安費諾 (APH) 2005 Q2 法說會逐字稿

Welcome and thank you for standing by.

At this time all participants are in a listen-only mode. [OPERATOR INSTRUCTIONS] Today's conference is being recorded.

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

Now we'll turn the meeting over to Miss Diana Reardon.

Thank you, ma'am, you may begin.

Thank you and good afternoon.

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

I'm here together with Martin Loeffler, the CEO and we would like to welcome everyone to our second quarter call.

The second 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 we'll then have a question and answer session.

The second quarter was a record quarter in all respects.

Sales for the quarter were 444 million, up 15% in U.S. dollars and 13% in local currencies over the second quarter of 2004, and up 8% in U.S. dollars and 10% in local currencies sequentially from Q1 of '05.

Breaking down sales into our two major components, the interconnect business, which comprised 88% of our sales in the quarter was up 16% compared to last year with increases in all major end markets and geographic regions.

Our cable business, which comprised 12% of our sales, was up 7% from last year as a result of increases in broadband cable television markets.

In the later part of Q2 the Company completed the acquisition of a U.S. manufacturer of high performance RF interconnect products for military and aerospace markets.

The Company has annual sales of approximately 20 million.

Sales in the second quarter from this acquisition were not significant.

Since December 31, 2004, the Company has completed four acquisitions.

The acquisitions complement and broaden the Company's presence in a number of its target markets.

Excluding the impact of acquisitions, sales increased approximately 5% from last year's Q2 and 5% consecutively from the first quarter of 2005.

Operating income for the quarter was strong at 86 million compared to 69 million last year.

Operating margin was 19.4%, an increase from 17.8% last year and up 50 basis points sequentially from Q1 2005.

Margin improvement over last year was driven by expanding margins in both segments.

In the cable segment margins increased approximately 120 basis points over last year to 12.9%.

Price increases implemented in 2004 were partially offset by a continued increase in material costs.

From a sequential standpoint cable margins were comparable to Q1 levels.

In the interconnect segment, margins increased over 160 basis points versus last year and 90 basis points over Q1 2005 levels.

Increases relate primarily to 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 5.8 million compared to 5.7 million last year reflecting higher rates offset in part by lower average debt levels.

Other expense was 1.4 million compared to 2.2 million last year, reflecting foreign exchange gains in the '05 quarter and losses in the '04 quarter due to the relative strength of the dollar.

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

Net income was 52.1 million and exceeded 11% of sales, another indication of the Company's excellent profitability.

Diluted EPS for the quarter was a record $0.58 per share, up 29% from last year and the 14th consecutive quarterly increase.

During the quarter we generated a strong cash flow from operations of 49 million.

The cash flow from operations, along with 13 million of proceeds from the exercise of stock options, were used to fund capital expenditures of 15 million and payments relating to acquisitions of 47 million.

The Company did not purchase stock under its stock buyback program during Q2 and approximately 3.4 million shares remained available for purchase under the program at the end of June.

The balance sheet is in good shape.

Accounts receivable and inventory balances increased as a result of acquisitions and higher activity levels.

Accounts receivable days sales outstanding, excluding the impact of acquisitions, were 65 days at the end of June compared to 64 days at the end of December.

Inventory turnover, excluding the impact of acquisitions, remained relatively flat at 4.3 times compared to 4.2 times at year end.

Debt was 477 million at June 30, up 28 million from year end, reflecting additional borrowings to fund a portion of the price of acquisitions completed during the first six months.

The Company's leverage and interest coverage ratios remained very strong at 1.5 times and 15 times respectively.

Orders for the quarter and six months reflected a book to bill ratio of approximately 1.01 to 1 and 1.02 to 1 respectively.

Also of note during the quarter the Company was pleased to achieve an investment grade credit rating from S&P in June in recognition of the Company's history of strong operating performance and substantial deleveraging.

I am also pleased to report that the Company completed a refinancing of its senior credit facility on the 15th of July.

The new senior credit agreement consists of a $750 million unsecured five year revolving credit facility, of which approximately 440 million was drawn at closing.

The net proceeds from the refinancing were used to pay all outstanding indebtedness under the Company's previous senior secured credit agreement.

In conjunction with the refinancing the Company will incur one time expenses of approximately 2.5 million or $0.02 per share, representing the non-cash write off of unamortized deferred debt costs, net of a cash gain on the termination of related interest rate swap agreements of approximately 3.2 million.

