安費諾 (APH) 2002 Q3 法說會逐字稿

Good afternoon. This conference is being recorded. I would like to introduce the host for today's conference, Edward Jepsen.

Thank you. Afternoon. My name is Edward Jepsen, the CFO of Amphenol, together with Martin Loeffler, the CEO. The Q3 2002 results were released earlier this morning. I'll provide financial commentary and Martin will give an overview of the business and current trends and then we'll have an Q&A. The third quarter was excellent considering the continuing challenging business environment. Sales for 268 million up 6 percent from the 253 million in the third quarter of 2001. The sales increase including a positive currency effect of about 7.7 million. Breaking down sales into our two major sectors the connector interconnect which comprises 86% of our business was up 7 percent compared to a year ago with increases in all of its major markets of communications, military and aerospace and industrial and automotive. Our coaxial cable business for broadband network which comprises 14% of our business was up 3% from a year ago. But down sequentially as the domestic and international market for cable and broadband cable television systems continues to be challenging. Operating income or EBIT for the quarter was 44.2 million. Compared to 42.6 million last year. The operating margin was 16.5% compared to 16. 9% per last year, on any industry comparative basis and considering the economic environment, profitability continues to be have good primarily because of programs of cost control and the continuing development of new higher margin specific application products. Interest expense of the quarter was 11.5 million compared to 14 million last year reflecting lower rate and debt levels. Other expense was 1.2 million the same as last year. The tax expense was 10.9 million at an effective rate of about 35 percent. Equivalent to the rate last year after adding back goodwill amortization. Diluted earnings per share was 48 cents per share up 23 percent from 39 cents a year ago. In 2002 we adopted the new goodwill accounting standard which had the effect of eliminating goodwill amortization. On a pro forma basis EPS in the Q3 of 2001 would have been 47 cents per share under the new standard. Cash flow as measured by EBITDA was 53 million for the quarter compared to 55 million last year. The balance sheet is in excellent shape, the cash balance September 30 was 25 million. The accounts receivable outstanding was comfortable to the second quarter and last year. Inventory in the quarter is down 11 million from the December 31 balance. Debt outstanding September 30 was 641 million. Down 80 million from the 720 million December 31 last year. During the quarter we generated a strong 41 million of cash flow from operations. Of such cash flow 6 million was used for capital expenditures. For the first nine months of 2002 free cash flow from operations less capital expenditures was 101 million. The company continues to be a strong generator of cash. Finally orders excluding cancellations reflected an even book to bill ratio of 1-1. On balance there was an excellent quarter with excellent profitability and cash flow and in a difficult business environment. I'll turn it over to Martin.

