Title

Presentation

Amphenol Corporation beats earnings expectations. Reported EPS is $0.827, expectations were $0.77. Amphenol Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello, and welcome to the Fourth 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 introduce your conference host, Mr. Craig Lampo, you may begin.

Craig Lampo: Thank you very much. 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 a Happy New Year, and welcome you to our fourth quarter of 2023 conference call. Our fourth quarter and full year 2023 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. The company closed the fourth quarter with sales of $3,327 million and record adjusted diluted EPS of $0.82.

Fourth quarter sales were up 3% in U.S. dollars, 2% in local currencies and down 1% organically compared to the fourth quarter of 2022. Sequentially, sales were up 4% in U.S. dollars, 4% in local currencies and 2% organically. Adam will comment further on trends by market in a few minutes. For the full year of 2023, sales were $12,555,000,000 down 50 basis points in U.S. dollars, flat in local currencies and down 3% organically compared to 2022. Orders in the quarter were $3,164,000,000, up 10% compared to the fourth quarter of 2022 and flat sequentially, resulting in a book-to-bill ratio of 0.95:1. For the full year, orders were $12,267,000,000, down 5% compared to 2022, resulting in a book-to-bill of 0.98:1. GAAP operating income and operating margin was $690 million and 20.7%, respectively, in the fourth quarter of 2023 which increased 10 basis points compared to both the fourth quarter of 2022 and the third quarter of 2023.

Adjusted operating income was $706 million, which excluded $16 million in acquisition-related costs. Adjusted operating margin was 21.2% during the fourth quarter and a new quarterly record for the company. On an adjusted basis, operating margin increased by 30 basis points compared to the fourth quarter of 2022 and increased by 40 basis points sequentially. The year-over-year increase in adjusted operating margin was primarily driven by strong operating leverage on slightly higher sales levels as well as the benefit of pricing actions. These benefits were partially offset by the dilutive impact of recent acquisitions, most of which are currently operating below the corporate average. For the full year of 2023, GAAP operating income was $2.56 billion, which included $35 million of acquisition-related costs and excluding these costs, adjusted operating income was $2.594 million.

For the full year of 2023, GAAP operating margin was 20.4% and adjusted operating margin was a strong 20.7%, consistent with our previous annual record margins achieved in 2022 and 2018. On a GAAP basis, operating margin decreased 10 basis points compared to 2022. Compared to 2022, adjusted operating margin was flat, which primarily was driven by strong operational performance as well as the benefit of pricing actions, partially offset by the dilutive impact of acquisitions. This was an impressive margin performance given the slight sales decline we experienced in 2023. Our team continued to execute well in the quarter, and we are proud to have sustained these healthy levels of profitability, despite the continued range of challenges around the world.

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Breaking down fourth quarter results by segment. Relative to the fourth quarter of 2022, sales in the Harsh Environment Solutions segment were $900 million and increased by 13% in U.S. dollars and 6% organically. Segment operating margin was 26.5%. Sales in the Communications Solutions segment were $1.345 billion and declined by 6% in U.S. dollars and 7% organically. Segment operating margin was 23.1%. Sales in Interconnect and Sensor Systems segment were $1.082 billion and increased by 7% in U.S. dollars and 2% organically. Segment operating margin was 18.5%. Breaking down full year results by segment relative to 2022, sales in the Harsh Environment Solutions segment were $3.531 billion, an increase by 14% in U.S. dollars and 9% organically, and segment operating margin was 26.7%.

Sales in the Communications Solutions segment were $4.913 billion and declined by 13% in U.S. dollars and organically and segment operating margin was 21.6%. Sales in Interconnect and System – Sensor Systems segment were $4.111 billion, an increase by 6% in U.S. dollars and 3% organically and segment operating margin was 18.3%. The company’s GAAP effective tax rate for the fourth quarter was 22% and the adjusted effective tax rate was 24%, which compared to 19.2% and 24.5% in the fourth quarter of 2022, respectively. And for the full year of 2023, the company’s GAAP effective tax rate was 20.7% and the adjusted effective tax rate was 24%, which compared to 22.3% and 24.5% in 2022, respectively. In 2024, we expect our adjusted effective tax rate to be approximately 24%.

GAAP diluted EPS was $0.83 in the fourth quarter, up 1% compared to the prior year period, and on an adjusted basis, diluted EPS increased 5% to a record $0.82 compared to $0.78 in the fourth quarter of 2022. This was an excellent result. For the full year, GAAP diluted EPS was a record $3.11, a 2% increase from $3.06 in 2022. And adjusted diluted EPS was a record $3.01 in 2023, an increase from $3 in 2022. Operating cash flow in the fourth quarter was a record $842 million or 162% of adjusted net income. And net of capital spending, our free cash flow was a record $739 million or 142% of adjusted net income. We are pleased to have continued to deliver such a strong cash flow yield in the quarter and for the full year. In the full year, 2023 operating cash flow was a record $2.529 billion or 130% of adjusted net income.

Net of capital spending, our free cash flow for 2023 was a record $2.160 billion or 111% of adjusted net income, a very strong result. From a working capital standpoint, inventory days, days sales outstanding and payable days were 85, 70 and 55 days, respectively, all within our normal levels. And during the quarter, the company repurchased 1.3 million shares of common stock at an average price of approximately $86 bringing total repurchases during 2023 to 7.2 million shares or $585 million. When combined with our normal quarterly dividend, total capital returned to shareholders in 2023 was $1.86 billion. Total debt on December 31 was $4.3 billion, and net debt was $2.7 billion. Total liquidity at the end of the quarter was $4.9 billion, which included cash and short-term investments on hand of $1.7 billion, plus availability under our existing credit facilities.

