安費諾 (APH) 2004 Q3 法說會逐字稿

Welcome to the Amphenol third-quarter earnings conference call.

At this time all participants are in a listen-only mode.

After the presentation, we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS).

Today's conference is being recorded.

If you have any objections, you may disconnect at this time.

Now I will turn the meeting over to Ms. Diana Reardon.

You may begin.

Good afternoon.

My name is Diana Reardon and I am Amphenol's CFO.

I'm here together with Martin Loeffler, the CEO, and we'd like to welcome everyone to our third-quarter earnings conference call.

Third quarter 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'll have a question-and-answer session.

The third quarter was an excellent quarter in all respects.

Sales for the quarter were 384 million, up 22% in U.S. dollars and 19% in local currencies over the third quarter of 2003.

And down 1% sequentially from a record Q2, an excellent achievement in a seasonally softer third quarter.

Breaking down the sales into our two major components, the interconnect segment, which comprised 87% of our sales in the quarter, was up 24% compared to year ago with increase is in all major end markets and all major geographic regions.

Our cable segment, which comprised 13% of sales, was up 13% from last year as a result of increases in both domestic and international broadband cable television markets.

Operating income, or EBIT, for the quarter was strong at 70.3 million compared to 52.4 million last year.

Operating margin was 18.3%, an increase from 16.6% last year and up 50 basis points sequentially from Q2 '04.

Margin improvement in the quarter was driven by expanding margins in both segments.

In the cable segment, margins increased approximately 200 basis points over last year as price increases implemented late in Q2 were partially offset by a continued increase in material costs.

In the interconnect portion of our business, margins increased 180 basis points over last year as a result of the continuing development of new higher margin application-specific products, excellent operating leverage on incremental volume, and aggressive programs of cost control.

On any industry comparative basis, profitability continues to be very good.

Interest expense for the quarter was 5.6 million compared to 7.2 million last year, reflecting lower debt levels.

Other expense was 1.6 million compared to 2.4 million last year.

And tax expense was at an effective rate of approximately 34%, the same rate as last year.

Net income was 41.6 million and exceeded 10% of sales, another indication of our excellent profitability.

Diluted EPS for the quarter was a record $0.47, up 47% from $0.32 last year, and the 11th consecutive quarterly increase.

During the quarter we generated a very strong cash flow from operations of 47 million.

This is net of a cash contribution to the Company's pension plans of $20 million.

The cash flow from operations was used to fund capital expenditures of 11 million and acquisitions of 29 million.

In addition, during the quarter, the Company purchased 567,000 shares of its stock at an average price of $29.50, for a total of 16.7 million.

The balance sheet is in great shape.

Accounts Receivable increased in line with the increased activity, and inventory was essentially unchanged from year end, other than currency and acquisition impacts, in spite of the higher volumes.

Long-term debt was at 458 million at the end of September.

Since the end of last year, we have reduced our long-term debt by $74 million.

The amount of receivables sold under our receivable securitization program at the end of September was 85 million compared to 74 million at the end of last year.

Finally, orders for the quarter reflected a book to bill ratio of approximately .98 to 1 for the quarter and 1.02 to 1 for the nine months.

Also of note during the quarter, in late September we acquired a French manufacturer of engineered cable assemblies for the automotive industry.

The Company's current run rate is approximately $40 million.

In October, the Company's Board of Directors increased the size of the Company's stock repurchase program from 2 million shares to 5 million shares.

Approximately 4 million shares remain available for purchase under the program.

Moody's upgraded the Company's credit rating to BA-1.

Both major rating agencies now rate the Company one notch below investment grade.

And in addition, effective October 1st, the Company's stock has been included in the S&P 400 MidCap Index.

The Company is very pleased with these outcomes and believe they reflect the Company's excellent liquidity and strong operational performance over an extended time.

Certainly from a financial perspective, it was an excellent quarter.

Martin will now provide an overview of the business and current trends.

Thank you very much, Diana, and welcome for the first conference call that you conduct here as the appointed Chief Financial Officer of the Company.

Congratulations.

Thanks.

We'd like to say also welcome to all of the listeners to the conference call at the occasion of our earnings release.

As Diana said, I'll provide some highlights of the third quarter, talk about the trends in our various markets that we serve, and comment on the outlook for the rest of 2004.

