Earnings Call Transcript - APH Q2 2023

Operator, Operator

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

Craig Lampo, CFO

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

Adam Norwitt, CEO

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

Operator, Operator

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

Luke Junk, Analyst

Good afternoon. Thank you for taking my question. Adam, with all the recent focus on AI, I was hoping you could help us understand its significance for Amphenol based on what you've observed during what you refer to as the surge. Quantitatively, I’m curious about its impact as a percentage of sales, either in relation to IT datacom or the company as a whole. Additionally, I would appreciate your insights on the potential long-term opportunities from your perspective, considering we are still in the early stages and understanding how it is currently scaling in the business would be very helpful. Thank you.

Adam Norwitt, CEO

Thank you, Luke. As we entered the second quarter, we expected to see flat performance in our IT business, but it turned out to be slightly weaker as customers managed their accumulated inventory from previous years. However, we recorded a sequential growth of 6%. This increase was largely driven by immediate demand from various customers working on AI-related systems. Our overall book-to-bill ratio for the company was 1:1, but we experienced a strong book-to-bill of about 1.1:1 specifically in the IT datacom market, which reflects solid bookings and gives us confidence for sequential growth in the third quarter. While AI isn't yet the dominant factor in our IT datacom market, we see it as a significant driver for our company's future. The architecture of AI systems requires substantial interconnectivity, as these systems need to transmit data quickly and efficiently with low latency while using minimal power. Amphenol is well-positioned to supply the high-speed products and efficient power interconnects that are critical to this demand. In the long run, we are in the early phase of AI's development and while I won't predict its future implications, we do know that it currently requires a lot of interconnect. As our customers build their networks, we are prepared to respond swiftly to help them remain competitive. Many of them view this as crucial, and we are committed to being there for them, which I believe will ensure they continue to rely on us for their needs as they invest in the long term.

Operator, Operator

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

Samik Chatterjee, Analyst

Hi. Thank you for taking my question. I'm curious about the industrial segment, which not too long ago was experiencing double-digit organic growth. It seems to have moderated since then. This quarter, I believe you mentioned a decline. How much of this is due to inventory adjustments by the distributors compared to a decrease in direct demand from some end markets? Additionally, do you have any thoughts on when we might start to move past these individual factors in terms of timing? Thank you.

Adam Norwitt, CEO

Thank you very much, Samik. During our last quarter, we mentioned that we started noticing some early signs of inventory accumulation in the industrial market, particularly among our distributors. In reviewing our second quarter results, while we were flat in U.S. dollars, we saw an organic decline of 7%. This was partly due to distributors managing their inventory in the industrial market. Certain areas within the industrial market, such as factory automation and instrumentation, have shown some softness year over year, despite the excitement surrounding semiconductor capital equipment. We’ve seen some pullbacks in capital expenditures in certain parts of that market. While there is long-term optimism about semiconductor equipment, there have been some short-term fluctuations over the past couple of quarters. Our position in the industrial sector remains strong and diverse. We continue to see excellent performance in sectors like rail mass transit, alternative energy, oil and gas, and medical. Our team deserves credit for not focusing solely on one segment but maintaining a broad range of products. As for your question about how long this cycle might last, it’s difficult for me to predict. We have received similar questions regarding IT datacom in the past. Currently, there is a correction occurring with distributors, but whether this lasts for one, two, or three quarters is uncertain. We will keep you updated as we gain more clarity on the situation.

Operator, Operator

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

Mark Delaney, Analyst

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

Craig Lampo, CFO

Thank you, Mark. We're really proud of our overall profitability in the second quarter. We achieved just under 35% sequential conversion, which significantly exceeded our 25% goal due to higher sales. Year-over-year, we saw a negative 30%, which aligned with our expectations, but if we exclude acquisitions, the actual performance is even better than the reported 30% in U.S. dollars. Overall, our company's profitability remains strong, thanks to the management team's efforts to protect the bottom line, especially in challenging markets like communications, where there have been notable declines in mobile networks and devices. This reflects the agility of our team in maintaining robust margins despite these conditions. Regarding gross margins, while we typically focus on operating margin, we did see higher gross margins this quarter compared to recent periods. The mix of our markets can affect gross margin and SG&A, as some sectors have higher margins or SG&A. In the second quarter, sectors like military and commercial air performed very well. We're primarily focused on operating margins, and fluctuations in gross margins or SG&A on a quarterly basis aren't something we are overly concerned about. Our goal is to ensure that our operating margins continue to leverage higher sales effectively, which is what we're currently seeing. Looking ahead, our guidance suggests strong conversion and leverage for the third quarter, enhanced by pricing improvements over the past year. However, I wouldn't categorize pricing as a 2023 story since it reflects adjustments made last year. Currently, pricing costs are relatively neutral, and we will respond to any changes in the cost environment as needed. We're pleased with our overall margins and will continue to progress in that area.

Operator, Operator

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

Abdullah Khan, Analyst

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

Adam Norwitt, CEO

Thank you, Abdullah. We don’t have a clear understanding of the auto OEM inventory situation, whether it’s excessive or being reduced. What we do know is that our customers are actively taking products from us, and we supported them well this quarter, achieving a strong performance in automotive with a growth of 9% in U.S. dollars and 11% organically. This reflects our team's ongoing success in creating new products for emerging applications in cars. If automakers decide to adjust their inventory based on car sales, that is outside our control. However, we can focus on our advancements in new applications, such as electrified drivetrains, advanced safety features, and enhanced communication systems. Recently, I purchased a new car and still haven’t figured out many of its features, highlighting the influx of new systems and applications, as well as the growing content in vehicles. We're noticing products that were previously used in computers and other advanced systems are now being repackaged for cars, leading to significant growth in content. While there may be changes in inventory levels this quarter alongside our 11% organic growth, we are experiencing robust momentum in automotive and have a positive outlook for next quarter, following several years of strong performance compared to any equivalent measure.

Operator, Operator

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

Wamsi Mohan, Analyst

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

Adam Norwitt, CEO

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

Operator, Operator

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

Matt Sheerin, Analyst

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

Adam Norwitt, CEO

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

Operator, Operator

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

Steven Fox, Analyst

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

Adam Norwitt, CEO

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

Operator, Operator

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

Chris Snyder, Analyst

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

Adam Norwitt, CEO

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

Operator, Operator

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

Joe Giordano, Analyst

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

Adam Norwitt, CEO

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

Operator, Operator

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

Will Stein, Analyst

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

Adam Norwitt, CEO

Thank you very much, Will. I mentioned in my prepared remarks that we are experiencing a temporary pause, but we have had significant growth in broadband over the past year. Last year, we saw an increase of 62% in U.S. dollars and 38% organically. In the second quarter, we remained flat and anticipate a slight decline in the third quarter. However, we are certainly benefiting from the global demand for higher speed connectivity for homes and businesses, as well as from government funding. Specifically, initiatives like RDOF and BID in North America are crucial and, in my opinion, long overdue. In today’s world, access to the Internet is essential, comparable to electricity and indoor plumbing. Without Internet access, finding a job or applying for government benefits becomes nearly impossible. Therefore, I believe it is a commendable effort to enhance access in some of the most remote areas of our country, ensuring that everyone has equal access to high-speed, low-latency Internet and its advantages. We are pleased to contribute to this cause and anticipate that this temporary pause will evolve. As governments and the private sector invest in broadband infrastructure in the coming years, we expect to be a strong participant and enabler of the broadband revolution.

Operator, Operator

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

Adam Norwitt, CEO

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

Craig Lampo, CFO

Thanks, everybody.

Operator, Operator

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