安費諾 (APH) 2003 Q2 法說會逐字稿

Good afternoon and welcome to today's Second Quarter Earnings Conference Call.

At the request of the company, today's call is being recorded for replay purposes.

Should anyone have any objections, you may disconnect at this time.

I'll now like to turn the conference over to today's Speaker Mr. Edward Jepsen.

Sir, you may begin.

Thank you and good afternoon everyone.

My name is Ed Jepsen.

I'm the CFO of Amphenol and together with Martin Loeffler the CEO.

The company's second quarter 2003 results were released this morning, I will provide some financial commentary on the quarter and Martin will give an overview of the business and current trends and then we will have a Q&A.

The second quarter was an excellent quarter not withstanding the continuing challenging business environment.

Sales for the quarter were 305m that's up 13% from the 271m in the second quarter of last year.

The sales increase includes the positive currency affect of $17.9m.

Breaking down sales into our two major sectors, the connector, interconnect business, which comprises 88% of our sales was up 17% compared to a year ago with increases in all major end markets and all major geographic regions.

Our coaxial cable business for broadband networks, which comprises 12% of our sales was up sequentially from the first quarter this year, but down 13% from the year ago as the domestic and international market for cable for broadband cable television systems continues to be challenging.

The PCD industrial/avionics business that was acquired in the quarter contributed approximately $3m in incremental sales and in so-called custom assembly business acquired in the first quarter this year contributed approximately $9m of incremental sales.

Both operations were profitable and accretive.

Operating income or EBIT income for the quarter was strong at $49.3m compared to $45m last year.

The operating margin was 16.2% comparable of the first quarter this year and down slightly from the 16.6% in the second quarter of last year.

Any industry comparative basis and considering the economic environment, profitability continues to be very good primarily because of the continuing development of a new higher margin application specific products and aggressive programs of cost control.

Interest expense for the quarter was $7.7m compared to $12.9m last year reflecting lower rates and lower debt levels.

Other expense was $1.7m compared to $1.6m last year.

As previously reported in the second quarter this year we completed a refinancing of our debt, which has the benefit of extending the maturity date and giving us more flexibility with our free cash flow.

In conjunction with the refinancing, we incurred a $10.4m pretax and $6.8m after tax or 16 cents a share and one time cost associated with the refinancing.

Essentially these costs are the call premium on the Subordinated Notes that were called and the write-off of unamortized deferred debt issuance costs.

The tax expense was at the -- an effective rate of 34%.

The same rate that was used -- in the first quarter and down slightly from the effective rate of 34.5% used last year.

Diluted EPS excluding the one time refinancing costs were 60 cents a share is up 30% from the 46 cents of a year ago.

During the quarter we generated a strong cash flow from operations of $27m. $6m of what was used for capital expenditures in the quarter leaving a free cash flow of $21m.

Of the free cash flow $14m was used for the PCD industrial/avionics acquisition and the balance of free cash flow was used for a debt reduction.

The balance sheet is in good shape, accounts receivable are up due to the increased activity, the day sales outstanding is essentially unchanged from last quarter.

The total debt outstanding at June 30 was $635m.

It's down $14.2m from the March 31st amount outstanding.

In June, we announced the filing of a shelf registration for the future sale of secondary shares.

We cannot be more specific on the timing of such sale as it will depend on market conditions and other factors and we are in registration.

Finally, orders for the quarter reflected a positive book-to-bill ratio of approximately 1.02 to 1.

With that I will turn over to Martin.

Thank you very much Ed, and welcome to our traditional conference call.

Thank you all for your interest in Amphenol and joining this call.

As Ed said, I will very briefly give you some further highlights on the second quarter and the first half of 2003.

I will discuss some of the trends and the progress we are making in our served markets, and then I'll like in conclusion to comment on the outlook for the rest of this year and for the full year 2003.

As Ed mentioned already, we're very pleased and excited actually about the results of the second quarter and the progress that we have made in further strengthening Amphenol's position in its end-user markets and geographic regions.

It is rewarding to see that we have achieved both sequential sales increases as well as year-over-year increases in a continuing, uncertain, and challenging environment.

As Ed mentioned, sales were up 13% in the first -- in the second quarter of this year driven primarily by strong performance of the interconnect products, which were up 17% in the second quarter compared to the same period of last year.