As Diana already said, the third quarter was an excellent quarter in all respects, and it shows a continuation of our superior growth and profitability that we have shown over an extended period time.

It is a great pleasure to say that our sales increased 22%, and the interconnect products even 24% compared to the same period of last year.

The sales were broad-based, as we mentioned, in all geographic regions.

Actually, in North America, Europe and Asia, sales were up equally in all regions at 22%.

Although currency had a positive effect in Europe, in local currency Europe was up 13%.

Sales increased also broad-based in all of our major and diverse end-user markets.

The highest growth was achieved, again, this quarter in mobile communications.

We will talk about these trends in just a minute, but we are also very pleased with the excellent growth in our military, aerospace and industrial markets.

We are particularly pleased with the sequential performance of the Company, where we reached in the quarter sales levels that were very close to our record levels of the second quarter of 2004.

This is particularly pleasing to see as the third quarter is usually a seasonally much slower quarter.

Relative to our operating margins, we are also very pleased with the result that we continued to expand those margins.

These operating margins reached a level of 18.3% in the quarter.

And in our connector business, 87% of our sales exceeded 20%.

This margin expansion is primarily due to the good continuing conversion margins of incremental interconnect sales.

The new interconnect solutions for the specific applications of our products, of our customers, always have higher margin.

Our ongoing cost control programs are very effective, and we clearly are in a more favorable pricing environment than we have been just a year ago.

We were pleased also with our EPS.

EPS benefited, certainly, from our operating leverage as well as the financial leverage in the Company.

We achieved a new record of $0.47 a share in the quarter, which is up 47% over the same period of last year.

It's also remarkable that for the 11th consecutive quarter we have seen EPS increases.

Obviously, that is a trend we would like to continue to see as we talk about the outlook for the fourth quarter of this year.

Net income also, again, reached a very high benchmark and exceeded 10% of sales.

We are very pleased with these operating performances in the Company.

Amphenol remains an excellent generator of cash.

As Diana said, we generated about $47 million from operations in the quarter.

We continue to apply cash in four major categories -- one is to invest in new products.

New products in the quarter represented, again, more than 20% of our sales, which is an excellent benchmark that we have these new application-specific products with higher margins in the pipeline.

We apply our cash to acquire complementary smaller companies.

And one example of these tuck-in acquisitions was the acquisition of Selek (ph), a French manufacturer in the quarter.

As Diana said, the run rate of the Company is about $40 million in sales.

And we are very pleases with that acquisition, as it represents the opportunities in our range of product of engineered, cable assemblies for safety devices and under (ph) onboard electronics.

The Company has not only facilities in France, but also in Eastern Europe and the Czech Republic, as well as in Tunisia.

That's our first manufacturing, low-cost manufacturing plant -- in Tunisia, which will benefit not only the automotive business, but other businesses in Amphenol that we can leverage into these low-cost areas.

We completed the transaction just a few days before the closing of the quarter, so the sales that they contributed in the third quarter were really minimal.

We continue to explore further acquisitions and have several in the pipeline to look at, to continue to apply our cash very accretively towards these tuck-in acquisitions.

Another area where we use our cash is to buy back our stock.

And as Diana mentioned, in the quarter the Board of Directors approved an additional 3 million shares to be included in the stock buyback program.

So that in total, 5 million are approved for buyback, of which 1 million were already used and bought back in the third quarter and the first quarter of this year.

The extension of this program really will create shareholder value and not only to be used to offset the effect of the stock option program.

We continue also to reduce debt.

It's certainly another area where we can create value, but with a lower interest rate, certainly that has the smallest impact on creating value.

But in this context, we are very pleased that Moody has upgraded our credit rating in that area.

Obviously, they recognize our good performance, the continued debt reduction in the Company, and we are now with both rating agencies just one level below investment grade.

That's very pleasing also.

I'd like also to note that in the quarter, KKR (ph) essentially exited the Amphenol with a secondary offering.

We certainly have a high appreciation for the more than seven years of very fruitful relationship with KKR, and we will continue to treasure that relationship even if they have now fully exited the Company.

The sale of these shares has also increased the liquidity and further increased the liquidity of our stock.

Diana mentioned already that we have been included in the quarter, in the Standard and Poor's 400 MidCap Index.

We feel that this is a strong recognition of our long-term record of positive achievements.

So, a lot of things happened in the quarter, and I'd like now due to comment on the trends in the various market segments.

