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. Until then, all lines will remain in a listen-only mode. At the request of the company, today's conference is being recorded. If anyone has any objections, you may disconnect at this time. I would now like to turn – introduce today's conference host, Mr. Craig Lampo. Sir, you may begin.

Thank you very much. Good afternoon, everyone. This is Craig Lampo, Amphenol's CFO; and I'm here together with Adam Norwitt, our CEO. We would like to welcome you to our first quarter 2023 conference call. Our first quarter 2023 results were released this morning. I will provide some financial commentary, and then Adam will give an overview of the business and current trends, and then we will take questions. As a reminder, during the call, we may refer to certain non-GAAP financial measures and make certain forward-looking statements. So please refer to the relevant disclosures in our press release for further information. The company closed the first quarter with sales of $2.974 billion and GAAP and adjusted diluted EPS of $0.71 and $0.69, respectively. First quarter sales were up 1% in U.S. dollars and organically and up 3% in local currencies compared to the first quarter of 2022. Sequentially, sales were down by 8% in U.S. dollars, 9% in local currencies, and 10% organically. Adam will comment further on trends by market in a few minutes. Orders in the quarter were $2.896 billion, which was down 16% compared to the first quarter of 2022 and flat sequentially, resulting in a book-to-bill ratio of 0.97 to 1. The lower book-to-bill was driven by lower bookings in the communications-related markets, which continue to experience a decline in demand. GAAP and adjusted operating income were $592 million and $597 million, respectively, in the first quarter of 2023. GAAP and adjusted operating margins were 19.9% and 20.1%, respectively, in the first quarter. On a GAAP basis, operating margin decreased by 10 basis points compared to the first quarter of 2022 and decreased by 70 basis points sequentially, and GAAP operating margins for the first quarter included $5 million of acquisition-related costs. On an adjusted basis, operating margin increased 10 basis points compared to the first quarter of 2022 and decreased by 80 basis points sequentially. The year-over-year increase in adjusted operating margin was driven by strong operating leverage on the modestly higher sales volumes. And on a sequential basis, the decrease in adjusted operating margin reflected normal downside conversion on the lower sales levels. Our team continues to execute strongly in the quarter, and we are proud to have sustained these strong levels of profitability despite the continued range of challenges around the world, including the moderating conditions in several of our communications-related markets. In particular, we truly appreciate the quick reactivity of our teams working in the communications markets, who took appropriate actions to preserve strong profitability in the face of downturns in customer demand. Breaking down first quarter results by segment. In the Harsh Environment Solutions segment, sales were $854 million in the first quarter, which was an increase of 17% in U.S. dollars and 15% organically versus prior year. Segment operating margin was 26.5%. In the Communications Solutions segment, sales were $1.127 billion in the quarter, which was a decrease of 15% in U.S. dollars and 13% organically versus the prior year. Segment operating margin was 20.5%. In the Interconnect and Sensor Systems segment, sales were $993 million in the first quarter, which was an increase of 10% in U.S. dollars versus the prior year. Segment operating margin was 18%. The company's GAAP effective tax rate for the first quarter was 20.9%, and the adjusted effective tax rate was 24.0%, which compared to 23.8% and 24.5% in the first quarter of 2022, respectively. GAAP diluted EPS increased 4% to $0.71 compared to $0.68 in the prior year period, and adjusted diluted EPS increased 3% to $0.69 compared to $0.67 in the first quarter of 2022. Operating cash flow in the first quarter was $532 million or 125% of adjusted net income. And net of capital spending, our free cash flow was $436 million or 102% of adjusted net income. We are pleased to continue to deliver a strong cash flow yield. From a working capital standpoint, inventory days, days sales outstanding, and payable days were 93, 72 and 52 days, respectively. The higher inventory days were primarily driven by the lower sales level in the first quarter together with some continued impacts from the supply chain disruptions that our industry experienced over the past year. Our management team is focused on bringing the inventory days back down to a more normal range over the coming quarters. During the quarter, the company repurchased 2.1 million shares of common stock at an average price of approximately $79. And when combined with our normal quarterly dividend, total capital returned to shareholders in the first quarter of 2023 was more than $290 million. Total debt at March 31 was $4.6 billion, and net debt was $3.1 billion. Total liquidity at the end of the quarter was $4.5 billion, which includes cash and short-term investments on hand of $1.5 billion, plus availability under our existing credit facilities. First quarter EBITDA was $708 million. And at the end of the first quarter of 2023, our net leverage ratio was 1.0 times. We are very pleased that the company's financial condition remains extremely strong by any measure. I will now turn the call over to Adam, who will provide some commentary on current market trends.

