安費諾 (APH) 2006 Q2 法說會逐字稿

Hello and welcome to the second quarter earnings conference call for Amphenol Corporation.

Following today's presentation, there will be a formal question-and-answer session. (OPERATOR INSTRUCTIONS).

Until then, all lines will remain in a listen-only mode.

At the request of the Company, today's conference is being recorded.

If anyone has any objections, you may disconnect at this time.

I would like to introduce today's conference host, Ms. Diana Reardon.

Ma'am, you may begin.

Thank you and good afternoon.

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

I'm here together with Martin Loeffler, the CEO, and we'd like to welcome you all to our quarterly call.

Q2 results were released this morning.

I will provide some financial commentary on the quarter and Martin will give an overview of the business and trends.

The Company had a strong Q2, achieving a new record in sales and excellent profitability.

Sales for the quarter were 607 million, up 37% in U.S. dollars and 36% in local currencies over Q2 of 2005, and from a sequential standpoint up 7% in U.S. dollars and 5% in local currencies from the first quarter of 2006.

Sales of TCS in the quarter were approximately 110 million.

This compares with pro forma sales of 97 million in Q2 of 2005 and sales of 94 million in Q1 of 2006 respectively.

Excluding the impact of all acquisitions made by the Company since Q2 of '05, sales increased approximately 9% in U.S. dollars and local currencies over last year's Q2 and were up 6% sequentially compared to Q1 of 2006.

In Q2, sales were reduced by approximately $10 million as a result of the previously announced flooding at the Company's Sidney, New York manufacturing plant.

Breaking down sales into our two major components, the interconnect segment which comprised 89% of our sales in the quarter was up 39% compared to last year.

Sales were up in most markets with particular strengths in the Wireless handset, industrial, and IT datacom markets.

Aerospace sales were adversely affected by the flood-related sales loss.

Our cable business, which comprised 11% of sales, was up 20% from last year as a result of increases in broadband cable television markets and the impact of price increases.

Operating income for the quarter, excluding flood-related costs, was strong at 108 million compared to 86 million last year.

Operating margin on the same basis was 17.8% compared to 17.3% in Q1 of 2006 and 19.4% last year.

The lower margin percentage compared to 2005 relates primarily to the impact of the TCS acquisition and to a lesser extent the impact of stock option expensed.

Q2 of 2006 includes the results of TCS, acquired on December 1st, 2005.

As previously disclosed, TCS has operating margins that are lower than the average of the Company.

TCS operating margins were 7.5% in December of '05, increased approximately 10% in the first quarter of '06 and reached 13% in Q2.

While the acquisition was accretive in Q2 and added approximately $0.07 to EPS, it lowered consolidated operating income margins by approximately 1% in the quarter.

We're very pleased with the progress the TCS has made to date.

The timely implementation of profit improvement actions has enabled TCS to achieve sequential improvement in operating margins in both the first and second quarter.

We continue to expect the implementation of these actions to bring TCS margins up to the average of the Company over time.

In accordance with GAAP, Q2 2006 includes 2.1 million of compensation expense relating to stock options, reducing consolidated op income margin by approximately 40 basis points when compared to Q2 of 2005.

From a segment standpoint, cable margins decreased approximately 100 basis points from last year, but increased 140 basis points from a sequential standpoint to 11.9% in the quarter.

Margins in this segment have been adversely impacted by the continued increase in material and freight related costs driven by higher commodity and energy prices.

The Company has implemented price increases in 2005 and 2006 that have begun to produce margin improvement sequentially in Q2.

In the interconnect segment, margins were 20.1%.

Excluding the impact of the TCS acquisition in Q2 '06 interconnect margins were 21.8%, consistent with Q1 of 2006 and down approximately 10 basis points from Q2 2005 levels.

The decrease in interconnect margins relates primarily to the revenue and margin loss resulting from the temporary flood-related shutdown of the Company's Sidney, New York manufacturing facility at the end of June.

Overall, we are extremely pleased with the Company's margin achievement in this challenging cost environment.

Interest expense for the quarter was 10 million compared to 5.8 million last year, reflecting the impact of increased borrowings related to the TCS acquisition and higher [interest] rates.

Other expense was 3.4 million compared to 1.4 million last year, reflecting higher fees on sale of accounts receivable under the Company's securitization program and higher minority interest expense.

Tax expense in the quarter was at an effective rate of 33%, the same rate that was used for the full year of 2005.

Tax expense in the second quarter of 2005 was at a 34% effective rate.

Net income before flood-related losses was $63 million or 10% of sales, another indication of the Company's excellent profitability.

Excluding the impact of the onetime charge for flood losses of $0.11 per share, diluted EPS for the quarter was $0.69 per share, up 19% from $0.58 last year.

Excluding the impact of stock option expense, Q2 2006 EPS was $0.71, up 23% from last year.

As announced earlier this month, the Company incurred damage at its Sidney, New York manufacturing facility as a result of severe and sudden flooding in New York State during the period June 28th to July 1st.

In addition to the loss of sales and margin during the plant shutdown, the Company recorded the charge of $15 million or $0.11 per share for property related damage net of expected insurance recoveries.

This charge includes the Company's best estimate of the loss related to inventory and machinery and equipment.

In the third quarter, the Company expects to incur approximately $5 million or $0.04 per share in onetime expenses relating to cleanup and repair efforts net of insurance recoveries.

We expect to be substantially back to full production capability next month.

Sales in Q3 are expected to be impacted by approximately $15 million as a result.

During the quarter, the Company generated a record cash flow from operations of $87 million.

