安費諾 (APH) 2019 Q2 法說會逐字稿

Hello, and welcome to the second 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.

Good afternoon, everyone.

This is Craig Lampo, Amphenol's CFO, and I'm here with -- together with Adam Norwitt, our CEO.

We would like to welcome you to our second quarter 2019 conference call.

Our second quarter 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 second quarter with sales of $2.015 billion and with GAAP and adjusted diluted EPS of $0.93 and $0.92, respectively.

Sales were up 2% in U.S. dollars and up 4% in local currency as compared to the second quarter of 2018.

From an organic standpoint, excluding both acquisitions and currency, sales in the second quarter decreased 1%.

Sequentially, sales were up 3% in U.S. dollars and in local currency and 1% organically.

Breaking down sales into our 2 segments.

Our cable business, which comprised 4% of our sales, was down 19% in U.S. dollars and down 17% in local currencies compared to the second quarter of last year.

The interconnect business, which comprised 96% of our sales, was up 3% in U.S. dollars and 5% in local currency as compared to last year.

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

Adjusted operating income was $408 million for the second quarter of '19, and adjusted operating margin was 20.3%, which is down 30 basis points compared to the second quarter of '18.

Compared to the first quarter of '19, adjusted operating margins increased 20 basis points.

From a segment standpoint, in the cable segment, margins were 9.7%, which is down compared to 13.2% in the second quarter of '18 primarily driven by volume as well as, to a lesser extent, product mix.

In the interconnect segment, margins were a strong 22.2% in the second quarter of '19, which was down slightly compared to 22.4% in the second 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 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 an increasingly uncertain market environment.

Through the careful fostering of this culture and the deployment of our 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 $26 million last year.

And as discussed in our prior earnings call, this increase is due primarily to higher average interest rates as a result of the first quarter bond issuance and higher average debt levels.

The company's adjusted effective tax rate was approximately 24.5% for the second quarter of '19 compared to 25.5% in the second quarter of '18.

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 second quarter of '19 includes the items just mentioned -- including the items just mentioned, was approximately 21.3% compared to 24.7% in the second quarter of 2018.

Adjusted net income was a strong 14% of sales in the second quarter of 2019.

On a GAAP basis, diluted EPS grew 2% in the second quarter to $0.93 compared to $0.91 in the second quarter of 2018.

And adjusted diluted EPS grew 2% to $0.92 in the second quarter of 2019 from $0.90 in the second quarter of 2018.

Orders for the quarter were $2.019 billion, which was flat compared to the second quarter of '18, resulting in a book-to-bill ratio of 1:1.

The company continues to be an excellent generator of cash.

Cash flow from operations was $322 million in the second quarter or approximately 114% of adjusted net income.

From a working capital standpoint, inventory, accounts receivable and accounts payable were approximately $1.3 billion, $1.7 billion and $815 million, respectively, at the end of June.

And inventory days, days sales outstanding and payable days were 83, 75 and 53 days, respectively, all within the normal range.

The cash flow from operations of $322 million, along with borrowings of $400 million from our commercial paper programs, proceeds from the exercise of stock options of $66 million and cash, cash equivalents and short-term investments on hand of approximately $10 million net of translation, were used primarily to fund acquisitions of approximately $357 million to repurchase approximately $249 million of the company's stock, to fund net capital expenditures of $74 million, to fund dividend payments of $69 million and to fund the purchase of minority interest related to a previous acquisition of $21 million.

During the quarter, the company repurchased 2.6 million shares of stock at an average price of approximately $94 under the $2 billion 3-year open-market stock repurchase plan.

As mentioned in today's earnings release, the company's Board of Directors has approved a 9% increase in the quarterly dividend on the company's common stock from $0.23 to $0.25 per share.

The increase is effective for payments beginning in October.

At June 30, cash and short-term investments were approximately $1 billion, the majority of which is held outside of the U.S. At June 30, the company had issued approximately $1.3 billion under its U.S. and euro commercial paper programs.

The company's cash and availability under our credit facilities totaled approximately $2.2 billion.

Total debt at June 30 was approximately $4 billion and net debt was approximately $3 billion.

The second quarter of 2019 adjusted EBITDA was approximately $500 million.

From a financial perspective, this was another excellent quarter.

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

Our current guidance for the second half of 2019 reflects a significant reduction in our sales expectations for the communications equipment related markets together with a reduced outlook by customers in the industrial and automotive markets.

This reduction in organic sales is partially offset by the new acquisitions announced today.

Adam will comment further in a moment.

I would also note that the Amphenol management team is reacting quickly to this reduction in expected demand by initiating actions to adjust the cost structure of our impacted operations to current demand levels.

Our EPS guidance includes the cost of these actions, which are primarily reflected in the third quarter.

The EPS guidance also reflects the lower than company average initial operating margins of our new acquisitions.

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

Well, thank you very much, Craig, and welcome to all of you on our call today.

As is customary, I'm going to highlight a few of our achievements here in the second quarter.

I'll then talk about our trends and our progress across our diversified served markets.

And then finally, I'll make some comments on our outlook for the third quarter and full year 2019.

And of course, we'll have some time at the end for questions and answers.

As Craig just detailed, our results in the second quarter were within the company's guidance, and that's despite a clear increase in market uncertainty that we saw during the quarter.

Sales grew by 2% in U.S. dollars and 4% in local currencies, reaching just over $2 billion, in fact, $2.015 billion.

The company booked $2.019 billion in orders, representing essentially a book-to-bill of 1:1 for the quarter.

Adjusted operating margins were again very strong in the quarter, reaching 20.3%.

Also, the company generated healthy operating cash flow of $322 million in the second quarter, which is yet again an excellent reflection of the quality of the company's earnings.

I'd like to also just note that I'm very pleased that the Board of Directors just yesterday approved a 9% increase in the company's quarterly dividend to $0.25 per share effective with the October payment.

I'm very proud of the Amphenol management team.

The results this quarter were just another clear reflection of the agility and discipline of our entrepreneurial organization around the world as we performed well amidst both a very dynamic electronics industry and a volatile demand environment, all while driving outstanding operating performance for the company.

I'm very pleased to announce today that we completed 4 outstanding acquisitions just in the last several weeks, which collectively represent approximately $150 million of annualized sales and which we acquired for a total purchase price of approximately $280 million.

First, CONEC, which we completed in late June, is a provider of high-technology connectors for the industrial market with annual sales of approximately $80 million.

CONEC is based in Lippstadt, Germany, and its products are sold into a wide array of applications in the industrial market, including factory automation, instrumentation and many, many others.

This company represents an outstanding complement to our already broad array of interconnect solutions for industrial applications.

Kopek, which also closed in late June, is a manufacturer of RF passive interconnect components for the broadband market.

Kopek's products are sold primarily to Amphenol as a vendor to us, together with a very small amount of sales to outside customers.

The company is based in Hong Kong with manufacturing operations in Shenzhen, China.

Bernd Richter, which we completed just here in July, is a manufacturer of leading-edge interconnect assemblies primarily for the medical market with annual sales of approximately $30 million.

