安費諾 (APH) 2019 Q1 法說會逐字稿

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.

Sir, 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 2019 conference call.

Our first quarter of 2019 results were released this morning.

I will provide some financial commentary on the quarter, and then Adam will give an overview of the business as well as current trends, and then we will take questions.

As a reminder, we may refer in this call to certain non-GAAP financial measures and may make certain forward-looking statements, so please refer to the relevant disclosures in our press release for further information.

The company closed the first quarter with sales of $1.959 billion and with GAAP and adjusted diluted EPS of $0.87 and $0.89, respectively.

Sales are up 5% in U.S. dollars and up 8% in local currency as compared to the first quarter of 2018.

From an organic standpoint excluding both acquisitions and currency, sales in the first quarter increased 5%.

Sequentially, sales were down 12% in U.S. dollars and in local currency and 14% organically.

The sales decline was driven primarily by the anticipated reduction in the mobile devices market.

Breaking down sales into our 2 segments.

Our cable business, which comprise 5% of our sales, was down 1% in U.S. dollars and up 2% in local currency compared to the first quarter of last year.

The interconnect business, which comprised 95% of our sales, was up 5% in U.S. dollars and 8% in local currency compared to last year.

Adam will comment further on trends by market in a few minutes.

Adjusted operating income was $393 million for the first quarter of 2019.

Adjusted operating margin was 20.1%, which is down 10 basis points compared to the first quarter of 2018, reflecting the impact of SSI's slightly lower than company average profitability.

Compared to the fourth quarter of 2018, adjusted operating margins are down 90 basis points, which is primarily driven by normal conversion on the reduced sales levels.

From a segment standpoint, in the cable segment, margins were 10.9%, which was down compared to 11.7% in the first quarter of 2018, primarily driven by product mix.

In the interconnect segment, margins were a strong 22% in the first quarter of 2019, which was down slightly compared to the 22.1% in the first quarter of last year.

This strong performance is a direct result of the strength and commitment of the company's entrepreneurial management team, which continues to foster a high-performance, action-oriented culture in which each individual operating unit is able to appropriately adjust to market conditions and, thereby, maximize both growth and profitability in a dynamic market environment.

Through the careful fostering of such a culture and the deployment of these strategies to both existing and acquired companies, our management team has achieved industry-leading operating margins and remains fully committed to driving enhanced performance in the future.

Interest expense for the quarter was approximately $30 million, which compares to $25 million last year.

As discussed in our prior earnings call, this increase is due to higher average interest rates as a result of the recent bond issuance and the generally higher interest rate environment in addition to higher average debt levels.

The company's adjusted effective tax rate for the first quarter of 2019 was approximately 24.5%, which we expect to maintain this year.

This compared to 25.5% in the first quarter of 2018 and compares to our prior expectation and guidance of 25%.

The adjusted effective tax rate excludes the impact of the excess tax benefit associated with stock option exercises and the tax effect of acquisition-related costs incurred in both periods.

The company's GAAP effective tax rate for the first quarter of 2019, including the items just mentioned, was approximately 22.8% compared to 24.4% in the first quarter of 2018.

Adjusted net income was a strong 14% of sales in the first quarter of '19.

On a GAAP basis, diluted EPS grew 4% in the first quarter of the year to $0.87 compared to $0.84 in the first quarter of 2018.

Adjusted diluted EPS grew 7% to $0.89 in the first quarter of 2019 from $0.83 in the first quarter of 2018.

Orders for the quarter were $2.003 billion, which was down 1% compared to the first quarter of '18, resulting in a book-to-bill ratio of 1.02:1.

The company continues to be an excellent generator of cash.

Cash flow from operations was $344 million in the quarter or approximately 125% of adjusted net income.

From a working capital standpoint, inventory, accounts receivable and accounts payable were approximately $1.2 billion, $1.7 billion and $797 million, respectively, at the end of March.

And inventory days, days sales outstanding and payable days were 84, 78 and 55, respectively, all within our normal range.

The cash flow from operations of $344 million along with proceeds from the bond offering of $500 million, borrowings of $268 million from our commercial paper program, proceeds from the exercise of stock options of $47 million and cash, cash equivalents and short-term investments on hand of approximately $306 million net of translation were used primarily to prepay the $750 million 5-year senior note to fund acquisitions of approximately $399 million, to repurchase approximately $160 million of the company's stock, to fund net capital expenditures of $70 million and to fund dividend payments of $69 million.

During the quarter, the company repurchased 1.8 million shares of stock at an average price of approximately $90 under the $2 billion 3-year open market stock repurchase plan.

At March 31, cash and short-term investments were approximately $1 billion, the majority of which is held outside the U.S.

At the end of the quarter, the company had issued approximately $889 million under its U.S. and euro commercial paper programs.

And the company's cash and availability under our credit facilities totaled approximately $2.6 billion.

Total debt at March 31 was approximately $3.6 billion, and net debt was approximately $2.6 billion.

In addition, we have adopted the new lease accounting standard, which was effective during the first quarter of 2019.

I would note that the new standard had no impact on the income statement or cash flow, and the balance sheet reflects a gross up of approximately $180 million for the right to use asset and the offsetting lease liabilities recorded related to the company's outstanding leases.

The first quarter 10-Q will include the relevant and required disclosure related to this new standard.

The first quarter of 2019 adjusted EBITDA was approximately $479 million.

From a financial perspective, this was an excellent quarter.

Before I turn the call over to Adam, I would like to make a brief comment relative to the 2019 guidance.

Our current guidance reflects a reduction in our expectations for the mobile devices market, resulting in anticipated full year decline of approximately 30% for this market.