Thank you very much Ed. Welcome to the conference call much Amphenol which has become a real tradition. Thank you for your interest in our company. I will briefly review some highlights of the third quarter then continue with some of the trend that we see in the business and give an outlook in these market segments that we serve. Some of our highlights of the quarter, first of all, the very difficult business environment continues, visibility continues to be very weak in most of the markets that we serve especially in the communications-related markets. However, we're pleased with the results of the third quarter. As Ed said, sales for the first time after five quarters had positive comparisons against last year. This was primarily driven by stronger performance in the connect for business with a sequential increase as well as strong yield increase. The coaxial cable business was slightly down sequentially but had positive year to year comparisons. As it relates to the sales increases, they are primarily based on our strength in that we have developed over several years in our target markets. We're very pleased to be able to capitalize on the diversity of the end user markets that we're serving as well as the diversity of geography. We continue to develop new product and as a result of this have gained in the quarter further position in the markets that we serve. We're also pleased with the financial side of it as our operating margins continue to be strong. 16.5 percent in a difficult environment as we're in is certainly an excellent result it compares favorably weather rest of the industry or with any industrial company. This is a result of our continued programs of cost control. EPS has grown both sequentially as well as year to year and we're pleased with that because we're using our strong cash flow to reduce our debt which certainly drives EPS positively as interest experiences are coming down. In all of these up ins that we have in the third quarter as well as in the year to date numbers, we have carried a significant burden of expenses for redundancy payments as well as paying for underutilized assets. But we have not taken any one-time charge throughout that downturn. So in summary, I think the third quarter is an excellent result and it can be measured in free strong cash flow generation during a time where other companies have especially some of our customers have really difficulties in their cash flow. Let me now talk about the trend in the markets that we serve. First the communications related markets. In general again a market that is certainly not rebounding by any means with any strength. Demand remains very relatively weak. And at the low level. Nevertheless, it is a market that -- all these markets together represent about 51% of our sales in Q3. They are important markets for us. Not only the present but at also for the future. In the broad band communication market which represents 15% of our sales coaxial represents 13% of that 15. So 2 percent is related to fiber optic product and connector we sell and these connector and fire optics are growing through the year and in also Q3. In north America Amozos (ph) have slowed the upgrade activity with the exception of AT&T, that has contributed to some of the sequential flowing in that market. International markets remain project oriented in general and are more sporadic. Pricing is relatively stable in the market and the outlook is that we will continue to see levels of sales in the same that we have seen in Q3 and Q2 approximately even if in Q4 we anticipate somewhat lower sales because of the seasonally lower quarters. As it relates to ought -- Q4. As it relates to other segments in the communications markets which represents 36% of our sales, we're also some mixed performances. This market I comprised of internet related equipment, wireless infrastructure and mobile phones. Let me start with the internet related equipment market. In that market wear pleased that we have been able to capture some additional new business and position ourselves stronger with certain customers and that includes with no -- includes program winds at Dell, Cisco, Sony and the hard disk drive market in the far east. We're pleased with those position wins because they will carry us in to the future even in the immediate impact in Q3 was not as significant. We're building on our strength as a manufacturer of high performing, high speed data communication interconnect solutions. And with those solutions we're positioned well on the next generation product. However, the next generation products of our customers are not ruling out at the same speed required to offset the relatively slow demand of existing equipment. So overall in this market we have seen a decline year over year interest internet related equipment of 5 per 5%. For Q4 we will see the same level of sales as we have seen in Q3. We do not anticipate a major change in the short term in that market but, how much we continue to position ourselves strongly and through gains of market shares we may see an improvement as we move into the year 2003. In mobile infrastructure we have seen a very strong quarter. However that should not give an indication of a trend change in the market itself. We were just at the right time with the right customer with the right programs to see a very positive year over year improvement in that segment in Q3. Overall the market remains relatively soft as the generation three broad deployment has clearly been delayed. In the near term, we'll see the demand coming primarily from upgrade and sporadic upgrade of operators that require equipment from our customers to increase capacity. It is interesting to note that in July we crossed over the line that there are more subscribers for mobile communication than for wire communication. Nevertheless, the traffic that goes over mobile networks at this point in time was voice or data represents only 17 per of the total traffic. Which means nothing else that over time networks will be upgraded and filled out and we're well positioned to participate in that when that happens. In mobile phones we continue to have a very strong performance. Q3 was just another strong quarter for the company where we have been growing by 15% over the last year in dollar values which is very important to note because it is an indication that our strategy to increase content on mobile phones is really working. In addition, we're benefiting from our strong presence in Asia and the penetration we have achieved and continued to achieve in the Asian manufacturers of mobile phones, we're also positioning ourselves -- positioning ourselves well in the manufacturers of mobile appliances. In most laptop devices mobile components including antennas are being designed in and we're well positioned world wide on those especially with the manufacturers in Taiwan where this is essentially the stronghold of all the laptop manufacturing of the world as well as in Korea. We see very good opportunities also with the P.D.A. manufacturers who want to increase components for mobility in their devices in communications. So overall in mobile phones we're going to see a strong year for Amphenol. We'll have increased penetration in number of mobile phones that we serve from 200 million last year to 220 million this year. But more importantly our revenues will be off somewhere between 16 to 18 percent for the year which we anticipate another strong quarter in Q4 in that segment. Outside of the communications market, we have two real strong hold. One is the defense related markets, aerospace and defense in total which represents about 25% of our total sales. Year over year we were up 7% in that segment and sequentially we were about even with Q3. We continue to see strong demand resulting from the new programs, European fighter aircraft, some of the helicopter programs as well as missile programs. However, this strength on the military side is mitigated by the slowness and significant slowness especially in north America of the commercial aircraft and aircraft and general aviation. Overall the market will continue to be strong in the future as both new programs as well as the more demand for existing equipment will continue to strengthen. We had in Q3 a slow period through distribution, but it has however, rebounded in October as a new fiscal year has started. So for Q4 we see a positive outlook with sequential growth in the military and aerospace segment. In industrial and automotive markets we see also continued strength. It represents 24 percent in the third quarter of our total sales. The industrial markets have shown some modest improvements as many of our customers and their customers are looking for improving factory automation to gain productivity and to reduce costs. On the automotive side it came from continued strong demand from interconnect product for safety features in the cars and a new element of growth for Amphenol is communications electronics that is being put into cars which we call the telematic. Very strong growth quarter after quarter sequential increases and that occurred in also Q3. Overall we'll continue to count on the automotive segment in Q4 and modest improvements in the industrial market. from a geographic standpoint we have seen a slow European growth - actually a decline in Europe in Q3 while all the other regions were up in north America we were up 4 percent, in Asia strong mid-20's growth and in Europe, a significant decline of about 5 percent in the quarter. Asia is growing not only because of our presence there, but it is growing because of transfers that I have seen out of the European as well as in north America. Especially the mobile phone side and the internet related equipment, much of the production is transferring to Asia and we're fortunate to have strong presence there to pick up some of that business. So overall 6% growth in nominal dollars and 3% growth in constant dollars in the quarter compared to last year. Very few notes on the future outlook, we do not anticipate that there will be a very significant change in the general economic conditions in the near term. We're going to build our future on our strong holds that we have seen in the past, and the strong growth markets in defense, automotive, mobile phones as well as in some segments of the industrial markets. And we're going to continue to make the investments necessary from the global structure as well as global presence as well as from new product developments to participate strongly also in the relatively soft markets that we are participating in at this point in time. For the short term in Q4 we anticipate revenues will be essentially even with the revenues of Q3 whereby interconnect product will show growth and the coaxial cables will show some decline because of the seasonally slower quarter Q4. EPS -- we anticipate will show sequential increases. The sequential increase will be based on the continued strong operating margins that we have today as well as further interest reductions that we'll experience in Q4 because much of our reduction of debt. The longer term it's difficult to make a firm outlook projection for the year 2003. Nevertheless we feel from building on the strength that we have in a markets that we serve and what we see at this point in time, we anticipate that we can achieve in the year 2003 with no real economic change foreseen, 5 to 10% increase in sales. We have in the past 10, 12 years since we became a public company in 1991 achieved of EPS increases in average 25% per year in -- EPS increases -- on the basis of 5% growth next year we anticipate there is strong possibility that Amphenol can achieve 20% increase in EPS That's essentially building on our current run rate of 50 cents or the 51 to 53 cents that we expect for Q4 which will carry into the next year with lower interest expenses as well as the strong margins we have. Some growth we anticipate in our strong margin clearly an EPS growth in our traditional ranges that we have achieved in the past are clearly achievable and we have optimism and enthusiasm in the company that we can build on our strength that we have developed in the markets that we serve. Thank you very much for your attention and with this I would like to open it for any questions that you may have.

