安費諾 (APH) 2007 Q1 法說會逐字稿

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

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

[OPERATOR INSTRUCTIONS] 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'm Amphenol's CFO.

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

The first 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'll then have a question-and-answer session.

Before I start, I'd just like to note that the company's 2-for-1 stock split announced last quarter was effective at the end of March, and all share and per share amounts have been adjusted accordingly.

The company had a good first quarter, exceeding the high end of the company's guidance in both sales and earnings per share.

Sales for the quarter were $650 -- $651 million, up 14% in U.S.

dollars and 12% in local currencies over the first quarter of 2006.

From a sequential standpoint, down 1% in U.S.

dollars and 2% in local currencies from the fourth quarter of 2006, reflecting seasonal patterns in the communications-related markets.

Breaking down sales into our two major components: the interconnect business, which comprised 90% of our sales in the quarter, was up 15% compared to last year.

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

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

Operating income for the quarter was strong at $123 million compared to $98 million last year.

Operating margin was 18.8% compared to 17.3% last year.

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

From a segment standpoint, in the cable segment, margins were 12%, up 150 basis points from last year.

The increase in margins relates primarily to the impact of price increases implemented in 2006, which offset the significant increases in material costs, particularly a -- aluminum, driven by higher commodity prices.

In the interconnect segment, margins were 21.3%, up 170 basis points from last year.

The increase in operating margins relates both to good operating leverage in the company's core connector business and to margin improvement at TCS, which the company acquired in December of 2005.

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 products, combined with a strong focus and the timely implementation of cost reductions.

Overall, we're pleased with the company's margin achievements.

Interest expense for the quarter was $9 million compared to $10.2 million last year.

The decrease from last year relates primarily to the reduction in debt levels.

Other expense was $3.1 million compared to $2.7 million last year.

The increase from last year relates to increases in minority interest expense.

The company's effective tax rate in the first quarter was 29.6%, this includes a reduction in tax expense of $1.5 million for tax reserve adjustments related to the completion of the audit of certain of the company's prior-year tax returns.

This increased earnings per share by about $0.01 and reduced the effective tax rate by approximately 1.4% in the quarter.

At this point we continue to expect a 31% tax rate for the remaining quarters of 2007.

In the first quarter of 2006 and for the full year 2006, the company's effective tax rate was 33% and 31.5%, respectively.

Net income was $78 million in the quarter, approximately 12% of sales, an indication of our excellent profitability.

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

Diluted earnings per share in the quarter was $0.43 per share, up 39% from last year.

During the quarter, we generated a strong cash flow from operations of $62 million.

The cash flow from operations along with $5 million of proceeds from the exercise of stock options and increases in debt of about $8 million under the company's revolving credit facility, were used primarily to fund: capital expenditures of $23 million, stock buyback of $14 million, acquisition-related expenditures of $22 million, relating to deferred payments and contingent performance-based payments on prior a -- acquisitions, about $3 million in dividend payments, and an increase in cash of $11 million.

The balance sheet is in good shape.

Accounts receivable days outstanding were 65 days at the end of the quarter compared to 66 days at the end of 2006.

Inventory was up a little under 3% in the quarter, primarily as a result of inventory increases in the company's mil-aero and industrial units, where sales grew sequentially in the first quarter.

Inventory days were 89 days at the end of March compared to 85 days at the end of December.

Debt was $688 million at the end of March compared to $680 million at the end of December.

The company's leverage and interest coverage ratios remain very strong at 1.4 times and 12 times, respectively.

First quarter EBITDA was approximately $142 million, and availability under the company's revolving credit facility was $313 million at the end of March.

The amount of receivables sold under our receivables securitization program was $85 million at the end of March, the same level at the end of December '06.

On January 1st of this year, the company implemented the provisions of financial accounting standard board's interpretation 48, related to accounting for uncertainty in income taxes.

Among other things, FIN 48 prescribes a recognition threshold and measurement attribute for tax positions taken or expected to be taken on a tax return.

It also provides guidance on classification and disclosure requirements for tax contingencies.

As a result of implementing the new pronouncement, the company recorded an increase in liabilities for unrecognized tax benefits and reduced retained earnings by approximately $200,000.

We also reclassified the majority of the related liability from other accrued expenses to other long-term liabilities.

A January 1st '07, the total liability for unrecognized tax benefits was approximately $30 million.

Orders for the quarter were $665 million, a book-to-bill ratio of approximately $1.02:$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.

Welcome to our traditional conference call at the time of the our earnings release.

As Diana just said, I will provide some highlights of -- of our first quarter achievements and then discuss the progress and the trends in our served markets and from there we go on to have some comments on the outlook for the rest of the year and for the second quarter of 2007.

We're very pleased with the start that we had in 2007.

The first quarter results were strong in all respects.

Sales increased by 14%, as you just have heard over the prior year.