The sequential increase of our sales was 10% and again here driven by both the interconnect products, as well as the coaxial cable sales which had a seasonably much stronger performance as we expected.

It's very rewarding to see also that these sales increases were very broad-based, and I will comment on this in a moment, in all of our end-user markets as well as geographic regions.

We believe that these strong sales increases are a direct result of continuously and persistently pursuing our strategies to capitalizing on the industry trends towards consolidation, globalization, and technically more demanding complete interconnect solutions.

As part of this consolidation process, as Ed mentioned, we acquired PCD out of bankruptcy similar what we did with Insilco's cable assembly business in the first quarter, it was also acquired out of bankruptcy.

And with the acquisition of PCD, we are complementing our product range in the military and industrial markets.

PCD is a company that generated about $12-14m of sales and we are very excited about the opportunity to have that company as part of Amphenol.

As we acquired both of them out of bankruptcy, it is obvious that they haven't very high profitability as they entered into the second quarter.

We are very pleased to say that we have been able in a very short period of time to bring that profitability up to the levels of the average of Amphenol, and we are confident that for the remainder of this year these companies will contribute at least with the average margin of our business.

This leads me to operating margins.

They remain very strong at 16.2% despite of the variety of pressures on margins.

The pressures come from price pressures in the marketplace, new competition, as well as inflationary increases.

In spite of these pressures, we have been able to retain these strong margins as a direct result of our continued strong and stringent cost controls.

Our G&A expenses are well under control, as well as our factory expenses.

We continue to expand in low cost areas not only with direct operators but also with indirect functions.

And we continue to focus on providing value to our customers inform of complete interconnect solutions rather than just merchandising product and price.

We're very pleased also with our EPS performance.

It's up 30% over prior year and also up sequentially significantly not considering the cost related to the refinancing.

Again EPS is strong and has that strong growth because of not only the strong operating performance, but also of our financial leverage and our capability to have lower rate in interest both through [debt] reduction as well as the refinancing opportunity.

Both the focus on operational performance in profits as well as our continuous focus on the balance sheet management, we've been able to remain a strong generator of cash, and we are employing that cash mainly in three areas.

One to complement our growth with strategic small acquisitions, to continue to invest in new products and capabilities around the world, and to continue to service debts.

All three are accretive to Amphenol.

With this, I would like to talk very briefly about some of the trends and the progress we make in the [inaudible] market.

Let me start out with the broadband communication market, which is the market for hybrid fiber coax networks of the cable television systems.

Broadband communications represents about 13% of our total sales.

As I had said, sales were down compared to last year, but sequentially up by 14%.

We expected that increase because usually the second quarter is seasonally also always stronger.

In general, the market remains soft, which is directly related to the reduced capital spending of the system operators.

Pricing continues to be relatively stable.

We have not seen any price increases in spite of the significant material cost increases that have occurred due to the oil-based components as well as material processed through natural gas.

We are very confident though into the future of that business.

Even we believe that for the third and the fourth quarter that business will remain at current levels, the future is bright.

Cable Systems have signed up four times as many subscribers for fast internet access than DSL, and that trend is continuing at a very strong pace.

System upgrades will be required.

Equipment manufacturers producing new equipment to introduce IP telephony over those systems rather than switch services, which is more expensive.

So, once these less expensive IP telephony opportunities become available, new upgrades of systems will be required.

Amphenol will benefit from this long term in this segment.

Let me go to the next segment, the wireless telecom and datacom segment, which represents about 35% of our total businesses being comprised of mobile phones and mobile terminals, mobile infrastructure and internet-related equipment.

Mobile phone business was up 6% over last year, actually the lowest growth that we have experienced in several quarters.

However, that was more of a temporary situation caused by over inventory in Asia where demands were relatively slow in 2 out of the 3 months.

We have seen a rebound already in June and very confident that the higher level of production will continue as we move into the third quarter.

We are very pleased with our increased position with some of the emerging Taiwanese manufacturers is about the production of 30-35m phones and modules for mobile terminals in Taiwan, and we are pleased to have gained position in that area.

We've also gained new positions with companies and emerging companies in Korea, in addition to the more commonly known Samsung and LG.

