安費諾 (APH) 2006 Q4 法說會逐字稿

Hello, and welcome to the fourth quarter and full-year earnings conference call for Amphenol Corporation.

Following today's presentation there will be a formal question-and-answer session to ask your question. (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 now like to introduce today's conference host, Ms. Diana Reardon.

Ma'am, you may begin.

Thank you.

Good afternoon.

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

I am here together with Martin Loeffler, the CEO and we would like to welcome everyone to our fourth quarter conference call.

Fourth 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.

We will then have a question-and-answer session.

The company had a strong fourth quarter achieving new records in both sales and earnings.

Sales for the quarter were $659 million, up 30% in US$ and 27% in local currencies over the fourth quarter of 2005.

From a sequential standpoint sales were up 4% in U.S. dollars and 3% in local currencies from the third quarter of 2006.

Sales of TCS in the quarter were approximately $112 million.

This compares to the pro forma sales of $83 million in the fourth quarter of 2005 and sales of $126 million in the third quarter of 2006.

Consistent with our Q4 guidance, TCS sales were reduced by approximately $15 million as a result of the implementation of new inventory hub arrangements with certain customers.

TCS was acquired on December 1, 2005.

Excluding the TCS acquisition sales increased approximately 16% in US$ and 12% in local currencies over last year's fourth quarter.

Breaking down sales into our two major components, the interconnect segment which comprised 90% of our sales in the quarter was up 31% compared to last year, 15% excluding the TCS acquisition.

Interconnect sales increased in all of the Company's end markets.

Our cable segment which comprised 10% of our sales in the quarter was up 19% from last year as a result of increases in broadband, cable television markets and the impact of price increases.

Operating income for the quarter was strong at $125 million compared to $94 million last year.

Operating margin was 18.9% compared to 18% in Q3 of 2006, excluding flood related charges at 18.5% last year.

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

In accordance with GAAP the fourth quarter of 2006 includes $3 million of compensation expense relating to stock options, reducing consolidated operating income margin by approximately 50 basis points when compared to the fourth quarter of 2005.

From a segment standpoint in the cable segment, margins were 12.1%, up 150 basis points from last year and down approximately 30 basis points sequentially from the third quarter of 2006.

Margins in this segment have been under pressure as a result of the increases in material, particularly aluminum and freight related costs that have been driven by higher commodity and energy prices.

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

In the interconnect segment margins were 21.3%, up 90 basis points from the third quarter of 2006 and up 60 basis points from the fourth quarter of 2005.

The increase in operating margins relates both to good operating leverage in the company's core connector business and to continued margin improvement at TCS.

The achievement of these strong margins in the Company's interconnect business reflects the Company's continued focus on the introduction and growth of higher margin application-specific interconnect products.

Combined with a strong focus on the timely implementation of cost reductions and other profit improvement actions providing a solid base for future performance.

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

Interest expense for the quarter was $9.3 million compared to $7.4 million last year.

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

Other expense was $2.8 million compared to $3.6 million in the third quarter of 2006 and $3.2 million last year.

The reduction compared to Q3 relates to lower fees on sale of accounts receivable under the Company's receivable securitization program resulting from lower average levels of receivable sales during the quarter and lower minority interest expense.

In the fourth quarter of 2006 the Company reduced its annual effective tax rate from 32% to 31.5%.

The reduction relates primarily to the U.S. government's reinstatement of the R&D tax credit at the end of 2006.

This resulted in a 30.3% tax rate in the fourth quarter, reducing tax expense and increasing EPS by approximately $1.9 million and $0.02, respectively.

The tax rates in the fourth quarter of 2005 and the full year 2005 were 33%.

At this point we expect a 31% tax rate in 2007.

Net income was $78 million over 11% of sales, an indication of our excellent profitability.

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

Diluted EPS for the quarter was $0.85 per share, up 39% from $0.61 last year.

During the quarter we generated a strong cash flow from operations of $76 million.

This cash flow includes approximately $3 million in onetime cash receipts relating to flood insurance proceeds net of expenses at the Company's Sidney, New York facility.

The cash flow from operations, along with $13 million of proceeds from the exercise of stock options were used to fund $25 million of capital expenditures, $39 million of stock buyback, acquisition related expenditures of $4 million related to the acquisition of a small Chinese fiber-optic interconnect supplier, $2.7 million in dividend payments, a debt reduction of $8 million and an increase in cash of approximately $11 million.

The balance sheet is in good shape.

Accounts Receivable days outstanding were at 66 days at the end of 2006, up 3 days from the end of September and up 1 day from the end of 2005.

Inventory days were 85 days compared to 81 days at the end of September and 86 days at the end of 2005.

