Amphenol Q4:2024 Earnings
Amphenol’s full-year 2024 sales increased 21% (or 13% organically) and adjusted EPS grew 25% year-over-year. EPS grew faster than sales because of operating leverage on strong sales volumes (adjusted operating margins improved 100 basis points to a record 21.7%) and because of share repurchases.
Organic sales growth was driven by strong demand in IT datacom, commercial air, mobile devices, and defense (including space) end markets. Its sales to the industrial end market continue to decline on an organic basis. Full year orders grew 37%, and the company generated a book-to-bill of 1.11. Amphenol closed on two acquisitions in 2024 and expects to complete two more in the first quarter of 2025.
It generated about $2.2 billion in free cash flow, which was roughly flat compared to 2023 because of elevated capex spending to support its AI business. Its $2.2 billion in FCF represents a FCF margin of 14% and FCF conversion (FCF-to-net income) of 89%. It returned 59% (or $1.3 billion) of its FCF to shareholders in the form of dividends and share buybacks (this compares to the nearly $1.1 billion it returned to shareholders in 2023). Impressively, Amphenol increased its dividend 50%. Amphenol generated a return on equity (ROE) of nearly 27% and return on invested capital (ROIC) of nearly 14%. Its ROE and ROIC both increased compared to 2023.
In my opinion Amphenol is an exceptional, almost one-of-a-kind profitable growth business. I say one-of-a-kind because of its decentralized entrepreneurial structure in which Amphenol is really 140 different, agile, adaptable, and independent businesses operating under the corporate umbrella. This enables it to innovate and bring new products to market quickly to meet its customers’ needs, but it also allows the company to quickly adapt to the unpredictable nature of markets, economies, and geopolitics. This decentralized, adaptive culture, along with its global manufacturing scale, and product complexity provides Amphenol with what I think is a wide and durable moat. The future is unpredictable (we don’t know what we don’t know…just like we don’t know the ultimate long-term impact of DeepSeek on our portfolio companies), but as a portfolio manager it helps me sleep well knowing that Amphenol has a culture of adaptability and resilience in the face of constant change.
Amphenol is a great business and the market knows it. It’s a high-multiple stock, trading at a NTM P/E of around 30x and its multiple drops to only 24x on three-year out consensus estimates. I won’t say this often, but I think the high multiple is justified based on Amphenol’s diverse and stable business with attractive organic growth, its decentralized culture and unique M&A prowess, rising margins and returns on invested capital, exposure to long-term tailwinds, and what I think is a long runway of 10% – 15% EPS growth. If I’m going to pay up, Amphenol is the type of business I’m willing to pay up for.
Key Quotes from the Q4:2024 Earnings Call:
“If you step back for a moment and think about what makes our company special, it is really that decentralized entrepreneurial organization with nearly 140 general managers around the world who each have the full authority and accountability to tailor their individual businesses in such a way that they meet customer demands.”
“Specific to tariffs, let me just say this. I mean, this is not a new topic. We dealt with tariffs back — from the US back in, I think it was 2017. Those were — tariffs were mostly directed to China, but not only at China. And I think what we saw in that time is our team did a fabulous job of mitigating the impact of those tariffs through a wide variety of measures. There was not a one size fits all solution. Underlying all of that is the backdrop that we tend to make our products in the regions where our customers buy them, not 100%, but that we tend to always try to be close to our customers, and sometimes our customers are making things in regions and shipping them into the US or into Europe and we try to be close to those customers wherever they’re making them. But if you really get to the essence of why we were so successful in mitigating the last phase of tariffs, it comes down to that unique entrepreneurial organization that I mentioned earlier. The fact that we don’t here at headquarters put out for everybody a mandate to say, “Hey, there are tariffs coming, here’s what you have to do. Here’s step one, step two, step three,” rather, what we do is we tell all of our general managers around the world that it’s up to them to manage through anything that comes along and impacts their business, including trade policies, including tariffs, including whatever can come along. There’s a whole host of different government policies that can ultimately bump into our company. And what that means is not that they kind of guess where the policy is going, but rather that they make sure that their operations are as agile as possible. And we run a company that’s based on the principle of agility, of entrepreneurship, the flexibility, the reactivity. And that positions us extremely well when there are these kind of unpredictable situations that are coming.”
