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Presentation

Operator: Hello, and welcome to the Fourth Quarter Earnings Conference Call for Amphenol Corporation. Following the 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 today. I would now like to introduce today’s conference host, Mr. Craig Lampo. Sir, you may begin.

Craig Lampo: Good afternoon, everyone. This is Craig Lampo, Amphenol’s CFO, and I’m here together with Adam Norwitt, our CEO. We would like to wish everyone Happy New Year and welcome you to our fourth quarter 2022 conference call. Our fourth quarter 2022 results were released this morning. I will provide some financial commentary, and then Adam will give an overview of the business and current trends, then we will take questions. As a reminder, during the call, we may refer to certain non-GAAP financial measures and make certain forward-looking statements. So please refer to the relevant disclosures in our press release for further information. In addition, all prior year comparative data discussed during this year is on a continuing operations basis.

The company closed the fourth quarter with sales of $3.239 billion and GAAP and adjusted diluted EPS of $0.82 and $0.78, respectively. Fourth quarter sales were up 7% in U.S. dollars 11% local currencies and 8% organically, compared to the fourth quarter of 2021. Sequentially, sales were down by 2% in U.S. dollars, 1% in local currencies and 2% organically. Adam will comment further on trends by market in a few minutes. For the full-year 2022, sales were a record $12.623 billion, which were up 16% U.S. dollars 19% in local currencies and 15% organically, compared to 2021. Orders in the quarter were $2.884 billion, which was down 12%, compared to the fourth quarter of 2021 and 8% sequentially, resulting in a book-to-bill ratio of 0.89:1. This was driven by lower bookings in the communications related markets.

For the full-year, orders were $12.925 billion, resulting in a book-to-bill ratio of 1.02:1. GAAP and adjusted operating income were $666 million and $676 million, respectively, in fourth quarter of 2022. GAAP and adjusted operating margin were 20.6% and 20.9% respectively in the fourth quarter. On a GAAP basis, operating margin increased by 100 basis points, compared to the fourth quarter of ’21 and decreased by 10 basis points, sequentially. GAAP operating margin for the fourth quarter included approximately $10 million of acquisition related costs. On an adjusted basis, operating margin increased by 80 basis points, compared to the fourth quarter of ’21 and decreased by 10 basis points sequentially. The year-over-year increase in adjusted operating margin was driven by strong operating leverage on the higher sales volumes, as well as the benefit of ongoing pricing actions.

On a sequential basis, the slight decrease in adjusted operating margin reflected normal downside conversion on the lower sales levels. For the year 2022, GAAP operating margin was 20.5% and adjusted operating margin was 20.7%, when compared to 2021, adjusted operating margin increased by 70 basis points, which was primarily driven by normal operating leverage on higher sales volumes, as well as the benefit of pricing actions. Given the overall cost and supply chain headwinds we experienced in 2022, we are very proud that our adjusted operating margin equals our previous full-year record operating margin set in 2018. Breaking down fourth quarter and full- year results by segment, in the harsh environment solutions segment, sales were $795 million and $3.107 billion in the fourth quarter and full-year of 2022 respectively.

Compared to the prior year fourth quarter, segment sales increased 10% in U.S. dollars and 12% organically. Compared to the full-year 2021, segment sales increased by 13% in U.S. dollars and 15% organically. Segment operating margin was 25.7% and 25.8% in the fourth quarter and full-year of 2022 respectively. In the Communications Solutions segment, sales were $1.436 billion and $5.652 billion in the fourth quarter and full-year of 2022. Compared to the prior year fourth quarter segment sales increased 1% in U.S. dollars and organically, compared to the full-year 2021, segment sales increased by 17% in U.S. dollars and 13% organically. Segment operating margin was 22.2% and 22% in the fourth quarter and full-year of 2022. In the Interconnect and Sensor Systems segment, sales were $1.008 billion and $3.863 billion in the fourth quarter and full-year of 2022.

Compared to the prior year fourth quarter, segment sales increased 14% in U.S. dollars and 17% organically. Compared to the full-year 2021, segment sales increased by 17% in U.S. dollars and 18% organically. Segment operating margin was 19.2% and 18.5% in the fourth quarter and full-year of 2022. The company’s GAAP effective tax rate for the fourth quarter was 19.2% and the adjusted effective tax rate was 24.5%, which compares to 18.8% and 23.8% in the fourth quarter of 2021 respectively. For the full-year 2022, GAAP effective tax rate was 22.3% and adjusted effective tax rate was 24.5%, which compared to 20.6% and 24.3% in 2021. In 2023, we expect our adjusted effective tax rate to be approximately 24%. GAAP diluted EPS from continuing operations was $0.82 in the fourth quarter, an increase of 14%, compared to $0.72 in the prior period.

Adjusted diluted EPS was $0.78, an increase of 11%, compared to the $0.70 in the fourth quarter of ’21. This was an excellent result. For the full-year, GAAP diluted EPS from continuing operations was $3.06, a 22$ increase from $2.51 in 2021. Adjusted diluted EPS was $3 in 2022, a 21% increase from $2.48 in 2021. Operating cash flow in the fourth quarter was a record $705 million or 147% of adjusted net income and net of capital spending, our free cash flow was a record $613 million or $127% of adjusted net income. We are pleased to have delivered a cash flow yield at these strong levels. For the full-year 2022, operating cash was a record $2.175 billion or 117% of adjusted net income and net of capital spending our free cash flow for 2022 was a record $1.796 billion or 96% of adjusted net income, a very strong result.

From a working capital standpoint, inventory days, days sales outstanding and payable days were 86, 73 and 54 days respectively. During the quarter, the company repurchased 2.3 shares of common stock at an average price of approximately $75, bringing total repurchases during 2022 to 9.9 shares or $731 million. When combined with our normal quarterly dividend, total capital return to shareholders in 2022 was more than $1.2 billion. Total debt at December 31 was $4.6 billion and net debt was $3.1 billion. Total liquidity at the end of the quarter was a very strong $4.1 billion, which included cash and short-term investments on hand of $1.4 billion plus availability under existing credit facilities. Fourth quarter and full-year 2022 EBITDA was $798 million and $3.1 billion, respectively.