Based in Wipperfürth, Germany, Bernd Richter's products are sold into a variety of applications for medical equipment made by customers in Europe as well as in North America.

This great company strengthens our already successful medical interconnect products offering while also improving our position in value-add assemblies for the European medical market.

And then finally, just last week, late last week, in fact, we closed the acquisition of the GJM Group.

GJM is a provider of cable assemblies for the automotive market based just outside of Barcelona, Spain

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of approximately $40 million, manufactures cable assemblies for complex applications within passenger vehicles and represents an excellent complement to our already broad value-added offerings for the worldwide automotive market.

As we welcome these outstanding new teams to the Amphenol family, we remain very confident that our acquisition program will continue to create great value for the company.

In fact, so far this year, we've already acquired 7 great businesses which collectively represent annualized revenues of approximately $470 million.

But even more importantly, we've strengthened Amphenol with these new, strong management teams, their complementary market positions and the capabilities they offer, thereby creating platforms for future expansion as well as performance improvement.

No question that our acquisition program clearly remains a core competitive advantage for Amphenol.

Now before I get into reviewing the details of our performance by end market, I would like to comment on some recent market developments over the last quarter that have impacted our outlook heading into the second half year of 2019.

First, following the restrictions that were placed on sales to Huawei by the U.S. government, there has been a significant increase in uncertainty across the communications equipment market as many customers are grappling with potential changes in China demand.

This has resulted in certain customers reducing their outlooks for the second half of 2019.

Second, we have -- there has also been a moderation of demand expectations in both the industrial and automotive markets, including in both Europe and Asia in particular, as customers no longer expect a step-up in sales in the second half, which they previously had been anticipating.

Finally and no doubt related to these 2 dynamics, our distributors have also moderated their expectations for demand for our products, reflecting both the reduced end market demand as well as their elevated inventory levels.

We have reflected these lower demand levels in our outlook, and I'll discuss the specific impact of these changes in each of the relevant markets in a few moments.

But before I do that, I just want to say that I'm very proud of our teams working in these affected markets, who are around the world quickly adjusting their costs while equally importantly, redeploying their resources to ensure that Amphenol is well positioned regardless of the market environment.

And look, I mean ultimately, this is the ultimate reflection of Amphenolian agility.

Now turning to our trends and progress across our served markets.

I would just note that we continue to be very pleased with the value created by the company's balanced and broad end market diversification.

In fact, in the second quarter, once again, no market represented more than 20% of our sales.

Now very importantly, that market diversification helps to mitigate the impact of the volatility of individual end markets while also serving to expose us to leading technology innovations wherever they may arise across the electronics industry.

Now starting out with the military market.

That market represented 12% of our sales in the quarter, and sales grew by a better-than-expected 18% in U.S. dollars and 19% organically.

This very strong growth was broad-based but was driven in particular by growth in military vehicles, naval applications, avionics and as well as communications equipment.

Sequentially, our sales increased by 7%.

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

And for the full year 2019, we now expect to achieve high teens sales growth in this very important market.

This represents an upgrade to our outlook provided last quarter.

I remain extremely proud of Amphenol's team working in the military market as demand for military interconnect products continues to accelerate given both the robust government spending levels as well as the acceleration of adoption of new technologies.

Our organization has done an outstanding job reacting to meet these elevated levels of demand while also gaining market share.

We simply have the broadest range of interconnect products together with the strongest and most international manufacturing footprint, and this positions us very strongly for the long term.

The commercial aerospace market represented 5% of our sales in the quarter, and sales in the second quarter came in stronger than expected, growing 11% in U.S. dollars and 13% organically as we capitalized on continued strong demand for next-generation jetliners.

Sequentially, our sales were down just slightly from the first quarter.

Looking into the third quarter, we expect a slight moderation of sales given typical summer seasonality.

But regardless, we now expect a low double-digit increase in sales in the commercial air market for the full year 2019, and this represents an improvement from our prior expectations.

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

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

The industrial market represented 20% of our sales in the quarter.

Sales in the second quarter were down by 3% in U.S. dollars and 8% organically as growth in factory automation, industrial battery and medical applications was offset by reductions in heavy equipment, instrumentation and alternative energy.

Our sales to distribution were also softer on a year-over-year basis.

On a sequential basis, sales increased by 2% from the first quarter.

We're very excited about the recent additions of both CONEC and Bernd Richter, which strengthen our position in the European industrial market in particular, across a range of exciting segments, including medical, factory automation, instrumentation and many other applications.

As we look into the third quarter, we expect sales in the industrial market to increase from these second quarter levels as we benefit from the additions of our new acquisitions together with modest sequential organic growth.

And while we do anticipate growth in the high single digits for the full year, as I mentioned earlier, we now do not expect to grow organically for the full year as both our distributor and OEM customers no longer foresee a step-up in demand in the second half.

Regardless of this organic moderation in demand that we've recently seen, we remain very encouraged by the company's leading position in the industrial interconnect and sensors market.

Through both our successful acquisition program as well as our innovation initiatives, we've developed a very broad array of products across a diversified range of exciting segments within the global industrial markets.

We're proud of the success, and we look forward to realizing the benefits of our efforts in the industrial markets for many years to come.

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

Sales in the automotive market were about as expected in the second quarter with sales flat to prior year in U.S. dollars and down 3% organically.

This organic moderation of sales was related primarily to the European market and to a lesser extent, North America.

Sequentially, our automotive sales increased by 4%.

As we look into the third quarter, we expect sales to moderate slightly from these levels.

And for the full year 2019, we now expect sales growth in the low single digits, which is a slight reduction from our prior expectations.

As I alluded to earlier, while we came into the second quarter expecting a step-up in demand in the automotive market in the second half, based on our current input from customers, we no longer expect any meaningful organic increase in sales here in the second half of 2019.

This relates primarily to subdued vehicle production expectations for Europe and Asia.

Regardless of this more muted outlook for the full year, the company's position in the automotive market is as strong as ever.

We continue to work with a wide array of customers around the world to design-in our broadening portfolio of interconnect, sensor and antenna products into their next-generation vehicles.

In addition, we're working on many advanced technologies with customers around the world, including next-generation electrified drivetrains, autonomous driving systems and many others.

And with the acquisition of GJM further expanding our product range and customer reach, we believe we've built an excellent base for future performance.

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

Sales were slightly lower than expected in the second quarter, growing 4% from prior year as growth in smartphones, laptops and wearables was partially offset by a reduction in sales related to tablets and production-related products.

Looking into the third quarter, we expect demand to increase moderately from these levels as customers begin to ramp up their new platforms.

And for the full year 2019, we continue to expect a roughly 30% reduction in sales from prior year as we discussed extensively during last quarter's call.

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

I remain encouraged by Amphenol's position in the mobile devices market.

Our team is continuing to work on a wide array of next-generation mobile devices, including smartphones, laptops, tablets, wearables and many other accessories.

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

Most importantly, our team working in the mobile devices market remains just simply the most agile at reacting to the inevitable changes that occur in this very exciting space, thereby securing both our market position and financial performance.

The mobile networks market represented 9% of our sales in the quarter, and our performance was a bit better than expected in the second quarter with sales increasing by 9% in U.S. dollars and flat organically as we benefited from the contributions of -- from the Charles Industries acquisition that we announced last quarter.