Well, Craig, thank you very much, and allow me to extend my welcome to all of you on the phone here today. And I hope you all are enjoying a lovely spring so far. As Craig mentioned, I'm going to highlight some of our achievements here in the first quarter. I'll then discuss our trends and progress across our served markets, and then make some comments on our outlook for the second quarter. And then, of course, we'll have time for some questions at the end. With respect to the first quarter, our results were stronger than expected, exceeding the high end of guidance in sales and adjusted diluted earnings per share. Our sales grew from the prior year by 1% in U.S. dollars and 3% in local currency, reaching $2.974 billion. On an organic basis, our sales increased by 1%, with growth in commercial air, broadband, military, automotive, and industrial markets, largely offset by declines in the IT datacom, mobile networks, and mobile devices markets. The company booked just under $2.9 billion in orders in the quarter, representing a book-to-bill of 0.97:1. Our operating margins, adjusted operating margins in the quarter reached 20.1%, and that was a 10 basis point increase from last year's levels. As Craig just mentioned, we achieved a still very robust level of profitability despite the ongoing cost challenges around the world, as well as declining volumes in many of our communications markets, and this is just an excellent reflection of the strength of our company's execution in these very dynamic times. Adjusted diluted EPS grew 3% from the prior year to $0.69, and we generated strong operating cash flow of $532 million and $436 million in the quarter, all clear demonstrations of the high quality of Amphenol's earnings. I'm just extremely proud of our global team of Amphenolians around the world. The company's results this quarter once again reflect the discipline and agility of our uniquely entrepreneurial organization as we continue to perform well in a very dynamic and challenging environment. Now turning to our progress across our various served markets, I would just comment that we remain very pleased that our end market exposure is still 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 worldwide electronics industry while not being disproportionately exposed to the risk associated with any given market or application. So with that said, the military market represented 11% of our sales in the quarter. And sales in this market grew from the prior year by a strong 15% in U.S. dollars and 16% organically. And this was really driven by broad-based growth across most segments within the defense market. Sequentially, our sales increased by 2%, which was in line with our expectations coming into the first quarter. And as we look into the second quarter, we expect sales to increase modestly from these first quarter levels. We remain very encouraged by the strength of the company's position in the defense market, where we continue to offer the industry's broadest range of high-technology interconnect products. As the geopolitical environment has become certainly more dynamic, nations around the world are expanding their investments in next-generation defense technologies, thereby increasing the long-term demand potential. We look forward to supporting this increased demand with our wide array of interconnect and sensor products, together with our expanded capacity, resulting from the investments that we've made in recent years. The commercial aerospace market represented 4% of our sales in the quarter, and sales increased by a strong 42% from the prior year and 44% organically as we benefited from the continued recovery in global aircraft production. And while aircraft production may not yet be back to the levels that it was before the pandemic, we are very pleased that after several very challenging years in this market, our team has driven our sales essentially back to pre-crisis levels, a truly great achievement. Sequentially, our sales grew by a much better-than-expected 15% from the fourth quarter. And as we look into the second quarter, we expect sales to remain at these first quarter levels. I'm just so grateful to our team who works in the commercial air market. With the ongoing recovery in travel and thus demand for jetliners, our efforts to strengthen our breadth of high-technology interconnect products, while diversifying our market position into next-generation aircraft, are paying real dividends. And we look forward to realizing the benefits of these initiatives here in 2023 and beyond. The industrial market represented 28% of our sales in the quarter. And our sales in this market grew from the prior year by 11% in U.S. dollars, 14% in local currency, and 5% organically. This growth was driven, in particular, by sales into traditional and alternative energy generation, heavy equipment, rail mass transit, factory automation, and medical applications, together with contributions from our acquisition program. On a sequential basis, sales were up 2% from the fourth quarter, which was a bit better than our expectations. And as we look into the second quarter, we expect sales in the industrial market to remain at similar levels as we saw here in the first quarter. Our outstanding global team working across the industrial market continues to find new opportunities for growth across the many distinct segments of this exciting and truly diverse market. I remain confident that our long-term strategy to expand our high technology interconnect antenna and sensor offering both organically and through complementary acquisitions has positioned us to capitalize on the many revolutions that are happening around the industrial electronics market. We look forward to realizing the benefits of this strategy for many years to come, the automotive market represented 22% of our sales in the quarter, and sales in the first quarter grew 9% in U.S. dollars and 14% organically with our growth supported once again by strength of our sales into electrified vehicle applications, together with other products sold into a wide array of new electronic systems in cars. While sales in Asia were slightly down from the prior year, we realized strong growth in North America and Europe in the automotive market. Sequentially, our sales declined by 5% from the fourth