Fourth quarter and full year 2023 EBITDA was $830 million and $3.1 billion, respectively. And at the end of the fourth quarter of 2023, our net leverage was 0.9 times. We are very pleased that the company’s financial condition remains strong by any measure. I will now turn the call over to Adam, who will provide some commentary on current market trends.

Adam Norwitt: Well, Craig, thank you very much and I’d like to extend my welcome to everybody on the phone here today. And I hope it’s not too late to wish all of you a happy New Year here from Wallingford, Connecticut. As Craig mentioned, I’m going to highlight some of our achievements in the fourth quarter and also for the full year of 2023. I’ll then discuss our trends and progress across our served markets. I’ll make some comments on our outlook for the first quarter, and then, of course, we’ll have time for questions. 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 3% in U.S. dollars, 2% in local currencies, reaching $3.327 billion.

On an organic basis, our sales did decline by just 1%, with growth in commercial air, defense, automotive and IT Datacom markets offset by declines across our other end markets. The company booked $3.164 billion in orders in the fourth quarter. This was a 10% growth versus prior year and flat to last quarter, but did represent a book-to-bill of 0.98:1. We’re very pleased to have delivered record adjusted operating margins of 21.2% in the quarter, a clear reflection of our team’s outstanding execution and these margins increased 30 basis points from prior year and 40 basis points sequentially. Adjusted diluted EPS reached $0.82 in the quarter, representing a growth of 5% from prior year. I have to say that we were especially pleased that the company generated record operating and free cash flow of $842 million and $739 million, respectively, in the fourth quarter both just really clear reflections of the quality of the company’s earnings.

I come out of the fourth quarter, extremely proud of the Amphenol team. 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 that we announced this morning that we closed four acquisitions in the quarter, really in November and December. Based in Ohio, TPC Wire & Cable is a value-added provider of harsh environment, cable and cable assemblies for applications across the industrial market and this includes particularly factory automation and heavy equipment and TPC has annual sales of roughly $110 million. On headquartered in New Hampshire and with annual sales of approximately $90 million, Airmar is a leading provider of sensors for the recreational marine, commercial fishing and industrial markets.

LID technologies based in Toulouse France has annual sales of approximately $40 million and LID is a high-technology supplier of sensor products to the industrial and automotive markets with a focus on tire pressure monitoring and the telematics associated with that. We also closed on the previously announced acquisition of PCTEL, a leading global provider of antennas for a broad array of markets, including in particularly the Internet of Things or industrial IoT market. PCTEL generated in 2023, approximately $85 million in sales. As we welcome these outstanding new teams to Amphenol, I remain confident that our acquisition program will continue to create great value for the company. In fact, our acquisition program was very successful in 2023 and our pipeline of prospective deals remain strong as we enter the new year.

Indeed, we continue to see interesting near-term potential opportunities to bring outstanding and complementary organizations into the Amphenol family. Our ability to identify and execute upon acquisitions and then to successfully bring these companies into the Amphenol family remains a core competitive advantage for the company. As our organization has evolved and scaled, so too has our ability to effectively manage a greater number of acquisitions of all sizes. Now turning to the full year of 2023, despite the demand challenges that we did experience in certain end markets in the year, I have to say that the Amphenol team delivered another successful year of performance. Amidst significant organic declines in the communications end markets due to inventory builds in 2022 as well as the more recent moderations in demand in the industrial market.

Our team was able to deliver overall sales that were only slightly down from prior year. This was a testament to the breadth and diversification of the company as well as our team’s ability to capitalize in real time on opportunities for incremental sales across the entirety of our markets. Our full year 2023 adjusted operating margin of 20.7% was flat with our last year record levels in 2022 despite the organic sales decline. This excellent performance by our team allowed us to deliver adjusted diluted EPS of $3.01 which was just slightly above prior year levels. We also generated record operating and free cash flow of $2.529 billion and $2.160 billion, respectively, both confirmations of the company’s superior execution and disciplined working capital management.

Our acquisition program, which I just discussed really created a great value throughout the year with 10 new companies contributing annualized sales of more than $600 million joining Amphenol in 2023. These new acquisitions enhanced our position across a broad array of technologies while bringing outstanding and talented individuals into the Amphenol organization. We’re excited that these companies represent expanded platforms for the company’s future performance and have deepened our already strong bench of leaders around the world. In addition, in 2023, we bought back over 7 million shares under our share buyback program, and increased our quarterly dividend by 5%, and that represented a total return of capital to shareholders of nearly $1.1 billion.

So while there continues to be a high level of volatility across the overall market environment in 2023, as we enter 2024, our agile entrepreneurial management team is confident that we have built further strength from which we can drive superior long-term performance. Now turning to the trends and our progress across our served markets. I would just comment that we remain very pleased that the company’s end market exposure is still highly diversified, balanced and broad with no end market representing more than 25% of our sales in 2023. This market diversity helps to insulate us from the effect of any given market volatility, while also exposing us to the exciting revolutions happening across the electronics industry. Turning first to the defense market.

