Amphenol Corporation (APH) Earnings Call Transcript & Summary

All right. Good morning, everyone. Asiya Merchant here. Welcome to Citi's 2024 Global TMT Conference. Like I said, my name is Asiya Merchant. I cover the tech hardware, tech supply chain companies here. Really pleased to have Amphenol's management here, Adam Norwitt, President and CEO; Craig Lampo, SVP and CFO. I will let the -- maybe the company introduce himself. If not, we can jump right into questions. If you have anything you'd like to make a few opening comments. Otherwise, I have a bunch of questions that I'll be going through, and we'll be opening it up to investors. I would just appreciate if you wait for the mic to come if you have any questions. So welcome. Welcome, Adam. Welcome, Craig.

Thank you very much. And I'll just say one quick comment, which is -- thank you very much for hosting us, and it's always a pleasure to be back at the post-Labor Day Citi Conference. And I know people have lots of questions. So we'll turn it back over to you, but thanks so much for all your interest in the company.

We've been asking all the companies that have been here right away about end demand, first of all, like help us understand where end demand is. You guys have already reported calendar 2Q obviously. As you're sitting here in calendar third quarter, how are you thinking about end demand? You guys are exposed to a wide variety of markets.

Yes. Well, first of all, we're very pleased with the company's results in the first half of this year. And I think if you look in the second quarter, we grew by 18%, 11% organically, with broad-based growth across many segments of the company's diversified markets. And I think we gave a strong guidance for the third quarter. And sitting here in September, I wouldn't say anything different than what we guided to. Our company has had great success over a long time period. I'm 26 years now in Amphenol as of July. And during that time, we've benefited from every revolution that has come along in the electronics industry. And the bet on Amphenol has always been not a bet on one individual thing, but on the proliferation of electronics and the growth of electronics long term. And I think we're very fortunate to continue to be living in revolutionary times where our organization has perpetuated the leadership that we have in reacting to those great opportunities. And the near-term environment, the medium-term environment, the long term all create really great excitement for us.

Maybe if you dial it back to where you started the year, which end markets do you think did better? And as you look ahead, which end markets do you feel really good about, maybe have better visibility and if you look at over the next, let's say, 3 to 6 months?

Yes. So I think as we came into the year, I mean, we've clearly had strong performance in IT datacom. Last quarter, we grew 57% on a year-over-year basis. We grew 29% sequentially even in that market but, at the same time, had great performance in our military market or defense market, strong performance in Commercial Air. We've had ongoing strong performance for a number of years in our automotive business. And while it slowed a little bit in the second quarter, we're still growing by a rate of 5% organically, which is a really strong comparison to the overall market where I think folks feel that that's a pretty muted demand environment. We were encouraged last quarter, in particular, with the kind of beginning of a turnaround in mobile networks. We actually grew by 22% sequentially in mobile networks. We grew -- I think it was 7% organically on a year-over-year basis, and that's after, I don't know, 6, 8 quarters of more challenging time period. And we announced, as you know, the acquisition of the wireless assets of CommScope, which we call Andrew. It wasn't time to coincide with that turnaround in the mobile networks market, but it's something that we're excited about for the long term for the company. And mobile devices, we outperformed in the second quarter and I'd say even in the whole of the first half compared to what we had anticipated coming into the year.

Okay. AI, the topic that's on everybody's mind. Clearly, AI -- just maybe you could spend some time framing for us how Amphenol thinks about the AI opportunity as it relates to your TAM. And specifically, just given you have a leading position in AI, how does that influence perhaps your growth expectations? .