We are very pleased to have completed this refinancing.

The five year facility is unsecured and has improved pricing in recognition of the Company's strong performance.

In addition, the new facility will provide significantly increased flexibility to pursue additional opportunities to expand and grow the business.

In conjunction with the refinancing, the Company has entered into new interest rate swap agreements to fix approximately 250 million of the Company's borrowings under the facility for a three year period.

The combination of these new swap agreements and the lower pricing of the new facility should allow the Company to maintain an attractive borrowing cost over the next few years.

Availability under the facility is approximately 300 million.

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.

Good afternoon and welcome to our traditional conference call here at quarter end.

As Diana just mentioned, I would like to reiterate some highlights of the second quarter 2005 achievements, discuss trends and progress in our served markets and comment on the outlook for the remainder of 2005.

We're very pleased, extremely pleased with the second quarter results.

They reflect the consistently strong trends in our business.

We set new record levels in sales and earnings.

Sales increased 15%, 13% in local currencies, over a strong second quarter ahead of industry growth.

Sales increased sequentially 8% in U.S. dollars, 10% in local currencies as the U.S. dollar strengthened over the first quarter of 2005.

This sequential increase reflects the effects of the seasonally stronger period and our own initiatives.

We're very pleased with this sequential increase.

Overall, the sales performance was excellent considering the generally more moderate demand as compared to the economic rebound of last year.

The sales performance we believe is a direct result of building on our competitive strength.

We continue to benefit as a preferred supplier and gaining position with major manufacturers in our target markets.

Our strong global presence provides local broad support to our customers which gives us a competitive advantage over the smaller players.

We continue to introduce new products, especially new integrated interconnect solutions for the next generation products of our customers which drives growth of application specific products with better margins.

All these initiatives are key to sustaining our strong organic growth.

In addition, we continue to pursue small acquisitions that fill out our product line as well as our geographic presence.

Since the beginning of the year we completed four acquisitions, as Diana mentioned.

We have talked about three of them at our last conference call.

In late May, we acquired an additional company, U.S. based, called SV Microwave, a leading producer of RF and microwave products for harsh environment applications.

We are very excited about the addition of SV Microwave as it extends our leadership of RF technology in the communications and information technology markets into the military and aerospace market and thereby increases our participation in several of very important programs such as the Joint Strike Fighter aircraft, JTRS, as well as many radar systems on ship boards and so forth.

Relative to profitability, the second quarter was also an excellent quarter.

Cash flow remains also strong; as we all know Amphenol continues to be an excellent generator of cash.

We preserved and continued to extend our industry leading profit margins to 19.4%, in the interconnect business even higher.

EPS increased for the fourteenth consecutive quarter to a new record level.

This is two -- three and a half years of sequential increase of EPS quarter after quarter, quite a remarkable record.

A record that we certainly would like to see continue.

The level of profitability is a direct result of our good conversion of incremental sales into profit.

We have excellent operating leverage in our business.

Our higher margins, they come from application specific products and very rigorous and ongoing cost control programs, especially as they relate to our engagement and presence in low cost areas.

We're very pleased that, based on our sustained strong financial performance, we obtained an upgrade of our credit by a major rating agency.

As Diana already explained that we were able to refinance our debt to a better credit facility than we have before which will help us in our flexibility for further expanding our business.

Let me now talk a little bit about the trends and the progress in our served markets.

The growth in the second quarter was broad based across all our major markets in geographic regions.

As compared to last year, we have -- we achieved the strongest sales increase in mobile networks, mobile infrastructure as well as in industrial, military, and aerospace markets.

We particularly are pleased as I said earlier, with the sequential sales increase which was also very broad based, and in all of our served markets.

Geographically, the rate of growth was comparable in all three major regions that we serve.

We continue to benefit from our diversity in markets, geography, and products.

Let me discuss the trends in the various segments in a little bit more detail.

First, the communications and information technology related markets.

Sales in mobile network markets increased a strong 21%.

New product introductions added to the growth as demand at the OEM equipment manufacturers remained relatively moderate.

We continue also to gain share in the sales side installation market especially in North America, South America and in parts of Asia.

We expect that strong trend to continue for the rest of the year.

Sales in the mobile phone market increased 17% year-over-year and grew a strong 15% sequentially.