There are many other manufacturers of mobile phones.

We are also encouraged by the fast pace of growth and the introduction of wireless LAN where we have developed a variety of new products; they give us a very positive outlook for the future in this market.

Overall, we continue to serve more than half of the real production of mobile phones with our products, with our strong customer base and broad customer base, and increasing content.

We are very confident that we will return to double-digit growth in the near future.

Mobile networks or mobile infrastructure has an outstanding quarter.

That is not because of the fact that the market is strongly rebounding, but we believe we have clearly gained position in that area both in Europe as well as in the United States and in Asia with equipment manufacturer especially for GSM.

Why was GSM so important in that quarter because there were many countries that have out of capacity or constrained in capacity and upgraded and expanded their systems, which has driven the growth of GSM networks.

And that includes 2.5 GPRS networks as well.

And we -- through our broad customer base have been able to participate with most of the customers who participated in that roll out.

The market itself remains relatively stable and slow even if these -- this very project oriented business was available to us.

It showed the tribute to Amphenol's broad customer base that we can benefit from these spurts as they occur.

Long-term the outlook here is very positive, why because the capacity constraints that operators see today with signing up so many subscribers is a good sign that capacity upgrades and expansions will be required not only for one quarter but for a longer period of time.

The UMTS or third generation role outs are relatively slow but nevertheless they are occurring.

We are supplying product to third generation base stations and are encouraged with the deployment that is happening.

Last segment is the internet-related equipment market in this wireless telecom -- datacom segment that I' am discussing.

This segment was somewhat on the pressure.

We had a 6% sales increase in the quarter and essentially we are flat sequentially.

Main reason for this situation in the internet related market is the continued pressure on price.

Internet auctions are very common on commodity products.

We are very pleased though that we can retain our higher margins in this market place due to the roll out and the providing complete interconnect solutions especially in the high speed applications to our customers that keeps our margins high and keeps us at the forefront of our customers.

We are also benefiting from our global presence in those markets as our customers continue to transfer business into lower cost areas.

We are ready there to service them which give us a clear benefit.

The outlook for this marketplace continues to be somewhat uncertain and more sporadic both on the surveys, as well as in the storage systems side and the [rival] side, but we are encouraged by the many programs that we are involved for this -- in the near-term so that we will see an increase of our business in the third and fourth quarter of this year compared to last year.

Switching away from the communications related markets to our other end user markets, the aerospace and defense market being the first.

It represents 26% of our sales, had a very, very strong quarter were up 18% over the last year and 11% sequentially.

The new programs continue to be funded like the European fighter aircraft, the F22 helicopters, as well as battlefield communication systems, and we are strong participator in these new programs.

We are also capturing new business with a much broader product offering as we have continued to be the consolidator in that business, especially since we acquired this originally small company in France, [ALB], we have been able to penetrate the Airbus industry very, very strongly and participating there with strong growth.

Especially, positioning ourselves on the new A3 [AD] aircraft where we have a very strong content and growing content.

It is not fully defined yet.

This market segment will continue to perform well for the rest of this year and for the years to come as long as funding is continuing in most countries around the world.

Our last major market segment is the industrial and automotive segments, which represents also 26% of our sales; it was up strongly 27% in the quarter and 13% sequentially.

We have clearly benefited from our strategy to focus in addition to our strong distribution sales onto the OEM and the major companies to develop new more sophisticated interconnect solutions for their applications in the mass transportation market, factory automation market, as well as specially in the medical market.

Our strategy that we have started several years ago to focus on the OEMs directly with application-specific product is working very well and will continue to drive growth for the rest of the year.

In the automotive market, we have also seen double-digit increases and we are very, very pleased to see that we continue to benefit from the two main segments that we are involved, which are the safety devices as well as the telematic applications, but we are involving ourselves in more electronics on the car as well as in the equipment that goes into the car.

Both have good outlooks for the rest of the year.

So, in summary, Amphenol has been able to perform very strongly in a continuing challenging environment and in certain market segment even surrounded with cries of uncertainties still.

We are benefiting from and creating ourselves new opportunities both through penetrating the customers with new product, as gaining positions as a global supplier and participating in the consolidation of the industry.