First the broadband communication market, which represented about 13% of our total sales in the quarter.

Our sales in the coaxial cable products were up 13% over the prior year's same period.

And we are very pleased no only with the continued growth in that area, both in international and domestic markets, but also by the improving profit margins, which are a result of the June price increase.

However, with the continuing increases in material costs, especially in aluminum and steel and the plastics materials, we foresee another round of price increases later in the year to further mitigate the increases of these costs in material cost.

Relative to sales, we expect in the fourth quarter coaxial cable sales to be seasonally lower than in the third quarter.

That is the normal pattern that we've seen every year, that the first and the fourth quarter are somewhat lower than the second and third quarter of the year.

That's built into our outlook that we have given earlier and will continue to present today.

However, long-term, the digital conversion will continue to drive cable network upgrades in expansion, thereby drive the growth of our cable products in the future.

In mobile communications, Amphenol had another excellent quarter, both in mobile phones as well as in mobile infrastructure.

Let me talk about mobile phones first.

They represented about 9% of our sales in the quarter and were up over last year 27%.

Very strong sales growth is driven by a few main factors.

Number one, the increased functionality of mobile phones is increasing our content for phones.

Second, we see an acceleration of most of our customers to launch new product models, including 3G phones, which is also driving growth.

Another area of growth driver is the increasing proliferation of mobile devices, PDAs and others, as well as Wi-Fi applications where our products are used on a broad basis.

With the broad customer base that we have, including the OEMs that are increasingly making mobile phone products for the OEMs, we have an excellent (indiscernible) foundation for continued growth in mobile communications.

In mobile infrastructure, which represented about 12% of our sales, we grew 55% over the same period of last year in the third quarter.

Demand was strong in most areas, but fluctuating.

What I mean by that is, that not every customer of our broad customer base is similarly focused on all network standards.

So we have seen some fluctuating demand in that area by customer, but since we have that very broad customer base and are supporting all network infrastructure standards in the world, we had very good growth.

The growth was further driven by our strong penetration of the sales (indiscernible) installation market with our new products that includes also the antenna for cellular base stations.

Especially the EVDO (ph) buildout, we felt very strong.

The buildouts in India, with all the operators there had a major contribution to that growth, as well as the new connector standards that we have developed for the tilt-down antenna business -- has also seen very significant growth in the quarter.

Those tilt-down antennas are essentially used for 3G applications.

And we see quite some activity in that area.

We expect that the network upgrades for new services, the expansion for new and increased capacity, and the increasing deployment of 3G networks will continue strong growth in that segments for Amphenol.

Another area where we have very good performance, again, in the third quarter was the computer storage and Datacom equipment market.

You will recall that in the first quarter we had single-digit growth, year-over-year growth, while we stepped up to double-digit growth in the second quarter.

And we continued that double-digit growth also in the third quarter with an 11% increase over the same period of last year.

We see that the new generation of our customers with high-speed applications, as well as the serial (indiscernible) technology is now really being used and driving our growth.

We see also an opportunity for further growth and expansion in the disk drive market, especially in the new emerging microdrive market, which creates quite substantial opportunities.

It is anticipated many of the mobile phone products will include such microdrive in the future for their data storage and for the media applications that 3G phones will have in the future.

A great growth potential for the Company.

You will recall that in the last conference I alluded to the license of an AirMax product line from FCI that we acquired.

This backlane (ph) interconnect system is gaining quite some significant acceptance for Next Generation high-speed applications with our customers.

We do not anticipate significant sales over the next twelve months in that area, but the design and activity is high, so this area will be certainly an expansion area in the long run for Amphenol.

In general, in computers and the data communications areas, we anticipate that the technological change will continue to be a significant growth driver for the future.

Let me now have a word to some markets outside of the communication and technology segment.

The military and aerospace segment was very strong in the quarter.

It represented 25% of our total sales, and sales were up a strong 25% over the third quarter of last year.

The growth continues to be driven by new military programs, as well as a modestly improving commercial aircraft market.

The military operations also generate incremental sales.

And we're very pleased to say that we are working diligently to prepare our future with broad design wins in both military and Next Generation commercial aircraft applications.

We expect the military and aerospace segments to remain strong for the remainder of this year and throughout the year 2005.

The industrial market was also strong.

It represented 16% of our sales in the quarter, and was up a strong 28% compared to the quarter of last year.