This was helped by the earlier acquisition this year of Phoenix Korea.

Without Phoenix, the sequential growth would have been 9%, primarily driven by our position with the worldwide leading manufacturers of mobile phones as the Chinese manufacturers continue to have a slow period.

We expect for the second half of this year that new phone model introductions with increased functionality which will require our new interconnect solution to stimulate growth for the rest of this year.

Sales to the broadband network market increased 13% reflecting a seasonally stronger bill period and continued subscriber growth for new digital video, data and voice services.

We expect the third quarter to be another seasonally strong quarter.

Sales in the computer, datacom and peripheral -- especially storage, markets rose 3% as demand remained moderate especially for high-end equipment.

Also I’d like to note that the price points for the next generation high speed interconnect are significantly lower than those for the prior technology.

Margins remain strong; however, sales prices are lower and therefore somewhat having an impact on revenues and growth rates.

We're very excited, though, about our new customer wins especially in the disk drive market and the numerous new design positions in emerging high speed data and power applications.

Outside of the communications and information technology markets, we also had very good performances.

Sales in the automotive market were up 30%.

If we exclude the acquisition of Teldix, of the fourth quarter of 2004, sales were relatively flat with last year in the second quarter, slightly up sequentially.

Despite the slow market, especially in Europe, we expect sales to continue to grow as new car models with increased electronics will roll out over the next several months.

We have seen already the effects of this here in North America as demand started to pick up here in July relative to these new car models.

Sales to the industrial markets increased 7%, strong across all segments driven by new interconnect solutions for data bussing and power distribution.

Very pleased that within the industrial segments we have seen continued strength in the rail mass transit factory automation instrumentations, especially in the America market.

We expect this segment to continue to be a strong contributor to our future growth.

Sales in the military aerospace market increased 17%, another very strong quarter.

Also this segment was helped by an earlier acquisition this year, SSI, if you may recall without that acquisition growth would have been about 7%.

We continue to benefit from our program participation, our superior technology, the increasing momentum in the commercial aircraft segment, and in the future from the addition of SV Microwave.

Again, this segment is going to be a strong contributor not only for the rest of this year but clearly on a long-term basis.

In summary, we see a very positive trend in most of our segments that we serve due to our own initiatives and some strength in certain markets.

We are confident in our excellent position in diverse global markets, in our competitive strength and the ability of our agile organization to take advantage of the many opportunities for continued strong growth and profitability.

Accordingly, we are raising upward our expectation for the rest of 2005.

In our new guidance, we assume no major future change in the economic environment or in currencies.

We maintain our strong positive outlook for our core business, but we revise upward our prior, more conservative assumptions for the acquired companies and account for the negative effects of a stronger U.S. currency.

So the new guidance for the year in sales is 13 to 15% growth.

This is a very, very strong guidance because it assumes that we would have to maintain the strong growth that we have seen in the first half of this year throughout the year.

Considering that the industry has a projected growth rate somewhere between 4 and 6%, this is a very, very strong growth outlook for the Company.

The prior guidance compares to 11 to 14% in sales.

We continue to assume strong operating leverage in our business and therefore also increase EPS guidance from the prior one, 20 to 25%, to the new guidance of 23 to 26% growth in EPS.

Very strong conversion of the top line to the bottom line.

For the third quarter we also provide some guidance this time.

The third quarter is traditionally a seasonally slower quarter.

Therefore our guidance is in the range of 435 to $445 million in sales.

At the upper end, that would match the strong performance of Q2, a very, very significant accomplishment.

We guide EPS in the range of 56 to $0.58 a share which is again at the upper end, matches the strong performance of Q2 which in the seasonally slower quarter would be an outstanding achievement.

Both of these guidances for the full year and as related to third quarter does not include the $0.02 per share cost related to the expenses of the refinancing of our debt.

In summary, Amphenol had a great first half 2004.

We look forward to a very strong second half and we are very excited about the bright future long-term.

With this I would like to open up the session for questions and answers, and I would kindly ask that everybody limit their question to one.

Thank you very much.

[OPERATOR INSTRUCTIONS] Our first question comes from Matt Sheerin.

You may ask your question and please state your company name.

Yes, thank you, Thomas Weisel Partners.

My question, Martin and Diana, is in regard to your operating margins and the margin expansion that you're talking about, trying to get more specific color on exactly what the incremental margin contribution will be going forward.