Our sales represented 12% of our total in the fourth quarter and 11% for the full year 2023. Fourth quarter sales once again grew strongly from prior year, increasing by 18% in U.S. dollars and 17% in local currency. On an organic basis, sales in the defense market increased by 15%, with broad-based growth across virtually all defense applications, particularly strong in naval, helicopters, communications and airframe applications. Sequentially, our sales increased by a better-than-expected 4% from the third quarter. For the full year 2023, sales in the defense market grew by 20% in U.S. dollars in local currency and by 18% organically. This reflected our operational execution, as well as broad strength across most segments of the defense market, and that particularly related to naval, aircraft engine, helicopter, communications and space-related applications.

Looking ahead, we expect sales in the first quarter to decline in the mid-single digits sequentially, and we remain very 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 today’s 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. We are well positioned to accelerate our new product development and increase our capacity to support this demand long into the future. The commercial air market represented 3% of our sales in the quarter and 4% of our sales for the full year 2023.

In the fourth quarter, our sales grew by a very strong 25% in U.S. dollars and 23% in local currency and organically, and this was driven by broad-based strength across all aircraft applications. Sequentially, our sales grew by 1% from the third quarter, which was actually ahead of our expectations for a modest seasonal decline. For the full year 2023, sales increased by a very robust 36% in U.S. dollar local currency and organically, reflecting our strong design-in positions on a broad range of platforms, as well as broad-based demand across all aircraft applications. Looking into the first quarter, we expect sales to remain at these lofty fourth quarter levels. I’m truly proud of our team working in the commercial air market. With the ongoing recovery in travel and thus demand for jetliners, our efforts to strengthen our breadth of high-technology interconnect products, while diversifying our market position into next-generation aircraft are paying real dividends.

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 those growth initiatives for many years to come. The industrial market represented 23% of our sales in the quarter and 25% of our sales for the full year. Our sales in the fourth quarter did decline by 4% in U.S. dollars, 5% in local currencies and 12% organically as growth that we realized in oil and gas, rail mass transit and marine applications was more than offset by moderations in demand in other segments, including battery and electric heavy vehicles, building automation, transportation and heavy equipment. In addition, our sales into the industrial distribution channel continued to be more muted than they were a year ago.

On a sequential basis, sales grew by 1%, but that was driven primarily by acquisitions that we did close in the quarter. For the full year 2023, sales were flat in U.S. dollars in local currency and declined by 7% organically as the contribution from acquisitions was offset by weakness in instrumentation, battery and EV, and electric heavy vehicles, factory automation and heavy equipment applications in particular. Looking into the first quarter, we expect sales to remain at these levels as the benefit of recent acquisitions offset the modest organic sequential decline. Despite this near-term demand pause driven in particular by elevated inventory levels, both in the distribution channel as well as in certain end markets, I remain proud of our outstanding global team working in the industrial market.

We are very excited by the additions of TPC, Airmar, LID and PCTEL, each of which adds complementary new interconnect sensor and antenna technologies to our industrial product offering. And I’m confident that our long-term strategy to expand our high-technology interconnect antenna sensor offering, both organically and through complementary acquisitions has positioned us to capitalize on the many revolutions that will no doubt continue to occur across the industrial electronics market. The automotive market represented 24% of our sales in the quarter and 23% of our sales for the full year. Sales in the fourth quarter grew by a robust 16% in U.S. dollars and 15% in local currency, and on an organic basis, our sales to the automotive market increased by 12%.

That was really driven by broad-based strength across most automotive applications, including electric and hybrid electric vehicles. Sequentially, our automotive sales increased by 8%, which was better than our expectations coming into the quarter. For the full year 2023, I’m pleased that our sales increased by a strong 12% in U.S. dollars, 13% in local currency and 12% organically, and that reflected broad strength across the automotive market, including, in particular, next-generation electronics, for example, electric and hybrid drivetrains. Looking into 2024, we expect a high single-digit sequential seasonal moderation in sales in the first quarter from these levels. I’m truly proud of our team working in the automotive market. Their performance in 2023 is yet another confirmation of the benefits of their focus on driving new design wins with customers who are implementing a wide array of new technologies into their vehicles.

It’s really a multitude of applications, including electrified drivetrains, but not just that, many other applications. We look forward to benefiting from that strong position for many years to come. The mobile devices market represented 11% of our sales in the quarter and 10% of our sales for the full year 2023. Our fourth quarter sales moderated by 3% in U.S. dollars, local currency and organic as robust growth in smartphones was once again more than offset by declining sales into tablets, laptops and wearables. Sequentially, our sales increased by 9%, which was much better than our expectation coming into the quarter for a high single-digit decline. For the full year 2023, sales in the mobile devices market declined by 12% in U.S. dollars and 10% organically as strong growth in smartphones was more than offset by declines in other mobile device applications.

Looking into the first quarter, we do anticipate a typical seasonal sequential decline of approximately 35%. While mobile devices will always remain one of our most volatile of markets, our outstanding and agile team is poised as always 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 a broad range of next-generation mobile devices, which positions us well for the long term. The mobile networks market represented 3% of our sales in the quarter and 4% of our sales for the full year. Sales in this market declined from prior year by 26% in U.S. dollars, 27% in local currency and 34% organically, as we continue to manage through a broad-based reduction in spending by network operators and wireless equipment manufacturers.