Essentially, all organic growth and significantly above industry growth.

The growth was very broad-based, and what is more pleasing, it was well-balanced across all of our served markets and included all geographic regions.

We have continued to gain position with the main manufacturers in our served markets.

I'll certainly talk more about this as we move on.

The pipeline of acquisitions and potential acquisition is encouraging.

However, as we usually hunt for smaller, mid-sized companies that are run by entrepreneurs, it is very difficult to predict when such an acquisition will actually materialize.

But we're very pleased to see that that pipeline is good.

We have not made any acquisition in the first quarter of 2007.

From a profitability standpoint, we are very pleased, cash flows continue to be strong.

We maintained industry-leading operating profit margins of about 18.8%.

The interconnect business remains strong at 21.3% operating income margins.

We're very pleased with that excellent performance, considering that the price-[bound] pressure from our customers continues, and the material and other costs remain high and actually continue to increase.

Our strong operating leverage -- financial leverage in the company is also represented in our strong EPS growth, 39% growth in EPS over the prior-year period.

This is more than twice the rate of our sales growth.

As you know, this is our long-term goal to have earnings grow at twice the rate of our sales.

The EPS in absolute numbers of $0.43 matched the record level of the fourth quarter EPS in a seasonally slower quarter, where our revenues were slightly below the record of Q4, another indication of the strong operating performance ability of the company.

We're very pleased, also, that the cash flow was strong at $62 million generated in the quarter, and we spend about a 33% of it, $23 million, for new capital in -- for tooling, machinery, and capital equipment that will will continue to support our growth in the future.

So, overall, the sustained performance with our industry-leading growth and profitability is a direct result of our close relationships with our customers, the preferred supplier relationships that we have developed over many years and continue to develop.

It's a direct result of our competitive strength in diverse markets.

The diversity is truly driving the performance of the company.

We have a very strong global footprint, which allows us to reach out to our customers in every corner of the world, whether in emerging markets or in more mature markets.

It's a direct result of our ongoing programs of cost control.

The company remains very, very lean, even in good times in which we feel we are in at this point in time.

And most importantly, we are providing and continue to provide significant value to our customers in form of our application-specific solutions for them that allow our customers to develop higher performance equipment.

All of this achievement is certainly carried by a very strong entrepreneurial organization, and we're very pleased that this organization was able to affect another stock split at the end of the quarter, the third in seven years.

And we're very pleased that the results of the first quarter are in line with our expectation for continued growth and profit enhancement.

A few words to the progress and the trends that we see in our served markets.

We're very pleased with the well-balanced growth that we have been able to achieve in this first quarter across our market segments.

All market segments have double-digit growth, led by military aerospace at 18%, but also in the communication and information technology market, where information technology was up 15%, mobile devices, mobile phone, up 14%, and the industrial market also up 14% over prior year.

On a sequential basis, we had kind -- somewhat mixed results as the communication and IT-related markets were seasonal -- seasonally flat to down as expected, while the military aerospace, industrial, and automotive segments were up.

Again, the strong performance here of the company attribute to its diversity.

A few words to the military, the aerospace market itself.

It represented 20% of our total sales in the quarter.

Sales increased 18% over the prior period in a continuing healthy demand environment.

We are confident that we will see continued growth throughout 2007, as we are involved on a broad basis with new platforms of defense programs, as well as, we expect the growth to accelerate of our new commercial aircraft business towards the end of the year.

The industrial market represented 13% of our sales and was up 14% over prior year.

Very strong growth that continues to be based on our focus on discreet growth segments of the market, especially the oil and gas exploration, new power applications, as well as the medical instrumentation market.

We expect this positive trend to continue for the rest of the year in this industrial -- in these industrial markets, as we see our customers gaining more and more confidence in our new technology that we provide for their embedded electronics that they need for the next generation equipment.

The automotive market segment, which -- in which we generate -- which is the smallest of all of our market segments at 8% of our total sales.

We're very pleased to see that, again, this quarter -- this quarter we had sales increases of 11% over the prior period, which we feel is a tribute to the very successful launch of our next generation safety devices, as well as the inclusion of new electronics in lower end car models where our products are being used.

We expect our new product to support continued growth throughout 2007, while we still remain very prudent with the uncertainties in that market itself.

Now a few words to the communications and information technology markets.

The broadband communication market over hybrid fiber coax network represented 10% of our sales and was up 13% over prior year.

Most of that growth is attributable to price increases that were implemented over the last 18 months, but we also have seen a more healthy demand environment in this typically seasonally slower first quarter.

We attribute this to the continued strength of the MSO running out and their broadband -- new broadband services.

I think the success of that new products and services and seasonally healthier quarter -- second quarter will continue to drive growth also in that broadband communication segment.

In the information, technology, and data communication markets, which represented 26% of our sales, the most significant segment of [inaudible] now after the acquisition of TCS, has seen sales increase of 15% over prior year.