Yes. So I mean, we've been talking about AI, let's just say, since maybe early last year, externally. We've been working on AI for a long, long time period. I mean, in fact, our engineers -- we have one of the engineers in the company who's one of our top high-speed engineers. He did his PhD thesis on AI networks, and this was like 20-plus years ago, 25 years ago, I think, he did. He actually made his wife where -- like this funny thing where he'd created a neural network out of her brain, and that was his PhD thesis. It's unbelievable. This guy is still one of our leading high-speed engineers designing next-generation products for AI systems. So we've been working on AI for a very long time period. And it was really -- I don't know when you'd know, but in like November of '22, when the world started talking about ChatGPT and the investments that were forthcoming related to AI. And what makes AI special from our perspective is the architecture of a data center for AI, where rather than a traditional data center where you have this kind of trunk and branch and leaf approach to storage and processing, with AI, you -- essentially coding these neural networks, this fabric-based systems where every processor has to talk to every other processor in order to create these -- whether they be large language model or other types of AI models. And that just requires an enormous intensity of high-performance interconnect products, both the high-speed products that allow the ultra-high speed and ultra-low latency communication between the chips. And that latency and speed are of equal import in these systems because if the signals take too long to get back and forth to each other and if you're comparing trillions of factors, the models are obsolete by the time they're released because it just takes too long and it takes too much compute power. And we're able to solve a bottleneck of that through our high-speed, low-latency products. But in addition to the high-speed products, you have all the power products that go along with that. And I think a lot has been talked about the power consumption and the challenges around power in these creations of these AI networks. And again, we're part of the solution there by helping to create more efficient power transfer through the racks within the data centers, even everything from the grid all the way through to the boards. And so we've been working on these things for a very long time. We work with customers across the entire stack of an AI system, from people who make chips, all the way to people who configure the ultimate data centers and everything in between. And I would tell you that the range of our customers is extremely broad. The types of programs and the number of programs that we're working on is extremely vast in that nature. And we're selling an incredible array of different products onto different systems that go along with that. And what ties them all together is you're creating these high-performance neural network-based AI data centers. Why are we in a leadership position? I think it comes down to really 2 things. Number one is just technology. When you have been the leader in high-speed interconnect technology and one of the leaders in power technology with really the broadest range of power products for a long time period, it actually goes back 19 years ago to the acquisition of Teradyne Connection Systems, when we acquired the world leader in high-speed backplane connectors. And we've built upon that base of high-speed backplane to have a range of products that goes from backplane connectors to IO connectors, high-speed cable, high-speed cable assemblies, cable backplanes and everything in between that is really the broadest in the industry. So there's this underlying product technology. But coupled with that,is the unique entrepreneurial flexibility and the agility of our organization to react in real time when these opportunities arise and to be faster than our competitors, to be broader than our competitors and to do that with a deeper, higher performance range of technologies. And I think that's positioned the company in a very strong way for the future. When I think about AI in the short, medium and long term, we feel very, very positive about this opportunity for the industry more broadly, but in particular, for our position in that industry.

CapEx that is needed to -- I guess, that you guys need to invest to take advantage of this AI opportunity, I think we get a few questions from investors wanting to understand how we should think about the CapEx trajectory.

Yes. So we've talked about this publicly, and I think what we've said is that we expect a little bit of elevation in our CapEx in the short term. Now we didn't really see that last quarter. I think our CapEx was right in the range, sort of, what, 3.5-or-so-percent of sales last quarter. But we do anticipate, for a couple of quarters, to have a little bit of elevated CapEx. And that comes particularly because these are extremely high-performance products. They require a certain degree of automation. By the way, we do the vast majority of that automation in-house, one of the unique capabilities that we've built up over many years. It is a proprietary capability to make our own manufacturing equipment, in addition to just the products that we make. And that's part of this sort of moat that we've created in Amphenol. It's not just the underlying design properties of the products, but actually how to make these things. And how you make these things is not easy whatsoever, and so we started -- gosh, I mean, it's been more than a decade of slowly developing in-house competency around manufacturing equipment. But that does require a certain amount of capital to build those equipment, and some of that capital was just on labor because we're building the machines ourselves. But that comes from the complexity, the reliability and the requirements that are put upon these products. And so there's a little bit of that right now. But again, this is not going to be a categorical monster thing. It's not like we're betting the company on this, but it's in line with what our customers are telling us that they need. And you can also imagine that when we invest a little bit more than we're accustomed to, that we would work with our customers to ensure that we've got good protection from those customers and commitments from those customers that stand behind whatever investments we would make.

And we saw some of that in the second quarter with the order of strength we saw in the datacom market in terms of orders that cover some of those capital that we're -- we'll be investing is. And then the other part of the increase in capital is the defense market we talked about as well. It isn't just the IT datacom market. We have some increases in capital related to defense spending, given the growth that we've had in that market to support that.

