安費諾 (APH) 2006 Q3 法說會逐字稿

Hello, and welcome to the third 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 listen-only mode.

Today's conference is being recorded.

I will now introduce today's conference host, Ms. Diana Reardon.

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 everyone to our third quarter earnings call.

Third quarter results were released this morning.

I will provide some financial commentary on the quarter and Martin will give an overview of the business and current trends and we'll then have a question-and-answer session.

The Company had a strong third quarter achieving new records in both sales and EPS.

Sales for the quarter were $636 million, up 42% in U.S. dollars and 40% in local currencies over the third quarter of 2005 and up 5% from a sequential standpoint.

A strong third quarter performance in what is normally a seasonally slower quarter.

Sales of TCS in the quarter were approximately $126 million.

This compares with pro forma sales of $94 million in Q3 2005 and sales of $110 million in Q2 of 2006.

Excluding the TCS acquisition, sales increased approximately 14% in U.S. dollars and 12% in local currencies over last year's third quarter.

In Q3 sales were also reduced by approximately $15 million as a result of the previously announced flooding at the Company's Sidney, New York, manufacturing facility.

Breaking down sales into our two major components, the interconnect component, which comprised 89% of our sales in the quarter, was up 45% compared to last year led by strength in the communications related markets.

Our cable segment, which comprised 11% of sales, was up 27% 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 charges, was strong at $114 million compared to $86 million last year.

Operating margin, excluding flood charges, was 18% compared to 17.8% in Q2 of 2006 and 19.3% in Q3 of last year.

The margin improvement over Q2 relates to increased margins in both segments of the business.

The lower margin percentage compared to 2005 relates primarily to the impact of the TCS acquisition and the impact of stock option expense.

From a segment standpoint, in the cable segment margins increased to 12.4%, up 70 basis points from last year and 50 basis points sequentially from Q2.

Margins in this segment have been under significant pressure as a result of increases in material and freight-related costs driven by higher commodity and energy prices.

The Company has implemented multiple price increases in both 2005 and 2006 that have collectively begun to bring up margins in this segment.

Interconnect margins were 20.4%, up 30 basis points from Q2 2006.

The sequential increase in operating margins relates to continued improvements in operating margins at TCS.

The timely implementation of profit improvement actions and good operating leverage on incremental sales has enabled TCS to achieve sequential improvement in operating margins in every quarter this year reaching almost 16% in Q3.

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

Excluding the impact of the TCS acquisition, interconnect margins in Q3 of 6% were consistent with Q2 '06 and Q3 '05 levels.

The achievement of these strong margins reflect in the Company's core interconnect business reflects the Company's ability to offset the pressure of higher material-related costs through pricing actions, cost reductions and operating leverage.

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

Interest expense for the quarter was $9.3 million compared to $10 million in Q2 of '06 and $5.5 million last year.

The increase over last year relates primarily to the impact of increased borrowings relating to the TCS acquisition.

The reduction compared to Q2 of '06 relates to lower average debt levels and lower borrowing costs resulting from the repricing of the credit facility at the beginning of the quarter.

Other expense was $3.6 million compared to $2.6 million last year reflecting higher fees on sale of accounts receivable under the Company's securitization program and higher minority interest expense.

In the third quarter of 2006 the Company reduced its annual effective tax rate from 33% to 32% to reflect a more favorable cash repatriation plan and increased income in lower tax jurisdictions.

This resulted in a 30.3% tax rate in Q3, reducing tax expense and increasing EPS by approximately $2.6 million and $0.03 respectively.

The tax rates in Q3 of '05 and the full-year 2005 were 31% and 33% respectively.

Net income was $67 million over 10% of sales in the quarter, an indication of our excellent profitability.

On any industry comparative basis profitability continues to be very strong.

Excluding the impact of the one-time flood charge of $0.04 per share in the quarter, diluted earnings per share was $0.77, up 35% from $0.57 last year.

Excluding the impact of stock option expense in Q3 of '06, EPS was $0.79, up 39% from last year.

As previously announced, 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 through July 1st.

In addition to the loss of sales and margin during the plant shutdown, the Company recorded charges of $21 million, or $0.15 per share for recovery and cleanup expenses and property-related damage net of expected insurance recoveries.

$15million, or $0.11 of these charges were recorded in Q2 and $6 million, or $0.04 were recorded in Q3.

These charges reflect the Company's best estimate of flood-related losses.

Based on these estimates the Company does not expect to incur any additional significant flood losses.

As of today the plant is operating at its pre-flood production level.

During the quarter we generated a very strong cash flow from operations of $71 million.

This cash flow is after a $15 million contribution to the Company's U.S. defined plan and reflects approximately $9 million in one-time cash expenses related to flood recovery actions at the Company's Sidney, New York facility.

The cash flow from operations, along with $6 million of proceeds from the exercise of stock options, were used to fund $24 million in capital expenditures, $13 million of stock buyback, $2.7 million in dividend payments, debt reduction of $19 million, and an increase in cash on hand of approximately $17 million.