We're ready to begin the question and answer session. Our first question comes from Jerry Iabowitz (ph).

Jerry Iabowitz (ph): Good afternoon. Can you give us a couple highlights of some programs that you would say are helping offset some of these challenging markets?

Very happy to do this. We have won a very significant status in Nortel on their current fiber optic business which represents somewhere between $12 million to $8 million. It's their current need and usage. It's nothing new, we're pleased with. In Nortel we won on that -- this is for networking programs. The other one is Nortel at for the wireless deployment. We just learned yesterday that there is a major opportunity coming and firming up for C.D.M.A. deployment in Asia, where we all participate very strongly because we have a strong position on those space stations (ph). The same is true with Lucent in north America where we have won essentially all the generations that they are developing with strong contents. So we're very pleased with this. Also Cisco some of the routers that they are developing for networking at this next generation routings what we have developed are interconnect solutions for them for very high speed and high band data transmission. It's a complete solution of connectors and we make the solution for the cable assembly as well. So that is a new win as well as Asia where we have won disk drive opportunities with Sony and Sony manufacturers where we have expanded our presence with new product as well. So we're very pleased. These are some examples that I have on those as well as a mobile phones. We have increased our content clearly by a significant amount because the mobile phone production itself is stable. This year compared to last year. Relatively flat last year. But we increased in dollar value which is only an indication that we have to increase our content because the prices clearly haven't gone up, they have come down.

Jerry Iabowitz (ph): Are you doing business with the Taiwanese Ode's with the cell phones?