And they're also extremely high performance products that go in some of the harshest and most high-reliability environments that you can imagine.

Right. Okay. And you talked a little bit about a broad set of customers, because I think investors are concerned about customer concentration, not necessarily for Amphenol, but for others in the supply chain, including the chip makers, about the customer concentration in AI. So if you can just help investors here understand Amphenol's across -- Amphenol's customer composition for that AI. And related to that, what you're hearing from those end customers? Where is there the greatest momentum? Are they all performing at the same level or same speed in terms of adopting AI? Just kind of expand on that, it would be great.

Yes. So I mentioned earlier, we're present with AI customers all the way from folks who make chips and, I say, folks, well, who make chips, all the way to people who make servers, networking equipment,to people who can figure and design data centers, to people who actually own and operate those data centers. And there, across that spectrum, is a multitude of customers. Now I know that there are a few customers who have multitrillion market caps that everybody focuses on, and you can imagine, we work with all of those. But we work with a lot of other customers as well. And the products that we're selling to those customers are all what I talked about, high-speed, power products, fiber optics and the like. And I think what we're hearing from all customers, across the universe, continues to be very positive. I mean, our growth of 57% year-over-year last quarter with a very, very strong book-to-bill that we had in IT datacom last quarter., Our guidance for this quarter, which would imply also very robust growth here in the third quarter is all part and parcel of a very positive view that we have from our customers. And I think that positive view stems from the fact that this buildout of AI, whatever it may be, it feels to me, and I've been through a lot of these revolutions, very similar to some of these real sort of seismic changes that we've seen in the industry, whether it was the advent of the personal computer. And I was not around for that one, but I've certainly read about it and heard about it, whether it was the advent of the Internet and the explosion of the Internet back in year 2000 and with the bubble of 2001 and 2002. I mean, I don't know if you've looked at a graph of kind of data and traffic on the Internet. From year 2000 compared to today, it doesn't even register, like the collapse of 2001 doesn't even register on the visual of the graphic. But at that time, this was an enormous revolution that created a lot of opportunities for us and for the industry. Then you have the revolution in mobility, which came really with the 3G and smartphones and all of that, and, ultimately, the mobile Internet. We've seen other revolutions, things like EVs and electrification of everything. This AI feels like it is of that same special nature. There's economics behind it. It's creating and solving real problems. And we work with customers who are working on applications with AI, whether it's in things like pharmaceuticals or defense or so many other places where you're looking at quantum leaps in performance, in development of drugs, in ability to identify friend or foe in a defense context. So many other applications that ultimately drive economics behind these investments that our customers are making. And so when you think about the environment today and the long-term prospects for that, I believe that there's really great long-term prospects for the economics around AI. And for us, what really matters is the nature of these systems does create, regardless of individual designs of individual systems, the architecture of an AI system long term is just going to require more interconnect, and it's going to require higher performance interconnect and a broader range of those. And that creates a unique opportunity for us over the long term.

Maybe switching just a little bit outside of AI. What about the general purpose infrastructure? We just had Dell last week. They talked about growth in the server business. After many quarters of demand growth, that we finally see that in their revenue line as well. So I know that market's been fairly depressed while everything has been pushed towards AI. Just given that you guys also have a leading position broadly across on the IT datacom side, what are you seeing there on the general purpose infrastructure?

Yes. I think we talked about last quarter, we were encouraged to start to see a little bit of our growth, I think, especially on a sequential basis, which came not just from AI, but from underlying IT datacom demand. And there's no doubt that IT datacom suffered from a real kind of explosion of demand during the pandemic when everybody had to work from home or a study from home or interact with their family from home. That drove Internet traffic. That drove a massive amount of investment, and we saw that ourselves. And all the way -- I think starting in Q3 of 2020, we started to see extraordinary demand in IT datacom and into 2021. And I think they've built up both in inventory of components, but also an inventory of capacity in the networks that we then, we being the whole industry, suffered through over a year or 2 during that time period. And then with AI coming along, I think there's no doubt that these investments in AI, to some extent, cannibalized some of the investment that folks were making in, again, more traditional AI infrastructure -- or traditional IT infrastructure. And we're encouraged that I think that's balancing a little bit today. The fact is like data center traffic, you see sometimes these buildouts and then those excess capacity in the network and the capital spending will relax a little bit and then you start to redline the networks and then they start to build again. And I think we're at a more normal environment for that underlying IT spend. Now I'll caveat all that by saying that it's not like there's a bright line between a server that's used exclusively for AI or partially for AI. So we have very strong demand from a lot of customers in the IT datacom world, and I can't always tell you what is exactly AI and what is exactly not AI. But I think overall, we're encouraged by the momentum in the overall market.