This is a very, very strong growth in that segment considering that the market has certainly some uncertainties.

We attribute our strength in that market to our strong product portfolios that probably one of -- offers one of the most comprehensive product range in the industry.

And, as such, we see a good diversification of our customer base happening as we are gaining more customers on a geographic basis, as well as in our core traditional markets.

Compared to the fourth quarter, the sales in that segment were essentially flat, which again is a good performance considering that we have seen this year a much more pronounced Chinese New Year, which is a very slow period, and certainly some uncertainties in the marketplace itself.

Over the year 2007 and beyond, we see good growth in that segment.

Our new high-speed interconnect product offering is gaining momentum in all respects.

What I mean by that is that we are gaining new design wins, as well as gaining position and existing customers, both drive our growth in the segment in the future.

Mobile infrastructure had another good quarter.

It represented 12% of our sales and was up 11% over prior year.

A very strong performance, considering that the market itself had relatively moderate growth and some uncertainties driven by the mergers that are happening amongst four of the major suppliers to the mobile infrastructure market.

We know about the Siemens, Nokia, as well as Lucent/Alcatel merger.

These mergers certainly bring some uncertainty, but long-term good potential for Amphenol, as we are offering a very, very complete product offering to that market, have a very diverse customer base, which actually helped -- has helped us to have that strong performance in the first quarter.

In addition, we feel that long term that market segment carries substantial opportunity for further growth.

The subscriber growth continues.

In India alone, we have more than 6 million subscribers now a month, more than we had the best times in China.

So, that is not only driving mobile phone business, but mobile infrastructure business as -- as we move forward.

In addition, we -- seeing an increase in the data and multimedia traffic over these networks, new IP networks -- mobile networks are being developed where we are present.

We're very encouraged by the news that in China the new TDS/CDMA network, the Chinese network is going to go to trial in several cities, which is nothing else than a precursor for a broader licensing that will occur in China for the [YTDMA] networks moving forward.

So long term, the outlook in this market, clearly, very positive and Amphenol well positioned.

We're very pleased with the last market segment that I'm discussing here, the mobile phone, the mobile device market, which represents -- represented 11% of our sales in -- in this first quarter.

We have seen a very significant decline in demand in the first quarter over the fourth quarter, in part driven by normal seasonality, but also in part by changing demands at certain major customers and players in that market segment.

So, we are extremely pleased that our sales were -- we were able to increase our sales by 14% over a very strong first quarter of 2006.

Many of you will recall that the first quarter of 2006 was a very, very strong, atypical if I want to say, strong first quarter last year.

And to grow at that rate above this is a tribute to new and successful product introductions that have taken off in the first quarter on new phone model.

And these new -- in addition, we had significant new design wins with these new technology products, which give us confidence that the mobile phone market will continue to grow in 2007 as well.

So in summary, we are very pleased with the excellent progress, and the trends that we see in the first quarter, and the opportunities we have been able to create to move forward with confidence into the second quarter and beyond.

So what is the outlook for the company moving into the second quarter and for the rest of the year?

We're very cognizant of the fact that there is varied strength in the various markets that we are serving, and there are uncertainties in the electronics market in general.

And so, we're also cognizant about the fact that the market -- the connector market itself is expected to grow moderately in 2007.

However, we continue to be very confident in our own ability, in the ability of our excellent organization, to capitalize on our leading position in diverse markets, to capitalize on our technology, and to capitalize on the many new opportunities that we have created in the markets that we are serving.

So we are confident to continue the positive trend that we have seen over so many quarters.

On that basis, we have increased our guidance for the full year 2007, essentially adjusting for the strong first quarter performance.

Sales are now expected to be in the range of $2.670 billion on the lower end to $2.715 billion on the high end.

EPS is expected to be in the range of $1.78 to $1.80.

For the second quarter, we expect sequential increases in both sales and earnings to new record levels.

Sales are expected to be in the range of $670 million to $685 million on the high end, a growth of 10% to 13% over prior -- over last year, significantly ahead of expected industry growth.

And EPS continues to grow more than twice the rate of -- of our sales growth.

We expect EPS to be in the range of 43% to 45%, or 23% to 29% sales increase in EPS over the second quarter of 2006.

In summary, we are very excited about our future, our abilities, and we look forward with confidence to achieve another record year for Amphenol in 2007.

Martin, the EPS range for the year was $1.75 to $1.80.

Just to correct that.

I'm sorry, Diana.

Sorry.

That's exactly what it is.

$1.75 to $1.80.

Okay.

Yes.

Great.

Thank you, Diana.

Sure.

Well with this, I would like to open it up for some questions that you may have.

Thank you.

[OPERATOR INSTRUCTIONS] One moment please for the first question.

Our first question comes from Matt Sheerin.

Please state your company name.

Yes.