Sequentially, our sales decreased by 6%, which was in line with our expectations. For the full year, sales declined by 26% from prior year and 32% organically driven by the spending reductions that we’ve discussed throughout the year. Looking ahead, we expect a modest increase in sales from these fourth quarter levels. And despite this more challenging short-term wireless investment environment, our team continues to work aggressively to realize the benefits of our efforts, to expand our position in next-generation 5G equipment and networks around the world. When customers once again drive renewed wireless investments, we look forward to benefiting from the increased potential that comes from our position with both equipment manufacturers and mobile service providers.

The information technology and data communications market represented 20% of our sales in the quarter and 19% of our sales for the full year. We’re very pleased that our sales in the fourth quarter returned to growth compared to prior year, with sales in U.S. dollars and local currency increasing by 6% and organically by 5%. Sequentially, our sales increased by a much better-than-expected 6%. As we continue to benefit from our strong presence with AI data center customers as well as some overall improved demand. For the full year 2023, our sales in the IT Datacom market declined 13% in U.S. dollars and organically as strong demand for AI-related applications was more than offset by inventory adjustments that we saw amongst our traditional IT Datacom applications.

Looking ahead, we do expect in the first quarter a mid single-digit sequential seasonal decline in sales. I have to say coming out of what was a challenging year in the overall IT Datacom market that we’re more encouraged than ever by the company’s position in this space. Our team continues to do an outstanding job securing future business on next-generation IT systems, particularly those enabling artificial intelligence. Indeed, the revolution in AI has created a unique opportunity for Amphenol given our leading high-speed power and fiber optic interconnect products. With machine learning driving a more intensive usage of these highest technology interconnect products, we are very well positioned for the future. This creates a continued long-term growth opportunity for Amphenol.

The broadband communications market represented 4% of our sales in the quarter and 4% for the year. Sales in the fourth quarter were down 31%, in U.S. dollars and 32% organically, as broadband operators continued to moderate their procurement levels. On a sequential basis, sales did decline by 12%, which was worse than our expectations coming into the quarter when we anticipated more of a modest increase. For the full year 2023, sales were down by 7% in U.S. dollars and organically, driven by the continued pause in broadband operator spending. Looking ahead, we expect sales in the first quarter to increase modestly from these levels. Regardless of the current demand dynamics, we do remain encouraged by the company’s strengthened position in the broadband market.

We look forward to continuing to support our service provider customers around the world, all of whom are working to increase their network coverage and bandwidth to support the proliferation of high-speed data applications to homes and businesses. And finally, turning to our outlook. There’s no doubt that the current economic environment remains somewhat uncertain. Assuming the continuation of these current market conditions and also assuming constant exchange rates, for the first quarter, we expect sales in the range of $3.4 billion to $3.1 billion and adjusted diluted EPS in the range of $0.71 to $0.73. This would represent sales growth of 2% to 4% and adjusted diluted EPS growth of 3% to 6% compared to the first quarter of 2023. 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 Amphenol’s market position, while driving sustainable and strong profitability over the long term.

And finally, I just want to take this opportunity to thank our entire global team around the world, including all of those who work across our factories, touch our products, and ultimately deliver to our customers what they need. I’m just truly grateful for all of their outstanding efforts both here in the fourth quarter, but moreover, for the entirety of 2023, without them, we wouldn’t be able to make it happen like we do. And with that, operator, we’d be very happy to take any questions.

Operator: [Operator Instructions] The first call is to Amit Daryanani with Evercore. You may go ahead.

Amit Daryanani: Thanks. Good afternoon everyone. One question for me would be, can you sense on the weakness on the industrial market space you talked about seeing softness there, a little bit of inventory sell, I’m curious, is that stable versus what you saw like do you feel like it’s getting worse as you head into 2024? And then you can talk about it, do you see the [technical difficulty]

Adam Norwitt: Yes, Amit, I didn’t perfectly hear the second part of your question. There’s a little bit of a connection issue. But I think relative to your question, which was, is industrial stable versus 90 days ago. I mean, look, I think we came into the quarter with an expectation of kind of a modest reduction in sales, our sales — we’re essentially in the line with that. So I think it was kind of what we expected it to be. I would say that the book-to-bill in industrial was a bit weaker. I mean, if we think about why our book-to-bill was 0.95:1. I mean, the real driver for that was industrial on 1 side. And we did see in the IT Datacom market a little bit of a softer book-to-bill. But that that is really just a little bit more of an equalization from very high books to build that we’ve seen over the prior couple of quarters.

So I don’t think the IT data come book-to-bill is at all representative of the demand environment. But I think — in the industrial market, we did see bookings a little softer than we had anticipated. I’m going to assume that your second question is how do we see that going forward? And where do we see that kind of cycle in industrial. And I think it’s early to tell. I mean the beauty of our industrial business is it so broad. And so we’re not levered on to one or another of the individual segments. And you know there are so many segments across the industrial market that we participate in. And we don’t have any of those that are really disproportionate to our overall business. And we continue to see some of those segments areas like marine and oil and gas, rail mass transit, medical during the course of this year.

They still had very robust demand. But no doubt about it, areas like factory automation, instrumentation, those are areas where we’ve seen more market reductions in demand and also more impact from the distribution channel. When is that going to be worked out in the distribution channel, the inventory, when does some of that demand return in some of those segments. I think it’s a little too early to tell. And as we go through the course of this year, we’ll try to give you a really good read on that. I mean as we look into here now in the first quarter, as I said in my prepared remarks, we do anticipate in the first quarter, a kind of a modest level, but really supported by the acquisitions that we’ve made. And on an organic basis, we see the first quarter, again, modestly down from our current levels.