quarter, which was a bit better than our expectations coming into the quarter, and that just reflected strong execution by our team in reacting to opportunities with customer demand. For the second quarter, we expect a modest sequential increase in sales from these levels. And I just have to say that I remain truly impressed by our team working in the automotive market. They continue to grow our global position by remaining focused on driving new design wins with customers who are implementing a wide array of new technologies into their vehicles. In particular, our long-term efforts at expanding our now comprehensive range of next-generation interconnect products that are incorporated into electrified vehicles have enabled us to expand our position with a wide range of customers, all of whom are pursuing carbon-neutral driving solutions and that creates further potential for the business. The mobile devices market represented 9% of our sales in the quarter, and sales declined by 15% from the prior year as growth in smartphones was more than offset by declining sales into laptops, tablets, and wearables. Sequentially, our sales declined by a slightly better than expected 31% from the fourth quarter. And as we look into the second quarter, we do expect a further mid-teen sales decline from these first quarter levels. There's no question that the mobile devices market remains one of our most volatile. Nevertheless, our outstanding and agile team has adjusted their resources in real-time with the changing levels of demand and stands poised as always to capture any opportunities for incremental sales that may arise in 2023 and beyond. Our leading array of antennas, interconnect products, and precision mechanisms continues to enable a broad range of next-generation mobile devices, which positions us well for the long-term. The mobile networks market represented 4% of our sales in the quarter. Sales declined from the prior year by 19% in U.S. dollars and 17% organically as operators and equipment manufacturers reduced their demand after several quarters of stronger consumption. Sequentially, our sales in the first quarter were down by 11% from the fourth quarter, which was a bit more than we had expected coming into the quarter. And now as we look into the second quarter, we do expect a further low double-digit sequential decline in sales as operators further moderate their spending. Our team continues to work aggressively to realize the benefits of our efforts to expand our position in next-generation 5G equipment, as well as the networks being constructed around the world. And while there is currently seemingly a pause in the investment cycle when customers once again drive renewed construction of 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. The information technology and data communications market represented 17% of sales in the quarter, and sales did decline by 21% in U.S. dollars and organically as both service providers and equipment manufacturers moderated their demand in light of still significant levels of inventory across the market. On a sequential basis, sales declined 17% from the fourth quarter, which was a touch better than our expectation of a 20% decline coming into the quarter. And as we look towards the second quarter, we expect sales to remain roughly at these first quarter levels. Regardless of this current correction in demand largely due to inventory, we remain encouraged by the company's outstanding position in the global IT datacom market. Our team has just done an outstanding job developing leading high-speed, power, and fiber optic interconnect products that are enabling our OEM and web service provider customers to continue to drive their equipment and networks to higher levels of performance. With exciting new applications, including in particular artificial intelligence, together with the continued growth in overall data traffic, we're confident that we'll be able to realize the benefits of our leading position in this important market for many years to come. And finally, the broadband communications market represented 5% of our sales in the quarter. Sales grew by a very strong 17% from the prior year and 18% organically as we experienced a significant increase in demand from cable operators for a wide range of our products. This growth was driven by increased network build-outs as well as our customers preparing for new government-supported spending on expanded broadband coverage, particularly here in North America. On a sequential basis, sales declined by 15%, slightly worse than our expectations coming into the quarter. As we look into the second quarter, we anticipate a mid-single-digit sequential moderation of sales from these first quarter levels as broadband operators temper their procurement levels. Nevertheless, we remain encouraged by the company’s strong and expanded position in the broadband market and we look forward to continuing to support our service provider customers around the world, all of whom are working to increase their network coverage and bandwidth to support the proliferation of high-speed data applications to homes and businesses. Now turning to our outlook. The current economic environment remains for sure dynamic and highly uncertain. In addition, we do expect reduced demand to continue in the second quarter across the communications-related markets. Assuming market conditions do not meaningfully worsen, and also assuming constant exchange rates. For the second quarter, we expect sales in the range of $2.890 billion to $2.950 billion and adjusted diluted earnings per share in the range of $0.66 to $0.68. This would represent a year-over-year sales decline of 6% to 8% and adjusted diluted EPS decline of 9% to 12% again compared to the second quarter of the prior year. Nevertheless, I remain confident in the ability of our outstanding management team to adapt to the many opportunities and challenges in the current environment and to continue to grow our market position while driving sustainable and strong profitability over the long term. Finally, I would be remiss if I didn’t take this opportunity to offer my true gratitude to our entire global team around the world for their outstanding efforts here in the first quarter. And operator with that, we’d be very happy to take any questions.