We are capitalizing on our diversity, on our customer relationship, and our worldwide capabilities, and certainly benefiting from our continued culture of cost control.

We are very encouraged by our position and therefore in spite of the environment that we're in, we have a very positive outlook for the rest of the year.

We, therefore, have increased our guidance for the full year 2003; previously the guidance was that we would grow the top line about 4-7%.

At the last quarterly call we said we would be at high end of 7%; now we are saying, we are looking forward to grow more like 9-12% for the year.

Consequently, also we are changing our EPS outlook for the year.

Previously, the guidance was 20-25% increase over last year; last year we had an EPS of $1.85.

We're growing and increasing that outlook to 25-30% for the full year 2003, obviously, that means sequentially EPS increases for Q3 and Q4.

We're very encouraged with our achievement and we are very encouraged with where we are going.

With this, I would like to open it for questions.

Thank you very much.

Operator?

Thank you.

At this time, we would now poll for the q-and-a portion of today's call.

Should anyone have a question, you may simply press "" "1" on your telephone touchpad.

If you're using a speakerphone, you may need to lift, press "" "2."

Once again, its "" "1" to ask a question and "" "2" to cancel.

One moment while the questions are registered.

Our first question comes from Steven Fox (ph).

Hi.

Good afternoon.

First question is on TFC.

I was curious if there was any difference international demand versus domestic in the quarter, and then is there any chance of you guys being able to pass off the higher oil prices to your customers during the rest of this year?

Thank you very much Steve.

Good afternoon.

As it relates to the split between international and domestic, we have seen essentially a small flat performance in international market and a stronger performance in South America, as well as, in North America in the second quarter compared to the first quarter.

As it relates to the material cost increases at this point in time we have not seen any signs of a drive towards increases in the prices and pass these cost increases onto the market place.

And just one other question Martin, is there any new programs or market share gains that you will particularly highlight that are going to start to help in the second half of the year?

There are several areas -- I think we have clearly gained position in the wireless infrastructure market; we've seen this in the next round of negotiations for the year that is coming up.

We have gained certainly in -- with several of the mobile phone manufactures in Taiwan and some in Korea.

We have gained increased content on some of the Chinese manufacturers, as well as, with Nokia and Motorola.

So, we are pleased with those, and we continue, obviously, to work on incremental areas also in the internet related the market, the storage, as well as, the disk drive market.

So, it is not just one singular area, it's the broad-base and that's what we are reporting here also the growth is the broad based and our efforts are broad-based it will drive us, you know, upwards in this third and fourth quarter of this year.

Thanks

Thank you very much Steve.

Thank you.

Your next question comes from Patrick Parr (ph)

Good afternoon guys.

Good afternoon Patrick.

How are you?

Swell, how are you?

I' am wondering you put up some really big growth rate numbers in the Aerospace and defense area and the industry on Automotive, and I guess we had predicted some of that.

But as we are trying to model going forward, you know, what could you tell us about the back half of the year in these two segments as far as, you know, new wins or projects ramps that would help us in terms of modeling that?

The automotive business as I said was up about, you know, 10% year-over-year.

This is actually something that we had, you know, previously so that wasn't -- actually that was sequentially up 10% but year-over-year 30% that was obviously some currency loss indices as well because quite substantial portion of our business is in Europe so the euro have some effect on this.

But the -- this 10% growth that we have seen in the past will continue in the automotive business for the rest of the year.

We are encouraged especially by the new products that we have introduced as next the generation of type of airbag and seat belt constraint systems that are rolling out.

There is also a next generation telematic product line in the works it will not have an impact really this year because most of the models will still use the current generation products, but that gives us the confidence for 2004, as that will be rolled out.

As it relates to the industrial market our strategy as I said to penetrate the OEMs directly with new application specifics solutions is very, very encouraging because they are really in need of more sophisticated and advanced interconnect solutions while in the past, you know, they bought some connectors off the shelf of distributors.

Today their applications in medical, as well as, in rail transportation just become more sophisticated we require different solutions.

So again, it's more broader-based it's not just one customer or one win that gives us that encouragement to say that this will be a strong portion of our business moving forward.

We have had a strong growth there in the past.

Okay.

And then based on your revenue or your implied revenue guidance for the rest of the year, what kind of free cash flow if you can help us here a little bit would you expect to generate in the next two quarters?