On an organic basis, our sales increased to OEMs but were offset by a continued moderation of demand from wireless service providers.

And sequentially, sales grew by a strong 17% from the first quarter with those contributions from Charles.

Looking into the third quarter and the second half of 2019, we now anticipate a significant sequential reduction of sales as a result of the dynamics that I addressed earlier in the call.

And for the full year 2019, we now expect sales to be flat to prior year in U.S. dollars but down in the high single digits organically as benefits from the Charles acquisition are offset by a moderation in demand from both OEM and operator customers in the second half of 2019.

Regardless of this more challenging situation that emerged here in the second quarter, we remain very confident in the long-term outlook for our mobile networks business.

Our leading-edge interconnect and antenna solutions have positioned the company strongly with OEM and operator customers really in all geographies.

As those customers plan for 5G and other network upgrades, we look forward to benefiting from our robust position as a partner with those customers, and this creates a significant long-term expansion potential for Amphenol.

The information technology and data communications market represented 19% of our sales in the quarter.

As we had expected coming into the second quarter, sales were slightly down from prior year as growth in networking-related products was more than offset by reductions of sales of products sold into servers and storage hardware.

Sequentially, sales were up slightly from the first quarter with the addition of Charles Industries.

Looking into the third quarter, we now expect a significant sequential reduction in sales resulting from the dynamics I addressed earlier.

And for the full year 2019, we now anticipate a mid to high single-digit decline from prior year.

Regardless of these current market dynamics, our OEM and service provider customers across the IT datacom market are continuing to push their systems and networks to higher levels of performance.

Our ability to enable such performance through our next-generation high-speed fiber optic, power and other interconnect solutions has enabled Amphenol to be a leader in this market.

And we're confident that we'll continue in that position into the long term.

And then finally, the broadband market represented 4% of our sales in the quarter.

Sales in the second quarter reduced by a greater-than-expected 15% from prior year as spending by operators in the broadband market continued to moderate.

On a sequential basis, sales were down by roughly 3%.

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

However, for the full year 2019, we now do expect sales to be down in the high single digits from prior year on reduced capital investments by broadband operators.

Regardless of this more muted outlook in the broadband market, we remain encouraged by the company's continually expanding range of products for the broadband market together with our strong position with customers around the world.

The acquisition of Kopek, while small, brings in-house our capabilities for RF passive interconnect devices and represents yet another strengthening of our product offering.

So in summary, I would just say that I'm very pleased actually with the company's performance in the second quarter, in particular given this heightened level of uncertainty that emerged during the quarter.

The Amphenol organization has clearly continued to execute very well in this dynamic marketplace.

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

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

Now turning to our outlook.

As I mentioned earlier, we have moderated our outlook in the second half due to the dynamics affecting the communications equipment, industrial and automotive markets, which include as well the effects of reduced demand from our distributors.

Based on these factors and considering the heightened level of uncertainty in the overall economy and of course, assuming constant exchange rates, we now expect the following results.

For the third quarter, we expect sales in the range of $1.960 billion to $2 billion and adjusted diluted EPS in the range of $0.86 to $0.88.

This represents a sales reduction versus prior year of down 6% to down 8% and a decrease versus prior year adjusted diluted EPS of 11% to 13%.

For the full year 2019, we now expect sales in the range of $7.920 billion to $8 billion with adjusted diluted EPS in the range of $3.56 to $3.60.

For the full year, this represents sales and adjusted diluted EPS declines of 2% to 3% and 5% to 6%, respectively.

Regardless of this reduction in our outlook, the Amphenol management team looks forward to driving further strength into the future.

Our team is reacting quickly to align costs with the level of demand reflected in this outlook, all while aggressively pursuing a diverse array of growth opportunities.

This is the essence of the agile Amphenolian culture that's embodied by our outstanding management team.

And that team, coupled with our deep technology position with customers across our markets and complemented by our successful acquisition program, positions the company very strongly for the future.

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

(Operator Instructions) The first question is coming from Amit Daryanani with Evercore.

I have 2 questions.

I guess the first one, Adam, when I look at the revenue reduction in the back half of $230 million or so, maybe $300 million when the deal is factored in, how much of that do you think is really attributed to tariff, the tariff outlook or the U.S. government putting restrictions on certain Chinese entities, kind of things that are driving that, versus driven by just lower end demand and things like industrial market that might be a little bit more segregated from that perhaps?

Sure.

Well, thanks very much, Amit.

I think the way we think about this reduction in the back half is roughly 2/3 of that reduction is coming from the communications end markets.

And of that communications end market, I would say you can call it somewhere around half or a little bit more is maybe related to the specific restrictions that were put in place, the direct and indirect effects of those.

And maybe the rest is more -- a more broad market and distribution element.

And then of the remaining, call it, roughly 1/3, I would say that that's relatively balanced between industrial and automotive.

Got it.

That's really helpful.

I guess Craig, if I hold you to [these industry] comments you talked about, undertaking a swift cost reduction plan, I don't know if you guys normally take these as a onetime charge.

So perhaps help me understand, when I think about margins going down in Q3, which you're implying mid-19%, 80 basis points down sequentially operating margins, that's my math, how much of that is really driven by these cost reduction initiatives that most companies would call it a onetime but you're not versus just revenue deleverage in the model?

Yes.

Thanks, Amit.

And as you know, we don't call these types of things out in normal course.

So this is something that we do include, and we hold ourselves accountable as our general managers holds themselves accountable for the results.

But in regards to the amounts, I'm not going to probably talk about specific amounts.

But what I would say is if you look kind of sequentially at kind of our implied conversion, there's a few things that kind of are happening.

And the acquisitions clearly have some impact from a growth perspective.

They're contributing a certain amount, and those are contributing, I would say, an operating margin lower than the average of the company today.

And certainly, over time, we do expect that -- to get those up, but they will not contribute to the level that we would expect as a normal kind of conversion going into this third quarter.

The other thing that's happening is, I would -- is these costs related to these restructuring kind of charges that we've -- that are in these results.

And I would say that you could probably back into that number by effectively understanding that the implied conversion, if you take out those restructuring charges essentially within our normal range, it's not anything really much different than that.

So if you kind of backed into that, it would -- you can kind of get to that number.

But we really don't want to start calling out charges because we do hold ourselves basically accountable.

And then in the fourth quarter, our implied conversion would be pretty strong going into the fourth quarter as we kind of go into that quarter.

I guess one other point that I would say is that if you actually look at our year-over-year kind of implied conversion coming from Q3 of '18 to Q3 of '19, what you'd see actually, if you take out the impact of those 7 acquisitions that we now have, that all are effectively on average under our kind of average operating margin is that you would actually see that are -- we are really also converting on the downside, which is quite a significant decline organically in the third quarter kind of in a normal range.

So I have to say the management team really has done a great job of ensuring that the bottom line is protected even while taking certain cost actions that are going to be impacting the bottom line in the third quarter to ensure that going forward, we really are in a good position from a cost perspective to be able to come out of -- in the current demand environment.

