Amphenol Corporation
Q2 2019 Earnings Call Transcript

Published: 24 Jul 2019

[Operator:]

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 [Operator Instructions].I would now like to introduce today's conference host Mr. Craig Lampo. Sir, you may begin.

[Craig Lampo:]

Thank you. Good afternoon, everyone. This is Craig Lampo, Amphenol's CFO. I'm here with, together with Adam Norwitt, our CEO. We would like to welcome you to our second quarter 2019 conference call. Our second quarter 2019 results were released this morning. I will provide some financial commentary on the quarter and then Adam will give an overview of the business as well as current trends, and then we will take questions.As a reminder, we may refer in this call to certain non-GAAP financial measures, and may make certain forward-looking statements. So please refer to the relevant disclosures in our press release for further information. The company closed the second quarter with sales of $2.015 billion and with GAAP and adjusted diluted EPS of $0.93 and $0.92 respectively. Sales were up 2% in US dollars and up 4% in local currencies compared to the second quarter of 2018. From an organic standpoint, excluding both acquisitions and currency sales, sales in the second quarter decreased 1%. Sequentially sales were up 3% in US dollars and in local currency and 1% organically.Bringing down sales into our two segments. Our cable business, which comprised 4% of our sales was down 19% in US dollars and down 17% local currencies compared to the second quarter of last year. The Interconnect business, which comprises 96% of our sales, was up 3% in US dollars and 5% local currencies compared to last year. Adam will comment further on trends by market in a few minutes. Adjusted operating income was $408 million for the second quarter of '19 and adjusted operating margin was 20.3%, which is down 30 basis points compared to the second quarter of '18. Compared to the first quarter of '19 adjusted operating margins increased 20 basis points.From a segment standpoint, in the cable segment margins were 9.7% which was down compared to 13.2% in the second quarter of '18 primarily driven by volume as well as to a lesser extent, product mix. In the interconnect segment, margins were a strong 22.2% in the second quarter of '19, which was down slightly compared to 22.4% in the second quarter of last year.This strong performance is a direct result of the strength and commitment of the company's entrepreneurial management team, which continues to foster a high performance action-oriented culture and which each individual operating unit is able to appropriately adjust to market conditions and thereby maximize both growth and profitability in the increasingly uncertain market environment. Through the careful fostering of this culture and the deployment of our strategies to both existing and acquired companies, our management team has achieved industry-leading operating margins and remains fully committed to driving enhanced performance in the future.Interest expense for the quarter was approximately $30 million, which compares to $26 million last year. And as discussed in our prior earnings call, this increase is due primarily to higher average interest rates as a result of the first quarter bond issuance and higher average debt levels.The company's adjusted effective tax rate was approximately 24.5% for the second quarter of '19 compared to 25.5% in the second quarter of '18. The adjusted effective tax rate excludes the impact of the excess tax benefit associated with stock option exercises and the tax effect of acquisition-related costs incurred in both periods. The company's GAAP effective tax rate for the second quarter of '19 includes the items just mentioned -- including the items just mentioned was approximately 21.3% compared to 24.7% in the second quarter of 2018.Adjusted net income was a strong 14% of sales in the second quarter of 2019. On a GAAP basis, diluted EPS grew 2% in the second quarter to $0.93 compared to $0.91 in the second quarter of 2018. And adjusted diluted EPS grew 2% to $0.92 in the second quarter of 2019 from $0.90 in the second quarter of 2018. Orders for the quarter were $2.019 billion which was flat compared to the second quarter of '18 resulting in a book-to-bill ratio of 1

[Adam Norwitt:]

Well, thank you very much Craig and welcome to all of you on our call today. As is customary, I'm going to highlight a few of our achievements here in the second quarter, I'll then talk about our trends and our progress across our diversified served markets. And then finally, I'll make some comments on our outlook for the third quarter and full-year 2019 and of course, we'll have some time at the end for questions-and-answers.As Craig just detailed, our results in the second quarter were within the company's guidance and that's despite a clear increase in market uncertainty that we saw during the quarter. Sales grew by 2% in US dollars and 4% in local currencies, reaching just over $2 billion in fact $2.015 billion. The company booked $2.019 billion in orders representing essentially a book-to-bill of 1

[Operator:]

Thank you. The question and answer period will now begin. The first question is coming from Amit Daryanani with Evercore. Your line is now open.

[Amit Daryanani:]

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

[Adam Norwitt:]

Well, thanks very much. Good afternoon, Amit. I think the way we think about this reduction in the back half is -- roughly two-thirds of that reduction is coming from the communications end markets and -- of that communications end market, I would say you can call it somewhere around half or a little bit more is maybe related to the specific restrictions that were put in place the direct and indirect effects of those and maybe the rest is more, a more broad market and distribution element. And then of the remaining call it roughly third, I would say, that's relatively balanced between industrial and automotive.

[Amit Daryanani:]

I guess, Craig, if I hold you toward the end of your comments, you talked about undertaking a swift cost reduction plan. I don't know, you guys normally take these as a one-time charge, so perhaps, help me understand when I think about margins going down in Q3 which implying mid-19%, 80 basis points down sequentially operating margins, that's my mouth. How much of that is really driven by these cost reduction initiatives that -- most companies would call as a one-time, but you're not versus just revenue de-leverage in the model?