Okay. Perfect. Maybe just touching base on some of the other segments, which are in Comms. Like maybe outside of data centers, you talked a little bit about mobile network infrastructure, mobile devices, which includes, I guess, laptops and smartphones for you. If you could just double-click on how is demand there, how sustainable is that. And what are some of the drivers that you're seeing there that suggest demand could sustain here?

Yes. So just on mobile devices, I think we came into last quarter thinking that our sales would be down on a sequential basis, kind of mid-single digits or so. We ended up, up 9% sequentially, which was a fair amount better than we had anticipated. And I think it's just another proof point of the agility of our team who works on mobile devices. I mean, this is an extraordinarily agile team. I was with a bunch of them week before last in China, and they're just phenomenal in how they react to demand that changes sometimes on a week-to-week basis. And they're able to flex capacity and get out there and capitalize on the opportunity that maybe our competition cannot do, and I think they did that here in the second quarter. We guided in all the devices to be up, I think, in the 20% or so range here in the third quarter, which is a constructive guidance, especially given that we outperformed in the second quarter. So I think we feel good about that environment. I have no idea what the overall demand for mobile device is going to look like in the second half. I have never been really correct at guiding in that market. It's almost impossible to create an outlook in mobile devices. But what I'm very confident in is to the extent that there are incremental opportunities for demand from our customers, our team will seize upon that and do a great job of getting more than our fair share of the business. On mobile networks, it's a small market for us today. And I say today, because we obviously announced the acquisition of what I call Andrew, which is the wireless assets from CommScope. But our business today is just 4% of sales. It had strong performance last quarter. I mentioned we were very pleased to see that market kind of turning after more than 2 years of a more challenging capital environment. And I think a similar dynamic hit the wireless operators around the world. They had to increase capacity during the pandemic because of all the same reasons of IT datacom, and now we start to see that normalizing, let's say. And that's reflected in not only our year-over-year growth, but a pretty strong sequential growth. We anticipate that market in the third quarter to be a little bit down sequentially, which is kind of normal seasonality in that space. But I would just say that with the acquisition of Andrew that we signed and announced just before our earnings in July, and we expect it to close sometime in the second half of...

First half.

Thank you, Craig -- of next year. This is a fabulous company. It is a true technology leader in the interconnect and antenna offerings associated with next-generation mobile networks. I've known this company for virtually my entire career in Amphenol. I mean, they are truly the technology leader in this position. And I think coupled with Amphenol's breadth and exposure across the market, their technology, their manufacturing capabilities and their position with operators in this space, I think it'll position us for the long term to be a very, very strong supporter of our customers in an area that, maybe in a given quarter, is people say, "Well, is wireless CapEx XYZ?" Long term, whether it's with AI or EVs or autonomous cars or whatever, the Internet and data traffic is, long term, still relying on mobile networks to the vast majority of its consumption. If you think about how much of our time today do we sit at a desk connected to a cable versus are we on a device connecting to a network, and I think that the Andrew business positions us to benefit and to be an enabler of that long term through all the generations. We're at 5G today, there will be 6G and 7G. And I don't know if I'll be around for 8 and 9G, but who knows? Maybe I will be. I'm still fairly young. And we're just really excited that this now positions us so strongly in that market. Yes. The other thing I'll say, and I know it's not -- you didn't specifically ask that, but as I talk about the Andrew acquisition, it's another piece of us making sure that we have a balanced and broad exposure to every part of the electronics industry. We've always said for many, many years, however people get data, we want to be present as an enabler of the interconnect solutions of those systems. People get data in lots of different ways. However people consume that data, we want to be an enabler of the devices and the networks that are helping them to consume that data. And I think this is a piece of that very long-term strategy that we've had.