Thomas Weisel Partners.

Good afternoon, Martin and Diana.

Hi.

Question, Martin, for you is on the TCS business, could you elaborate more on what you see for growth prospects and selling -- cross-selling opportunities this year here, and also expectations for further margin leverage?

You've done a good job of growing margins there, so the question that investors have is how much is left?

As we have said last time, TCS has become a very, very strong integral part of Amphenol.

We're not talking about TCS in isolation anymore, but in context of our total penetration of the IT information and technology and communications related markets.

As you can see, or heard from the first quarter results, with a 15% sales increase, we continue to benefit from the complete interconnect system architecture that we can now offer our customers and we see good leverage in that opportunity, as well as the launch of new connector products across that segment, including TCS is very encouraging.

We have many new design wins with -- especially to TCS, next generation back plane of products that have the ability to run at speeds of 20 GHz per second in the back plane, which is about twice the rates that offered today, and not even used today in its full extent.

So we are clearly ahead today in our development phase, and we have gained tremendous interest from that.

And that will give us both a sales growth opportunity long term, as well as profit enhancement opportunity.

Okay.

Thank you.

And just as a quick follow up.

If you could just be a little bit more specific on some of the acquisition pipeline that's going on now?

Well, that's a very fine question.

The acquisition certainly continues to be part of our strategy to complement our growth, as we have done in the past.

Obviously, our main priority is to grow organically.

We have done that over the past, and in this acquisition pipeline, we are clearly looking for companies, in all of our market segments, where we can have a complementary strength, in terms of technology, geography, or market position with specific customers achieve.

In addition, as you know, one of the characteristics is always to find a company that has good management, because we're not there to restructure, not performing customers -- companies, and it involves usually entrepreneurs that are not -- that they would like to sell, but sometimes it takes a little longer to convince that they really want to sell the company, or would at least sell a portion of that company and long term be part of it.

So the pipeline is good, and when I say is good, there -- there -- there could be acquisitions made, but it depends really when we can close on some of those.

It's not like in an auction process, where you have a kind of deadline determined by an investment bank, when that will be accomplished.

It's a long, drawn out dating process, if I would like to call it that way.

And -- but, we've had very much success with that kind of approach.

Sometimes we have a conservation of some acquisitions, sometimes it's a little bit more of a gap in between them.

But we're confident that there's opportunity.

Okay, thank you.

Our next question comes from Steven Fox.

Please state your company name.

Hi.

Good afternoon.

Merrill Lynch .

Good afternoon, Steve.

How are you?

I'm, great.

Thank you.

Can you just maybe dive in a little bit more.

You mentioned two areas of new products that I thought was interesting.

One was on the handset side, and I was curious, how much of that is being driven by just new models versus dollar content?

And then secondly, on military aerospace, with the growth having accelerated a little bit, can you talk about more specifics about how that's going to continue this year?

Sure.

I'm very happy to do that.

In -- in the mobile market, as you know, everything is extremely dynamic.

Certain models that were in in the past, like flip phones and so forth, are being kind of transitioned into newer models, which are slide phones and so forth.

We have developed very state of the art product, including hinges with the interconnect solutions that allow very slim -- the production of thin, very thin products.

It's the -- thin is the model that we have developed and patented for -- in the world and has gained a lot of interest amongst the major players in that market, because thin is in.

So that is someone -- in addition, our antenna products, really state of the art products have found their ways into very new applications as well, and are driving some growth, and some of the major players and actually emerging players, without naming the company, but emerging players in that market have chosen Amphenol for some of the product -- their advanced product needs, and that will certainly drive growth in the future.

The military aerospace market is also -- they're -- this is not all exclusive.

If I can go on here, we have developed new products that are used for the -- what we generally call the systems connector or charger connectors and so forth.

We have developed a whole new generation of that product that gains tremendous momentum as well, and we have excellent opportunities, which is essentially replacing an old generation of products that were used for many, many years in that area.

So new product development is really driving the growth on many fronts here.

It's very innovative.

The second area that you asked for is military aerospace.

Military aerospace has accelerated and one of the acceleration is due to a strengthening environment in Europe.

Europe was, as you may -- may recall last year not necessarily a stronghold of Amphenol, and that is very positive.

In addition, here in North America, distribution is going very strong.

Obviously, most of that or many of those things are related to military operations, because this is more of the stand-up products that are being sold, but there's a constant kind of shift between new defense programs and -- and spending for -- for military operations and we see that certainly in our product mix.

But overall, and in addition with the upcoming growth of the new commercial aircrafts, 787 as well as the Airbus product that finally is -- is going to go into production as first deliveries are due this year, first one for Singapore Airlines, we are very well presented on all these aircraft, and that will certainly drive also growth in the second half of this year.

Great.

Thank you very much.

Thank you, Steve.

Our next question comes from Tom Dinges.