Absolutely. We're doing business with the Taiwan but the ones grow the fastest are the Chinese companies. There are three Chinese manufacturers which make in aggregate 15 to 20 million phones this year -- 20 million phones this year and we have twice or three times as much as we have with the multi-national companies. At the same time, the ODMs that are building the board and so forth for laptop computers are putting components from mobility on it which again we were heavily involved. Both in Taiwan as we well as Korea. We set up an new design center in Taiwan for mobile communication. Mobile communication wasn't really strong in Taiwan in the past. But in order to preserve their own strength in laptop and work station computers they are now beefing up that technology and we have a design center and work with all the ODE's there on those new programs.

Jerry Iabowitz (ph): Thank you very much.

Helen Chey (ph) from Prudential Securities.

Helen Chey (ph): Good morning. I was wondering if you could give us detail on pricing trends you saw in your interconnect business.

That's a delicate question because obviously the OEMs and CMs as well as the OJMs (ph) are all putting in their way a lot of price pressure on connector manufacturers. It's a delicate and fine line to walk between the manufacturers to not give away too much of a price. In essence we see price pressure from everywhere, nevertheless, the way we're countering this is to bring more value solutions to the customer. And we're doing this in making our own cable, our own connectors and providing the full solution both on the coax (ph) side as well as the high speed data side where we have the ability in Amphenol and develop that back when integration to do so. And that provides a cost savings to the customer because he can eliminate essentially several levels of margin as he went in the past to a connector manufacturer and cable manufacturer then a cable house to do this. As we're integrating this we can provide a lower cost and still have high margins rather than just competing pure head on price. On the other hand in some of the areas like in mobile phones we just continuously go to lower cost areas be it in eastern Europe, Mexico be it in China. To meet the requirements of the cost reductions. In general the request is usually between 15 and 20 percent in average we're probably have seen a reduction in the neighborhood of three to five percent in the internet related equipment, mobile phones as well as mobile infrastructure market. While on the broad band communications side, coaxial (ph) cable and the components (ph) we have seen a relatively stable environment in the past and the defense market we are leading the price effort there increasing prices rather than reducing it.

Helen Chey (ph): You mentioned a number of new wins. Could you give us some sense as to who you are taking some share from or who you see most often and who you have been able to beat in those contacts?

We're actually mostly winning against smaller companies or what we call traditional cable assembly companies who have bought in the past connectors and cable and put the two together. This is becoming increasingly difficult for those traditional cable assembly houses because of the higher performance requirements of the interconnect solution. If you go to speed which are meeting the 10 gigabit ethernet or multiple of the fiber channel speed, it's difficult to find how traditional assembly houses have that technology to fit the high performing cable assembly. That's where we're winning. We're not really not trying to compete head on against the larger manufacturers in the connector industry. We have carved out our strongholds in those areas respectively, but its is mostly the smaller company that have neither the global reach to support a customer on a global basis, can participate in the transfers. They are losing the business - the business transfers from North America or Europe to Asia. We can pick that up. It is mostly against the smaller companies where we take share and are capable of taking the share.

Helen Chey (ph): You mentioned that there is limited visibility. Would you say your visibility is good quarter outer or I guess we're trying to get a sense of what is your mix much turns versus any business that has any lead times and to what kind of lead times are you seeing?

As it relates to lead times we have seen reduction of lead times everywhere. The real visibility comes through the forecasting that our customers are doing with whom we're connected overcome computer systems. And they give us the visibility into their MRP systems. But they change and fluctuate as well. And they customers demand fluctuating. So visibility is -- continues to be somewhat difficult even in the defense area, lead times have come down dramatically from where they were, turn business is much higher and as a result of this, they are not as strong as they used to be because there is more business that turns in six weeks rather than the 12 weeks we had in the defense area. But in the communications area it's essentially living from hand and mouth and knowing what the customer's programs are and what they are customers are requiring is more important than hooking at forecasts in pure numbers.

Helen Chey (ph): Thank you very much.

Patrick Parr (ph) from USB Warburg.

Patrick Parr (ph): Good afternoon. Question for you regarding the cost cutting. You mention that you haven't taken any charges. And I'm wondering if you can give us a sense of the magnitude of some of the reductions in staff and moving of capacity that might be behind this and what maybe your plans might Nebraska that regard.