The balance sheet is in good shape.

Accounts receivable days outstanding were 63 days at the end of September compared to 65 days at the end of 2005.

Inventory turnover was 4.3 times at the end of September compared to 4.2 times at the end of December.

Debt at the end of Q3 was $689 million, down $92 million from year-end.

The Company's leverage and interest coverage ratios, reflecting the pro forma impact of the TCS acquisition, remained very strong at 1.6 times and 10.5 times respectively.

EBITDA in the third quarter was approximately $133 million.

And availability under the Company's revolving credit facility was $333 million at the end of the quarter.

In addition, the Company had approximately $85 million in receivables sold under its receivable securitization program at 9/30, the same level as at the end of 2005.

Orders for the quarter were strong and reflected a book-to-bill ratio of approximately 1.03 to 1.

This is a stronger than normal book-to-bill ratio for a third quarter, and includes approximately $20 million of orders in excess of sales relating to the Company's mil-aero and industrial business in Sidney, New York, that was impacted by the flood.

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 Q4 2006 sales and EPS guidance were based.

Sales are estimated in a range of $640 million to $650 million, or growth over last year of 26 to 28%.

EPS is estimated at 80 to $0.82, an increase of 33 to 37% over Q4 2005 option adjusted EPS.

EPS guidance includes the following assumptions.

Guidance is based on a 32% effective tax rate. 2006 guidance includes stock option expense for the fourth quarter of approximately $3.1 million, or $0.02 per share.

Before guidance reflects a 10% sequentially decline in sales at TCS primarily as a result of the implementation of new inventory hub arrangements with certain OEM customers.

Based on the mid-point of this guidance for the year 2006, sales would be approximately $2.45 billion, sales growth of 36% over 2005, 13% excluding TCS.

EPS would be $2.90 excluding the $0.20 of flood-related charges, or growth of 30% over the option adjusted 2005 earnings per share.

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

Thank you very much, Diana, and welcome to our traditional phone call at the time of our earnings release.

Thank you very much for taking the time to join us here.

[The following] I'd like to reiterate some highlights of the third quarter 2006 achievements target Diana just said about the trends and the progress in our [inaudible] markets and give a very brief comment on the outlook for 2006.

First some highlights.

We're extremely pleased with the results of the third quarter of 2006.

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

We maintained strong momentum of growth in a seasonally slower period.

Sales increased 42% to a new record.

Sales increased also sequentially strong by 5% in the seasonally slower period and we had also strong organic growth.

Excluding TCS, sales were up strong 14% over the same period of last year, significantly, above industry growth rate expectations.

TCS sales increased sequentially a strong 15%, and reached a new high of $126 million.

It's an outstanding performance in a short period of time to get from the $84 million level in the fourth quarter of last year, which was clearly a low, to that level in the third quarter.

Obviously driven by some, you know, favorable environment in the markets that we serve.

Sales increases in general were very broad-based with particular strength in all communications and IT-related markets.

The strength in these markets more than offset the decline that we have experienced in the military aerospace segment due to the miss of flood-related sales.

Excluding TCS, the strongest growth, obviously, TCS wasn't with us last year, so I'm excluding the effects of it on a year-over-year comparison, so in the market of the mobile devices, Amphenol had, again, the strongest growth with 53% increase.

Geographically, Asia has been, again, the strongest growth area with a 36% growth.

We're very pleased also that profitability and cash flow remained strong in the third quarter of this year.

We continue to expand our leading operating profit margins to 18% in the quarter, slightly up from the 17.8% in the prior quarter.

This was a result of the effects of the continuing pricing actions at our cable business as well as the increasing margins at TCS.

Again, here, a remarkable improvement from the 5% level pro forma in the fourth quarter of last year of TCS's margins to the close to 16% in the third quarter of this year.

I'm also very pleased to say that in a very, continuing very difficult environment relative to cost and pricing, we have been able to sustain in the core connector business of Amphenol the industry leading margins of 21.8%.

In fact, we expect margins to further expand in Q4 and as we move into 2007 as a result of our ongoing cost reduction programs, further improvements at our TCS operation, and further pricing actions that hopefully will allow us, at one point in time, compensate for the material cost increases that we have endured over the last 24 months.

Net income remains a strong measure of our financial performance with over 10% of sales.

EPS, as Diana said, grew very strong in the quarter, 35% to a new record of $0.77 a share, significantly ahead of our own guidance.

This excludes the $0.04 flood-related charge that we had announced earlier in the second quarter.

EPS growth would actually be even stronger, 39%, if you adjust for the stock option expense that we started in the -- at the beginning of this year.

Cash flow from operations remained very strong.

Amphenol truly remains a strong cash machine, $71million generated in the third quarter.

We continue to apply that cash towards value creating alternatives including, as one of the high priorities, to invest in new products.

