APH - NYSE

Hello. And welcome to the Second Quarter Earnings Conference Call for Amphenol Corporation. Following today’s presentation, there will be a formal question-and-answer session. Until then all lines will remain in a listen-only mode. At the request of the company, today’s conference is being recorded. If anyone has any objection, you may disconnect at this time. I would now like to introduce today’s conference host, Mr. Craig Lampo. Sir, you may begin.

Thank you very much. Good afternoon, everyone. This is Craig Lampo, Amphenol’s CFO and I am here together with Adam Norwitt, our CEO. We would like to welcome you to our second quarter 2023 conference call. Our second quarter 2023 results were released this morning. I will provide some financial commentary and then Adam will give an overview of the business and current trends and then we will take questions. As a reminder, during the call, we may refer to certain non-GAAP financial measures and 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 $3,054 million and GAAP and adjusted diluted EPS of $0.74 and $0.72, respectively. Second quarter sales were down 3% in U.S. dollars, 2% in local currencies and organically -- and 4% organically compared to the second quarter of 2022. Sequentially, sales were up 3% in U.S. dollars in local currencies and 2% organically. Adam will comment further on trends by market in a few minutes. Orders in the quarter were $3,044 million, which was down 12% compared to the second quarter of 2022, but up 5% sequentially, resulting in a book-to-bill ratio of 1:1. GAAP operating income was $620 million in the second quarter of 2023, which included $4 million of acquisition-related costs. Excluding these costs, adjusted operating income was $624 million. GAAP and adjusted operating margins were 20.3% and 20.4%, respectively, in the second quarter of 2023. On a GAAP basis, operating margin decreased by 40 basis points compared to the second quarter of 2022, but increased by 40 basis points sequentially. And on an adjusted basis, operating margin decreased 30 basis points compared to the second quarter of 2022, but increased by 30 basis points sequentially. This modest year-over-year decrease in adjusted operating margin reflected a strong downside conversion on the sales -- lower sales volumes, as well as the dilutive impact of acquisitions, which are currently operating below the corporate average. On a sequential basis, the increase in adjusted operating margin reflected strong conversion on the higher sales levels. Our team continues to execute well in the quarter, and we are proud to have sustained these healthy levels of profitability despite the continued range of challenges around the world. During the second quarter, we were excited to have closed on the previously announced acquisition of RFS. The value of the net assets we acquired were in excess of the RFS purchase price. And as a result, we recorded a noncash gain of $5 million in the second quarter, which has been excluded from our adjusted EPS results. In the third quarter of 2023, we expect to incur restructuring costs associated with RFS, which we estimate will be in the range of $5 million to $10 million. These costs will be excluded from our third quarter adjusted EPS results and are excluded from our Q3 2023 guidance. Breaking down second quarter results by segment, relative to the second quarter of 2022, sales in the Harsh Environment Solutions segment were $889 million and increased by 12% in U.S. dollars and 9% organically and segment operating margin was 27%. Sales in the Communications Solutions segment were $1,162 million and declined by 16% in U.S. dollars and organically and segment operating margin was 20.5%. Sales in Interconnect and Sensor Systems segment were $1,003 million and increased by 4% in U.S. dollars and 1% organically and segment operating margin was 18.5%. The company’s GAAP effective tax rate for the second quarter was 21.9% and the adjusted effective tax rate was 24%, which compared to 23.3% and 24.5% in the second quarter of 2022, respectively. GAAP diluted EPS decreased 3% to $0.74, compared to $0.76 in the prior year period. And on an adjusted basis, diluted EPS increased -- decreased 4% to $0.72, compared to $0.75 in the second quarter of 2022. Operating cash flow in the second quarter was $536 million or 120% of adjusted net income, and net of capital spending, our free cash flow was $442 million or nearly 100% of adjusted net income. We are very pleased to continue to deliver such a strong cash flow yield. From a working capital standpoint, inventory days, days sales outstanding and payable days were 87 days, 71 days and 48 days, respectively. Through the focused attention of our management team during the quarter, we were able to bring inventory days back in line with our normal range. During the quarter, the company repurchased 2 million shares of common stock at an average price of approximately $77. When combined with our normal quarterly dividend, total capital return to shareholders in the second quarter of 2023 was $280 million. Total debt on June 30th was $4.3 billion and net debt was $2.8 billion. Total liquidity at the end of the quarter was $4.8 billion, which included cash and short-term investments on hand of $1.5 billion plus availability under our existing credit facilities. Second quarter 2023 EBITDA was $736 million and at the end of the second quarter of 2023, our net leverage ratio was 0.9 times. We are very pleased that the company’s financial position remains extremely strong by any measure. I will now turn the call over to Adam, who will provide some commentary on current market trends.