And Amit, I would just add maybe one thing here, which really gets to a core part of how we think about running the business.

And we've talked about this in the past that in good times, we run the business as if we're driving a car with one foot on the gas and one foot on the brake.

And we don't change that mindset when all of a sudden, you have reductions in the outlook of the demand.

We're continuing to drive with one foot on the gas and one foot on the brake.

And what does that ultimately mean is that these kind of cost reduction actions are just par for the course.

This is a normal type of behavior.

It's why we hold ourselves accountable for it.

It's why we hold our general managers accountable for that, that when you're growing, you should also grow with the understanding that one day, you might have to take certain steps that will be on the other side of growth where there's a different cycle that comes along.

And that kind of mindset of driving with one foot on the gas and one foot on the brake really ultimately shows its strength in times like this.

There's no doubt -- I mean are we happy to have less demand coming from certain of our end markets?

Of course not.

We much prefer to have everything moving up and to the right, but it is part of life.

It's part of business and it's part of working in a very dynamic environment that we all operate in today.

And I think in such an environment, that mindset, that agility, the accountability of the Amphenol management team is really purpose-built for a time period like we are finding ourselves in here right now.

And that's why, as Craig said, we feel very, very good about this outlook on a year-over-year basis, and we feel very optimistic about how that's going to position the company going forward.

Our next question is coming from William Stein with SunTrust.

Great.

First, you talked about lower outlook at least partly owing to the banned entities.

Adam, is there anything in there that we should read into aside from Huawei?

And many of your semiconductor peers have talked about discovering that perhaps not all of their products are covered by this ban and being able to ship more and more as the quarter went on.

Are you seeing the same dynamic?

Yes.

Well, I think look, we should also recognize that this is not the first time that the U.S. Department of Commerce has put in place restrictions or put a company on the entities list.

That's happened a number of years ago with ZTE, who is albeit a smaller customer, it was a very similar dynamic.

And so our team knew exactly what we could and couldn't do.

And we were very aggressive at complying with the law, which we knew very, very well.

And so as many have reported, this is not a ban on shipments by American companies.

It's a ban on export of know-how and technology from the United States.

And so from that perspective, it does not ban one from supporting from outside without the integration of American technology.

I would also just point out that as you know very well, we have always taken an approach of supporting our customers, the vast majority of the support of our customers coming into regions where we -- where those customers are located.

And that has been an approach that we've taken for many, many years, which has insulated us from some of the trade dynamics.

It has also allowed us to strengthen our position with customers by having local teams in their localities really working with them.

And so when this became the issue, this restriction, we have local teams who are not reliant upon kind of a matrixed organization that relies on American engineers or American know-how in every case.

Now all that being said, you can only shift as much as the customer wants to have.

And so there can also be instances when there are such restrictions where they don't necessarily have everything that they need and thus, they don't need stuff from you.

And so that's a different aspect of that dynamic.

But I'm really proud of our team, how they've dealt with all of the trade dynamics that we've been facing for now more than a year.

I mean this has been more than a year where there's been turbulence in the trading environment, and our team has just done a fabulous job of adjusting in real time to whatever impediments come along to our business.

And again, it gets to what I referred to earlier, we really believe that how our company is organized, that unique entrepreneurial approach to management where we have general managers who are fully accountable, and we invest in them the authority we empower them to make really real-time decisions that, that structure is really purpose-built for this slightly more dynamic environment that we all find ourselves in.

One more if I can.

Has the company ever acquired a supplier before as you've announced today?

And maybe confirm my understanding as a result of the majority of the revenue of that company being derived from Amphenol, it's not really a revenue builder for you but instead, a cost reducer as you could take out those stacked margins there.

And what it tells us about the company's M&A strategy, I don't think there's any meaningful change here, but I think it's new or at least unusual.

Yes.

Actually, it's not the first time we've acquired a supplier.

We've done that over the years a few times.

Sometimes, there were very small supplier where it was not even meaningful.

Other times, it was a little bit bigger.

I think out of abundance of transparency we talked about -- but this company Kopek, which is a great company.

It's been a long-term supplier for us.

And when you acquire a supplier, it's not just that kind of margin stack-up that you described.

I mean our suppliers don't make a lot of margin necessarily with us.

So that is not necessarily the -- what you're doing, but what you are doing is you're taking control of technology when you feel that, that technology is really core to you.

So I can tell you, a number of years ago, we acquired a supplier in Malaysia.

We acquired another supplier in China years ago, which became really a real asset for the company from a next-generation technological development perspective.

And I would say that Kopek, while there is a little bit from the margin, it's not so meaningful.

It's really a technology, our ability to shape the technological development by having, in that case, the real vertical integration.

It doesn't mean a change in our acquisition strategy.

We are not becoming more or less vertically integrated.

We are not shifting towards going out and acquiring ourselves through the supply chain.

This is a unique company.

It created a unique opportunity for us and one that we felt really made a lot of sense.

And I don't think it represents at all a shift in where we would think about acquiring for the future.

Our next question is coming from Craig Hettenbach with Morgan Stanley.

Yes.

Just, Adam, on the knock-on effect with the uncertainty around comm equipment and other customers from a demand perspective in China, any visibility into kind of -- as the quarter progress for you or how are you thinking the balance of the back half.

Like what signals you're looking for that some of this demand might come back into play?

Yes.

I mean look, this knock-on effect, it's a little hard to pin down.

But I can tell you what we saw during the quarter was while there's been a lot reported about the puts and takes in the trade negotiations, no doubt about it, a restriction that was placed on one of the world's largest, not the largest communications equipment player, a little bit changed the game.

And so I think that our -- we have seen customers, equipment manufacturing customers who have themselves faced more uncertainty in the China market in particular, for whatever reason.

I mean I'm not going to get into or try to guess what all the various dynamics at play are, but just let it be said that they have seen more dynamics in that market which caused some uncertainty for them, which thereby forced them to assess really their demand plans, look at their inventory positions, look at all what they have in terms of their expectations.

And that has really been the result that we have seen across the communications equipment market.

In terms of when does that change, I would say the whole trade dynamic is really too early to call.

I mean every day, there seems to be a report one way or another.

One day, there's a positive.

The next day, there's a negative.

I am certainly not going to be the one who's going to predict when the resolution is.

I will be the one to applaud if there is a resolution.

I believe that the world's 2 largest economies should not be in a trade battle and hopefully, that, that will be resolved.

And I understand there's real issues that are being addressed, and I'm very hopeful that those issues will be addressed, but I'm not going to predict neither the timing nor the ultimate resolution of those issues.

Understood.

And then just second question, the strength in the military market, can you just talk about -- I would expect at some point, maybe it decelerates from these levels but just anything from a program?

And I know you've talked about before the content increases and things like that.

But certainly, that's a standout on the positive side.

And if you can give us maybe a little bit more context around some of the drivers you're seeing there.

Sure.

No.

Thanks very much.

I mean look, we're really pleased and proud of our military business.

I mean you know well this business has been a part of Amphenol for essentially the entire history of the company and even before because part of it came through even predecessor companies years and years ago.

And we have been just the interconnect innovator in the military market.

And so yes, today, you have a robust spending environment.