We are seeing the effects of the new product investments in the increased organic growth that we have experienced in the third quarter and will continue to experience as we move forward.

We also continued our stock buyback program, debt reductions, all EPS drivers.

We have good acquisition activity in the pipeline but it's always hard to predict when any of these acquisitions actually would close.

In summary, Amphenol had truly a very strong quarter.

Let me now talk a little bit about the trends in the various market segments that we serve.

First, the military and aerospace market segment represents about 18% of our total sales.

We are very pleased to say that we are fully operational again in our Sidney facility after a two-month period following the flood in June of intense recovery.

It is good to see that the operation is in full swing at pre-flood levels operating, and that gives us quite some confidence in the fourth quarter to resume not only full activity but to become -- get back to the pre-flood revenue levels.

As expected, and Diana mentioned it earlier, we missed about $15 million in sales in the third quarter due to this recovery effort which resulted in the decline in this market segment over last year, however, demand remained strong from an order standpoint.

The $15 million that we missed in sales were in its major part delivered out of the distribution network, and we have plans in place over the next few quarters to replenish that inventory of our distributors.

We expect the fourth quarter sales to exceed pre-flood levels.

And a continuing strong trend into the year 2007 in that segment.

Industrial market segment, which represents 13% of our sales, had another very strong quarter with a 25% sales increase.

We continue, from our strong and broad product range, that sales strongly through distribution, but that is complemented through growth in new emerging markets, growth markets such as the medical market, alternative power markets as well as the gas and oil market where we strongly participate and generate incremental sales in that market segment.

We expect this positive trend to continue into Q4 and beyond.

The automotive market segment is the smallest segment for Amphenol, represents about 8% of our sales, and as expected, we experienced weak demand, especially in Europe but also in North America, which resulted in a 10% sales decline over prior year.

New car registrations are expected to remain relatively soft for the rest of this year or the near-term, however, we're encouraged by the launch of new products used in new car electronics that will potentially mitigate the generally soft market segment.

In broadband communications over hybrid fiber co-ax networks, we had another strong quarter.

Sales in this quarter represent about 11% of our total.

Sales were up strong 29% over the prior year.

This strong demand here was essentially driven by the success of [inaudible] in that triple play and in a series of new products for Voice Over Internet Protocol applications, mainly the electronics at the head end.

Margins in the cable products further improved, as we mentioned earlier, due to past pricing actions, but further pricing actions will be required to further compensate for the significant material cost increases that we have experienced and endured, if you want, over the last eighteen months.

We expect the demand to remain strong in the first part of the fourth quarter and then start to taper off due to somewhat slower build rate towards the end of the quarter into the winter season.

The IT and data com markets have, data communications markets, have become the largest segment for Amphenol with 25% of sales.

Amphenol and TCS combined truly have created a very powerful market presence, yet the growth that we have experienced in that market segment is a result of truly a favorable demand environment but also the success of our customer diversification as a result of the combination of TCS and Amphenol and our success with new high-speed products in next generation products.

Sales, excluding TCS and TCS hasn't been part of Amphenol as you know in the third quarter of last year, were up a strong 14%.

That's a continuation of our strong trend of increased participation in this market segment.

We're very encouraged with the design wins of new products that we are launching so that the trend overall in the near and long-term will continue to be strong.

However, in the fourth quarter and maybe through the first quarter, we will have a one-time effect of a change of, as requested by our customers, from a customer-held inventory to a vendor-held inventory process, which means nothing else that the customer will deplete its own inventory and will want the vendor, Amphenol, to build up an inventory hub over a period of time to the same level.

During that period of time we wouldn't make any sales and that is the one-time effect.

There could be somewhere between 5 and $10 million over these two quarters as we look forward, but that is included in the guidance that we have given earlier.

Another strong market segment for Amphenol is mobile infrastructure which represents about 13% of our total sales.

Sales in this market segment, excluding the effects of TCS, were up a strong 15% over last year.

As expected, the demand in the mobile installation market has significantly improved in the third quarter and driven that growth.

Together with TCS we clearly have strengthened our position in this marketplace and we believe that the outlook is very, very positive in that segment not only due to our own strength, but also the continuing subscriber growth, especially in emerging markets such as India, South America and others, Africa not to forget, increasing data and multi-media traffic that will require new installations, new equipment.

A shift over to new IP mobile networks will also drive future growth.

We're very encouraged by that market segment.

Another segment of strength, that I mentioned already earlier, was our mobile consumer products, which represent now already 12% of our total sales up from about 10% of sales a year ago.

The quarter was very strong.

We had the highest growth in that segment with 53% driven primarily by some early seasonal demand for phones that our customers want to put on the shelf apparently earlier this year than normal.

In addition, we are participating with a very broad customer base and with them, with many different models, that allow us to participate also in the strong selling mobile phones so that this is really driving our growth.

Another growth driver in this segment is innovation.