I will like to ask Ed to respond without giving a specific amount.

Without giving a specific amount--I think -- that they'll continue the patterns that we have in the first half of the year and that we achieved last year what [which was working capital management and so just looking through the income statement I think that working capital will remain under control and so based on levels of profitability you will see continuing levels of free cash flow.

Great.

Well thank you very much.

Thank you very much [Patrick].

Thank you.

Our next question comes from Matt Sheerin (ph.).

Yes, thanks.

Good afternoon.

Good afternoon.

I just had a question regarding the gross margin which was down a little bit.

Sequentially you did talk about some higher material cost and of course the higher substantive sales on the cable side.

Could you just talk about the cable the margin there?

Was it product mix cost and sort of how you see that going forward?

Well, actually we are very excited about our margins.

The margin in the first quarter was 16.3% and it is 16.2% in the second quarter.

So essentially flat operating margins between the two quarters.

We had as we discussed two acquisitions that we took out of bankruptcy was certainly -- didn't have really good profitability as we went into this quarter we ramped up twice well, but we didn't get the benefit of good contribution there even if was accretive to the same level of the 16% throughout the whole quarter.

That is they are you know right up there now and will have good outlook for the future.

Obviously, we have with the lower volume in coaxial cable and the material increases that occur especially for that business, which is more impacted because a bigger portion of material cost is part of the total cost.

That certainly have some pressure on the margin, but at the same time we are encouraged by the new application-specific products that are coming to drive margins positively and volume will also help.

As volume continues to move up, we'll see better margins coming through as well, but 16% strong operating margins in the connect industry, the confidence that over time we can move it further up as a general climate is improving as well and thereby price pressure is somewhat relieved.

Okay great, and Martin you mentioned that you saw a pickup of demand on the handset side in June, is it your belief that any other sort of access component inventory buildup has been worked off?

Yes.

Well actually there was quite some finished goods inventory in Asia of mobile phones and to the June -- of almost a quarter or so, and I think that has started to work itself down and therefore we have seen demand improving in June and we are confident with both, the improving demand there as well as some new wins will come back to double digit growth in that segment.

Okay and just one number, could you just give what the distribution representative as a percentage of sales and how that did sequentially?

Distribution it is a little better.

Distribution for us is mostly involved in two areas, military/aerospace as well as industrial.

There was a small improvement, but disproportionate to the improvement that we have seen on the OEM side, which was stronger.

Okay.

But there was some sequential improvement.

Okay, thanks.

Thank you.

Thanks.

Our next question comes from Michael Morris.

Yes, thank you.

Good afternoon.

Good afternoon Michael.

How are you?

I'm fine Martin.

Last quarter you characterized the end market environment as somewhat stop and go and it sounds as though in the mobile phone segment you again had a little bit of softness in the beginning of the quarter and then strengthening through the month of June.

Would you characterize your other segments as still being in that somewhat stop and go kind of environment or how would you characterize the other segments?

Yes.

You have excellent notes, Michael, stopping over exactly what I used to.

Actually here in Asia, I wouldn’t have thought about the mobile phone as a stop and go, and that’s why I didn't want to characterize it.

It was just more of a temporary situation, where demand was slower because of an earlier inventory buildup, and that has to go its way down, but I think underlying demand will continue on mobile phones, and mobile terminals in general, not just mobile phones.

As it relates to the stop and go, this may be a little bit more in some segments of the internet-related equipment markets, you know service or storage systems where I would continue to characterize that way where you have a stronger month and softer months followed by a stronger month.

No underlying mail robust continued strength.

The other segments, the mobile infrastructure and mobile networks, we really see some opportunity there, not only because we gained some position, but because of the signs that the operators really want new equipment because they are somewhat -- some of them are capacity constraints.

It is not necessarily in all the countries that we usually see it, may be in [relatively] remote countries, Africa and others, where there is deployment happening, but you know obviously through the equipment manufacturers that we serve.

So, overall the communications-related market doesn't show any robust recovery, as far as I would say characterize it.

It is relatively stable at the level that we have seen before, but we have gained and made some progress ourselves.

Okay.

My second question shifting gears a bit.

You referred to your total interconnect increasing proportion of sales in the total interconnect area.

