Amphenol Corporation (APH) Earnings Call Transcript & Summary

They're more than welcome. I don't know if the compliance will allow that.

Well, let's talk about just margin expansion in general, like not even just the CommScope acquisition. Craig, I know every quarter, you get hounded by, oh my God, your incremental operating margins are so amazing. And how much more room is there to grow? So maybe you can just talk about what do you see out there that gives you confidence that there is durability here? There's room for more expansion on the margin side?

Yes. No, I think -- I mean, listen, I think you kind of need to step back and say why are we at the margins we're at today and then the baseline of that. And I think we've talked about this a little bit before in that I think the baseline is there's no doubt that electronics are becoming more embedded, more important in terms of to our customers' architectures in terms of applications. And we've talked about AI, but you kind of go across all of our markets and kind of see that very clearly. And as part of that, interconnect products to enable those electronic architectures are also becoming more important. They're adding more value. They're more complex. They're more dense. There's higher power, there's higher speed, all of these things. They're in harsher environments. And as part of that, ultimately, that's value we're creating for our customers. And as part of that value, we ultimately are able to share some of that value through pricing and otherwise, ultimately to ensure that we keep some of that through margin. But you just don't keep it by definition. You keep it because we, as a company and our general manager specifically, they're very -- have a lot of cost discipline. They think about everything in terms of their factory. We talk about the automation capabilities we have. And ultimately, that's driven a lot of value in terms of cost efficiencies within the company as we've grown. And then ultimately, you look at the growth and you kind of take the fact that we're adding a lot of value with our customers. We're ultimately leveraging that into great margin expansion because, number one, the growth has been significant. Number two, the cost discipline and even in light of inflation and tariffs and other things that we've had. And then ultimately, through automation capabilities and other things, we're also more important with our vendors. I mean we're a larger company. We're ultimately able to have strong relationship with our vendors to ensure that we're getting the best pricing, the best service from our vendors to do all that. And then lastly, and kind of coming full circle, we just talked about CommScope. We're also seeing improvements in our -- in the acquisition, ultimately, margins that we've had. I mean CommScope is not the only one that we're actually seeing margin improvement from that is ultimately adding to the margin expansion that we've seen over the last couple of years here. So with all that said, I absolutely see opportunity in the future as we continue to grow to be able to expand that margin. And I think that we're certainly not at -- at certainly the highest level we'll be in as we continue to grow. And I think that there is certainly opportunity. And as our -- as the products become more important to our customers over time, which I think this will be a continued trend. So we're certainly confident of that.

Great. And then switching back just to on the IT datacom AI side of things. I mean, you often hear about other constraints that may sort of lump -- make the customer readiness, the hyperscaler readiness to accept product a little bit more lumpy, right? And so these are big, again, big investments, big dollars, big revenue numbers for you guys as well. How do you manage that risk where there is customer readiness potential delays, not due to your product, but some other constraints that are out there?

Yes. I mean we just managed through it. This is kind of what an Amphenol general manager does is deal with volatility. Volatility can be to the downside. Volatility can also be to the upside. Both of them can be equally challenging. And so I think that our team has dealt with that, is dealing with it and will deal with it by just every day making sure that they understand what they need and they align their resources accordingly. And part of aligning your resources means like when you add resources, you also think about what it means and may mean when you don't need those resources in the future. And this is this concept we talk about -- we talked about last night, driving with one foot on the gas and one on the brake. And I think every Amphenol general manager, regardless of whether their foot is deep on the gas or they're slamming on the brake, they always are touching both of them and thinking about if I'm going to buy this machine today, what if I don't need that machine 2 years from now? Well, you're going to make slightly different decisions about how you do that. And in many companies, the decision is taken away from you because they just have this cycle of writing off and restructuring and writing off and restructuring. Many companies, they go through this. They just pedal to the metal. And then when they hit a wall, they take a big write-down, then a new CEO comes along and then they start from scratch again. And that's kind of the cycle that many go in. That's not how we operate. Our average general manager has a tenure of 17 years. They've lived through these various cycles in very impactful ways. And so when you're buying a new machine or hiring a new team of people or signing a lease for a new facility, all the sort of nuts and bolts that it takes to grow a business. When you're working with your customers to share the risk of investments, you're doing all that with the mindset knowing that you're going to benefit on the upside, but you're also going to be the one who has to clean it up if it goes in the wrong direction. And so you just embed everything you do with as much flexibility as possible while still not sacrificing the opportunity to take that upside when it's there. And that's just a mindset.