Innovation which has allowed us to increase content in the mobile phones over time.

If we look at this, we are serving this year projectively about 520 million mobile phones and devices and generate about $290 million of sales, so our content has significantly increased over time.

The proliferation of these products -- of our product into new mobile devices like music phones, like laptops that are all being equipped to be fully mobile, as well as PDAs, is another element of driving further growth.

We expect the strong growth to continue in the early part of the fourth quarter but then tapering off seasonally towards the end of this quarter.

In summary, Amphenol had an excellent quarter with record results in sales and earnings in the seasonally slower period.

We're pleased to be fully operational in Sidney, TCS continues their strong trend upward.

We have strengthened our positions in all the markets that we are serving, building a solid foundation for continued growth.

Increasing volume, our ongoing cost reductions, as well as our continued pricing actions, will also drive further margin expansion as we move forward.

So we're truly excited about not only our own position here and in the markets that we serve, but the future potential of the Company.

See tremendous opportunities ahead of us and are very confident in the ability of our organization to fully capitalize on these opportunities.

On that basis, we have been, again, raising our outlook for the fourth quarter for the full-year of 2006.

Diana outlined the basis of these increases of our earnings outlook for the rest of the year, and we look forward to a very strong close of 2006 but we are equally confident for a strong continuation into 2007.

Thank you very much and I would like to open it now for questions that you may have.

[OPERATOR INSTRUCTIONS] Our first question comes from Steven Fox with Merrill Lynch.

Hi.

Good afternoon.

Good afternoon, Steven, how are you?

I'm great.

Thanks.

Just looking out to the fourth quarter, Martin, you seem to be suggesting that maybe there was some above average demand in Q3 that doesn't continue into Q4, but at the same time it sounds like your operating margin should expand nicely.

So can you maybe talk about those two dynamics a little bit and how much -- how you guys see your margin -- why your margins would expand?

Margins, as I mentioned, would expand because we already projecting a further volume increase.

I mean, when I say the demand is somewhat slowing, that doesn't -- that means only on a year-over-year comparison.

That means still that we will have higher volume and sequentially higher volume than in the record Q3, so volume is one driver.

Our ongoing cost reduction programs is another driver of our opportunities moving forward and then the continued expansion that we see coming from TCS as well as from the cable products where we have cost reduction actions as well as specific action in TCS.

So all of these elements together will certainly have the potential to further move margins up.

And then with, specifically, with the TCS business, the growth, like you said, has been surprisingly strong.

What type of growth business do you think it is going forward?

Can you sort of talk about the market opportunities versus your ability to grow faster than the market in those areas?

TCS had a very strong performance.

As I mentioned earlier, we had favorable demand, but at the same time, as time goes forward, we also see the synergies between Amphenol and TCS in offering our customers a complete interconnect system architecture both through just selling the narrow product line of TCS.

TCS itself is further expanding into new product areas that I chasten to the traditional back plane business.

In addition, we have geographic diversification of TCS that plays into further growth opportunities in there, so we are not expecting just to totally cycle with market demand in this area as we have a lot of additional action in place to continue and further the growth of that division.

Great.

Thank you very much.

Thank you.

Our next question comes from Jim Suva with Citigroup.

Great.

Thank you, Martin and Diana.

Martin, you mentioned a couple of comments about further price increases.

Is it fair to say that right now still there's still some room left in the recently announced price increases to gain traction meaning that contracts are negotiated like on a quarterly basis for some items, and when you talk about future product price increases, do you have some plan for Q3 or Q4?

This is a very important question in the context of this whole material price increases.

First of all, let me talk about the material, the cost increases before I get to the pricing.

You know, it is generally assumed when commodities prices go down that automatically material prices from our vendors will go down.

Actually, that's not necessarily the case because most of our vendors had inventory at lower costs, and then now they buy, you know, and have bought material at higher costs, and they want to push these cost increases back to us upwards, so we still experience, clearly, the demand of our vendors for further cost increases in that area.

At the same time our customers are talking to us about the inflection point that commodities have come down.

If we don't accept price increases we want rather price reductions.

So we are kind of is, this continued difficult environment to balance ourselves between prices and cost increases but, obviously, this is a main priority item for us, we will continue to focus on this, and there where it is possible to certainly pass on and continue to pass on price increases.

We have done some this year already, and we certainly have plans at the beginning of this year to further [inaudible] some price increases with the necessary notice periods and so forth.

Great.

Thank you.

As a quick housekeeping item, can you talk about the lower tax rate going forward, is that because you're gaining more profitability in lower tax jurisdictions and should we assume that going forward rather than say a higher 33% tax rate we should be looking at something closer to 32?

I think the 32% rate would be a good thing to think about as you look forward.

I think it's a combination of an increase in income in lower tax rate areas and also some change to our repatriation plan as we kind of look out where some of the tuck-in acquisition opportunities are and in some cases may make the decision to leave some cash, you know, there rather than bring it back here, pay U.S. taxes and then make the acquisitions from here, so I think it's a combination of those two factors.