Inventory at December 31, 2006 was increased by approximately $13 million and about 3 days relating to the previously announced establishment of new inventory hub arrangements with certain customers in the fourth quarter of 2006.

Debt was $680 million at the end of the year, down $101 million from the end of 2005.

The Company's leverage and interest coverage ratios remained very strong at 1.5 and 11.5 times, respectively.

Fourth quarter EBITDA was approximately $143 million and availability under the Company's revolving credit facility was $335 million at the end of December.

The amount of receivable sold under our receivable securitization program at year end was $85 million.

At the end of December the Company implemented the provisions of a new FASB statement, FASB statement 158 which relates to retirement obligations.

Among other things, the new pronouncement requires the recording of a liability equal to the difference between plan assets and the projected benefit obligation which takes into consideration future salary increases.

As opposed to the old guidance which used the accumulated benefit obligation, which does not consider future salary increases.

As a result of implementing the new pronouncement, the Company recorded an increase in the unfunded obligation under its retirement plan of approximately $31 million.

And reduced equity by approximately $19 million.

At December 31, '06 the total net unfunded retirement plan obligation was $138 million compared to $99 million at the end of 2005.

Orders for the quarter were $655 million, a book-to-bill ratio of approximately 0.99 to 1.

Certainly from a financial perspective it was an excellent quarter.

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

Thank you very much, Diana, and welcome to our first conference call in the new year.

I trust that it is not too late to wish you all a happy new year 2007.

As Diana just said, I will highlight some of our achievements in the fourth quarter and the full year 2006.

I will discuss trends in progress in served markets, and then conclude with some comments on the outlook for the first quarter and the full year 2007.

As far as fourth quarter results are concerned, we are extremely pleased with our performance in that period.

We achieved new records in sales and EPS.

We maintained our industry-leading growth with both year-over-year sales increases, as well as sequential sales increases.

Year-over-year sales increased as Diana just said 30%, and without TCS a very strong 16% in the fourth quarter and 4% sequentially.

The sales increases were broadbased across all our served markets.

Essentially all our served markets have shown double-digit growth except the automotive market, which had mid-single-digit growth.

We also enjoyed growth in all geographic regions in which we do business.

From a profitability standpoint and cash flow standpoint our performance remains strong in the fourth quarter.

Operating income margin expanded from 18% in the third quarter to 18.9% in the fourth quarter despite a continuing difficult cost and pricing environment.

EPS increased 39% over the prior year as a result of strong organic growth and the contribution from TCS.

Net income increased to a new high of 11.9% to sales, another indication of our excellent profitability.

Cash flow remains strong, and we applied it toward a variety of value drivers, including a very small acquisition in China.

The company's name is [ETD], and it is a very typical Amphenol acquisition.

Small sales of about $6 million, however, coming along a very entrepreneurial management team, a nucleus of superb fiber-optic technology at low-cost, which has significant potential for leverage through our worldwide organization.

From a total year perspective a few highlights.

Amphenol had another excellent year in all respects.

Sales increased from $1.8 billion to almost $2.5 billion over that period.

EPS increased approximately 32% excluding flood related charges and adjusting for stock option accounting.

We maintained industry-leading profitability in a very challenging environment throughout the year.

And lastly, in a very smooth transaction TCS became an integral part of the high-performance culture of Amphenol converging towards our high standards of performance in profitability.

We continue in 2006 to building competitive strength.

Our strong performance is a direct result of our diversified reach in markets, customers, product and geographies, and TCS has helped us to strengthen our position in several of our key markets.

It is a direct result of continued development in new application-specific products and solutions for our customers that keep there higher margins.

It is a direct result of our cultural cost control and the permanent emphasis of cost-cutting programs in good and difficult economic cycles.

It is a direct result of our proven investment approach and certainly a result of a strong organization.

And we continuously adjust our organization to the changing needs of market conditions.

And as part of this ongoing organizational development we appointed recently a President and Chief Operating Officer, Adam Norwitt.

And I am excited about his initial mission.

It will be to enhance our focus on expansion opportunities across all of our operating divisions.

He will more specifically drive our geographic expansion in areas where we have significant potential for further growth.

It will be his goal to capitalize on new emerging markets like the medical market that is in high-growth status as well as other markets that we have targeted.

And he will continue to strengthen and accelerate our already very successful acquisition activity.

I am very excited about this new phase of profitable expansion that Amphenol is engaging in.

Let me now comment on some of the trends in our various market segments.

The military, the aerospace market represented 19% of our sales in the fourth quarter, and sales increased 11% over prior year.