[CraigLampo:]

Thanks, Amit. As you know, we don't call these types of things out in normal course. So this is something that we do include and we hold ourselves accountable as our General Managers hold themselves accountable for the results. But in regards to the amount. So I'm not going to probably talk about specific amounts. But what I would say is, if you look kind of sequentially kind of our implied conversion, there's a few things that kind of are happening and they -- the acquisitions clearly have some impact from a growth perspective, they're contributing a certain amount and those are contributing. I would say, operating margin lower than the average of the company today and certainly over time, we do expect to get those up, but they will not contribute to the level that we would expect as a normal kind of conversion going into the third quarter.The other thing that's happening is I would -- is these costs related to these restructuring kind of charges that are in these results and I would say that, if you can probably back into that number by effectively understanding that the implied conversion. If you take out those restructuring charges, essentially within our normal range, it's not anything really much different than that. So, if you kind of back into that it would -- you can kind of get to that number, but we really don't want to start calling out charges because we do hold ourselves basically accountable.And then in the fourth quarter, your implied conversion would be pretty strong going into the fourth quarter as we kind of go into that quarter. I guess one other point that I would say is that, if you actually look at our year-over-year kind of implied conversion coming from Q3 of '18 into Q3 of ' 19, what you'd see actually if you take out the impact of those seven acquisitions that we now have that all are effectively in an average under our kind of average operating margin is that you would actually see that we really are also converting on the downside, which quite a significant decline organically in the third quarter, kind of in a normal range.So I have to say the management team really has done a great job of ensuring that the bottom line is protected even while taking certain cost actions that are going to be impacting the bottom line in the third quarter. To ensure that, going forward we really are in a good position from a cost perspective to be able to come out of -- in the current demand environment.

[Adam Norwitt:]

And Amit, I would say that maybe one thing here, which really gets to a core part of how we think about running the business. And we've talked about this in the past that in good times, we run the business as if we driving a car with one foot on the gas and one foot on the break and we don't change that mindset when all of a sudden you have reductions in the outlook of the demand. We are continuing to drive with one foot on the gas and one foot on the brake. And what does that ultimately mean is that these kind of the costs reduction actions are just part of the course.This is a normal type of behavior, that's why we hold ourselves accountable for it, that's why we hold our General Managers accountable for that. When you're growing, you should also grow with the understanding that one day you might have to take certain steps that will be on the other side of growth, where there is a different cycle that comes along and that kind of mindset of driving with one foot on the gas and one foot on the brake, really ultimately shows its strength in times like this.There is no doubt. I mean are we happy to have less demand coming from certain of our end markets. Of course, not. That's we much prefer to have everything moving up into the right. But it is part of life, it's part of business and it's part of working in a very dynamic environment that we all operating today. And I think in such an environment, that mindset, that agility, the accountability of the Amphenol management team is really purpose-built for a time period like we are finding ourselves in here right now. And that's why, as Craig says, we feel very, very good about this outlook on a year-over-year basis and we feel very optimistic about how that's going to position the company going forward

[Operator:]

Thank you. Our next question is coming from William Stein with SunTrust. Your line is now open.

[William Stein:]

Great, thank you for taking my questions. First, you talked about lower outlook at least partly owing to the ban entities. Adam, Is there anything in there that we should read into aside from Huawei and many of your semiconductor peers have talked about discovering that perhaps not all of their products are covered by this ban and being able to ship more and more as the quarter went on. Are you seeing the same dynamic?

[Adam Norwitt:]

Well, I think, look, we should also recognize that this is not the first time that the US Department of Commerce has put in place restrictions or put our company on the entities list, this happened number of years ago with ZTE, who is albeit a smaller customer, it was a very similar dynamic. And so, our team knew exactly what we could and couldn't do, and we were very aggressive at complying with the law, which we knew very, very well.And so as many have reported, this is not a ban on shipments by American companies, it's a ban on export of know-how and technology from the United States. And so from that perspective it does not ban one from supporting from outside without the integration of American technology. I would also just point out that as you know very well, we have always taken an approach of supporting our customers.The vast majority of the support of our customers coming in the regions where we -- where those customers are located and that has been an approach that we've taken for many, many years, which has insulated us from some of the trade dynamics is also allowed us to strengthen our position with customers by having local teams in their localities really working with them. And so, when this became the issue this restriction, we have local teams are not reliant upon kind of a matrix organization that relies on American engineers are American know-how in every case.Now all that being said, you can only ship as much of the customer wants to have. And so, there can also be instances when there are such restrictions where they don't necessarily have everything that they need and thus they don't need stuff from you. And so that's a different aspect of that dynamic. But I'm really proud of our team how they've dealt with all of the trade dynamics that we have been facing for now, more than a year.I mean this has been more than a year where there has been turbulence in the trading environment and our team has just done a fabulous job of adjusting in real-time to whatever impediments come along to our business. And again, it gets to what I referred to earlier. We really believe that how our company is organized that unique entrepreneurial approach to management where we have general managers who are fully accountable and we vest in them, the authority we empower them to make really real-time decisions. That structure is really purpose-built for this slightly more dynamic environment that we all find ourselves in.

[William Stein:]

Thank you for that. One more if I can. Has the company ever acquired a supplier before as you've announced today and maybe confirm my understanding as a result of the majority of the revenue of that company being derived from Amphenol it's not really a revenue builder for you, but instead a cost reducer as you could take out the stacked margins there. And what it tells us about the company's M&A strategy? I don't think there's any meaningful change here, but I think it's new or at least unusual.