Well, thank you very much, Craig, and I’d like to extend my welcome to all of you here on the phone today on this beautiful summer day here in Wallingford, Connecticut. And I do hope that all of you on the call, together with your family, friends and colleagues are enjoying a little bit of your summer thus far. As Craig mentioned, I am going to highlight some of our achievements in the second quarter. I will then spend a moment to discuss our trends and the progress across our served markets and make some comments on our outlook for the third quarter, and then obviously, we will have time for questions at the end. With respect to the second quarter, our results were better than expected as we exceeded the high end of our guidance in sales and adjusted diluted earnings per share. Sales declined 3% in U.S. dollars and 2% in local currency reaching $3,054 million, with growth in commercial air, military and automotive end markets, as well as contributions from our acquisitions, slightly more than offset by moderations in the mobile networks, IT datacom and mobile devices segments. On an organic basis, sales did decline by 4%. We are very pleased that the company booked orders in the quarter of $3.44 billion, which represented a book-to-bill of 1:1. As Craig described, our margins in the quarter, adjusted operating margins were 20.4%, which was down 30 basis points from prior year, but which improved by 30 basis points from the first quarter sequentially. I am very pleased that our margins in the second quarter once again reflected outstanding execution by our global management team, who continue to quickly adjust to changing demand and costs amidst these very dynamic times. Adjusted diluted EPS in the quarter of 72% -- $0.72 declined 4% from prior year but increased 4% from the sequential prior quarter. We also generated strong operating and free cash flow of $536 million and $442 million in the second quarter, yet another demonstration of the high quality of the company’s earnings. I am extremely proud of the Amphenol team around the world. Our results this quarter once again reflect the strength of our Amphenolian entrepreneurial organization, as we continue to perform well amidst a very dynamic and challenging environment. We are pleased to announce today that we closed the previously announced acquisition of the North American cable and global base station antenna business of RFS. Despite some current moderation in the mobile networks market, we remain excited about the long-term prospects of RFS as part of the Amphenol family. We now expect this acquisition to generate roughly $30 million of sales in the second half of 2023. In addition, we are pleased that just in the last few days, we closed on the acquisition of EBY Electro. EBY is based in the state of New York in the U.S. with annual sales of approximately $15 million. And EBY is a designer and distributor of terminal block interconnect products to the North American industrial market. The addition of EBY further expands our offering of high technology interconnect products into the diversified industrial market. As we welcome these outstanding new teams to Amphenol, we remain confident that our acquisition program will continue to create great value for the company. Our ability to identify and execute upon acquisitions, and successfully bring these new organizations into the Amphenol organization remains a core competitive advantage for us. Now turning to the trends and progress across our served markets. We are very pleased that the company’s end market exposure remains highly diversified, balanced and broad. In particular, in hits these very dynamic times, Amphenol’s end market diversification continues to create great value for the company. The military market represented 12% of our sales in the quarter and sales in this market grew by a very strong 21% in U.S. dollars and 19% organically, and this was really driven by broad-based growth across most segments within the defense market. Sequentially, our sales increased by a better-than-expected 8%. Looking into the third quarter, we expect sales to remain at these robust second quarter levels. I just have to say that we remain very encouraged by the strength of the company’s position in the defense market, where we continue to offer the industry’s widest range of high technology interconnect products. Amidst today’s highly dynamic geopolitical environment, countries around the world are expanding their investments in both current and next-generation defense technologies, thereby increasing the long-term demand potential for Amphenol. We continue to make targeted investments to expand our capacity and look forward to supporting this increased demand with our broad product offering. Turning to the commercial aerospace market. This market represented 4% of our sales in the quarter and we had another very strong quarter with sales increasing by a robust 40% in U.S. dollar and organically from prior year, as we benefited from both the continued recovery in global aircraft production, as well as our ongoing efforts to expand our position within this market. Sequentially, our sales grew 9% from the first quarter, which was much better than expectations coming into Q2. We are also very pleased that in the second quarter, our commercial air business was able to reach its highest ever level of quarterly sales. Looking to the third quarter, we expect sales to moderate slightly from these strong second quarter levels and I am just truly grateful to our team working in the commercial air market. With the ongoing recovery in travel and thus demand for jetliners, our efforts to strengthen our breadth of high technology interconnect products, while diversifying our market position into next-generation aircraft are paying real dividends and we look forward to realizing the benefits of these initiatives in 2023 and beyond. The industrial market represented 26% of our sales in the quarter and sales in this market were flat in U.S. dollars and local currencies, but did decline by 7% organically, as growth in medical, transportation, oil and gas, alternative energy and rail mass transit segments was more than offset by moderations across the other segments of the industrial market together with lower sales to the distribution channel. On a sequential basis, sales declined 3% from the first quarter, which was somewhat worse than our expectations. This reflected some incremental slowing of demand from certain customers, in particular, in factory automation and heavy equipment. Looking into the third quarter, we expect sales to moderate slightly from these second quarter levels. Nevertheless, and despite this positive demand, I am very proud of our outstanding global team working in the industrial market. They continue to pursue growth opportunities across the many distinct segments of this exciting and truly diverse market. I remain confident that our long-term strategy