We have seen solid demand, but continue also to gain market share from the smaller, technically less advanced companies in that marketplace.

The demand for more sophisticated solutions in industrial applications, especially in rail transportation, factory automation, and medical instrumentation continues to favor a company like Amphenol that has advanced technology as well as a global presence.

The automotive market represented 10% of our sales in the quarter, and was up 10% compared to last year.

The sales increase is particularly rewarding because we have seen a very soft -- actually lower than normally soft -- quarter in Europe that were expanded vacation periods.

We continue to see some softness in that area, especially at Company Opal (ph), which has nothing to do with the economic situation, but with the social situation there.

That certainly is impacting some of the sales.

Nevertheless, we're very pleased with the 10% growth, as it is driven by new design wins and new sales of new products and more technically advanced products for the safety devices, as well as Telematic applications, especially satellite, radio and entertainment systems for cars.

We also see that the satellite radio is now expanding outside the car, with Walkman type of devices that are being built, which use our products.

We also same further opportunities for expansion of our automotive business from a geographic standpoint, especially in China.

In summary, the third quarter was a great quarter.

We had excellent results and a continuation of our strong growth and profitability.

We have developed, over many years, a competitive advantage through a strong and consistent financial performance, through our superior technology, through our strong global presence, through our lower-cost capability and manufacturing and designing in low-cost areas.

And most importantly, we have a very broad-based preferred supplier and customer relationship.

And that is very valuable as we can build on this strength to further gain position in our excellent markets and the diverse markets that we're serving.

We are very confident in our own ability and we are excited, really, about the future.

The near term, the fourth quarter, as well as in the foreseeable future for the year 2005.

So we have a positive outlook for the rest of 2004 in spite of the fact that we are not oblivious to the remarks that are being made by economist as well as statements made by our customers that would suggest that there is some easing of the very strong economic recovery that we have seen in the first half of 2004 coming out of a recession.

But we remain positive on ourselves, but will remain conservative in our outlook.

Assuming, however, that no major change in the economy and currencies will occur, we now expect EPS for the full year to increase 43 to 45%, which is significantly up from our previous guidance of 35 to 40%.

This guidance implies an estimate for our fourth-quarter sales in a range of 390 to 395 million -- cannot get really narrower than 5 million to forecast in an environment where we still deal with uncertainties.

EPS for the fourth quarter is estimated to be somewhere between $0.48 and $0.50, which would establish a new record for the Company and a record for us to achieve EPS increase for three years, quarter after quarter, in a row.

Certainly something we're shooting for.

So we are expecting to achieve not only this record in the fourth quarter, but a record year in 2004.

And looking forward with a lot of confidence and excitement in 2005.

At our next conference call, when we talk about the earnings of the fourth quarter, we will provide some guidance for the year 2005.

Thank you very much, and with this, I would like to open it for any questions you may have.

(OPERATOR INSTRUCTIONS).

David Pescherine of Smith Barney.

Dianne, could you maybe talk a little bit about the operating margins and what you are anticipating, certainly for next quarter, but also as we move into next year?

So you've got connector margins looking like they're starting to peak out, but I'd like to get your view on how much higher we can see connector margins moving in the next few quarters.

But more importantly, on the coaxial side, should we anticipate that margins are actually pretty flat into December?

And then maybe expanding again next year as the price increases start taking hold?

Sure, I think that the Company certainly has a very good track record of margin expansion.

I think on the interconnect side of the business, we would still continue to expect some margin expansion.

The main drivers there certainly are the good operating leverage we get from higher volumes.

And as Martin, I think, described in the fourth quarter, we so expect to have some margin -- some sales growth on the interconnect side of the business.

There is -- certainly our continued (indiscernible) in growth of the higher margin application-specific products, which tend to carry a higher margin characteristic and are continuing programs of cost control, are also very important for us.

From a consolidated basis, our operating margin goal remains 20%, and we are not there yet.

The broad management team is certainly committed to continuing to expand margins towards the achievement of that goal.

So I think we do have an expectation that we will be able to continue to improve margins.

On the coaxial side, specifically, I think Martin mentioned that we do expect more opportunity to increase prices that probably will not have much of an effect on Q4, as you mentioned in your question.

So there is, from a material cost standpoint, material cost certainly continued to increase during Q3.

There may be some impact on the coaxial margins as a result of that in Q4 before the price increases take effect in the beginning of next year.