Very amazing. Let's just talk a little bit about the fact that some of your peers, specifically in the optical space, NVIDIA has made some big announcements where they've been giving some of your -- some of the participants a lot of money to ramp up the scale of this optical TAM that could be expanding pretty meaningfully here. How are you looking at the spend? I mean, clearly, on one side, it benefits given now that you're a very strong player in the optical side of things as well. But then just given the level of investments, are we overbuilding? Are you concerned about the fact that there might just be a lot of overbuilding that's going on here?

Look, I'll let others answer as to whether these long-term contracts and the investments are going to be a good or a bad idea long term. I mean we work very closely with our customers. We get a lot of commitments from our customers. We also make 0 announcements about it. As you know, we're going to continue to make 0 announcements about it. I know much to your frustration. That's how we've always been, and that's just kind of who we are. We let our customers get the media attention, and we try to stay pretty low key, which, to be honest, in today's environment, political and otherwise, I think being low key is a pretty good principle in running a company. We stay ultra-low key. I apologize in advance. You will not see me on CNBC. You will not see me getting interviewed. Sherri is really good at saying, Adam does not do interviews when she gets called. I'm here today with you, of course. And -- but we are working very intensively with our customers on making sure that to the extent that we make investments that they're sharing in the risk of that. And they share in the risk of those investments in a variety of ways. It includes giving us long-term non-cancelable orders, which you could reframe as a big strategic agreement if you wanted to. It includes giving us participation in investments when we make significant investments that are tailor-made for certain customers. So we've had all of that happening. But in Amphenol, it's going to always happen in a very quiet fashion.

If we can switch -- I mean, it's a big day for Apple, right? We're going to be hearing announcements hopefully here very shortly. Mobile devices, that's an interesting segment for you guys as well. I think you've talked about Q3 rising here 20% sequentially. You have some new programs launching. But it's been a little bit of a dour market for smartphones in general and for laptops and PCs as well, just given the memory inflation that we're seeing. Just as you sit here, what are you thinking about the opportunities for mobile devices, the content opportunity for you guys and just that segment, like the growth drivers in that segment?

I mean we're really excited about it. And dour, I mean, we did grow 14% organically last quarter, and that's before any big announcements that folks are talking about. So I think our team in mobile devices has demonstrated for a very, very long time period, the ability to outperform in this space regardless of what the overall market is doing. And we've taken a very simple principle in mobile devices from the beginning, which is we love this business, and we will continue to participate in this business so long as there is a premium on the hardware. We're not a software company. And I remember when I first became CEO, gosh, 18 years ago, there was all this talk about, well, these are basically becoming commodities, and it's all about the software and what does that mean for your business long term? Well, during that time period, our business has roughly grown by about 8% organically on an annualized basis during that exact same time period. And it's done that because, number one, there's been continued innovation in hardware and maybe that's even accelerating today because it turns out Customers want this thing to not just be an empty vessel for some software. They want it to actually create functionality. You're paying a lot of money for these things. They should delight you. And I think we work with a lot of different customers who are really good at delighting their end customers. And the second is, again, gets back to kind of the same principle we talked about with AI is our team has shown the wherewithal to execute on these very critical next-generation ramps with our customers, which a lot of folks in our industry struggle with. And why have we pretty consistently outperformed our expectations or why have we achieved that level of high single-digit organic growth over a very, very long time period, is really because we've executed when we needed to, when our customers needed us the most and thus took a little more than our fair share of that business. Our business is really a business that's interconnect products, it's antennas and it's mechanisms and the mechanisms include, of course, things like complex hinges. We've been making hinges for a very, very long time. I mean, I think we made an acquisition of a company who made hinges, gosh, 23 years ago. 22 years ago. And we've been in that business forever. And there's been lots of evolutions of what these kind of mechanisms can do from phones that slide up and down to phones that do this to different devices that do lots of different things. I mean you'll find our products on eyeglasses. You'll find our products on people's wrists in their ears. You'll find our products in weird pendants and security cameras and everything that is kind of a mobile device. And I think these devices are becoming more varied, more complicated and actually more exciting over the time. And then what does AI mean for the evolution of mobile devices, I think, is another interesting thing over the long term because having that ubiquity of accelerated compute present in your hands, on your wrist, on your pocket, on a pendant, in your ears, on your eyes, it can be pretty cool and can also drive some innovation long term.