to expand our high technology interconnect antenna and sensor offering, both organically and through complementary acquisitions has positioned us to capitalize on the many revolutions that continue to occur across the industrial electronics market. We look forward to realizing the benefits of this strategy for many years to come. The automotive market represented 23% of our sales in the quarter and sales in this market grew 9% in U.S. dollars and 11% organically. This was really driven by broad-based strength across most automotive applications, including electric and hybrid electric vehicle applications. Sequentially, our sales increased by 7% from the first quarter and this was slightly better than our expectations coming into Q2. For the third quarter, we expect sales to be roughly at the same level as we achieved here in the second quarter and I am just really proud of our team working in automotive. Their performance so far this year is yet another confirmation of the benefits of their focus on driving new design wins with customers who are implementing a wide array of new technologies into their vehicles and this includes electrified drivetrains, as well as a multitude of other exciting applications. The mobile device market represented 8% of our sales in the quarter and our sales did moderate by 8% in U.S. dollars and 6% organically in the second quarter, as strength in smartphones and related products was more than offset by declines in tablets and wearables. Sequentially, our sales increased by 3%, which was substantially better than our expectation for a mid-teens decline that we had coming into the quarter. As we now look into the third quarter, we anticipate sales to increase sequentially in the mid-teens from these second quarter levels on seasonal strength. While there’s no question that mobile devices remains our most volatile of end markets, our team once again in the second quarter did an outstanding job of capitalizing on opportunities to realize incremental sales. Their agility and ability to adjust resources in real time with the changing levels of demand continues to create value for Amphenol. As we head into the second half of 2023, our team stands poised as always to leverage our leading array of antennas, interconnect products and mechanisms to capture any opportunities for incremental sales that may arise this year and beyond. The mobile networks market represented 4% of our sales in the quarter. Sales declined by 24% in U.S. dollars and 32% organically as we manage through the expected and broad-based weakness in spending by network operators and wireless equipment manufacturers. Sequentially, our sales in the second quarter declined by 6%, which was a touch better than our expectations coming into the quarter. Looking to the third quarter, we now expect sales to remain at roughly similar levels as we achieved here in the second quarter. Look, there’s no doubt that it’s a challenging short-term wireless investment environment. But nevertheless, our team continues to work aggressively to realize the benefits of our efforts to expand our position in next-generation 5G equipment and networks. With now the addition of RFS together with our already broad array of products, when customers once again drive renewed wireless investments, we look forward to benefiting from the increased potential that comes from our unique position with both equipment manufacturers and mobile service providers. The IT datacom market represented 18% of our sales in the quarter and while sales did decline by 24% in U.S. dollars and organically from prior year, our performance in the quarter was actually better than we had expected 90 days ago. In fact, on a sequential basis, sales increased by 6%, which was in excess of our expectations for sales to be flat. This sequential uptick in sales was driven by a surge in demand from customers accelerating their investments in AI-focused systems or alternative intelligence -- artificial intelligence, which offset somewhat weaker demand in more traditional markets. We also saw robust orders for AI-related applications, which is a strong affirmation of our team’s success in positioning Amphenol as a true leader in the interconnect systems that support AI. Looking to the third quarter, we expect sales to increase modestly from these second quarter levels. While we are continuing to manage through the inventory adjustment in the broader IT market, we are more encouraged than ever by the company’s position in this important space. Whether enabling the current surge in AI-related installations or the broader range of Internet-enabling networks, our team has done an outstanding job developing leading high speed, power and fiber optic interconnect products that are enabling our OEM and web service provider customers to continue to drive their equipment and networks to higher levels of performance. This creates a continued long-term opportunity for Amphenol. The broadband market represented 5% of our sales in the quarter and sales were flat from prior year and up just 1% organically as broadband operators tempered their procurement levels. On a sequential basis, sales declined by 2%, which was modestly better than our expectations. Now looking into the third quarter, we do expect a mid-single-digit sequential decline in sales as operators moderate their spending following several quarters of strong demand and investments. Regardless of this momentary pause in demand, we do remain encouraged by the company’s strengthened position in the broadband market and we look forward to continuing to support our service provider customers around the world, all of whom are working to increase their network coverage and bandwidth to support the proliferation of high speed data applications to homes and businesses. In addition, there remains a significant amount of government funded initiatives, particularly in North America, which gives us confidence for the future of the broadband market. Now turning to our outlook and assuming the current market environment does not meaningfully worsen and also assuming constant exchange rates. For the third quarter, we now expect sales in the range of $3.040 billion to $3.100 billion and adjusted diluted EPS in the range of $0.72 to $0.74. This would represent a sales decline of 6% to 8% and an adjusted diluted EPS decline of 8% to 10% compared to the third quarter of 2022. I remain confident in the ability of our outstanding management team to adapt to the many opportunities and challenges in the current environment and to continue to grow our composition while driving sustainable and strong profitability over the long-term. Finally, and really most importantly, I’d like to take this opportunity to thank the entire Amphenol team around the world for their truly outstanding efforts here in the second quarter. And Operator, at this time, we would be very happy to take any questions that there may be.