This compares to our prior expectation of mid- to high-teens decline.

Adam will comment further on trends by market in a moment.

I will now turn it over to Adam, who will provide an overview of the business and comment on current trends.

Hello, Craig.

Thank you very much, and thanks to everybody for joining our conference call here on a wonderful spring day in Wallingford, Connecticut.

As usual, I'm going to highlight our achievements in the quarter and then spend a little bit of time discussing the trends and progress across our diversified served markets.

And then I'll spend a few moments to comment on our outlook for the second quarter and the full year, and then, of course, we'll have time at the end for questions.

With respect to the first quarter, our results in the quarter were stronger than we had expected coming into the quarter.

We exceeded the high end of our guidance in both sales and adjusted earnings per share.

Sales in the quarter grew 5% in U.S. dollars and 8% in local currencies, reaching $1.959 billion, and very pleased that sales in the quarter grew organically by 5%.

The company also booked just over $2 billion in orders, representing a book-to-bill of 1.02:1.

And our adjusted operating margins were again very strong in the quarter, reaching 20.1%.

Finally, the company generated strong operating cash flow of $344 million in the first quarter, as Craig described, which is yet another strong reflection of the quality of Amphenol's earnings.

Just have to say with respect to our overall results in the quarter that I'm extremely proud of our team around the world.

The results this quarter once again reflect the true value of the discipline and agility of Amphenol's entrepreneurial organization as we continue to perform well amidst a very dynamic electronics industry, all while driving outstanding operating performance for the company.

Very pleased in the quarter to have completed 2 new acquisitions actually just in the last several weeks, which collectively represent $140 million of annualized sales and which we acquired for a total purchase price of approximately $200 million.

Aorora, which we completed 3 weeks ago, is a provider of high-technology, fine pitch printed circuit board connectors based in Huizhou, China.

Aorora has annual sales of approximately $20 million.

Aorora's products are sold into the automotive and IT datacom markets and are incorporated, in particular, into embedded computing platforms in these areas.

The company represents a great complement to our already broad array of connector products for these important markets.

Charles Industries, which closed actually just yesterday, is a manufacturer of harsh environment fiber optic and copper interconnect enclosures sold to service providers in the mobile networks and IT datacom market.

Charles is based in Schaumburg, Illinois and has manufacturing operations around the U.S. in Florida, Illinois and Missouri.

And the company expects annual sales of approximately $120 million.

I could just say that as we welcome these outstanding new teams to Amphenol, we remain very confident that the company's acquisition program will continue to create great value.

Our ability to identify and execute upon acquisition opportunities and then to successfully bring these new companies into the Amphenol family remains a core competitive advantage for Amphenol.

Now turning to our progress across our served markets.

I'd just reiterate once again how pleased we are that the company's balanced and broad end market diversification continues to create value for the company.

In particular, no market in the first quarter represented more than 21% of our sales.

We believe this diversification helps to mitigate the impact of the volatility of individual end markets while also continuing to expose us to the leading technologies around the interconnect industry, wherever they may arise.

Turning first to the military market.

The military market represented 11% of our sales in the quarter.

Sales grew by a better-than-expected 16% in U.S. dollars and 18% organically.

This growth was very broad-based, but it was driven, in particular, by growth in military vehicles, avionics applications as well as space.

Sequentially, our sales increased by 4% from the already very strong fourth quarter.

Looking ahead, we expect sales in the second quarter to again increase from these first quarter levels.

And for the full year 2019, we now expect to achieve mid-teens sales growth in the military market, a stronger performance than we had anticipated coming into the new year.

I just have to say how proud I am of our entire team who works in the military market.

They continue to leverage our broad and high-technology product range across a wide array of next-generation military applications.

This position, together with the current robust military spending environment, has resulted in us expanding our overall position in the military interconnect market.

Our upgraded outlook for 2019 is another reflection of this strengthening, and we look forward to continuing to enable next-generation military electronics for many years into the future.

The commercial aerospace market represented 5% of our sales in the quarter.

And in this market as well, our sales in the quarter were stronger than expected, growing 14% in U.S. dollars and 16% organically as we continue to grow our design-in position amidst increasing volumes from commercial aircraft manufacturers.

Sequentially, our sales increased by 6% from the fourth quarter.

Looking into the second quarter, we expect sales to moderate somewhat from these levels, but nevertheless, for the full year, we have now raised our expectations to a mid- to high single digits sales increase as procurement of our products used in commercial jetliners continues to expand.

We remain encouraged by the company's strong technology position across a wide array of aircraft platforms and next-generation systems integrated into such airplanes.

And we look forward to benefiting from that position for many years to come.

The industrial market represented 21% of our sales in the quarter, and sales in industrial increased by 10% in U.S. dollars, 13% in local currency and 5% organically from prior year.

And these increases really were driven by stronger organic sales in rail mass transit, medical, heavy equipment and factory automation, together with contributions from the SSI acquisition that we completed at the beginning of the first quarter.

On a sequential basis, sales increased by 5% as contributions from SSI offset a slight organic moderation in sales from the fourth quarter, which we had expected.

Looking into the second quarter, we expect sales to increase modestly from these first quarter levels.

And for the full year of 2019, we continue to expect high single-digit sales growth resulting from the contributions of our acquisitions together with our organic growth efforts.

I just want to emphasize that we remain encouraged by the company's leading position in the industrial, interconnect and sensors market through both our successful acquisition program as well as our organic innovation.

We've developed a very broad array of products across a diversified range of exciting segments within the global industrial market.

We're proud of our success thus far, and look forward to realizing the benefits from our efforts in the industrial market for many years to come.

The automotive market represented 19% of our sales in the quarter.