Cash flow from operations, along with $8 million of proceeds from the exercise of stock options, were used to fund $14 million of capital expenditures, $20 million of stock buyback, 2.7 million in dividends, and a debt reduction of $52 million.

The balance sheet is in good shape.

Accounts receivable days reduced to 62 days at the end of June and compared to 65 days of the end of December.

Inventory turnover increased to 4.4 times at the end of June from 4.2 times at the end of December.

Debt at the end of the quarter was 707 million, down 74 million from year-end.

The Company's leverage and interest coverage ratios, reflecting the pro forma impact of the TCS acquisition, remain very strong at 1.7 and 9.8 times respectably.

Availability under the Company's revolving credit facility at the end of the quarter was $330 million.

And the Company had $85 million of receivables sold under its receivable securitization program at the end of June.

Orders for the quarter are strong and reflect a book to bill ratio of approximately 1.03 to 1.

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

Before I turn the call over to Martin, I would like to provide a brief overview of the assumptions on which the Company's 2006 sales and EPS guidance were based.

Sales are estimated in a range of 2.375 billion to 2.405 billion, or a growth over 2005 of 31 to 33%.

TCS sales are currently estimated at approximately 400 to 415 million.

Growth excluding the TCF acquisition is estimated at 9 to 10%.

2006 EPS excluding flood related charges is estimated at $2.75 to $2.83 compared to the Company's previous guidance of $2.64 to $2.72.

Including the impact of onetime costs associated with flood losses of $20 million or $0.15 per share, EPS guidance is $2.60 to $2.68.

The 2006 EPS guidance includes the following assumptions -- flood related charges of 15 million or $0.11 per share recorded in Q2 and 5 million or $0.04 per share to be recorded in Q3.

In addition, guidance assumes a loss of revenue of approximately $15 million in the third quarter resulting from the flood-related impact on production in July.

Guidance is based on a 33% effective tax rates, the same rate as 2005.

Guidance includes stock option expense of approximately 9.4 million or $0.07 per share.

If 2005 EPS was adjusted to reflect option expense, 2005 EPS would've been reduced by $0.05 from $2.28 to $2.23. 2006 guidance reflects operating margins at TCS of 12.5 to 13.5% for the full year.

The Company's previous guidance included TCS operating margins of 10 to 11%.

This results in accretion of approximately $0.21 to $0.25 per share for the year versus the Company's previous guidance of $0.11 to $0.13 per share.

EPS growth using pro forma 2005 EPS after option expense and excluding flood-related losses is 23 to 27% in 2006 over 2005.

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

Thank you very much Diana.

Good afternoon and welcome to our traditional conference call.

Thank you very much for joining in.

As Diana just said, I will provide some highlights of our second quarter achievements, discuss the trends and progress in the main markets we serve, and give some additional comments on the outlook for 2006, more specifically the outlook for the third quarter of this year.

First, some highlights.

We are extremely pleased with the second quarter results.

We believe that these results reflect the continuation of the strong trends in our business.

We maintained strong momentum on our topline.

Sales increase 37% over the same period of last year.

And excluding the TCS acquisition, sales increased 12%, significantly above the industry.

The sales reached for the first time in the history of the Company in the quarter over $600 million in sales, and that excludes and certainly was impacted somewhat by the flood that Diana referred to earlier.

Sales increases were broad-based, and that further strengthened our position in served markets as well as in the geographic regions we do business in.

Excluding the TCS acquisition, the strongest growth we experienced in mobile -- in the mobile device market, which was up 70% this quarter over the same period last year, and geographically in Asia where sales were up 38% over the same period last year.

In addition to strong sales and topline, profitability and cash flow remained strong in the quarter.

We continued to expand the industry-leading operating income margins over the first quarter, primarily due to increasing profitability of TCS, which for the first time since we are part of TCS reached 13% return on sales.

And we have certainly seen some positive respect from pricing on our cable business coming from a very low margin in that area.

We are pleased with the margin improvement, considering that we are continuously working in a difficult cost environment.

Inflationary increases have not gone away.

Customers continue to be reluctant to take price increases, so we're working a very fine line here between the cost and pricing situation.

We also missed some profit that was related to sales that we missed relative to the flood.

So overall, obviously, the margin improvement that we have seen is very encouraging for the Company dealing with some very difficult and adverse situations.

Net income of the Company as a percent of sales was at 10%, which is another strong indication of our financial performance -- ongoing strong financial performance of the Company.

EPS increased 23% to a new record of $0.69 a share, excluding the onetime expense for the flood and adjusting for the stock option expense that we started to expense at the beginning of this year, very strong performance in that area.

And cash flow also remains strong with generating a record 87 million.

We continue to apply this cash towards a variety of options to increase value and drive EPS.

Particularly in the quarter, we continued to make investments in new products and machinery through capital expenditures of about $14 million.

We continued to buy back stock when the stock was at a lower point during the quarter, and we continued to reduce debt.

We didn't make any acquisition in the quarter, but we have a very promising pipeline of opportunities.

None of those are forecasted, but we are excited about the potential that is [accessed].

In summary, Amphenol clearly had another very strong quarter in all respects.

I'd like to comment on two additional things.

One is the TCS acquisition itself and give you a brief update, and the second, some additional information on the flood that we experienced in Sidney, New York.

We are extremely pleased with the progress and the performance improvement of TCS during the second quarter during which TCS is part of Amphenol.

TCS sales increased 17% sequentially to $110 million in sales.

Just remember when we acquired the Company in the fourth quarter of last year, pro forma, the Company was performing at a level of 84 million; in the first quarter reached 94 million, and now we are significantly over the 100 million mark.