Thank you. [Operator Instructions] Our first question is from Luke Junk with Baird. You may go ahead.

Good afternoon. Thanks for taking the question. Adam, given all of the attention on AI recently. Just was hoping you can help us better understand the materiality to Amphenol based on what you look, so far amid what you are calling the surge, I guess. Quantitatively, I am thinking in terms of percentage of sales, either relative to IT datacom or maybe even relative to the company, overall? And then qualitatively, just any perspective on sizing the longer opportunity -- longer-term opportunity from your point of view given what’s clearly very early innings right now and just understanding how it’s scaling in the business near term would be very helpful? Thank you.

Well, Luke, thank you very much. Yeah. Look, without putting specific numbers on to sub-segments of our end markets, I will just tell you that as we came into the second quarter, we had a certain expectation to be flat. And I would tell you that kind of the underlying IT business was maybe even a touch weaker as customers continue to manage through inventory that had built up over the last couple of years. Yet we ended up growing sequentially by 6%. And really, all of that upside -- more than just that upside came really from the near-term demand that we are seeing from a variety of customers who are building out their AI-related systems. In addition, we had a book-to-bill overall for the company of 1:1, but we had a very strong book-to-bill in our IT datacom market. I would tell you, it was about 1.1:1 in IT datacom, where we saw just really strong bookings, which gives us confidence as we guided in the third quarter to be sequentially up. And so I’d say that it’s -- while it’s not the dominant thing in our IT datacom market far from it, because it’s really -- as you say, the early innings. We see the investments in AI as being a real significant dynamic for our company in the future -- in the near-term and in the future and to think about why that is you really have to get to the architecture of these AI systems. In particular, as customers build out these very intensive systems with these GPUs and otherwise, they built them out in a structure that requires just an enormous amount of interconnect. They call it kind of a fabric, if you will, of interconnect, where you have -- you are creating effectively a neural network. And in the neural network, everything has to connect to everything else and it has to do that with high speed and low latency, while using as little power as possible and that just puts an enormous premium on the highest of technology, high speed products, on the most efficient interconnect -- power interconnect and these are all things where Amphenol has a strong leadership position in the industry. Look, long-term, I think, we are in the early euphoria of AI right now and I don’t want to kind of try to prognosticate what AI will mean, let alone what it will mean sort of ethically and more -- metaphysically and all of those things, but what we know for sure is it requires a lot of interconnect today. And as our customers are building on these networks, we stand ready to react to them in real time to make sure that they can stay competitive in a world that has become a real -- a significant dynamic for our customers. Many of them see this kind of existentially and when they need us the most is when we step up to the plate always as Amphenol and are there for our customers. And I think that means that as they continue those investments long term, they will continue to turn to us as really their first phone call.

Thank you. The next question is from Samik Chatterjee with JPMorgan. You may go ahead.