Sales were a bit weaker than we had anticipated coming into the quarter with revenues down 2% in U.S. dollars, up 3% in local currencies and down 4% organically from prior year as the contributions from SSI were offset by slower sales, in particular related to moderated demand in Europe.

Sequentially, our automotive sales increased by 2% as the contributions from SSI offset a sequential moderation in sales from the fourth quarter.

Looking into the second quarter, we expect our sales to increase modestly from these levels.

For the full year 2019, however, we now do expect sales growth in the mid-single digits, which is a slight reduction from our prior expectation due to an overall lower demand outlook from our automotive customers, in particular those based in Europe.

Nevertheless, we remain encouraged by the company's strong position in the automotive market.

We continue to benefit from our long-term and successful strategy of expanding our range of interconnect, sensor and antenna products, both organically and through acquisitions, all to enable a wide array of onboard electronics across a diversified range of traditional and hybrid electric vehicles supplied by automakers around the world.

In particular, this quarter's acquisition of Aorora, while relatively small, broadens the range of products we offer for onboard electronics in cars, positioning the company strongly as those new applications continue to proliferate across the automotive electronics market.

Mobile devices market represented 12% of our sales in the quarter.

As we had expected coming into the first quarter, sales were down by 10% from prior year and by just over 50% from our very strong fourth quarter as overall customer demand was reduced from the significant levels we experienced in the fourth quarter.

Year-over-year, we did have some growth in tablets, but that was offset by reductions in demand related to both smartphones and laptops.

And as we had discussed last quarter, we do believe some of this quarter's shortfall in sales was related to incremental demand that we experienced in the fourth quarter.

I just want to say how proud I am of our team working in the mobile devices market.

Just as they managed so successfully the incredible ramp-up of demand in the second half of last year, they were able to quickly react to this significant sequential reduction in demand and, thereby, protect the financial performance of the company.

There's no doubt that the mobile devices market is one of the most volatile segments in the electronics industry and that our team's agility enabled Amphenol to be successful regardless.

Now looking into the second quarter, we expect demand to remain at approximately these first quarter levels.

And given our latest outlook from customers in the mobile devices market, including changes in product architecture, which have reduced content on certain mobile devices, we now expect a more significant full year sales decline than previously thought, with sales down in the 30% range for the full year.

This compares to our previous outlook of a mid- to high-teens decline for 2019.

But as always, our team will be poised to capitalize on any incremental demand opportunities that may arise as the year progresses.

Despite this volatility in demand that we're seeing here in 2019, we remain encouraged by the company's outstanding position in the mobile devices market.

Our team continues to work diligently on a wide array of next-generation mobile devices, including smartphones, laptops, tablets, wearable devices and other accessories.

And we're confident that in the long term, this market will continue to be a positive contributor to Amphenol's overall performance.

The mobile networks market represented 8% of our sales in the quarter.

Our performance is better than expected in the quarter with sales increasing by 5% in U.S. dollars and 9% organically as stronger sales to OEMs were only partially offset by a moderation of demand and from wireless service providers.

Sequentially, sales were down just slightly from the fourth quarter.

Looking ahead, we anticipate second quarter sales to increase in the low double digits from these levels.

And for the full year, we now expect to realize low double-digit sales growth from prior year as we benefit from the addition of the Charles Industries acquisition.

We're very encouraged by our continued strong performance in the mobile networks market.

Our team around the world continues to work aggressively to expand the company's position with next-generation equipment and networks.

And with the addition now of Charles Industries, we've significantly broadened our range of products for mobile network operators just as those operators and OEM customers plan for their next-generation systems.

And we look forward to benefiting from the increased potential that comes from our unique position with both equipment manufacturers and mobile service providers around the world.

This creates a significant long-term expansion potential for the company.

The information technology and data communications market represented 20% of our sales in the quarter.

Sales in the first quarter grew by a better-than-expected 11% from prior year, driven by strong performance in networking as well as some growth in servers, but partially offset by a moderation in demand for storage-related products.

Sequentially, our sales were down by a bit less than expected 6% due to what we normally do see in the first quarter -- normal level of seasonality.

Looking into the second quarter, we expect sales to remain at these first quarter levels.

And for the full year, we continue to anticipate growth in the low single digits as the benefits of our acquisitions are offset by a modest moderation of demand that we expect among some customers in the IT market.

We're excited by the benefits of both Charles Industries and the Aorora acquisition, which bring together added product capabilities to our customers in the IT datacom market.

With these new family members, the company's already strong technology position has become even broader and more robust.

And we continue to work with customers around the world to drive their equipment and their networks to ever higher levels of performance in order to manage the dramatic increases in demand for particularly bandwidth and processor power.

Whether in high speed, power, fiber optics or complex value-add interconnect assemblies, we offer the broadest range of products for customers in the IT datacom market.

The broadband market represented 4% of our sales in the quarter, and our performance in broadband was a bit softer than expected in the first quarter with sales declining slightly from prior year and by 7% sequentially.

These lower sales levels were related to more modest spending by operators in the broadband market.

Looking ahead, we expect sales to increase from these levels in the second quarter.

However, for the full year 2019, we now expect sales to be slightly down from 2018 levels on an overall softer operator capital spending.

Nevertheless, we remain encouraged by the company's continually expanding range of products for the broadband market, together with our strong positions with customers around the world.

We continue to position Amphenol as the most flexible supplier in the marketplace, thereby ensuring that the company can benefit should there be any upticks in demand from our customers around the world.

In summary, I just want to say I'm extremely proud of the company's performance in the first quarter.

Our organization clearly continue to execute well in what is very clearly a dynamic marketplace and in particular, given the ongoing uncertainties in the global economy.

