Analysis of First Quarter 2017

Sales Performance – World

The connector industry shipped $1.365 billion more this quarter than the same period in 2016 for a sales increase of +10.8%. Orders booked were $14.565 billion versus $12.640 billion in 1Q16 for a +15.2% increase.

This is a great start to 2017. The first quarter book-to-bill ratio of 1.04 ($565 million more orders than shipments) suggests the second quarter will also result in a high level of shipments. The following graph displays the percentage change of world connector sales for the past 15 quarters.

You will note that 1Q16 was the last quarter in which world sales declined, making an easy comparison to 1Q17 results. Further, 2Q16 achieved a sales increase of only +1.5%. This leads us to conclude that 2Q17 will result in a substantial sales increase.Comparisons become harder in the second half of 2016 because of sales increases of +8.9% and +9.2% in quarters three and four, respectively.

Sales Performance – Regions

All geographic regions are now generating sales growth. The following compares the quarterly sales performance by regions.

The regional results in 1Q17 are an excellent turnaround in demand. Note that China, the connector industry growth engine over the past decade, is again producing exceptional sales growth (+21.2% in 1Q17). Japan had a good quarter growing +18.9%.

Markets Served

Most market sectors are achieving growth. The strongest markets are automotive, telecom/datacom, mil/aero, industrial, transportation and medical.

Connector Confidence Index

The World Connector Confidence Index (WCCI) was substantially higher in 1Q17 than 1Q16. As can be seen in the following table, the WCCI was as much as 37 points lower in 2016.

A confidence index above 50.0 indicates a degree of confidence in business conditions. The March index of 90.3 is a high confidence level for future business expectations. This is a good indicator for the remainder of 2017.

Price Index

A price index above 3.000 means industry personnel believe prices have, or will increase. Methodology: Increase A Lot = 5; Increase A Little = 4; Stay the Same = 3; Decline A Little = 2; Decline A Lot = 1.

The price index in January 2016 indicated that prices had declined slightly in the last six months and would continue in that mode in the next six months. In January 2017, the price index indicated that prices had declined slightly in the last six months, but would be stable in the next six months. In both February and March, the index indicated stable pricing both past and future, which is a brighter outlook.

We are in an unprecedented period of stable connector prices. We have not experienced any significant downward pressure on prices for several years.

Contributing to this phenomenon has been:

• China’s downward pressure on prices has abated as costs rise in China, especially labor.
• Raw material costs have been increasing. It is difficult for connector users to demand price concessions when raw material prices are rising. Note, since 1Q16, gold prices are up 3.5%, copper/brass prices are up 20.6%, steel/iron prices are up 19.7% and thermoplastic prices are up 3.6%.
• Connector demand is strong and lead times are increasing, moving toward seven to eight weeks.

Industry Profitability

Industry average net income over the past ten years was 7.0% of sales. The industry is going to do much better in 2017 because:

• Demand is strong and expected to remain strong throughout the year.
• Connector prices are stable. We see no indication of price erosion.
• Raw material costs are rising, but only modestly.

Profits achieved by Amphenol and TE Connectivity in 1Q17 provide a window into how the industry will perform.

• Amphenol achieved 1Q17 net income of $224.9 million (14.4% of sales, up 43.6% over 1Q16.
• TE Connectivity achieved calendar 1Q17 net income of $405 million (12.6% of sales), up 6.6% over 1Q16.

We believe the industry will achieve net income as a percentage of sales over 10.0% in 2017.

Conclusion

The first quarter of 2016 was a transition period when the connector industry was still in “recession” but on the verge of breaking out, as happened in 2Q16. This shows in all the above numbers. The following are some observations for the remainder of the year:

• The high YOY sales growth is partially the result of easy comparisons. As the comparisons get more difficult in the remainder of 2017, we expect the growth to be more modest than what the results were in 1Q17. We are forecasting mid-single-digit growth for 2017, not the double-digit growth we saw in the first quarter. We expect growth in the 6% to 8% range.
• We expect the world connector confidence index to remain relatively high for the remainder of the year meaning greater than or equal to 80.
• We expect prices to remain relatively stable, around the current level.
• We expect lead times to remain relatively stable, around the six to eight week range. The industry will be very profitable in 2017, achieving net income as a percentage of sales over 10.0%.