Hi. Thanks for taking my question. I guess I am just curious about the industrial segment and this segment you were not very long ago doing double-digit organic growth. It’s obviously moderated since then. This quarter, I think, you had a decline is what you said. I mean how much of this is attributable to inventory digestion of the distributors versus essentially some of the demand -- direct demand from some of the end markets starting to turn negative and any thoughts in terms of when you start to sort of cycle past those individual drivers in terms of timing? Thank you.

Yeah. Thank you very much, Samik. I think we talked at least last quarter about the fact that we started to see some signs of a little bit of -- some early signs of a little bit of inventory in the industrial market including with our distributors. And no doubt about it, when we look at our results here in the second quarter, where we weren’t in U.S. dollars flat, but organically, we were down by 7%. There is some element of that which comes from distributors managing a bit more of their inventory across the industrial market. And then there are a few segments of the industrial market where I think it’s been well reported that there’s a bit of softness in area like factory automation, on a year-over-year basis, something like instrumentation, where even if there’s been this euphoria around semiconductor capital equipment, for example, there have also been pockets of that market where you have seen real pullbacks in CapEx. I think it’s a market where long-term, there’s a great degree of optimism about the long-term in semiconductor equipment, but there are some short-term vacillations that have been going on in the last quarter or two. Those are areas that maybe I would highlight. I think that our position in industrial remains very broad. We continue to have parts of the industrial market that are performing extremely well. In fact, we saw great growth in areas like rail mass transit, alternative energy, even oil and gas, believe it or not, medical continues to be a very strong area for us. And a credit to our team for never going kind of all in on any one segment of the industrial market, but rather continuing that long-term drive to be as present as possible with the broadest range of products as possible. And to the extent that -- to your question about how long that cycle, may be hard for me to guess. I mean I think we have had similar questions about IT datacom in the past. Here, I think, you have certainly some correction that is happening with distributors, whether that is a one quarter, two quarter, three quarter, hard for me to guess and we will certainly let you know as soon as we have a better view of that.

Thank you. The next question is from Mark Delaney with Goldman Sachs. You may go ahead.

Yes. Good afternoon and thank you for taking my question. Is there anything in particular that has been helping gross margins such as price/cost mix or the integration of acquisitions or the gross margin in 2Q was at the highest in about five years, even as a handful of end markets are still soft. So I am hoping to better understand what may be positively impacting margins and then any color you can see on how to expect either gross or EBIT margins to trend going forward?

Yeah. Thanks, Mark. Yeah. No. We are -- I mean, we are really just proud of kind of this overall profitability here in the second quarter. I mean we converted on a sequential basis just under 35%, which is certainly far eating kind of our 25% kind of goal on higher sales and year-over-year, the negative version is 30%, which was certainly roughly kind of what we kind of expect on the downside. But if you actually peel acquisitions away from that, it’s really even much better than this 30% that we certainly reported in U.S. dollars here. So, I think, overall, the profitability just of the company just continues to be very robust and really just -- is really because of the great work of the management team to be able to continue to protect the bottomline when we have some markets like communications market, specifically IT datacom that has on a year-over-year basis really seen some significant declines in mobile networks and mobile devices and of sort. So this is really just a great representation of the agility of the entire team to be able to have these robust margins in this environment. I mean specific to gross margins. We typically don’t necessarily measure ourselves on gross margins or SG&A, we really do look at operating margin, which is kind of looking at all aspects of cost. But certainly, to your point, gross margins were higher this quarter than they have been over certainly the recent past. And I think that if you look at kind of the mix of our markets, our markets certainly do have -- our businesses that serve that certain markets do have sometimes higher gross margins or in high SG&A or lower gross margin and lower SG&A to kind of get to those operating margins that we expect and so times -- sometimes the mix of the sales in those markets could have an impact on the overall mix that you are talking about from a gross margin or SG&A perspective. I think we are seeing some of that in our business in the second quarter, where places like military and commercial air certainly very strong. But I think, overall, regardless of how they fluctuate kind of what we are focused on here is operating margin. So I think that, whether or not gross margin SG&A fluctuates a bit on a quarterly basis, I wouldn’t necessarily be concerned or be super focused on that. But at the end of the day, I think, really, what we are focused on is making sure that our operating margins continue to drive good, robust leverage on the higher sales and I think that’s exactly what we are seeing. And as we move forward, even our guidance implies really as strong, I think, conversion and leverage going into here the third quarter, and certainly, I think pricing over the last year has helped a bit with that. But I think that’s kind of necessarily a new story, I think, we talked about us kind of catching up on pricing kind of later last year. So I wouldn’t call that a 2023 story in terms of pricing. I think pricing cost at this point is relatively neutral, and certainly, we will react to anything that happens in the cost environment if that changes. But certainly, very happy with the overall margins and we are going to continue to march forward on that front.