You've talked in the past about a 20% operating margin target.

Do you think you can exceed that now, and what role does the application specific products play and what percentage of your products now are application specific and what number are you looking at going forward?

Thanks.

This is a very fine question.

Obviously we continue to see margin expansion, and we said earlier that 20% is our near term goal.

We're not there yet, at this level, but we certainly driving for it, and will continue to take the steps necessary to move forward in this direction.

When we were around 15% or below 15% we set for ourselves a certain goal.

Now that we have reached and close to reaching that goal, certainly we're reaching out for a next step in our margin expansion.

The possibilities and opportunities are there.

We have excellent cost lines, the new designs, that allow us to build in cost effective methods will allow us to continue to work on that margin expansion.

Obviously volume plays a role in margin expansion, as you see from the operating leverage that we have.

Application specific products continue to play a very significant role in the second quarter.

New products, these application specific products, represented more than 20% of our sales, or closer to 25% of our sales, so we're very pleased with the expansion that has taken place in this area.

But you remember that we are measuring new products in application specific products just within a two-year window.

So they have a major impact on that as we move forward, and it is very good to see that the connector industry, as it drives -- in the end-users new technologies will require and continue to require these applications specific solutions.

So we're not moving away from that kind of trend.

Thank you.

Our next question comes from Steven Fox.

You may ask your question and please state your company name.

Hi, good afternoon.

Could you just talk about the raw material impact on margins and expectations for the next couple quarters?

Good afternoon, Steve, thank you very much.

This is a kind of a very difficult question to answer, because obviously there are, you know, some trends that there may be some easing in certain materials, in others it still continues to go up especially if they are related to oil and gas and those areas.

And as it is always the case, vendors are not likely to give in their gained position that easily but we're working hard on it and we're not only working hard on it by kind of just working with the same vendors but finding new sources, lower cost sources in other areas that and also combining vendors, having a vendor base reduction so that we can give them higher volume which gives them again an opportunity to reduce costs.

So overall, I think material will not have a very significant impact in the second half for margin improvement.

I think it will come from the volume as well as from the continued design in of these application specific products.

Clearly the measures of cost control, never to forget.

Thank you, Steve.

Thank you.

Carter Shoop, you may ask your question and please state your company name.

Thanks.

Deutsche Bank.

I wanted to further flesh out the comment you made earlier, Martin, in regards to lower price points for high speed interconnect products.

In particular, is that for both storage products, other competing products and telecommunications, and is that a result of seeing the more –- the advanced TCA interconnect becoming more adopted or is that as a result of maybe more competitive pricing pressure?

This is -- I am glad that you asked that question.

Thank you very much, because this is an area where we have been talking about for a long time, that growth rates may not be as impressive as in other areas, but it is very clear when the market is shifting away from what is called the parallel technology to a serial technology, the price point’s more than 50% lower of these products.

We have still excellent margins on those products, but the technology doesn't require the same kind of price point.

It is just -- both on the cable side as well as in the connector side a more cost effective technology to our customer.

That's the reason why computers, storage equipment and so forth in pricing is coming down.

Also speeds and so forth can be increased and certainly that has an impact on growth rates as we move -- as we flush out the old technology and move into the new technology at which point in time when this is all flushed out we will see more normal patterns.

I’d like to stress also that in this area you have what we call less application specific solutions because it is usually a standard committee that defines some of these interfaces.

That was the case with the prior technology; that's the case with this.

We have participated with excellent margins in the past and will continue to participate with excellent margins in the future, but we have just to be a few quarters patient and when I say a few quarters, it could be almost two to four quarters patient relative to the growth as one technology changes to the next.

Thank you very much.

Thank you.

Steven Weiss, you may ask your question and please state your company name.

Mindflow Capital.

Great job guys, on a strong quarter.

Follow up on some questions.

A lot of your competitors have recently been implementing some new strategic initiatives to reduce their raw material and commodity costs by opening up a better line of communication with their suppliers and collaborating in a more efficient way to reduce their supply chain costs.

I am interested if you could provide some color and a little more detail as to what you plan on doing to reduce your supply chain cost and throughout raw materials by establishing a better line of communication with your suppliers.

This is very fine question.

We have had excellent relations with our suppliers for a long period of time.

We have established supplier performance reviews.