Thank you. The question-and-answer period will now begin. Please limit to one question per caller. Our first question comes from Amit Daryanani with Evercore. You may go ahead.

Yes. Thanks a lot. Good afternoon, everyone. Adam, I hope you could expand a bit more on the communication segment softness that you’re seeing. I think we’ve talked about the IT datacom softness for a few quarters now, it sounds like maybe it’s incrementally there on the mobile network side as well. Would love to get your perspective if you think this is more demand driven or inventory driven issue, and then from your vantage point, what do you think is the duration of this softness of correction as you go forward? Thank you.

Well, thanks very much, Amit. And for sure, I mean, our team working in the communications market has been wrestling with quite some vacillations in demand. And if you just look back over the prior couple of years, we had just fabulous growth in all the communications market, in particular in IT datacom, but we also had strong growth in mobile networks and decent growth in mobile devices. And I think what we’ve seen as we came into the end of last year and certainly coming into this quarter that in particular in the IT datacom market, there is a significant degree of overbuying of components. Not because we had disappointed our customers, quite the contrary. We were constantly coming to the rescue of our customers over the course of their boom in demand with the agility that they’ve come to expect from Amphenol. But regardless, they seem to have opened their aperture of procurement across virtually everything that they buy in light of the supply chain crisis. And that included building up inventory of our products certainly, which we saw with hindsight. Relative to the mobile networks market, I’d say this is not as much an inventory issue as it is the dynamics of service provider spending. And I think it’s kind of well reported the ups and downs of the various service providers and their capital plans. And I think what we’ve seen in particular in mobile networks as we’ve seen the early stages of operators building out their 5G networks and we benefited no doubt about it from that build-out with the long-term efforts that we put in to build our position across those next-generation systems. And sometimes what you see is initial build-outs and then they digest it and they figure out the economics and then they come once again to build out a next phase. And I would tell you that in most of the places where we operate places like North America, Europe, and otherwise, these 5G networks are certainly not fully built out, quite the contrary, but they’ve built out the rough framework of them. It allows them to get a certain amount of coverage, start to realize a certain amount of economic return for their investments, and then as typically happens, they would at a certain point start to do further investments to build up more capacity in those networks. And when that happens, we’ll be well equipped to deal with that. I mean, the other communications market mobile devices, this is one that is very volatile. We saw in particular last quarter still really robust strength in smartphones, but that was offset or more than offset by fairly dramatic declines in the overall demand for computing devices like laptops and tablets. And I think that’s also a well reported dynamic with the kind of pull forward of demand of those kind of devices as everybody went to work from home. And if our office is any indication, work from home is a distant memory because as Craig and I come into the office, the parking lot is full, the cubicles and the offices are quite full here. And so I think that mad rush to equip people for working from home with those various devices has a little bit change the cycle of replacement of them and maybe bunched a bit more into the prior two years. And then last I’ll talk about is broadband, which is our kind of fourth of the communications markets. We had just outstanding performance in broadband last year and that continued here into the first quarter. And that was really supporting our customers with a really broad array of products. We’ve dramatically expanded the range of products that we sell into the broadband market. And that resulted in us taking significant position with our customers. I mean, we grew, as you’ll recall, very well last year by 38% organically and 62% in U.S. dollars with the variety of acquisitions that we’ve made in recent times and still robust double-digit organic growth here in the first quarter. And I think now we see a little bit of digestion of those customers as we look into the second quarter. But no doubt about it, the position that we’ve built over the last couple of years in broadband is something that we think long-term is going to create great value for the company.

And our next question comes from Wamsi Mohan with Bank of America. You may go ahead.