Obviously again to give you some flavor on the people that we have reduced during that downturn which was about in excess of 20 percent of our workforce. Now, 45, 43 percent of our total workforce is now in low cost areas. And that has certainly facilitated the fluctuation of our workforce to some extent rather than having it in the high labor areas where there are much more high-cost labor areas where there is much more social pressure in charges that you have to have in order to reduce the workforce. But the preparation for such a downturn in Amphenol has started long turn before the downturn occurred and so we didn't have to move into the lowest cost areas and do all of these moves and transfers in a more abrupt way. Nevertheless we have significantly reduced our work flows and over that period. And we continue to adjust. We're continue to adjust in an evolutionary basis because we're not at the end in the sense of transferring more business and more of our indirect functions to low labor areas. That will continue to occur. We'll continue to incur some costs also in the future. So it's not that we're saying these one-time charges will immediately go away when we have a turn in the business. Or even in 2003 where we don't anticipate a significant turn of the business. So the point I that we'll continue to carry expenses in reorganization Amphenol toward lower costs on an evolutionary basis and not abruptly (ph) closing down facilities and down sigh as we go along and carry the costs as we go along.

Patrick Parr (ph): The second question, regarding the defense business, do you see any programs coming along in the next calendar year that could drive particularly strong growth there or is that going to be a steady eddy kind of business that continues to grow at a solid rate into the future?

Well, the defense business is actually a very interesting business because of the past decades decade we have seen significant declines in that business. We gained market share. We were also the consolidator. We acquired a few companies that strengthened our overall product offering that we have today, and through that better positioning and some of these acquisitions we have excellent opportunities to leverage that capability across many customers, not only in Europe, but transatlantic basis. And that gives us some additional growth opportunity that we didn't have in the past. In addition, the programs are really just starting to roll out, the strike fighter aircraft I at its infancy stage. Helicopter programs is in the infancy stage and many other program as well. So we anticipate stronger growth in 2003 in the defense program than we have seen in 2002. The primary reason is not so much that the new programs will continue, but the primary reason is that essentially the deployment of all traditional equipment was going on but no replenishment of size has occurred. So we're seeing and we anticipate that essentially in -- there will be much more use of connectors for traditional equipment, the smart bombs that have to be replenished, the shelters that have to be rebuilt. All of this hasn't happened in 2002 so there will be an additional component in there. On the other hand we see Boeing, especially in north America being very strongly downsizing while others keeping their own, they are going to produce more aircraft next year than Boeing and are participating strongly there. But there is a component that mitigates the strength in defense.

Patrick Parr (ph): A final quick question. There has pen a lot of talk in the supply chain about the debt rating agencies downgrading a lot of companies. Have you had discussions regarding your debt out there?

None at all nor would I anticipate given the debt reduction we have had and the strong cash flow.

Matthew Sharon (ph) from Thomas Weisel Partners.

Matthew Sharon (ph): Martin could you talk about the distributors, what you are seeing in terms of their sell through both to the commercial market into the military market which I know they play a big role in serving to you and also the inventory levels.

Distribution is a stronghold for us both industrial as well as the defense market as they represent about 35 to 40 percent of our sales in America. And increasingly also being used in Europe. Now the inventory levels at traditional levels so we do not have any issue relative to inventories. Inventories have come down to some extent this year, they are turning their inventory faster. We introduced new technologies and will continue to introduce new technologies in terms of value added assemblies which will further allow them to reduce inventory to increase the profitability and the basis (ph) as well. So we're very much focused on those programs. The distributors are really at this juncture depending not so much on the deployment and the funding of the new programs but on the funding and the procurement of existing equipment. That's where their stronghold is because this is all designed, that's standard business. But their funding wasn't strong in Q3. The good news I in the first two weeks of October we have seen a significant rebound from the low levels of Q3. The rebound is back to the level that we have seen somewhat in Q2 and Q1 of this year while in Q3 was abnormally low. So we don't know exactly what they have been waiting for. We all assume that it is the waiting for the new fiscal year and the opening of some funding for traditional replenishment. In the industrial market it's the same, we have seen modest improvement in that inventory levels and distributions are good and we anticipate that this modest improvement in the industrial sales for distribution will continue.

Matthew Sharon (ph): One other question. Regarding your growth margin, let's say you are in the five to eight percent growth range next year. You talked about some cost cutting you have done. What kind of improvements do you expect to see in gross margin and is that a function of some other initiatives.

