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Edited Transcript of APH earnings conference call or presentation 22-Apr-20 5:00pm GMT

Q1 2020 Amphenol Corp Earnings Call

WALLINGFORD Apr 28, 2020 (Thomson StreetEvents) -- Edited Transcript of Amphenol Corp earnings conference call or presentation Wednesday, April 22, 2020 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Craig A. Lampo

Amphenol Corporation - Senior VP & CFO

* Richard Adam Norwitt

Amphenol Corporation - President, CEO & Director

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Conference Call Participants

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* Amit Jawaharlaz Daryanani

Evercore ISI Institutional Equities, Research Division - Senior MD & Fundamental Research Analyst

* Craig Matthew Hettenbach

Morgan Stanley, Research Division - VP

* David Lee Kelley

Jefferies LLC, Research Division - Equity Analyst

* Deepa Bhargavi Narasimhapuram Raghavan

Wells Fargo Securities, LLC, Research Division - Associate Analyst

* Jim Suva

Citigroup Inc, Research Division - MD & Research Analyst

* Joseph Craig Giordano

Cowen and Company, LLC, Research Division - MD

* Joseph Robert Spak

RBC Capital Markets, Research Division - Analyst

* Mark Trevor Delaney

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Matthew John Sheerin

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst

* Nikolay Todorov

Longbow Research LLC - Analyst

* Samik Chatterjee

JP Morgan Chase & Co, Research Division - Analyst

* Shawn Matthew Harrison

Loop Capital Markets LLC, Research Division - MD

* Wamsi Mohan

BofA Merrill Lynch, Research Division - Director

* William Stein

SunTrust Robinson Humphrey, Inc., Research Division - MD

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Presentation

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Operator [1]

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Hello, and welcome to the first quarter earnings conference call for Amphenol Corporation. Following today's presentation, there will be a formal question-and-answer session. (Operator Instructions) At the request of the company, today's conference is being recorded. If anyone has any objections, you may disconnect at this time. I would now like to introduce today's conference host, Mr. Craig Lampo. Sir, you may begin.

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Craig A. Lampo, Amphenol Corporation - Senior VP & CFO [2]

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Thank you very much. Good afternoon, everyone. This is Craig Lampo, Amphenol's CFO. And I'm here with Adam Norwitt, our CEO. We would like to welcome you to our first quarter 2020 conference call.

As a reminder, during the call, we may refer 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. But before I review the financial performance for the quarter, Adam would like to say a few words.

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Richard Adam Norwitt, Amphenol Corporation - President, CEO & Director [3]

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Well, thank you very much, Craig. And first and foremost, I wanted to express my hope to everybody that's here on the phone today that you, your family, your friends and your colleagues are all staying safe and healthy amidst the current COVID-19 crisis.

As Craig just mentioned, I'm going to comment on the current environment. I'll discuss also some of our highlights in the first quarter. I'll then turn it over to Craig to provide further detail on our financial performance. And then finally, I'll come back to me to discuss the trends and progress across our served markets, and I'll make a few comments about the future.

No question that we're living in truly unprecedented times, as the COVID-19 pandemic has impacted all of us around the world in really extraordinary ways. Here at Amphenol, our first priority from the earliest days has been to ensure the safety and wellbeing of our employer, our suppliers, our customers and the many communities in which we operate around the world. And I'm sure that this pandemic has also personally impacted many of you on the phone here today, just like it has really everyone around the world.

Our company began to see the impact from the outbreak at the time of the government restrictions that were imposed by China, starting with the shutdown of Wuhan on January 23. While we don't have any facilities in Wuhan, our team successfully navigated an unprecedented 3-week shutdown of our 50 manufacturing operations in China. And I just wanted to mention here how truly proud I am of our entire China team who were able to return to full production levels by the beginning of March, substantially earlier than we had originally expected.

As the COVID-19 virus has continued to spread around the world, Amphenol's entire global team has been focused on executing amidst very challenging market conditions and quickly evolving government measures to control the pandemic, all while clearly prioritizing the safety and the health of our more than 75,000 employees around the world. To that end, we early on proactively instituted significant measures to protect our employees, which has ultimately enabled us as a company to continue to operate throughout this pandemic.

I'm truly proud of the Amphenol organization, who despite these unprecedented conditions has continued to execute as Amphenolians always do, including by supporting our communities around the world when they need us the most. We've donated hundreds of thousands of masks to local hospitals, reconditioned machines to produce our own face mask, dedicated 3D printers to help make face shield, significantly expanded our production of components used in ventilators and other critical equipment and ramped up the capacity of our high speed and power products to support the expanded bandwidth needs around the world.

And these are just a few of the many, many initiatives that have been taken by our more than 120 operations around the world. And I just wanted to take this opportunity to thank each and every one of our Amphenol employees around the world for their dedication, resolve, agility and focus amidst these most challenging and uncertain times.

Now turning to the first quarter. As I'm sure you all well know, due to the widespread disruption caused by the COVID-19 pandemic, on February 24, we withdrew our first quarter guidance that had been issued at the time of our January earnings release. Despite this, I'm very proud of the results that the company ultimately achieved in this uniquely challenging quarter.

Our sales reached $1.862 billion, a reduction of 5% in U.S. dollars versus prior year and 9% organically. And that was driven by lower sales in the mobile devices, mobile networks, IT datacom, automotive and industrial markets. These declines largely related to the COVID-19 disruptions in China including, in particular, the approximately 3-week shutdown of all of our manufacturing operations in that country. I'm very pleased that the company booked $2.150 billion in orders in the first quarter, and that represented a book-to-bill of 1.15:1, the highest level in the modern history of the corporation. And despite the significant disruptions to our operations in the quarter, adjusted operating margins held up very well, reaching 17%.

Amphenol's financial position is extremely strong, with operating cash flow of $384 million in the first quarter, supporting the company's excellent liquidity, which included a substantial $2.4 billion in cash and cash equivalents at quarter end. Craig will give more details on this in a few moments.

Just like to close by saying, I'm extremely proud of our team and that our performance this quarter, once again, reflects the discipline and agility of our entrepreneurial organization as we continue to perform well amidst the truly unprecedented challenges related to the COVID-19 crisis. And with that, I'll turn it over to Craig to review our financial performance and then come back in a few moments to talk about our end markets. Craig, please.

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Craig A. Lampo, Amphenol Corporation - Senior VP & CFO [4]

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Thanks a lot, Adam. So as Adam just reviewed, the company closed the first quarter with sales of $1.862 million and with GAAP and adjusted diluted EPS of $0.79 and $0.71, respectively. Sales were down 5% in U.S. dollars and 4% in local currencies compared to the first quarter of 2019. And from an organic standpoint, excluding both acquisitions and currency impacts, sales in the first quarter decreased 9%. Sequentially, sales were down 13% in U.S. dollars in local currency and organically.

Breaking down sales into our 2 segments. The interconnect business, which comprised 96% of our sales, was down 5% in U.S. dollars and 4% in local currencies compared to last year. Our cable business, which comprised 4% of our sales, was down 13% in U.S. dollars and 11% in local currencies compared to the first quarter of last year. Adam will comment further on trends by market in a few minutes.

Operating income was $317 million for the first quarter of 2020. And operating margin was 17%, which was down 310 basis points compared to the first quarter of 2019. Compared to the first -- the fourth quarter of 2019, operating margin decreased 300 basis points. The reduction in operating margins reflected a negative conversion rate higher than our typical 30% downside conversion. This elevated conversion was primarily driven by the impact on the first quarter of the COVID-19 pandemic on production and productivity, particularly due to the various government instructions that limit our ability to adjust payroll costs.

From a segment standpoint, in the interconnect segment, margins were 19.1% in the first quarter of 2020, which was down compared to 22% for both the first and fourth quarters of 2019. In the cable segment, margins were 7.6%, which is down compared to 11% in the first quarter of 2019; and 10% in the fourth quarter of 2019.