As expected, the sales exceeded pre flood levels in our Sidney facility, and we are very pleased with this result.

The demand in defense remains healthy in North America and is improving in Europe.

And we expect new commercial aircraft businesses to complement our growth in 2007.

We believe that this segment will remain very strong for the Company through 2007.

The industrial market represented 12% of our sales in the fourth quarter, and sales increased a very strong 21% over prior year.

We continue to benefit from our strategic focus on discrete growth segments of the industrial markets, such as the medical instrumentation, power applications and rail met transit as well as oil and gas exploration markets.

We expect also this market to remain positive and strong moving into throughout 2007.

The automotive market is the smallest segment that we serve with 7% of our sales, but we are very pleased that we returned to positive growth of 5%; in part driven by the launch of our next generation interconnect products for safety devices.

We believe that the main driver for continued positive trend in this area will be the sale of our new products to new applications, electronic applications in the car.

Overall we expect the demand to remain moderate in that segment in the near-term.

Now a few comments to the communications related markets and information technology segments.

First, the broadband communication market over having fiber coax networks represented 11% of our sales in the fourth quarter, and we experienced very strong growth of 22% over the prior year.

This was a result of our earlier price increases and strong demand, and this strong demand in a typically seasonally slower period was essentially due to the success of new broadband services offered by the MSOs.

High material costs continue to impact margins of our cable products, but further price increases will be required in 2007 if material costs don't change.

We expect demand to moderate in this segment in the first quarter due to the normal seasonal pattern of a slower build rate in that period.

The information technology and data communication market represented 25% of our sales.

Sales were up a strong 68% over last year; without TCS, it was up strong 12%.

We are very pleased that both the growth of our core business, as well as the contribution from TCS has significantly enhanced our market position in that important growth market.

New high-speed products are gaining momentum.

Our product and customer diversification is driving growth, and we are very encouraged with the design wins of new products in that area.

We expect the positive trend in this segment to continue in 2007.

The mobile infrastructure market represented 13% of our sales in the quarter, and sales were up a strong 38% in the quarter.

Again, TCS contributed significantly to further strengthen our market position in that segment.

Without TCS the sales in this segment grew 11%.

As you all know, as of next year we will not have any more to talk about the TCS excluding TCS because we will have full-year comparisons at that point in time.

As far as the mobile infrastructure market is concerned, we achieved gains in the equipment market -- we gained in this market which were somewhat offset by seasonally slower demand in the installation market, in net effect a gain and a growth of 11% without TCS.

There is some uncertainty in the near-term pending due to the emergence of Alcatel and Lucent, Nokia and Siemens in that segment but we see excellent potential long-term after these combinations of companies are consummated.

And fully in operation.

Overall, the mobile infrastructure market has good opportunities for us in the future as subscriber growth continued increase of Beta and multimedia traffic.

New IP mobile networks are being designed, and we are participating in those designs which all supports a long-term, very positive outlook for this market segment.

The last segment that I like to discuss is a mobile device market which represented 13% of our sales in the fourth quarter.

We had an excellent quarter again, as so many in 2006 in this segment.

Sales increased a strong 31% year-over-year and 8% sequentially despite the slowing demand towards the quarter end.

We continue to benefit from our diversity in customers, phone models and products that we offer our customers.

Our continuous innovation in products are increasing the value of our content, and we are very confident that the proliferation of product to mobile consumer devices is increasing our overall market opportunity.

We expect continued growth in 2007 with a more normal, seasonal demand pattern, which means that the first quarter usually is somewhat slower than the fourth quarter of the year.

A few comments to conclude on the outlook for 2007 and the first quarter.

We expect the connector industry to grow somewhere between 4 to 6% with a normal seasonality in 2007, that means that the first and third quarter will be somewhat seasonally slower than the second and fourth quarter of the year.

Amphenol is an excellent market with a strong organization, and we are excited about the future potential of our Company and the many opportunities in front of us.

And therefore we provide a very strong guidance for 2007 with sales increase of approximately twice the industry growth, somewhere between 8 and 10% is our sales expectation.

And significant operating leverage to improve profitability.

In sales we expect for the year 2007 sales in the range of $2,650,000,000 to $2,710,000,000.

This is about an 8 to 10% growth over this year's achievement.

We expect EPS in the range of $3.45 to $3.55, consistent with our long-term goal of achieving earnings growth at twice the rate of the sales growth.

At the high end of our guidance that would mean a 20% EPS growth.

We expect the first quarter sales to be seasonally in line with our overall assumptions for the year, and to be somewhat below the fourth quarter 2006 in a range of $635 to $645 million.

Expect the first quarter EPS to be strong in the range of $1.80 to $1.82 a share.