[Adam Norwitt:]

Yes, actually it's not the first time we have acquired a supplier, we've done that over the years a few times. Sometimes there were very small supplier, where it was not even meaningful. Other times it was a little bit bigger. I think out of abundance of transparency we talked about, but this company Kopek, which is a great company, it's been a long-term supplier for us. And when you acquire a supplier it's not just that, that kind of margin stack up that you described. I mean our suppliers don't make a lot of margin necessarily with us. So that is not necessarily what you're doing. But what you are doing is, you're taking control of technology, when you feel that, that technology is really core to you.So I can tell you a number of years ago, we acquired a supplier in Malaysia, we acquired another supplier in China years ago, which became really, a real asset for the company from a next generation technological development perspective. And I would say that Kopek, well there is a little bit from the margin, it's not so meaningful, it's really a technology, our ability to shape the technological development by having in that case the real vertical integration.It doesn't mean a change in our acquisition strategy. We are not becoming more or less vertically integrated, we are not shifting toward going out and acquiring ourselves through the supply chain. This is a unique company, creating a unique opportunity for us and one that we felt really made a lot of sense. And I don't think it represents at all a shift in in where we would think about acquiring for the future.

[Operator:]

Thank you. Our next question is coming from Craig Hettenbach with Morgan Stanley. Your line is now open.

[Craig Hettenbach:]

Just Adam, on the knock on effect with the uncertainty around comm equipment and other customers from a demand perspective in China. Any visibility into kind of as the quarter progresses for you or how you're thinking about the back half, like what signals you're looking for that some of this demand might come back into play?

[Adam Norwitt:]

I mean look, this is knock on effect, it's a little hard to pin down. But I can tell you, what we saw during the quarter was, well there's been a lot reported about the puts and takes in the trade negotiations, no doubt about it. A restriction that was placed on one of the world's largest, if not the largest communications equipment player, a little bit changed the game. And so I think that our, we have seen customers -- equipment manufacturing customers who have themselves faced more uncertainty in the China market, in particular for whatever reason.I'm not going to get into or try to guess what all the various dynamics at play are. But just let it be said that they have seen more dynamics in that market, which caused some uncertainty for them, which thereby forced them to assess really their demand plans, look at their inventory positions, look at all what they have in terms of their expectations and that has really been the result that we have seen across the communications equipment market.In terms of when does that change, I would say the whole trade dynamic, it's really too early to call. I mean every day, there seems to be a report one way or another. One day, there is a positive, the next day there is a negative. I am certainly not going to be the one who is going to predict when the resolution is, I will be the one to applaud.If there is a resolution, I believe that the world's two largest economies should not be in a trade battle and hopefully that that will be resolved. And I understand there is real issues that are being addressed and I'm very hopeful that those issues will be addressed. But I'm not going to predict neither the timing nor the ultimate resolution of those issues.

[Craig Hettenbach:]

And then just second question, the strength in the military market, can you just talk about it. I would expect at some point maybe it decelerates from these levels. But just anything from a program, I know you've talked about before the content increases and things like that, but certainly that's a stand out on the positive side. And if you can give us maybe a little bit more context around some of the drivers you are seeing there?

[Adam Norwitt:]

I mean, look, we're really pleased and proud of our military business. I mean you know well this business has been a part of Amphenol, for essentially the entire history of the company and even before, because part of it came through even predecessor companies years and years ago. And we have been just the interconnect innovator in the military market.And so, yes today, you have a robust spending environment you also have just an acceleration of the adoption of new technologies. And that's a trend, that technology adoption is a trend, that we've seen really across the applications, whether you're talking about next generation fighter jets, whether you're talking about communication systems, munitions, naval applications, I mean there is without a doubt a clear acceleration of the adoption of technology across the military. As the military looks to get more functionality with less cost, less manpower whatever they're looking to achieve.And no question it's also it's a world geopolitical where there is not a kind of monolithic mission of the military. And thus there is a real diversity of where the spending is happening and not just in the United States, but really in all the regions in which we participate in the military. Will it always grow in the kind of high-teens as we've guided it to go this year, certainly we wouldn't expect it always to grow at that rate. At one point, it will not grow at that rate, but I do believe that when you look at our position in the military market, the breadth of our position, when you look at our track record in particular, this year and last, in being able to satisfy the demands of our customers, which is not an easy task.And when you look ultimately at the long-term plans of the military to adopt next generation technologies, we feel very good about this market for the long-term. Ultimately what that long-term growth rate will be, will there be ups and downs, for sure there will be ups and downs. But I think all of those dynamics that I just addressed give one reason to feel confident for the long-term.

[Operator:]

Thank you. Our next question is coming from Mark Delaney with Goldman Sachs. Your line is now open.

[Mark Delaney:]

Yes, good afternoon and thanks for taking the question. I -- on comm's infrastructure more in terms of strategic and competitive standpoint, can you help us understand if any of the weakness that you're seeing, you'd attribute to any increased market share challenges and kind of related longer term in comm's infrastructure this reflects how well do you think Amphenol's position in 5G? Because I know some companies are in different parts of the supply chain and maybe see 5G strength earlier than Amphenol would. But just, there's been a few companies I think starting to see some strength from 5G and just wanted to better understand how you think Amphenol is going to fit into the 5G landscape over the longer term?