Operator: Next question comes from Asiya Merchant from Citigroup. You may go ahead.

Asiya Merchant: Great. Hopefully, you can hear me clearly, and I don’t have an echo, I will try. On IT Datacom market, if you guys on share some insight? Looks like this market is ramping up quite nicely for you guys. If you could elaborate a little bit on how you think about your wins in the AI segment and how you’re able to ramp that into revenues going forward, especially given constraints on supply on the GPU side, how do you guys think you can ramp for AI for the remainder of the year? Thank you.

Adam Norwitt: Yes. Well, thank you very much, and welcome to our call. I look forward to getting to meet you in person. We’re really excited about the progress that the company has made in AI. And I just want to reflect on one aspect, which is that AI is not new to us. While the world over the course of the last year has sort of woken up to AI with the advent a year ago, November of ChatGPT and the sort of revolution of generative AI. Our team has been working on the interconnect architecture surrounding AI for a long, long time. And so it is only now that maybe there is this acceleration almost, you could call it even a kind of revolution or a goldrush around AI, but we’ve been building the capability, building the product capability, building the manufacturing capability and capacity to support that for a long time.

And I think this year, one of the ways that we were able to maybe even get a disproportionate share of some of the more urgent demand was that we were very quick to flex our capacity in favor of customers who needed products and when they needed it. And I think our team has always showed the ability to have that agility in reacting to upticks of demand. And I think that this AI is no different. I’m really proud of our team and how they’ve done that. Looking forward, it’s still too early to say, what does that, look like over the long-term. But there’s no question in my mind that AI seems like something that is not such a small deal. It seems like something where there are real economics behind it, where large companies are making significant investments into AI and where ultimately our architecture, our interconnect architecture is a very critical component together with the chips that you alluded to.

Now relative to shortages of chips, that’s — I mean, we hope that there are significant investments in chip manufacturing, because in our industrial business, we do supply a lot of interconnect products that go into the industry for semiconductor manufacturing. I don’t think that we’ve necessarily seen that as a governor on our output or on our customers’ demand right now. But we’ll see. It’s not something that would directly impact except that maybe customers, if they couldn’t get enough chips, they would moderate their overall construction. But we haven’t seen that yet. And I think our team is just doing a fabulous job dealing with the surge in demand that we saw this year. And it came at a time when overall IT demand was down. But in fact, some of the products were very different products.

So it wasn’t just that we were able to reallocate capacity from IT products that were not being consumed as much into these. There was a lot of new stuff that we had to do. And I think we did a really great job executing on that.

Operator: Our next caller comes from Luke Junk with Baird. You may go ahead.

Luke Junk: Great. Thanks for taking the question. Adam, just hoping you could comment on pricing dynamics into 2024, especially in which parts of the portfolio might look at as more normal with respect to price downs this year versus areas of the business that could be a laggard in that respect? And then the related question would just be, how you’re feeling about delivering productivity of your supply chain and your operations to offset any price downs you might face this year. Thanks Adam.

Craig Lampo: Hi Luke, its Craig. I’ll take that one for Adam. I think as we think about pricing, 2023, certainly, we talked about the fact that we didn’t necessarily — we saw pricing coming back to normal. I mean, 2022 we talked a lot about pricing adjustments we are making to try to catch-up to inflation — inflationary increases on costs that we saw. And I think that as we came into 2023, sequentially, we did a great job on the profitability, but that wasn’t necessarily the pricing dynamics. That was more really just operational execution. And I think the pricing in 2023 and as we look into 2024 is, certainly a more normalized and that the price and cost environment is more balanced. I wouldn’t say that the cost environment necessarily has decrease at all.

I think there is certainly an elevated level of cost, but they’re just not increasing at the pace that we saw a year ago. So from that perspective, I think the pricing environment is in more of a normal situation. And as we move into 2024, I don’t necessarily think we’re going to get necessarily the benefit of price. And historically, that’s not something that we would see anyways. And typically, if you have a normal cost environment and normal price environment, I think you’ll see kind of typical kind of margins and margin increases from a profitability perspective, we talk about 25% as being a typical target that we have in a normal environment. And I think as we move into 2024, I would expect that to be the case kind of sequentially as we move into it.

So really happy with where we actually ended the year here at record operating levels. So we’re really well positioned, I think, as we move into 2024. I mean if you look at our — our margin improvements, I think that that’s something that I’m really proud of the team to be able to actually execute so well during the year to get to these profitability levels. So, as we move into 2024, I expect that overall environment to be the same, and I certainly expect the team to be able to execute at a similar level.

Operator: Next question comes from Wamsi Mohan from Bank of America. You may go ahead.

Wamsi Mohan: Yes. Thank you. Adam, you called out the weakness in 2023 in the communication-related markets, but you did exceed your expectations in the fourth quarter. Do you see a greater than normal organic growth rate over the next two years in these markets given the historically easier compares here? And if you could also just talk about the environment in China, that would be really helpful? Thank you.

Adam Norwitt: Well, thank you very much, Wamsi. Well, you’re asking me to do a tough thing, which is to talk about the next two years, in a very volatile space, which is communication. I think that’s hard to say what will be the overall growth across communications. I would tell you, we see great opportunities across each of those areas with different things going on because remember, communications, not just IT datacom, it includes mobile networks. It includes mobile devices and obviously, broadband and I think there’s different stuff going on in each of those areas. If you talk just about IT datacom, which is the biggest part of our communications business, I mean there is no doubt that, as I mentioned earlier, these investments in AI, I think we’re in early days on this.