Our enthusiasm and confidence in the future is also reflected in our decision to again effect a 2 to 1 stock split in the first quarter.

This is the third stock split since the year 2000.

We had one in the year 2000, one in the year 2004 and now at the beginning of 2007.

Jokingly it appears that we are accelerating our pace of these stock splits.

We certainly look forward with a lot of confidence into the future.

With this I look forward to any questions that you may have.

(OPERATOR INSTRUCTIONS) Matt Sheerin, Thomas Weisel Partners.

Thank you.

Good afternoon.

Just a question, Martin, regarding your distribution business.

I know that due to the flood in Sidney last summer distribution inventory was depleted.

Did you see distributors replenish most of the stocks in the last quarter, and did you get any abnormal benefit from that and do you see that continuing this quarter?

This is a very good question.

Obviously we have said early already that we believe that we will replenish that inventory over time.

We didn't get a onetime benefit in the fourth quarter whatsoever.

We were just shipping what we had on our books at this time, maybe at a little higher rate overall but not necessarily to distribution.

But distribution has continued to have a strong pattern of their orders.

They obviously like to see their inventories at a little bit lower level.

So and see that this works, as well; but nevertheless we believe that there will be replenishment over time in 2007 happening.

My follow-up question regards raw material pricing and copper specifically.

I know that has been an issue, and one reason why you've increased pricing to customers.

Now with copper pricing coming down I know there is a lag effect, but when would you expect to see a positive impact from that on your margins, and how does that impact your pricing to customers?

This is a very broad question and certainly looking into the future, it is hard to predict what really commodity and material prices are doing and how our vendors react to it and how fast they are.

We are certainly putting a lot of pressure on our vendors but at the gas stations they are very reluctant to come immediately down after they see some decline.

Because obviously they have right now purchased their raw material at the higher cost and that has to be flushed out before we can see anything there.

We will continue to look for opportunities for increasing prices on a selective basis going forward.

Michael Walker, Credit Suisse.

Good afternoon.

My first question is just kind of a general macro outlook.

I'm wondering if you can comment on demand and the connector market, specifically.

I heard you say that you expect a little uncertainty on the wireless infrastructure side given (technical difficulty) customer consolidation.

But Molex obviously complained about handsets; we've heard a couple other people talk about handsets and PCs, we've heard about inventories.

So I wonder if you can kind of give a general viewpoint on end demand in '07 and how it is looking.

And also just the connector market in general, you're targeting about 8 to 10% organic growth here.

You just grew 12% last year organically if you back out TCS so is there a slowdown going on or just wondering if you could talk about that.

This is a very comprehensive question, Michael.

First of all, as far as the various market segments are concerned I think I've walked you all through the various demand patterns in those as we see them.

And it is very hard to compare what one company has compared to another.

It depends on the diversity and so forth.

We continue to benefit from our diversity.

Sometimes served markets are slowing and others are strengthening.

In aggregate we have been able to achieve various strong performance as a result of that diversity.

Just more specifically to the mobile phone market, yes, we saw in the fourth quarter somewhat slowing of demand towards the end of the quarter, and we believe that will continue into the first quarter.

That is nothing abnormal.

What was abnormal was the year 2006 and 2005 as in the fourth quarter of 2005 there was an enormous demand for mobile phones.

Even flushing over and into the first quarter of 2006, which I do not consider as a normal seasonal pattern.

We are entering just a normal seasonal environment here, and we have been dealing with this many years before.

So this is going to be no surprise to anybody.

As far as other market segments are concerned, we see continued strength in those market segments that I outlined earlier.

As far as our growth rate is concerned we are very excited about our growth rate.

Our growth rate over the last ten years was somewhere in the range of 10% without the TCS additions, and we continue that strong path which is in line with what we always said.

We want to grow somewhere between around two times the growth rate of the industry, and this is what we are targeting at this point in time.

Whether a 2% can be forecasted so precisely whether you go to from 12 to -- from 10 to 12 or 12 to 10.

That is to be seen as we go and get further into the year.

Obviously we are going to take all undertakings to maximize our growth as we move forward.

But this is our initial guidance for the year which I consider very strong relative to what we generally see the market will perform in.

My follow-up question is the acquisition environment as ripe as it has been in the past do you still expect to do a number of kind of smaller -- I know you did one last quarter -- but smaller bolt on deals and maybe a larger one here and there.

Do you still see a lot of potential acquisition opportunities out there?

Glad that you asked that question.

Obviously Adam Norwitt, our President, and our team here will continue to focus very strongly on the acquisition opportunities.