[Adam Norwitt:]

Thanks very much, Mark. I mean look, I would tell you that absolutely, we are not only preserving our market share but I would expect it to be even more than preserved. We have a fabulous position in the communications infrastructure market, whether that is in the mobile networks market, where 5G is more specifically relevant or in the IT Datacom market in all of the sort of core, whether that's routers or switches or servers or web service providers or whatever that is.We have an outstanding position. We have invested over many years in developing new products. We have made excellent acquisitions, going all the way back even to the FCI acquisition, which ultimately created for us the broadest platform of products, the broadest range of products across really the price performance curve, which enables us not just to be the supplier and the solution provider for the ultra-high end applications, but really to be a one-stop shop for our customers across all the range of applications that they need, and that's on high speed products, that products, fiber optics, and many others, RF as well.Specific to 5G, I would tell you that we have an outstanding design and position. Our teams have been working for many, many years. We have an unique position in that, we have a broad interconnect offering together with an antenna offering both on the infrastructure as well as on the devices, which gives us a unique perspective, a very unique perspective on all the changes that are coming with 5G in terms of how the signals are going to be propagated, what the nature of the 5G architecture is going to be. And we've been working with customers for many years on that.We have seen already some benefit from 5G, I think we've seen some early systems, I mean 5G ready kind of hardware where we are participating. I can tell you one thing that we have seen and should not be surprising. I mean, you look at the mobile networks market in particular, which is the market where there are not so many equipment manufacturers. And when one of those equipment manufacturers ends up kind of in the bull's eye from a geopolitical perspective, it should not be surprising that the operators around the world would take a little bit of a wait-and-see approach to such a dynamic.One -- if one doesn't have to make significant investments in that moment, wouldn't it be a wiser move by such an operator who is really facing significant investments in the long term to sort of see how that all shakes out. And I think we have seen a little bit of that dynamic here with some of our service provider customers in particular where they take a little bit of a wait and see. They know that there is a lot of turbulence, a lot of dynamics in these discussions.And I think people, those who have the luxury to wait and see may do a little bit of that here, but look relative to 5G for the long term, we are very, very well positioned and I would say, uniquely well positioned because of the technologies, the breadth of the technologies that we offer, and we look forward over the long term to participating in that.

[Mark Delaney:]

That's helpful, Adam. So my follow-up question is on the topic of inventory destocking and you talked about that in particular in the channel. When your competitors reported this morning, they talked about typically 4 to 6 months in duration when you look back through past cycles. And I know you've been in this -- this is a long time and every cycle is unique and has its own characteristics, but any thoughts from Amphenol to how long you think inventory destocking in the channel may last for? Thank you.

[Adam Norwitt:]

Well, thank you, Mark. I mean, I have a hard time to get too specific about this I think. As you say, I take the words out of your mouth. I mean every cycle is a little bit different. I think we are dealing here with not just inventory destocking, but I think there is a change in demand at the end customer that is also there, and how did the distributors ultimately react to that and how long of a time does it take them to manage through that is something that I would be a little hesitant to give a kind of a projection on.But look, I mean our teams are standing ready to capitalize to the extent that there is any uptick in demand. No doubt about it, they will be there ready to do so. And I would just make a point here, which is we see this uncertainty whether that is in the distribution channel, whether that's in the communications infrastructure channel that you alluded to. One thing that we have not seen any slowdown on is the pace of proliferation of electronics, the pace of innovation, the developments that our customers are undergoing. We have not seen at all a slowdown in that activity.To the contrary, I would say that our customers in every one of our markets and -- are working extremely hard to drive innovations that ultimately can satisfy the thirst of the end customers for higher performance in whatever application they maybe desiring two years. And I think that pace, the long-term pace of the proliferation of electronics continues from our perspective to accelerate. And so, yes, they are here. There is some enhanced uncertainty in some of these areas. But I think the long term in terms of this adoption of electronics continues to be very, very healthy.

[Operator:]

Thank you. Our next question is coming from Matt Sheerin with Stifel. Your line is now open.

[Matt Sheerin:]

Yes. Thank you. And hello, Adam and Craig. Question, Adam, just regarding the mobile devices guidance for the quarter and the year. It sounds like you're looking for of some sequential growth in Q3, but sort of backing into your roughly 30% down for the year, it looks like relatively muted back half for mobility relative what we've seen in the last cycle. I know you've talked about demand issues as well as some content issues, but could you drill down a little bit in terms of what you're seeing not just in the smartphone area, but in notebooks and other devices?

[Adam Norwitt:]

Sure, Matt. Thanks very much. I mean, I know we talked a lot about this on the last call and I would say that our outlook really hasn't changed in mobile devices, and our views that we talked about last quarter haven't changed. But just to remind, you're correct. I think the second half this year will be relatively muted. It will have a step-up, but it will certainly not be the level of step-up that we experienced last year.And you'll recall, I mean we nearly doubled the business from first half to second half last year, and that makes for a tougher compare going into the second half. I mean all that being said, I'm very pleased that the team we saw actually grow here in the second quarter on a year-over-year basis, which is just a testament to our team continuing to fight for every opportunity that may be there.In terms of why that demand changed, again we spoke about that 90 days ago, but it is a combination of architectural changes in certain devices together with some expectation of overall unit volume being down. And I think we see a kind of a sharper year-over-year reduction in smartphones and maybe a more modest change in areas like laptops and tablets and other accessories. And some of the smaller accessories, things like wearables and other accessories, we see even some opportunities for growth this year. I mean, there's more significant reductions that we've seen in the higher-volume products.