I think that there are going to be more and more developments around the real kind of creation of new economic models around AI and then the investments to support that. That’s already been broadly talked about. You’ve heard folks talking about pretty significant investments in these next-generation systems. And again, the interconnect products are a really integral part of those systems. So, I think on that front, I’m not getting out too ahead of my skis to say that I think at least specific to AI in IT datacom, I would expect over the coming couple of years. to see some great opportunities. I don’t know about the base of IT Datacom over the next two years. I couldn’t — I can barely give you a 90-day kind of a very inaccurate guidance for mobile devices.

I think that on wireless, we’re going through a cycle, which is a typical cycle where they invest in a new type of a standard they wait to see and by day, I mean the service providers, the operators, they wait to see how does that settle out, how do customers take it? Are customers willing to pay more for the functionality that’s delivered by that? And then there starts usually another round of the investments around that. And I think we’re in that low period right now. I couldn’t tell you when that low period will inflect and become more investment. But I can tell you, for sure, that in the coming years, there will need to be more investments around 5G and ultimately 6G and all the wireless networks because the vast majority of people connecting to the Internet are doing it not on a connection like a Cat 5 cable or in an office, they’re doing it on a wireless basis, while they’re moving around the world.

And so that network is going to have to keep up with the data traffic that continues to expand kind of on an unabated basis. And then finally, broadband. Broadband is an area where I think there is a lot of push in countries like ours and others to ensure that there is both the capacity and the coverage for broadband access because it’s viewed not as a luxury, but rather as a necessity that folks can have broadband access. And so I think long term, there’s good opportunities there as well. Relative to China, I think I’m very happy to see that the sort of geopolitics of China and the U.S. seems to be the pendulum is swinging towards a more moderate phase. There’s more people talking and all of that. And we’re encouraged by that. I think the world is a better place when countries are talking rather than arguing, and I think that’s a good thing.

I think there’s a lot written about the Chinese macro environment, and I’m not the expert to sort of go off on that. But what I will say is that in those areas of the electronics industries, where we support in China, places like the automotive industry, places like the industrial market, we continue to see great opportunities, and our team continues to do a fabulous job of capitalizing on those opportunities for the domestic market. And we feel really good about the position that we have as a company who is, of course, a global company but who operates through our unique organizational approach as a local company in that environment. And being the best of both worlds at a time like this when the world is somewhat uncertain, is a really good advantage for Amphenol.

Operator: And our next caller is Samik Chatterjee with JPMorgan. You may go ahead.

Samik Chatterjee: Hi. Happy New Year, and thanks for taking my question. I guess, Adam, I wanted to see if you can share your thoughts around organic growth opportunities for the company in 2024 related to inorganic growth. You have a strong pipeline of revenue from the acquisitions you’ve closed that you’re on boarding, maybe share your thoughts about how you think about the rest of the business growing, whether they are more positive related to negatives in 2024. And what is the average sort of growth average expected of the acquisitions that you closed more recently for 2024? Thank you.

Adam Norwitt: Yes. Thank you very much. Again, there seems to be a little bit of a cut out of the sound there. But I think your question is, how do I see the organic growth prospects as opposed to just the acquisitions. And I think we feel good about the organic prospects of the company, given all what I talked about each of our individual markets, and I’m not going to go through each of them once again. But I will just tell you that the investments that we’ve made in next-generation technologies, the work that we’ve done to support customers when they need us the most over the last two, three, four years, has positioned us very, very strongly organically to have a strong, robust performance in the years to come. And the other thing I would say as well is we think about acquisitions and obviously, in the first year that you own a company that’s considered acquired growth.

But we’re focused much more on what happens thereafter. And are we acquiring companies that become platforms of future organic growth for the company. And I would tell you, all these 10 companies that we acquired this year, the nearly 30 companies that we’ve acquired since 2019. To me, these companies all represent expanded platforms for future organic growth for the company which makes me feel confident that over time, we will have subject to all of the market dynamics that, for sure, we are not immune to that the company is positioned to have really great organic growth potential.

Operator: And our next caller is Andrew Buscaglia with BNP. You may go ahead.

Andrew Buscaglia: Hi, guys. I just wanted to ask on IT datacom, again, with AI, the past couple of quarters, you called out sequential — attributed sequential improvements to AI. What would you say the same thing took place in Q4? And then that plus your guidance, would you imply — is this — because we can’t see that AI piece in that business. Would you say it’s continuing to accelerate on a sequential basis?

Adam Norwitt: Thank you very much, Andrew. Yes, I think what I said in my remarks is that we saw growth in AI, and we saw also growth in the underlying business. So I think over the last couple of quarters, I’ve described that are all of our upside, all of our sequential growth really did come from AI. I think that this quarter, it’s some of each, which is actually really encouraging for us that we’ve seen maybe what 1 could call a bottoming of the underlying IT demand. Are we continuing to make progress in AI? Do we see continued acceleration opportunities? Yes, I wouldn’t say that every quarter, it’s going to accelerate in lockstep like it did over the course of Q2 and Q3 but for sure, we see opportunities long-term to be generating sales related to AI that are greater than we are today.

Operator: And our next caller is Mark Delaney with Goldman Sachs. You may go ahead.