Despite the year-over-year and sequential operating margin decline, we are proud of this quarter's performance, given the unprecedented challenges created by the COVID-19 pandemic. Our team's ability to minimize the negative margin impact with -- from this crisis 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 thereby maximize both growth and profitability in an uncertain market environment.

Interest expense for the quarter was $29 million, which compared to $30 million in the first quarter of last year. And the company's adjusted effective tax rate was 24.5% for both the first quarter of 2020 and 2019, respectively. The adjusted effective tax rate for the first quarter of 2020 excluded a discrete tax benefit of $20 million due to refunds in certain non-U. S. tax jurisdictions and the resulting adjustment to deferred taxes as well as an excess tax benefit of $5 million associated with stock option exercised during the quarter. The adjusted effective tax rate for the first quarter of 2019 excludes the impact of acquisition-related costs, partially offset by the impact of an excess tax benefit associated with stock option exercised during the quarter.

The company's GAAP effective tax rate for the first quarter of 2020, including the items just mentioned, was 15.9% compared to 22.8% in first quarter of 2019.

Adjusted net income was a strong 12% of sales in the first quarter of 2020, another confirmation of the strength of the company's financial performance.

On a GAAP basis, diluted EPS declined by 9% in the first quarter to $0.79 compared to $0.87 in the first quarter of 2019. Adjusted diluted EPS declined 20% to $0.71 in the first quarter of 2020 from $0.89 in the first quarter of 2019.

As Adam mentioned, orders for the quarter were $2.150 billion, which is up 7% compared to the first quarter of 2019, resulting in a record book-to-bill ratio of 1.15:1.

Despite the extremely challenging environment, the company continues to be an excellent generator of cash. Cash flow from operations was $384 million in the first quarter or 177% of adjusted net income. And net of capital spending of $61 million, our free cash flow was $323 million or 149% of adjusted net income.

From a working capital standpoint, inventory, accounts receivable and accounts payable were $1.3 billion, $1.5 billion and $817 million, respectively, at the end of March. And inventory days, days sales outstanding and payable days were 92, 75 and 57 days, respectively. While DSO and DPO were both within a normal range, DSI was slightly elevated due to the lower sales levels in the first quarter, which were driven primarily by the extended shutdown of production in China as well as the production challenges in other parts of the world. Due to the current crisis, we do expect inventory days to remain somewhat elevated, while sales levels are depressed, but to come back down to normal levels as business returns to a more typical pattern.

The COVID-19 pandemic created significant uncertainty -- significant economic uncertainty and volatility in the credit and capital markets during the first quarter of 2020. As a result and as mentioned in our earnings release, out of an abundance of caution, in late March, the company proactively borrowed $1.25 billion under our $2.5 billion revolving credit facility. In addition, due to the significant volatility in the commercial paper market, the company decided to reduce its reliance on the public commercial paper market. And as such, approximately half of the proceeds from the revolving credit facility is allocated to repay amounts due under our commercial paper programs.

During the first quarter, our cash flow from operations of $384 million, along with net proceeds from our various credit facilities of $1.36 billion, proceeds from our recently completed bond offering of $400 million and proceeds from the exercise of stock options of $30 million were used primarily to repurchase $257 million of the company's stock at an average of approximately $96, fund repayments under our commercial paper programs of $250 million, fund dividend payments of $74 million, for a net capital expenditures of $60 million, for an acquisition of $16 million and fund distributions to and purchases of noncontrolling interest of $8 million.

At March 31, cash and short-term investments were $2.4 billion, of which $1.4 billion was held in the U.S. This elevated level of cash was driven by $400 million on hand from proceeds of the February bond offering, which was subsequently used to fund the $400 million bond maturity due on April 1 and the previously noted drawdown of our credit facilities in excess of our current or expected cash needs in order to fund the decision to reduce our reliance on the commercial paper market and to provide a cash buffer during this period of extreme market volatility.

At March 31, there was $1.36 billion outstanding under our credit facilities as well as $138 million of outstanding commercial paper remaining that will come due in April and be repaid with cash on hand. As a result, total debt at March 31 was $5.1 billion, and net debt at March 31 was $2.7 billion, which was unchanged from the net debt level as of December 31, 2019. Total cash on hand as well as the remaining availability under our credit facilities was $3.6 billion at the end of the quarter, which leaves the company in a very strong liquidity position. The first quarter 2020 EBITDA was $403 million, and our pro forma net leverage ratio was 1.4x.

In summary, although this was certainly a much more challenging quarter than we had anticipated coming into the year, we finished the quarter in a position of real financial strength and with a very strong balance sheet and liquidity position. We believe this financial strength, coupled with the company's broad market and geographic diversity, positions us well for the current volatile environment, which is characterized by moderating demand and continued uncertainty across global markets.

And with that, I will now turn it over to Adam, who will provide some commentary on current market trends.

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Richard Adam Norwitt, Amphenol Corporation - President, CEO & Director [5]

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Well, thank you very much, Craig. Craig just mentioned the value that we see in the company's balanced and broad end market diversification. And I can just tell you that, that value is even more clear in times like we're living in today.

In the quarter, no single end market represented more than 21% of our sales. Such diversification continues to mitigate the impact of the volatility of individual end markets and geographies while also exposing us to leading technologies wherever they may arise across the electronics industry. And this is just a great asset in a dynamic and unpredictable environment like we are experiencing today.

Now turning to our end markets. The military market represented 14% of our sales in the quarter. Sales again grew very strongly from prior year, increasing by a bit less than expected 18% in the first quarter. And this was driven by growth across virtually all segments of the military market, including, in particular, helicopters, space, military vehicles and avionics applications. Sequentially, our sales decreased by 5% from the fourth quarter.

Looking now into the second quarter, we expect sales to decrease from the first quarter levels as certain of our facilities that support military customers are operating with reduced staffing as a result of governmental restrictions related to the COVID-19 pandemic. Nevertheless, our team focused on the military market has worked hard for many years to strengthen our position across the market while increasing our capacity to serve customers really in all segments of the military market. The company's continued strong performance is a great reflection of the results of those efforts. Given the ongoing favorable military spending environment, our team continues to solidify our leadership position by ensuring that we execute on the demand that we see in support of the many next-generation technologies that are required for modern military hardware.

The commercial aerospace market represented 5% of our sales in the quarter, and our sales were down slightly as production volumes declined and as overall demand from commercial aircraft manufacturers began to experience the negative impact of the COVID-19 crisis late in the quarter. Sequentially, our sales decreased by 10% from the fourth quarter, which was a bit more than we had expected coming into the first quarter. There's little doubt that the commercial air market has been significantly impacted by the rapid and unprecedented reduction in air travel around the world. Accordingly, we do expect a further reduction in sales as customer shutdowns and reduced demand for air travel impact overall aircraft production volumes. Regardless of the difficult environment that we're seeing in the commercial air market today, our team working in this market remains committed to leveraging the company's strong technology position across a wide array of aircraft platforms and next-generation systems integrated into those airplanes. And that positions us very well for the long term.

The industrial market represented 21% of our sales in the quarter. Sales in the industrial market declined by approximately 3% as growth in medical, instrumentation, alternative energy and battery-related applications, together with contributions from our acquisitions completed last year, were offset by declining sales related to heavy equipment, rail mass transit, oil and gas as well as other segments. On a sequential basis, sales in the industrial market were down more than we expected by about 4% from the fourth quarter. And this reflected, in particular, the China COVID-19-related shutdown.

I'd like to take this opportunity to highlight just how proud we are of our team working in the medical segment of our industrial market, who is ramping up our production of sensors, connectors and a wide variety of interconnect assemblies in support of countless applications that are providing medical treatment for COVID-19 patients.