This is related and can -- a result of strong demand across the core markets of TCS which are the datacom market, the information technology market as well as the Wireless Infrastructure market.

In addition, we -- the Company TCS launched successfully a number of new products and the market was very receptive to these products, and are very promising to drive further growth in the future.

We see this in the many new design win set TCS has been experiencing during the second quarter with these new products.

In addition to excellent topline, TCS' operating income margin further expanded to 13%.

Again, remember in the fourth quarter pro forma, the Company was somewhere around 5% [RS], 7% in December when we acquired it, 10% in the first quarter, now going to 13%.

All of this is a result of the ongoing cost reductions in manufacturing, our sourcing efforts, as well as (indiscernible) on the indirect costs in the Company.

We have been able to take some select pricing actions in that area and have engaged in a very strong focus on higher value application specific products, which in addition obviously higher volume always helps in expanding margins.

All of these trends are very positive.

Initiatives continue in this area, so we can look forward to further margin expansion of TCS over time and be very confident that TCS will be able to reach or even exceed Amphenol's average margin over time.

Let me now make a brief comment to the flood in Sydney, New York.

The flood in our facility in Sidney, New York that manufactures essentially products for the Aerospace, industrial and military markets, was hit like a tidal wave -- severe, sudden, and totally unexpected.

Just to give you a picture, on the 28th of June, which was a Wednesday evening, and around 7PM in evening, we had about 1 inch or 1.5 inch of water in the plant.

And the highest expectations -- the expectation of the highest increase was maybe six inches.

Well, within three hours, we had three feet of water in the plant.

Two hours later, it was over four feet.

If you measure this, this is about -- going up to the screen of your computer on your desk.

So we were hit very hard.

The heroic effort, especially in the plating shop of our people to neutralize all the (indiscernible) there in this very, very large plating shop, was a heroic job to avoid any pollution, to avoid any environmental activity.

Usually to neutralize a plant of that size, if everything goes well and you have no adverse effects going, is about six hours.

The people there did it in three hours just before the water hit these tanks, so that we have no environmental exposure in that whatsoever.

In addition, the powering down and so forth, [where] very precautionary things that have been happening to avoid further damage.

At the same time, when the water was still rising, local management was setting up immediately a central operating center away from the flood area to talk about recovery and to start executing a recovery plan.

Very pleased with the tremendous commitments of all the employees, with enormous appoint support of the vendors, the equipment manufacturers, and external flood specialists.

We were able, through this recovery plan and the local leadership there, to have our data systems back up within 24 hours off site, to have within 48 hours contact and communication with our customers, and are fully operational today in all functional areas of the business.

The manufacturing itself was suspended.

Today, we are operational somewhere around 25 to 30% with our machinery, and we are ramping up fast in all areas of the factory to be in -- at full capacity in the next month.

The customers, essentially as I mentioned military, aerospace and the industrial field are very understanding and supportive.

We have a tremendous selection of inventory at the largest electronic distributors here in the United States which will cover the needs of our customers for an extended period of time, essentially with standard products.

Our factory is gearing up essentially in those areas where we have specialty and application specific products to support the customers in those areas.

So over time, we don't think that there will be a loss of business as a result of the flood.

It's just a question of time -- how fast we can catch up with the sales, backfilling the inventories of our distributors.

I think the whole management team and all the employees of that operation in Sidney, which is our largest operation, figure a 700,000 square foot plant, need to be commended on the enormous job that was done to get Amphenol back on track very, very quickly.

With this, I would like to continue to talk a little bit about the trends and the progress in our served markets.

Let's start with the military aerospace market that is about 19% of our total sales.

Sales were obviously negatively affected by the flood and were down 2%.

Without the flood, we would have estimated that in that segment we would be up somewhere around 8% year-over-year.

We expect in the third quarter to have a continued miss in sales of about $15 million related to the startup and restart up of the plant.

Nevertheless, the recovery is on the way, as I mentioned, and the customers are being taking care of.

The fundamentals in those segments have not changed.

Orders are strong as we started July, and we are very confident that our leadership position that we have will not be impacted by this adverse situation.

The industrial segment, which represents about 13% of our total sales, increased by a strong 26% over the prior year.

We continue to benefit from our strategy to focus on discrete growth segments of the industrial market.

The industrial market is kind of a catchall.

Our focus is in oil and gas exploration -- medical instrumentation, power applications as well as rail transportation, all very strong markets for Amphenol and we expect the positive trends in those markets to continue.

The automotive segment that represents 8% of our total sales were impacted by a weak situation in Europe as well as in North America, as expected, resulting in a [60]% (sic –- 6%) decline year-over-year.

However, we continue to be excited about the future in this area as more electronics are being built -- put into cars, we're participating in those.

We have new design wins on next generation products.

So as soon as these car models run out, we believe we will be able to return to growth in that segment over time.

Next segment at Broadband Communication over hybrid fiber coax networks, which represents about 11% of our total sales, experienced very strong growth in the quarter of 21% over last year.

The strong demand is really a result of the success of the MSO to offer triple play to its customers.

In addition, price had some benefits on the topline and initial benefits also to mitigate some of these escalating material costs that we have experienced over the last two years.

We have announced another price increase for the month of July in the range of 8 to 10%.

Actually it was effective this past Monday, and we believe that this price increase will be accepted, especially in North America.

And obviously we'll deal with international markets separately, but I think as there are more competitors, it's not kind of this duopoly that we have in North America.

But we're very confident that again, this price increase will help us come out from these very, very low margins that we have in the coaxial cable business compared to the connector business over time.