And at the end of the fourth quarter of 2022, our net leverage ratio was 1 times. I also wanted to make a few comments on interest expense. As I mentioned last quarter, due to the rising interest rate environment, our interest expense had increased primarily as a result of our floating rate convertible paper, which represents approximately 14% of our total debt outstanding at the end of the year. Based on current and near-term expected interest rates and debt levels, we expect 2023 quarterly interest expense to be approximately $40 million, which is reflected in our first quarter guidance. I’d now turn it over to Adam, who will provide some commentary on current market trends, as well as the recently completed acquisition this month.

Adam Norwitt: Well, thank you very much, Craig. And welcome to all of you to our first earnings call of 2023 and I hope it’s not too late to wish as well all of you a Happy New Year and to those of you celebrate the Lunar New Year, wish you all a happy year of the rabbit. As Craig mentioned, I’m going to highlight our fourth quarter and full-year 2022 achievements, including some discussion about the acquisitions that we mentioned in our press release. I’ll then discuss our trends and progress in our served markets and then make some comments on our outlook for the first quarter, and of course, we’ll have time for questions at the end. Looking to the fourth quarter, our results in the fourth quarter were stronger-than-expected.

Exceeding the high-end of our guidance in sales and adjusted diluted earnings per share. Sales grew by 7% in U.S. dollars and 11% in local currencies, reaching $3.239 billion. On an organic basis, our sales increased by 8% and that was driven by robust growth in the broadband, commercial air, automotive and military end markets. And I’ll give some more details about those markets in a few moments. The company booked $2.884 billion in orders in the fourth quarter, representing a book-to-bill of 0.89:1, and this negative book-to-bill was driven by order reductions in several of the communications related markets as certain customers adjusted demand in light of excess inventory that they had built up throughout 2022. We’re especially pleased to have delivered another quarter of resilient and strong profitability with adjusted operating margins reaching 20.9% and 80 basis point increase from prior year.

We achieved these results despite the continued wide range of challenges around the world. Adjusted diluted EPS, as Craig mentioned were $0.78, representing robust growth of 11% from prior year and that’s another excellent reflection of our organization’s continued strong execution. Finally, the company generated record operating free cash flow in the quarter of $705 million and $613 million, respectively, clear reflections of the quality of the company’s earnings. I’m extremely proud of our team around the world and our results this quarter once again reflect the discipline and agility of our entrepreneurial organization as we continue to perform well amidst the challenging and dynamic environment. We’re also pleased to announce that we closed the acquisition of Control Measure Regulation Group or CMR just here in January.

CMR is based in France and has annual sales of approximately $75 million and they’re a manufacturer of a broad array of cable assemblies and complex interconnect assemblies for the industrial market with a particular focus on heavy equipment engine applications. This acquisition further expands our offering of high technology, value-added interconnect products in the diversified industrial market. In addition, we’re pleased to have signed an agreement for the acquisition of the North American hybrid and fiber optic cable and cable assembly, as well as the global infrastructure antenna business of RFS at the end of the fourth quarter. Based just down the street from us here in Meriden, Connecticut, RFS is a provider of Interconnect and Antenna products for the mobile networks market with expected sales of approximately $100 million in 2023.

This acquisition, which we anticipate will close by the end of the second quarter and thus is not included in our guidance, expands Amphenol’s product offering and presence with mobile network service providers, who are continuing to invest in their next generation 5G networks. As we welcome the outstanding CMR team to Amphenol and look ahead to welcome the RFS team once that transaction closes, we remain confident that our 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. I just want to make a few comments about 2022. And I would just say that 2022 was another very successful year for Amphenol.

We expanded our position in the overall market, growing sales by 16% in U.S. dollars, 19% in local currencies and 15% organically reaching a new sales record of $12.623 billion. In fact, over the past three very dynamic years, we’re proud to have grown our sales by more than 50% from our 2019 levels, actually 53% to be exact, a great reflection of the company’s diversification and agility in these truly dynamic times. Our full-year 2022 adjusted operating margins reached 20.7% and that was an increase of 70 basis points from 2021. This strong level of profitability enabled us to achieve record adjusted diluted EPS of $3. Finally, we generated record operating and free cash flow of $2.175 billion and $1.796 billion respectively, clear confirmations of the company’s superior execution and disciplined working capital management.

Our acquisition program again created value this year with two new companies added to the Amphenol family in 2022 and one added here already in 2023. CMR, NPI and ICA Holdings have expanded our position across a broad array of technologies, particularly in the industrial market, while bringing outstanding and talented individuals into the Amphenol family. We’re excited that these acquisitions, as well as the RFS acquisition, which we expect to close at the end of the second quarter, represent expanded platforms for the company’s future performance. We also bought back in 2022 almost 10 million shares under our share buyback program and increased our quarterly dividend by 5%, representing as Craig detailed a total return of capital to shareholders of just over $1.2 billion for the year.

Finally and really importantly, especially in this today’s dynamic environment, we come out of 2022 in a uniquely robust financial position with the lowest leverage and highest liquidity and availability we’ve seen really in modern times. And while there continued to be a high level of volatility in the overall market environment in 2022, as we enter 2023, our agile entrepreneurial management team is confident that we have built further strength from which we can drive superior long-term performance. I’d like to spend a little bit of time to talk about our trends and progress across our served markets, and I would just comment that we remain very pleased that our balanced and broad end market diversification continues to create real value for the company with no single end market representing more than 25% of our sales in the year of 2022.

We believe this diversification mitigates the impact of the volatility of individual end markets, while continuing to expose us to leading technologies wherever they may arise across the electronics industry. Turning first to the military market, this market represented 10% of our sales in the fourth quarter and 9% of our sales for the full-year. Sales in the quarter grew strongly from prior year, increasing by 11% in U.S. dollars and 13% in local currencies and on an organic basis sales increased by 12% with broad-based growth across virtually all applications, but particularly military vehicles, space and airframes. Sequentially, our sales increased by a better-than-expected 11%. For the full-year 2022, sales grew by 4% in U.S. dollars, 6% in local currencies and 4% organically, reflecting our operational execution, as well as strength in space related unmanned aerial vehicles, ground vehicles and avionics applications.