I was just wondering if you could perhaps flush that out a little bit.

Do you share with us the proportion of sales, for example, that you would consider to be more total interconnect structurally?

Does that have an impact on your margins, good or bad, just any additional detail you can give us on that particular element of your business?

: Yes.

About 35-36% of our total sales are related to completing interconnect solutions and that includes complete engineered cable assemblies that includes backplane assemblies, that includes some complete interconnect subsystems that we are making in complete boxes and that represents about 36% of our total sales and about 40% or 42% is connected and the rest is cable.

Okay.

When you provide total interconnect, is all of the content Amphenol content?

Are you procuring outside inputs to the system and passing those through to the customer?

It is always our attempt to provide a complete solution where we develop our own components and specify those own components.

We just recently had a very significant win with IBM on this as well to specify and then all the companies are using that kind of specification even if they will want one or two more sources to fill our specifications as we have a head start on that.

So, that’s our attempt, but this is not the exclusivity because we also use products from our competition, where it is needed where it is required and where it is specified, and that works very well.

Okay.

Obviously we work very early on with our customers to get the early specification of our products and thereby developed the complete interconnect system rather than being just an assembler and providing labor because it has very little margin to be made at the end.

Right.

That's very helpful.

Thanks very much.

Thank you very much, Michael.

Thank you.

Our next question comes from Mark Heisenberg (ph.).

Good afternoon.

Good afternoon Mark.

Congratulations.

Let's say someone is raising expectations.

The couple of years ago when it became obvious that there was going to be a delay on 3G, there were some sharp reductions and expectations in terms of revenues and profits and since then the business has developed not as fast as we had originally hoped.

Looking forward over the next 2 to 3 years, we assume that 3G continues to take longer than originally expected; what kind of opportunities for growth in profit does the current environment have for you?

And then when 3G finally does come, what are the opportunities there and are these great as you originally expected to do?

This is we can write a different patent on this whole subject here, but very briefly, Mark, the opportunities on the existing systems are very positive moving forward, why, because obviously the operators in order to save capital and increase the subscribers and increase also the appetite of the subscribers to use not only voice, but data over a wireless networks is available today by pure upgrade.

GPRS has enough data speed that allows to do initially what is required to do, and therefore we see quite some upgrade activity in certain countries.

First of capacity constraints; a lot of new subscribers have signed up, as well as because of the capacity constraints relative to the data traffic that has developed and the SMS traffic that has developed.

So, there is quite some substantial opportunity in the upgrade of the existing systems.

The upgrade may not be just like to go from GSM to GSM; it may be to go from GSM to GPRS, it may be to go from CDMA to CDMA 2000, which is all 2.5G, but it is an upwards compatible solution which is very cost effective and brings new subscribers and therefore revenue streams for the operators.

So, this is where we are going to benefit initially from -- if I look at 2003 and 2004 -- those are going to be very driving forces.

At the same time, however, we have seen deployment of generation 3.

There are several generation 3 platforms out there today and obviously they will start to contribute as we go through 2004, stronger than they do in 2003, but we are shipping today and we have excellent content on third-generation base stations.

Well, those who participate and are the major players.

There will be a shift in the players of the third-generation base stations as we see compared to the traditional second generation suppliers and as that is happening, we are very well-positioned also for that to occur.

So, we are participating at both fronts and I think we will see a good performance coming out of that segment plan

And if I can ask one more question, there was a question earlier about distribution, I believe it was in the component side, on the military aerospace side, particularly with the strong quarter you just reported, what do the inventories look like there in distribution?

Distribution inventories have actually always been pretty stable and not overall inventory throughout that whole period in the military aerospace business.

So, there is really no change in this.

We are confident that we have the right inventory levels at distribution there.

Terrific.

Thanks.

Thank you very much Mark.

Thank you.

Our next question comes from Elwood Rodman (ph.).

Good afternoon.

Good afternoon.

How are you?

Doing well.

Thanks yourself.

Thank you.

Very good quarter and I have some questions.

My first question is related to your upgrading the estimate.

Could you tell us or outline for us how currency interplayed with the first estimate and how it interplays with the second estimate if it's included at all?