Our long-term, dual-pronged approach of growing both organically and through our acquisition program has resulted in us expanding our market position while strengthening the company's financial performance.

Amphenol's superior performance is a direct reflection of our distinct competitive advantages: our leading technology; our increasing position with customers across our diverse markets; a broad worldwide presence; our lean and flexible cost structure; a highly effective acquisition program; and most importantly, our agile, entrepreneurial management team.

Now turning to our outlook and given the ongoing uncertainty in the global economy and in particular, our reduced outlook in mobile devices, which I discussed just a few moments ago, and also based on constant exchange rates, we now expect the following results.

For the second quarter, we expect sales in the range of $1.980 billion to $2.020 billion and adjusted diluted earnings per share in the range of $0.91 to $0.93.

This represents a sales increase versus prior year of flat to 2% in U.S. dollars and 2% to 4% in local currency and an increase versus prior year adjusted diluted EPS of 1% to 3%.

For the full year 2019, we now expect sales in the range of $8.130 billion to $8.250 billion and adjusted diluted EPS in the range of $3.80 to $3.86.

For the full year, this new guidance represents sales and adjusted diluted EPS performance of down 1% to up 1%, and up 1% to up 2% over 2018 levels, respectively.

Regardless of this somewhat more muted growth outlook for 2019, I can just tell you that the entire Amphenol team looks forward to driving further strength going forward, even given the many dynamics in the world's marketplace.

I'm confident in the ability of our outstanding management organization to build upon these new performance records across the company and to continue to capitalize on the many future opportunities to grow our market position and expand our profitability.

And with that, operator, we'd be happy to take any questions that there may be.

(Operator Instructions) Our first question comes from the line of Wamsi Mohan of Bank of America.

Yes.

Adam, the mobile device market you characterized it as pretty well, and we've seen that in the past as well.

Can you characterize for us the change in the guide over the past quarter?

Typically, the upside or downside in mobile devices have really come in the third or fourth quarter because of volume changes and dynamics of timing of launches of major products.

Can you maybe talk a little bit about why this larger change is transpiring so early in the year?

And when you talk about architectural changes, I think you mentioned that in your prepared remarks, you guys have been very good at working with customers to capitalize on those changes.

So what was different about this architectural change?

And do you view this more as a cyclical issue or more of a structural issue?

Well, thank you very much, Wamsi, and appreciate the question.

I think your point is very true that when we've had that kind of volatility where we've been, in many cases, able to capitalize on demand that has come later in the year, sometimes that has happened when competitors have not been able to satisfy demand or otherwise.

I think what I mentioned and what you also alluded to is we did see here in this quarter as the designs of the products were finalized with our customers that there were changes to the architecture of some -- of certain products, and that ultimately resulted in less content opportunity for the company in those products.

And again, that's -- it's not always that content goes always up with every platform.

We've talked about that many times that every new system has a slightly different design, has a slightly different product overlay to it, different natures of opportunities and content.

For us, and I think in this case, the customer chose to design a slightly different way, and that had a negative impact on our outlook.

But does it mean that this is kind of a one-way ratchet or some permanence to it?

Absolutely not.

I mean, every product gets designed in a slightly different way.

And I think what we have always said about this market is we always look for new opportunities to design-in our products into new applications and new systems.

And while over the long term, that has been a very favorable trend for us over a very long term, if you look over a decade, our mobile devices market has average growth of more than 8% organically over the last decade because of that long-term trend.

But in the short term, that can go up and that can go down.

And that's the inherent nature of the volatility of the market.

There's volatility on content.

There's volatility also on volumes.

There's volatility on winners and losers amongst our customers, and that's something that we've dealt with over many, many years.

And we've been able to build long term a very, very strong business, regardless of that.

So as we always do, we always try to update our outlook given what we know in the moment.

And due to these architectural changes that you mentioned and that I mentioned earlier, that really drove us to have the outlook that we introduced here today.

Okay, Adam.

Appreciate that color.

As a quick follow-up, when I think about the strong organic growth that you posted in the quarter of 5%, you're guiding a little bit softer growth here in the second quarter.

But the full year obviously is more challenged from an organic growth perspective.

Would you say that as you look across your diversified business base that this delta really is largely attributable to the shortfall in mobile devices and you feel pretty good about sort of the organic trajectory of the rest of the business?

And I've heard the puts and takes across the various businesses.

Seems like you still have upside on military and commercial aerospace, and some of the other end markets are tracking more or less in line.

Would this be a fair characterization of that?

Yes, I think that's a fair characterization.

I mean, as you mentioned, there were puts and takes, as there always are across a diversified range of end markets like we have, which is one of the reasons why diversification is such a core pillar of how we run this company.

I mentioned earlier that no market was more than 21% of our sales in the quarter.

I think when you look last year also, no market was more than that similar level.

And this has always been, with Amphenol, a very, very important principle for us that we tried to stay diversified across markets, within those markets, across customers, to the extent one can, and across customers, across their applications.

When you look at the more modest organic growth outlook for the year, the math is pretty straightforward.

When you have a market that last year was 17% of our sales down 30%, that has a certain magnification on the overall outlook for organic growth.

And I think, across the other markets, we have some markets performing at stronger levels, and we have others performing a little bit less robust, but that's the nature of the business, and that's not any categorical change.

The big categorical change here in this -- in our outlook is, in fact, the mobile devices.

Our next question comes from the line of Craig Hettenbach of Morgan Stanley.

Yes.

Just a question on SSI.

I know it's just a few months, but just kind of how that's performing versus expectations, and any anecdotes in terms of growth drivers you see for that business?

Yes, thanks very much, Craig.