Looking ahead, we expect sales in the first quarter to grow slightly from these fourth quarter levels and we continue to be excited by the strength of the company’s position in the defense market, where we offer the industry’s broadest array of high technology Interconnect products. As the geopolitical environment has become more dynamic, militaries around the world are expanding their investments in next generation technologies, thereby increasing the demand potential. We look forward to supporting this increased demand with our expanded range of Interconnect and Sensor products, as well as our significant investments in new capacity that we have made in recent years. The commercial aerospace market represented 3% of our sales in the fourth quarter, as well as for the full-year 2022.

And in the quarter, our sales grew by very strong 33% in U.S. dollars and 38% in local currency and organic. As we benefited from the continued recovery in the commercial air market. Sequentially, our sales grew by 13% from the third quarter, which was well ahead of our expectations coming into the quarter. For the full-year 2022, sales increased by 36% in U. S dollars, 40% in local currency and 36% organically, reflecting our strong design in positions on a broad range of platforms, as well as the ongoing recovery in demand for aircraft. Looking into the first quarter of ’23, we expect now a modest sequential moderation in sales. I just want to say how grateful I am to our team that’s working in the commercial air market. Over the last three years, they performed really well amidst a truly volatile demand environment.

And with the ongoing recovery in travel and thus in demand for jetliners, our team’s efforts to strengthen our breadth of high technology Interconnect and Sensor products, while diversifying our market position, including into next generation aircraft are now paying real dividends. We look forward to realizing the benefits of this in 2023 and beyond. Industrial market represented 25percent of our sales both in the fourth quarter and for the full-year and sales in the quarter grew by 7% in U.S. dollars, 12% in local currency and 7% organically from the prior year fourth quarter. This growth was driven in particular by sales into alternative energy, battery and electric heavy vehicle, factory automation, oil and gas and medical applications. On a sequential basis, sales were down by just 1%, which was a bit better than our expectations.

For the full-year 2022, sales grew by a strong 14% in U.S. dollars, 19% in local currency and 13% organically, and we really had broad-based growth across virtually all segments of the global industrial market. And looking into the first quarter, we expect sales in the industrial market be roughly at the same level as we achieved here in the fourth quarter. Our outstanding global team working in the industrial market continues to find new opportunities for growth across the many segments of this exciting market. I remain confident 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 revolutions happening across the industrial electronics market.

To that end, the addition of CMR further strengthens our position, particularly in the important heavy equipment segment. And we look forward to realizing the benefits of this strategy for many years to come. The automotive market represented 21% of our sales, both in the fourth quarter and for the full-year and we had another great quarter in automotive sales growing by a strong 21% in U.S. dollars and 31% in local currency and organic. Our growth was broad-based, but was once again particularly robust in hybrid and electric vehicle applications. On a sequential basis, our automotive sales increased by 5%, which was above our prior expectations. For the full-year 2022, I’m very pleased that our sales increased by a strong 22% in U.S. dollars and 29% in local currency and organic, reflecting broad strength across our automotive markets, including in particular in next generation electronics, including electric and hybrid drivetrains.

Looking into 2023, we expect a high single-digit sequential moderation of sales in the first quarter from these high levels, driven especially by a seasonal moderation of sales in Asia. I remain extremely proud of our team working in the automotive market. They continue to manage through a dynamic overall environment all while remaining focused on driving new design wins with customers, who are implementing a wide array of new technologies into their vehicles. In particular, our long-term efforts that expanding our range of next generation Interconnects incorporated into electric and hybrid electric vehicles has enabled Amphenol to expand our position with a broad range of customers and thereby created further potential for the future. The mobile devices market represented 12% of our sales in the quarter and 11% of our sales for the full-year 2022.

Our sales in the quarter declined from prior year by 11% in U.S. dollars and 7% in local currency and organically, and this was driven by reduced sales of products incorporated into smartphones, laptops, tablets and wearables. Sequentially, our sales declined as we had expected by 10% as demand was impacted by a pull forward of demand into the third quarter as we it discussed 90-days ago. For the full-year 2022, sales in this market increased by 3% in U.S. dollars and 5% organically, as growth in smartphones and wearables was somewhat offset by a moderation in tablets coming off the higher levels of the pandemic. We are pleased with this performance amidst the market with generally muted demand in 2022. As we look into the first quarter of ’23, we anticipate a seasonal sequential decline of approximately 35%.

And while mobile devices will always remain one of our most volatile markets, our outstanding and agile team is poised as always to capture any opportunities for incremental sales that may arise in 2023 and beyond. Our leading array of Antennas, Interconnect products and mechanisms continues to enable a broad range of next generation mobile devices, which positions us well for the long-term. The mobile networks market represented 4% of our sales in the quarter and 5% for the full-year 2022. Sales in the quarter declined from prior year by 8% in U.S. dollars, 6% in local currency and 12% organically as we experienced the pause in demand from operators after a number of quarters of strong growth. Sequentially, our sales declined by a higher-than-expected 17%.

For the full-year ’22, sales grew by 8% from prior year and 3% organically as we saw increased demand for products used in next generation 5G equipment. Looking ahead, we expect a high single-digit sequential reduction in sales in the first quarter as operators continue to moderate their investments. Our team continues to work aggressively to realize the benefits of their efforts to expand our position in next generation 5G equipment and networks around the world. And as customers continue their investments in these systems, we look forward to benefiting from the increased potential that comes from our unique position with both equipment manufacturers and mobile service providers. We’re also excited by the pending acquisition of the hybrid and fiber optic cable and antenna assets of RFS, which will further broaden our product offerings for this important market.

The information technology and data communications market represented 19% of our sales in the quarter and 21% of sales for the full-year. Sales in the fourth quarter declined by 6% in U.S. dollars, 5% in local currency and 8% organically from prior year as many customers reduced their demand after five consecutive quarters of robust double-digit growth. Sequentially, our sales declined by 11% as we had expected coming into the quarter. For the full-year 2022, our sales in the IT datacom market grew by a strong 18% in U.S. dollars, 19% in local currency and 14% organically as we continue to benefit from our leading technology solutions and design and positions across a wide array of applications. Looking ahead, we expect a roughly 20% sequential decline in sales in the first quarter as our OEM and web service customers continue to moderate their demand levels.