You also have just an acceleration of the adoption of new technologies, and that's a trend, that technology adoption is a trend that we've seen really across the applications.

Whether you're talking about next-generation fighter jets, whether you're talking about communication systems, munitions, naval applications, I mean there is, without a doubt, a clear acceleration of the adoption of technology across the military as the military looks to get more functionality with less cost, less manpower, whatever they're looking to achieve.

And no question, it's also -- it's a world geopolitically where there's not a kind of monolithic mission of the military and thus, there's a real diversity of where the spending is happening and not just in the United States.

We're really in all the regions in which we participate in the military.

Will it always grow in the kind of high teens as we've guided it to go this year?

Certainly, we wouldn't expect it always to grow at that rate.

And at one point, it will not grow at that rate.

But I do believe that when you look at our position in the military market, the breadth of our position, when you look at our track record, in particular this year and last, in being able to satisfy the demands of our customers, which is not an easy task, and when you look ultimately at the long-term plans of the military to adopt next-generation technologies, we feel very good about this market for the long term.

Ultimately, what that long-term growth rate will be, will there be ups and downs?

For sure, there will be ups and downs.

But I think all of those dynamics that I just addressed give one reason to feel confident for the long term.

Our next question is coming from Mark Delaney with Goldman Sachs.

Yes.

I had one on comms infrastructure, more in terms of strategic and competitive standpoint.

Can you help us understand if any of the weakness that you're seeing you'd attribute to any increased market share challenges?

And kind of related longer term in comms infrastructure just reflect how well you think Amphenol's positioned in 5G because I know that some companies certainly are in different parts of the supply chain that maybe see 5G strength earlier than Amphenol would.

But just -- there's a few companies, I think, starting to see some strength from 5G and just wanted to better understand how you think Amphenol is going to fit into the 5G landscape over the longer term.

Yes.

No.

Thanks very much, Mark.

I mean look, I would tell you that absolutely, we are not only preserving our market share, but I would expect it to be even more than preserved.

And we have a fabulous position in the communications infrastructure market, whether that is in the mobile networks market where 5G is more specifically relevant or in the IT datacom market, in all of the sort of core -- whether that's routers or switches or servers or web service providers or whatever that is, we have an outstanding position.

We have invested over many years in developing new products.

We have made excellent acquisitions going all the way back even to the FCI acquisition, which ultimately created for us the broadest platform of products, the broadest range of products across really the price-performance curve, which enables us not just to be the supplier and the solution provider for the ultra high end application, but really to be a one-stop shop for our customers across all the range of applications that they need.

And that's on high-speed products, that's on power products, fiber optics and many others, RF as well.

Specific to 5G, I would tell you that we have an outstanding design-in position.

Our teams have been working for many, many years.

We have a unique position in that we have a broad interconnect offering together with an antenna offering both on the infrastructure as well as on the devices, which gives us a unique perspective, a very unique perspective on all the changes that are coming with 5G in terms of how the signals are going to be propagated, what the nature of the 5G architecture is going to be.

And we've been working with customers for many years on that.

Have we seen already some benefit from 5G?

I think we've seen some early systems, I mean 5G-ready kind of hardware where we are participating.

I can tell you one thing that we have seen and it should not be surprising.

I mean you look at the mobile networks market in particular, which is a market where there are not so many equipment manufacturers.

And when one of those equipment manufacturers ends up kind of in the bull's-eye from a geopolitical perspective, it should not be surprising that the operators around the world would take a little bit of a wait-and-see approach to such a dynamic.

One -- if one doesn't have to make significant investments in that moment, wouldn't it be a wiser move by such an operator who is really facing significant investments in the long term to sort of see how that all shakes out?

And I think we have seen a little bit of that dynamic here with some of our service provider customers in particular where they take a little bit of a wait and see.

They know that there's a lot of turbulence, a lot of dynamics in these discussions.

And I think people, those who have the luxury to wait and see, may do a little bit of that here.

But look, relative to 5G for the long term, we are very, very well positioned, and I would say uniquely well positioned because of the technologies, the breadth of the technologies that we offer.

And we look forward over the long term to participating in that.

That's helpful, Adam.

For my follow-up question -- is on the topic of inventory destocking.

And you talked about that in particular in the channel.

One of your competitors reported this morning and talked about typically 4 to 6 months in duration when you look back through past cycles.

I know you've been in this.

This isn't a long time.

Every cycle is unique and has its own characteristics.

But any thoughts from Amphenol to how long do you think inventory destocking in the channel may last for?

Yes.

Well, thank you, Mark.

I mean I have a hard time to get too specific about this.

I think every -- as you say, I take the words out of your mouth, I mean every cycle is a little bit different.

I think we're dealing here with not just inventory destocking, but I think there is a change in demand that the end customer that is also there -- and how does the distributors ultimately react to that and how long of a time does it take them to manage through that is something that I would be a little hesitant to give kind of a projection on.

But look, I mean our teams are standing ready to capitalize to the extent that there is any uptick in demand.

No doubt about it, they will be there ready to do so.

And I would just make a point here, which is we see this uncertainty, whether that is in the distribution channel, whether that's in the communications infrastructure channel that you alluded to, one thing that we have not seen any slowdown on is the pace of proliferation of electronics, the pace of innovation, the developments that our customers are undergoing.

We have not seen at all a slowdown in that activity.

To the contrary, I would say that our customers in every one of our markets and -- are working extremely hard to drive innovations that ultimately can satisfy the thirst of the end customers for higher performance in whatever application they may be desiring to use.

And I think that, that pace, the long-term pace of the proliferation of electronics continues from our perspective to accelerate.

And so yes, there are here -- there is some enhanced uncertainty in some of these areas.

But I think the long term in terms of this adoption of electronics continues to be very, very healthy.

Our next question is coming from Matt Sheerin with Stifel.

Yes.

A question, Adam, just regarding the mobile devices guidance for the quarter and the year.

It sounds like you're looking for some sequential growth in Q3.

But sort of backing into your roughly 30% down for the year, it looks like relatively muted back half for mobility relative to what we've seen in the last cycles.

I know you've talked about demand issues as well as some content issues.

But could you drill down a little bit in terms of what you're seeing not just in the smartphone area but in notebooks and other devices?

Sure, Matt.

Thanks very much.

I mean I know we talked a lot about this on the last call, and I would say that our outlook really hasn't changed in mobile devices.

And our views that we talked about last quarter haven't changed.

But just to remind, you're correct.

I think the second half this year will be relatively muted.

It will have a step-up, but it will certainly not be the level of step-up that we experienced last year.

And you'll recall, I mean we nearly doubled the business from first half to second half last year.

And that makes for a tougher compare coming into the second half.

I mean all that being said, I'm very pleased that the team -- we saw actually growth here in the second quarter on a year-over-year basis, which is just a testament to our team continuing to fight for every opportunity that may be there.

In terms of why that demand changed, again, we spoke about that 90 days ago.

But it is a combination of architectural changes in certain devices together with some expectation of overall unit volume being down.

And I think we see a kind of a sharper year-over-year reduction in smartphones and maybe a more modest change in areas like laptops and tablets and other accessories.