Fair enough. I think some questions around -- I mean, that's a pretty sizable acquisition. You're -- just closed on the CIT one as well. That's a pretty -- that was a pretty sizable one. I guess investors' concern was just given Amphenol and given the size of these acquisitions, how do we make sure the culture that you guys have developed over the years continues, the agility that you guys talk about and the due diligence in making sure these companies fit into the culture that Amphenol has developed over the years?

Yes. No, it's a great question. And I think -- I mentioned earlier the Teradyne acquisition, which is 19 years ago. We still have never made an acquisition that, on a proportional basis, is the size of Teradyne. At that time, Teradyne was 1/3 the size of Amphenol. And so for us to make an acquisition of that size today, we'd have to have revenues of close to $5 billion. And neither of the -- even these 2 collectively don't represent as big as Teradyne was back in 2005. But more importantly, if you've looked at how we have scaled the organization of Amphenol, in order to preserve, protect and to scale the culture of the company, I think it reflects the fact that not only do we have our 137 or so general managers around the world, we have 14 operating groups. And above those 14 operating groups, you'll recall, 2.5 years ago, we created 3 global divisions. And those global divisions, which are Harsh Environment Solutions, Communication Solutions and then Interconnect and Sensor Systems, those are run by division presidents who run themselves multibillion-dollar enormous global enterprises, which each are bigger than what Amphenol was when I took over. When I took over Amphenol, we had less than $3 billion in sales in my first year as CEO, and these businesses have substantially more than that in all cases. And so when you look at a CIT acquisition, you can imagine that there's a division president, in this case, his division controller, they are working on that CIT acquisition, which is part of our Harsh Environment Solutions division. The CommScope deal, which we call Andrew, is part of our Communication Solutions division. So you have a totally separate organization. The only thing in common is our headquarters, and our headquarters remains fairly petite. Let me say that. And we have an M&A team. We have a tax team. We have an audit team. We have a legal team. And certainly, in a transaction, we're involved in all the transactions. These 2 deals, while we closed one just before we announced the other, it's not like they were done on exactly the same day. We were doing diligence at different times and all of this. But I have no doubt in my mind that our ability not only to effectively negotiate, to effectively review the due diligence of and to close on the deals, [indiscernible] ability to make sure that those companies are successful as part of Amphenol, that they internalize and promote the culture of the company, there's no doubt in my mind that we'll be able to do that successfully, given the span of our organization today. And embodied in all those individuals is the same priority that I have, which is to protect and to secure and scale the culture of Amphenol.

Fair enough. Let me just see if there's any questions in the audience. We have one here. Do you mind just bringing the mic? Thank you.

Just kind of building off what you were talking about there. Can you maybe talk about capital allocation a little bit going forward? Maybe talk about it in the context of leverage or the dividend increase. You've got the repo program in place. You did $2 billion for CIT. You've got Andrew's coming. You've issued debt. More debt is likely, it seems like, over the next year. Just how should we think about your ability to continue to deploy capital in the context of leverage or credit ratings or kind of what's kind of governing your ability to deploy capital?

Yes, sure. Thanks. No, great question. I mean, the company, for a long time, our capital allocation program has been pretty consistent, and certainly, this has not changed in the near term, even with these big acquisitions. I mean, our net leverage has been extremely low, given that strong cash flow we generated. We've generated very significant cash flow over the years and continue to expect to generate significant cash flow. And that cash flow allows us to do these big transactions as well as regular transactions as well as be able to do the things like return capital to our shareholders. And our capital allocation, as we've talked about before, is roughly, over time, about half of our free cash flow, over time, will be acquisitions. And then we continue to believe that those create a more significant return on investment for our shareholders. And the other half, again, over time, would be kind of return to capital to shareholders, whether it be that dividend program or share repurchase program. And I think even given the dividend increase and the share purchases over time, you'll continue to see kind of that rough allocation kind of over time. Our net leverage even with -- once we close on the Andrews acquisition, the CommScope acquisition we talked about, will continue to be relatively low, certainly below our investment-grade rating. We don't intend to -- we don't have any intention. We wouldn't breach that our current investment-grade rating kind of that we're currently at. And given the significant earnings that we generate, significant cash flow, I don't think you'll see a lot of change. And reality is that the company is much bigger than it has been from a -- and we're able to do deals of this size, and you'll continue to see deals of some size and some smaller deals and medium-sized deals that we've continued to do. So I really view just the fact that we happened to have 2 bigger deals currently has any change in how we view our capital allocation program over time. And the company will -- is continuing to be very healthy from a cash flow and leverage perspective, and we'll continue to be.