Regardless of this current demand pause, we remain encouraged by the company’s outstanding position in the global IT datacom market. Our team has done an excellent 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. We look forward to realizing the benefits of that leading position in this important market for many years to come. Finally, the broadband market represented 6% of our sales in the quarter and 5% of our sales for the full-year 2022. Sales increased by a very strong 79% in U.S. dollars, 82% in local currencies and 64% organically as we experienced a significant increase in demand from cable operators for a wide range of our products.

On a sequential basis, sales grew by a much better-than-expected 19%. For the full-year 2022 sales grew by 62% in U.S. dollars and 38% organically, as we benefited from strong demand from broadband service operators, who are both upgrading and expanding their data networks, as well as from the Halo acquisition completed last year. Looking ahead, we expect sales to decline in the low double-digits from these levels, due to seasonal adjustments from customers. We remain encouraged by the company’s expanding 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 bandwidth to support the proliferation of high-speed data applications to homes and businesses.

And in certain cases in furtherance of government programs to expand broadband. Now just in summary, I want to comment on our outlook. The current economic environment remains highly uncertain. In addition, as we did discuss earlier, we have seen certain customers in the communications markets reduce their demand as they normalize inventory levels. Assuming market conditions do not meaningfully worsen and also assuming constant exchange rates. For the first quarter, we expect sales in the range of $2.840 billion to $2.900 billion and adjusted diluted EPS in the range of $0.65 to $0.67. This would represent a sales decline of 2% to 4% and adjusted diluted EPS of flat to down 3%, compared to the first quarter of ’22. 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 robust profitability over the long-term.

And finally, I’d like to take this opportunity to thank our entire team around the world for their truly outstanding efforts here in the fourth quarter and for the full-year of 2022. And with that, operator, we’d be very happy to take any questions.

Operator: Thank you. The question-and-answer period will now begin. Our first question is from Guy Hardwick with Credit Suisse. You may go ahead.

Guy Hardwick: Hi, good afternoon.

Adam Norwitt: Good afternoon.

Guy Hardwick: I think I’ll leave the questions on guidance to callers after me. But Adam, just when I speak to investors about Amphenol, they push back initially, if they don’t know the company that well, that’s why isn’t this company exposed to commodity price deflation if it’s selling components to the electronics industry. What was your — what would be your pushback on that? And maybe if you could talk about some of the content drivers in connectors and other products?

Adam Norwitt: Yes. Well, thanks so much, Guy. And I think what you’re referring to is, kind of, Moore’s Law, which says that over time, whether it’s every 18-months or some approximation thereof, that electronics tend to get a doubling of the performance for the given price. And I think that, that is true in electronics that if you look at what we — the devices that we use today, the networks that we use today, we get so much more out of those things given the increase or even in certain cases, not increase of what we pay for those things today. And so it comes down then to innovation. And are we, as a company, innovating, developing products that are enabling our customers’ applications and allowing our customers to sell value.

And so you mentioned commodity. And we don’t view our products as a commodity. Actually, we view them as a very precious piece of jewelry almost that the Interconnect products that we make from connectors to value-add Interconnect, Sensors, Antennas, these are highly critical components that go into very complex systems, everything from mobile devices all the way up to fighter jets and everything in between. And they represent also a very high risk and relatively low value as a percentage of the total bill of materials. And thus, if you can embed technology, if you can embed value, if you can be there for your customers, well, then your customers will be willing to share with you some of the value that they’re able to realize on the sale of the end product.

And so the difference between, kind of, a standard commodity is something that you see the price trading on an exchange somewhere, and ours is just a chasm of distance between them, because our products are enabling technology. They’re very much application specific. We’re selling hundreds of thousands and millions of different products to tens of thousands of customers and millions of different applications around the world. And if our product doesn’t work, that small little thing in the system, then ultimately, the system itself doesn’t perform for its customers. And so it’s up to us to develop innovative new technologies on a consistent basis to be able to execute on behalf of our customers to do that with high quality, high reliability with a breadth of products so customers can come to us all at once.

And if we can do that consistently, then we’re able to realize good margins while also controlling the cost on our side. And that’s another piece of this, which is that at the end of the day, margin is price minus cost. And so we have to control the price by selling value to our customers. We have to control the cost by ensuring that every element of cost is controlled and treated as it was coming out of our own pockets. And that comes really from the entrepreneurial organization, the 130 general managers around the world, who all treat the company’s money as if it were their own. And the fact that we don’t have cost centers in the company, we have a tiny little headquarters. And so that control on cost together with selling value through technology ultimately allows us to realize robust margins on a consistent basis.

Operator: Thank you. Our next question is from Amit Daryanani with Evercore. You may go ahead.

Amit Daryanani: Thanks for taking my question. I feel, I guess, Adam, I’m hoping you can just maybe talk a little bit more about the March quarter guide. You folks are talking about revenue being down double-digits sequentially. And I don’t want you to repeat all these segments discussion, but you sort of talking about 2 times normal seasonality. Perhaps you just talk about what are the one or two segments you think that are performing worse than what you would expect them to do in the normal seasonal environment? And then to the extent this weakness that you see in March, do you think it’s more demand weakness? Or is it more inventory adjustment by our customers? Thank you.

Adam Norwitt: Thanks so much, Amit. There’s a little bit of static on the line, but I think I heard the question well. Look, our guidance that we’ve given here, and I think I talked a lot about by each segment, but let me just put a finer point on this. If you just take two of our end markets and the guidance that I discussed and that’s mobile devices and IT datacom, which are two of our largest communications markets, those represent about two-thirds collectively of the implied sequential reduction in sales from the fourth quarter to the first quarter. And I think we talked about in IT datacom that we clearly see a, sort of, reduction in orders from customers, because of elevated inventory levels. And there may be some demand layered into that, as well as our customer — as the end customers, kind of, pause their build-outs, but we shouldn’t forget one thing about IT datacom.