If we achieve -- this is theoretical. If we just assume a five percent increase in sales, the very, very confident to achieve a 20 percent-plus increase in E.P.E.P.S. That's going to driven by improvement in margins because we're expecting good conversion margins, our break even point is lower, so it will be good conversion margins coming down from this incremental talk line then the reduction in interest expense. Reduction in interest expense is an important component of a leverage company that we're that helps generating on the five, eight percent increase in sales. And 25 percent increase in EPS We have shown over period of 10 years that we can do this. We're confident we can show it in the last 10 years as well as the next 10 years.

Erol Rudman (ph) from Rudman Capital (ph).

Erol Rudman (ph): There was a small increase in shares outstanding. Can you refresh my memory how that occurred?

There what you some exercised (ph) of stock options I believe. They have been included. But I think in the actual shares there was some necessary stock options.

Erol Rudman (ph): Given your prospects have you increased stock option awards?

We have an annual event on stock options where we talk about stock option awards which usually in the first part of the calendar year. We haven't changed that pattern whatsoever. We wish to have some much this at these level but we continue our tradition to do this on an annual basis to review the situation as parts of the total compensation, long-term compensation. No change in terms of how many shares will be issued. We have traditionally issued a number of shares that hasn't changed very significantly over the last five years that we have been associated and doing this pattern. And I do not anticipate we're going to change that significantly moving forward.

Erol Rudman (ph): Martin, do you feel as if looking out over the next six months that your visibility and confidence has improved over what it was this time last year?

I don't think that our visibility has significantly changed. Obviously one element is positive and that is inventory level have been brought down at all levels of customers. Be it EMS or OEM. And that is certainly a positive situation because you can anticipate that if our customers has demand, the demand will come through in demand for us rather than being buffered by inventory. So that's a positive aspect. On the other hand with the availability of credit with the funding availability of some of the operators ultimately buy the equipment from our customers in many cases except broadband, I think that is still very nebulous as far as I'm concerned. What we have a situation at Amphenol where we build on our own strength. So customers are still buying today and they are buying a lot. And at 20 billion dollar company has demand for connectors which is significant. So we can get more opportunity and position ourselves farther and expand with those customers with our strength on product offering and our strength in global presence and that's what really what we're focusing on rather than saying the market will come back, visibility will come back, there is visibility, customers have demand on product. And that's what we have got to get and that's what we're working on.

Erol Rudman (ph): Thank you very much.

Wayne Cooperman (ph) from Cobalt Capital (ph).

Wayne Cooperman (ph): Could you give your sales growth for next year, can you break it down by division or by end market? I assume auto sales will be down. The cable business is flat. Looking for a little more meat while you are confident you can grow sales five percent.

What I said in that growth, we haven't assumed improvement beyond what we're seeing today. But we're basing it on strong strengths in the defense area and the automotive area and mobile phone area. And -

Wayne Cooperman (ph): If auto sales were down next year which he assume they will be given the incentive. Are you getting more autos that would offset --

We're not as the any time over the past 10 years really involved in any -- we're involved in the electronics that our customers would like to build in the cars so they can sell more of those cars. They are all very intensively working on improving the safety in cars. Not only by safety in a reaction mode but safety in a preventing mode. So sensor connectors, all of this is new opportunity that goes into cars. That's what we're focusing on so we're really somewhat -- I wouldn't say isolated but somewhat distanced from cyclicalities (ph) that we have there.

Sorbet Francois (ph) from Credit Suisse First Boston.

Sorbet Francois (ph): From top down, what you see in regard to capacity utilization (ph) and if you are give us detail thousand that stand within your end markets.

Good afternoon Harry. You know this is a difficult question because obviously we can produce much of more in all of our factories around the world. We also have our own supply chain which we can tap into on an as needed basis to increase capacity. What we have done though is to really adjust our workforce. Worldwide towards the lower capacity utilizations. We have taken care in our financials to write down some of the assets that were underutilized or were not utilized because of lower demand of phasing out of programs. As I mentioned earlier, we have captured all of this in our operating expenses throughout the year. So we are actually in very, very good shape relative to this adjustment of capacity utilization. But we can produce more, no question about it with any significant addition of capital other than tooling but certainly not in machinery.

Sorbet Francois (ph): Okay, I was running a back of the envelope on the guidance you have given for 2003. And still seems a little challenging to get down to about a 220 number. To finish up the year at a buck 83. Talk about 20 percent earnings growth of 5 percent revenue growth (ph). Will your interest payments be less this year for 03? Can you give us some guidance on what that will look like for 03 (ph) and even the December quarter?