[Matt Sheerin:]

And you just touched on the previous question regarding the 5G opportunity, not just in mobile networks, but you touched on the mobile devices itself. Could you talk about the content opportunity in next-generation 5G phones versus the legacy phones or older phones?

[Adam Norwitt:]

Sure. I mean it's -- when we think about mobile devices, we've talked about this for a long time. For us, it's all about the complexity of the hardware and to the extent that the devices themselves as opposed to the software that those devices act as host for. The devices themselves to the extent that they have innovation in them, to the extent that they have added complexity, that's usually a good trend for Amphenol.So as it relates to 5G, there is no question that as phones adopt 5G, that may require the phone manufacturers to add complexity to those devices because they have another signal path associated with it, because you think about it, a 5G phone got to also work on a 4G and a 3G and a 2G network, got to also work in Wi-Fi, got to also have Bluetooth and other connectivity standards associated with it.And so, it is really just an added signal path in a device and many of the architectures that may result in added complexity. I'm not going to say that it's universal because every device is going to have its own unique design associated with it. But clearly having that additional functionality by and large should prove a positive for us amid all the other dynamics that come in mobile devices.

[Operator:]

Thank you. Our next question is coming from Shawn Harrison with Longbow. Your line is now open.

[Shawn Harrison:]

Wanted to just speak on the M&A environment in that big step-up year-to-date in terms of the numbers of acquisitions and -- at very reasonable prices, particularly considering the valuation of large deal win out as we get. But are you seeing more M&A in sellers willing to I guess deal with Amphenol at this point in time or is it just more timing, I know things come and go. But it seems seven deals year-to-date, significant revenue contribution at a good valuation, maybe the macro slowing down means more M&A activity through the back half of the year for you guys.

[Adam Norwitt:]

So well, thanks very much, Shawn. I mean I think there is no question that our program, we've -- has accelerated this year. Objectively, we have announced seven new companies to the Amphenol family here in the first half of the year, is that related to the overall market environment? I wouldn't be necessarily so quick to jump to such a conclusion. I mean, I will tell you that the companies that we have so far brought into the Amphenol family this year, there's one thing that we're very, very proud of about these seven acquisitions.Virtually, all of them are family founded, family run companies, where in fact the family members in almost every case except one or two where there was a natural retirement have stayed with Amphenol to continue to run those companies together with their organization. And these companies were not short necessarily courtships. These were companies that we have been developing relationships with over a long time.Sometimes the date of closing is a little bit more luck of the draw than anything because there is a certain time period it takes to incubate those relationships, there is a time period it takes to execute on the mechanics of acquisitions, the negotiations and all that. But I just think it really speaks to the strength of our acquisition model that here we are, seven companies that we have acquired this year, all of them family companies, each unique with a unique advantage from a technology perspective, complementary from a market perspective, really across diversified array of our markets and across diversified geographies.I mean you go back, SSI which was a family owned company, you look at companies like Aurora, which was a family owned company in China, you look at the companies -- I mean these are all just fabulous companies. They're not like Johnny-come-lately. These are not investment vehicles for some one. These were real heart and soul companies of founders. And again, we're just so proud to bring those founders in.The reasonableness of the price, I will tell you, we're not looking to just buy companies on the cheap. We work with these founders over a longtime period, we develop a relationship and we find a meeting of the minds at a price level that ultimately provides fair value to them and ultimately can deliver great returns for Amphenol. And I think this year we've just done an outstanding job of doing so.To the extent are more sellers willing to deal with us and, I would say that, the more acquisitions we make, the more successful we are after the acquisition in bringing those companies into the Amphenol family, allowing them to flourish in our special organizational approach, it does, for sure, strengthen each time incrementally our reputation among sellers. And I can tell you, some of the acquisitions that we announced this quarter, we were not the only one talking to those companies. They had choices for sure.I mean, as you mentioned, I mean, there is a thirst to make acquisitions in the interconnect industry and sometimes that results and also prices that we wouldn't necessarily pay, but these companies all -- we were not the only suitor. And yet, they chose to join into the Amphenol family because they believed in the fact that their companies and our culture would have a wonderful future. And I think as we go forward, I think that reputation will continue to proceed us and will be an asset for the Company for a long time to come.

[Shawn Harrison:]

And then as a brief follow-up, Adam, the weakness in the broadband business, is that solely tied to weaker MSO CapEx? Or is there something within the portfolio that Amphenol may be lacking in terms of how the technology is shifting in that field ?

[Adam Norwitt:]

Yes, I mean, I would say it's really related to just overall spending. I mean, that market -- in the broadband market at the MSO, I mean, yes, there has been a lot going on in that space, there is a lot of discussions around content, there is a lot of discussions around distribution and our team has a great portfolio of products and we've augmented that here with the Kopek acquisition strengthen that for sure. But really, by and large, what we have seen is that overall spending levels being down as the customers in the broadband market, those MSOs in particular.But not just MSOs also the satellite and telco side of the delivery, they grapple with the sort of changing landscape that is there. Look, ultimately we have a very strong position in that space and it's one that long term we continue to think is a great asset for Amphenol, even if we are seeing incremental weakness there and that has resulted in us downgrading for the year our outlook for the broadband market.