And some of the smaller accessories, things like wearables and other accessories, we see even some opportunities for growth this year.

I mean it's more significant reductions that we've seen in the higher-volume products.

Okay.

Great.

And you just touched on the previous question regarding the 5G opportunity not just in mobile networks, but you touched on the mobile devices itself.

Could you talk about the content opportunity in next-generation 5G phones versus the legacy phones or older phones?

Sure.

I mean it's -- when we think about mobile devices, we've talked about this for a long time.

For us, it's all about the complexity of the hardware.

And to the extent that the devices themselves as opposed to the software that those devices act as host for, the devices themselves, to the extent that they have innovation in them, to the extent that they have added complexity, that's usually a good trend for Amphenol.

So as it relates to 5G, there's no question that as phones adopt 5G, that may require the phone manufacturers to add complexity to those devices because they have another signal path associated with it.

Because if you think about it, a 5G phone got to also work on a 4G and a 3G and a 2G network.

It's got to also work in WiFi.

It's got to also have Bluetooth and other connectivity standards associated with it.

And so it is really just an added signal path in a device and many of the architectures that may result in added complexity.

I'm not going to saying that it's universal because every device is going to have its own unique design associated with it.

But clearly, having that additional functionality, by and large, should prove a positive for us amidst all the other dynamics that come in mobile devices.

Our next question is coming from Shawn Harrison with Longbow.

Wanted to just speak on the M&A environment in that big step-up year-to-date in terms of the numbers of acquisitions and at very reasonable prices, particularly considering the valuation of the large deal that went out this week at.

But are you seeing more M&A and sellers willing to, I guess, deal with Amphenol at this point in time?

Or is it just more timing?

I know things come and go, but it seems 7 deals year-to-date, significant revenue contribution at a good valuation, maybe the macro slowing down means more M&A activity through the back of the year for you guys.

Yes.

Well, thanks very much, Shawn.

I mean I think there's no question that our program we've -- has accelerated this year objectively.

We've announced 7 new companies to the Amphenol family here in the first half of the year.

Is that related to the overall market environment?

I wouldn't be necessarily so quick to jump to such a conclusion.

I mean I'll tell you that the companies that we have so far brought into the Amphenol family this year, there's one thing that we're very, very proud of about these 7 acquisitions.

Virtually all of them are family-founded, family-run companies where, in fact, the family members, in almost every case except 1 or 2 where there was a natural retirement, have stayed with Amphenol to continue to run those companies together with their organizations.

And these companies were not short, necessarily, courtships.

These were companies that we have been developing relationships with over a long time.

And sometimes, the date of closing is a little bit more luck of the draw than anything because there is a certain time period it takes to incubate those relationships.

There's a time period it takes to execute on the mechanics of acquisitions, the negotiations and all of that.

But I just think it really speaks to the strength of our acquisition model that here we are, 7 companies that we've acquired this year, all of them family companies, each unique with a unique advantage from a technology perspective, complementary from a market perspective really across diversified array of our markets and across diversified geographies.

I mean you go back, SSI, which was a family-owned company.

You look at companies like Aorora, which was a family-owned company in China.

You look at the companies -- I mean these are all just fabulous companies.

They're not like Johnny-come-latelies.

These are not investment vehicles for someone.

These were real heart-and-soul companies of founders.

And again, we're just so proud to bring those founders in.

The reasonableness of the price, I will tell you, we're not looking to just buy companies on the cheap.

We work with these founders over a long time period.

We develop a relationship, and we find a meeting of the minds at a price level that ultimately provides fair value to them and ultimately can deliver great returns for Amphenol.

And I think this year, we've just done an outstanding job of doing so.

To the extent are more sellers willing to deal with us, and I would say that the more acquisitions we make, the more successful we are after the acquisition in bringing those companies into the Amphenol family, allowing them to flourish in our special organizational approach, it does, for sure, strengthen each time incrementally our reputation among sellers.

And I can tell you, some of the acquisitions that we announced this quarter, we were not the only one talking to those companies.

They had choices, for sure.

I mean there's -- as you mentioned, there is a thirst to make acquisitions in the interconnect industry.

And sometimes, that results in also prices that we wouldn't necessarily pay.

But these companies all -- we were not only the only suitor, and yet they chose to join into the Amphenol family because they believed in the fact that their companies in our culture would have a wonderful future.

And I think as we go forward, I think that reputation will continue to precede us and will be an asset for the company for a long time to come.

And then as a brief follow-up, Adam, the weakness in the broadband business, is that solely tied to weaker MSO CapEx?

Is there something within the portfolio that Amphenol may be lacking in terms of how the technology is shifting in that field?

Yes.

I mean I would say it's really related to just overall spending.

I mean that market in the broadband market at the MSO, I mean yes, there has been a lot going on in that space.

There's a lot of discussions around content.

There's a lot of discussions around distribution.

And our team has a great portfolio of products, and we've augmented that here with the Kopek acquisition, strengthened that, for sure.

But really, by and large, what we have seen is just overall spending levels being down as the customers in the broadband market, those MSOs in particular, but not just MSOs, also the satellite and telco side of the delivery, that they grapple with the sort of changing landscape that is there.

Look, ultimately, we have a very strong position in that space, and it's one that long term, we continue to think is a great asset for Amphenol even if we are seeing incremental weakness there.

And that has resulted in us downgrading for the year our outlook for the broadband market.

Our next question is coming from Deepa Raghavan with Wells Fargo Securities.

A question for you.

Can you comment on your performance by regions if able to, North America, China versus Europe?

Also with regards to North America and Europe, which are some of the verticals that surprised you versus your plan?

China, I guess, we can all make a guess.

But how about Europe and North America?

And I have a follow-up.

Sure.

Well, thank you very much, Deepa.

I mean just to comment broadly, it should not surprise anyone that with the strength that we saw in military and commercial air that -- which is not a wholly North American business, but it certainly has a strong North American component, that our performance was strongest in North America.

We -- from a local currency perspective, that was clearly the strongest.

I think Asia was maybe the lowest, as you alluded to, and Europe was sort of in the middle of that.

In terms of which verticals or which of our end markets as we would term them, performed in what way on a geographical market, again, I mean, military was strong in all the geographies where we sell, but it's just a little bit disproportionate to North America.

I'd say that in automotive, I alluded to the fact that on an organic basis at least, we saw weaker performance in Europe and then a little bit less weak but still some weakness in North America, kind of flattish performance in Asia.

And in the mobile networks market, in fact, we saw strength in North America and in fact, in Asia and a little bit weaker in Europe, just to pick a few of them by example.

Got it.

Just as a follow-up, can you talk about your automotive outlook in China?

I mean what are some of the conversations you're having with your clients in terms of recovery in the region?

And if you can also add any commentary on industrial segment outlooks in China.

I mean that's one we don't -- we all seem to grapple with.

There is some short-cycle weakness, but not necessarily sure enough at this point in time, but just curious what your thoughts are on automotive and industrial outlooks in China.

Sure.

I mean I think when we look into the second half, there is clearly, in the automotive market, more of a negative sentiment in China than maybe there has been.