In addition, we expect demand remain to strong in that segment, certainly throughout the summer months where building activity is usually very active.

The IT and data communication markets which became the largest market segments that we serve with 25% of our sales, had another strong quarter.

Without TCS, which has a strong penetration in the market, our sales were up a strong 10%, the continuation of the double-digit growth that we have now experienced three quarters in a row.

We're very pleased with this because it is a testimony to the success of the new products that we have introduced into this market.

In addition, the combination with TCS gives us additional potential for a continued strong sales increase for the future.

We expect the strong momentum in those market segments to continue into the second half of this year.

Mobile infrastructure, which represents about 13% of our sales, had a quite interesting quarter as we have seen a decline in sales of about 5% year-over-year excluding TCS, which was primarily attributable to a very slow installation market.

That has very much slowed in North America and other areas while the OEM market, which is essentially the equipment manufacturers, still has a very good performance which [if] nothing else is an indication that the installation market will come back because these space stations are being built by the OEMs and obviously installed at a later point.

The good news in this segment is clearly that on a sequential basis, sales were up 20%, not totally reaching the high point of last year, but still 20% sequential increase is a strong indication that we have confidence into a gradual improvement in this segment for the second half of this year.

In addition, TCS contributed strongly in this market and strengthened our overall position for additional market share gain.

The highest growth we expected in the mobile consumer products which represented about 11%, I call it mobile consumer products because the market has expanded over time just beyond the normal mobile phones themselves.

Our products are more and more used not only in the mobile phones, but in PDAs, in laptop computers, in desktop computers, in products that are music related and so forth.

There is a -- much expanded market.

The growth we experienced was 70% over last year, and a 20% sequential growth in this area.

We're participating with all major manufacturers of mobile phones, increasingly with the laptop manufacturers as well, computer manufacturers, as well as manufacturers of other mobile devices.

And we are participating with the strong running models of these various customers, which gives us this boost in sales.

In addition, we continue to innovate, bring new products which again have broad acceptance and drive growth and add higher value content.

Furthermore, we look forward into the third quarter as of seasonally slower quarter.

We will have year-over-year growth in that area while on a sequential basis, we will see some decline before a rebound will be expected in the fourth quarter of this year as the seasonal preparation for the holiday period.

So overall, the trends in our markets are strong.

And as a result of this strong outlook in our -- in the markets we serve, as well as in the confidence in our strong competitive precision and excellent organization, we have raised our positive -- our guidance that we previously had for the full year 2006.

Diana already gave you information relative to the full year guidance increase.

For the third quarter specifically, we expect sales in the range of $595 million to $605 million.

In -- sales at the high-end of the range is essentially the same as in the second quarter.

So we consider this a very, very strong outlook considering that traditionally, the third quarter is a seasonally slower quarter than the second quarter.

In addition, we're clearly still in the recovery mode on our Sidney, New York facility.

EPS, we expect in the third quarter in the range of $0.69 to $0.72 per share before the flood-related charge that Diana mentioned of $5 million or $0.04 per share.

Again, EPS growth in the third quarter over the second quarter is driven by further expanding our operating income margin through pricing actions, continued cost reduction actions, and the focus on high margin application specific products.

Obviously, this is a very, very strong forecast for the third quarter or guidance for the third quarter, with revenues and expanding margins and EPS.

But we're excited about our opportunities in those markets we serve, very confident in our own ability to expand margins with the actions I mentioned.

So near and long-term, our potential for continued growth and profit enhancement is good.

And we look forward to another strong and record year for Amphenol for the year 2006.

Thank you very much for your attention, and with this, I would like to ask the operator to start with the question-and-answer session.

Thank you.

(OPERATOR INSTRUCTIONS).

Michael Walker, Credit Suisse.

Thanks.

I think it's dried up around here a little bit in the last couple weeks.

That's good.

We like the dry well.

Your biggest problem now is going to be the electricity and power in that facility.

But just a couple of questions.

First, housekeeping, can you confirm the IP end market, if you include TCS, was up something in the neighborhood of 140 to 150% year-over-year?

I think about 133%, 135% year-over-year.

And then on the impact of the commodity costs, it was nice to see a pretty decent size rebound in margins in the cable business, which I assume it is the full impact of your price increases rolling in.

It looks like that's going to continue with these pretty big increases in July.

Can you talk about what the impact from commodity costs is on interconnect side of the business?

Are you seeing a lot of headwind copper pricing on the interconnect side?

That is obviously a very important issue for the Company and therefore important question here.

Material costs have escalated, and that's not only copper.

Gold is still very high and we consume [quite some] gold and other materials continue to have an impact on the business.

And interestingly enough, it is actually showing now more as companies -- your contractors and vendors, they obviously had some opportunity to keep prices at the lower level for a period of time.

And now, what we are buying now is when they bought their material at the highest point.

So even if in some areas material costs or commodity prices came down, that doesn't mean that we will see that immediately because vendors are still working off their inventory from the higher cost areas.

So we see continued challenge in that area.

In addition, we have seen some easing on pricing -- reluctance of price -- taking some price increases for our customers, but still there is a clear expectation in many of our segments that prices should not go up, rather come down.

So we are balancing that very clearly, and we are very pleased actually that we were able to keep our operating income margins for the interconnect business, excluding TCS, above the 21% level in this very challenging environment.

Okay, and my follow-up is on TCS specifically.

You talked about the big increase in revenues sequentially, up 17%.

Can you give a little bit more color there in terms of -- is there a new market segment or a new set of customers that is buying the integrated concept behind the backplanes with the connectors or is this just you going after sort of opportunities that Teradyne had left behind previously?