I think on a consolidated basis, given the stronger interconnect sales that we expect in Q4, we would expect to see some improvement in margins.

Maybe if I could just follow-up on that, given the rising raw material environment that you've been faced with for a few quarters and what you anticipate for the next several quarters, have you actually been building inventory anywhere?

And again, as I look at your inventory levels, you've done a fantastic job of working them down since the trough, but they are still significantly higher than some of your larger peers.

And I'm just trying to figure out if maybe the inventory, if we were to actually get a little more granularity, if we were to look at the connectors versus coaxial, that maybe there's a marked difference between the level of inventories between the two businesses.

We have not specifically built inventory in response to concerns about commodity price increases.

The inventory comparison -- I'm not sure who you're comparing to -- but the military/aero and industrial side of the business, because of the longer product lifecycle, do tend to carry a little bit more inventory than, say, the communication side of the business.

David Fox, Merrill Lynch.

If you can expand a little bit on the acquisition from two standpoints -- one, did you wind up carrying a little after your inventory on your balance sheet at the end of the quarter related to it because you had no sales?

And then Martin, can you just expand from a standpoint of what kind of customers does it add?

You mentioned Onboard Electronics, specifically what types of products are we talking about?

And then lastly, how quickly is it accretive?

Well, thank you very much, Steve.

Obviously we're very pleased with this acquisition because the first element that they add to Amphenol is an expansion on our safety devices, where we already have a leading position.

In addition, they have quite a number of products that are used in the entertainment area, in the lighting area, in electronics for the wipers as well as for the electronics for the mirrors.

Businesses that we really have not been part of in the past, but with our really engineered components.

And I think that will allow us to leverage it across a broader customer base.

Obviously, with their location, the primary customers are the French manufactures, but also some manufacturers just in the southern region of Europe, in general.

But primarily, it is Renault and Peugeot and their top contractors.

And the subcontractors we know very well -- I mean, Autoleve (ph) and those companies -- Vallejo (ph) and so forth -- they're very well known to us.

And we have visited them, and they are very pleased that they are now part of Amphenol.

So Amphenol having a broader range to offer to this market segment, which was always a little bit of a concern of our customers, that we had a relatively narrow range.

So that is very positive.

Obviously, we carried a little bit more inventory relative to the acquisition, and have less sales.

That's just the nature of the transaction happening four days before closing.

But obviously, that will be fleshing out.

The acquisition will be accretive almost immediately, and we're very pleased with that.

And that is one of our criteria, as you know Steve, that we always follow.

We want to have an acquisition to be accretive.

They are very close to the operating margins of the average operating margins of the company.

Matt Sheerin, Thomas Weisel Partners.

Just a follow-up on the acquisition.

I assume that the revenue contribution there is included in your guidance for the December quarter.

So that would imply that your core business would be flat to down.

Is that what you'd normally see?

Or are you expecting some areas of weakness aside from the broadband business?

That's a very fine question.

Thank you very much.

Obviously, we have no experience with that acquisition.

When we say we have a run rate of 40 million, we don't know necessarily what the seasonality will be this year specifically, because we don't have that experience.

So we may be a little bit conservative of the revenue number that we have included for that acquisition in the fourth quarter.

In the fourth quarter, we have not changed really our outlook otherwise that we had given previously in the sense that we expect an up quarter in the connector business as we traditionally expected.

So it will be stronger than the third quarter.

Somewhat offset by the lower coaxial cable sales, as I mentioned, in the quarter.

And that's also something that we normally expect.

So I think, overall, we may be a little bit conservative relative to the inclusion of some of the sales (indiscernible), but that experience we'll gain over time.

Great.

And a follow-up, a broader question for you, Martin.

It's interesting where you've got a lot of suppliers in semiconductors and passive components that had been taking numbers down.

We've been seeing pre-announcement after pre-announcement saying that there is a big inventory correction, booking correction going on.

Whereas the interconnect industry appears to the be holding up much better.

And I'm just trying to get your view of why that is.

Why do you think that sector is holding up better?

And why are you holding up better?

Well, I can especially talk for Amphenol.

I think we have developed competitive advantage that I mentioned earlier.

It clearly helps us to gain a position at existing customers as well as new customers.

And that certainly is a factor in the outlook that we have.

But we are also not ignoring what we're hearing from our customers.