Yeah, currency -- obviously we do not forecast currency, but we are taking where the currency is right now and make our best judgment on this.

Obviously, currency had an effect on both quarters.

In the second quarter, the currency effect was about $17m roughly and so it is quite significant in translation.

And therefore, that is certainly an element of changing our outlook.

Does that mean that that you strap away that the 17 times 2 for the second half, so it's 34 is incorporated into the revenue outlook for the second half.

We're not necessarily doing, you know, these precise and detailed currency extrapolations.

I think what we are more basing it on is on the current -- on the levels of business that we have and maybe Ed wants to add some comment to this as well.

Simply it's based on the current exchange rates and we know what they were for the latter half of last year, though we're not anticipating change one way or the other to the current exchange rate.

I see.

So in effect you're anticipating that the second half of this year will be extrapolated by quarters end -- it’s the end of the year and we should compare that to last year?

We're not extrapolating from the first half.

Let us say, we're just taking -- we know what the exchange rates were for the second half of last year and we know what the current exchange rates are and that's why we're extrapolating it.

Thanks.

The second thing is that I thought you said that you acquired these two companies along with $3m in sales in the first quarter.

In the second quarter -- first quarter had $9m of sales.

So that if I'm right it had $12m of sales in the second quarter is that correct?

Yes.

So and you said that they contained profitability from bankruptcy margins in the second quarter.

Could you outline -- I realized it’s a small amount, but just symbolically could you outline what you did you turn these companies around?

Well we do what we always do.

We pace our decisions and making that acquisition on the management team in place and whether they would be working together with us to adopt very quickly our culture and they have.

And the way what we did is really was to go essentially to the customers that they had on some that they lost because they were in bankruptcy preceding to see whether they would work with us as are now part of Amphenol.

And I want to tell you this was one of the biggest opportunity that we have seen there because the customers were really excited about the fact that they could retain a company that was a relatively small company and is joining one that has now a global reach and thereby becomes essentially a global player.

So that was one to retain the business on the front.

The second was to look at the cost structure of the company's that we have in place and see what we have to do locally, not with consolidating with other businesses so locally.

You know what they just have to do in order to be more profitable and the third element was and we took the actions there.

And the third element was to locate price.

I mean some of you know we can reduce cost and material and still not be competitive.

So, some of the pricing was not in line with the cost.

And here we just do not shy also to go back to the customers and tell them, you know, that, you know, that was probably not the right pricing level and whether they still would work with us and how we can work that out and we are working these things through very well with our customers.

In addition, all that -- in both cases the fact that we are on bankruptcy was more due to the fact that they had a bad capital structure and over leverage that we -- while we have to improve profitability the underlying operations were possible in both situations prior to our acquisitions as well.

If I took the sales gain -- we are taking the sales gain of about $33m in the second quarter over that of the same last year, 18 comes from currency and about 12 from the acquisitions leaving the gain of about 13 over about $270m in the second quarter of '02.

So, would I be correct in assuming that your enthusiasm or your rationale for increasing the estimates and the guidance for the second half comes less from the momentum that occurred and more on the builds up late in the quarter that you saw?

And that's one question.

Second question relating to the same topic is that, on the extra sales that you forecast for this year versus last year and in changing your estimates, the incremental profit margins are actually below what they were in the second quarter of this year and the question is, does that imply an adverse pricing environment as things get better or are you just being very conservative?

Well I think we can and I would suggest we can off-line talk this through in more detail because I do not want to take all the time up for question and answers from all the others.

We are very encouraged with the momentum that we have built in the company.

I think you have to take into consideration you know the drop in coaxial cable sales and what that means in the connector sales, so if you compare that really the momentum that we have created in the connector sales site internally as well as through the incremental acquisitions.

You have to take into consideration the opportunity that have been created through the refinancing that we haven’t seen the full impact in Q2, but will have an impact stronger in Q3 and Q4.

So there are many factors that have held up our opportunity.

Obviously, the guidance that we have given, we are there to meet or beat.

So, if you sense a lot of bit of conservative situation in that, I would not disagree with it.

Thank you very much, Earl.

Maybe we can continue that a little bit offline, so that we can allow others also to ask some questions.

Sorry for asking too many.

No, they were very excellent questions.

I am glad that you asked them.

Thank you.

