as you know mark.
And at the end of the day, we don't have just one recipe for how do companies improve their operating margins to bring up to you know at or above our corporate average. We believe that there are no sacred cows margin is price minus cost and we seek to expose them to their sister and brother companies.
Around the world so that they can see some of the ways that other amphenol ends have gone about improving their companies in due course, and I think both the folks at C. I T and Anne and Andrew and they have different levels of profitability by the way C. T. As is has a lower profitability today, Andrew is actually operating at really nice levels of profitability.
But we see with both of them long term great opportunities both on the top line and on the bottom line and how that's going to happen.
These are exciting businesses with lots of different inputs and outputs and I'm very confident that the team will find a way and we'll certainly help them do that.
Thank you. Our next question is from will Stein with Truest Securities You May go ahead.
Great. Thanks for taking my question.
Adam Congrats on all the deals you've announced recently, some really big ones with some storage companies with the with Andrew in particular and it sort of.
Our forces me to wonder.
About management bandwidth to deal with all these and to potentially continue to look at deals I know that you've added.
A new layer of management that might've been several years ago to facility potentially adding and bigger acquisitions, we're starting to see something like that.
But I wonder whether you have the management bandwidth to continue to look at new deals and to do even more or perhaps youre going to have to put a pause on deals for a while thank you.
Well. Thank you well I mean look you ask a question that is so close to my heart and I.
I think I've, even use this with you before I view my job as CEO of Amphenol really twofold to protect the culture of the company and to scale. The company given that culture, and you know call it to protect and to scale not not not quite like the N Y P D to protect and to serve.
And I think we can look back over these last lets call. It 20 years 25 years, even I've been in the company 26 years I've been now CEO for 15, and a half of those years I think we've done actually an outstanding job of both of those things I would tell you that the culture of the company today across our more than one.
Third 35, I don't know 137, or so general managers that amphenol and culture of entrepreneurship is stronger today than it has ever been before is if somebody to cross those people the vibrancy and the strength of that entrepreneurship is amazing I see it all over the world as I travel around to meet with our people.
It is so unique and so powerful but at the same time, we have scaled the company and you correctly point out two and a half years ago, We took a big step in the company's evolution with the creation of three divisions run by Division Presidents.
Each of those are reportable segments, but that was a natural evolution that goes all the way back to even the beginning of the 2000 2003, when we created our first operating groups, where we had five of those and that was the first time. The general managers didn't just report to our then CEO, who still happens to be our chairman you know we have a lot.
Continuity in Amphenol, a as you know.
And those groups expanded over time to the point, where today. We have 15 of these operating groups. You know these are groups that you now are roughly $1 billion or so on average in size. We have the three global divisions and that has created an enormous bandwidth for us both to pursue organic growth.
<unk>, which are which are still very very critical is really core to the company, but also to continue to expand the range of our acquisition program and we've gotten the question over the years you may have even been asked it yourself will you know as the company grows.
If you roughly contribute about a third of your growth over the long over the long term from acquisitions that must mean, either you have to do more deals or do you have to do bigger deals and my answer has always been for the last 15 and a half years, yes.
Some combination of the two we will have to do and I think we can look back and say, yes. We have continued to do that we have continued to open the aperture of both the number and the scale of the deals that we do and that is exactly related to that that's scaling up of our organization.
Interesting, though when you think about most companies and how traditionally they would scale an organization you would build layers you would build matrices you would build really bureaucracy is at the end of the day, but that's not what this has happened in amphenol in fact, whether its the divisions or the groups. These are very lean organizations.
But they are exactly what our lean headquarters once was before I mean, if you think about you know the when we when we had just 15 gms reporting to the CEO and we would make maybe one acquisition.
In a year or two and then when we first started our five groups, maybe we'd make three or four and now here in the last 18 months. We've made we've closed on 12 acquisition. We've signed two more and that's included the two largest in the company's 92 year history and that is just a reflection of the <unk>.
Assessable scaling.
Of the Amphenol culture. The fact is as C. I T and what we will call Andrew are in different divisions. They report to different division presidents.
And you can bet that those individuals are working extraordinarily extraordinarily hard on getting to know the company is doing the diligence like we discussed with Mark's question and ultimately bringing them successfully into the Amphenol family.