I would -- I'm happy you asked that question because if I think it is important to take something like Q4 as a milestone. As it relates to EPS and the interest payments. If you make an extrapolation of Q4 you will see that you achieve over $2 at essentially the same revenue level. Then you are adding the five percent then weather conversion margins that you have, then you are not far away from the 20% or actually you are exceeding the 20 percent I'm talking about.

Sorbet Francois (ph): Despite sequential improvements in revenue throughout 03. You're going to se gross margin improvement that coupled with some of that energy expense paydown (ph). It should get you to a decent bottom line number for 03.

We can make that calculation at one point in time. But Ed may wanted to add color to that.

On the interest expense we have (ph) variable rate into fixed that swap will be in this quarter which will be at the lower variable rates. So it will be of significant interest expense reduction as far the interest coming through on the net paydown (ph).

Sorbet Francois (ph): Are you comfortable with forecasting a quarterly interest expense paydown (ph) similar to the one you did in the third quarter relative to the second quarter?

I think for the reason I just mentioned it will exceed (ph) between the second and third quarter.

One more question, operator?

Jeff Beach from Stiple Nicholas (ph).

I would like to you expand a little bit on a couple of your markets. You mention last conference call you started initial procurements of the joint strike fighter program. How might that ramp up over the next year maybe the next two years and then if you were to look at right now roughly the growth you might see and the defense market how much would come from new programs versus this retrofit of existing programs that you are optimistic about?

Thank you very much for the question. We would -- it would take us some time but I would like to try to generalize a little bit more. Most of the growth this year came from new programs. And not procurement of connectors that go into existing equipment. Most of the growth came from those new programs. Now which means nothing else. There was military activity in Afghanistan and military activity at this juncture for and so forth. All of this came out of the stores. Most of this came out of the stores that government had built up over many years. This is the level today where we know that procurement (ph) is required and will be required and we see the procurement budget. That's the important thing of the defense budget, the procurement budget is significantly up next year compared to this year. We'll continue as we look at the projection from the defense ministry we'll continue to go up. And that is building the confidence level in us that the funded programs which have achieved 7, 8 percent growth this year will combine with additional procurement and therefore you know lead to a higher growth rate next year than this year.

All right. And one other thing. In the automotive and industrial markets, if you assumed flat auto sales next year how much growth can you get from increased content that you are talking about on electronics and safety?

I can give you just one example. This year we're going to have in the telematic roughly about eight to 10 million dollars in sales depending on what the final number will be in Q4 up from 300,000 dollars of sales last year. If you look at this relative to our total automotive business this alone an eight percent growth from that segment. Here we see debt segment continue to grow because now we're selling only connectors as. In the near term we're going to have value added program which again are helpful to the top line. In addition we'll add the cables that we previously procured from elsewhere from our internally. Again that will add to it. And that would requirement just flat auto sales at this point in time because the penetration is now with General Motors, but Ford and Chrysler and we're getting approvals in Asia and especially in Japan. So we're going to see opportunities in that area. For next year to grow at a similar rate that we have done this year which was double digit. Next year even on flat auto sales. Because the electronic content is not only to be built into luxury cars but in more consumer cars as well.

And last, in the industrial market do you have a lot of new product or increased content going into your existing base similar to what's happening in some of your other markets?

In the industrial market is not as intense as it is in some of the other markets because a lot of our sales is through distribution and there by cycle somewhat through the distribution channel. But wear pleased with some of the new opportunities we have created with major OEMs in the real transportation market where we deal with the end user for cars, with people like Kawasaki, Pompadie (ph), Siemens making these rail (ph) cars. And we are gaining penetration. The same is true in factory automation. Where we do more value added product where we again make the connectors, design the connectors or even lead the specification of connectors as we have done it with both general motors as well as Ford for rectangular products where we're not selling the rectangular connector in head on competition to entrenched suppliers but we have changed the specifications on the basis of a value added product which now I the new specification where our competitors have to follow us and that is a longer term outlook and we in the meantime have the additional sales. So we have clearly made a change in the strategy in the industrial market. Not just selling for distribution but getting closer to OEMs which is showing through in some of the modest increase I have been talking about this year and will somewhat contribute also next year. I'm not suggesting this is a market next year that will for us be in the double digit mode growth.

Thanks a lot.

Well, this was the last question so far for the day. And for this conference call. We thank you all for your interest in Amphenol and look forward to speaking to you in the near future. Thank you very much for your attention. Goodbye.