Thank you. The next question is from Abdullah Khan with Evercore. You may go ahead.

Hi, everyone. Thanks a lot for the question. I wanted to ask about autos, and specifically, we have seen some auto OEMs take down inventories that were built up during the worst crisis of the supply chain. And so I wanted to get your perspective on that, if you have an estimate of how much inventory is overbuilt, if there is any, and as well as the various percentages around the end market? Thank you.

Yeah. Thank you very much, Abdullah. Honestly, we don’t have a good read on the auto OEM inventory, whether that’s overbuilt or whether they are taking it down. I think what we know is that what our customers are taking from us and what we are able to support them with, and in the quarter, we were able to have a very strong -- yet another very strong quarter in automotive, growing by 9% in U.S. dollars and 11% organically. And I think that’s just a testament to our team’s continued success in developing new products that go on new applications in the car. And so, to the extent that there is some vacillation that should come, if automakers decide to take more inventory or less inventory if they sell more cars or less cars, I mean, these are kind of things that are what they are. But what we can control is our position on these new applications on things like electrified drivetrains, on things like advanced safety, on things like advanced communication and so many other new applications going into cars. I mean I just got a new car recently and I still after a couple of weeks haven’t figured out half of what the darn thing can do. And it just reminds me how many new systems are put into these cars, how many new applications and how much content for new products that weren’t previously in a car. And we are seeing products being sold into cars that in the past, we were selling things that went into computers or to other advanced systems and all of a sudden they are being repackaged and repurposed to go into these cars where the continued growth in content is really explosive. And so I don’t know, was inventory going down a little bit this quarter when we were going up 11% organically, maybe others have a better read on that than we do. But for sure, we continue to see strong momentum in automotive, and I think next quarter, we have once again a strong outlook in this market, and that’s after several years of real outperformance to any comparable measure.

Thank you. The next question is from Wamsi Mohan with Bank of America. You may go ahead.

Yes. Thank you so much. Adam, I know you mentioned it’s a hard market to nail down seasonality, but if you think about seasonality in mobile devices and where you are guiding to in the mid-teens, that’s the lowest level since 2016. It’s at least 15 points below what you typically guide, or well, typically achieve anyway and when I sort of look at even 2016, that was a year where 2Q grew in the mid-teens, and you were coming off a much stronger base. So can you help us think through maybe what you are seeing today in terms of what seasonality it feels as though, at least from what we hear, at least on the PC side, there is a sequential improvement. So just wondering what the puts and takes are that you are seeing that’s causing you to guide to good mid-teens over here? Thank you.

Yeah. Wamsi, thanks so much. I mean, look, I will put this maybe in a couple of contexts. One is that we came into the second quarter with an expectation for the market to be actually down in the mid-teens and we ultimately achieved on a sequential basis, close to 20 points better than that, growing by 3% sequentially. Yes, still down on a year-over-year basis, but very strong compared to our expectations and that strength really did come out of smartphones, in particular. And as we look at our guidance here for the third quarter, I think, you are arithmetically correct, that 17% sequential in the third quarter is maybe a touch lower than what we have seen in years past, maybe 2016 to the contrary notwithstanding. But if we break that down a little bit, I can just tell you this, that our expectation for our sales into smartphones is actually very robust, actually, I would say, even a little bit above our normal seasonality and that’s offset by a more modest expectation in areas like tablets and laptops and other computing devices. And look, I don’t know what the PC forecasts are, how those relate to, to the various devices that we are selling into. But one dynamic is, for sure, is that with COVID happening over the recent three years, there was a surge in demand for those products that were really used for home by people who are studying and working and otherwise communicating from home. And that kind of put a little bit of a hitch in the typical replacement cycle of a lot of these devices and I think we are still seeing a bit of a hangover from that right now in terms of the overall demand for those devices. Meanwhile, the smartphone products, our position on smartphones remains very robust and we see strong growth potential in smartphones going forward into the third quarter and that ultimately comes all together with this mid-teens expectation that we have on a sequential basis for the third quarter. Look, I mean, you can get pretty grey hair pretty quickly by trying to guess all the ins and outs of where the mobile device market is headed and we do our best job as we can in giving an outlook for that. But then once we give that outlook, as you know, our team is not resting on their laurels. They are ready at any time to capitalize on any upside that may come along or to manage through a downside that make it along as well and it remains our hardest market to forecast and guide to and it remains our team that is the most agile of any that I have ever seen in the industry. So I am confident going forward, that our team will continue to create great success and that our robust position in this market will continue to create great value for Amphenol.