The thousand connector companies that I talk about that make up half of the world market have not gone away.

There are still tremendous opportunities for us.

Haven't seen necessarily bigger ones that would be a great fit for us at this point in time, but we have seen a lot of the smaller types that we are going after at this point.

Amit Daryanani of RBC Capital Markets.

Good afternoon, guys.

I may have missed this, but could you talk a little bit about what the margins were in the TCS business in the fourth quarter?

And just what do you expect TCS margins to trend in calendar '07?

TCS is, as you know, has grown in margins over the year.

And as I said earlier, margins are starting to converge with Amphenol's average margins.

And we are, as we haven't done in the past we are not going to continue to disclose margins of a particular operating unit as we move into 2007.

Fair enough.

And just following up on the acquisition question could you talk about maybe what end markets are you targeting at this point, and do you still remain comfortable in going after those 20 to $40 million tuck in acquisitions?

We continue to look at these type of acquisitions moving forward, whatever the size may be, the fiber-optic operation that we are acquiring is $6 million but we have high expectations that this can be multiplied by a significant factor moving forward through our channels.

And we will continue to look at those acquisitions certainly as we move into 2007 very strongly.

Bernie Mahon, Morgan Stanley.

Good afternoon.

Question for you on the TCS margins.

Can you just go over what maybe the target margins are there and what kind of timeframe you think you can get to that?

It is the same essentially question saying what is the margin at TCS and where we want to go.

I think what we said at the beginning of 2006 was that we have all confidence that TCS can get to the average of the company.

And we are converging to that point and we are certainly have expectation that all of our operating units, including TCS incur margin expansion as we move forward.

As volume grows, as we get leverage on our new application-specific products, and that is not different from TCS.

TCS has actually become an integral part of the culture that we have in Amphenol, and I am very pleased with that situation, and therefore we have strong confidence that they will help us to continue to grow our margins moving forward.

Okay, but I thought you said before that you think they can get to the interconnect margins.

Do you still expect that, and do you think you will get there in 2007?

This is certainly will continue to be our goal.

Steven Fox, Merrill Lynch.

Good afternoon.

Could you talk a little bit about the military aerospace and commercial aerospace business?

You mentioned that commercial was showing some signs for next quarter and beyond.

I am just curious how you look at that growth in 2007 and what proportion will be coming from commercial versus military.

That is a very fine question.

Obviously, to break that down at this point in time in exact percentages is something presumptuous at this point, but what I see is that we have gained very strong position on the new aircraft especially the 787.

Obviously also the Airbus, but that is a little bit lagging in the production.

But coming up.

And the 787 is clearly coming up.

They have received significant orders, and we have a very significant position in that as I mentioned earlier, and this will certainly have a contribution.

On the military side we continue to believe that 2007 will be a very strong year, whether it is military operation or the funding of some new programs.

It will be shifting back and forth as it has done all year 2006, but overall we believe that will continue to be strong throughout the year.

So we have high expectation for the military aerospace market to be strong in the double-digit growth area for 2007.

Just as a follow-up, Martin, you also mentioned cost savings.

Can you share with us any plans you have for either new plants in low-cost regions or closing some plants in higher cost regions that have been announced to employees?

Just get a sense for what operational you're doing in '07?

This is a very important question.

As you know, Steve, we continuously look at this all along during the year, and we don't make big announcements publicly where we close, where we open and so forth.

But what is certainly in the starting blocks right now is our new facility in Chengdu in China in the west of China, which is a much lower cost facility than what we have in Shenzhen, and most of our new products and new additional growth areas go into this facility rather than into the south of China.

And we have continued efforts in other areas like in Korea, like in Taiwan.

They will concentrate more their manufacturing activity in lower cost areas than in those high-cost areas moving forward.

The same is true for some of the European operations but this is all evolutionary as we always do it and we don't expect any specific restructuring charges but we certainly expect as a result of those, margin improvement throughout 2007.

Jim Suva, Citigroup.

Can you briefly touch upon the importance about the shift between mix shift of lower handsets versus increased units?

And kind of your competitive position as opposed to higher-end handsets versus low-end handsets as a trade-off to units and how that all folds in and impacts Amphenol?

This is a very, very important question that we all ask ourselves all the time and the good news about this is that we have a very, very broad customer base and a very broad model of participation.

So that it didn't impact Amphenol as strong maybe as others that shifts in those models occurred.

Obviously there is a tendency, especially in low-cost areas like India and others, to promote a number of these lower-cost phones to the subscribers in that market to get hooked to that kind of technology.

But what we have seen in China that obviously over time reverts to higher level phones.

So we have a mix in both.