We have reduced our supplier base over the years to give them more volume and thereby get economies of scale, and most importantly we have regionalized our sourcing so that we don't have -- incur the logistics costs, the transportation costs and all of this that goes along, that we eliminate most of the exposure relative to currency transactions between several regions.

So we have been very efficient in the management of our vendors.

Always there is opportunity for doing more as we go along and I think what we see at this present time is just the pressure that they had on -- our vendors had on profitability relative to very strong, strong material cost increases over the year, they are just very reluctant to give in at this point in time.

But we are working our way through to achieve some initial opportunities there with our vendors as we move along.

Thank you.

Thank you.

Thomas Dinges, you may ask your question and please state your company name.

J.P. Morgan.

I wanted to elaborate a little bit on the prior question about the lower prices on products, but extrapolate it to what you're seeing in the mobile phone market, where you're seeing some good growth in the general market, but a lot of it is coming from the lower end of the market.

And although your commentary did talk about in the second half of the year they will have a number of new models coming out that do have higher content, as you look out over the longer term, in your mind does the phone market start to resemble a little bit more of the datacom market where the more standardized product where ultimately price points are a bit lower and therefore just ultimately revenue growth has to be augmented a lot more by acquisitions in that area or what are your thoughts there on that particular topic?

Thank you.

This is a very broad question here.

I would like to stress that in the information technology market obviously there are a number of products that are standardized and also those are for opportunities for application specific solutions because every equipment doesn't have -- of our customers doesn't have the same opportunities.

Similar in mobile phones.

Obviously everyone wants to have a new way of presenting its phone, either in terms of fashion or in terms of functionality or in terms of how the phone flips or turns or hinges, how big the screens are, again, quite substantial -- on new functionality phones -- substantial opportunity for application specific solutions.

Especially we see this in the hinges that have taken up enormous dimension of diversity and we're participating strongly there.

And I don't see any standardization relative to hinges at this point in time.

Even if some of the system connectors or other connectors seem to be standardized, every phone has somewhat a little different buildup on the PC board in their thickness and so forth, which require an application specific adaptation of maybe what would otherwise seen -- be seen as a standard product.

And therefore I don't see necessarily in the mobile phone business a deviation from our current strategy that says application specific products continue to be important, continue to drive margin in that area, even if some of the products used in phones may appear to be more standard.

Thank you, our next question comes from Michael Walker.

You may ask your question and please state your company name.

Thanks, First Boston.

I’m wondering if we could drill down on the coaxial cable business just for a second.

You’ve described this business or at least the market, the cable market, as being challenged for an extended period of time.

You are growing the revenues there on a high single digit pace year-over-year but the margins seem to be relatively flat sequentially.

Wondering what your second half outlook is for this particular piece of the business and if you think there is a chance for margins there to kind of get back to where they've been in the past, like the 17% type margins that you had in fiscal '02.

That's a very fine question.

Actually, cable business actually is a very fine business, as I always say, and the second quarter and the third quarter of this year are going to be the strongest quarters of the year.

Usually a period in the fourth quarter will be somewhat slower.

But on a comparative basis against last year probably will also be up, so for the full year we clearly believe that in broadband communications we will be up over last year.

As far as margins are concerned, we have seen some improvement earlier this year in the margins, however, without a very significant increase in pricing overall, I think margins will only very gradually improve as material costs will come down gradually.

I think we will see a direct relation between pricing as well as the material costs.

On the other hand, I would like to stress that we have taken initiatives to improve margins in the future and that is not to manufacture everything in North America.

We have now manufacturing overseas in South America, in Asia, we're just in the process of finishing up our plant in China, so all of these things will contribute also eventually to improving margins although the major impact because materially such a high component in the cable will remain pricing as well as material costs and how those two elements will play out.

Thank you.

Scott Craig, you may ask your question and please state your company name.

Banc of America.

Good afternoon, everyone.

Good afternoon.

Just a quick question on the margins from both a quarter-over-quarter and a year-over-year basis, you mentioned three things that are driving the margins, the application specific products, volumes and cost control.

Can you maybe help us understand what the one or two really key drivers of those are, or are they all equal?

Just give us a little bit of flavor around that.

Thanks.

All three elements continue to be important.

I mean, we have always a close eye on cost.

We continue to use the presence that we have in low cost areas to further augment our cost competitiveness, overall and to improve margins.