Look, we always love all of our children, and we love our new children even better.

But I have to tell you, this has been a fabulous acquisition.

Craig and I, actually just a few weeks back, had the opportunity to visit the European operation of SSI, which is in the Czech Republic, and just an unbelievable organization of people with fantastic products, great customers and extremely high-technology products.

And the business is going really well.

I'd say it's performing at or above our expectations for the year.

And more importantly, whenever you acquire a company that is really a family company and that organization has to transition into not being a family member and where the patriarch in this case who was quite a senior gentleman, when he's retiring at that time and the management team, who is all still there, is now part of Amphenol, I mean, this is always something that we focus very heavily on.

I remember we were there the first day that it closed to welcome them all.

We've spent a lot of time with them over what has now been the better part of 4 months, and the team has truly embraced being part of the Amphenol organization.

And we see an enormous amount of activities ongoing between them and other divisions of Amphenol, hunting for that long-term, collaborative value, whether that be with customers, with technologies, with cost reductions.

I mean, you name it.

And so I would say that SSI and the wonderful organization there has embraced our team and vice versa in a way that is actually beyond my expectations.

And that would lead me to think that long term, the prospects for that business are very good.

Got it.

And then just as a follow-up.

Understand there's puts and takes by the different end markets, but with the book-to-bill of 1.02:1, any comments on just kind of the broader environment that you're seeing out there, kind of how customers are reacting to demand and their view of inventory at the moment?

Yes.

I mean, if you look at our book-to-bill, it was strong in the quarter.

I mean, just over $2 billion in bookings.

I mean, you can imagine, when you go through the puts and takes of the markets and where we've kind of upgraded our outlook and vice versa, that the booking, the stronger book-to-bill would probably be in those markets where we've had a bit more of an organic upgrade to our outlook.

So markets like military, markets like commercial air in particular, where we had strong bookings.

But we had very robust bookings really across the company.

And relative to inventory positions, again, we don't have great visibility.

As you know, we have some visibility into the distribution channel.

And we haven't seen anything out of the ordinary in distribution channel.

I guess I would say that those distributors who are a little more focused on military and aerospace are probably booking at a little bit more aggressive levels, but that's on the margins, I think.

By and large, we haven't seen any significant changes or causes for concern in distribution inventory.

I think, in the other end markets, it's more anecdotal.

We may have seen -- I talked about in the IT market how we did see, for example, in storage, a little bit of weakness.

And we did see maybe a few pockets there where there was some inventory that was built, and there's some planning around that.

But by and large, I would tell you that the overall position, again, to the extent that we see it, which is a relatively small extent, is nothing so notable.

Our next question comes from the line of Matt Sheerin of Stifel.

Yes.

Adam, you commented on the datacom market growth, but you also talked about some moderation in some of the submarkets there.

Could you elaborate on what you're seeing specifically in the data center?

I know you've had a lot of success going directly to the hyperscale cloud providers, and I know there's some noise about some inventory build or lumpiness in those markets.

So could you give us more color there?

Yes.

I mean, I think what I talked about relative to the submarkets, we had real strength in networking.

We had maybe a little bit less strength in servers, and then storage was a bit soft in the quarter.

And relative to the hyperscale -- and what's interesting about hyperscale, it is really a service provider model.

So we're very used to service provider businesses.

We service a lot of operators in the mobile networks market, in the broadband market.

We've been involved with that mindset of a service provider for many, many, many years, as you know well, Matt.

And there is a certain volatility, a lumpiness as you term it, in the hyperscale market, which is just natural for service providers.

I mean, it turns out that when you're buying product to manufacture other product, you're essentially -- in many times, you're kind of keeping a factory busy, making whatever you're making, networking equipment or servers or something else, but when you're installing data centers and configuring data centers, there's just a lot of other factors that are at play.

You're constructing sometimes things.

In the case of the mobile networks market, sometimes, weather has an impact.

The same is true in broadband.

So there's a lot of other factors besides just build rates that come into play in that hyperscale.

And I would also say that you don't have always as many kind of intermediaries, things like contract manufacturers who are involved.

And so there can be a little bit more volatility in that space.

And I think when we look at our performance this quarter in IT datacom, very, very strong performance, growing by 12% organically actually in the quarter.

But our outlook for the second quarter is a more modest outlook, and I think there may be some of what you described, that volatility embedded in that outlook.

But this is normal.

I think it's not an abnormal thing for an operator-driven space.

Our next question comes from the line of Shawn Harrison of Longbow Research.

On the mobile networks business, you took up the guide for the year, the expectation for the year.

How much of that was organic versus solely the Charles acquisition, particularly given the strength you saw in the first quarter?

Yes.

I'd say the vast majority of the increase was really the Charles acquisition, but we've had -- but there is some strength in that market that was a bit better than we expected in the first quarter.

I mean, look, we're really excited about just the growing array of products that we have in that area.

And so whether that performance is coming from the addition of Charles organically, I would tell you that we just remain very well-positioned as operators and as customers really start to plan for their next-generation networks, whatever they want to be called.

I mean, I know companies are suing each other over what they call these networks, but let's say 5G or whatever you want to say here.

And I think that the Charles acquisition just brings us an added complement of really sophisticated interconnect enclosures that are used in areas like small cells, in areas like more densified 5G networks and things like that.

And so we're really excited about bringing that in at this moment.

It's a company that we've been courting for a long time.

It was a family-owned company.

It's called Charles Industries because the wonderful gentleman who founded it was a guy named Joe Charles.

And Joe, I spoke to him last night, he's just an outstanding individual with just vision and drive and running -- and the company that he founded 50 years ago.