Obviously the content in the lower phone models is lower but at the same time as I said with innovation and some innovative products that create a new features in phones like for example the Apple phone or others.

We have certainly the opportunity to maintain a strong balance in that business moving forward.

And as a quick follow-up your inventory hubbing situation, is it completely now, completely shifted to hubbing, or can we expect some more?

What should we expect for inventories next quarter?

That is a very fine question.

I would like to see into the future in this, too.

However, what we have completed it was requested, it is a major shift of one of our major customers.

We don't expect to have a major shift like this happen in the second quarter or even in 2007.

Hubbing will continue to be with us, and there are still some customers out there that may require to shift to this kind of logistics system.

But I don't see a major impact coming in the near-term relative to this if I look at our customer mix.

Thomas Dinges, JPMorgan.

Good afternoon Martin and Diana.

A real quick, more of a point of clarification.

You mentioned when you were talking about the broadband segment that you talked about materials costs are still high and that price increases were needed.

If I look back to last quarter it sounded as if you guys were ready to raise prices as 2007 started.

And can you just clarify that you haven't actually gone to the market yet to raise prices but you're ready to do so if the materials stay higher; just to clarify that would help.

This is obviously a question that we would like to ask ourselves what can be done in this market.

As you know, our strategy has been to kind of follow the market leader as far as pricing is concerned rather than take initiative and this continues to be our strategy in the future.

Okay and then quickly on the industrial side, that was actually when you looked at it year-on-year likely one of your strongest markets aside from what was going on with mobile infrastructure and devices there.

And you talked a bit about the medical market but can you talk about what the big growth drivers were there in that particular market?

Was it just purely organic growth that you're seeing on programs that you are on?

Was there an increase in content?

Was there some share gains and so forth, because obviously it is a market that a lot of other both smaller and larger competitors are focusing on, as well as they look to 2007 for some growth opportunities.

As I mentioned earlier, there are several market segments where we see disproportionate growth.

The industrial market is kind of a catch of all that is not particularly defined.

And we see the opportunity primarily in the medical market, in oil exploration, as well as in to some extent in rail transportation especially as far as China is concerned with a major buildout.

And then also in the new alternative power applications where there are new opportunities, as well.

And the strategy that we have followed in this market was to focus much more on customer needs and application-specific solutions.

In the past let's go three years back, our average growth in that market was more in the middle single digit numbers because most of our business was through distribution.

If I look back three years, we sold through distribution about 95% of our product.

Today we are at around 60 to 65%, and the rest is OEM without having lost the momentum with distribution.

So we have over the last three years focused very, very heavily on customer penetration in very distinct markets, and I think that has allowed us to gain share to develop next generation application-specific products with good margins.

And that will continue to be our strategy moving forward to drive our growth.

Carter Shoop, Deutsche Bank.

Quick follow-up there on kind of where you want to target acquisitions on a go forward basis.

One area where you guys are clearly underweight in the connector industry is the automotive market.

Can you talk a little bit about your strategy in targeting that market if you have one?

This is a very good question;

I get that all the time.

Where should we put the money and which segment as far as acquisitions are concerned.

And I think there was a question earlier, as well which I didn't respond fully to.

But as far as the automotive segment is concerned, we would like to participate in that segment, not as the dominant player like we -- and leading player as we would like in the other market segments.

In the automotive segment we would really like to be a supplier to the new electronics in the car.

We are not trying to catch up with any historical products that are being still sold to the automotive industry and will be sold for a long time to the automotive industry.

So we, at this point in time, want to be -- I want to call it a niche player in that area, focusing on the new electronics with new application-specific products that yield higher margins and that will continue to be our goal in the near-term.

If there are opportunities to make an acquisition in that area that covers that, we will certainly pursue it.

We're not going to pursue acquisition opportunities that just try to catch up with historical product in that area.

That is not our intent to get engaged in that competitive war.

Great.

As a follow-up, a more broader question on the market in general.

Can you give me your outlook for both inventory in the channel and kind of directionally where your leadtimes are going right now?

We believe clearly that there was some in some of this market segment, some inventory build.

Mobile phones may be one.

Also some telecom equipment and so forth may also be another area, but we don't believe that it is so substantial that this doesn't flush out itself over the next few months if demand remains as we forecast it relatively normal and moderate in the industry.

So I think there is not a huge overhang that should create a concern; as far as what we can see relative to the models and the products that we are serving.

So from that standpoint I think we'll just have a normal first quarter in 2007 from an inventory standpoint.

Kevin Sarsany, Next Generation Research.

Thank you.

Good afternoon.

I guess maybe I missed it, but did you mention the book-to-bill?