I think it's a combination of all of the above.

I think the key actually for the success is focus, confidence, and the ability to sell at value product to the marketplace.

I mean, Teradyne Connecting Systems is the leader in high-speed interconnect.

They undervalued themselves some of products that they have, and obviously, that is something that has changed.

In addition, we are focused on new products, launching them, supporting them with quick introductions in terms of capital expenditures and support them strongly because we know about the connector business and these things can maybe go a little bit more expeditiously than in the former environment.

So that is a certainly benefit.

In addition, we have seen opportunities at new customers that previously were not there.

And that is on both sides of the aisle if you want, for Amphenol new customers as well for TCS new customers, and that is also playing a very positive role.

So I think all of these elements play and we're very, very happy to see that TCS actually is gaining momentum in its markets, in all the core markets that they're serving.

We are focused on value added products, so the backplane assemblies.

We continue also to focus on the counterpart, the connector that sits on the [data] ports if you want, much more than we have in the past.

And that has been a very strong success in refocusing the sales force towards these opportunities which maybe haven't been pursued as strongly as in the past.

Thanks a lot.

(OPERATOR INSTRUCTIONS).

Amit Daryanani, RBC Capital Markets.

Thanks a lot.

Good afternoon guys.

Just a question on the handset segment.

It's been doing tremendously well for you guys in the first half of the year.

There has been some growing concern that we may have a bit of an overbuild on the handset side.

I'm wondering if you're seeing that from your perspective and that -- if that would potentially drive down sales in the segment more than seasonality in Q3.

We haven't really seen in those models where we are participating, a strong buildup of inventory at our customers.

Obviously we don't have total visibility on the -- we have seen some seasonal slowing starting in late June and continuing probably here through July, but it is not more as we can see right now than seasonal.

In addition, we see some offsetting to this with new launches in other areas that are mobile devices and not just the traditional mobile phones, which will continue to drive our strong performance in that area.

We had about a 70% growth -- close to 70% in the first quarter, the same in the second quarter.

I think we'll see continued strong year-over-year growth in the next two quarters even if we may have a seasonal dip, but there's no more that we can see at this point.

And just to follow-up on the TCS side, it looks like you aren't expecting margins to improve much from current levels [at] year-end.

I realize TCS used to procure most of its raw materials from high-cost regions before you guys acquired it.

Can you talk about maybe what percent of TCS' raw material is sourced from low-cost regions today?

Where do you see that number trending for the rest of the year?

We continue to clearly transfer this over -- on a timely basis as well as in coordination with our customers.

I can't give you an exact percentage how much is sourced, but we have made major progress in sourcing from lower cost areas.

In addition, we just are in the process of starting out our new China facility in Changzhou for TCS, and that is obviously progressing very well.

And that includes local sourcing in addition to just the pure manufacturing side and assembly side as well.

So I think both of these components are doing very well.

In addition, we're launching some of the new products that we have discussed right in China, as opposed to first doing it in North America and then doing it elsewhere, because of these talent that we collectively between TCS and Amphenol have in China.

So there are tremendous opportunities just right out of the park to use the jargon, have a cost savings on that basis.

We will continue to drive this very strongly as our customers permit it.

I guess the point then is if you're able to leverage all these points you have spoken about, you should be able to drive incremental margins upwards in TCS from --

We will certainly drive margins up and I said -- as I said earlier, we are prudent in what can be accomplished in certain periods of time.

But we are very confident that the potential for further margin improvement at TCS is present for the near-term as well as in the long-term.

And I think the business itself, as we see it today, where we're much more intimately involved, we believe that they have truly the potential to have the margins that Amphenol has as a Company today.

Okay.

Do you care to put a timeframe on when we'll get there?

Well, we try to get there as fast as we can.

Thanks a lot, great job guys.

Matt Sheerin, Thomas Weisel Partners.

Thanks, good afternoon.

Question on if you could give us insight into the different geographies, percentage of sale by area.

And then, I'm interested if you could give your view viewpoint on Europe right now, and then whether or not this whole transition towards lead-free in Europe and ROHS has any impact on your business.

That is a very good question here.

Obviously, the impact on ROHS is -- we don't have anyone because we have been working on compliance to ROHS a have for a long time before actually the starting point was for being ROHS compliant.

So we have no impact on this.

On the other hand, Europe as a whole, especially in the automotive segment, continues to be just slow for us, and will continue I think to be somewhat slow because demand is not as good, and then North America as well on cars.

But we have good new positions, and as such, we believe that we will be able to rebound with growth in that area.

Great.

And if I could just ask a -- have a bigger picture view of your -- question of your view of the cycle, there has been some buzz and some concerns about the macroeconomic environment -- IT spending, about the semi cycle looking like it's getting near a peak.

Correct me if I'm wrong, but I believe your business and connectors in general tend to lag that or you don't really see it as a leading indicator, but what are some of the things that you generally look for in terms of signs that things are maybe beginning to soften a bit?

Have you seen any of that yet?

This is certainly a very broad question.

We're trying to get all sort of -- use all sort of indicators, especially also talking with our customers and their end customers, which gives us quite a -- some insight on what could happen.

But I think the best weapon for us is speed and execution when things change.

And just as flood-related situation clearly shows you that we have the ability to react extremely quickly to adverse situations.

We have shown that in the year 2000, and I think when it comes -- I think it will come -- if a sudden change happens, we will be able, with the organization, how we're organized, to react very, very quickly in those areas where it is necessary to react.

There are some indicators that we look at.

For example, the semiconductor industry is always a good indicator because there is a lag between the connector industry and semiconductors of about six months.