Yes, thank you. Adam, curious as to why you think this weakness is contained within communications. I mean, you are so diversified even within communications, radio, consumer exposure and mobile. You have enterprise and cloud exposure and IT datacom, carrier exposure and mobile networks. Given that, like why is this – it sounds like it’s a very broad macro kind of slowdown. Is this just more early cycle given some of the inventory things that you noted and we should expect some moderation even in the industrial and auto and other areas as we go through the course of the year. Is that the right way to think about it? And if I could, would love to get your perspective on trends in China as well I’m not sure if you had a chance to get over there, but you typically do. And now that it’s opened up if you have or even if you’re not, it would be great to get some perspective on what you’re seeing on the ground in China. Thank you.

Yes. Thanks very much, Wamsi. Look, I don’t think that the communications markets and the dynamics that I just discussed, which are quite unique in each of them. We’re talking about one dynamic in IT datacom and different in mobile networks, a different again in devices, and yet again in broadband. I wouldn’t say that that is an indicative or leading indicator for a broad economic situation. Quite contrary, we’ve given guidance for next quarter for all of our markets. And I don’t think that that guidance reflects a kind of a broad economic slowdown, quite the contrary. Relative to China, I mean, I’m glad you asked the question. It was just early last month when China changed its visa policies and as soon as the news came out that visas were reenacted literally that day we booked our flights and Craig and I were in China at the very first day of April, and what a pleasure it was. I can’t tell you to be three years away from our team in China who just did such a phenomenal job over these three very challenging years. In particular, over last year, which was particularly challenging in certain places, including in Shanghai. I tell you, I had the opportunity to meet some of our factory workers who went into a bubble in Shanghai for more than six weeks in one case. And just to be able to see them and to be honest, to like hug them and thank them for all what they did on behalf of the company during that time period was just a tremendous, tremendous satisfaction for me. Not to mention Craig and I, somehow we didn’t gain weight with all the food that we ate over that week of visiting 21 of our operations in China. But the trends in China, I tell you being there on the ground, this does not seem like a place that is going into deep recessions. Infrastructure investments continue apace. You see new rails for high-speed trains next to virtually every highway you go on. And what I was most impressed by was our own operations and what they have done during this time period when nobody was visiting them. And it’s a credit to how we are organized as a company that we don’t have just subsidiary factories that are relying on a whole infrastructure outside of China to function, but rather we have standalone entrepreneurial organizations like we do around the world run by general managers and their teams and what amazing work they did over this time, driving growth in technology, developing new products for the China market, not relying on Western countries or engineers who may be subject to government restrictions that can be applied from anywhere that you think of, but rather developing native capabilities inside of Amphenol. Also, many of our Chinese operations had during that time for a variety of reasons, the incentive to set up operations outside of China, and doing that while still not being able to travel, going to a place like Vietnam or to India or to Thailand or even Mexico and setting up satellite factories on behalf of their customers who wanted to have China Plus One or something like that. It was just really exceptional to see that. And another reminder of what really makes this company special. Are there trends in China? Are there macro issues, long-term things like population growth or lack thereof? Sure. Are there geopolitics that are sitting kind of at the highest levels between Beijing and Washington? Sure they are. But I can tell you, when you go on the ground, you meet with the people there, you get really encouraged as I do everywhere that I go around Amphenol, from the U.S. to Mexico to India to Western Europe, and now finally being able to go back to China, and I look forward to going back again soon.

Our next question is from Samik Chatterjee with JPMorgan. You may go ahead.

Hi thanks for taking my question. Adam, just wanted to see if I can get some of your thoughts about how you’re thinking sort of for the second half of the year with the guidance that you have for 2Q, the first half, you’re going to be down a bit year-over-year. But the orders have now stabilized. Is that giving you a bit more visibility into the opportunities for growth or the opportunity for the aggregate company to grow in the second half or maybe even for the full year, any thoughts there? Thank you.

Yes. Thank you very much, Samik. Look, I mean, we’re not giving full year guidance because it does remain a very volatile environment. And so as much as I would love to sort of get out ahead of my skis and tell you that the second half is going to give growth or not give growth, I’m going to refrain from doing that here today. But I can tell you this that the company remains strong. The base of our strength with customers, the financial condition of the company, I mean just look at the margins that we were able to secure in the first quarter despite real volatility that we saw in our communications market. And Craig mentioned that very specifically. I mean it’s just another testament to the underlying strength of the company. So to the extent that in the second half, customers want more product from us, for sure, we’re going to support them with that. But I think today, sitting here just on the 26th of April, it’s premature given how dynamic it is for me to give a sense of what Q3 and Q4 and, ultimately, the full year is going to bring. You can bet our team has high aspirations, but we’re also realistic to the environment that’s in front of us, and we’re going to manage through whatever comes our way.