Looking into the second quarter, we expect the industrial market to remain relatively stable as increases in production in China are offset by lower sales in other geographies related to some of the restrictions on production that we're now seeing. We remain very pleased with the company's broad position in the worldwide industrial market. And through both our acquisition program as well as our organic innovations, we have developed a very broad array of products across a diversified range of exciting segments within this market. We're proud of the company's long-term success in the industrial market, and we look forward to realizing the benefits from our efforts for many years to come.

The automotive market represented 19% of our sales in the quarter. Sales were weaker than we had expected coming into the quarter due to both the China shutdowns in February as well as COVID-19-related shutdowns by automotive customers in other parts of the world later in the quarter. Sales declined by 8% in U.S. dollars and 6% in local currency. And sequentially, our automotive sales decreased by 13%. As we look towards the second quarter, we do expect sales to further reduce as customer shutdowns continue to impact demand and as a number of our automotive plants are restricted from full operations in certain countries.

At this time, it's very difficult to predict the exact timing and nature of the automotive market recovery. Nevertheless and regardless of this extremely challenging period for the automotive market, we're very confident in our long-term position. When this crisis is behind us, we look forward to once again benefiting from our long-term and consistent strategy of expanding our range of interconnect sensor and antenna products, both organically and through acquisitions, which enable a wide array of onboard electronics across a diversified range of vehicles made by auto manufacturers across the world.

The mobile devices market represented 10% of our sales in the quarter. Our sales to mobile device customers were significantly impacted by the 3-week shutdown and subsequent month-long ramp-up of production in China. Sales in the mobile devices market declined by 20% from prior year and by a greater-than-expected 43% from the fourth quarter of 2019. Although the first quarter was very difficult for our team working in the mobile devices market, I'm just so proud that they were able to fully recover our production levels by early March. And as we look towards the second quarter, we do expect our sales to mobile device customers to increase from these first quarter levels.

Regardless of the COVID-19-related disruption in the first quarter, our long-term position in the mobile devices market remains very robust. Our leading array of antennas, interconnect and products and mechanisms continues to enable a broad range of next-generation mobile devices. And while there's no doubt that this market will always be one of our most volatile, our outstanding and agile team is poised as always to capture any opportunity from our customers that arises in 2020 and into the future.

The mobile networks market represented 7% of our sales in the quarter. Sales decreased as expected from prior year by 14% in U.S. dollars and 31% organically, as we were impacted by reduced demand from wireless OEMs. As we discussed extensively last year, the U.S. government restrictions on sales to certain Chinese entities ultimately resulted in many operator and OEM customers reassessing both their build-out plans and inventory levels, leading to lower demand for our products. In addition, the China shutdowns related to the COVID-19 crisis also impacted our sales in the first quarter in the mobile networks market.

On a sequential basis, our sales actually increased 6% from the fourth quarter, and that was driven by higher sales to mobile network service providers. Given the continued disruptions related to the COVID-19 crisis as well as the ongoing U.S. government restrictions that I just discussed, we anticipate sales in the second quarter to be similar to those levels that we realized in the first quarter. Regardless of the continued challenges in the mobile networks market, we're confident in the company's long-term position in this important and exciting industry. Our team continues to work aggressively to expand our opportunities with next-generation equipment and networks. And as customers plan for these advanced systems, we look forward to benefiting from the increased potential that comes from our unique position with both equipment manufacturers and mobile service providers around the world.

I would just mention in addition that as we all know, global communication systems are being stretched by the radical shift in work and education practices due to the COVID-19 crisis. These factors create a significant long-term expansion potential for the company.

The information technology and data communications market represented 20% of our sales in the quarter. Sales in the first quarter were weaker than expected due to the impact of the China shutdowns and the subsequent ramp back up to full production. Sales declined by 4% in U.S. dollars and 10% organically from prior year, as the contributions from the Charles Industries and XGiga acquisitions completed last year, together with stronger sales of server related products, were offset by the impact of the production shutdown in particular in China. Sequentially, our sales declined by 12% from the fourth quarter.

I would mention that we did see a significant uptick in orders in the first quarter from a wide array of customers in the IT datacom market. We believe the surge in activity is related to our customers' efforts and our customers' customers' efforts to increase bandwidth in support of new demands related to the COVID-19 crisis. And this includes the increase in online video communications, streaming services and gaming, among others. We're well positioned to support these initiatives due to our team's continued effort at developing industry-leading products across a wide array of technologies, including, in particular, high speed and power products.

And while we do expect sales to increase in the second quarter due to these strong orders, I would mention that we continue to face production challenges in many geographies due to COVID-19-related government restrictions. Nevertheless, we remain very encouraged by the company's strong technology position in the global IT datacom market. Our customers around the world continue to drive their equipment to ever higher levels of performance in order to manage the dramatic increases in demand for bandwidth and processor power. In turn, our team remains singularly focused on enabling this continuing revolution in IT datacom through their ongoing development of a wide range of next-generation technologies.

The broadband market represented 4% of our sales in the quarter. Sales decreased by 10% from prior year, as spending levels from broadband operators continued to moderate. On a sequential basis, sales decreased by a greater-than-expected 11% from the fourth quarter. We expect sales in the second quarter to increase as customers seek to quickly upgrade capacity in their networks to support the significant increase in demand for bandwidth that I discussed earlier. Our team is working very hard amidst a number of operational challenges to support these upgrades in capacity.

Now turning to our outlook. Given the significant uncertainty related to the COVID-19 crisis, we believe it's prudent to withdraw our full year sales and EPS guidance at this time and will not be providing a specific sales and EPS outlook for the coming quarter. With that said, we do expect sales and EPS in the second quarter to be lower than our first quarter level. This expectation is related to weaker demand in certain markets due to the overall economic environment as well as certain operational restrictions that we're experiencing in several countries related to the government measures that have been implemented to reduce the spread of COVID-19.

In some cases, these restrictions have limited our ability to adjust our resources in line with the volume declines we are experiencing, resulting in elevated costs in several of our businesses as we take actions to comply with government mandates while also ensuring the safety and health of our employees. Nevertheless, despite all these challenges, you can rest assured that the team of Amphenolians around the world is fighting hard to secure the company's overall performance, all while dedicating ourselves to protect the safety and health of our more than 75,000 employees around the world.

So now to summarize, while the first quarter of 2020 has been uniquely challenging, I come away extremely proud of our team's performance. Amidst an unprecedented global pandemic, the Amphenol organization continued to execute extraordinarily well. In fact, it is in times of crisis like we are all facing today that the Amphenolian culture demonstrates its true value. The company's strong performance is a direct reflection of our distinct and consistent competitive advantages: our leading technology, our increasing position with customers in diverse markets, a worldwide presence, lean and flexible cost structure, our highly effective acquisition program and our agile entrepreneurial management team.

And I would just like to take this final opportunity to recognize and thank the entire Amphenol organization around the world for their focus on protecting our people and their communities, their dedication to supporting our customers and their agility in the face of uncertainty, all of which helps to create value for all of our stakeholders. And at this time, operator, we'd be very happy to take any questions that there may be.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Amit Daryanani from Evercore.

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Amit Jawaharlaz Daryanani, Evercore ISI Institutional Equities, Research Division - Senior MD & Fundamental Research Analyst [2]

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I hope everyone at Amphenol and the family are safe and healthy as well. I'll just stick to one question. Adam, do you think, structurally, anything is different today versus pre-COVID for Amphenol that would prevent the company from getting back to this 20% operating margin or the incremental margins you guys have talked about once things eventually normalize? And I guess, when I just think about the cost optimization and things you have talked about, does that actually inherently lower the revenue run rate you need to get to that 20% operating margin target?