Thank you. The next question is from Matt Sheerin with Stifel. You may go ahead.

Yes. Thanks, and good afternoon, everyone. Adam, I wanted to asked about the military market, you have had some very strong double-digit growth here for a few quarters and your outlook continues to be strong. Could you talk about some of the drivers and maybe some of the programs and the diversification within those end markets?

Yeah. Thanks very much, Matt. No doubt about it, our team working in the military aerospace market or defense market, as I actually call it a lit bit often these days, is doing a great job. And it’s interesting, we track, I don’t know, kind of 10 or a dozen different sub-segments of that market. And about three quarters or even closer to like eight out of 10 of those markets grew in very strong double digits on a year-over-year basis last quarter, with just a couple of them a little bit lower performance. And it just reflects the real breadth of our position and the breadth of investments that countries around the world are making in new defense technologies. I mean, look, I look every day at what’s happening with the tragedy in Ukraine. I looked with some anxiety at some of the other geopolitical tensions that are around the world. At the same time, I think, we at Amphenol look in the mirror and we feel very positive about the role that our team is directly playing in ensuring that the free people of the world get to remain free. And that reactivity of our team to grow by 19% organically on a year-over-year basis in a market with a product set that is not an easy product set to scale. I mean, these are products that are very complex to manufacture. They require an immense amount of qualifications and adherence to standards. They are very vertically integrated. And so to flex one’s capacity in this market as we have done is really an extraordinary and one that is not lost on our customers in terms of our ability to really do what it takes and our willingness to invest when need be and to flex whenever possible to satisfy this really kind of existential demand that we are seeing in many cases. As I look forward in the defense market, I think, for better or for worse, I think, we are in an era today of more anxiety, more dynamics where more and more the nations that are allied with our country, with the Europeans and others are having to invest more significantly than ever before in next-generation defense technologies. And is the broadest manufacturer of those products, both having the broadest product line in the deepest technologies, we are ready and able to support that as much as possible. We will see, I mean, we are guiding here in the third quarter to a kind of similar levels in what is traditionally a softer third quarter from a seasonality perspective and our team stands ready to react whenever needed. And every day we watch the pictures coming from Ukraine and while we have a tear in one eye, we also have a pride in our belly of the part that we are doing to help those people stay free.

Thank you. The next question is from Steven Fox with Fox Advisors. You may go ahead.

Thanks. Good afternoon, Adam. I was just hoping to circle back a little bit more on the industrial markets. I mean the macro data is looking worrisome, but I am trying to understand how much of your sales on to like factory plant floors is under pressure, maybe where there’s some good signs and how long of a decline you are thinking looking at that just industrial factory sales? Thanks.

Thanks very much, Steve. Look, I think, we talked a little bit about factory automation as one area that I highlighted that we did see on a year-over-year basis, some downturn and also on the sequential basis. And I think it’s been broadly reported that there’s some moderation in demand around that area. How long that’s going to last? It’s really hard, Steve, for me to give a prognosis on. I think that we have a very strong position here. I think that the adoption of electronics in factories. The underlying trend of that, I think, is a very positive trend in the short-, medium- and in particular, the long-term. As countries and companies around the world deal with labor shortages, and I mean, gosh, you can’t pick up a newspaper these days without seeing something about some either labor shortage or labor strike that is happening in the world over, there’s no doubt that the adoption of electronic be it automation, robotics, next-generation factory management systems, I mean, these are really accelerating broadly. And the fact that we go through right now, let’s call it, a kind of temporary pause in that for a variety of reasons, it does not take away from the very long-term prognosis for factory automation, which I think is quite a positive over the long-term.

Thank you. The next question is from Chris Snyder with UBS. You may go ahead.

Thank you. I wanted to follow-up on some of the AI commentary from earlier. It certainly seems to be an opportunity right in the company to real house, and obviously, great to see meaningful revenue impact already. I was just wondering if you could talk a bit about the competitive landscape for these high power, low latency data center applications and Amphenol’s competitive positioning within that. I would assume there’s not too many companies that can deliver this technology? Thank you.