And our next question is from Steven Fox with Fox Advisors. You may go ahead.

Hi good afternoon. Adam, I was just looking back at your earnings track record for the long period of time. If I take out the COVID period, you’re experiencing a down year of earnings for the first time since 2009. And I was just curious what you think about this cycle relative to prior cycles where your earnings are down, and what steps you’re going to take to maybe sort of mute that earnings decline in coming quarters? Thank you.

Thank you, Steve. As I mentioned to Samik, it's difficult to predict the full year earnings at this point. However, when you bring up 2009, it resonates with our approach. Whether it was 2009 or even 2001, our strategy at Amphenol has always been to confront challenges head-on. We don’t just wait for better times or delay action. We assess our orders and customer needs, and if we identify resource imbalances, we make quick adjustments. This responsiveness directly impacts our profitability. Historically, even during significant demand drops, like in 2009 or the early months of 2020, our margins saw only a small decline. While we’re not expecting the severity seen in 2009 based on our current guidance, the business environment remains dynamic. Our operational strategy hasn’t changed; despite being a much larger company now, we still foster a culture of entrepreneurship among our general managers, who engage with customers daily and adapt resource allocation in real-time. If demand decreases, we reduce costs but simultaneously seek to capture market share. This has been our consistent approach for the 25 years I’ve been with the company, and I plan to maintain it. We don’t aim for a drop in EPS this year, but if demand is weaker than last year, we’re prepared to navigate through it.

Hey, Steve, this is Craig. And I think I just would add just one thing to that. I think that if you look in the first quarter results, and we’ve said this a couple times. But if you look at the first quarter results and you take into account that we have three or four markets that are reducing sequentially by double digits. You really just see that resiliency from a margin perspective and the ability for the company to kind of react to those kinds of reductions. I mean, the mobile devices market is certainly normally used to having kind of reductions like that. But places like IT, data, mobile networks, broadband, these are not markets that typically have that type of volatility from a quarter-to-quarter basis. And I think that you really see that kind of shows through just in the results for the first quarter. And as Adam said, I don’t think that would be any different in the future. But the bottom line is we’re driving for continued growth and we will react to demand reductions where that may be.

Our next question is from Luke Junk with Baird. You may go ahead.

Yes. Thank you for taking the question. Adam, hoping you could just comment on the focus areas specifically for the IT datacom group right now, as the market goes through this consolidation period, is the fact that you’re able to catch your breath after what you already referenced today as a very busy multi-year period. In some respects, is that actually a positive relative to the longer-term positioning of the business? I guess, if I look at the margin side, 27% decremental margins for communication solutions could have been worse. And then on the demand side, looks like there’s some interesting AI related opportunities that are emerging on the horizon. If you could speak to both those things? Thank you.

Luke, well, thank you very much. I’m glad you emphasize this. I mean, this 27% downside conversion margin for an organization that is already making pretty robust margins is really phenomenal. And by any measure, it’s a reflection of that quick reactivity that I was discussing earlier. Luke, I would be lying if I told you our folks working in that market are happy to have a little bit of a downturn to kind of to use your phrase, catch their breath. Nobody likes dealing with this. But we do it. It is what it is. Like it’s – we don’t sort of punt reality. It just is what it is. At the same time, though, what’s interesting is while we’re making sure that the financial strength of the company stays as robust as it did, and again, the 27% conversion margin that you mentioned is a great indicator of that. We are working on an extraordinary array of next-generation technologies. Just because customers have some extra inventory doesn’t mean they don’t have an enormous amount of next-generation things that they’re trying to achieve. And you mentioned, and I think I alluded to, AI as one of those, I mean, these are the kind of revolutions that drive kind of quantum leaps in the demands of our customers for processor power, for speed as it relates to data transmission and networking, all of which creates demands on the equipment for next-generation high-speed interconnect for the fiber optics and for the high-efficiency power interconnect that’s so important to sustaining the operating expenses and let alone the carbon footprint of these massive processors that are going into these enormous data centers. And so we haven’t slowed down at all as it relates to developing and designing next-generation products together with our customers. And you could actually argue that in certain cases we’ve had to accelerate those efforts as customers have gotten into competitive situations with others on things like AI, machine learning, and alike. And that’s the kind of carrying water on both shoulders that is an Amphenol trait as well. It’s not something necessarily. I emphasize so much. But we talk a lot in the company about driving with one foot on the gas, one on the brake, carrying water on both shoulders. Sometimes you got to go out and cut costs at the very same time as you’re ramping up engineering support for next-generation systems. And being able to do that, having the mindset and the agility to do that is I think a very unique trait that is resident inside our organization. And that includes within all of those working across IT datacom.