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Richard Adam Norwitt, Amphenol Corporation - President, CEO & Director [3]

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Yes. Amit, look, structurally, we are not different than we have been either in good times or bad. And you know it well, this is an organization in many respects that's purpose-built for a crisis like we see today. The agility of and the flexibility of our organization in times of change has always been really the hallmark of Amphenol's performance. And so for sure, this crisis is, in many ways, different from the prior crisis, whether that was the tech collapse of 2001, the financial crisis of 2009, because this is also a crisis where health of people is an issue. And so Craig mentioned, I think, very astutely that our conversion margins going in the first quarter were higher negative conversion margins, because you're dealing with the fact that you have governments shutting down certain production or limiting production. You also have employees where we are taking steps to ensure the safety of our people. And some of those steps have, at least for the time being, not the greatest effect on productivity or on efficiency and all those things that you have grown to expect with us.

But no doubt about it, the structural capability of this company, the organizational, the cultural capability of this company to achieve the margins that we achieved just 90 days ago in the fourth quarter, that hasn't changed whatsoever. Now does something happen during this crisis that ultimately allows us to do even better? Well, let's -- let time tell. But I will say that we are always striving for strong conversion margins on the upside and moderating those conversion margins on the downside, even in an environment like today, where there are very, very different dynamics.

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Operator [4]

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Our next question is from Wamsi Mohan of Bank of America.

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Wamsi Mohan, BofA Merrill Lynch, Research Division - Director [5]

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Adam, can you maybe comment on the pace and cadence of new design activity? You mentioned significant headwinds in mobile devices that you witnessed in the quarter, given that a lot of it is China-centric. But given this disruption in travel and continued disruption, are you seeing or anticipating resulting push-outs of product launches in mobile devices?

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Richard Adam Norwitt, Amphenol Corporation - President, CEO & Director [6]

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Thanks very much, Wamsi. And I -- look, I think without commenting on any specific programs, I would tell you that our customers in all of our markets, and that includes mobile devices, I think there's an adjustment period to this new way of working. We are all working, and I'm sure all of you on the phone here today are working in a way that is very different than you had worked in the past, sitting in your offices, meeting in conference rooms. And now we are all experts on video calls and working remotely and somehow trying to replicate the collaboration and the interaction that you can't really do in person, but that you can seek to replicate through all these different tools that we're all using.

And as it relates to developing new products, launching new products, no doubt about it that customers had to sort of adjust to this. But I will tell you, our teams who are working on new programs with customers, and again, not just in mobile devices, but overall, the level of interaction with customers now that everybody has kind of figured out the technology and figured out how to work in this way, I think that, that level of interaction continues really unabated. And in many ways, I will tell you just personally, my ability to interact with customers when I'm not flying $500 a year, it's amazing. I can visit so many customers from just the comfort of my desk here with the TV screen and a camera. And that is -- and I know that technology existed before, but we all liked to touch and feel and meet people in person and shake hands.

And I think we've had to adapt very rapidly to this new environment. And I believe this new environment actually creates wonderful opportunities, and we'll learn a lot from it. And again, specific to individual launches, I think there were some sort of early adjustment periods that customers have. But by and large, what we see is, to the extent that our customers have access to their manufacturing facilities, that they can produce in full volume, that we still see an enormous amount of activity with customers around the world.

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Operator [7]

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The next question is from Craig Hettenbach from Morgan Stanley.

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Craig Matthew Hettenbach, Morgan Stanley, Research Division - VP [8]

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Adam, just a question on the book-to-bill, which was very strong. I know there's particularly end markets like comm and medical that are helping, but also kind of customers as they look to mitigate supply chain concerns. And so just curious to get a little bit more context on how you feel like kind of the shape of those bookings are and relative to kind of what the demand you're seeing is?

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Richard Adam Norwitt, Amphenol Corporation - President, CEO & Director [9]

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Yes. Well, thank you very much, Craig. I mean, let's go back a little bit. When we think about these bookings, and they were very strong, I mean, the strongest book-to-bill in our history and one of the strongest order quarters we've had. Craig mentioned up 7% year-over-year. Our original guidance for the quarter would have had us, I think, at the high end around $2 billion. And we booked orders of $2.150 billion. So that would have been about 7%, 8%, which would have been a strong book-to-bill, no doubt about it. So I think some element of the strong book-to-bill is just the production restrictions that we had in the quarter. And there's another element of that book-to-bill, which is really increased demand in certain areas and pretty sudden increase in demand, whether it's in the wide range of medical products that our team is working on, whether that's in anything related to bandwidth and communications. And I talked about that in my prepared remarks as well that we see actually sequential increase in sales in a number of those areas.

Now the third category that you alluded to is, are customers placing orders to secure position and prevent against supply chain risk, which could kind of otherwise get in line, there may be some of that, but I would put that kind of in the distant third position of those 3 factors that I've just reviewed. We haven't seen really things like double ordering or frantic kind of ordering just to kind of get a place in line. That's not what we've seen. I think we have seen orders that we can't satisfy because of production requirements. Obviously, when you book $2 billion more than -- or $2.150 billion and you ship $1.860 billion, there are some orders that you booked that you couldn't get out because of some of the restrictions.

But I don't think this is customers really having that kind of panic buy because of shortages. I think the orders are just a great reflection of the breadth of the importance that we play in the technologies of our customers and the importance in turn of our customers in the things that matter right now today. I mean, I will just say one thing, I mean, we have worked in the IT datacom market and mobile devices market for so long, as you know, very well, Craig, and we have always done a phenomenal job of reacting to our customers, reacting to their needs. And those devices, they were supporting so many different applications from video, over the Internet, helping social media, all the various things that were driving demand for things like mobile devices, things like IT datacom, I will tell you, our team today works with a different purpose.

Because those systems that used to be for gaming and for video are now for educating kids. And without those systems, my kids would not be going to school today. We would not be able to function as a corporation. Hospitals would not be able to communicate with the families of the patients who they cannot visit physically because of all of the restrictions. You heard wonderful stories about the use of tablet computers to allow families to tragically meet their loved ones sometimes for the last time in these very, very critical stories. And as I say, our team around the world feels a sense of purpose around this and making sure that we can satisfy the requirements that our customers have. And we're fighting really hard to do that. And so -- but the strong orders, I think they're more a reflection of the urgency of the purpose. And our team is going to find a way, no matter what, to really support those customers.

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Operator [10]

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Our next question comes from Matt Sheerin of Stifel.

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Matthew John Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [11]

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Adam, relative to the operational restrictions you're facing outside of China, can you give us an idea of what your utilization or production levels are now? Where you're seeing the biggest issues? And relative to that, are you expecting similar cost headwinds as you saw last quarter? Or is it too early to tell, given the fluid situation?

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Richard Adam Norwitt, Amphenol Corporation - President, CEO & Director [12]

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Yes. Thanks so much, Matt. I mean, look, the first quarter was largely about the sort of unprecedented, very clear shutdown in China. Chinese New Year came, and it was on then February 10 when essentially you were allowed to reopen, and by the way, reopen with a lot of challenges. Because the government put forth a very, very detailed, very detailed requirements for you to reopen your factory, including things like you had to have enough face masks for every employee to change their masks 3 times a day and you had to have 14 days of stock. And they would come and audit, do you have enough face masks. So -- and do you have enough disinfectant solution, temperature checking devices, all these things. A very rigorous process to reopen.

I will say the rest of the world has not been necessarily as clear as what we saw in China, which is not surprising. I mean every country does things their own way. And that is what it is, and it's not for us to judge that, but rather to react to it. And so we operate, as you know, in close to 40 countries around the world, and every country has a little bit of a different approach. And even here in the United States, where we operate in a number of locations, we have very significant workforce in the U.S., every state has a little bit of a different nuance to that, what are exempted businesses, what are essential businesses, and how is that all defined.