We shouldn’t forget that this is a market, first of all, that since 2019, we’ve grown that market by more than 70% during that time period that our customers have had to increase their output and their construction of their networks in order to satisfy a true explosion of demand for the Internet. And I think the underlying drivers of that, whether that be a video over the Internet or the use of certain tools that we didn’t ever use before, the data traffic on the Internet is not dropping. I think what we are seeing is maybe a pause and a kind of realignment because these companies went real gangbusters for a number of years. But the structural increase of data traffic over the Internet in the broadest sense, that’s something that we believe, and I think we’re in good company believing that we’ll continue for a long time to come.

On mobile devices, I think we talked about the fact that during the course of the pandemic, there was a real surge in mobile device demand, as people had to detach from their offices and go home, things like tablets, things like computers, upgrades of phones and the like. Let alone the fact that everybody had a lot of disposable income to buy new things in their ears and on their wrists and otherwise. And I think there’s been some relaxation of demand that’s well reported, and you yourself have talked a lot about that in a variety of reports here in 2022. And regardless of that, our team did a fabulous job this year, driving 5% organic growth in 2022. But we’re reacting to the demand that we hear from our customers. We’re not losing share. Quite the contrary.

But the demand expectations of our customers here in the first quarter really result in the guidance that we’ve given. So I would maybe point to those two markets, most particularly, which represent just roughly two-thirds of the sequential decline in our outlook.

Operator: Thank you. Our next question is from Matt Sheerin with Stifel. You may go ahead.

Matt Sheerin: Yes, thanks. Good afternoon and Happy New Year, everyone. Adam, it’s just a question regarding the industrial markets. In addition to your acquisitions, you’ve been growing really well organically. And there was some concern that those industrial markets typically lag some of the other markets like consumer and datacom. There’s also concerns about inventory build, but it sounds like you’re relatively optimistic in terms of the drivers across those diversified markets. So any color you can give on your outlook there would be great?

Adam Norwitt: Yes. Thanks so much, Matt, and Happy New Year back to you. No, look, our industrial market has a real bright spot for us over these three years. And I just mentioned how IT datacom since 2019 has grown by 70%. Our industrial business has actually grown by more than 90% during that time period. And we’ve added some amazing acquisitions across Interconnect and Sensors, but we’ve also driven really strong organic growth. And I think, last year, we grew by 13% organically. In €˜21, we grew by 27% organically and really on a wide swatch of the industrial market, which is very, very diversified inside it. This industrial lag consumer and datacom, I don’t have a really good opinion about that, I think they’re quite different markets.

You have a lot of very different demand drivers. And if you think about what are the underlying drivers of demand in industrial, well, think about the things that are in the headlines today. Things like investments in infrastructure, things like electrification, things like decarbonization, which includes everything from infrastructure to support electrification, which includes things like alternative energy generation, which includes things like natural gas conversion and pipelines. And we’ve actually seen funny enough, like strong performance in both our alternative energy business, but also our oil and gas business. Both of those are really showing really strong momentum right now. And I wouldn’t think that any of those correlate necessarily to a consumer or a datacom world.

Is there inventory in the supply chain of industrial? I don’t have good evidence to say, yes or no to that. I’m sure if you looked at a variety of publicly traded balance sheets, you may see some evidence of and some evidence of not. We do look in our distribution channel in there. I think inventories are healthy. They’re not crazy. I mean, they may be up a touch or two, but not out of whack to the overall demand environment. Look, industrial is going through a true revolution. And when you think about everything from electrification, electronification, all the underlying drivers that I talked about, I think we’ve done a fabulous job, and our team in that area has done a fabulous job, both organically, as well as identifying and bringing to the Amphenol family great companies like CMR this quarter and many others over the last three, four years that put the company in a strong position going forward.

Operator: Thank you. Our next question is from Samik Chatterjee with JPMorgan. You may go ahead.

Samik Chatterjee: Hi, Adam. Hi, Craig. Thanks for taking the question and Happy New Year. I guess the question I had was more on the margins. You had pretty robust margins in the fourth quarter. But as you’re sort of looking in terms of the end market outlook and some of this sub-seasonal sort of trajectory starting off the year. How should we think about the puts and takes on the margin and also in relation to some of the acquisitions that you’ve done recently? What sort of impact on the margin will that have? How resilient are these sort of margin levels at this point? Thank you.

Craig Lampo: Great. Thanks, Samik, and Happy New Year to you. Yes, I think that if you think about our margin, I mean, I think I’d start off by just saying how proud we are of the margins performance that we’ve had in 2022. We really have, ultimately — I mean, throughout 2022, we really done, I think, a great job of just expanding our margins, even sequentially converting, kind of, higher than our normal conversion with the cost actions, with the pricing actions we’ve had to take. And thus — and really hitting our 21% in Q3, which is kind of a timing of record and really 20.9% in Q4 and then 20.7%, which matches the record of 2018. So I’m really happy with certainly achieving those. And as we guide here into the first quarter, we’re guiding down, I’d say, above seasonal and then we talked about — Adam just talked about that in response to a previous question.

And I think if you, kind of, look at the markets, we’ve always said that our markets don’t really drive kind of our margins. So we don’t have significant margin differences of a significant range within our markets, except for broadband, we’ve talked about before, which was our old cable business. But other than that, I think the markets are similar operating margins and drive similar conversion level. So I wouldn’t really talk about that as being a place where it’s driving a change in the way our overall conversions would look. We talked about decrementals and kind of that close to 30% range. We’re kind of seeing a little — even slightly less than that as we’re guiding here into the first quarter. And I think that just goes to the management team and how well they have done in regards to responding to some of these areas where we have seen some headwinds from a demand perspective in IT data, which is declining at above normal rate typically.

And then in the first quarter, they’re taking great actions that obviously are reflected in our guide and not necessarily impacting our normal conversion. And mobile devices, they’re used to these types of decrementals and headwinds in terms of their first quarter and certainly, they’re taking them. So I think that — and this is really not a different story than we’ve had over many years where we’re able to manage, you know, regardless of the demand environment, we’re able to manage their operating margins and really do a great job of expanding our margins when we see demand increases, which we’ve done here in 2022. And then here in Q1, where we see a little bit of headwind in certain of our markets, taking the actions that really need to be taken in regards to protecting our bottom line.