So this is not a fly-by-night kind of a business either, and we're just so proud to be the kind of adopted new parents of somebody's baby that they created.

And just the fact of how that business has developed and their focus on the mobile networks market in a different area of the interconnect world than what we have is something that we're just really, really excited about.

So I think we had good strength in the quarter organically.

I think that translates into a good outlook organically for the year.

And then, coupled with Charles, I think it brings us really a more favorable position than we thought we would be coming into the year.

And then as a follow-up on mobile devices, the lower content this year, is that a function of share loss where maybe competitors are providing material type of technology that just wasn't something you were focused in on?

And how does that play into the kind of 5G knowing there'll be more frequencies to support millimeter wave, and that should be potentially a benefit to Amphenol and its mobile devices business?

Yes.

I mean, first and foremost, this is not a share loss.

I mean, sometimes, customers design things with different products that they're either replacing something with, as you said, maybe a different technology, or just not integrating the same type of product.

They solve the situation maybe on the board or they solve it somewhere else.

And so -- or there's a different functionality that's embedded into the product.

So this was really a change in the available content for us, not a share loss at all.

And then, related to 5G, who knows, I think, is the first answer I would give you, which is who knows ultimately what the products, how they're going to be designed for 5G.

But we have always benefited from enhanced complexity in devices.

And so to the extent that there is more complexity, more signals being generated, more signals that have to be handled inside a mobile device, be that a phone, a tablet, a laptop, a wearable, whatever it may be, that's usually a good thing for us.

I can't tell you it's categorically always good at each individual platform or each individual device.

But by and large, complexity and added complexity, more signals, more frequencies in general should be a good trend for Amphenol.

Our next question comes from the line of Jim Suva of Citigroup.

Adam, I know you spent a lot of time on the mobility side of things, but just to kind of help us all, we're a little bit struggling with it.

So maybe one last chance of helping us understand a little better.

It sounds like it was not a competitor undercutting Amphenol on price.

You'd mentioned more it has more to do like available products or available content.

Is that because there is like a mix shift down or the newer platforms have less content?

Or just trying to figure out about are the newer smartphones coming out structurally having less content for Amphenol?

Yes.

Look, Jim, you're not at all beating a dead horse here.

I know it's a very important topic for everybody.

And again, it's not a question of us losing share.

We were not undercut by anybody.

That's not the case.

It was just the customer took a different design approach.

I mean, we sell antennas, we sell connectors, we sell mechanical devices into these products.

And sometimes, for example, a customer will take a different approach to an antenna technology where they'll reduce the number of antennas or they'll change the structure of those antennas.

That's the type of dynamic that we were dealing with here and that we are dealing with here.

Is it -- and it ultimately does result, as you correctly term it, in less content available for the company on that given set of platforms.

But like I said earlier, this doesn't mean that, that is a onetime shift till time immemorial.

I mean, you all know that last year, we benefited greatly from an increase in content opportunity that our team did a fabulous job of capitalizing upon, really incredible effort that the team went through in order to ensure that we could support an extraordinary ramp, 90% increase first half to second half last year, which took a lot of doing and then reacting in turn, as they've done so successfully here in the first quarter.

So this is the nature, as I said earlier, of the volatility of this space.

Every product has a little bit of a different design.

Each generation can have more, can have less.

There can be new competitors.

Your customer can lose share or gain share.

These are all the things that make this market not for the faint of heart but make us be able to be successful because of that unique agility that our team has.

Okay.

Now I finally get it, Adam.

I'm glad I helped you there, Jim.

Yes.

And a quick follow-up for your reduction for that segment for the year.

Is it mostly the reduction, I'm talking about only -- is mostly the reduction due to the design change or like a reduction in overall industry demand from like units being consumed out there in the market?

Well, look, I think the change that we're talking about here is mostly due to, as I said in my prepared remarks, just sort of architectural change.

Is there a little bit less sanguine view of overall volume demand?

I think, sure.

There is a little bit of that as well.

Our next question comes from the line of Deepa Raghavan of Wells Fargo Securities.

A couple of questions from me.

I'll start with the composition of full year revenue guidance.

I look at the flat guidance on revenue and trying to assess what the acquisition versus organic growth probably looks like.

Looks like acquisition is $300 million contribution, up 3% to 4%.

ForEx is a bigger headwind now, maybe 2% down, and organic growth is maybe 1% or 2% lower on a year-on-year basis as well.

Does that sound right to you?

Just not very sure what's in your guide.

Appreciate any color.

Sure, Deepa.

Actually, your math is relatively good on that, and so not to go into every detail, but I think that basically we describe from a bridge perspective from last year, this year from a revenue growth is pretty much on target.

Okay.

My follow-on would be Europe.

Adam, you talked about weakness in Europe, but your comments were very specifically rounding around auto as being weaker.

But just curious if there are any other verticals that have turned softer versus earlier on in the year.

Can you talk about that?

That is a much bigger vertical for you and probably a higher content region also for you.

Well, thank you, Deepa.

No, I think, I wouldn't really mention any of our other markets specifically.

The only thing I would say is there are a few pockets of industrial in Europe, which some of the industrial segments in Europe are a little bit the tails wagged by the dog of the automotive industry you see once in a while.

But again, our overall outlook for industrial still remains as robust as we had talked about coming into the year.

So I think, within the industrial markets, there've been sort of geographical puts and takes as well.

But really, where it was most noticed, most obvious was in automotive.

Our business is today much more balanced geographically in automotive than it once was.

I think you'll remember well that there was a time when Europe used to be roughly 2/3 of our automotive business.

And now, it's more balanced.

It's a little bit bigger than the other 2 regions, which are roughly the same size.

But we did see in Europe a little bit less demand than we had anticipated coming into the quarter.