“I would just comment that we’re very pleased that the company’s end-market exposure remains highly diversified, balanced and broad. This diversification continues to create great value for Amphenol because it enables us to participate across all areas of the global electronics industry, all while not being disproportionately exposed to the volatility of any given market or application.”
“For the full year 2024, our sales in the IT datacom market grew by a very strong 57% in US dollars and 56% organically as we benefited from strong demand for AI-related applications as well as growth in our non-AI IT datacom business. Looking ahead, we expect a further mid-single digit sequential increase in sales in the first quarter as investments in AI-related data centers continue to accelerate. We are more encouraged than ever by the company’s position in the global IT datacom market.”
“This revolution in AI continues to create a unique opportunity for Amphenol given our leading high-speed and power interconnect products. And really whether high-speed power or fiber-optic, our products are critical components in these next-generation networks and this creates a continued long-term growth opportunity for Amphenol.”
“I was just a couple of weeks ago out in Las Vegas at the Consumer Electronics Show and I know for a lot of people going to CES is kind of a chore and they dread it. They spend their whole Christmas holiday dreading going on the first week of January to roam around the crowded aisleways of CES. For me, it’s the most exciting thing on Earth to go. I think I burnt nearly 30,000 steps in one day, wandering the hallways, looking at this extraordinary array of what’s going on in the world. And there was one thing that we see in our business and you saw on full display in Las Vegas, which is the real convergence of all of these things that have been going on, things like robotics, the next-generation vehicles and next-generation consumer devices, IoT and the like, and converging that with now this revolution in accelerated computing. And the combination of the device and product innovation with the acceleration of compute power that really is AI, for me, that’s going to unlock opportunities across our industry that we never could have imagined before. And when I spent those 30,000 steps in my half day of walking the — and burning out my shoe leather at CES, I just saw this over and over and over again. And so, I am really excited about that convergence and I’m really excited about what that’s going to create, the unknown new industries that are going to come out of this accelerated compute and that convergence with the amazing developments around product technology that we as a company are enabling across all of our end markets.”
“Look, the complexity is a great thing for Amphenol and we’ve talked about this already a number of times with this advent and with the development and the acceleration of the investments in AI. But what is really unique about these systems is the fact that these chips, the processors have to all talk to each other to make the complex calculations and the probability calculations that ultimately creates a learning model or a neural network or machine-learning, whatever it is you want to call it and our products are an integral part of that connectivity of linking chips to chips and then linking them across the various devices in the data center. We — is that complex? It is by definition, because the products have to all talk to each other. And so, then, it’s a question of can we solve our customers’ problems with the highest speed, lowest latency interconnects that enable those chips to talk to each other to make those calculations amongst themselves, and to do that using the lowest possible amount of energy, because I think nobody — you cannot pick up an article about AI without also hearing in the same breadth about the challenges around the power supply for these networks as they’re being built out. And the beauty of the products that we supply is they accomplish both. They are enabling the high speed, enabling the low latency, but also doing that with a much more significant reduction in power than you would get from certain other architectures. And for us, we’re agnostic to how customers go about architecting these products as long as they continue to make investments broadly across the board in these new AI architectures, which just are by definition going to have a more intensive content of interconnect products for our industry and where Amphenol, we’re confident we’re going to gain more than our fair share of that opportunity.”
“Excluding acquisition-related costs, full year 2024 adjusted operating income was $3.303 billion, resulting in an adjusted operating margin of 21.7%, also a record. Compared to 2023, adjusted operating margin increased 100 basis points, which was primarily driven by the strong operational performance on the higher sales levels, partially offset by dilutive impact of acquisitions. I am very proud of the company’s record operating margin performance in the fourth quarter and for the full year.”
“This was an excellent result, especially considering that our capital spending was somewhat elevated in the quarter due to investments we are making in support of the strong growth we are seeing in IT datacom and defense markets. We expect to continue to have somewhat elevated levels of capital spending in the first quarter as we continue to invest to support the significant growth that we are seeing in the IT datacom market, particularly related to AI applications. For the full year 2024, operating cash flow was a record $2.815 billion or 116% of net income and net of capital spending, our free cash flow was $2.157 billion in 2024 or 89% of net income, a strong result. From a working capital standpoint, inventory days, days sales outstanding and payable days were 80 days, 68 days and 58 days, respectively, all within our normal levels.”