[Operator:]

Thank you. Our next question is coming from Deepa Raghavan with Wells Fargo Securities. Your line is now open.

[Deepa Raghavan:]

Good afternoon, Adam and Craig. Question for you. Can you comment on your performance by regions, if able to, North America, China versus Europe? Also with regards to North America and Europe, which are some of the verticals that surprised you versus your plan? China, I guess, we can all make a guess, but how about Europe and North America? And I have a follow-up.

[Adam Norwitt:]

Sure. Well, thank you very much, Deepa. I mean just to comment broadly it should not surprise anyone that with the strength that we saw in military and commercial air that -- which is not a wholly North American business, but it certainly has a strong North American component, that our performance was strongest in North America. From a local currency perspective that was clearly the strongest. I think Asia was maybe the lowest as you alluded to and Europe was sort of in the middle of that.In terms of which verticals or which of our end-markets as we would term them performed in what way on a geographical market. Again, I mean, military was strong in all the geographies where we sell, but it's just a little bit disproportionate to North America. I'd say that in automotive, I alluded to the fact that on an organic basis at least we saw weaker performance in Europe, and then a little bit less week but still some weakness in North America, kind of flattish performance in Asia. And in the mobile networks market, in fact, we saw strength in North America and in fact in Asia, and a little bit weaker in Europe just to pick a few of them for examples.

[Deepa Raghavan:]

Just as a follow-up, can you talk about your automotive outlets in China. I mean, what are some of the conversations you're having with your clients in terms of recovery in the region. And if you can also add any commentary on industrial segment outlooks in China. I mean that's one we don't -- we all seem to grapple with, there is some short-cycle weakness, but not necessarily showing up at this point in time, but just curious what are your thoughts on automotive, industrial outlooks in China? Thank you.

[Adam Norwitt:]

Sure. I mean I think when we look into the second half, there is clearly -- in the automotive market more of a negative sentiment in China than, maybe, there has been. When I say negative sentiment, I really mean there was an expectation that the second half would be a little bit more favorable. And I think customers have really pulled back from that expectation. At this point we see, really in the second half, no real recovery at least expected by our customers.All that being said in the automotive market, again specific to China, there is a lot of great stuff going on. I mean, you look at the innovations that are happening in electric vehicles and other next-generation automotive systems where our Company has done a fabulous job of positioning ourselves. I mean, there is no doubt about it that that is a long-term great platform of growth for the Company. And our position in Asia, in general, and in particular in China, has really strengthened over the recent years.I mean you will certainly recall and others on the phone will recall that our automotive business traditionally was a much more European dominated business, where effectively in the past two-thirds of our business was in Europe, and roughly one-third was in North America and then just a little bit in Asian.And today, the picture of that business is much more balanced across those geographies where maybe Europe is just a touch bigger than the other two and the other two geographies are relatively balanced. And that, I think, gives us exposure to those areas. But when you have a slowdown, like the Chinese market has seen and that's been very, very broadly reported, that now has a little bit more of an impact on us than it would have had in the past.With respect to industrial, I wouldn't say necessarily that we have seen a significant change or moderation of expectations more specifically to China. I think we've probably seen a little bit more of a moderation of industrial outlook in Europe. Together with our distributors where -- for us, industrial has a little bit more of a component of distribution to it than maybe some of our other markets. Obviously, automotive, you don't sell much through distribution to the automotive market. And I think -- so industrial has a little bit different dynamics, I would say, than automotive which is -- seems to be a little bit more Europe and a China story.I mean, you ask about China, and maybe I just make a quick comment here with respect to China. As everybody on the phone knows, I mean our Company has just done a fabulous job over the years of building our position in all geographies and that's a real testament to again how we empower our people worldwide to build their businesses on a local basis. It's no secret that if you read our 10-K, you would see that China last year represented just over 30% of our sales.But I think it's important to take that also in context, which is that the mobile devices market, which last year for us was roughly 17% of our sales is essentially fulfilled almost exclusively in China. And so if you take that out, you're then talking about kind of a low to mid-teens of our sales in China. And that -- some portion of that is for foreign invested companies who are manufacturing products that are sold around the world and some portion of that is for the domestic market. We're really proud of the balance that we have, but it is just important I think to take that China in context.

[Operator:]

Thank you. Our next question is coming from Wamsi Mohan with Bank of America Merrill Lynch. Your line is now open.

[Wamsi Mohan:]

Yes, thank you. I'm sorry if I missed this, but would you mind elaborating a little bit on the second half revisions in the IT datacom market. Was it largely in the networking equipment where you saw that, are we revising that down from a IT datacom perspective or was it more broad based with like server storage transmission. Can you give us any color on that? And I've a follow up.

[Craig. Lampo:]

Sure. Thanks very much, Wamsi. I mean, I would say that it is not just in networking, it does include in networking, but we have seen really moderated outlooks from customers in networking and servers and in storage. So I wouldn't say that it's confined to that.Our business is a very, very broad business. We are really the interconnect leader in that space. We have a strong position with customers around the world in all those applications together with the Web service providers that have really emerged over the last four, five years as an important channel. And I would just say that, it's probably more an OEM issue than it is necessarily a Web service provider issue, but across the OEMs it's -- I wouldn't say that it's just networking or just servers or just storage, it's really all three of those have some impact.