And when I say negative sentiment, I really mean that there was an expectation that the second half would be a little bit more favorable.

And I think customers have really pulled back from that expectation.

And at this point, we see really, in the second half, no real recovery at least expected by our customers.

All that being said, in the automotive market, again specific to China, there's a lot of great stuff going on.

I mean you look at the innovations that are happening in electric vehicles and other next-generation automotive systems where our company has done a fabulous job of positioning ourselves.

I mean there's no doubt about it that, that is a long-term great platform of growth for the company.

And our position in Asia in general, and in particular in China, has really strengthened over the recent years.

I mean you will certainly recall and others on the phone will recall that our automotive business traditionally was a much more European-dominated business where effectively, in the past, 2/3 of our business was in Europe, and roughly 1/3 was in North America and then just a little bit in Asia.

And today, the picture of that business is much more balanced across those geographies where maybe Europe is just a touch bigger than the other 2, and the other 2 geographies are relatively balanced.

And that, I think, gives us exposure to those areas.

But when you have a slowdown like the Chinese market has seen, and that's been very, very broadly reported, that now has a little bit more of an impact on us than it would have had in the past.

With respect to industrial, I wouldn't say necessarily that we have seen a significant change or moderation of expectations more specifically to China.

I think we've probably seen a little bit more of a moderation of industrial outlook in Europe together with our distributors where -- and distribute for us.

Industrial has a little bit more of a component of distribution to it than maybe some of our other markets.

Obviously, automotive sell much through distribution to the automotive market.

And I think -- so industrial has a little bit of different dynamics, I would say, than automotive, which is -- seems to be a little bit more a Europe and a China story.

I mean you asked about China, and maybe I'd just make a quick comment here with respect to China.

I mean as everybody on the phone knows, our company's just done a fabulous job over the years of building our position in all geographies, and that's a real testament to again how we empower our people worldwide to build their businesses on a local basis.

It's no secret that if you read our 10-K, you would see that China last year represented just over 30% of our sales.

But I think it's important to take that also in context, which is that the mobile devices market, which last year for us was roughly 17% of our sales, it's essentially fulfilled almost exclusively in China.

And so if you take that out, you're then talking about kind of a low to mid-teens of our sales in China.

And that -- some portion of that is for foreign invested companies who are manufacturing products that are sold around the world, and some portion of that is for the domestic market.

And we're really proud of the balance that we have, but it is just important, I think, to take that -- China in context.

Our next question is coming from Wamsi Mohan with Bank of America Merrill Lynch.

Adam, sorry if I missed this, but would you mind elaborating a little bit on the second half revisions in the IT datacom market?

Was it largely in the networking equipment where you saw that?

Or we are writing that down from an IT datacom perspective?

Or was it more broad-based with like server, storage, transmission?

Can you give us any color on that?

And I have a follow-up.

Sure.

Thanks very much, Wamsi.

I mean I would say that it is not just in networking.

It does include in networking, but we have seen really moderated outlooks from customers in networking, in servers and in storage.

So I wouldn't say that it's confined to that.

Our business is a very, very broad business.

We are really the interconnect leader in that space.

We have a strong position with customers around the world in all those applications together with the web service providers that have really emerged over the last 4, 5 years as an important channel.

And I would just say that it's probably more an OEM issue than it is necessarily a web service provider issue.

But across the OEMs, it's -- I wouldn't say that it's just networking or just servers or just storage.

It's really all 3 of those have some impact.

Okay.

And then is there any way to just give us a ballpark on this headwind to margins from M&A versus the cost actions that you're taking, the 50-50, the 25-75, some rough estimate of that so that we can think about what the margin contribution from these deals are?

And it seems to me that historically, the largest of deals that you did like FCI were dilutive, but more -- I mean at least now in the second half, we're talking about these 4 deals being somewhat dilutive to margins, and you mentioned sort of multiple suitors.

Should we just think that the market now is such that the returns that were generated prior from acquisitions are no longer possible in the future just given the more competitive M&A interest from your peers?

And is it reasonable to think that from here forward, no matter -- I mean if it's any meaningful size of revenue, then that's going to be initially dilutive?

No.

Wamsi, look, I would actually not say that.

I think that when we think about the contribution from our acquisitions, we still feel very, very good about the long-term contribution, the returns from those acquisitions.

I mean look, we paid prices ultimately that were very reasonable prices.

But as I said earlier, they were reasonable for the seller and reasonable for the buyer.

They were not bid up.

I think the point that I was making earlier was that yes, there were, in certain cases, not all of them, in certain cases, multiple suitors.

But it was really the compelling proposition for those companies to be a part of the Amphenol organization that ultimately was a very, very powerful attraction and not necessarily that we were willing to pay the last $0.01 highest price for every one of those acquisitions.

I mean these sellers, in particular, the family-owned companies, they deeply care, they deeply care about the future of those companies.

Is their organization going to have a future?

Or is it going to get swallowed up into just kind of a big, bad matrixed organization where you don't even find it later on?

And I think that, that sort of care that they have for the future of that organization brings to Amphenol a lot of benefits in "the market for acquisitions."

We still see fabulous potential in our acquisition program.

It's true.

I mean these companies have lower margin.

I mean they're not dilutive per se.

They are accretive to the company from an EPS perspective, no doubt about that.

Do they have lower margins initially?

They do, but do we have a long-term goal that is already well established with the sellers who are remaining with the company that as part of Amphenol, they will over time move those margins up to the company average or maybe better?

Absolutely.

That is the conviction.

That is the mission of all those companies as they join Amphenol.

And so I think when Craig was talking about the kind of margin headwinds in terms of the lower-than-average margin of these acquisitions, it's not that they are lower than average in perpetuity.

I mean our goal is obviously not for that to happen, and I think we have a great track record of demonstrating that we can generate excellent returns from these companies.

And we have full conviction that we'll continue to do that for the future.

I mean relative to your sort of initial question, I think Craig has been pretty clear about the fact that our conversion margin, if you take out the money that we're spending on making some -- taking some of the actions in light of lower volumes, and if you take out the kind of -- the below-average margins of the acquisitions, we really are performing really well from a sequential and a year-over-year conversion margin basis.

Our next question is coming from Steven Fox with Cross Research.

Just one question from me, please.

Adam, you seem to constantly be able to find ways to reduce costs during tough times, and I would imagine that every time, it's a little bit different.

So I was wondering if we could get a little bit of color around what you're doing right now and especially since you seem to be accomplishing a lot of tasks very quickly on -- across your business units to offset some of these declines.

Thanks so much, Steve.

I mean look, this is not so much black magic.

I mean I mentioned earlier that the mindset of an Amphenol general manager is always to drive with one foot on the gas and one foot on the brake.

And I think what that just means is that you scale as it comes.

I mean you build the business always with the understanding that one day, you may have to scale it back.

And thus, you make decisions accordingly.

You don't put massive infrastructure that is fixed forever in place.

You take a little bit more of a flexible approach.

Maybe you lease a building instead of you own the building.

Maybe you buy not always the #1 most expensive machine when all the times are good.

Maybe you buy the machine that is the right machine, not always the best machine.