And therefore, we have somewhat also, all along, the whole year, been a little bit more conservative with the outlook.

Because we know that the general trends in the industry and growth rates in our industry are somewhere between 5 and 7% a year.

We've seen much, much higher growth rates this year, in general, specifically for Amphenol, which are a normal reaction to a recession.

But it is an accelerated growth, which then somewhat eases into a more normalized growth.

And if I look at this, that's really what I think the phase we are entering at this point in time.

The connector industry as a whole is very hard to comment, because you see very broad ranges of achievements when you look at the announcements that have already been made.

They range from essentially no growth to the growth of 24% in the connectors that we achieve.

So it is a very wide range and depends on going from market segments you are in.

It depends on how much preferred supplier relationships you have to get access to the new products.

It is my prediction that those who have the kind of global presence as well as technology like we have, will do better in the coming years and accelerate their growth over those who have just a narrow scout.

Patrick Parr, UPS.

One question, your tax rate, I guess relative to a number of other folks in the electronics industry, is a little bit higher.

Wondering if there is anything you guys can do to get that down a little bit moving forward?

I think that the tax rate reflects the fact that we repatriate the majority of the cash back to the U.S. for debt service.

I think there may potentially be some impact from some of the new tax legislation, assuming that the bill gets signed.

We are still looking at that.

But generally speaking, barring that to the extent we continue to bring the cash back, I think the effective tax rate will remain where it is.

Even as more of your production shifts overseas?

It's not so much the location of the production; it is the use of the cash back in the U.S. that really drives the rate.

All right.

Martin, you just kind of made a comment about the industry, historic growth rates known to be in the mid single digits.

In a normal world, you target growing at a premium to the market, I'm sure.

Can you give us a sense of whether it is the multiples to the market or a premium to the market?

How would I think about the long-term growth rate in Amphenol, at least from a topline perspective?

I appreciate the question.

As far as 2005 is concerned, we are still going through our budgeting process, which will be completed by the end of the year.

And certainly we are targeting in the higher range than the industry.

Since the industry growth rate is not as black and white defined, it is very difficult to say, you know, you grow once or twice the rate of the industry.

I can only tell you that over the last 10 years, we certainly have exceeded the growth rate of the industry by a factor of 2.

And we're certainly not looking for something that is less than this, but that also depends on the market mix that we are involved in.

So, I would not want to take a very specific arithmetic calculation here, because the basis is somewhat spread.

All right.

And could you remind us what percentage of your sales goes direct versus distribution?

And then give us a sense -- was there any difference between the sales trend you saw in each of those two channels?

Well, if we look at the channel, I think it is relatively consistent with what we've seen in the pas.

We have about 80% of our sales or so going to OEMs directly. 10% to contract manufacturers, and about 10% to distribution on a worldwide basis.

That is different from region to region and -- I think I gave you a wrong number; it is 70% OEM, 20% distribution, and 10% contract manufacturers.

And that has not really changed substantially, but it is different from region to region.

But no remarkable change to see -- obviously with the strength of the military aerospace and industrial market, there is a component that goes more through distribution than it would otherwise go in the other market segments.

Thank you very much.

Michael Walker, of CFSB.

Just to clarify an earlier question, since you did the acquisition in September, you do expect a full 10 million of contribution sales to show up in Q4?

Thank you for that question.

I probably wasn't precise enough to mention that we have taken a relatively conservative look to what the contribution of the company could be, because we really have no specifics of the seasonality of that company.

In the fourth quarter, specifically, how the order patterns and the sales patterns are.

Usually in France, as you know, they shut off much earlier for Christmas vacation and so forth.

So in our outlook, we have not necessarily included the full 10 million in our forecast.

And then my second question on the debt.

It looks like you paid down a little less, if any, debt sequentially this quarter than you have in the last four or five quarters in a row.

Is that just because, as you said earlier, you don't really get the benefit because interest rates are so much lower?

Or has there been a change in terms of debt paydown strategy.

Thank you.

This is a fine opportunity to clarify some of the priorities, how we invest our cash.

As I mentioned, the first priority is always to invest it in products and tooling for new products, because that gives us a very good return and excellent accretion to shareholder value.

And the second one is acquisitions.

And this is where primarily we spend our money in the quarter.

You now, when there is left over -- let me say it this way, because we cannot spend it in those higher accreting areas, then we would pay down debt.