We continue to work on even transferring some business.

We're not manufacturing any more, essentially commercial products in Canada.

We just moved out with manufacturing of commercial products out of France, all of that is now in Asia and China especially, so we didn’t take any restructuring charges for those.

That was all certainly done over the last several months and obviously the benefit can come through in that area as we see full production starting up for those.

So we'll continue to have these cost controls, the movements, also indirect functions into low cost areas as we have done it very aggressively into Eastern Europe so that the higher cost skilled tasks like engineering, manufacturing, engineering is not all done in high cost areas.

That will continue to help us with margin in the future.

Application specific products, that is going to be an ongoing situation.

Every day, every month, we're developing new products that bring new solutions to our customers as technologies are accelerating to develop across our major markets and volume has a good -- is a good driver for expanding margins as well as we are very diligent in not expanding at the same rate of our fixed costs and that will always help to improve margins over time.

I wouldn't say that in each quarter the contributions are equal from every element.

But these elements are somehow tied very closely together and cannot be seen separately.

Thank you.

Darrell Rudman, you may ask your question and please state your company name.

Errol Rudman, Rudman Capital.

How are you today?

Very well.

I wanted to talk about -- I was hoping you could talk about financial strategy, that is, what was the thinking behind the five year revolver, and you had mentioned the size of and growth of your cash flow.

How do you plan in the future to deploy that, that cash flow and as it relates to the debt levels and might you in the future use -- what levels might you use the stock as currency for acquisitions rather than debt as you have been?

I will just refer this question to Diana, but I’d like to give you just a brief overview.

First of all, the debt financing was done with the primary goal to increase the flexibility of the Company, having the opportunity of having an unsecured loan after a long period of time of ten years, or longer having not had that since 1995.

I think this is a very fine opportunity for the Company to have more flexibility in the future.

As far as cash deployment is concerned, we haven't changed our strategy from the past where we have essentially -- first of all the investments that we want to make in new products and that will continue to drive our application specific solutions.

We have not the intention directly to say, now we are spending more on acquisitions.

It is just a good pipeline that we have.

Therefore we had more acquisitions this year than prior.

Whether new companies will come on the market in the future and give us the opportunity to do more of these acquisitions, time will show.

But we're not intentionally searching it out.

We're searching out to complement as we have done in the past, no change in strategy, to complement our product lines and geographic regions.

And then we have the other use of cash to further reduce debt and to buy back stock.

I mean, a lot of alternatives we have left open for ourselves.

Maybe Diana may want to give some more specifics.

Sure.

I am not sure I can add too much more to that.

But just to add to that, I think that we saw an opportunity based on the Company's very strong operating performance and a very receptive bank market to improve significantly on the structure of the Company's credit facility both in terms of pricing, the flexibility that Martin referred to and so we of course took advantage of that and we're very pleased to have this new facility.

The five-year revolving structure, as opposed to the term structure we had in the prior facility, really allows the Company to effectively utilize the operating cash flow on a day-to-day basis through the revolving structure while preserving that future availability for whatever cash deployment needs we would have, and so that's really what drove the decision to do the refinancing.

I think from a priorities for cash deployment standpoint, Martin has really already talked about that.

I mean, we certainly prioritize investments in the business both from an organic standpoint and our tuck in acquisition strategy as the two most important uses of cash flow, and then as Martin said, the choices of debt service and stock buyback are really made based on what make sense given the particular economics at that particular point in time.

Thank you.

Our next question comes from David Pescherine.

You may ask your question and please state your company name.

Hi Martin, how are you?

Good afternoon.

How are you?

Good, thank you.

Martin, there has been a growing concern, obviously, regarding the shift in military spending priorities away from larger systems to more tactical gear for soldiers.

Can you just talk a little bit about how dependent your military business is on these larger weapon systems versus say, military communication systems and just more tactical types of equipment for the individual soldiers, and also can you maybe talk about if we saw big weapon systems get pushed out or delayed, would we maybe see some of that get made up by your retrofit business?

Very important question.

Thank you very much.

The most important thing to understand in our military aerospace business is that none of the programs make up more than 3, 4% of our sales.

So we're very broad based in program participation.

That is clearly our strength.

I am very glad you mentioned these tactical communication systems that are being deployed and so forth.

We're participating strongly on the soldier of the future and so forth, which means two things essentially.