Please state your came -- company name.

JPMorgan.

Good afternoon, Martin and Diana.

Just like -- wanted to follow up on a couple of your comments earlier, Martin.

You had talked a bit about ASP pressure still remaining and actually being quite high in some areas like mobile phones.

And was hoping you could talk a little bit about maybe how much that gated a little bit of margin this quarter, either year-on-year or sequentially.

And the same -- and the same vein there, talking about the material costs, even with the material costs increasing, you look at the year-on-year, especially in cable where material is obviously a much higher component of the overall cost of goods sold, still getting some -- some nice improvement there.

But do you think you get a little bit of relief anytime soon, or do you think it's just sort of, we've settled in here at a market where these prices are going to stay on the material side where they are, and we just hope to get better efficiency to drive margins higher?

Well, I think all of those things that you mentioned are somewhat a yes and true.

And what I mean by that is nothing else.

We live in a market that will continue to have pricing pressures.

We lives in markets where we cannot foresee that material costs are coming down in the near term, so we have to live with it.

And Amphenol, as a company, is very good at adjusting at situations.

And we're very dynamic, agile.

We look at ourselves, what we can do and not just look at, well, we'll just report different margins because of the -- of the material situations.

What can we do?

And we have done a lot of things in the cable business to lower our costs where -- where possible.

We are obviously working with vendors -- diversifying vendors that always helps in the process.

And then in areas where copper plays a major, major role, which is in cable, we have obviously gone -- gotten a little bit smarter from last year's events to negotiate [inaudible] that can help us also to mitigate the progress of -- or the increases in material cost as we move forward.

But nevertheless, I would like to underline that it is a challenging environment.

Our customers continue to expect price decreases, and that is very, very normal because mobile phones prices come down.

If you look at several of the base stations, they are coming down.

If you look at site solutions, they have to come down.

I mean, India is not willing to pay maybe the same high dollars as in other areas, so everybody gets -- and we, together with our customers, get very innovative in terms of redesigning, reconfiguring, and finding new ways to just produce lower costs.

It's not just going out and saying the same product is now at a lower cost.

So all of these things are happening in the company in order to help further improve our margins.

And the company on higher volume has a record of being able to achieve good -- good returns and I thinks that going to continue moving forward.

Just a real quick housekeeping item, there.

Thank you for that -- for that answer.

For Diana, on the inventory, you mentioned the increase was primarily related to building ahead for strong growth for industrial and mil-aero.

Was there anything else in there that drove the inventory increase this -- this quarter at all?

And then what's the expectation into the second quarter?

Do you think you work a little bit of that down and maybe increase the cash flow a little bit more as a result, or does it stay kind of where it is?

Sure.

There wasn't really anything else.

Most of the increase that we experienced were in those markets.

The units that are in those markets grew from a sequential standpoint in Q1 and there's also some positioning of the inventory as they move into Q2.

It's not uncommon for us to build a little bit of inventory, because we do typically experience a sequential increase in Q2.

Relative to what we expect for inventory in the second quarter, I think our -- our hope would be that we'd see the days come down some as we move into Q2 and out of Q1.

Okay, thank you.

Sure.

Our next question comes from Bernie Mahon.

Please state your company name.

Hi.

Morgan Stanley.

Good morning.

A question for you, Diana.

On the gross margins, you did a good job, you grew them sequentially despite revenue being down.

Given -- say we have a kind of flattish raw material pricing environment, how do you think gross margins would trend over the next couple of quarters as revenues should grow sequentially?

Will you get 30 to 50 basis points improvements, or how should we think about gross margins?

Yes.

I don't think I'd want to give a specific guidance on gross margin.

I think if you look at the EPS guidance that we've given and listen to the comments that Martin just made relative to the company's historical conversion on incremental volume, for all the reasons he just said, so I won't repeat those.

We would expect to see some sequential ROS improvement as we move through the quarters during 2007.

We have a very low fixed cost structure.

We work hard to keep that low, and so as -- as we get incremental volume, we have historically done a good job in terms of converting that and expanding margins, and we don't see any reason why 2007 would be any different.

Okay.

And then just a quick follow up on a couple of the end markets.

So the mobile phones, you'd said that that was probably weaker than you expected because some customers were cutting orders.

Like what are you expecting there for the second quarters -- for the second quarter?

Are you still seeing these orders being cut, or has it kind of stabilized, or do you think it's going to be down again sequentially?

Yes.

I think what Martin said was -- not that it was weaker than we expected.

I think that the first quarter, both when we gave guidance and as it's come in, is it's a seasonally tougher quarter due to Chinese New Year and so forth.

So we expected to see a sequential decline in sales.

That is what we -- what we saw.

We still feel for the year 2007, that this is a segment that offers good growth potential for the reasons Martin stated.

We have a lot of new design wins on hinge antenna and interconnect products, and so we feel good about the market for the year.