And our next question is from Chris Snyder with UBS. You may go ahead.

Thank you. I wanted to ask on IT datacom, obviously that’s been a segment that’s been I guess the most impacted so far by inventory digestion. I think in Q1 you guys said it was down about 17% sequentially. And if I heard it right, it sounds like the subsegment is going to be actually be flat sequentially in Q2. And I know there’s seasonality involved, but does that indicate that subsegment is moving past maybe the bulk of some of the inventory digestion headwinds that have impacted the segment over the last three or four quarters now? Thank you.

Thanks. Thanks, Chris. Look, I’ve talked a lot about IT datacom, but to the specific of your question, I mean, I don’t know what the second half is going to bring. I certainly hope that Q2 and the fact that we see sales to be flat is an indication that we've kind of reached a kind of a little bit more of an equilibrium. 90 days from now, I hope to be able to give you a better sense of that as it relates to the second half. But it's certainly a better indication than if we had seen another leg down on a sequential basis. So we'll see what the second half brings. Again, the fact that it's flat in the second quarter gives me some hope, but 90 days from now we'll try to give you a little more certainty about that.

Our next question is from William Stein with Truist Securities. You may go ahead.

Great. Thank you for taking my question. I’d like to just linger on these relatively weaker end markets for a moment, just to get slightly more clarity. And the weakness in comms, in general, are you seeing that more pronounced in any particular geography? And within IT datacom specifically, is that more hyperscalers where you're seeing the weakness? Or is it more broad-based across all sizes and shapes of customers? Thanks.

Thanks very much, Will. I wouldn't point out any significant geographical distinction across the communications markets. I mean remember that a lot of these communications products they do get that – a lot of them still get made in Asia, especially on the device side and a good portion of the – at least the OEM products of the IT datacom. So you can imagine that in Asia, that's having a worse situation overall for the company. And sure enough in Asia, our – we did not have as robust performance in the quarter as we did in North America and Europe overall and that's driven a lot by that. But otherwise, I wouldn't say that there's any sort of end customer geographic changes here. Relative to hyperscale versus the equipment manufacturers, again, I don't think there's a real distinction because ultimately the hyperscale people are also customers for the equipment manufacturers in many cases. And I think that that overall inventory position is fairly broad across both areas of that market.

Our next question comes from Mark Delaney with Goldman Sachs. You may go ahead.

Yes. Good afternoon. Thanks for taking the question. I was hoping to touch a little bit more on supply chain and what it might mean for your own free cash flow generation. Given demand softer, do you think supply chain stabilizing enough that perhaps you can take inventory down and lead to better free cash flow here?

Yes. Thanks, Mark. Yes, I mean, in Q1 we actually had good cash flow, I mean 100% essentially of our yield on for the first quarter, which for the first quarter actually is probably better than average. But given that, I do recognize that our inventory was even a little bit higher than we would typically wanted to see here in the first quarter from a day's perspective. And the team is – there's many reasons for that. I mean we had certainly a very strong 2022. We had supply chain issues throughout the majority of the year of 2022. And I think that as we came into the first quarter, where days typically get higher. Normally, there certainly is kind of a lag effect or a hangover effect from a supply chain perspective as well. And I do believe that the team certainly will have some impact on that over the coming quarters, and we should see some improvement from a day's perspective on inventory, which just naturally will help from a cash flow. But I think our target cash flow continues to be 100%, or 90% to 100% kind of from a free cash flow perspective. And I think that certainly, that should be achievable here and for the full year, and there may be a quarter or two where we're actually a little higher than that as we kind of bring inventory a bit down.

And our last question today comes from Guy Hardwick with Credit Suisse. You may go ahead.

Hi, good afternoon.

Hi, Guy.