Great. Just going to ask the audience questions to raise your hand. We have a question here.

Can you please chat a bit about your China manufacturing footprint, the evolution there in the past couple of years and looking forward, any derisking, anything else you do?

Yes. No, I mean, look, we have a very global footprint. We operate in 45 countries around the world. And over the last 25 years, as you can imagine, as the whole world was moving to China and other places in Asia, but in particular, China. And as the China domestic market was growing, we did a great job of building up an organization there of general managers, local general managers like we have in every country. So if you go to an Amphenol factory in India, you're going to meet Indian general managers. You go in China, you're going to meet Chinese general managers. And our team in China has been phenomenal at creating innovations, in particular, around automation. I have to say doing automation in China has been a phenomenal asset. It wasn't that we made that decision. It's just our team organically created that, actually supporting teams around the world and building up automation capabilities outside of China as well. But we've also seen a lot of growth recently in places like Southeast Asia, where we've got customers -- we have customers who have a wide array of different desires of where we manufacture. We are not making any blanket headquarters decisions about where we manufacture stuff. We will follow our customers. Our customers want us to support them in Thailand or India, we support them in Thailand and India. I mean we have the largest footprint in our industry in India. We have an enormous footprint in Southeast Asia. We have an enormous footprint in Mexico, in Eastern Europe. In the U.S., I mean, I think we have 50 facilities in the United States with 25,000 people domestically here in the United States. And so China remains a very significant place for us to manufacture, both for the local market as well as for customers who are doing their contract manufacturing in and around China. But we're expanding all over the world.

One more question.

I have to say every year, I come to this presentation, it's always a highlight. Thank you for your executor I don't see you on TV. I just -- I thought maybe you could just talk about you have so many opportunities in front of you, and it's like we love all our children. But if you think about where the biggest opportunities over the next across the company, what would you highlight as things that our eyes on?

Well, look, I mean, there's no doubt that this AI remains a huge opportunity, and I'm sure it will continue to be a significant opportunity in the years to come. Let's take that as a given. I mentioned before the defense industry, where I think we're seeing a blossoming of defense innovation really unlike anything in a generation or 2. I mean, look, if you go all the way back to World War II, when we were building our defense interconnect business, working in partnership with the allied forces. There was a lot of innovation then, too. When you go back to the beginning of the space race, there was a lot of innovation. I would put today in a similar category of defense innovation, similar to like World War II and the space race of the late '60s, where you've seen just extraordinary innovation and demands put on electronics in the defense market. We talked about mobile devices. I don't want to repeat myself there. I'm going to eventually result in telling you, I love all my children equally, by the way, if that's -- there's the punch line for you. I'm super excited about what AI ultimately means for the industrial market. What it means for robotics, what it means for the medical industry, what it means for resource extraction, what it means for energy generation, what it means for factory automation, what it means for rail transit and the like. The commercial air market, our team is doing phenomenal in. The CIT acquisition was a real quantum leap for us there in broadening and deepening our capabilities. And I'd be remiss without mentioning that I think the communications networks market long term is also going to be a great space to be as the world leader, both in wireless and wireline. Again, having AI means we're going to have to connect to AI, and we're going to do it in a multiplicity of fashion through interesting devices that connect to advanced next-generation networks. So I love all my children equally.

And then coming back to Craig, like given he wants to spend for all his children, you have free cash generation. Like how do you guys decide? I mean, obviously, there's an acquisition in Military right now as well. I mean how are you thinking about free cash flow generation and dividing it amongst your various priorities, including acquisitions and CapEx.

Yes. No, thanks. I mean just from a -- and I'll be quite care because I think we're out of time. But I think the free cash flow generation of the company continues to be extremely strong. And M&A will continue to be kind of our priority in terms of using our free cash flow. I mean 50% or so of free cash flow over time is what we kind of talk about. But ultimately, the pipeline is strong, and we're continuing to kind of weight that free cash flow because it just creates a great return on investment for a number of reasons. And then obviously, our dividend program that we have, and we will continue certainly committed to that. And then our share repurchase program, we have a $2 billion program that ends kind of at the end of this year. As you can imagine, we'll probably renew that at some level, and we'll continue to use that as our last lever. But the leverage of the company continues to be extremely healthy and strong, and we'll continue to generate a lot of free cash flow and try to deploy that in a way that makes us leverage that into more growth.

Thank you. That was fantastic.

Yes. Thank you all very much.