And I think this is a pretty normal sort of trend that we've seen in Q1 and one that we expected to see.

We have actual performed extremely well.

If you look at -- again, I like to mention that the strong growth that we had of 14% over a very strong 2006, this is an outstanding performance, even if seasonally the expectation is in the first quarter, usually, to be somewhat slower than -- than Q4.

So our new products that we have launched and the confidence that our very diverse customer base has in these new products was of not only -- we're not looking over having a better, better performance.

The performance was already very good in Q1.

Okay, that's great.

Thanks.

Our next question is from Kevin Sarsany.

Please state your company name.

Next Generation.

I just have a question on -- well, I have two questions.

First, on your guidance, given that the first quarter was up 14% and the mid point.

The second quarter suggests 12%, but for the full year you're talking about 8% to 10% growth.

So it appears that the second half is going to be below the 8% to 10%, but from what I'm -- where I sit, it seems like there's electronic inventory adjustment, everybody's talking second half being better this year.

Could you kind of square that for me?

We certainly would hope that the second quarter will turn out the way you're describing it.

There is, though, ongoing uncertainty in the total economy.

There's uncertainty in -- in markets, there are uncertainties with how customers -- certain customers in those markets will perform.

We have performed well in the first quarter.

We give strong guidance for the second quarter, and if these trends continue, we'll certainly look at -- have a closer look into the second half of the year.

But as you know, Amphenol on one side is very aggressive in terms of execution and performing, but somewhat more prudent in saying what is going to happen in three, four quarters out, which is not as easy to predict.

I -- I understand.

And I guess bringing that one step further is looking at your EPS guidance, it also suggest that margins are better in the second half, given your -- even with your revenue outlook.

Is there something -- I mean, I know you guys are very good at executing work [inaudible] quarters.

Is there anything you see that's going to drive that, or do you just expect to keep executing the way you have in the past?

First of all, we continue always to execute and to be consistent in our execution.

At the same time, we always stress that new application-specific products driving some of the margin expansion, and we have quite a number of these new products in our pipeline, which gives us some more confidence in that area.

Obviously, we seeing material costs trending in the other direction.

So the combination of those gives us some expansion opportunity, but we'll see how it works as we go along in the year.

In addition, we have a lot of other things of cost reduction underway, with a new facility that [Changzhou] that certainly will drive costs down.

We have TCS now fully settled in the new facility in China that is at lower cost.

So there are opportunities that have not been discussed in -- in detail that are somewhat implied in the outlook that we have for the rest of the year.

So I appreciate very much you're pointing to this, because we have a lot of these things on the way that allow us to -- to execute in that area as they -- we are -- we are in the process of implementing those.

Okay.

Thank you.

Thank you.

Our next question is from Carter Shoop.

Please state your company name.

Deutsche Bank.

And a quick follow up to the last question, looking at kind of second half growth rates and how they're a little bit conservative.

Can you maybe discuss which end markets in particular you are most concerned about, or you feel less comfortable about in regards to predicting them?

As we have had a very balanced growth in the first quarter, and look forward to a very broad-based growth also if the second quarter, we don't have a particular market where we say that it will be much, much less than others.

We're just are prudent relative to the general trends in the electronics industry, across the board, and how they will develop and that could affect one or the other market.

We also have some seasonality in the third quarter, as you know, with Europe and the automotive industry getting very slow during that period of time and maybe other areas of the European market itself, where the industrial market sometimes slows down in the third quarter as well, as factories and factory builds are being short and so forth.

So there are -- there is some seasonality built in, similar to like what we have in the first quarter here, that in the third quarter it can be somewhat slower.

And sometimes the strength in Asia is overshadowing us, but we're not predicting this at this point in time at the rates that we see.

And as a follow-up question, one of your large data networking customers is reworking an inventory program there.

Curious to know what your thoughts are on the progress on that implementation, both with the end customer and also their contract manufacturing partners.

That's a very good question, because it seems to be a little bit longer drawn out process than originally foreseen in that area, as the whole supply chain has to adjust, and obviously the ones that are closest to the end customer are affected the quickest, then the process slows down as it goes down in the supply chain.

But there's progress, and we're working it, and hopefully that will help us also in our inventory reduction as we move into the second quarter.

Great.

Thank you.

Thank you.

Our next question comes from Yuri Krapivin.

Your line is open, and please state your company name.

Lehman Brothers.

Good afternoon.

Good afternoon.

Martin, can you discuss business trends by channel, OEM versus EMS versus distribution?

Yes, definitely.

We -- we usually don't disclose the specific numbers on this, but I can tell you that in industrial and military market where we had the majority of our business in the past, running through distribution.

That channel was very strong in the first quarter, and we feel that this is a trend that should continue as we move into -- into this next period.