Mark Delaney: Yes. Good afternoon. Thanks very much for taking my question and Happy New Year to all of you as well. Automotive has been a fast-growing market for the company. However, several auto OEMs have been seen EV sales and they said they’re going to rethink how fast they want to shift their production towards EVs. And so I’m hoping to better understand if you think that will create any meaningful near to intermediate-term challenges for Amphenol that could limit the company’s growth of market or perhaps lead to some inventory destocking? Thanks.

Adam Norwitt: Well, thank you very much, Mark, and Happy New Year to you as well. Look, we read all the same papers, and we hear about the sort of discussions about slowdowns in EV sales. And I think we shouldn’t forget that this is a fairly western dynamic. I don’t think we hear, for example, in Asia and specifically in the largest car market in the world, China, about folks turning their back on EVs and going back to internal combustion engine. But we do hear a little bit about that, I think, here and in Europe. And as I’ve described, I mean, we don’t care if a car has an EV drivetrain or not. What we care about, does a car have a lot of electronics in it and new electronic systems. Among those systems are certainly electrified drivetrains or hybrid electric drivetrains.

And I think that what we’ve seen in Asia, what we’ve seen in Europe, what we’ve seen in North America is that there is a real acceleration of the adoption of electronics in cars period. And some of that may actually be related to the fact that EVs tend to be a little more fancy electronically. And I think car companies are seeing that and upgrading their standard companies to incorporate more electronic functionality. And whenever you have electronic functionality in a car, regardless of the drivetrain, you’re going to have new interconnect solutions. You’re going to have new sensor solutions. You’re going to have new antenna solutions. And those are the three areas of our participation in the automotive market. For sure, if I go to like the largest EV market, China, for example, I mean, there continues to be unabated a real adoption.

And I would almost say that EVs in that market have kind of reached a sort of escape velocity, where they’re just really normal. I mean you see them all over the place. And I think our team there just did a fabulous job of getting a breadth of penetration across both domestic and international EV manufacturers, whereby we really are able to enjoy the benefits of that. And I think in Europe and in North America, we’ve done a great job, but we’ve also done a really great job on capitalizing upon some of these new electronics. And so, I wouldn’t put any dynamic here in the category of something that we view as a real near or medium-term challenge. I think quite the contrary, as car companies struggle to figure out how they can sell their products and make more money from doing it, they’re always going to fall back on electronics as the way to do that.

And that’s a good thing for Amphenol.

Operator: Our next caller is William Stein with Truist Securities. You may go ahead.

William Stein: Great. Thanks. Adam, I’m hoping you can comment on the aperture for M&A and products within it. I think historically, you’ve talked about not wanting to acquire system-level solutions. And I think at least one of the acquisitions you’ve done recently has such products. And I wonder if that could potentially be something you’ll grow into and expand or if we should see you perhaps shy way of that business going forward? Thank you.

Adam Norwitt: Well, thank you so much. I think what you’re alluding to is PCTEL and the fact that they have a very small test and measurement business and really wonderful people, wonderful products, but that’s not why we bought PCTEL. And just — you’ll recall, we’ve acquired companies in the past, some of which are not purely the things that we were looking to acquire. And we’re always very sensitive that we’re never going to put ourselves in a competitive situation with our customers. And really PCTEL is known for their antenna technologies, which are fabulous. Not to say a bad word about their team that works in test and measurement, but we’re not adopting a strategy to go after system-level products. In terms of our aperture for M&A, I mean we just see fabulous opportunities.

I mentioned it in my prepared remarks. I think we have demonstrated an ability to acquire companies really across the board from a size perspective. We’ve demonstrated the ability to acquire a lot of companies and to process those effectively. And our small little headquarters team here, they may have been a little bit busier than normal over the last year with these 10 acquisitions. But the beauty is because of our organizational structure now having 14 groups across three global divisions, we have the wherewithal to make sure that those acquisitions get really their due attention when they become part of Amphenol. And I think the near-term pipeline remains a very robust pipeline, and we look forward to taking advantage of that. We will always remain a very disciplined buyer as we have forever.

I am willing to walk away at the very last moment, if I have to, if something we find is not to our liking. We’ll always pay a reasonable price, a fair price for great companies. We may not always be the highest priced buyer, but I think we are often the best buyer because of our effectiveness, our willingness to work aggressively to get things done. And the fact is our organizational structure allows those newly acquired companies to become part of Amphenol in a very unobtrusive fashion. They joined seamlessly. They come in and on day one. They just keep operating like they were doing on all the days before. And that is a relatively low-risk approach to acquisition, because we’re not going in and just over — just sort of having these kind of convulsive restructurings of the company, where you run the risk of destroying what you didn’t even know you had.

So we look forward to continuing to have great acquisitions in the future, but we’re not going to be a kind of a system-level company. We know what we are. We’re an interconnect company. There are wonderful opportunities for interconnect products to be expanded, both organically and through acquisition going forward, lots of really attractive companies out there, and we’ll continue to position ourselves so the ones that match with us, the ones that go through our really rigorous kind of Rubicon of deciding whether or not to buy them, we’ll be in a good position to execute on those over the near, medium and long term.

Operator: And our next call is Chris Snyder with UBS. You may go ahead.

Chris Snyder: Thank you. I wanted to follow up on some of the earlier conversation on AI. So it sounds like book-to-bill for AI moderated sequentially, maybe after some early outsized orders just given the company’s foundation in that market. So I guess the question is, do you think that this moderation is a single quarter phenomenon? Or would you expect that to persist for multiple quarters? Because it does seem like the top line is still continuing to grow sequentially? Thank you.