“And at the end of the fourth quarter of 2024, our net leverage ratio was 0.9 times. We are very pleased that the company’s financial condition remains strong by any measure.”
“These strong orders were once again driven primarily by data center demand related in particular to artificial intelligence or AI investments by a number of our large customers.”
“As we cross $15 billion in sales in 2024, our organization is proud that we have grown our sales by 40% just in the last three years, and it’s a great reflection of our organization’s ability to navigate market uncertainties while capitalizing on the broad array of opportunities arising across the electronics industry.”
“And finally, we generated record operating cash flow of $2.815 billion and free cash flow of $2.157 billion, clear confirmations of the company’s superior execution and disciplined working capital management. Also very pleased that our acquisition program again created great value in 2024. We completed the acquisition of Carlisle Interconnect Technologies, our largest ever, together with the acquisition of Luetze US and Europe.”
“We returned substantial cash to shareholders in 2024, buying back 11.1 million shares under our share repurchase program and increasing our quarterly dividend by 50%. And this represented a total return of capital to shareholders of nearly $1.3 billion.”
“For the full year 2024, [industrial end market] sales grew by 14% in US dollars and local currency as we benefited from the impact of our acquisitions. Organically, sales declined by 2% from prior year as strength in rail mass transit, alternative energy and medical applications were more than offset by moderations in other markets. Looking into the first quarter of 2025, we now expect sales to decline in the low-single digits from these fourth quarter levels. I will say that in 2024, despite the overall market moderation, we did continue to expand our range of products and capabilities in service of the diversified global industrial market.”
“But anything related to industrial, and industrial by the way in Europe still has a strong linkage to the overall automotive industry, that I think the recovery and the timing of that recovery is yet to be really determined.”
“The automotive market represented 18% of our sales in the quarter and 20% of our sales for the full year. Sales in the fourth quarter were down by 3% in US dollars, local currencies and organic, and that was really driven particularly by lower demand from European customers, which more than offset organic growth in North America and Asia. Sequentially, our automotive sales increased by 1%, which was a bit better than our expectations coming into the quarter. For the full year 2024, our sales increased by 6% in US dollars and local currencies and by 4% organically, and this was driven particularly by strong performance in North America and Asia, which was partially offset by reduced demand in Europe. Looking into the first quarter of 2025, we expect a seasonal moderation in sales from this quarter’s levels. I just want to say that I’m really proud of our team working in the automotive market. While there are clearly some uncertainties in the market, in particular in Europe, our team remains focused on driving new design wins with customers who are implementing a wide array of new technologies into their vehicles, and this includes everything from electrified drivetrains to a whole multitude of other exciting applications that we’re working on and we look forward to benefiting from our strong position in the automotive market for many years to come.”
“I mean, we’ve outperformed in both of those markets. And I would say that that’s not a rarity for us in recent years. I mean, automotive, for example, I think we’ve outperformed for a number of years, whatever benchmark one wants to use. And I think, the underlying driver of automotive has always been for more than a decade, the expansion of electronics into cars and thereby the content opportunity that comes to us. And then, our ability to try to win more than our fair share of that content, whether it’s in next-generation drive trains, next-generation electronics, safety, communications and the like. And relative to mobile devices, it really comes down to two things. One is our position with customers through the breadth of our antenna interconnect and mechanism offering and wide variety of products that we sell into that market, everything from unique antennas to complex interconnect products to mechanical hinges and the like. And then, our ability to execute when customers need us the most, and thereby to take a little more than our fair share of that overall business.”
“We talked about the fact that EVs and ICE vehicles all have growing amounts of content. And when you get to an EV and you’re converting things that were mechanical or hydraulic into electronic and electrical, that creates a great opportunity for our company. And I think we’ve done a fabulous job of capitalizing upon that opportunity around the world. And meanwhile, with ICE vehicles, to the extent that there is a tilt to or from EVs to ICE, there’s no doubt that ICE vehicles will be built to also be more fuel efficient and electronics is a great driver of that fuel efficiency as well, new sensors, new interconnect products that go along with that. And the vast majority of our automotive business is actually agnostic to the drivetrain. And what it’s not agnostic to is the expansion of electronics in the car.”
Source: investors.amphenol.com/…
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