As far as our relationships is concerned, our biggest relationship continues to be with the OEM itself, which represents roughly, maybe 60% of our sales, more than 65% to EMS, and distribution share and the other piece.

And we are successfully growing, also, our commercial business through distribution.

TCS, for example, didn't have distribution in the past.

They're going to start up with a major distributor here and have started up.

So that -- that is a new channel that that wasn't there before for us, and so we're very pleased with that development as well.

Otherwise, there's no real change in the channel distribution that we have.

Strong, very strong with OEM, the majority of our business, and then followed by the EMS and distribution as the other channel.

Okay, great.

Then, you mentioned your new facility in western China in Changzhou.

Is this facility fully operational at this point, and what kind of capacity do you have there?

We do at this point in time assembly, and we are starting up plating, and as we are starting up plating, simultaneously, we're starting up stamping.

So this has been initiated in the fourth quarter of last year.

We are now operational with about roughly 300 people and that will grow as we go -- move into the second quarter and beyond.

And most of our business, that is -- that is not transfer business, but it is growth.

We're moving essentially our growing new product, the business that is expected to -- to add to Amphenol in volume, that moves into the new facility so that we don't have any disturbances relative to transfers and so forth.

Our next question comes from Shawn Harrison.

Your line is open, and please state your company name.

Hi.

Longbow Research.

Good afternoon.

Good afternoon.

Just two quick questions.

With respect to the -- the coaxle business, is Amphenol still benefiting from price increases introduced last year?

Is there a still a tailwind, sequentially, to margins that you're benefiting from at this point?

You have seen in the margin improvement that we've achieved in the first quarter that that is certainly has on a year-over-year comparison that impact and therefore there is some of that tail.

And since some of these price increases were implemented a little later in the year, again, we'll see some of that coming forward, but at the same time we have to be conscious about the fact that our aluminum has gone up again, and that is certainly an impact, and plastic materials as well.

So if you take that in account for how much tailwind that is another question.

Okay.

Will you be looking for additional price increases here in the second quarter in that business, or will it be dependent on what your larger peer is looking to do?

I think the expectation of the customers at this point in time, I'm talking more about North America, which is an easier market to see, because of the limited numbers of -- of system operators and fewer players, we don't foresee any price increases in the near term, unless these commodity prices really continue to grow significantly further and we have a good reason to go back to our customers.

We truly would have a good reason to go back to our customers, because with the price increases we have not offset any -- even not close to the material cost increases that we have endured over the last 18 months or or two years.

But from a customer perspective, they look at this very more short term, saying commodity prices have somewhat eased and therefore no more price increases and rather reductions.

So I don't foresee necessarily, unless the material commodity prices really go up, that in the near term there will be some price increases in that area.

So it's safe to say much of the margin improvement going forward sequentially in this business is going to be reflective of just growth and -- and unit volume?

Growth is one, but also other cost reductions.

Okay.

I mentioned vendor-based changes, or so, as well as material changes, as well as changes of locations where we are producing the product and so forth, a little different product mix with the products that we bring into -- into the cable business as well.

All of this can help to improve margins.

Okay.

My second question is a little more high level.

With AMP becoming part of a public company shortly here, just wondering if maybe you can provide some high-level commentary on what you may think that does, if anything, to industry dynamics?

In particular, I'm concerned with the market for acquisitions, whether they become a competitor to you in the market, because they haven't been for some time.

Well, obviously, it's very good to have another comparative measure in the marketplace with Tyco Electronics going public and to have comparative numbers.

I -- from a strategic standpoint, we don't know what their plans are, but they have developed, already under Tyco, a very fine technology company that is selling product on value, and as they go public, I would assume, that this is certainly a driving aspect that it will go for.

As far as competition, we have a lot of compe -- competitors on acquisitions.

It's not only the ones that publicly known.

But there are many companies out there that are -- want to grow and see the opportunity in the fragmented nature of our business to -- to acquire.

So there is a lot of competition out there for acquisitions, whether one or another comes to the party really doesn't make that much of a difference.

Alright.

Thank you very much.

Thank you.

Our next question is from Jeff Beech.

Your line is open, and please state your company name.

Stifel Nicolaus.

A question for Diana and one for Martin.

Diana, a big increase in working capital in the first quarter came from reduction of accrued expenses.

Is this resulting from that explanation you gave earlier about moving some liabilities long term, because I don't -- that doesn't seem like that would be a cash item?

Yes, we had about $30 million, roughly $29 million of reserves that were moved in accordance with this new accounting for income tax requirements and it came out of other accrued liabilities and went into long-term liabilities.

So that is a noncash reclassification in accordance with the requirements of this pronouncement.

On the cash flow statement, why was there such an increase in working capital then?

Well, on the cash flow statement, we had increases in inventory, which I talked about.

Inventory was up about 3% in the quarter, and this was primarily in the mil-aero and industrial businesses, where we had some increase to support the higher activity level in Q1 and then also in anticipation of the ramp up in Q -- Q2.

