Amphenol Corporation — 2024 Q1
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
Hello, and welcome to the First Quarter Earnings Conference Call for Amphenol Corporation. [Operator Instructions]. At the request of the company, today's conference is being recorded. If anyone has any objections, you may disconnect at this time. I would now like to introduce today's conference host, Mr. Craig Lampo, and you may begin.
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 welcome you to our first quarter 2024 conference call. Our first quarter 2024 results were released this morning and I will provide some financial commentary, and then Adam will give an overview of the business and current market trends. Then we will take questions.
1. GAAP and adjusted operating income was $685 million, and operating margin was 21% in the first quarter of 2024.
Well, thank you very much, Craig, and I'd like to extend my warmest welcome to all of you here from beautiful Wallingford, Connecticut, where spring is certainly in the air. As you know as is typical, I'm going to highlight some of our achievements in the first quarter. I'll then discuss our trends and our progress across our diversified markets. Finally, I'll comment on the outlook for the second quarter. And of course, we'll have time for questions.
1. Our profitability was very strong in the quarter, and adjusted operating margins reached 21% even in the quarter, a robust 90 basis point increase from last year's levels. And from that profitability, we generated adjusted diluted EPS, which grew 16% from prior year to $0.80.
[Operator Instructions] Our first question is from Amit Daryanani with Evercore.
I guess, Adam, AI, you talked a little bit about AI as well, but it's mainly a big focus for everyone, including investors. So I'm hoping you could maybe, perhaps, help us understand what solutions, what products does Amphenol really sell to the customer base right now when it comes to AI infrastructure? And how does that really differ from what you sell to processor companies versus the cloud providers that are running their own infrastructure? I'd love to just understand that. And if there's any way to put dimensions around how big this business can get for you folks over time would be really helpful.
Well, thanks very much, Amit, and really appreciate the question. Look, we're really excited about the renewed and really revolutionary investments that are being made in AI right now. I mean I have to confess that I am a consumer of these products. I've been using them. It's amazing. Last night, my wife made me tacos because, of course, it's Tuesday, and she went on ChatGPT. And she said, "Give me a great taco recipe." And it's just unbelievable what you can do for these things.
Our next question is from Luke Junk with Baird.
Just hoping you could help us unpack a little bit more the uptick in orders and book-to-bill being positive this quarter. Just particular areas of strength that are driving that and maybe areas that are still lagging at this point?
Well, thanks so much, Luke. First of all, we're really pleased to see the positive book-to-bill, 1.03. I mean, I know during COVID, there were some funny books to bill at a few points where it was like 1.15:1 and then there were some negative book-to-bill. I mean, traditionally, 1.03 is actually a very strong book-to-bill for us because our lead times are not that long. We're a very reactive company, and I think that's a really good sign.
Our next question is from Saree Boroditsky with Jefferies.
I wanted to dig in more on the Carlisle, CIT, acquisition. It's relatively large. It was held by a commercial roofing company before. So what's the opportunity here being under your ownership? And where do you see potential to improve margins?
Well, thank you very much, Saree. I mean first, I just want to complement Carlisle, the corporation. I work closely with the CEO of Carlisle, who's a wonderful guy. It's a fabulous company actually. And it's true, their focus and their stated strategic focus is to be in the building materials industry. And they were a wonderful steward of Carlisle Interconnect for many years. But there's no doubt that interconnect was not where they were focused strategically. And I'm really pleased and happy for the team, the corporate team at Carlisle because I think they've really been able to realize their vision to be a focused building materials company.
Our next question is from Wamsi Mohan with Bank of America.
Adam, maybe back to this AI topic a little bit. Thanks for all the color you shared. Clearly, Amphenol has been in this space for a long time, and you continue to push the envelope both in terms of data speeds and signal integrity issues. So can you just talk about how you're seeing pricing evolves, maybe generation to generation? What's been the history there? How are you anticipating that given the higher value and kind of much more sort of transmitting 800 gigs instead of 400 gig speeds. So clearly, there's value in there, but the density of applications is becoming more complicated and the unit volumes are also growing kind of order of magnitude, higher.
Well, thanks, Wamsi. A lot wrapped up in that question. I mean, look, I guess to the very end of your question, I'm not going to get out ahead of myself and try to give a guidance about this revolutionary thing into 2025. As you know, we give guidance for the quarter ahead of us, and then we try to make sure we're maximizing our position of whatever the market will bring us long term. .
Our next question is from Mark Delaney with Goldman Sachs.
I'm hoping to better understand how Amphenol is thinking about capital allocation for the rest of the year, especially with the pending Carlisle Interconnect transaction. Is the M&A funnel still active? And with the new repurchase authorization you announced this morning, but also the potential cash usage for M&A., so just Carlisle, how active might the company be on buybacks this year?
Yes. Thanks, Mark. Yes, I think in regards to our capital deployment, we've had a very consistent policy and practice over many years with regard to our capital deployment and over a whole host of years where we've done a significant amount of M&A and less M&A, and we continue to be kind of -- it continues to be a balanced and flexible deployment strategy.
And Mark, relative to the M&A pipeline. I would just tell you that our pipeline remains strong. Yes, we completed last year, 10 acquisitions. Yes, we announced in January, our largest ever acquisition was CIT. But I can tell you, we have the appetite, the capacity and the ability and agility to continue to make acquisitions, large and small. And I think we continue to demonstrate our ability to do more acquisitions, do bigger acquisitions. And the beauty of this industry and the beauty of this market is that there's just so many great opportunities to find companies with great people and great technology and a very complementary market position to Amphenol.