Adam Norwitt: Thanks very much, Chris. Yes. I mean, look, I don’t usually talk about book-to-bill by submarkets. But I will tell you that, for sure, I mean, we had very strong bookings in AI-related applications in Q2 and Q3. And so it’s not surprising that here in Q4, our IT Datacom book-to-bill was a bit below zero and — sorry, a bit below one and because of those significant orders that we received, which customers wanted to place because they need the product and then we’re executing upon those orders. And yes, I think that our IT Datacom business is in a good position looking forward. I mean our guidance for the first quarter is to have a little moderation, which is not abnormal this time of year, actually quite normal. Let me say that. And layered on top of that, I think the AI is a good thing to have. So no, I think you characterized it quite well.

Operator: Our next call is Joseph Giordano with TD Cowen. You may go ahead.

Unidentified Analyst: Hi, guys. This is Michael on for Joe. So earlier, you had mentioned commentary regarding orders and specific markets. Can you just provide like a high level, maybe book-to-bill on a consolidated basis for the quarter? Or any color there?

Craig Lampo: About earlier that our book-to-bill was 0.95:1 for the quarter. Operator do we have another question.

Operator: Our next caller is Steven Fox with Fox Advisors. You may go ahead.

Steven Fox: Hi, good afternoon. I guess broadly speaking, the latest round of acquisitions were around sensors, antennas and assemblies I was just curious, like, Adam, your updated thoughts on your M&A focus by technology, especially in the context of what looks like gross margins that are now at the 33% level. I guess some of these products have lower gross margins, some have higher. I don’t know if there’s a mix impact that’s influencing the gross margin now with the M&A. But just broadly speaking, when you — the general buckets of technology that you look at, what is your thinking of what you’ve done and where you need to go now? Thanks.

Adam Norwitt: Well, thanks very much, Steve. Yes. I mean, look, in the quarter, we acquired companies who make sensors, antennas, cable and cable assemblies and really high-technology cable actually that has really great value for its customers. And we continue to see acquisition opportunities across really all of our interconnect products from discrete connectors to cable assembly, value-add, complex value-add interconnect products sensors, complex sensor interconnect assemblies, antennas and the like. And we’re really pleased to continue to find companies across all of those products. I wouldn’t tell you that we think so much about gross margin by product. We see great margin opportunities as you know. And Craig has said it so many times, we’re very much focused on operating margins.

And yes, I mean, some of these companies do operate below our corporate average, not all of them, by the way, but some of them do. And I think we — that doesn’t relate at all to their product type. We don’t believe that there is a correlation between whether someone makes a connector, a sensor and antenna a cable or a cable assembly that, that is necessarily going to put them in a certain bucket of profit potential. We actually see great profit potential for all companies. And that’s one of the ways we screen for acquisitions. I mean we’re not going to buy a company if we don’t see the long-term potential for that company to elevate its profitability to at or above our corporate average. Now, we do have industry-leading margins and so most of the companies that we do acquire tend to be lower than we are.

And then it’s our job and their job becoming part of the Amphenol family to bring those margins up over time. But it’s really not at all correlated to the type of products that they sell.

Operator: And our last question comes from Matt Sheerin with Stifel. You may go ahead.

Matt Sheerin: Yes. Thank you. Good afternoon. Adam, in your commentary on mobile devices, you mentioned that tablets and notebook PCs continue to be weak. But we are hearing some chatter about expectations for a potential refresh PC refresh cycle playing out in the next year or two. So wondering if you have any visibility into that? And can you give us a sense of the content opportunity for Amphenol within notebooks, particularly in the next-generation so-called AI-enabled PCs?

Adam Norwitt: Great. Thanks so much, Matt. Look, I hope what you say is the case. We certainly hope that there is a refresh. Look, I think we’ve talked about this year and even a little bit last year, that the strength that we’ve seen in phones this year, which was more than offset, in particular, by things like laptops and tablets. It had to do with the clear fact that during the pandemic and when everybody went to work from home and study from home, there was an enormous rush to buy new devices, which caused a surge and really kind of upset the normal replacement cycle of those products. And so I guess that one could expect that if everybody bought a bunch of stuff in 2020 and 2021 and if those things tend to last three, four, five years, that eventually you would hope to see a little bit of a refresh.

I don’t know — I can’t tell you I have any information to support that. I’m sure you’re getting your information from even wiser sources than I would have. Relative to the content, we do see great content opportunities in these devices as they get more complex, as they get more different wireless standards that they have to support as they have higher speeds, as they have more fine pitch and more precision inside of them, all of these create opportunities for Amphenol long term. We’ve always said about the mobile device market, and that includes tablets and laptops and the like, that to the extent that there is a premium on the hardware of the product, that can create opportunities for Amphenol over the long-term. And I think that will. Whether that’s related to AI or not, that I can’t necessarily connect those dots, but for sure, people are going to need new devices in the future, and we’ll be happy to enable the interconnect products across those devices.

Well, operator, if that was our last question, I guess I’d like to take this opportunity to thank everybody here today for spending a little bit of your time with us. I wish that you all have a good continuation of your winter wherever you may be. And we look forward to talking to all of you just 90 days from now. Thanks so much.

Craig Lampo: Thanks, everybody.

Operator: And this concludes today’s conference. Thank you for participating. You may disconnect at this time, and have a great rest of your day.