Great.

Thank you and congratulations once again.

Thank you.

Thank you.

Our next question comes from Michael Walker with Credit Suisse.

Thanks.

Good afternoon.

Good afternoon, Michael.

How are you?

I'm good.

Question just on the revenue guidance for Q4.

There's a couple moving parts.

It sounds like the TCS business will be down 10%, which I think is about $13 million sequentially, but then you're getting a little bit of revenues back from the Sidney flood regenerating into the inventory channel.

Correct.

So I guess when I back all that out, it looks like you're guiding to about a 3% or so sequential increase which is a little lower than you've done seasonally.

Just wondering if you can give some color on that.

I think first of all, obviously, the TCS decline has really to do essentially with the adjustments to the military -- to the hubbing situation that I talked in a major part and is not something that is ongoing, but certainly has an effect on the fourth quarter.

But there are a couple of market segments where we believe that seasonally sales may be not as strong because they had already been anticipated earlier, like in the mobile handset market as being one, the broadband market is usually tapering off towards the tail of this while the third quarter usually is a strong build period.

Those two markets, and we also said that the automotive market, especially as we look at the registrations, may remain soft as well, so no necessarily a sequential pick up, and as such, those areas which influence and impact this sequential increase upward, is there some upside opportunity, there is always depending on continued favorable demand environment and so forth.

Okay.

And then my second question's just on the gross margin line again.

Down 30 basis points sequentially in Q4, I assume that's from raw material cost impact, but it looks like you're guiding for it to rebound pretty strongly here in the Q4 timeframe.

I heard what you said earlier about price increases and lower costs, but just drilling down a little bit, are we looking at a situation here where the flattening raw material cost environment of last three to five months will start to flow through even as your prices are higher?

Is that what you're really --

That is one element of it.

The other element is certainly the launch of new products which have different margin characteristics.

It's also a volume impact that I mentioned earlier that has impact.

Volume always brings some new opportunities in that area as well, and so overall I think there are a couple of driving aspects including our ongoing cost reduction programs that we always pursue that allow us to think about this margin expansion in Q4, and we realized that this is a rebound.

Can TCS margins go up even with the revenues going down in Q4?

Yes, absolutely, that's one of our assumptions.

And I would also just add that there is some, now that the mil-aero business, if you want, is back to a normal quarter in Q4, and this is sort of replacing where we expect TCS sales to be lower because of the hubbing, so there is some mix shift there that has some impact on ROS.

How much sales from the mil-aero coming back into the channel do you expect in Q4?

Well I think the --

Go ahead.

We expect to have what I call a normal fourth quarter in that business, and I think we talked about we lost about $10 million in sales in Q2, we lost about $15 million in Q3.

I mean Q4 will be in excess of the Q1 level, but we certainly aren't recovering, as Martin said, before all of those lost sales in the fourth quarter.

We expect to that happen over a two to three quarter timeframe, so I would characterize it more as a normal quarter with perhaps some slight higher sales level as we replenish that channel but not a significant amount.

But if you take just the $15 million that we lost and say you get to pre-flood levels, that's the $15 million at higher margins that TCS has in the loss of $10 million.

So that's certainly a mix effect that is very positive.

Thank you very much.

Thank you, Mike.

Thank you.

Our next question comes from Carter Shoop with Deutsche Bank.

Hi.

I wanted to talk a little bit about TCS and the growth rate there.

If you kind of don't exclude the -- or if you do exclude the impact from the hubbing activities, we're looking at fourth quarter TCS revenue to be up roughly 40 to 45% year-over-year.

Obviously there's a lot of moving pieces over the past year, but how sustainable is this growth and how concerned are you that we have seen an inventory build at some of the subcontractors and also at the OEMs?

Just in summary, relative to inventory build, we haven't seen inventory build.

We have seen the strong demand cycle, but not necessarily have we seen that that ended up at the customer's shelves nor at the contract manufacturer's shelves.

Obviously, demand is fluctuating, but we look at TCS as a division that has excellent growth potential.

It has excellent growth potential, not necessarily at run rates of a 40% increase, and a 40% increase, and if you look at year-over-year comparisons by quarter, there's no quarter where there is 40%.

The 40% or so comes because you're comparing a fourth quarter low where we kind of started with TCS with a third quarter high, but there are sustainable growth rates that are double-digit numbers because of the diversification, because of the association with Amphenol, because of not only diversification relative to products and geography, but also to the capability of picking up business in the context of Amphenol where we have strength in customers where they didn't have the strength and so forth.

So product diversification, customer diversification, the geography, all of this will help increase the growth rate of TCS beyond the normal market growth rate.

And just two quick follow-up's on the acquisition front.

Were there any bolt-on acquisitions in the quarter and also can you comment about the acquisition pipeline?