Yes, the book-to-bill was 0.99 to 1.

I apologize.

And what is your EMS percent of revenue, contract manufacturers?

Contract manufacturers distribution and OEMs we have -- I don't have the number on top of my head at this point in time, but it is certainly more heavily in the datacom and information technology market than in any of the other market segments that we see.

As we in mobile phones there are increasingly contract manufacturers in between, but overall I think we have to look at this market segment by market segment in order to get a meaningful answer, the same with distribution.

Our distribution is about 20% of our sales.

We have in certain segments a much higher percentage.

10% is kind of what I recall.

The percentage distribution is about 15% or so now and the contract manufacturers are somewhere in the 18, 17, 18, 19% kind of range.

There was a -- the percentages you recall perhaps before we acquired TCS.

As Martin said, the mix within the market is very, very different with some of the communications markets have a much more heavy weighting towards the contract manufacturers as you would expect.

And the (indiscernible) and industrial markets have a much more heavy weighting towards distribution channel.

Now my real question.

Gross margin opportunity, it looks looking back the last eight quarters prior to the TCS acquisition you had gross margins of about 36%;

TCS in the first quarter kind of dipped down.

You had them for about one-third.

And I am just looking it looks like you have now gotten back to where when you had TCS for the first time.

So I am just wondering what are the margin, gross margin opportunities?

Obviously volume is going to contribute but obviously TCS as you bring them up to your corporate average, I was wondering about pricing and the other interesting comment was -- and I want a clarification on this is -- you were talking about needing the new price increases at today's commodity cost prices right now.

And also I was wondering about the inventory hubbing effect on gross margins.

That was a loaded question relative to margin.

I would like to bring it down to one common denominator, and this is material costs at this point in time are at a certain level and when I say they are at a certain level, it means nothing else that our vendors have purchased the material at a higher cost and until this flushes out and we will see how long it takes to have that flushed out, we will not see a significant movement on the part of the vendors to bring kind of a contribution to margins.

The contributions to margin expansion will continue to come from our efforts of cost reductions, productivity gains and having the opportunity to launch the new products at higher margins.

And that has always been our emphasis and our goal to do that, and that will continue to be the goal.

Obviously if truly the commodity prices remain lower, the first thing that will happen is that the customers want to have lower prices, and that is then again the continuous battle between the vendors and our customers, and we in the middle saying how do we balance that?

And we have done a good job in balancing that by maintaining margins in the interconnect business, as Diana just said earlier, for a full-year with such an enormous increase in material costs at that high level.

With not having tremendous opportunities for price increases in the interconnect segment, as well.

Yes, we have had some price increases where material costs is 80% of cost in the cable side, and that has certainly helped us to stabilize margin but not by no means to have them significantly increase.

You've heard Diana saying it is just over 100 basis points, so it is not that significant in the total mix.

We have a long way to go back to better cable margins that we had in the past over time and that again can happen with price increases, as well as material cost increases.

And cost reductions.

We will see whether they happen or whether they will not happen.

So overall I think Amphenol, and we continue to have our goal to expand margins and there are many components that go into this kind of equation that help us to expand margin, and that is certainly going to be our goal.

As soon as material costs stabilize there is always an opportunity; last year that wasn't stable and therefore we were wrestling and keeping them essentially flat.

Obviously the TCS acquisition has added to the overall.

Tom Graelis, Longbow Research.

I was wondering if you could give a little color on the growth outlook in the coaxial segment for 2007 and market expectations.

Coaxial cable side you mean or coaxial connectors?

The cable.

On the coaxial cable side obviously we have seen a strong growth in 2006.

We expect that the growth will continue to be strong in 2007 just based on what we see at the cable operators, as well as in some other broadband applications where our cable is being used.

As they are very successful with their triple play; some growing into what I call the quadruple play, all of this will do well for our cable moving forward.

So we expect the year to be strong, have strong growth.

Nevertheless some seasonality to it as we usually would expect.

Jeff Beach, Stifel Nicolaus.

First, congratulations on a great quarter again, Martin.

Thank you very much.

Two questions about past acquisitions.

First, are you continuing to see into 2007 sales synergies from the TCS acquisition?

And then second from the series of acquisitions you made in 2005, are those profit margins of all those acquisitions essentially maximized now or not maximized, but at your interconnect levels?

A twofold question.

As far as TCS is concerned we obviously will continue to work on getting the synergies or the sales -- combined sales opportunities of those two companies Amphenol and TCS.

And that I think is going to be becoming increasingly important element as we move into 2007 and beyond as obviously we are in a design in cycle where we decided to go to our customers with the full package and our full product line is being designed in.