One is equipping the solder itself as he is in the field with radios, as well as communication equipment and others, which are usually mobile communication systems, double mobile because they put them on the truck and then you have the mobile communication.

But in order for soldiers to be able to communicate within the ground as well as with the tactical operating centers, you need tactical operating centers.

And tactical operating centers are very important also sources for demand for our type of product in addition to the soldier who carries the equipment in the field.

We're participating strongly on these tactical communications systems here in North America, I referred to the Joint Tactical Radio System, JTRS, which is certainly being worked on.

Even if there was a little bit of a pushout from one quarter to another, it is really not something that affects immediate revenues.

It is just the development that sometimes takes a little bit longer for those to be tested and so forth.

As far as Europe is concerned, there is a big foreman (ph) program.

Again, here you saw a big pushout.

Nevertheless, we have other programs that fill in from there, both from the military operations for replacement parts as well as other programs that are being filled in instead, because we have that tremendous breadth of programs.

So I think these push outs have happened in the past of certain programs and they will continue to happen in the future.

We are very well tuned into those, but we haven't seen a situation where everything all at once is being pushed out in one manner or another.

Usually that is very gradual that things happen.

We have in the long-term clearly to think about the strength of the military market.

We have seen quite a period of several years here of strength.

Usually that is a ten years period of retrofit.

We are at about the mid-term of this.

So we have still a period to go.

Nevertheless, we are looking forward to be very, very strongly engaged as the commercial aircraft business is going to resume their build schedule.

They have been in a trough.

That's also a cycle of about 10 years.

They have been coming down in a trough and now it appears that over the next two years or so there will be more rollouts of new aircraft.

We have seen it with the A380 where we are strongly participating.

The 787 is also being in full design phase, where we're participating strongly.

So there will be a giving over of the baton in that segment and we feel very confident we will be strongly participating in the future on an overall basis.

Thank you.

Amit Daryanani, you may ask your question and please state your company name.

RBC Capital Markets, thank you.

Question on your share buyback program.

Could you just talk about specifically what metrics you use to determine when to initiate a share buyback and what percentage of cash that you would allocate to that.

I am assuming it is pretty much used for offsetting the dilution impact of options.

Could you talk a little about it?

I think from a deployment of cash flow standpoint we really I wouldn't say have a specific target that we work towards.

I think that our tuck in acquisition program and the organic investment in the business are really the two top priorities for operating cash flow deployment.

Those, particularly the tuck in acquisition program, is not something that necessarily can be forecasted at the beginning of a year because a lot depends upon what opportunities we come across and then how long it takes to close those deals.

So we really look each quarter at the available operating cash flow, also at leverage and determine, I would say for that quarter, how much cash we want to deploy and it’s prioritized for the investments that grow the business first with what's left being deployed between debt service and stock buyback, depending upon how we view the economics of each of those in that particular quarter.

Thank you.

Yuri Krapivin, you may ask your question and please state your company name.

Lehman Brothers.

Good afternoon, everybody.

Good afternoon.

Could you please update us on the percentage of your labor force located in low cost areas, and also if you could comment on your capacity utilization, please.

Yes, glad to do so.

We have in low labor areas right now about 56, 57% of our work force, relatively unchanged to what we have seen in the second quarter of last year.

Excuse me, the first quarter of this year.

And the reason is very simply from a percentage standpoint we have reduced in the high cost areas, we have also reduced somewhat in low cost areas because we have implemented some automation and so forth, so it remained relatively stable from a percentage standpoint.

Nevertheless it is a very significant percentage of our total work force.

It’s about 9,000 people that are in low cost areas in North America, in Eastern Europe, as well as in Asia.

As far as capacity utilization is concerned we are measuring this really towards the deployment of direct labor opposed to say how much we’re using our machinery and equipment and so forth because we are tailoring this really on a daily weekly basis towards the needs that we have in the business.

So I can, however, tell you that with the capital expenditures that we have today, there is no real specific need to make a quantum leap in capital expenditures if volume went up, nor do we foresee a significant change if volume decreases in our capacity utilization because we have usually about 25 to 35% outsourced, so we can bring things in and continue to run at very similar capacity in both cycles.

Thank you.

Jeff Beach, you may ask your question and please state your company name.

Yes, Stifel Nicolaus.

Good afternoon.

Good afternoon.