We also see regional lags between North America, Europe, and Asia even if this becomes more fluent because of the transfers of business to Asia and so forth.

But those are some areas that we're looking at.

And obviously, inflationary indicators also give an indication where spending may go.

We can go through a whole list of things, but the key element and take away is clearly that Amphenol is organized through its organizational structure to be able to react to adverse situations very quickly and turn the adversity into a positive.

Great.

But are you -- is there anything that gives you reason to be any more concerned today than it was a quarter ago about your business?

Actually, we have good trends markets that we are serving.

We have a mixed bag, as I mentioned earlier.

And the diversity of the company clearly gives us the ability to go through these changes as they always occur.

But to directly answer your question, no, we're not more concerned or less concerned than we have been just three months or six months ago.

Okay great.

Thank you very much.

Thomas Dinges, J.P. Morgan.

Very quickly, on the cable business, putting forth another price increase here, falling on the heels of one that you did earlier this quarter, Martin, as you look out over the next couple of quarters -- and it sounds as if you're very upbeat about demand, obviously one of your long-term longtime customers has finally resurged out of bankruptcy here with new ownership going forward.

And it's probably leading to some of that bullishness.

But on the margin front, do you think that as we exit this year, do you think you can get the operating margins back to where they were a couple years back, which was sort of low to mid-teens with the price increases and some incremental demand?

And I have a quick follow up question.

This is always a delicate question because you never know.

We thought we would have already better margins today.

But then material cost escalations continued, so it's very hard to predict what will happen in this area.

Right now [in the basis] if material prices would be relatively stable with some price increases that we have in July, we certainly will be able to edge up a little bit to better margins.

But we're far away from the margins that we once experienced in this business, very far away still even if we will see a mitigation.

Even if we will see an improvement in this margin, we're not at the levels that we were in the year 1999, 2000.

Okay, and then quickly on the recovery of revenues that you are expecting, you talked about this quarter some revenue loss obviously from the flooding and that will impact you a bit this next quarter.

You mentioned that your distributors were working to fill some of the standard product.

Perhaps just help with how much recovery the distributors are doing this quarter for you, and how much in, say, the fourth quarter that you think you can recover as some of your customers you said have been quite accommodating.

Just a little bit of help there as to how you think that segment particularly would track over the next couple of quarters.

Certainly.

The essence is we're losing essentially three quarters to a full month of production.

And to catch that up, it will take some months to do so.

And between an effort of in-house production as well, which will come essentially in the fourth quarter, and sourcing some of the components, we obviously have the support from other manufacturing sites in Amphenol to do so.

So I think by the end of the year, we have a good chance to recover some of this lost sales.

The only question is whether all of this can be recovered this year or whether some will spill over into next year.

It will really depend how closely we've worked with distribution, how fast their interest is to rebuilding inventory at that point in time.

But they need the inventory assortment anyhow over a longer period of time, but they can certainly live for a period of time with somewhat lower inventories and still service the customer.

So I think the key for us is really to focus on the application-specific proprietary products, and this is where we have already -- when I talked about 30% of the production, most of this is focused on the proprietary type of product.

The filter products, the products that are for the joint strike fighter, the products are for the JTRS applications which are more application-specific.

And here, we're in really good shape and moving forward strongly.

So this, which we cannot cover with distribution, will have the priority.

And therefore, I think from a recovery standpoint, this month's recovery will see a portion of late this year and the rest next year.

Okay thank you.

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Carter Shoop, Deutsche Bank.

To clarify on that last question, is it safe to maybe -- just for your forecasting here, can we assume that maybe you recover roughly half of that loss -- $25 million in the fourth quarter -- when you build out your forecast?

Is that the kind of number you're looking at or is it less than that?

We're looking actually at less than that at this point in time because obviously, we were running at that factory at a very good level of capacity.

The capacity is not everywhere used at 100%.

Where it is lower, we can catch up faster.

Where the capacity is higher, we have to source outside.

And as such, in order to catch up and avoiding capital expenditures to catch up which we would not do, so it depends on the segment of the business where we can catch up sooner or later.

So I would assume it's probably less than this amount that -- of that -- it's not half of the 25 million we're targeting at this point in time, but could possibly happen.

That's helpful.

In regards to TCS, I was a little bit surprised it was that strong given the fact that three of the top five customers had disappointing quarters in the June quarter.

Was the strength in TCS pretty broad-based?

And if it was, are you concerned about a little bit of an inventory build us customers like Lucent, EMC, and IBM had disappointing quarters?

Well, interestingly enough, and I'm glad that you asked that question, there are several customers in the university -- in the universe of TCS that actually would like to take more.

And we are still seeing that we can serve and increase our output to them, so that the demand is very strong.

And it relates really to not an inventory build at the customers, but I think a broadening of the customer base as well as some specific project oriented needs of certain customers which have been exceeding initial expectations.

In addition, it's the launch of the new products that also clearly contributes to the growth.

And the launch of new products is always a good indicator because it's not short-term, but usually longer-term in that area.

And it is broad-based.

It's not just one or two that have helped in that growth.

It's a very encouraging trend.

And the follow up, it looks like you guys have a relatively aggressive margin expansion forecast out there for the second half of this year.

How much of that is from improving commodities markets or price increases relative to a benefit from the facility in New York coming on-line?

I think the majority is really on the basis of taking some additional pricing actions, the efforts that we have put in the first half for further reducing costs, shifting products to lower cost areas, finding replacement materials for very expensive material that we had to buy in the past.

I think many of these actions that we have initiated in the first half which haven't really yet come totally to fruition will show some signs of contribution in the third quarter and more so in the fourth quarter.