Fair enough. Margins for AI relative to the Communications segment, I think these products kind of fall into your -- investors are concerned about margins here. Just if you could double click on that, how you think about margins for your AI products versus the broader portfolio.

Yes. I mean we don't talk about specific margins on specific products, as you know. You know the margins of our various divisions. But I think there's one more sort of qualitative principle that's important to understand. Margin is related directly to value that you create for customers, and you create value for customers in lots of different ways. And one of the ways you create value for customers is through technology. One of the ways is through execution, being there when they need you the most. Another way is the reliability of the product and quality of the product. And while we have, for sure, on a broad basis, industry-leading margins, I mean, our margins last quarter, 21.3% operating margins were a record for Amphenol, you can imagine there's a span. It's not like every product of the company results in exactly the average gross margin of the business. And you can also imagine that there is some relativity to the value that we create for our customers.

Okay, great. Switching maybe a little bit to the industrial side. I think people are just wanting to understand, is this end market coming out of -- it was fairly weak. Have we seen destocking here? Are we now coming out of that trough? And what are you seeing from your end customers there?

Yes. So industrial has had a couple of tough quarters, and I think -- it's important to think about industrial, it's a very fragmented market, and so there's lots of different things. We consider industrial to be everything from alternative energy to rail mass transit to factory automation, medical and the like. So it's not just a one-size-fits-all market. But there's no doubt that over the last, I don't know, 4 or so quarters, there have been some muted demand. We saw negative books-to-bill and the like. We're encouraged this quarter that not only did we see a little bit of sequential organic growth, I think just a hair up on a sequential basis, we did see a positive book-to-bill. And we saw, I think, importantly, a meaningful sequential growth in our sales to our distributors. And you mentioned destocking. And industrial is a market where there is some role of distribution, especially in the more standardized products. And the fact that we were able to see some sequential growth, and again, this was not just sort of low single digit, but actually meaningful growth from our distributors, is at least and indication. I'm not going to tell you it's the indication that says like everything is turning around in industrial. Because for sure, Europe is still very weak. And we talked about the fact that on a sequential basis, while our overall growth, I think, were up, I don't know, 1% sequential or something like that, Europe was still down on a sequential basis organically while North America and Asia were up. And so it's not a broad story around industrial. I think Europe remains challenged. We are encouraged to see, in North America and Asia, some growth. And as we come into the third quarter and the second half, as we get more certainty around where that is, we'll certainly let everybody know. But I think we were encouraged, at least, by the kind of green shoots of some stability here in the second quarter.

Okay. And as you look ahead, some -- any particular demand drivers there? I know you mentioned very fragmented market, but if you had to pick certain end markets where you think the demand for -- on the industrial side was a little bit better versus some of the other end markets.

Yes. I mean, I think -- again, it's a very fragmented market, but like -- we saw a little bit of stronger performance in medical. We've got a little bit of stronger performance in alternative energy. Conversely, something like factory automation, which is a more kind of Europe, even specifically German-focused area, we probably saw a little bit of incremental weakness in that area. I think heavy equipment, we saw a little bit of stronger performance. So again, it's pluses and minuses across the various segments. But overall, I'd say it's a better picture than maybe a quarter or 2 ago.

Fair enough. I'm going to talk a little bit about the auto market. You talked about -- you guys have been outgrowing your peers and clearly outgrowing the auto market itself as well. Just maybe if you can talk a little bit about the demand dynamics there in the automotive end market.