And therefore the debt reduction was a little bit slower in this quarter.

Okay, thanks.

My last question, Martin, you talked at the end of the call about some caution showing up among some of your customers.

Can you give a timeframe?

Was this the first quarter you heard the caution?

Or did you hear some last quarter?

Has it been going on for a while?

And secondly, are there specific end markets where you are seeing more caution than elsewhere?

Well, there are certain end markets where we hear it more than in others.

But I think -- I don't want to point out anything specific for a segment, because they all fluctuate a little bit.

We have seen a seasonally strong, or I would call it a seasonally strong wireless infrastructure market in the first half.

It has been a little bit slower now.

Customers say now it will accelerate again.

We will see.

I think there's just a little bit higher level of uncertainty as opposed to really a warning signal of a general slowdown.

Thank you very much, Michael.

Errol Redmond (ph) of Redmond Capital.

I wanted to ask several questions.

The first one dealt with the buyback.

You're now allocating a lot of your cash flow to the buyback.

Could you describe for us some of the metrics you use to make the determination as to how fast you will go and what percentage of the ongoing cash flow you'll allocate to stock buyback versus debt retirement?

I think that it's hard to give a specific target going forward on exactly how much will go to debt service and exactly how much will go to stock buyback.

I think we've increased the stock buyback program to provide the company with more options relative to deploying its very strong cash flow.

I think, as Martin said to the earlier question, the priorities for cash flow are first to invest in the business organically and then to invest in the type of tuck-in acquisitions that we have been doing.

But the company's cash flow is so strong that there's cash left once we do that.

I think that the cost of debt is relatively low at this point.

And that certainly is the main reason that we have increased the authorized amount of stock buyback, to give us the flexibility to make the right decision, depending on where the stock price is and so forth at a given point in time.

We did buy back about $16 million worth of stock in the third quarter.

And certainly you will see us choose between debt service and stock buyback as we go along here, based on the cost of debt and the cost of capital.

In the stock remains within the current parameters and the market don't change much, would we see you implementing the buyback quickly?

Or do think it might stretch over several quarters?

Well, Darrell, we don't want to forecast what we will do, because we don't know how to forecast the stock.

And you put some assumption in there at the current prices.

Obviously, it would be very accretive to the company.

And we'll make the decision at the time as we've crossed it.

But I would suggest that we have a two-years period allocated to this buyback.

So we will certainly look at those and use that period wisely.

My other question -- I actually have a brief question as to whether you could -- for the French acquisition, whether you are going to be putting new products into it or whether you'll be taking their products and distributing them through your system.

But I had another question, and that relates to KKR's departure.

You seem to be very -- it seemed to be a very heartfelt good-by by you, Martin, to them.

I was trying to understand if they had played an important role in the company beyond their initial financing.

And if so, what role that was?

And how they might be replaced or whether you'll be maintaining your contacts?

Were they helpful in acquisitions or in helping to strategize the direction of the company in various areas?

Could you amplify that relationship a little bit if you think it is appropriate?

That is a wonderful question, a very broad question, obviously, and we could spend a lot of time on it.

But I'd like to summarize that KKR was an excellent partner in all respects, an excellent sounding board, good relationships to the financial markets.

They were helpful in some of the transactions which related especially to them, which was selling stock and so forth.

The initial financing, as you mentioned, obviously very helpful, a good sounding board.

We have a good relationship with them and if we need any advice in the future, they will certainly be of help in the future.

We have become friends in that area.

So they are not going away because they have no more investment in the company.

At the same time, we have restructured the Board in such a way that the Board is now consisting of talents from many different areas, businesspeople with a lot of experience in global companies, financial backgrounds, M&A backgrounds.

So there is nothing that we are lacking on the Board in terms of sounding boards for the future that the company could not continue the trends that we have been on in the past.

Okay and then I had that --

Darrell, let's maybe give some other gentlemen or analysts an opportunity also to ask questions.

Obviously, we're available to you at any time to explore these other questions.

Thank you.

Thomas Dinges of J.P. Morgan.

Martin, just a very quick one for you on the industrial markets.

You had talked about very strong year-on-year growth of about 28%.

Was there any currency impact there, one?

And then two, you had talked about two tranches of growth, one being just solid underlying demand, the second being market share gains across the various markets there.

If you could, just provide a little bit more qualitative color around that.