[Wamsi Mohan:]

And then is there any way that you just give us a ballpark on this headwind to margins from M&A versus the cost actions that you're taking the 50-50, the 25-75 some rough estimate of that so that we can think about what the margin contribution from these deals are. And it seems to me that historically, the largest of deals that you did like FCI were dilutive. But more -- I mean at least now in the second half, we're talking about these four deals being somewhat dilutive to margins. And you mentioned sort of multiple suitors. Should we just think that the market now is such that the returns that we're generated prior from acquisitions are no longer or possible in the future. Just given the more competitive M&A interest from your peers. And is it reasonable to think that from here forward no matter, I mean it's any meaningful size of revenue, then that's going to be initially dilutive.

[Adam Norwitt:]

No, Wamsi. Look I would actually not say that. I think that when we think about the contribution from our acquisitions, we still feel very, very good about the long-term contribution the returns from those acquisitions. I mean, look, we paid prices ultimately, that were very reasonable prices. But as I said earlier, they were reasonable for the seller and reasonable for the buyer, they were not bid up.I think the point that I was making earlier was that yes, there were in certain cases, not all of them in certain cases multiple suitors but it was really the compelling proposition for those companies to be a part of the Amphenol organization that ultimately was a very, very powerful attraction and not necessarily that we were willing to pay the last penny highest price for every one of those acquisitions. I mean these sellers in particular the family owned companies they deeply care the future of those companies. Is there organizations going to have a future or is it going to get swallowed up into just kind of a big bad matrixed organization where you don't even find it later on.And I think that sort of care that they have for the future of that organization brings to Amphenol, a lot of benefits in "market for acquisitions." We still see fabulous potential in our acquisition program. It's true, I mean these companies have lower margin. I mean they're not dilutive per se, they are accretive to the company from an EPS perspective, no doubt about that. Do they have lower margins? Initially they do, but we have a long-term goal that is already well established with those with the sellers who're remaining with the company that is part of Amphenol, they will over time move those margins up to the company average or maybe better absolutely. That is the conviction that is the mission of all those companies as they join Amphenol.And so I think when Craig was talking about the kind of margin headwind in terms of the lower-than-average margin of these acquisitions, it's not that they are lower-than-average in perpetuity. I mean, our goal is obviously not for that to happen and I think we have a great track record of demonstrating that we can generate excellent returns from these companies and we have a full conviction that will continue to do that for the future.I mean relative to your sort of initial question, I think, Craig, has been pretty clear about the fact that our conversion margins, if you take out the money that we're spending on making some of -- taking some of the actions in light of lower volumes and if you take out the kind of margin -- the below average margins of the acquisitions, we really are performing really well from a sequential and a year-over-year conversion margin basis.

[Operator:]

Thank you. Our next question is coming from Steven Fox with Cross Research. Your line is now open.

[Steven Fox:]

Just one question from me please. Adam you're seem to constantly be able to find ways to reduce costs during tough times. And I would imagine that every time it's a little bit different. So I was wondering if you could get a little bit color around what you're doing right now and especially since you seem to be accomplishing a lot task for very quickly on across your business units to offset some of these declines. Thanks.

[Adam Norwitt:]

Steve, I mean look, this is not so much black magic. I mean, I mentioned earlier that the mindset of an Amphenol General Manager is always to drive with one foot on the gas and one foot on the brake and I think what that just means is that you scale as it comes. I mean, you build the business, always with the understanding that one day you may have to scale it back and thus you make decisions accordingly.You don't put massive infrastructure that is fixed forever in place, you take a little bit more of a flexible approach, maybe you lease a building instead of you own the building, maybe you buy not always the number one most expensive machine when all the times are good, maybe you buy the machine that is the right machine not always the best machine. When you need people, whether that be salespeople engineers or whoever when you're growing well, sometimes your people work a little bit harder as opposed to just adding in lockstep the number of people that you need.And then when it comes to a time like this, where the demand is certainly lower than you had expected. Well, you're doing the opposite you're adjusting down and you're doing that in a framework of a cost structure that was built with an eye to doing what you're doing on that day. Which is, you knew when you built that cost structure that one day you might have to reduce it. And that makes the job of doing that not nicer. it's not a nice job but it does make it a little bit more readily available to get done without inflicting just real harm to the organization.And I would just also add here that when we take this very seriously, there is nothing any of us like doing less than telling someone they don't have a job. But we do that in a very focused fashion. So we have around the world 110 or let's call it, now 114 operating units inside of Amphenol. We have many that are actually performing very well that are growing that are investing that are doubling down on executing on behalf of their customers and we have others who have some more significant impact because of the nature of the products that they sell, the customers to whom they sell it in the markets that they work in.And you can imagine that those general managers running those more impacted businesses, they are taking really quick action and that is really tough action; sometimes, it's people. It's working with your vendors to make sure that there is cost reductions. It's sometimes shrinking the footprint of what you have. Sometimes, it's moving something. I mean there -- in Amphenol, everything is fair game. There are no sacred cows, but the ability to do that is actually enabled in the good times, not in the bad times.And I think that's the really important concept from our culture to recognize that those times will come, business cycles will come, the environment that we see right now is not a shock to anybody. I mean, we would like to not have it, but it is what it is and we are fortunate that the mindset of the people was that as we were growing strong in those same businesses, they had an eye that one day this would come and they made decisions accordingly. And look, it is not something we like to do, but it is something that we know how to do. It is something that is really second nature to that in the moment agility of how Amphenol General Manager operates in his or her business every day.