When you need people, whether that be salespeople, engineers, whatever, when you're growing, well, sometimes you -- your people work a little bit harder as opposed to just adding in lockstep the number of people that you need.

And then when it comes to a time like this where the demand is certainly lower than you had expected, well, you're doing the opposite.

You are adjusting down, and you're doing that in a framework of a cost structure that was built with an eye to doing what you're doing on that day, which is you knew when you built that cost structure that one day, you might have to reduce it.

And that makes the job of doing that not nicer.

It's not a nice job, but it does make it a little bit more readily available to get done without inflicting just real harm to the organization.

And I would just also add here that when we -- we take this very seriously.

There's nothing any of us like doing less than telling someone they don't have a job, but we do that in a very focused fashion.

So we have around the world 110 or let's call it now 114 operating units inside of Amphenol.

We have many that are actually performing very well, that are growing, that are investing, that are doubling down on executing on behalf of their customers.

And we have others who have some more significant impact because of the nature of the products that they sell, the customers to whom they sell it and the markets that they work in.

And you can imagine that those general managers running those more impacted businesses, they are taking really quick action, and that is really tough action sometimes.

It's people.

It's working with your vendors to make sure that there's cost reductions.

It's sometimes shrinking the footprint of what you have.

It's -- sometimes, it's moving something.

I mean there's -- in Amphenol, everything is fair game.

There are no sacred cows, but the ability to do that is actually enabled in the good times, not in the bad times.

And I think that's the really important concept from our culture to recognize that those times will come.

Business cycles will come.

The environment that we see right now is not a shock to anybody.

I mean we would like to not have it, but it is what it is.

And we're fortunate that the mindset of the people was that as we were growing strong in those same businesses, they had an eye that one day this would come and they made decisions accordingly.

And look, it is not something we like to do, but it is something that we know how to do.

It is something that is really second nature to that in-the-moment agility of how an Amphenolian general manager operates in his or her business every day.

Our next question is coming from Jim Suva with Citigroup Investment Research.

I just have one question, and that is on the restructuring actions that you spoke about today.

Typically, Amphenol has normal, like you said, one foot on the gas, one foot on the brake and looking forward optimistically but being careful for the puts and takes that could happen with the economy and customers.

With that being said, it seems like in your press release and some of the more commentary on this call, you're talking about restructuring a little bit more.

Can you help us understand?

Is that because this kind of the slowdown in demand happened faster?

Or is there -- are you shifting footprint a little bit more effort than in the past?

Or anything we should kind of think about that because you are a much larger company today than, say, a decade ago.

Well, thanks very much, Jim.

I mean I don't know that we're talking about it necessarily more.

We maybe had a few more questions about it.

So that has -- and we're trying to be responsive to those questions.

But I mean look, was this a more sudden situation?

I think there's a portion of what we're seeing here in our outlook that was a little bit sudden.

There was a day there was a government policy that had a certain impact, and there were some direct and indirect effects that came out of that, and that was really in mid-May.

So I think to some extent, there was a little bit of a suddenness to some of the changes in the expectation, but this is not different.

You should not think that we're approaching this in a different way than we have in the past.

I think the mention of that, as you alluded to in our press release, I think, and Craig commented already very extensively about that, I mean it's really just to be transparent with everybody in particular as one looks at the sequential guidance and the profitability performance thereof.

So I wouldn't read anything more into it than that.

I mean we're doing what we always do.

This is normal course of business, and it's just, you said it, and I've said it now 2 or 3 times, you've got one foot on the gas and one foot on the brake.

And look, I will just say one last thing about that, which is when times are good, you say, well, you've got one foot on the gas and one foot on the brake, you're making decisions to protect yourselves going forward.

Well, when the demand is also down, we are also aggressively pursuing growth opportunities, very aggressively, and that has always been the hallmark of Amphenol through every cycle, whether those be big cycles or small cycles, that this does not take our eye off the ball of developing products for customers, supporting customers in every geography and ultimately coming out of any sort of change in demand environment in a stronger position than we had come into it.

And the last question is coming from

(technical difficulty)

with Cowen.

Just given the company is globally kind of responding to the trade tensions and potentially like a shift in overall policies and kind of like retooling supply chains, how -- can you talk about how attractive M&A is in other jurisdictions now?

Are you like specifically looking at potentially electronics businesses in like Vietnam or places like that where you're seeing increased investment to kind of diversify away from China specifically from some of your customers?

Yes.

So I mean I think it's a great question, Joe.

And I would just say it's the current kind of reordering or however one wants to call it, I mean I'm not going to try to predict what this environment is.

I know there's something going on.

Ultimately, how it's going to turn out is a little bit hard to say.

Is it changing our appetite or focus on M&A?

I would say no, it's not.

I mean we've been -- we've always had cast a very, very wide net in our acquisition program.

So I wouldn't say that this is causing us to go look at buying companies in Vietnam or going someplace else or diverting our focus away from China.

But I would say this.

There is something going on in the world.

And I'll let much smarter people than me write about it and talk about it.

Whatever it is, if it's a reordering, if it's sort of a reversion back from globalization towards localization, I mean whatever it is, again not really my place to get into the mix of talking about that, but what I can tell you is our organization is really purpose-built to deal with regardless.

I mean over the last number of decades, the way that we have approached building the business out around the world has been to put empowerment behind general managers around the world, enabling them to build comprehensive organizations, local organizations who can really adapt in real time to both the markets that they serve, to the customers that they work with, to the competitors that they face and to the geographies in which they operate.

And I think that unique tailor-made approach has worked extremely well in an environment where the world has been embracing, let's say, globalization.

If that changes, it's still a purpose-built organization because it is so localized, because we have not dispatched dozens or even hundreds of expatriates around the world, planted American flags everywhere that we go and said, "Here, come buy from us because we're Americans." No, no.

Far from it.

We say, "Work with us because we are local.

Work with us because we are the same as you.

We are from the same country.

We are speaking the same language.

We're developing products that you need, not that some other country thinks that you need."

And so if the world does, in fact, change tack here, which it may or may not, I can tell you that the Amphenol organization stands ready to embrace whichever way that it goes.

And I think that diversity of our business serves so well in a time like this.

We will never run away from the fact that we're headquartered in the United States, and we're proud to be an American company, prouder than you can imagine.

At the same time, we're very proud to be in Germany.

We're very proud to be in Macedonia.

We're very proud to be in India.

We're very proud to be in China, wherever we operate, and we operate as a global company who is really functioning as a local leader in every place where we go.

And the diversity, the span of the business, a business where I can tell you, aside from one customer who we spoke about last year in the mobile devices market where we didn't have a customer that represented more than 3% of our sales last year, I mean this is a broad and balanced business in all geographies.

And whatever comes our way in this dynamic that you alluded to, I can tell you that the Amphenolian organization stands ready to prosper and take advantage of that for the future.

Speakers, that was our last question.

Very good.

Well, again, I appreciate everybody taking that extra bit of time today to join us on the call.

I wish you all a wonderful summer.

I hope you get a little bit of time to rest and be back with your families, and we look forward to getting back together with you here in 90 days.

Thanks so much.

Bye-bye.

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