How was coming, really, from just solid underlying demand?

Then two, what are the trends that you see going into the next quarter on that, as you've started to see probably a little bit of demand and those markets become a little bit software?

And will the market share gains make up for that as you go forward?

This is a very fine question.

It's a very important market for Amphenol.

As I mentioned, sales were up 28% in U.S. dollars, 23% in local currency.

Yes, there were some currency (indiscernible), but still 23% is very strong growth in an industrial market.

The industrial markets usually grow in the middle single digits, in general.

Obviously, the general economic strength that we have in that area certainly would maybe suggest a somewhat higher growth rate, but I'm very confident that we are growing much faster than that.

And that is a result of this increased sophistication that is required in many of these specialized markets, as well as the market share gains that are related to this, away from the smaller companies.

I think that trend will continue as we continue to penetrate major players in these industrial markets rather than selling our products just through distribution.

You will recall that maybe two years ago we embarked in a real strategic change, not sell our products exclusively through distribution, but also get involved in the next generation development products in the industrial market.

And that certainly has started several, a few years back -- and shows now momentum and some real contribution to growth that is exceptional.

And that's the reason why I believe we will continue to be strong also in the future.

Jeff Beach, Stifel Nicolaus.

Last quarter conference call, you mentioned that you saw Amphenol entering the best pricing environment in several years.

In the meantime, raw materials are going up.

Can you talk a little bit about how much plastic content, how important that is to you?

And if you see the ability to raise prices more than your costs that are escalating, looking ahead over in the next year?

Pricing is always a very sensitive situation because, obviously, there are a lot of companies out there that would like also to share in the business that we have.

So you continuously go a real balance between your pricing as well as the volumes that you would like to achieve.

Now, when I say the pricing environment has improved, there is clearly in general, in all of our market segments, a better acceptance of the fact that material prices have gone out.

And about 35% of our cost in connectors is related to material, but that is process.

It's not only raw material when you see a couple of other prices going up.

It's not 35% of our cost there.

So there is the process cost.

So we have continuing discussions with our suppliers also to reduce their process costs, so that we don't get increases on processes as well as the materials.

The most significant area where these material cost increases play is, not only a material for the connectors, but it is essentially for the coaxial cable.

In coaxial cable, in cable products in general, the material content is very high as you know, somewhere 75, 80%.

And as such, that is where the swings in margin can happen if you cannot really achieve the price increases.

We're very pleased that we have that first price increase in June of this year.

Now, a major competitor in that area has announced a price increase, and obviously they have led the last price increase, and leading another price increase.

And obviously that's something that we view very positively for the future.

And this is really the major area where we have a margin issue as the coaxial cable products have lower margins than the connectors.

If we can bring them up, obviously our margin target of the 20% will be easier reached.

One follow-up, the book to bill at .98, I think is the first book to bill under 1 that I can remember in the last couple of years, third quarter last year was 1 even.

Is this suggesting some of the caution?

Or are we getting back to just the normal seasonality now?

What we do every quarter to clarify this is we go through our backlogs and look at what are booked over these material and the computers that talk to each other, which one are really the meaningful ones, which are delivered within the near foreseeable future, or which are the orders that are more scheduled over a longer period of time.

And we are then cleansings this at every quarter.

And if you look at our book to bill ratio for the nine months, it is still positive, and as such, we don't feel that because we have cleansed a little bit of the backlog in the third quarter, we have really a negative book to bill in that sense for the year, and that is the positive.

And on that, we base some of our positive outlook for the fourth quarter.

I think we have time for one more question.

Keith Dunne of RBC Capital.

Can you just give us a little bit of color on sales by end market sequentially?

I know overall you were flat, my guess is they were up and auto was down.

But maybe you can just spend a moment and kind of run down how they felt sequentially?

Yes, sequentially our sales were somewhat mixed.

And we can certainly go through this in more detail.

The aerospace and the broadband market certainly were up sequentially, with the aerospace market having the highest sequential growth of about 5%.

The automotive and wireless infrastructure and handset markets were all down from the prior quarter -- somewhere in the 5 to 7% kind of range.

The computer datacom store related market was relatively flat with the prior quarter.

Well, with this, I think we would like to conclude and think all of you for your interest in the company.

We look forward certainly to achieving another excellent quarter in the near term here, December quarter.

And thank you very much for your attention.

Goodbye.