There was no acquisition consummated in the third quarter.

The pipeline is good, and we look at several companies that are these tuck-in acquisitions, however, as you know, entrepreneurs are not always easily to let go in these companies even if you are dating and in discussions for a long period of time, it takes some time to close them.

It's very unpredictable when such acquisitions will close, but the pipeline is big enough to assume that there could be some acquisitions consummated even still this year.

And not in our outlook.

Great.

Thank you.

Thank you.

Thank you.

Our next question comes from Tom Dinges with JPMorgan.

Good morning guys or good afternoon your time.

How are you?

I'm doing well.

Yourself?

Good.

Thank you.

A quick one on the mobile infrastructure market, Martin.

You'd mentioned that you guys were seeing pretty strong demand, but obviously there's been some questions as to characterization of demand in the domestic market versus what you're seeing in the foreign markets, and it sounded from you that you're still seeing very, very robust growth in the foreign markets, but maybe help us, what are you seeing out there in the domestic market right now and what are you expecting in the next quarter?

And then I have a quick follow-up for you.

As far as the mobile market is concerned, we have distinguished Amphenol between the equipment manufacturers making Play Stations and making network electronics, and the [pure] installation market.

What has actually accelerated in the third quarter was the installation market.

All in North America to some extent with some buildouts in some areas, just new opportunities in North America, even coming along with the recent purchase of certain frequencies that relate to, you know, Wi Max mostly, and U think as far as the international market is concerned, we see just enormous buildout and strength in India, in developing countries such as India, but also outside of India and Africa, South America and so forth where essentially people and governments have decided really not to go along with stringing cable but really having installations of mobile networks to get subscribers to phones.

And I think that is not only driving the mobile infrastructure but also the mobile phone market itself because the subscriber growth is substantial.

In addition, we expect, truly expect, a continued almost exponential growth of the data traffic, and as data traffic continues to grow, you know, new installations, upgrades of networks in also the North America as well as in Europe will be required.

A shift over even to more powerful networks, this region of networks are clearly happening.

We see it very strongly happening in Korea, for example, that the shift to 3G networks, and that will also happen in other areas.

So we look forward not to a kind of bubble there that all of a sudden, you know, we will have a tremendous growth that will falter, but a continued strong growth to support that traffic that will occur.

I mean, how many people over the Internet are not sending, you know, pictures today, videos today, video clips today, and this whole multi-media traffic is going to add a total additional dimension to the mobile traffic that will be required in the future.

And then just a real quick one, more a clarification than anything else on the inventory management change that you're seeing with one of your customers there.

So you'll see sales down a little bit just simply probably because title can't transfer out of the hubs, I'm assuming over the next couple of quarters we'll see inventory relative to that pick up a little bit, and then the expectation is this sort of normalizes out to whatever the level of volumes is by the middle of next year.

Is that the --

That's a very, very accurate characterization of what is happening, yes, absolutely.

Thank you very much.

Our next question comes from Shawn Harrison with Longbow Research.

Hi.

Good afternoon.

Good afternoon.

Just a quick clarification first.

The EBIT margin for the TCS business.

I think you said it was 16% in the quarter.

Close to 16, 15.7%.

Okay.

Given that EBIT margins since you purchased the business in the fourth quarter of last year have almost doubled, my question pertains to how much more of the quote unquote low hanging fruit is available in terms of, you know, just almost immediate gratification versus kind of the slower progress you would expect as you begin to integrate the products?

Kind of when do we reach that inflection point?

Well, this is a very comprehensive question because, you know, if you look at the connector business, many connector companies in the world would admire to have a 16% operating margin to start out with, so to get to 16% operating margin is not just grabbing low hanging fruits.

You can get the low hanging -- to certain operating margins, obviously quickly, but in order to reach these higher levels, more things have to happen, and these things are happening consistent with what Amphenol has done, who has close to 22% margin its connector business, and as such we believe that TCS has still potential and room for further growth to converge, probably sometime in 2007 with the average margin of the Company.

The various elements that help us during this are really the focus of more value-added product where we have content, where we have the control over the bill of material, the focus on selling essentially the leadership position that TCS is in, they're not selling a commodity product, they're truly selling a capability that is unmatched in the industry.

There are many other aspects relative to cost reductions, you know, having more access to low cost sourcing that didn't have previously, and these are ongoing elements that will help us to further improve the margin similar like we have done it over time in Amphenol.

All right.

Thank you.

Thank you.

Thank you.

Our next question comes from Kevin [Cercin] with Next Generation Research.

Hi, guys.

Good afternoon.

My first question is a clarification.

When you just mentioned that you expect TCS margins to get to the average of the Company or do you mean the average of the interconnect segment?

This is a good differentiation.

They are at 16%.

The first step is to get to the average of the Company.

The next step would be to bring them to a higher level beyond that over time, and obviously that continues to be our goal.

Okay.

Good.

My question is on the cable business.