And I think as we look towards the out quarters, our presumption and expectation on the basis of what we've heard from our customers is that Europe may still a little bit underperform the other regions.

I mean, look, a lot of people much smarter than I and much more knowledgeable than I have written a lot about that, and it's probably the least well-kept secret in the industry that European automotive has a little bit of softness to it, but we're not immune to that, I would say.

Our next question comes from the line of Steven Fox of Cross Research.

Two quick questions for me, Adam.

On the -- you said that you were able to protect wireless margins by reacting quickly to the downturn.

Can you give us a sense -- would that mean that margins were flat with where they were before?

You just had degradation with volumes.

Can you give us a little more color on that?

Then I had a follow-up.

Yes.

I mean, look, it doesn't mean margins were flat.

I mean, we don't talk about it, as you know, margins by each of our markets.

But it's -- I think it would be quite a Superman feat to have flat margins with a 50% reduction in volume.

I think what we mean by that, Craig talks always about the fact of really driving conversion margins both on the upside and the downside, and I think our teams just did a fabulous job of managing those conversion margins.

There's, I can imagine, many organizations where if your business effectively falls in half in a 90-day period, you have an enormous amount of stranded fixed cost that I think it'd be hard for most businesses just to make money in such an environment, and our team just did an excellent job of managing the conversion margins, but it doesn't mean that the absolute level of profitability at that 50% lower volume level is the same as it was in the fourth quarter.

That's helpful.

I appreciate that color.

And then on the enclosures acquisition, obviously, there's a lot of interconnect areas that you've gone into that has added value to the business.

When you think about enclosures now, with this acquisition, does it broaden your acquisition lens out any further?

Are you thinking more of that other markets for enclosures?

Or is this more of a specific niche that you plan on focusing on?

Well, thanks.

I mean, look, this is actually not a new area for us necessarily.

I mean, you'll recall that we've made a few other outstanding acquisitions over the recent years.

Acquired a company called All Systems Broadband, and we acquired subsequently a company called Telect.

And those companies were really involved in complex interconnect enclosures more for indoor applications inside data centers, inside telecommunications, indoor applications.

And what Charles brings us is a very similar product actually to those that we've acquired before with Telect and All Systems Broadband, but it does that in a harsh environment application.

And in particular, what you see more and more is, for example, in the wireless market, as people move more towards small cell, more densified networks where there's a lot more outdoor requirements, that there's just not the place to put things indoors anymore.

And you have to have a high-technology packaging for those, so that you can get this complex interconnect into sight of the place right near where the tower goes and -- or right where the junction goes to the house or to the tower, to the distribution point.

And so Charles has just this very unique high-technology harsh environment interconnect enclosures, which is very complementary to the more data center, indoor application that we got from Telect.

So it's not that we have a strategy just to say we're going to go be an enclosure company at all.

I mean, this is really high-technology interconnect products together with the enclosures that go around them that really ruggedize and protect those interconnect products wherever they may be situated.

So it's really on a continuum, Charles, and we've been very pleased with the performance and the reception from our customers of both All Systems Broadband and Telect.

And now together with Charles, we really have a complete offering, both indoor and outdoor when customers need those really complex interconnect systems.

Our next question comes from the line of Mark Delaney of Goldman Sachs.

Yes.

I do have 2. First, I was hoping to get your perspective on the macroeconomic environment specifically in China.

There's been quite an array of data points, some quite weak, others maybe suggest some starting to see improvement in the China macroeconomic situations.

So hoping to get perspective from Amphenol on what you may be seeing with your orders as it relates to the China region.

Yes.

I mean, I don't know that we have any different view on China.

I think how you characterized it, Mark, it sounds like a pretty fair characterization, which would be, by the way, the same characterization around the world.

I mean, there are some areas of strength and some areas of weakness.

I think people talked broadly about Asia and China in particular, in automotive, and there's been a lot written about that.

I mean, I would say that our performance in Asia was not our strongest region.

I highlighted Europe.

Our strongest automotive performance was really in North America in the quarter.

But by the same token, we had strong performance in IT datacom in Asia and in China as well.

So I don't know that there's one general conclusion.

I mean, one thing I will say, Craig and I were there a few weeks ago, and there still seems to be a lot of Ferraris and Bugattis driving around Shanghai.

So it doesn't seem like anything is falling totally off of a cliff.

Understood.

That's helpful.

And then a follow-up question for Craig on EBIT margins in the second half of the year.

It seems like revenue will be down year-over-year, given the already discussed mobility dynamics.

So typically, does that, all else equal, help margins?

But I know there's maybe some puts and takes.

Volumes overall seem lower.

You got some new acquisitions coming in.

So maybe just help us think about sort of puts and takes to EBIT margins for 2H.

Sure.

No problem.

So yes.

No, I think, no, if you look at our full year guidance and certainly the second half of the year will be -- it's going to be impacting that.

Basically, what you see is organic reductions.

A few puts and takes on that.

Number one is obviously a normal range of conversion kind of year-over-year on our organic sales reduction that we talked about a little bit, a point or 2 of organic sales reduction.

But actually, the bigger impact is I think that if you looked at the range of conversion on that is actually relatively quite low on an implied basis.

It's really the reduction from an EBIT perspective is more impacted by the acquisitions.

Charles and SSI and Aorora collectively are slightly below the company average, and that certainly has some impact on not only the second half but also on the second quarter and even to a certain degree, on the first quarter as it relates to SSI.

So those are the things that ultimately are impacting the EBIT margin on a year-over-year basis.