And so our team around the world has been reacting to that -- to those restrictions, making sure that we are -- when we are essential that we're able to operate, making sure that our employees are kept safe. And fortunately, we learned a lot in China, a lot. And our Chinese team has been so helpful into all of our other operations in making sure that we can stay open as much as the governments will allow us, as much as they possibly will allow us by putting in place the appropriate protective measures for our employees. And that's been a real critical aspect of staying open where we have been able to do so, which is, by the way, the vast majority of places, is making sure that we can protect our employees and demonstrate to our people first that it's a safe workplace; and second, demonstrate that to the local government who, in most cases, come and audit and inspect that. If your people don't believe they're coming to a safe workplace, they're not going to come. This is a scary, scary virus. And there's no doubt about it that you need to make sure that the place of work is almost safer than the homes of our people. That's actually our mantra inside of Amphenol, make the workplace safer than the home. And then the people will be comfortable and justifiably comfortable in coming in.

Now ultimately, what does that mean? What is our utilization? I'm sorry to tell you, I can't tell you that. You know we don't have a central computer system, and I just don't know exactly what the utilization is. I can tell you that we have a number of facilities, but not an enormous number for -- who are operating at lower than their capabilities. The number of facilities that are really not producing is relatively small. The countries where these restrictions have been a little more rigorous, I would maybe point to a place like in India or Mexico, and even in those countries, we are operating. We're not totally shut down in those countries. We're operating as an essential business where it's appropriate for us to do so. In terms of the second quarter, I think Craig talked about the fact that we had these extra costs in the first quarter, and we would expect to continue to have extra costs in the second quarter. And what the extent of those will be is really hard to predict, and that's part of the uncertainty that is underlying our reluctance to give a specific outlook here in the second quarter. And I don't know, Craig, whether you would like to add to that.

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Craig A. Lampo, Amphenol Corporation - Senior VP & CFO [13]

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Yes. I would just add one quick thing to that, Adam, and I agree with absolutely everything you just said. I think as we're coming into the second quarter though, I mean the first quarter, we had the shutdown in China, which was that 3-week period and then, obviously, the ramp-up from that. And then really from what impacted us in other countries, really the most meaningful part of that was probably in the second half of March. So we're really in the second quarter. That's really in April in the second quarter, really seeing more of an impact from all the other countries, and time will tell ultimately how that resolves itself. So it's a little bit of a different -- difference between the first quarter and second quarter, both actually having certainly a meaningful increase in costs, just as a different -- maybe a little bit of different nature piece, the full impact of the quarter with the rest of the countries, which are all doing a little bit -- things a little bit differently.

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Operator [14]

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Our next question comes from Samik Chatterjee from JPMorgan.

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Samik Chatterjee, JP Morgan Chase & Co, Research Division - Analyst [15]

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I just wanted to follow up on the order trends and your comments related to that. And if you can kind of help share anything in terms of what you've seen for order trends early on in 2Q just because when I kind of compare the strong order trends you have with the lower economic activity, I mean, I would -- why should I not think that there should be some order cuts down the line from your customers because otherwise, this -- given kind of the strength you have, you would definitely have a very kind of strong, robust year, right? So just help me think about that. Like, are you starting to see some order cuts from customers? Or am I wrong in thinking there should be some down the line?

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Richard Adam Norwitt, Amphenol Corporation - President, CEO & Director [16]

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Yes. Well, thank you very much. Look, I think our strong orders in the first quarter, I talked a lot about where those came from. I think it's a little premature to comment here on the second quarter order trends. It's -- we're just barely 3 weeks into the quarter, and it's hard to see. I mean, I guess I would say that we -- that the orders, which -- in areas like IT datacom, those were strong through the end of the quarter. It wasn't that it was kind of a thing early on, like in February. I mean the orders definitely strengthened through the quarter.

Does that strengthening through the quarter continue here into the second quarter? Again, I think it remains a little early to say that. Does that mean that there is an order correction coming? Again, we're dealing in a time period of an enormous uncertainty. But one thing is for sure. I mean, when I look at the orders in the market where we probably had the strongest orders, which is IT datacom, these are not people putting stuff on shelves, far from it. I mean these are customers trying to get, frantically trying to get stuff in the field so that you and I and our children and our parents can have bandwidth that is not a disaster.

I mean, I'll tell you, I am here in a house with 3 kids going to school. I mean, I have only 2 kids, but one of them brought a second one with them. And when everybody is in school at the same time and when I am on my perpetual video calls during the course of the day, it isn't the greatest experience for anybody because the bandwidth is so constrained in many, many places. And I am not talking from the most rural of places here. And so there is -- these upgrades, the capacity expansion, the bandwidth expansion, these are real things. This is not customers just saying, I need to buy a bunch of stuff, put it on the shelf just in case. These things are going to the field.

I mean, you think about the medical market, they are producing every possible thing they can. They need every sensor that they can get. They need every connector that they can get in order to produce life-saving equipment that needs to save a life like not in 6 months, but like yesterday or today or tomorrow. So I think these are -- this is real demand. I just -- I don't personally feel that we're looking at here a kind of a supply chain bill, then people putting stuff in warehouses. That's a different dynamic than I believe what we're seeing today.

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Operator [17]

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Our next question comes from Mark Delaney from Goldman Sachs.

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Mark Trevor Delaney, Goldman Sachs Group Inc., Research Division - Equity Analyst [18]

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I'm just hoping to better understand the medical business at Amphenol, maybe some sizing of that business in terms of the percentage of revenue. And then do you have any more details about how much exposure in terms of revenue Amphenol may have to some of these areas that are going to help support COVID-19 patients like ventilators?

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Richard Adam Norwitt, Amphenol Corporation - President, CEO & Director [19]

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Thanks so much, Mark. Look, medical is part of our industrial market, and we haven't specifically split that out, but I would just tell you that it's an important part of our industrial market even though our industrial market doesn't have a dominant segment for sure. And across industrial, it's everything from factory automation, rail mass transit, heavy equipment, instrumentation and other important segments and including medical.

Now I think our medical business in the recent years, we've done a fantastic job of expanding our position in medical products. And that started really with some acquisitions we made many years ago, but it was enhanced and accelerated 6.5 years ago when we entered the sensor market with our original acquisition of GE's Advanced Sensor businesses, which was 6.5 years ago, who had a substantial sensor position across medical applications. And medical applications, which, by the way, included a long-standing leadership position in respiratory therapy. And you can imagine that today, respiratory therapy is kind of an important part of the medical market. We've always had a strong position in areas like patient monitoring, imaging and things like x-ray and CT and MRI and delivery of medications. And so that sensor business really positioned us, I believe, even stronger than we were before because the sensor becomes such a critical component.

And you'll recall, when we first got into the sensor market, one of the theories and thesis that we had was that while sensors represented a wonderful complement and a part of the interconnect system, oftentimes, the sensor element was a critical piece of the technological architecture of the products that we are in. And while it may not have always the highest value as an element, it has enormous value as a kind of tip of the spear into that application and into the engineering teams and the importance of the customers. And I would just say that we saw that and we've seen that over these 6 years, we see it much more today.

As we talk, and I personally interface with so many medical customers around the world, there's no doubt about it that having that sensor capability, that sensor portfolio that we have built, not just with our original acquisition, but multiple acquisitions thereafter, close to 8 companies, I believe it is now, that our position in the medical market, not just in terms of size, but the importance that we serve to customers in the medical market has really enhanced.

You'll also remember that last year, we made a wonderful acquisition in Germany of a great company called Bernd Richter, a real leader in medical market, value-add interconnect together with our preexisting companies that are very active in interconnect products in the medical market. So again, I'm not answering specifically, Mark, your question in terms of how -- what is the exact size, but I will just tell you that it's a very important market and segment within the industrial market, and it's one where we're very, very proud that our technology can play a significant role in helping the world to do battle against this COVID-19 virus.

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Operator [20]

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Our next question comes from Shawn Harrison from Loop.

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Shawn Matthew Harrison, Loop Capital Markets LLC, Research Division - MD [21]

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Question on capital deployment in terms of thinking this downturn versus 2008, 2009. There wasn't really a lot of M&A activity back in that period other than Times Microwave, I believe, and the share repurchase activity wasn't really something that Amphenol did either. And then we had this quarter where a significant share repurchase and I'm wondering if you could maybe just comment on your view of share repurchases going forward? And then also, what do you think of the M&A environment in 2020? Does it dry up?