And I think that agility of the organization is really going to — shining through again. And I think that’s just no different from what we’ve seen historically. And I wouldn’t expect any difference in terms of whatever comes here in 2023. And regardless, I think I feel really comfortable with how the team will perform.

Operator: Thank you. Our next question is from Mark Delaney with Goldman Sachs. You may go ahead.

Mark Delaney: Yes. Good afternoon and thank you very much for taking the question. Could you speak please to what Amphenol has seen in the China market, both how it’s been tracking recently, given the COVID dynamics and also whether you’re expecting demand in China to pick up materially over the course of this year given reopening?

Adam Norwitt: Yes. Thanks very much, Mark. And look, I’m glad you bring off China, because I want to just give a real shout out to our team in China. Q4 in China was a funky quarter. You came in with zero COVID and you left with 100% COVID. And that created a lot of challenges operationally. And the fact that we were able not only to deliver on our commitments in the quarter, but to actually exceed our guidance in the quarter was just a real testament to our entire global organization, but in particular, to our team in China, who just manage through this well while protecting our people as best you can in a country where basically everybody got COVID, it was really phenomenal And I’m just so proud of what they were able to do during that time period.

Look, our business in China, we have a great business in China. Our China business is very much a business for the local region, for the customers, who want to buy in those regions. And we’ve done such a great job over the years despite geopolitics and all of that of being a truly local company, and this gets to kind of our organization, which I think, I’ve used the term before that we have an organization that’s really purpose-built for whatever the world order is going to be. And that’s an organization of people who are made up of local nationals all over the world, people from India in India, people from China in China, people from France in France. And that allows us to really tailor our operations to the requirements of that region and of that country.

And we’ve certainly done that in China over these last several very dynamic years. In terms of whether we expect a kind of a demand rebound in China, I don’t know, I think it’s a little early to say that. But whatever comes will come. And I think we’re poised and positioned that if there is some rebound, if there is an increase in consumer spending or whatever on whatever kind of products, there’s no doubt in my mind that our team will be there to capture more than our fair share if that should so occur. I mean, they demonstrated here in the fourth quarter that nothing can stop them. And I’m very confident that whatever comes along, we’ll take full advantage. And if risks materialize, if some impediments should come along, I mean, this is a team that’s pretty battle hardened.

So I’m pretty confident they’ll do a great job.

Operator: Thank you. Our next question is from Steven Fox with Fox Advisors. You may go ahead.

Steven Fox: Hi, good afternoon and Happy New Year. I was just wondering, Adam, if you could talk a little bit more about the business, you’re acquiring from RFS. It seems like it’s a bit of a game changer for you guys in terms of product and how you might be able to compete against some larger players in antennas, et cetera?

Adam Norwitt: Yes. Well, thanks so much, Steven. Happy New Year to you as well. Look, we’re really excited about this business. I mean, we have a business in fiber optics, we have a business in hybrid cable, we have a business in antennas. But no doubt about it, RFS brings us a much, much stronger position from a technology perspective, from a capacity perspective and from a channel into certain markets. And we’ve always been really excited about the mobile networks market. And one of the unique things about Amphenol is, I think I’ve said this many times, is that we sell to the OEMs. We’re one of the leading interconnect suppliers to the world’s leading OEMs who make mobile networks equipment, but we also sell to the service providers and to the operators.

And that actually is an evolution of our long-term position with the broadband service providers where we know how to work with service providers. And today, we work with service providers in broadband, we work with them in the IT datacom market, we work with them in broadband — I mean, in mobile networks. And anywhere where now providers are our customers and not just OEMs making equipment. And I think RFS really allows us to take a step function growth in the strength of our position there with service providers. And doing that at a time where we’re still, I believe, in the early innings of the 5G investments in the network, let alone what happens when 5G exists for all of our other markets. And we’re big believers on the kind of structural potential of both the build-out of the 5G networks that are happening around the world, as well as what it means to have low latency, ultra-high bandwidth ubiquitous data traffic for all of our end markets.

And after 5G will come, 6G and then there will come 7G, and you and I will probably still be floating around when we’re talking about 10G one day, Steve. But now, we’re really excited about RFS and look forward to them. I look forward to getting to the regulatory process. And again, we expect to close it at the end of the second quarter. And thus, it’s not in our guide here in the first quarter, but it is certainly in our long-term strategy.

Operator: Thank you. Our next question is from Jim Suva with Citigroup. You may go ahead.

Jim Suva: Hi, Adam, you and your team have been through many similar cycles. And I wanted to focus a little bit on the communications commentary you gave about a little bit of inventory digestion or some pauses or things like that? Just curious, in past cycles, have you seen these last kind of one to two quarters or multiple, multiple quarters from when you sit there, it seems like this is one segment that is taking a little bit of a downshift, not that structurally you’re losing share problems with it, but more of a cyclical nature if I understand your comments correctly? Thank you.

Adam Norwitt: Well, thanks so much, Jim. I would love to be able to extrapolate from sort of past experience to today. But I would tell you that I don’t know that at least in my history, which is, by the way, 25-years this year in the company, to live through a time period like we’ve just gone through in the last three years and what that has done to the dynamics of the market from a pandemic to a supply chain crisis, to an explosion of data traffic that came out of the pandemic and shutdowns and work-from-home and all those various things, the transformation of how people consume, entertainment and media and information. So I don’t know that there is a good template for kind of the — what has happened in the IT datacom market over the last three years.

And thus, it would be hard for me to say, do I expect this to be a one quarter, two quarter or whatever kind of an adjustment? And thus, we don’t run our business that way. The fact is it is what it is right now, and we adjust in real time our resources to accommodate the level of demand that we see from each of our operations. We have 131 operations around the world right now, roughly. And each of them have their own set of customers. Some of whom have demand that is growing and others of whom and that includes those who work in this market, where maybe demand is moderating somewhat. They don’t make a guess and say, well, is that going to be a one, two, three quarter thing, and thus, what should I do? They just say, my customer needs this much, and I’m going to go out and adjust my resources in real time.