Yes. So you're correct. I mean, we've outperformed in auto now first time in -- basically through the whole pandemic cycle. And I'm just so proud of our team who works in auto because they've just done a fabulous job in really 2 respects. One is capitalizing on the sort of new revolutions, in that the new revolution, of course, that everyone talks about is electrification and whether it's EVs or hybrids or whatever, but anything being electrified in a car. And I think our team has done a great job there. And then just almost as important, they've done a fabulous job in just capitalizing on all the other electronics that come in cars. And I know there's a lot of talk about the pendulum of EV and this and that. But the fact is the vast majority of our sales are actually agnostic to drivetrain, but they're not agnostic to proliferation of electronics. And I think we've seen a real continued increase in content and I think we've gotten more than our fair share of that content during this cycle. Now I would say that in the second quarter, while we grew 5% organically, that was a bit slower than maybe in the first quarter and certainly have been last year. I think last year, we grew like 12% in auto. On a sequential basis, we were down a little bit. We've seen a little bit of incremental weakness in Europe, and we guided in the third quarter to be a bit down in this market, in particular, driven by the Europe dynamics. And there's some talk of a little bit of extended shutdowns and the like. And you can't open a paper lately without hearing something about Europe and the automotive market that they're in. But look, I was a couple of weeks ago in China, and I met a bunch of our team who are working automotive. And it's just amazing how broad we've been able to get a design-in position in -- across vehicle platforms, across nameplates, across applications in those cars. And that's just really a great testament to the agility of our team working in this space.

Okay. Fair enough. A little bit on raw materials. I mean, they've been like all over the place, and I know you guys have exposure to copper, other raw materials as well. Just maybe if you can talk about how you're thinking about raw materials and impact from that to your COGS and margins.

Yes. No, I mean raw materials, as we know, have kind of gone up and down. And depending on the month, year end, just kind of a different response to that. But I mean, overall, yes, I wouldn't say we're overall concerned about even the later increases or decreases. We do a good job, as an overall company, kind of managing that with our customers. I think that if it was a longer-term increase, we would have maybe some impact in terms of pricing with our customers. But in the short term, we're typically able to kind of manage the raw material. In fact, I mean, you see our margins. Adam mentioned kind of record margins here in the second quarter. And I wouldn't say the impact of raw materials has had any significant impact in terms of our expected margin performance for the overall company. I mean, the reality is that as long as the commodity environment kind of is somehow correlated with the demand environment, you're kind of able to typically manage that in a pretty good way. When it sometimes become uncorrelated, which doesn't happen so often, but it does happen, that's when it becomes a little bit more difficult to manage, but I don't see that happening in the current environment.

And if you don't mind reminding, do you guys hedge copper or you don't?

We don't do any hedging of that sort.

Right. Okay. Fair enough. Maybe just as you talk about M&A and opportunities ahead, I know, Adam, you're super excited about all the electronification opportunities ahead and you're broadly exposed to end markets. But as you look at your portfolio, like any 1 or 2 end markets that you think, okay, we would probably want to double down on this one in the future that gets you super excited? I mean, I'm not talking about anything M&A but you've kind of look ahead, yes.

I mean, look, the short answer is no because we want to double down on everything, and we want to double down on nothing at the same time. I mean, we consider ourselves really careful stewards of the company's money. And we believe that in this world of electronics, the only bet we should make is that electronics are going to continue to grow at a pace broader than overall GDP. And that's been a pretty good bet for 3 decades, and I expect it to be a good bet for 3-plus decades to come. And in doing that, we're going to make sure that we have a pipeline of acquisitions that are broad across every aspect of the interconnect market and to make acquisitions across all of our end markets, even those which are not necessarily, in the moment, in favor because you never know when a company is going to be for sale when that right inflection point is with the ownership and the like. And I think ultimately, that strategy of not making bets with our acquisition specific to individual markets, but rather betting on the long-term prospects and the positive prospects of electronics industry, that's been a really great way to steward our shareholders' money over a long time period. And we continue to do that, and we intend to do that for a long time to come.

Yes. Yes. I think we're all about done here. So I appreciate -- appreciate you guys.

Thank you very much. Thank you all very much for your time.

Thanks, everybody.