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Craig A. Lampo, Amphenol Corporation - Senior VP & CFO [22]

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Sure. Thanks, Shawn. Yes, as we did mention, we did purchase this 2.7 million shares during the quarter for the average price of about $96. I would note, I guess, that these repurchases did precede this extreme market volatility that we saw during the quarter and -- which kind of somewhat is evidenced by the average price of the stock that we bought it for during the quarter. The timing of our stock repurchasing certainly does always take a number of factors into account with regard to other cash needs in particular period and in periods where we have less acquisitions or other repurchases. There could be less share repurchases during that quarter or more share repurchase during the quarter when we have those lower cash needs. So that's certainly one of the reasons why we had a little bit higher in the quarter and per se, it gives you maybe a feel for the timing of that.

Subsequently, we did draw down the revolver and when that extreme kind of market environment cadence took place. But those were really independent actions that really had nothing to do with each other and just so happened to occur in the same quarter when we drew down the $1.25 billion under our revolving credit facility. And our intention would be with the revolving credit facility to really -- once -- as we generate cash, as we continue to explore other opportunities with regards to funding as we -- as the markets become a little bit more stable, we will -- we do intend even as early as the second quarter here to start paying down some of those amounts under the revolver. But -- so in terms of capital deployment, we do continue to take a flexible and balanced approach. That has not changed. We haven't stopped anything kind of in a formal way, but certainly in this environment, where things are a bit uncertain, we're going to be very thoughtful about our deployment and things like share repurchases and other things and be very prudent from that perspective. And I guess I'll let maybe Adam mention -- comment on the M&A.

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Richard Adam Norwitt, Amphenol Corporation - President, CEO & Director [23]

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Yes. Thanks very much, Craig. I mean, very well said. And I would -- just relative to the M&A environment, Shawn, you correctly point out that back in 2009, we did complete 1 acquisition early on of Times Microwave, a fabulous company, by the way, here. 11 years later, I can't tell you how happy we are to own it. We have never been a company that just chases markets either up and down during times of crisis, bottom fishing, if you will, for prices and other things like that. We take a very thoughtful long-term approach to our M&A program. And that means having long-term conversations with people, ultimately dating them with the intention one day to get married.

And I can tell you that in a short-term market dislocation, most people, if they don't have to sell, probably are not going to want to sell during a short-term market dislocation. And probably you don't want to necessarily buy during that short-term market dislocation when you really don't know the full extent of what you're buying. All that being said, what I will tell you that during this environment, this is a very, very kind of existential environment for many companies. And a company like ours who has the financial strength that Craig talked about, who has the diversity that we talked about, who has the geographical diversity as well, the footprint diversity, if you will, and who has that culture and reputation as an acquirer becomes an even more attractive destination for companies who may be going through today an existential crisis.

Maybe they are only in one market, maybe they're only in one geography, and they look kind of over the ledge today at their own existence. And I think that, that is a time where if those companies do survive, they may start thinking long-term about do I want to do this alone now that I know this kind of a crisis can happen. And I think the long-term prospects for us being a real acquirer of choice, I believe, coming out of this can be quite substantial. Now what does it mean this year? How much of our capital are we going to allocate to what? How much M&A will we do? It's a lot of uncertainty to make any prediction on that front. But our long-term approach to capital deployment clearly is the priority towards new product development, M&A and then obviously, the dividend, the buyback that Craig has already talked about. And we look forward to continuing to be the acquirer of choice for the thousands of companies in this industry going forward.

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Operator [24]

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Our next question comes from Deepa Raghavan from Wells Fargo Securities.

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Deepa Bhargavi Narasimhapuram Raghavan, Wells Fargo Securities, LLC, Research Division - Associate Analyst [25]

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I'm going to look ahead and ask about better times. Just looking back in history, can you talk about which verticals you typically see recovering earlier? And which usually take longer to recover? And hypothetically, let's assume macro forecast are right and we start to see some recovery sometime in the second half. Should we think about most of your sales actually being recoverable, some of them that got pushed out? Or can there also be examples of lost sales within your portfolio?

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Richard Adam Norwitt, Amphenol Corporation - President, CEO & Director [26]

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Well, thank you very much, Deepa. And I love that you ask about better time. This is a great question and one that is really close to my heart. Look, which verticals recover when? The answer to that is it depends. I mean, you cannot, I believe, compare the current environment with either 2009 or with 2001. Look, in 2001, we had many of our markets, which didn't even go down. You think about the military market as one example. Even the industrial market was still relatively strong, then it was really a tech bubble that burst and then it was followed by the tech collapse. And then the recovery in 2001 was not so fast, if you'll remember well. I mean, 2002, was also not the easiest year.

If you then go to the financial crisis, we had in the financial crisis a very severe, in the fourth quarter after Lehman Brothers, reduction in demand. You'll recall that we quickly adjusted our head count in the fourth quarter of 2008. Sales, I believe, were down something like 15%. We adjusted our headcount down by 17% in the same quarter. And we ultimately secured the profitability of the company in both of those crisis is down by just 300 basis points.

Now I think this crisis is a little different because it's our first global pandemic in our lifetimes. It scares people. It affects people. People are afraid to go to work. They're afraid to go to the grocery stores. They don't know. There is an intense personal insecurity to this crisis. But I will tell you this too shall pass. I don't know if we are in the middle or, the old Winston Churchill saying, "I don't know if this is not the beginning of the end, but it might be the end of the beginning." I don't know where we are in this crisis, but no doubt about it, it will one day have a beginning, a middle and an end. And what lies beyond that end? I believe, an enormous amount of opportunities lie beyond that end. And I think what we are going to see at the end of this crisis, when that "normal" that you refer do come, it will not be the same normal that we all knew on the 22nd of January.

There will be differences. We will reevaluate how we work, how we live, how we learn, how we function. And there's one common thread across all of that, from our perspective, is people are seeing the importance of electronics in everything. Whether that's electronics for medical equipment, whether that's electronics for communication purposes, you name it. Safety, HVAC systems, building automation. I mean, it doesn't take a big leap to start to think of just dozens and hundreds of new applications that will follow ultimately the reckoning that comes out of this very significant disruption that we've all experienced here. And I can tell you this, Amphenol sits strongly positioned for all of those opportunities wherever they may come. Our organization, 123 general managers around the world, each of them functioning in their little areas of the electronics world are poised to capitalize on whatever comes along. And we're going to be very proud to do that.

Now look, what does that mean for the second half? I mean, you mentioned some macro forecast. In the last 90 days, I haven't heard a single forecast that's been correct. So I don't know what those macro forecasts are really going to be. Whether there will be an L shape, a V shape, a U shape, an S shape, I don't know. You tell me what shape of recovery it's going to be, but a recovery will one day come. That I'm sure of. And when that comes, is there a catch-up of demand? It's hard to say is there a catch-up of demand. I mean, we're all sitting in our homes. I'm certainly not using a lot of gas right now.

So I don't know that people are going to go use a bunch more gasoline when they get out and catch up to all the gasoline that we didn't use. I haven't filled the tank in my car for, I think, a month right now. And so there are some things that may just have disappeared in terms of demand, but there are so many opportunities for new things that are going to come out of this whole crisis. And ultimately, I think those things are going to be real positives in the long term. Not a second half necessarily commentary, but I'm telling you, I think there's going to be a lot of goods that's going to come out of this.

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Operator [27]

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And our next question comes from [Steve Fox from Fox Advisors].

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Unidentified Analyst, [28]

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I guess the one thing I was left wondering about in terms of your own operations, was your supply chain. You mentioned disruptions with running your factories, but can you just talk about your ability to source raw materials, subcomponents and how that has been handled and how you think it's going to be handled in this quarter?