And that real-time reactivity and agility that Craig mentioned earlier, which, by the way, was reflected in our margins in the fourth quarter and is also reflected in our margins in the first quarter, that’s how we run the business. We’ll react to whatever the demand environment is, and we’re not going to try to trip over ourselves trying to guess how long it is. But what I know is this, long-term, the demand for data, the demand for our products, leading edge, high-speed fiber optic power products, that’s going to be a very robust demand long-term. And so we will come through this adjustment that our customers are going through, and we will come out of it a stronger company than ever, and we will continue to have a very robust technology position in the future.

Operator: Thank you. Our next question is from Luke Junk with Baird. You may go ahead.

Luke Junk: Good afternoon. Thanks for taking the question and Happy New Year from me as well. Adam, your auto business is underlying production now by an extremely strong level each of the past two years. And I know it’s always hard to parse up, but do you get the sense that channel inventory of your products has influenced that outgrowth at all? And maybe just more importantly, as you look forward, what do you see as the key factors plus or minus versus history that could influence your ability to grow strongly above market again in 2023? Thank you.

Adam Norwitt: Well, thanks to you and Happy New Year as well. Look, you said it, I mean, we have definitely outperformed in the automotive market for a pretty long time period here, quite a number of quarters, and I’m just really proud of our team. There weren’t always easy years, I mean, clearly, 2020 was a tough year. Even 2019 was a challenging year. But we never kind of threw in the towel during that time period. We never said let’s go cut back on new product investment or let’s retrench, let’s reorganize, quite the contrary. In fact, we continue to work with customers around the world on next-generation applications. And those next-generation applications, everything from passenger connectivity and power applications to high-voltage applications in the car to communications around Antennas and the like.

we are now really realizing the benefits of that over the last couple of years. And in terms of the channel, we don’t really see the channel and the inventory in the channel as being a big driver of the demand. I think the driver of the demand has been the rapid adoption of new electronic systems, in particular, electrification of cars, but not exclusively electrification. And so when I think about the key factors that can be plus or minus in the future, well, sure, at some level, the number of cars being sold matters. But more importantly is the content of electronics and the content of new systems in those cars in the future. And if that content continues to move up and to the right and if we continue to do a pretty decent job of getting some or more than our fair share of that, then I think there’s good potential for our automotive business in the long-term.

I would not get out in front of my skis here and tell you that 29% organic growth is going to be our perpetuity or 41% that we achieved in 2021. But we’re very confident in our — in the strength of our position.

Operator: Thank you. Our next question is from Will Stein with Truist Securities. You may go ahead.

Will Stein: Great, thanks. I’d love to hear about how the backlog changed during the quarter, and in particular, the duration of the backlog and perhaps it relates to lead times somewhat, whether you’re seeing customers still place orders in excess of lead times to the degree that has been a pattern? Thank you.

Adam Norwitt: Thanks so much, Will. I mean, look, we obviously had in the fourth quarter a lower book-to-bill of 0.89. But I would just point out that over the course of this year, we still have a positive book-to-bill of 1.02. And if you look over the last two years, we’ve actually booked in the last two years, $25 billion in orders and we’ve shipped $23.5 billion in sales. So we’ve added $1.5 billion to our backlog during that time. And we have, today, still a very robust backlog. I think we talked about last quarter that we probably saw about a three-week expansion of our backlog. And I think we’re probably still roughly in that ballpark right now, somewhere around a three-week or so beyond what maybe it was in the past. And when I say the past like 2020 and maybe year-end.

And that’s a really strong position. At the same time, there’s no doubt about it that the kind of acute phase of the supply chain crisis and the kind of multiplicity of pressures that was put on our customers across really all of our markets, I think we’re beyond the acute phase of that supply chain crisis. I’m not going to tell you like it’s totally in the rearview mirror, like there’s still little things that people have to deal with. But I would not be surprised if our customers, kind of, normalize a little bit more their lead times across the board. And one of the things that happened during the course of the pandemic and the supply chain crisis that came thereafter, is we were doing a great job. I mean, we supported our customers through the time.

We did not meaningfully have to extend our lead times, but customers were sort of taking a one-size-fits-all approach in several of the markets. And that led, I think, them to certainly in the communications market, to maybe end up ordering a little bit more than they were going to do. I would also point out one other thing out here just in the fourth quarter, with our relatively low book-to-bill, compared to historical levels, actually, that was really concentrated in our communications markets. And we saw a book-to-bill outside of the communications market, which was basically 1:1 in the fourth quarter, which also gives us some confidence that there’s still a robust demand for our products. But I don’t think in terms of the normalization, I would expect some normalization.

That whole cliche of just in time versus just in case, maybe customers long term will have a little bit more order windows. But I think we sit in a really good position here.

Operator: Thank you. Our next question is from Chris Snyder with UBS. You may go ahead.

Chris Snyder: Thank you. So the company has taken a lot of share coming out of the pandemic. And there has been a heightened focus on resiliency and connectivity from the customer base, again, coming out of the pandemic. I’d just be interested to hear how you think about those two drivers as the macro seemingly will normalize here at some point? Thank you.

Adam Norwitt: Yes. Thanks very much, Chris. I mean, look, resiliency connectivity, I think there’s been a lot of things that have shifted. We’ve just been through a once in a several-generation pandemic. Hopefully, we are sort of at the tail end of it. I know our team in China certainly hopes that in the fourth quarter. But I think it has changed everything. It’s touched everything. Let me say that, whether it’s dramatically changed everything. But no doubt, resiliency and ability of a company to be there for its customers regardless of what comes along. That is definitely more in the consideration of our customers than ever before, and that plays very well into our approach. Our approach has never been to put all our eggs in one basket to build these massive campuses.

We have 250 facilities around the world. Some people think we’re crazy to have that many factories, but part of it is risk. Part of it is making sure that we’re close to our customers, and we’re not putting all of our eggs in one basket. And we have a pretty fragmented manufacturing footprint all over the world with low-cost operations in all three of the major regions in continents. And I’ll tell you that, that enabled us during this time period to take share from maybe some of our competitors, who are either smaller or more concentrated and thus, we’re stricken by these kind of unpredictable impediments that came along during the pandemic and the supply chain crisis. And relative to connectivity, and I’m going to sort of put a little stab on what your implication is there, I mean, communications, the Internet, the ability to stay in touch with people, that has clearly been a dramatic shift in this pandemic.