Okay, so if you look at the 17.8% operating margin in the June quarter, if you exclude the charge, do you have a sense on how high that would have been if you didn't have the flooding and the manufacturer inefficiencies (inaudible)?

Well, I think this is a very delicate question, because let's say assume you have about $10 million of sales and then you have three days before the month end, obviously you have to expense most of your fixed expenses at that point in time.

All is included, so you have relatively high conversion margin on this -- on those additional sales.

And I think it's hard to estimate, but they're somewhere between $0.02 and $0.03, $0.04 that could be attributable to that.

Thanks a lot.

Steven Fox, Merrill Lynch.

Two quick questions for you.

One on the [Times] fiber business, if you look at the percent change in sales, can you sort of breakdown how much is from units and how much is from price increases?

Versus last year?

Versus last year and a quarter ago.

I think -- versus last year, there's I'd say maybe not quite half, but there's a good chunk that has to do with pricing.

And from the prior quarter, it wouldn't be quite as much.

The price increase was about 5% late in the quarter on -- similar on the domestic side of the business.

And second question, when you look at the IT datacom market, you mentioned that you grew about 10% ex acquisitions there.

Any sense for how much of that you think was related to Amphenol-specific gains as opposed to the market?

In other words, how much market growth do you think is going on there?

Well we don't think the market, looking at some of the results of our customers, has grown at the same trend to exactly say how much is market share gain and how much is not.

It's very delicate to say because some projects have more traction at customers than others, and we may have been just very fortunate to be part of some of the newer products that had traction in that particular quarter.

Okay, thank you.

Yuri Krapivin, Lehman Brothers.

Good afternoon and congratulations on a strong quarter.

Could you comment on your leadtimes?

Did your leadtimes stretch during the quarter?

Or were they stable?

In general, we're always working on reducing our leadtimes.

They certainly haven't stretched.

Leadtimes on some of the products obviously after the flood will stretch somewhat, but that is just a temporary situation and actually a specific case.

In all other areas, we haven't seen a need to stretch our leadtimes.

We have the capacity as well as the manpower in a very flexible way available to us so that we can have competitive leadtimes out there in all major market segments.

Okay, and then another question on TCS, is there a seasonality in that business?

Because it looks like in the second half of 2006, you expect [to] the flow of sales [than] the rate you achieved in Q2.

There is actually a seasonality.

If you go back [in] TCS in the past, usually the first half is stronger -- much significantly stronger than the second half.

We're not actually guiding that way because of the things that I mentioned earlier, which include the new products, which include new customer wins, which includes the penetration of certain segments where TCS hasn't been as active in the past, both from a product standpoint as well as from a regional standpoint.

And all of this is going to help us to be not following that traditional seasonal pattern, but actually getting to similar levels that we had in the first half.

This would be a very -- this is a very aggressive outlook if I just look at seasonality, but we're confident that this can be achieved.

Thank you.

Jeff Beach, Stifel Nicolaus.

Good afternoon.

Two questions.

First, your estimate of the charges or your charge in the second quarter and estimate of the third quarter charge, does it include any business interruption insurance that you would get back?

And related to that, is -- are the earnings you are looking at taking the full impact of the loss of these sales from the flood?

Sure.

The charges are net of the recoveries we expect for all elements of insurance, including property damage and business interruption coverage.

So yes, those are netted in those numbers in Q2 and Q3.

In Q3 the guidance contemplates about a $15 million revenue loss as a result of the timeframe in -- earlier in July where the plant is not up and running yet.

So both of those things are incorporated into the guidance.

But one is included in the charge, and the other one is not.

Okay.

So the loss of sales and related margin miss is certainly not part of this onetime charge.

No, any loss of sales goes through the normal components of the income statement.

There's no mechanism to bump sales back up as if the sales weren't lost.

This just runs through all the normal accounts.

All right.

And follow up question, you bought back stock heavily in the second quarter.

Can you tell us roughly what you estimate the third quarter sales base to be at and whether you have plans to buy more stock back ahead?

The stock buyback and other uses of cash we really prioritize on a quarter by quarter basis when we look at our acquisition pipeline and so forth.

So at this point, we wouldn't want to enter into a prediction of how much stock we might or might not buy in the next two quarters.

I think we'll prioritize the cash flow depending on what other needs we see, and with the top priorities really being new products and investments in the Company's tuck-in acquisition strategy.

In Q2, as you saw, we did not make any tuck-in acquisitions and therefore used the cash flow to buy stock back and to make a nice reduction in debt during the quarter.

And third quarter share base?

The third quarter shares outstanding?

Yes.

I think it will -- may move up somewhat from Q2 depending on what the stock price does on the conversion of options into the diluted shares, but I wouldn't think it would be significantly different than what it was in Q2.

(OPERATOR INSTRUCTIONS).

Shawn Harrison, Longbow Research.

Just one quick clarification before my question, but the decline in automotive -- was that 60%?

No. 6%.

Okay good.

I'm sorry I misspoke so badly.

I just wanted to make sure.

That sounded like a big drop-off.

My second question just has to do on the acquisition environment.

You mentioned there's plenty of opportunities out there, but with the raw material cost environment as it is, are you finding that you're singling out opportunities just because the smaller players don't have the purchasing scale out there that you do?

I think in the majority of the cases, it really is not related.

I think in the majority of the cases where we look for acquisitions, is that they are entrepreneurs.

They feel that being part of a large organization can benefit their future business, and that's where the relationship is.

It really hasn't to do whether they are somewhat adversely affected with cash flows and so forth.

That's certainly not a driving factor that we have seen at this point in time.