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Richard Adam Norwitt, Amphenol Corporation - President, CEO & Director [29]

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Thanks so much, Steve, and congratulations on your newly founded organization. We love your logo, by the way. Steve, the -- look, the supply chain is very important. I mean we -- suppliers are really important for us. One thing about Amphenol that you know very well, we don't have a centralized supply chain. We don't seek to put all of our stuff into one vendor and leverage that one vendor. We put the responsibility of manager and suppliers across all of our more than 120 general managers around the world. We may share information and do some smart things about that. But we are not putting all of our eggs in one basket of a supplier.

And I can tell you, today, I'm very grateful for that because there are suppliers. Even in the months of February through the China shutdown, our organization was so much quicker than most others to come back to full production. There were suppliers who were not able to come back, who didn't have the wherewithal, the agility, the capabilities to do what our team was so successful at doing and coming back to production. And to the extent that any of those, which for us usually are very small suppliers, created a disruption, we went and helped them right away. Our team was there for them, supporting those suppliers. We haven't seen anything material in terms of -- or meaningful, I should say, it's a double entendre material, anything real meaningful in terms of the impact from our supply chain.

I guess the one thing I would maybe point to is not really suppliers as much as logistics. It's been well reported, there are some logistical impediments going on in the world right now, freight capacities are quite significantly limited in certain areas. And our team is doing a great job of working collaboratively across the organization to make sure that we're getting the product that we need when we need it and getting what our customers need when they need it, but there's a little bit more work involved in doing that right now than there was 90 days ago.

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Operator [30]

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Next question comes from William Stein from SunTrust.

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William Stein, SunTrust Robinson Humphrey, Inc., Research Division - MD [31]

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It relates to the margin trajectory we might expect over the current and next couple of quarters. We understand that the decrementals were a little bit less. Well, let's say, they were a little bit worse than what they typically are in a downturn for Amphenol because you have some more challenging times in adjusting costs when you can't take actions on the employee base, given all the things going on with COVID. And I wonder whether we should expect this to have a relatively quicker resolution where we could see a quarter here of better-than-expected decrementals because you can align the cost base with the level of demand? Or if we should expect another quarter or 2 of the sort of current more challenging alignment of those 2 things?

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Craig A. Lampo, Amphenol Corporation - Senior VP & CFO [32]

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Yes. Thanks a lot, Will, for the question. Let me just start off by saying, I think as a company, we're really just proud of the fact that we are still able to achieve the 17% operating margins in the first quarter with all the obstacles that we had to deal with in the first quarter with China being closed, with the other parts of the world having productivity issues and having some of their facilities closed or limited in terms of people. Just the fact that we -- in that case still achieve 17%, and essentially had a sequential quarter kind of conversion from Q4 to Q1 of just 40%, not so far over our typical 30% downside conversion, I think it's just a testament of the team. So I just kind of wanted to start with kind of that. Because I think that's really just the important point in that we're really -- we are truly proud of.

Now as it relates to kind of going forward into the second quarter, and we certainly didn't -- aren't giving guidance for the second quarter. Adam -- we did say that we do expect sales and EPS to be lower in the second quarter. So with that being said, I said I wouldn't expect profitability or the pressures on our profitability to be meaningfully better in the second quarter than they were in the first quarter. I mentioned before, that in the first quarter, we had this China-specific event that happened, and it really wasn't until the end of the first quarter that we really saw the other parts of the world starting to create issues with regards to adding cost or limiting our ability to adjust cost. And that's really what we're seeing in a bigger way in the second quarter.

And so I think that we would expect still to have a drag from that and throughout the second quarter at this point in time. I wouldn't expect dramatically different sequential quarter conversions going into the second quarter that -- from the first quarter to second quarter, I would expect kind of maybe normal-ish conversions. But again, there's so many unknowns right now as we kind of come into the second quarter that it's really difficult to conclude on that.

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Operator [33]

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Our next question comes from Jim Suva from Citigroup Investment Research.

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Jim Suva, Citigroup Inc, Research Division - MD & Research Analyst [34]

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And great to hear the Amphenol team is doing well and your positive outlook, which a lot of my questions have been answered for that.

So I'll just ask one a little bit. When we think about guideposts, and I've been on the sell-side for over 20 years. I think back in history, in the global financial crisis, the worst quarter year-over-year was down 19%, but then back at the bubble burst, there was sometimes of down 30% year-over-year. And I think about this crisis, the coronavirus is much different of global plant closures, but then you talked about how positive your team came back in China. So can you give us any guidepost at all about is it much different from some of those past historical trends we've seen? Or the plant closures and coming back make it much different? It's just -- any guidance or color would be greatly appreciated.

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Richard Adam Norwitt, Amphenol Corporation - President, CEO & Director [35]

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Well, thanks so much, Jim. I mentioned earlier that I think while one can on their face say, "Well, there was the global financial crisis, there was the tech collapse, and should we or should we not compare this moment to those?" I think there is the difference here. We have never worked in an environment where governments are so deeply impactful. And for good reason, by the way, I mean, I think governments need to take a role. They have an extraordinary role to play in protecting the health of all of us on the phone and all of the citizens of the world. And so justifiably, I think governments have taken steps to limit interaction of people and thereby slow the spread of the virus. And the way it's happened has been very different.

China, I talked about, was a very clear, very distinct, and by the end of a certain time period, which was not so long. I mean, at the time, it felt like ages, let me tell you. Those 3 weeks felt like 3 years to all of us as we were planning the kind of reentry. But there was a moment in time where you knew you could take your people back to work as long as you did certain things to protect them. And I think in the rest of the world, the actions haven't been as clear as the actions were in China. And thus, the coming out of that is also, I believe, less clear.

And so what is that going to look like? It will depend. It will depend on the country. It will depend on the results. It will depend on the sort of, I hear so many times this term, are we bending or not the curve and all of these various things. And it's not dependent on is the fiber capacity in the market now finally filled and we can start rebuilding fiber optic equipment back in the year 2000. It's not dependent on is demand coming back because people are not getting foreclosed upon in their mortgages and unemployment and all of those things. There's an element, obviously. I mean, unemployment is increasing in many countries, ours for example, very significantly.

So there is an end demand that is related in some way to this crisis, but not a direct part of the battle against COVID-19. When does that end demand come back depends on so many factors. What's the degree of government stimulus that's going to be available to people? What will companies have in terms of support loans or grants or otherwise? I mean, there are a lot of factors that come into this, which make me feel like to draw that perfect parallel from those 2 crisis, would be maybe a dangerous parallel to draw. Again, I'll just reiterate one more time.

From our perspective, it just doesn't matter. Because our team is ready regardless. We are purpose-built for a time of strong demand. We're also purpose-built for a time where demand is very uncertain. And that's the agility, the flexibility of all of our organization that -- and really the resiliency of the organization in a time of kind of unprecedented uncertainty. And our ability to adapt and to embrace a new environment is, I believe, second to none. And will get us through this regardless.

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Operator [36]

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Our next question comes from Joe Spak of RBC Capital Markets.

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Joseph Robert Spak, RBC Capital Markets, Research Division - Analyst [37]

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Adam, I do want to just quickly -- I guess I'll follow on your last comments and go back to some of the color you gave on the China restart and the lessons learned there because I think that's important. And as you mentioned, that was pretty intense. It's unclear if that's followed elsewhere in the world. But you also mentioned you want your employees to feel safe, and I think there's some plants with a decent amount of manual labor and lines can be set up with employees close to each other. So you might have to do more than is minimally required in certain areas to get that level of comfort among your employees. So if we think about, even beyond second quarter, when there's obviously still going to be some costs because of the shutdown, does productivity not get back to where it was until there is a vaccine? Is that your view? Or does it sort of not matter because to follow on your last comments, maybe just to snap back to pre-COVID immediately either?