And we look at our position in our communications markets and the phenomenal growth that we’ve had, and I mentioned the IT datacom market for us growing 70% during that time period. But also, mobile devices grew by nearly 25% over those same three years. And that’s just a reflection of this kind of now demand for people to have a multitude of ways of communicating and connecting with each other. And that’s something as we seek to sort of enable the electronics revolution, that’s the phrase I always use, there’s no doubt about it that we’re living in revolutionary times. And that creates a real structural and long-term opportunity for Amphenol.

Operator: Thank you. Our next question is from Wamsi Mohan with Bank of America. You may go ahead.

Wamsi Mohan: Thank you. Hey, Adam, notwithstanding the comments you made on IT datacom earlier that might also apply to mobile devices. You specifically called out mobile device kind of mean reverting from abnormal COVID-driven level. So does that imply we should expect some seasonal growth for 2023? And more broadly, is visibility, maybe ex mobile devices, beginning to improve at all in your markets?

Adam Norwitt: Yes. Thanks very much, Wamsi. I am not going to get out in front of my skis on trying to give an estimate of what mobile device demand is going to look like this year. You know, well, I’m bad at guiding it even for the 70 or so days that we try to give guidance in a quarter let alone to make some estimate of what it’s going to look like in the course of the year. It’s hard for me to do that. What I do know is there’s a lot of new devices, they’re wonderful. I’m addicted to mine, and we have a strong position. And so I don’t take a position otherwise on whether mobile devices is going to have a worse or better performance seasonally going through the rest of this year. I mean, we tried to give some guidance here in the first quarter.

We’ll see what happens there, and then we’ll try to give some guidance on the second quarter 90 days from now. Relative to visibility in general, look, it’s still a fairly uncertain world. And so I don’t know that there’s a dramatic improvement in visibility. I mean, we’re not giving full-year guidance. We don’t think it’s prudent at this time, because there is still a lot of dynamism, a lot of uncertainty in the world today. And so we’ll see. I mean, I certainly hope that as we passed the three-year mark on the anniversary, I think — it’s actually three years from day after tomorrow that Wuhan was shut down. I remembered it very, very well. And you hope that after three years, it renormalizes. There’s a saying in Chinese that a pandemic doesn’t last more than three years.

It’s a famous old saying that, I think, a very old saying in Chinese. And hopefully, that is really the case, and there can be a little bit more normalization. But I think there’s still a lot of uncertainty in the world today.

Operator: Thank you. Our next question is from David Kelley with Jefferies. You may go ahead.

David Kelley: Hey, good afternoon, Adam and Craig. Maybe a question on the input cost environment. We’ve seen certain commodities pull back in certain areas. Energy and labor costs remain elevated and then maybe pricing pass-throughs might get tougher in 2023. But if we take a step back, can you just talk about the Amphenol cost opportunities in 2023?

Craig Lampo: Yes. Thank you, David. I think that, certainly, the cost environment is, in some ways, a little bit different than it probably was as we, kind of, entered the year here. I think there are certain places where it has improved, there’s other places, honestly, where it probably hasn’t improved. But I mean, certainly, on certain commodities, we’ve seen some level of relief in certain parts of the business without a doubt. But places like energy, places like the labor, certainly, logistics has gotten a little better, but I would say energy and labor is certainly very — sill continues to be a headwind in many places. So I’d say, on balance, it probably has made some improvements from a commodity perspective. I think that what does that mean from a cost perspective in 2023?

It’s tough to tell our margin perspective. I mean, there’s no doubt that in a normal environment, you would expect some pricing headwinds from your customers. And whether or not they will start in certain places to try to come back to pricing, we’ll certainly do our best to — as we always do to — as we add value to our customers to ensure that we’re keeping that fair margin. But as costs come down, I would expect in some places for pricing to have some headwind. But I would expect that ultimately a balance to happen where we were able to protect our margins and continue to have strong margins. It really wouldn’t — I wouldn’t think change from a profitability perspective. And in a normal environment, prior to the pandemic when inflation was kind of at a normal pace and the demand environment was normal, that’s — you did have that kind of normal balance.

And I expect that, ultimately, over time, we’ll see that again. And whether or not that happens in €˜23, that’s a little bit too early to predict. But I think we are in a better place, both on the price and a cost perspective, than we certainly were a year ago.

Operator: Thank you. Our last question is from Michael Anastasio with Cowen. You may go ahead.

Michael Anastasio: Happy New Year. Thanks for taking my question. Could you just quantify the impact of price in 2022 overall? And if there’s any areas that were strong in particular? And what are your expectations for the upcoming year? A – Craig Lampo Yes. I was kind of I was saying before, I mean, certainly, we did have some pricing kind of momentum in 2022. Honestly, I couldn’t even tell you what exactly the impact the price was on our top line. We don’t — unfortunately, our systems aren’t capable of even providing that information. I would say it’s somewhere kind of in maybe low single digits, but it’s a very difficult thing to even have to provide. So — and honestly, it really wouldn’t provide us with any help in regards to how we run our business.

So it’s not something we’re necessarily focused on. But certainly, there was some pricing in 2022. We’ve talked about that and without a doubt there was. I mean, again, as I mentioned before, in a normal environment, pricing would be, I would say, more of a headwind than a tailwind and €˜22 was a slight tailwind, I would say. And I know it’s tough to say whether we’ll be in 2023 as the cost environment maybe levels off a bit. But ultimately, whatever it is, I know I’m really not so concerned. I think that the team has continued to do a great job of managing cost, managing price and ultimately ensuring at the end of the day, we’re getting paid for the value we provide to our customers.

Operator: Thank you. And there are no further questions. I’ll turn the call back to Mr. Norwitt for closing remarks.

Adam Norwitt: Well, thank you so much. And again, we’d like — Craig and I would like to, on behalf of our entire team around the world, express our gratitude to each of you for the confidence you put in us. And we wish you all the best and look forward to speaking with you just a short 90-days from now. Thank you, everybody. Happy New Year again, and stay safe.

Craig Lampo: Thank you. Bye-bye.

Operator: Thank you for attending today’s conference, and have a nice day.