In the fourth quarter you acquired C-LAC, and a couple more companies in the first quarter.

Can you give us a sense as you're pushing towards a year on C-LAC or looking at these others, how much revenue growth you're seeing in these niche acquisitions and how much margin improvement you're seeing a year after you buy them?

Yeah, this is a very, very fine question.

Obviously we acquired C-LAC in the fourth quarter of last year, an automotive company and we have seen margins slightly improve in that business.

It is not totally at the level of Amphenol's average today, but it has very high margin relative to the automotive segment, which is usually a few points below the average of the Company in general.

So we're very pleased with their continuing performance.

As far as the other companies are concerned, we see continued opportunities for margin improvement in some of them, some have already good margins, and as such, overall I can only say that we are very pleased with their performances as they, in aggregate, really come very close to the Company's average, else we wouldn't have been able to expand our margins to the extent that we have and we'll certainly continue to provide these smaller companies the opportunities to get involved in low cost areas if they are not there.

Even if you are in Korea you're not in the low cost area.

But, you know, giving them the opportunity to manufacturer in China gives some -- SV Microwave who has all their manufacturing in North America, whereby we have extensive capabilities in Asia to make components for our type of connectors gives another opportunity for further cost reductions and so forth and margin expansions as a result.

So overall, I think in summary, we are very pleased with the performance of these companies else we wouldn't have now come a little bit away from this more conservative view of how well these acquisitions do.

We upsided and upgraded our outlook for the year essentially on the basis of the good performance of these acquired companies.

Thank you.

Kevin Sarsany, you may ask your question and please state your company name.

Kevin Sarsany, Foresight Research.

In your industrial segment, you mentioned that you were seeing strength there.

Did I hear right the year-over-year increase was 7%, and does that include acquisitions?

That is a very good question.

That does not include acquisitions.

The 7% growth was internal, essentially I think that may be 1% point if you take a fraction of some acquisition.

But we didn't make really a specific acquisition in that area of industrial, but the industrial, when I say strength, I mean it is strength that Amphenol has.

It is not necessarily that all the market segments are equally supportive for growth.

You know that mass rail transportation comes in kind of big programs usually, you know, they go up and cycle down and so forth.

Semiconductors are not necessarily -- equipment and automation is not necessarily very supportive and some other segments of the industrial products.

We are doing well in the market because the market was served by smaller companies who do not have the global reach.

We have the opportunity to continue to gain position as a result of this.

In addition, the transformation from more traditional type of interconnect solutions to more advanced solutions of internet utilization, as well as power applications that require new interconnect technology, we are just participating in a stronger way and therefore have maybe a stronger growth rate, as the market itself would suggest.

We would like to accept just one more question at this point in time.

Thank you.

Our final question comes from Phil Marriot.

You may ask your question and please state your company name.

ASP Advisors.

Good afternoon.

Good afternoon.

Nice quarter.

Thank you.

As usual.

I guess my question relates to your acquisition pipeline.

I was just interested if you could give us a sense for where things stand there, as well as if you could talk about end markets that are of most interest to you from an acquisition standpoint.

Thank you.

Thank you.

The acquisition pipeline continues to be good.

We continue to research our own companies that would be complementary to us and obviously we have some of these companies in the pipeline.

We're talking to owners, to founders and the process is very difficult to determine relative to time line and possibilities.

Not like an auction where an investment bank says I want to have a bid in a month.

A founder may take six months, a year before he really decides to sell.

So we're dealing with those uncertainties relative to this.

But we're working on several opportunities and I would like to stress that we do not exclude any market segments from these opportunities.

We see them in all the main market segments that we serve.

We are somewhat hesitant to move out into new market segments that we have not really any position like it would be for example in white goods where we have absolutely no position and just say let us acquire a company and participate in there, because we don't know that market as well.

The integration process is very much tied to the knowledge of the market that we have and therefore we're doing relatively well in incorporating and assimilating some of these companies quickly because we understand the market that they are in and that continues to be our strategy, to look for these smaller companies that fill out our product lines and geographic presence, customer presence in the markets that we serve.

With this I would like to conclude today's conference call.

I would like to thank you all for your interest and your continued commitment to Amphenol and would like to certainly continue our trends in our business and report good news in the future.

Thank you very much.

Goodbye.

Thank you.

This concludes today's conference call.

Thank you for your participation.

You may disconnect at this time.