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Richard Adam Norwitt, Amphenol Corporation - President, CEO & Director [38]

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Yes. Look, it's a great question, Joe. I mean, I think what you're saying is there is a pre-vaccine and a post-vaccine world. And I would tend to agree with you. There is a pre-vaccine world and there's a post-vaccine world. And the pre-vaccine world is going to require you to probably take more aggressive steps to protect your people. And I would just point out one thing. It was, for us, absolutely clear, as right on January 23 when that shutdown happened, the pure priority, the overarching priority of our corporation has to be to protect our people. And we do that because it's the right thing to do as a fellow human of those 75,000 people around the world, but we do it also because it's just good business. If you don't protect your people, you see what happens.

And there have been so many examples around the world, some well reported and others not so well reported, of the kind of catastrophic effect on a corporation's business if they're not sufficiently protecting their people. So we went overboard. We absolutely went overboard from the very get-go, making sure that our people were well protected. And yes, we have factories where we have assembly workers, who used to work very close together. They're not working close together today. And we've figured it out. We've repurposed offices. We've repurposed warehouses. We've staggered shifts. We've done so many things.

Now do all of those things ultimately hurt productivity in the pre-vaccine medium term? Not necessarily. I don't think they do, not necessarily. I mean, you'd be amazed at the resilience and adaptability, not just of our management team, but of our people on the factory floor. And I tell you -- and I'll just put a plug-in here right now, we have, every time for our earnings release and management call, these people in our factories are the heroes of Amphenol today. They are every day walking in the door of a factory. While those people who can work from home are doing so, we have a lot of people who have to go to work every day to do their job. And their job are so important today.

Like I said, I mean we are building things that go into life-saving equipment. We're building things that go into -- it's mission-critical communications network. And these heroes of our company who are going in every day, it's our job to protect them regardless of if that means I have the space or not in the factory, regardless of whether that means, I have to have the shifts not overlap quite as much and lose 2% in productivity that day because of it. That's not a consideration at this point. I believe that our team is going to make it happen regardless, and we're going to always follow that priority right now, which is we've got to protect our people and protect them, we will.

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Operator [39]

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Our next question comes from David Kelley from Jefferies.

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David Lee Kelley, Jefferies LLC, Research Division - Equity Analyst [40]

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A quick question on automotive. I believe you mentioned sales declined 8% year-over-year in the quarter, that's significantly outperformed the market. I was just hoping for some color on your exposure and what you're seeing there. Are you seeing any step-up in content? Was there anything region-specific that drove that upside? And then just curious if you expect any impact from supply chain timing that might be a headwind coming into the second quarter here?

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Richard Adam Norwitt, Amphenol Corporation - President, CEO & Director [41]

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Yes. Thanks very much, David. I mean, look, I think we have been outperforming the automotive market for the better part of the decade. And I think -- I hate to say outperforming when we're down 8%. I don't like saying that, but I guess maybe it's technically true. I mean, we're down 8%. It's not the greatest thing in the world. But yes, is it outperforming? Maybe it is. And I think our outperformance has been because we've just done a great job at capitalizing on new electronic applications in the car. I think that this crisis, when all is said and done, the automotive market is going to return. And I think that constant quest for new features in cars is going to continue. And I would bet that there are going to be some new features that may not be unrelated to keeping people safe in cars and keeping cars clean and keeping the air clean in cars and so many other things like that. So I personally think that the long term in the automotive market is -- remains to be a great opportunity and the long-term content growth opportunity for Amphenol remains strong.

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Operator [42]

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Our next question comes from Nikolay Todorov from Longbow.

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Nikolay Todorov, Longbow Research LLC - Analyst [43]

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I understand it's more of an art than a science, but I would like to hear your assessment of what downstream inventories look like. I understand that things in, like, communications and IT systems and medical, those orders are going directly to the field. But what about some of the other markets? What is your view on how much current orders are driven by underlying consumption versus inventory positioning?

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Richard Adam Norwitt, Amphenol Corporation - President, CEO & Director [44]

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Yes. I mean, I think I mentioned earlier, we don't see a lot of customers just putting a bunch of stuff in their warehouses. We don't have perfect visibility. The only place where we have visibility is inventories in our distribution channel. We haven't seen anything abnormal in the inventories amongst our distributors at this point. In fact, I'd say our distributors are continuing to service their customers very vigorously, especially those customers who have incremental demand related to the COVID-19 battles that are going on. So I wouldn't say that we see a big mismatch in inventories to the extent that we have visibility.

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Operator [45]

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Our next question comes from Joe Giordano from Cowen.

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Joseph Craig Giordano, Cowen and Company, LLC, Research Division - MD [46]

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I just wanted to follow up on some of the questions we talked about on productivity. So Adam, you mentioned like the pre-vaccine, post-vaccine. I guess, just think about structurally, is this just like a fundamental change where the -- what you thought was 100% capacity is now like 120% capacity? Like, do we have to rethink how these facilities long term are laid out? Do we need to use more automation? Is there an upward bias on labor cost to kind of incentivize people to come back? And just how do you think of that longer term than just what we're seeing right today?

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Richard Adam Norwitt, Amphenol Corporation - President, CEO & Director [47]

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Thanks. Look, we don't think about this monolithically. I think that every operation is different in Amphenol. That's one of the beauties of the company as we have also an enormous amount of operational diversity across the company. We have some operations who are highly automated. We have others who are highly manual. And they usually tend to be very much tailored to the market that they serve, the geography that they service from.

Is this going to create a new factor for people to consider? Of course, it is. I think it's going to create a new factor for everybody to consider for the rest of our lives. And that just means that each of our general managers in managing their operations is going to integrate that into their calculus of what are they going to do to optimize their business. But look, we have an expression in Amphenol, a no-excuses approach to management. It's a team of people who just makes it happen. We've been through a lot of different stuff over the course of our careers. And my career is now 22 years with this company wonderfully. And through that time, we have seen so many changes, changes in the cost of labor in certain geographies, changes in where things can be made, tariffs. I mean, you name it.

There have been an enormous amount of changes that come along. And the fact now that we need to prioritize and secure our locations for the health of the people. Do I believe that this is going to have a kind of a permanent negative drag on productivity? I do not. Look, in the short term, we have a lot of governmental shutdowns we're dealing with. Of course, that's going to have short-term impacts. You're paying people not to work in a number of places. But -- and you're doing that by law and also because it's the right thing to do. And -- but is this going to have a structural change to Amphenol's ability to be a highly productive manufacturing organization and thereby to drive strong returns for the company? I don't think it will.

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Operator [48]

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Thank you, speakers. As of this time, we don't have any questions on queue. I'll turn the call back to you for any closing remarks.

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Richard Adam Norwitt, Amphenol Corporation - President, CEO & Director [49]

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Well, thank you so much, and thank you all for your extended time today. We wanted to give everybody a chance to have their question. Look, I wanted to say just a few words here. I mentioned earlier, we're in a crisis unlike any of us have lived through. But there will be a beginning, a middle and an end to this crisis. There's no doubt about it. I'm not going to be the one to predict when does the end come or when does the beginning of the end come, but it will come. There's no doubt about it.

And what I have encouraged our employees to do, and I will encourage all of you as well, is relish the positives that may come out of this. Take advantage of the things that we're learning about ourselves, about how we can work, how we can operate and about our fellow people that I think are really some of the wonderful silver lining of what is a true tragedy for many people. And that tragedy, I'm sure all of you have been touched in somewhere or another by that tragedy. And we wish that all of you continue to stay safe with your families, your colleagues and all stay safe. And I'm sure, one day, we will get the chance to meet all of you in person. And I look forward certainly to sitting in the office with my colleagues at the nearest possible occasion.

And regardless of how that's come, you can rest assured that the Amphenol management team is there to support all of our stakeholders and to make sure that this company that our people remain safe and strong and that our company remains also healthy and strong for the long term. Thank you all very much, and we look forward to speaking to you again 90 days from now.

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Craig A. Lampo, Amphenol Corporation - Senior VP & CFO [50]

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Thanks, everybody.

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Operator [51]

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