No doubt about it we would not have been able to do this if we didn't have if we hadn't have evolved the organization, but today, we have really almost limitless capabilities to do that and coupled with a balance sheet that is second to none that Craig has been such an amazing steward of.
Thank you. Our next question is from Steven Fox with Fox Advisors, You May go ahead.
Steven Bryant Fox: Hey, good afternoon.
Just one more on Commscope can you just talk Adam a little bit from a technology standpoint, how you plan on leveraging.
All of the internal portfolio, you will have combined cable assemblies connectors et cetera.
It was part of one big organization that would be helpful. Thanks.
Yeah look Steve I think it's early.
Just sign the deal and we're obviously going to go through a regulatory process here and then once we get through that we'll certainly be very thoughtful about about the company, but what I would say is this I mean amphenol has been in RF connectors from the beginning I mean, we invented the world's first off connector back in 19.
<unk> 41.
Andrew was really the innovator of antenna technology, one of the innovators of antenna technology for mobile networks and I think the combination of those two rich legacies ultimately, it's going to create enormous value for our customers and I can tell you you know I haven't talked to already to a several of those custom.
<unk> you know they feel very excited about our amphenol as a home for this important partner for them.
Thank you. Our next question is from Joe Giordano with TD Cowen You May go ahead.
Good afternoon. This is Michael on for Joe.
Good afternoon. Thank you see you got it thank you.
So previously you guys suggested like AI revenues are probably annualizing around $800 million.
And there's probably a path to $1 billion for next year.
Just provide any color on customers' capex ramp required to support this AI growth and if you could provide any clarity.
Clarity on how margins compare versus the rest of the portfolio would greatly appreciate it. Thank you.
Yeah, Thanks, very much again.
We've given I think some good directional guide.
Guidance on the scale of this I've talked about the fact that the vast majority of our growth on a year over year basis is is really growth in AI and by the way we had somebody I already a year ago in the second quarter I think we talked a quite a bit already about the order patterns and the potential capex required.
For this I don't really want to repeat myself on that.
What I would just say is that the customers they want to work with us because of our technology.
And at the end of the day. These products. These systems have such demands put upon them. The performance levels that they are being run at are so extraordinary that it is coming back all the time to do you have the product number one and do you have the capacity and the competency to build that product.
And that capacity and competency to build is something that we have demonstrated over many many years many different revolutions in it datacom, but it does require a for sure us to continue to make investments. So that we can support this there's real revolution.
Investments and just from a margin perspective, we wouldn't call out any significant differentiated they are product line is certainly.
Margin accretive, but not so much not meaningfully different from the rest of the portfolio of products that we have and it's a good business and we want all the all of our businesses to continue to grow and provide margin contribution, which we expect that will happen.
Thank you and our last question comes from theory <unk> with Jefferies. You May go ahead.
Hi, Thanks for joining us.
Kind of going back to the industrial commentary you talked about distribution going meaningfully sequentially do you have a sense of underlying demand getting better or is this just the end of destocking. Thank you.
Yeah.
Yes, thanks, very much Jerry I mean look I think.
At the end of Destocking.
Usually just means that and demand starts to match with the demand put on us by the distributors because it wouldn't be a restocking. If you will so if you think about how that would normally go.
Customers start to reduce their demand didn't win the distributors are left with too much inventory they reduced their demand by even more and then once they get to a level that they feel good about then they tried to sort of mirror there in demand with the demands put on us. So I don't think that our distributors are necessarily restock.
<unk>, but probably they're matching what they're seeing and that again, that's why I say without saying that industrial as you know sort of booming here I think the earliest signs of the positive book to Bill that we saw together with the sequential and also somewhat year over year momentum from distributor.
So that is a good and positive early sign for industrial, but we'll see how it goes through the third quarter and through the end of the year.
And I will now turn the call back over to Mr. Norweb for any closing remarks.
Well, thank you very much and we truly appreciate everybody's time today and I do hope that all of you get a little bit of a chance to take some time off this summer and we look forward to being back with you here in the fall just 90 days from now thank you very much. Thank you.
Thank you for attending today's conference and have a nice day.