We didn't try to displace existing competitors so to speak on existing situations because this is usually just a price of battle without really winning.

We are winning at this point in time, and we are encouraged with this in many applications where the broader product portfolio in that market and that will certainly help us in 2007.

As far as the other acquisitions are concerned and their margins we continue to work with those acquisitions to get them to our level; the majority of them have either exceeded that level or are at that level.

Obviously in the total mix they have made a good contribution to Amphenol and will continue to make a good contribution because all of them have one in common.

They have adopted the very high-performance culture of the company.

Scott Craig, Banc of America.

Diana, can you maybe help us on the connector margins sequentially versus last quarter?

Can you quantify what drove the big improvement because I think it was almost 100 basis points?

For example it was one-third of it mix, one-third of it volumes, one-third of it TCS or is there a different way to think about it?

I think the two most significant factors where we did have another sequential improvement from the TCS standpoint, but the core connector business, as well certainly had a good sequential margin improvement.

As you know in the fourth quarter we had a full quarter or normal quarter of production in our aerospace facility, which has an impact in the prior two quarters by the flood.

We had strong sequential sales growth in that market, and that certainly was also a contributor to the sequential margin growth.

And from a longer-term perspective when you look at the margins in the connector business before you purchased TCS they were running in the range of like 22% for the connector side of things.

Is that the right way to think of a longer-term goal for you guys or even a medium-term goal over the next twelve months in the connector business?

I think the goal we've had for the consolidated operating margin for quite a while has was to get to the 20% level.

I think when we talked about that goal we had talked about 20% on a consolidated basis and 25 on an interconnect basis.

So I think those are the goals that the company has had for some time and we still have those goals.

From a timing standpoint it's always hard to pinpoint exactly when we get to those levels but I think as Martin said, we have a number of factors that drive the Company's margin performance.

Certainly one being the growth in application-specific new products and the other being just a real continuing commitment to cost control and cost reduction.

And I think those same strategies will be the ones that will continue to be the ones that we use to expand margin going forward.

Yuri Krapavin, Lehman Brothers.

Martin, can you comment on your strategy in the consumer electronics market outside mobile devices?

Are you gaining traction in that space, and what are your plans for '07?

This is a very good question because the consumer electronics market is certainly a very significant market in the connector industry.

The way we are involving ourselves in this is exactly through the products that we have today that we develop for a market that we are very knowledgeable of, like the mobile phone market, like others like set-top markets and so forth.

And as there are new converging devices being developed there is opportunities for us to move essentially on a broader basis into this market.

We have been, for example, in the laptop market, but with the development of our antennas for mobility we obviously moved into this laptop market as they used the product that was essentially designed and needed some upgrade.

But it was designed for mobility in general, and therefore you move into this laptop market.

Now you get all of a sudden involved in a market where you get customer relationships, they like your product, they like your performance, and all of a sudden you see incremental opportunities in there.

But we are not just going out and saying let's now go after this consumer electronics market in a broad basis.

Instead where we have some traction and is going to be an evolutionary process, it is mostly driven by convergence opposed to a very specific strategic focus on the Company's part.

And then Diana maybe a quick comment on expected stock options expensed in '07.

Sure.

Right now the estimate for '07 is about $13 million, about half a percent of so of sales, about the same relative level that we saw in the fourth quarter.

We have time for one more question if there is one.

Michael Walker, Credit Suisse.

I know that you have been talking a lot about commodity costs.

You don't have to say any of that over again, but just on the cable margins having gone down sequentially for the first time in a year despite the ability to raise prices, was there a mismatch between the price and the commodity costs?

You expect them to bounce back in the current quarter?

The simple thing that happened is that aluminum costs rose further in the fourth quarter compared to what we had in the third quarter.

Our biggest material is not copper.

Everybody always talks about copper but it's actually aluminum, and as Martin said, that cost went up during the quarter.

So does that margin bounce back or is it kind of where it should be?

I think that at this point as we sit here right now, I think that the aluminum prices are about the same as they were on average for the quarter.

I think we will have to see -- we don't have a crystal ball in terms of what the commodities are going to do.

If the commodity trend down, then we would see some benefit in margin.

But at this point we are not expecting that.

Thank you very much all for your questions.

Many of these questions were geared towards margin, margin improvement this time, and I would like just to confirm once more, and that is that our long-term goal has always been to achieve an EPS growth of twice the rate of the revenues.

This is again our outlook that we gave for 2007.

We believe in strong profitability combined with strong growth in a moderate economic environment.

Thank you very much for your interest in Amphenol, and we will talk to you all soon.

Goodbye.

Thank you for attending today's conference and have a nice day.