Our next question is from Steven Fox with Fox Advisors.
I was just wondering on the auto markets, the 17% growth you talked about. I know you highlighted communications. And I know you guys don't like to count cars per se, but can you just sort of provide some color on the backdrop you're settling into right now and into Q2? And what exactly would you call out as sort of leading products that you're especially doing well on right now?
Yes. Thanks very much, Steve. And you're right, I don't like counting cars necessarily. I mean, the market is what the market is. But look, we have taken advantage, I think, for a very long time, not of an overall growing auto market. I mean, if you look over, I don't know, 8 years or something, it's still sort of a similar level of total worldwide auto production. But there's no doubt that the content has expanded dramatically over these years.
Our next question is from Samik Chatterjee with JPMorgan.
This is Joe Cardoso on for Samik. Can you just give us an update on where we stand on the inventory destocking headwinds in the industrial market and how you're thinking about timing of when we see that normalizing? And then maybe as a quickie second, if I can. Can you just touch on the CapEx investments that you highlighted in your prepared remarks? How should we be thinking about magnitude and besides IT datacom that you mentioned, what are the other major buckets of investments there?
Yes. I mean just very quickly on industrial. I mean, I think we continue to see the demand in industrial to be somewhat muted. There is no doubt an impact from destocking with distributors. But it's not just destocking. I think distributors' orders themselves are also down. And so it's not just that they have too much inventory, but the demand in certain pockets of industrial. I would say, in particular, in places like Europe, maybe to a lesser extent in some parts of Asia and then even to a lesser extent, in North America.
Our next question is from William Stein with Truist Securities.
I'm going to ask yet another on AI. We understand that the 3 main connector vendors in the space, Amphenol and 2 others have very solid positions, very good technical capabilities. I'm wondering if you can talk about the competitive dynamics among the 3 of you, and also the degree to which you can capture some of their share. Or whether it's possible, another entrant among the hundreds of connector companies globally could realistically attack this market.
Thanks very much, Will. Look, I'm not going to comment on our peers. I have great respect for them. They're fabulous companies. What I will say is that we've been working in this area for a very, very long time. And as the leader in high-speed interconnect technology, you can imagine that we also have a very robust position here. This is not something that we have just recently developed. This is a very, very long, intensive and real leading position in development of those technologies. But I have great respect for all of our competitors.
Our next question is from Asiya Merchant with Citigroup.
Great results. Just incremental gross margins, if I did the calculation here, right, we're -- sorry, operating margins are very strong. Maybe you can talk about how you guys think about the trajectory of those gross -- incremental margins as the quarter progresses or as the year progresses. And especially when you think about rolling in a pretty sizable acquisition in the back half, how we should be modeling for that?
Yes. Thanks, Asiya. Yes. No, we are really proud of the 21% operating margins here in the first quarter. I mean, first quarter typically is the more challenging quarter in the years, given the sequential quarter typical decline we have. And certainly, we always do a good job. But this quarter really, I think, is an outstanding quarter from being able to achieve 21% -- 30% year-over-year and really sequentially about 30%. And that's -- we did 10 acquisitions last year, as you know, and those acquisitions were significantly under our company average.
Our next question is from Andrew Buscaglia with BNP Paribas.
Following up on that question, CIT, I think at a great price. As part of a holding company, you guys alluded to maybe not run optimally. But is this integration, is this company a cost-saving story? Or if you look at CIT, their growth, historically, wasn't all that exciting. Is this more of an opportunity to reaccelerate their growth? Or is it both? And if you could comment like that potential margin dilution in the back half, what might that be at this point?
Yes. I don't know that we have a specific number to give you for the margin dilution. I mean, we'll talk about it when we own the company. In terms of the priorities, I mean, every acquisition we make, we want them to accelerate their growth and make more money doing it. And so you can imagine that with the CIT team we're already talking about, to the extent that we can before closing, we're already talking about how do they both accelerate their growth, expand their market position, take advantage of being part of Amphenol, take advantage of the broader access that we have as a company, take advantage of the broader suite of technologies that we have to grow their business.
And our last question comes from Joe Giordano with TD Cowen.
Just curious like with the AI stuff, is there any inherent margin differential between the products that you're selling on these next gen technologies versus more traditional data center or versus like more of the company average? And then if I could, I asked your competitor this morning. But when you think about the CapEx that you need to do and the scale of what these customers of yours are thinking over a multiyear period is massive. How do you like bring that down to your own spend and like rationalize? Is this doable? Like how fast do we want to spend ahead of something that might be a 5-year story, like how do you balance that?
Yes. Look, I may let Craig comment on the margins, except I mean, it's an easy answer. It's just like look, we make margins based on selling value to customers. If we can create value for our customers, then usually there's value for us to be had there. And I think that's basically what I would say in this respect. Relative to scaling and working with our customers, I mean, you can imagine that we have very intensive discussions with our customers in every market. Here, because of the economics behind it, because of the pressure on our customers and the big vision, you can imagine that we're having even more intensive discussions.
Thank you. And I'll now turn the call back over to Mr. Norwitt for any closing remarks.
Well, thank you very much. And again, thanks to everybody for your time today. We appreciate everybody's attention. And I wish that everybody has a fabulous spring, and we'll talk to you again in 90 days or so. Take care.
Thank you.
Thank you for attending today's conference, and have a nice day.