Okay.

My second question has to do with control of operating expenses.

Maybe if you could identify a target in terms of where you think you could get SG&A in terms of percentage of sales maybe down to by the end of the year, because you did a pretty phenomenal job this quarter.

Yes, our SG&A is -- has been historically -- I think is already at a relatively low level, so I wouldn't expect to see a significant change in SG&A as a percentage of sales.

It may go up or down 0.5% or so, but we are very careful in controlling all of the Company's expenses, including those that are in SG&A, the new product development.

And front end sales and marketing expenses tend to fluctuate somewhat with demand and some of the administrative expenses tend to be a little bit more fixed in nature, but I wouldn't expect large shifts there towards the end of the year.

[Alan Brochstein], [Major Capital].

Thanks for taking my call.

Congratulations on the quarter.

I just wanted you to clarify -- Amit asked a good question earlier about the timing of the margin expansion at TCS.

And I guess you have done a great job of beating your timeline, and you're still maintaining the same goal.

Would you expect the progression -- or is there any reason though that the improvement has kind of front loaded this [thing]?

We have obviously had some opportunity for increasing margin in the first period a little faster.

We went up from 5 to 10%, and now we're going from 10 to 13%.

So you see curve a here, not a linear path.

So obviously, there is more work to be done to further improve the margins.

Margins of 13% in the connector industry just to take that -- are good margins in most of the companies, so I think [there's] a move beyond that is already a very big step.

We're confident that it can be done.

But it will take some time to do it, and therefore we're not just going out in saying it will be all done within a few months.

In addition, I would like to really mention that the outlook that we have obviously is, in my opinion, an aggressive outlook for the Company considering that there are uncertainties that persist in all of the markets that are not easy to -- all to understand.

There are uncertainties relative to the materials side.

There's uncertainties relative to the pricing that can happen.

So if we just -- in I'll areas where we can say well, it should be there, everywhere just consider that everything goes positive, obviously we could have even a different outlook.

But I think our outlook is already very aggressive and has a lot of variables.

In order to get there will take a lot of effort in order to overcome seasonality in the third quarter, to sequentially grow in the third and in the fourth quarter whereby our largest facility was just sitting in water for several days.

Those are things that have to be all considered when giving guidance.

So we feel very strongly and are excited about the future because we feel that the second half has the potential to be stronger than this.

But to assume even beyond that would be probably not prudent on the part of the Company.

Okay, and further on the TCS margins, if you had to qualitatively assess the upside you have had so far in terms of the speed, has it been more on the operating expense side or more on the revenue and synergies side?

Actually, the synergy side is probably the least of all.

When we talk about synergy, it's a word that can be really expanded into all things.

Obviously, the most important synergy I think that TCS benefited from was to be part of a connector company that has an understanding of the connector company, was supportive of their investment, supportive of all the things that need to be done to be successful in the connector business, and that has certainly had a major impact.

The other one is operating discipline itself that is somewhat different, and that has helped.

And obviously the volume increases and the guidance towards higher value added products, and products that have just better margins as well, is also an element.

So I mean you have a combination of things that have happened.

And obviously the access to lower-cost sourcing in Asia is another effect of synergies that we can call synergies.

But I think they're all synergies in one way or another to improve the Company's profitability to the level that we have been able to do it in the short period of time, away from the levels that they had for a long time previously.

So I think that there's an implied synergy effect that is very significant.

One last TCS question.

In the markets they address, what would you say that the market share for those areas for your Company is?

We believe that in the majority of the markets, and I'm excluding for a moment the automotive market as a very large market where we're really just a niche player.

In all the other markets, I think we have number one or two or number three position.

I'm sorry, just on the TCS part.

Oh, just on the TCS -- TCS is the market leader in the markets they serve.

There's no question.

I think the Wireless market they are leading, as well as in the information technology market.

But actually, you have to look at when we say that to the product range they have to offer.

It's related to the product range.

If you look at the total market IT market, total datacom market, obviously there is a lot more to be gained in conjunction with Amphenol that has totally complementary products and to gain further market share, but TCS for the products that they have they're certainly the leader.

So will you be shifting some of your R&D into developing new products that can be addressed?

We have a lot of additional products in Amphenol that are complementary to TCS.

And the total portfolio that we can offer to date is very significant and can certainly allow us to gain further market share over time, and we will continue to develop new products as well as we move forward.

I think we have time just for one more question here.

Jim Suva, Citigroup.

Thank you very much and congratulations everybody.

Quickly help me reconcile a little bit, inventory went up 5% quarter over corner, yet I would assume that you probably wrote off a little bit of inventory from the flood unit.

Yes, we had an increase in inventory in the plant due to the fact that, as Martin said, that we tend to make a preponderance of shipments in that last week.

So they had some inventory growth, and you're right, a portion of the provision that we booked then also went against the inventory balance.

And so those two I would say for a large part offset each other.

Okay that's good, so the ending inventory -- does it include the write-down of inventory yet?

Yes, it includes a write-down that was a portion of the charge that we took in Q2.

Okay, and with the second quarter of back-to-back book to bill above 1, I think 1.03 for both quarters, just checking to see, are you seeing any signs of customers getting ahead of themselves or pushing back or double ordering any orders?

We have not seen any of that at this point, so I think as Martin said earlier, we really haven't seen that in any of our markets.

Great.

That's good to know.

Thank you and congratulations.

Thank you very much all for your interest.

I think we had an excellent quarter.

We are excited about our future, and thank you very much for your continued interest in our Company.

Goodbye.

Thank you.

This concludes today's conference.

Thank you for attending and have a good day.