Could you expand a little bit on the industrial segment, which is now by far away your largest segment, I think you had 28% of sales. I know factory automation is probably the largest end market within that, but can you give us a little bit more color on trends within industrial, whether it's medical or energy?

Yes. Well, thanks very much, Guy. I mean the fact is as industrial is at least this quarter our largest segment, it was 28% of our sales. At the same time, industrial is far and away our most diversified market. I mean there's really not a correlation amongst the various segments within Industrial, except that they all represent harsh environments where our customers are trying to push new electronics deeper and deeper into some of the harshest of environments to an offshore windmill, into a semiconductor factory, into an operating theater, onto a train going 400 kilometers an hour and everything in between. In terms of the segments, I wouldn't say that necessarily factory automation is the largest. It's a significant segment, but we have strong sales in the areas like heavy equipment and medical, instrumentation, which includes things like semiconductor manufacturing into electric vehicles, heavy electric vehicles and battery. All types of – types of energy generation and that includes both alternative energy, but also traditional energy extraction and generation, rail mass transit, things like marine and entertainment. I mean, and you can tell these are not markets that correlate with one another. So if we're going to have one of our markets be a little bit bigger than the others, and in this case, still just 28% of sales, this would be the one that you'd want to have that. And we're just really excited by the progress that we've made in our industrial market over a very long time period. If I go back to 20 years ago, I mean this was a relatively small business that we didn't really have a close touch with where it went. It all went through distribution. And we had just fabulous leadership in our industrial business over that time who really drove a very much an application and segment-based approach to developing new products, application-specific, technology-specific products. At the same time, as we made a number of great acquisitions over many years, and we continue to make great acquisitions across the industrial market that have ultimately positioned us for this just multitude of revolutions going on as electronics gets pushed deeper and deeper into harsher and harsher environments. And so it's not just one or another piece of that, and we're just really excited about the ongoing strength of our industrial market, which has just been a fabulous asset for the company for many years, and I believe will remain so for many years to come.

We do have one additional question from Michael Anastasiou with TD Cowen. You may go ahead.

Good afternoon guys. Thanks for taking my question. Looking at the capital deployment side, you had a couple of deals announced at the beginning of the year. Can you just describe how CRM and RFS fit into the overall strategy? And on the broader front, what end markets or adjacencies do you see the most opportunity inorganically for the year? Thank you.

Thank you very much, Michael. Well, CMR, as we announced, we closed earlier in the year, and that's a fabulous company making harsh environment, value-add interconnect products that go into the industrial market, in particular, in heavy equipment. RFS, we announced that we signed the acquisition, but we have not yet closed it. We – as we said last quarter, we expect to close by the end of the second quarter, and we don't change what we say about that. And RFS really expands our position in the mobile networks market with really high-technology antennas and fiber optic solutions that go into next-generation mobile networks. And we're, again, very excited about that company, and our team continues to work closely with the RFS team as we get closer to bring them into the Amphenol family. In terms of our pipeline of acquisitions and where we see the future, we don't pick and choose our markets and say, well, that's the market where we want to make acquisitions or that's the market where we don't want to make acquisitions. And the reason for that is when we make an acquisition, we're getting married forever. We're not a trader where we buy companies and sell them and buy and sell and kind of do this portfolio management. We look for companies with great people, with outstanding enabling technologies and robust and complementary market positions across all of our end markets. And in our experience, which stretches over, in my career, more than 75 acquisitions, and I think more than 50 since I've been CEO in these 15 years nearly, that having that very simple approach leads to really outstanding long-term success and a great return on our capital that we deploy towards the M&A program. Our acquisition pipeline remains very robust today. I remain wholly incapable of predicting when we will close and if we will close certain deals. But I know that long-term, the program is going to continue to support really great growth for the company and a great use of the capital and the cash that we generate so much of. And so we look very much forward to continuing our M&A program, and it really complements the culture of the company as well because every time we bring in one of these new entrepreneurs, it actually strengthens the entrepreneurial culture of Amphenol. And that's something that I look very much forward to as well.

And Michael, just to clarify, just to avoid any confusion, RFS, since we have not closed on it yet, is not included in our guidance and it wouldn't be included in guidance until we close.

Well, very good. I think we have no further questions, operator. And so if that's the case, I would like to take this opportunity to wish all of you a wonderful continuation of your spring and we look forward to talking to you all just 90 days from now. Thank you so much, and best wishes to you all.

Thanks, everybody.

And thank you for attending today's conference, and have a great day.