But what I would have to say is that I'm extremely proud actually of the team and specifically the mobile device team on, as Adam before mentioned, being able to really react in an amazing way to this reduction in volume that they saw, #1, in the first quarter as it compares to the fourth quarter, in addition to the reduction that they're seeing kind of just for the full year and being able to deal with this and protect their margins to the bottom line.

And I think you inferred that ultimately, the mobile device market ultimately is a little bit less profitable from a margin perspective in other markets, but I would say that we never said that.

As a company, I think the company average we said that all our markets with respect to broadband really has in a range of similar margins, so I wouldn't say the fact that they're down 30% really is having an overall impact in the company, but what I would say is that if we didn't do such a good job in terms of the management team in dealing with this reduction, then there could have been a more significant impact than there really is in the margins that we see right now.

Our next question comes from the line of William Stein of SunTrust.

Great.

I understand from industry contacts, there's growing adoption of 48-volt technology in both data center and automotive applications, maybe automotive moving slower but still happening.

I'm wondering if there's an impact on Amphenol's business from this trend in particular?

Yes.

I mean, Will, you always have these great insights into tech, which is wonderful to see.

Yes.

No question.

I mean, we've been working on 48-volt applications in auto, in data center, in other areas.

And the underlying drivers, there's just so much more stuff going on in these systems.

And when you get to all the different things, just the typical, say, 12-volt in the car, for example, just can't support it.

The network cannot support all these different applications that are drawing power.

And so does that have implications from an interconnect perspective?

I think, absolutely, it does.

I think that anytime when you have that kind of generational shift, either in power or in bandwidth of data or frequency as it relates to RF, I mean, these are the things that connector companies really live for is really helping customers to enable those transformations, helping your customers to figure out what the ramifications of that are, what the -- how you have to test and validate and secure the system so that they're equally safe as they were in the past.

And so our team around the world, as they are on any of these technological evolutions or revolutions, they're working very closely with a number of customers all over the place.

Our last question comes from the line of Joseph Giordano of Cowen.

So I wanted to just dig in on auto a little bit.

I mean, I know you lowered your overall full year expectations.

But at end of the day, given this production environment, that's going to end up looking pretty good versus most who participate in that space.

I was curious if you can maybe talk at a high level about whether it's regionally -- is the content that you're doing above production, is that fairly balanced regionally?

And kind of curious if you can give some color into how that portfolio looks now, whether connectors versus sensors versus antennas?

And is one growing faster than another in terms of content?

Is there major variations there that we should be thinking about?

Yes.

No.

I think, first of all, appreciate the comments, and we do feel very good about the progress of our automotive business, even when we were a little disappointed with the performance in the quarter.

We pulled a little bit down the outlook for the year.

I mean, that does not reflect any disappointment with our progress and position in that marketplace, which is a very, very strong progress, an excellent position.

On a regional basis, I wouldn't tell you that there are regional differences in content because the expansion of content, the sort of revolution of new applications being put in the car, things like whether that's hybrid electric vehicle, whether that's new drive systems, whether that's new electronics, new communication systems, new interfaces with passengers, new types of control systems for transmissions and engines and braking and all of that, I mean, there's such an extraordinary array of different things happening in cars.

And I don't think that any one region has a disproportionate adoption, with maybe the only exception, I would say, is that the China EV market is certainly a more fluid market where there's a lot more players.

And so there's a lot going on there, and our team's done a really excellent job in that space.

But in terms of overall content in cars, I don't personally believe that there is a real differentiation on a regional basis.

Relative to our products, and you correctly categorized them, interconnect products and sensors and antennas, I think they all are seeing great opportunities, and so I wouldn't say again that one of them has a disproportionate progress.

I think they're all playing a role in the enabling of that advanced content in cars in all the various regions.

And we're just really pleased as we continue to build out the product range for the company, and that includes in this quarter with the acquisition of Aorora, which again, albeit a small company, they make unique products that are used especially in next-generation onboard electronics and embedded computing in cars.

And I think that, that just adds to what is already and has already become a very broad range of products.

And you know very well, you've covered the company long enough to see that over the last decade, we've really built that out, both organically and through acquisitions, and we continue to be on the hunt for the next sort of complementary product across those various product categories to allow us to be more important to our customers, to allow us to participate more strongly in that next-generation electronics, and that's what Aorora is an indication of, and we'll continue to drive a strategy that way going forward.

Great.

And then maybe one kind of basic one on mobile device.

I mean, I feel like you're the first one to say that you kind of have no idea how to, like, model that part of the business forward because of how volatile it can be.

But given what we talked about on the call here, moving your target down 30, like if you had a handicap, what's more likely from that spot?

Would it be more likely to move that down further or up further?

Do you have a sense for feel there?

I mean, last year, you've had, I think, about it was, what, we started at low single-digit and it ended up 40%.

So I'm just kind of thinking of how that -- how we handicap this one?

Yes.

Look, I'm not a golfer, so I don't know about handicapping.

We have always approached this in a very simple sense, which is we've always tried to communicate to our shareholders and to the world the best that we can at the time when we make that communication.

And so to tell you right now that we're going to be better or worse than the 30%, I couldn't tell you.

We think right now that our outlook is -- this is the best outlook that we have at this moment on the basis of all the information that we have.

I think that it remains a volatile market, and I think our team remains uniquely able to capitalize or deal with the changes as they may come, and that's the best we can do at this moment, and thank goodness I don't have to play golf and deal with handicaps.

Thank you very much.

At this time, there are no further questions.

Please proceed.

Well, thank you all.

We really appreciate everybody's continued interest and focus on the company, and we wish that you all have a pleasant spring, and we look forward to speaking to you in the summer.

Thanks very much.

Thank you.

Bye.

Thank you for attending today's conference, and have a nice day.