You're showing some pretty good growth over the last three or four quarters, and we saw similar kind of growth in 2003 and early 2004, and then it kind of tapered off and during that period you talked about maintenance kind of revenue growth, now it seems like you're talking a little bit higher expectations.

What's driving that and how long do you think that can last and what convinces you we're not going to see another drop off?

Well, this market place, and this is a very fair question relative to past historical experience.

Obviously this is a business that has some cyclicality to it and seasonality to [inaudible] it and, obviously, what we are seeing today is certainly a buildout, not necessarily of the network.

If we look at the network itself, most of this there are very little upgrades.

It's essentially the hookup of subscribers to provide the triple play, and that's really related to a lot of the drop cable rather than the semi flex distribution cable.

And as such, we believe that as long as the operators continue to be successful in their race against DSL, in their race against satellites and bring even kind of mobility ultimately or else the operators wouldn't have bought into some spectrum here recently, so as long as that is happening, we believe that the cable business can remain relatively strong over the next period of time, but it is more related to the drop side of the business rather than the buildout of new networks if you want.

And just a quick follow-up.

What would you characterize the price increases to raw material costs you've gotten in both segments?

I mean are you pretty close on the cable side and about there on the interconnect side or how far off are you?

I'm just trying to look forward if you don't get your price increases because it sounds like customers are pushing back a little bit, we do expect raw material costs to moderate, just wondering what the delta is on what you're getting?

Well, that is certainly different from segment to segment, and I think since we just talked about the cable, I think we have still a spread that is beyond 15% to a material costs are higher to what we got so far in pricing over time.

So there is still room to start to mitigate these material costs increases.

It's not as significant because the material content is not as significant in the other segments.

So it's smaller than that.

Thank you.

Thank you.

Thank you.

Our next question comes from Yuri Krapivin with Lehman Brothers.

Good afternoon.

Good afternoon.

Going back to the question of pricing, I know that you previously were relatively successful in raising prices in the industrial markets as well as in the distribution channel.

Are you saying that now you are being able to raise prices in the technology markets as well?

In other words, you are broadening this [global list] price increases?

We certainly have to the intent to do so.

When I say we are able to get it everywhere, I think that depends on the competitive environment in the various segments that we are in but, obviously, there is a more favorable environment to think about that truly material costs have gone up, and that at least the decline of pricing is moderating in some areas even we can get some price increases, but mostly the communications and data com area we're seeing more of a moderation of the declines [inaudible] requested or that we have to give to customers rather than pure price increases themselves.

But that also is helping margins.

Okay.

And then I have a general question.

So far this earnings season we have seen a multiple negative pre-announcements and earnings announcements by the analog semiconductor companies and it seems like demand could be an issue for them, yet you continue to sound very positive and I should say that several other component vendors continue to sound quite positive, so there is some disconnect here.

Do you have any thoughts in that regard, Martin?

I cannot speak for the other companies, but I can speak for ourselves and our ability.

With our position and the foundation that we have created in the Company we just feel that there are still tremendous opportunities out there.

I always say that there is about, you know, half of the world connector market available to us because it's essentially covered by many small companies that do not have our global presence, small companies that do not have our leading product and manufacturing technology, they do not have the cost levels that are required to compete on a global basis.

So there is tremendous opportunity still to gain, and therefore we will certainly be undertaking, undergo any fluctuations that are there in the demand, but we can obviously continue to mitigate those fluctuations with our own undertakings to gain positions in emerging markets in new segments of the business and so forth and that is clearly our intent.

That's what we have done over the last ten years where we grew about twice the rate of the industry, and that's our intent to continue in the future.

Thank you.

Thank you.

Thank you.

Our next question comes from Jeff Beach with Stifel Nicolaus.

Good afternoon, Martin, and nice quarter again.

Thank you.

Good afternoon.

I have a question about the profitability in your cable products in the third quarter.

At the beginning of the quarter you raised prices 8 to 10%.

You just reported the best revenues since 2000, so you'd think volume would be helping, and there was only small sequential increase here.

I know you talked a little bit about not getting the full effect of lower commodity prices, but it seems hard to believe that lower plastic and copper prices didn't help more.

Is there any other headwinds or anything you can explain maybe why the profit margin wasn't a little bit better this quarter?

Well this is a very good observation, and let me just clarify, there's no headwind.

The only thing that really is there is that if we look at the price increases, obviously, we're talking about maybe 60% of the business where it really hasn't affected is North America to start out with, so that is, you know, just already limiting to say the factor of how much pricing use of that 10% you can really get.

In addition, the price increase was in July which is only, you know, it's already a third less in the quarter on that basis.

So if [inaudible] down, I think the increase that we have seen may look small but is very consistent in what we have announced, and there is no really other headwind that we see relative to this.

Obviously prices continue to fluctuate.

I mean it's just a few weeks ago aluminum was at 1.13 and now it's again over 1.20, 1.24.