Yeah. Thanks so much, Chris. I mean, look, these are really hard products to make, let’s start from that. To have a high speed interconnect product, be it a cable assembly, an IO connector, a backplane connector, a cable backplane system, whatever it may be, these are extraordinarily complicated products to make where the underlying technology to make them take years to develop, the manufacturing processes are extremely challenging to make these things. And so you are correct, there is a very small universe of companies and we have strong competitors, there’s no doubt about it, who we respect, no question. But it is a relatively confined universe of companies who ultimately have put in the decades. And I call it really decades of investments in the engineering competency, the test and the validation of those products and all of those things, which ultimately allow one to make a reliable product that can support these next-generation complicated AI learning systems. Our position, look, we are the world leader in high speed interconnect technology. That’s something that we are very proud of and that we continue to be very carefully building upon over the years and that position, I think, is a robust one for as AI investments continue.

Thank you. The next question is from Joe Giordano with TD Cowen. You may go ahead.

Hey. Good afternoon, guys. Just curious if you can give some color or kind of update on how your mix in auto regionally has shifted over time. Just given the growth that you have had over the last several years? Just commentary like you expect 3Q to be kind of similar to 2Q, but production is supposed to be down sequentially like 5%. So I am just curious if some of that is just content you are winning or some of that is regional shifts and you are participating more in faster growth markets than you used to, just any color there would be helpful?

Yeah. Thanks very much, Joe. Look, I think, if you look over a very long time period, the mix of our auto business has changed quite dramatically. I remember, gosh, when I first became CEO and that’s 15 years ago, not to mention when I which was 25 years ago yesterday, our auto business was a predominantly European business. And even in my first quarter as CEO, I think, it was roughly two-thirds was European and the rest was sort of split evenly between Asia and North America and today I would tell you that the three regions are relatively balanced with maybe a touch more in Asia, followed by Europe and North America. So that has changed a lot. And I think part of that change has been really this revolution electrification where our team has done a fabulous job in taking advantage of that revolution electrification and where the largest markets for that, at least so far, have been in Asia and we have done an excellent job of positioning ourselves on a broad basis with companies who are really driving electrified and hybrid electrified vehicles. And so if I look at last quarter, we grew organically really in all three regions. I would say Europe actually grew the strongest last quarter, but we did realize growth in all three regions and I think we have a very robust position across all regions for the automotive market. And to the extent that those dynamics change, there’s new companies, accelerating their performance in other regions, I am confident that our team is going to do a good job of positioning ourselves there to benefit from that.

Thank you. And our last question comes from Will Stein with Truist Securities. You may go ahead.

Thanks for taking my question. I’d like to ask about the broadband end market. It’s been fairly well discussed among companies and in the media that there are several big projects in the U.S. like RDOF and other countries as well, to deliver broadband to more rural areas and I wonder if you can describe how that’s been influencing demand in that end market and your anticipated performance over the next few quarters? Thank you.

Yeah. Thanks very much, Will. Look, I think, I mentioned in my prepared remarks that, while we do see a temporary pause. I mean, we have had really strong growth in broadband over the last year. I mean, last year alone, we grew by 62% in U.S. dollars and 38% organically, and yes, I mean, in the second quarter, we were flat and we guided it to be a little bit down sequentially in the third quarter. But no doubt about it, we are benefiting not just from the demand for customers around the world for higher speed connectivity to their homes and businesses, but also from the government funding that is going into this. And in particular, you mentioned RDOF, there’s also BID [ph]. Both of these initiatives in North America are very significant, and by the way, long overdue from my perspective. I mean we live in a world where connectivity to the Internet becomes not just a nice thing to have, but it is really -- it is a kind of thing that you must have, it’s like electricity and access to water and indoor plumbing, having the plumbing to the Internet is critical. You try to look for a job if you don’t have the Internet. Try to apply for a government benefit if you don’t have access to the Internet. It’s essentially impossible these days. And so I think it’s a really noble cause that is there to build access some of the remotest areas of our country, so that all people can have equal access to high speed, low latency Internet and all what comes along with that. And we are very happy to play our part in that, and to benefit from that over the long-term and this temporary pause that is going on right now, I think, is just that. And we look forward over -- in the coming years as that money does necessarily get spent by governments, as well as by the private sector that will be a strong participant and enabler of the broadband revolution.

Thank you. And I will now turn the call back to Mr. Norwitt for closing remarks.

Well, thank you all so much for your time today. We appreciate everybody’s time on this hot summer day and I hope it’s not too late to wish all of you a nice summer. And I hope that you will have a little bit of chance to get some downtime as we get into the end of July and August, and we look forward to speaking to all of you in the fall in just 90 days. Thanks so much.

Thanks, everybody.