Thank you.

Thank you.

Our next question comes from Jeffrey Beach.

Yes sir.

Good morning, and great quarter.

Thank you.

Two things.

One, can you give us the sense on an overall basis how much of your sales or sales increase came from new products and new programs this quarter, and whether that’s still on a rising trend?

I am glad that you asked that question.

I think I didn’t mention this and I am glad that I can really inform you that our percent of new product sales is on the growing trend.

During the period of 2001 and 2002 that was at the lower levels than traditional, we are always shooting for about 20% and plus new product sales and we are coming closer to that target in the second quarter of this year.

Even when we are not totally yet that to 20% level, we are seeing it rising because some of the next generation equipment of customers is being deployed and they are such they are seeing these products moving along with it.

And second in the looking at the strong sales increase in the aerospace and defense.

Can you -- two things, one is can you give us a sense as to how much of the sales increase is reflecting the replenishment of supplies from the Afghanistan campaign and the Iraq war, and if we are still early in the stages there where there are still more orders than actual sales, and whether that will ramp up and then second how much of the strong sales increases, would you attribute to new programs as opposed to existing business?

The majority of the increase that we have experienced in the second quarter is coming from the roll out of new programs.

As I mentioned at the last conference call, we believe that the replenishment of equipment will take time and [will be] not one by one.

The replenishment will take time because the replenishment will go along with upgrading the equipment that was used to next generation equipment and as such we will see this happening overtime rather than in a spurt and then go away.

But again the majority of the growth came really from the deployment or the build of new programs and new products -- new equipments.

And last, just associated with that.

Is there anyway to gauge the impact of the replenishment of all these weapons and supplies and the upgrading coming as opposed to other programs?

Is there a way?

There is a way to do this in some way and the pure replenishment is really related to [Odyssey] that’s' where the stores are, that's where the replenishment comes, but again that is not all of it and therefore it's somewhat difficult to put a number to it, but obviously we know what is all the equipment, and where all the products go to and where newer products go to, but we -- at this point in time, we see and this is essential for us that the new programs are being deployed and the replenishment is supplementing it, but at a relatively low level.

Alright, thanks.

Thank you.

Your next question comes from Larry Harris (ph.)

Yes with a fine start.

Congratulations on the results on the quarter.

Thank you

I was wondering if you could provide in a sense with respect to the domestic spending in the coaxial cable area.

I think it was indicated that such sales were up about 14% sequentially and expected to be fairly similar in the third and the fourth quarters.

To what extent was the sequential increase in sales, a function of Comcast and what are we seeing in terms of spending trends of the other cable operators?

Well, the situation is, first of all it's a kind of a seasonal trend.

The second quarter is usually somewhat stronger than the first quarter.

So that -- we haven't seen substantial changes in the spending levels, which remain relatively low, but Comcast certainly is the one that continues to upgrade the AT&T systems and that is -- and clearly pursuing, but also some of the other companies have, you know, certain capital spendings even if it’s a lower level, but seasonally has done better than in the first quarter.

So we do not interpret here an underlying trend of increased capital that really supports that sequential increase, even if we believe that the third quarter will be about the same as the second quarter and the fourth quarter may be again seasonally a little bit lower, but again the interconnect quarter, the fourth quarter is stronger one to offset that so that in total we will see that growth that we anticipate here.

I see.

And I am assuming that you haven't seen significant change in terms of the mix between semi-flex versus the drop cable?

No, there is no major change in mix that we have experienced.

Great.

Okay, thank you.

Thank you.

I'll just have one more question operator.

Thank you and our last and final question comes from Michelle Kauffman (ph.).

Hi, I was hoping you could tell me who you have been gaining share from in the different businesses?

Well I think the share gains that we have is broader-based in the various market segments that we are talking in, because we have in the various market segment very discreet competitors, so it will be a broad discussion about this.

And in addition, I think from a general standpoint I would suggest to you that the trend is that we're gaining it mostly from smaller competitors that do not have the global strength, that do not have the breath of the products rather than from the larger manufactures in the industry.

Thank you.

Thank you.

With this, we would like to conclude this conference call.

We thank you very much for the questions; thank you very much for your interest and support of Amphenol, and we'll talk to you soon.

Thank you, good bye.