I think you see these changes, and we have now, instead of quarterly adjustments on these materials, monthly adjustments with our vendors, and that can go both ways.

All right.

Thanks.

Thank you.

Thank you.

Our next question comes from Mike Caputo with Cramer Rosenthal.

Hi, guys, nice quarter.

Good afternoon.

Thank you.

A couple questions.

On the organic growth rate, how much of that is really attributable to you guys offering this complete suite of Amphenol products to what were previously TCS customers?

Can you break that out?

That is, obviously, not always easy to measure what you can get because of this or not but, clearly, the growth rate that we have been achieved, have been able to achieve standalone in the information technology and data com market in the past was somewhere around -- somewhere between 5 and 10% if you recall.

This now we are up to a higher growth rate in the second quarter was 12, now it's 14%, so there is clearly an impact on this, but also combined with some of the new product launches with the new products that go now more increasingly into the next generation products than before as our customers are switching to, truly switching from the parallel passes to the serial passes forward.

I think it's a combination of [those] but there is an effect.

Great.

How much more opportunity do you think is still there to sell Amphenol product into TCS [inaudible] --

This is an ongoing opportunity that we are certainly pursuing.

We see still a lot of customers that have tremendous business with Amphenol, but very little with TCS where there is potential and vice versa.

We see also international customers that where Amphenol had good penetration but TCS doesn't have it yet and vice versa.

So there is continued opportunity to drive growth and that's one of the elements that I mentioned earlier that will continue to drive our growth maybe even stronger than demand levels are.

Okay.

Great.

And in the mil-aerospace can you just talk a little bit about military versus aero and you're seeing more strength on the OEM side or after-market side or both?

Actually, there was a period most recently the last three months, I would suggest, that there was clearly a funding shift towards military operations which means more of the standard products that are already used being required opposed to new programs, but most recently we have seen, again, a funding shift there that new programs have restarted again which require kind of next generation products and so forth.

So as long as these military operations are in process, they will be an ongoing yo-yo game between the two because there is not infinite funding available for everything.

As far as the split between aerospace and commercial aircraft, I assume you mean military is concerned, there's no major shift except that obviously the delay of the 480 aircraft at Airbus is certainly not a favorable situation at this point in time, and there is a lot written about it at this point we have great content there.

We continue to sell to all the other aircraft that are being produced by Airbus but not at the same level as we would have expected for the 480 to happen.

The 787, on the other hand, seems to be well on stream and we see increasing demand as trials are in process.

So there's no significant change except at the Airbus side.

Okay.

So in aerospace, though, do you know the mix of OEM versus after-market?

That is very difficult to say for us because a lot of our business goes through distribution and some is for the after-market and some is really for the OEMs.

I think we are measuring it more towards what is in military side, what is military operation and what is new programs because that certainly has an impact on capacities that we have to provide.

Okay.

Great.

Congrats on a great quarter.

Thank you.

We have time for one more question.

Our next question comes from Amit Daryanani RBC Capital Markets.

Good afternoon, guys.

Just a question on the TCS margin expansion.

The margin has expanded by 10 percentage points since you acquired the business.

And when you guys announced the deal I think it outlined sort of four big drivers for margin expansion, I think they were like, raw material sourcing, labor reduction, cross-selling and exiting some low margin business.

Can you just update us on which of these drivers are sort of more or less completely executed, which ones you need focus on to eventually get TCS to Amphenol's core connector margins from here?

First of all, I think all of those are correct but there was an additional driver, and that additional driver was clearly volume that, certainly, from a favorable demand in my mind has clearly helped also to improve the margins.

The other four elements that you have mentioned, they're ongoing.

I don't think we have here a real project that says we go from A to B and we're done with it.

These are all ongoing situations as far as cross-selling is concerned.

Obviously we're cross-selling into next generation products.

As far as cost reductions are concerned the move to lower cost areas, this is an ongoing process and will continue for some time, and as it continues it will help to us improve margin and it will help us in the future also as we have increased margins to offset some of the pricing pressure that may come in the future again and so forth.

So those are a whole host of dynamics.

But these are all programs that will be ongoing moving forward.

But we'll have one result and that is to further improve TCS's margins over time.

I guess, Martin, what I'm really trying to see is when you guys bought TCS, [just] to get 90% of the raw material was essentially coming from high cost regions versus for you guys it's about 15 or 20%.

What is that percent for TCS today?

Is half the raw material coming from low cost regions or is that a bigger number?

It is actually -- I give you a rough estimate.

It's certainly lower than the 90% today.

If it is 50% or 60%, I wouldn't be able to tell you, but it's somewhere in that range.

All right.

Fair enough.

Thanks a lot.

Good.

Thank you.

At this time I show no further questions.

Thank you very much for your interest in Amphenol, and we look forward to continuing to talk with you in the future.

Thank you.

Good-bye.

That concludes today's teleconference.

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