[Operator:]

Our next question is coming from Jim Suva with Citigroup Investment Research. Your line is now open.

[Jim Suva:]

I just have one question and that is on the restructuring actions that you spoke about today. Typically Amphenol, it's normal like you said one foot on the gas, one foot on the brake and looking forward optimistically, but being careful for the puts and takes that could happen with the economy and customers. With that being said, it seems like in your press release and some of the more commentary on this call, you're talking about restructuring a little bit more. Can you help us understand, is that because this kind of the slowdown in demand happened faster or is there -- are you shifting footprint a little bit more effort than in the past or anything we should kind of think about that because you are a much larger company today than say a decade ago?

[Adam Norwitt:]

Well, thanks very much, Jim. I mean, I don't know that we're talking about necessarily more. We fairly had a few more questions about it. So it have had and we're trying to be responsive to those questions, but I mean, look, it was this more of a sudden situation, I think there is a portion of what we're seeing here in our outlook.There was a little bit sudden. There was a day where there was a government policy that had a certain impact, and there were some direct and indirect effects that came out of that and that was really in mid-May. So, I think to some extent, there was a little bit of a suddenness to some of the changes in the expectation. But this is not different. You should not think that we're approaching this in a different way than we have in the past.I think the mention of that, as you alluded to in our press release I think and Craig commented already very extensively about that. I mean, it's really just to be transparent with everybody in particular, as one looks at the sequential guidance and the profitability performance thereof. So I wouldn't read anything more into it than that. I mean, we're doing what we always do.This is normal course of business and it's just -- you said it and I've said it two or three times; one foot on the gas and one foot on the brake. And look, I will just say one last thing about that, which is when times are good, you say, well, you've got one foot on the gas and one on the brake, you're making decisions to protect yourself going forward.Well, when the demand is also down, we are also aggressively pursuing growth opportunities, very aggressively and that has always been the hallmark of Amphenol through every cycle whether that's the big cycles or small cycles that this does not take our eye off the ball of developing products for customers, supporting customers in every geography and ultimately coming out of any sort of change in demand environment in a stronger position than we had come into it.

[Operator:]

And the last question is coming Joseph Giordano with Cowen. Your line is now open.

[Joseph Giordano:]

Just given companies globally kind of responding to the trade tensions and potentially like a shift in overall policies and kind of like retooling supply chains, can you talk about how attractive M&A is in other jurisdictions now? Are you like specifically looking at potentially electronics businesses in like Vietnam or places like that where you're seeing increased investment to kind of diversify away from China specifically from some of your customers?

[Adam Norwitt:]

Yeah, so I mean I think it's a great question, Joe, and I would just say is the current kind of reordering or however, one wants to call it I mean, I'm not going to try to predict what this environment is. I know there is something going on ultimately, how it's going to turn out is a little bit hard to say. Is it changing our appetite or focus on M&A, I would say, no it's not. I mean, we've been -- we've always had cast a very, very wide net in our acquisition program.So I wouldn't say that this is causing us to go look at buying companies in Vietnam or going someplace else or diverting our focus away from China, but I would say this, there is something going on in the world. And I'll let much smarter people than me right about it and talk about it. Whatever it is, if it's a reordering, if it's a sort of a reversion back from globalization toward localization I mean, whatever it is, again, not really my place to get into the mix of talking about that, what I can tell you is our organization is really a purpose-built to deal with regardless.I mean, over the last number of decades the way that we have approached building the business out around the world has been to put empowerment behind General Managers around the world enabling them. That build comprehensive organization, local organization who can really adapt in real time to both the markets that they serve to the customers that they work with, to the competitors that they face and to the geographies in which they operate.And I think that unique tailor-made approach has worked extremely well in an environment where the world has been embracing let's say globalization. If that changes, it's still a purpose-built organizations, because it is so localized, because we have not dispatched dozens or even 100s of ex-patriots around the world, planted American flags everywhere that we go and said, here come buy from us because we are American no, no, far from it.We say work with us because we are local, work with us because we are the same as you, we are from the same country, we are speaking the same language, we are developing products that you need not that some other country thinks that you need. And so if the world does in fact change tack here, which it may or may not, I can tell you that the Amphenol organization stands ready to embrace whichever way that it goes. And I think that the diversity of our business serves so well in a time like this.We will never run away from the fact that we are headquartered in the United States and we're proud to be an American company, prouder than you can imagine. At the same time, we're very proud to be in Germany, we're very proud to be in Macedonia, we're very proud to be in India, we're very proud to be in China, wherever we operate and we operate as a global company who is really functioning as a local leader in every place where we go.And the diversity of the span, the business, a business where, and I can tell you aside from one customer who we spoke about last year in the mobile devices market where we didn't have a customer that represented more than 3% of our sales last year. I mean this is a broad and balanced business in all geographies and whatever comes our way in this dynamic that you alluded to, I can tell you that the Amphenol organization stands ready to prosper and take advantage of that for the future.

[Operator:]

Speakers, that was our last question.

[Adam Norwitt:]

Very good. Well, again, I appreciate everybody taking that extra bit of time today to join us on the call. I wish you all a wonderful summer. I hope you get a little bit of time to rest and be back with your families. And we look forward to getting back together with you here in 90 days. Thanks so much. Bye-Bye.

[Operator:]

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