We had some increases in receivables as well.

March tends to be a very -- Q1 is very much skewed to March from a shipment stand -- standpoint, so the way that that manifests itself in the receivables balance causes some increase there.

In addition, if you recall in the fourth quarter, we had this hub arrangement that we put in place with one of our -- our major customers under TCS, and we actually paid for a bulk of that in the first quarter, so from a cash standpoint, although the inventory increase was in Q4, it really came out in cash in -- in Q1, so there was a commensurate reduction in accounts payable as a result of that, so I think those are the three main factors.

Alright, thank you.

Sure.

And, for Martin, in -- in this fourth year of recovery in the broadband market, margins are still near historical lows.

What -- what do you think it will take over the next year or two to get margins back to higher levels that you've seen in the past?

Well, it's very obvious to all of us that material is a major component of this, and, obviously the most significant impact can come from material costs reductions, and they can come because of commodities come down, or that we are looking at material alternatives that have -- do not have that high cost.

In addition, as I mentioned, some reductions come from the way we are producing the product, where we are producing that product that can reuse cost and we can improve margins.

But in order to get back to the historic levels, the simple answer is that truly that the material costs has really to come more significantly down, and -- otherwise, all the other actions that we are taking are going to take longer, but will certainly result in some incremental margin improvement over time.

But right now, over the last two years, we really have balanced more the -- not really balanced, but really seen the -- some of the price and -- and material play between the two, and it was in favor of the material, not in favor of the price.

But nevertheless, the good news about this marketplace itself is that there's -- there's good generation of cash, there is also an opportunity to bring in other products into this marketplace.

The broadband market itself has a strong characteristics with the new services.

So, dynamics change over time and we are a company that has suffered very, very significant declines in the military business, and has come out very strong, with strong margins.

And there are periods where some other market segments are maybe going through a period of longer term lower margins.

But as you can see, the total company has just very, very strong margin in spite of that segment that represents only 10% of our sales.

Alright, thank you.

Thank you.

Our next question is from Jim Suva.

Your line is open, and please state your company name.

Thank you.

Jim Suva from Citigroup, and congratulations.

Thank you.

When we look at comparing your EPS outlook today versus back in mid part of January, can you talk a little bit about how that relates to raw material?

Specifically, back then you guided to higher and again guided to higher than expected EPS and raising it.

But the raw material input pricing today versus back then has materially changed.

For your outlook specifically, what are you building in for your raw materials?

Kind of to stay where they're at now, are you expecting some kind of decline?

Or if they stay where they're at, are you still able to -- to make your full-year EPS?

Well, if our forecast, obviously we're considering all these commodities, but we also should know that commodities are being usually transformed into a product that we are buying, not so much maybe on the cable side than the other side, but on the connector side.

So the impact is not as -- as significant as one would think just by the pure increase of copper, pure copper, pure gold, pure silver, all of this going up.

But our assumption at this point in time is that there will be fluctuations as we have seen in the past.

We have not built into the assumption here that it will skyrocket like it did last year where copper essentially tripled over an 18-month period.

I think that, certainly, we haven't built into our assumption at this point in time, but we have offsetting programs in place -- cost reduction programs in place.

We have also now in place programs that adjust the prices of components that we are buying and so forth, if copper changes and so forth.

So there are some mechanisms in place that were not in place in the past that can help us go through this a little bit less challenged.

Alright.

But you're not counting on aluminum and copper to come down to still have a good year in EPS?

No, no.

We're not counting on anything changing and we're not counting on currency changing as well.

These are -- the -- the predictions we make is this is what it is today and on that basis we move forward in currencies, commodities change, whether they will change, and we'll certainly see how we can adjust ourselves, but we don't build any future expectations into our forecast.

Great.

A couple housekeeping items.

Am I correct that aluminum is a bigger raw material input than say copper?

And if so, what's kind of the way to think about it?

Is it like 30% of COGS, or what's the best way to think about the exposure there?

The -- aluminum is a major component in the cable side, which is 10% of our business.

It's not such a significant component in the connector side, copper and gold, certainly, or copper derivatives and gold are more significant components on the connector side.

But in aggregate, is there a rule of thumb you use?

Well, the rule of thumb is that for the connector business, our material content in general, and that is transformed material, that's not just pure commodity, is somewhere between 35% and 40%, where it is for the cable business somewhere between 75% and 80%.

Okay.

Those are kind of good rules to remember.

And last question, probably for Diana.

Diana, when we look at the balance sheet, it looks like goodwill went up a little bit and also the acquisition line for your cash flow statement, you used some cash there.

But am I correct to understand that that's related to like an earnout or bonus payment from previous items as opposed to, you mentioned, no acquisitions this quarter?

Yes, that's exactly right.

Okay.

Great.

Thank you, and congratulations.

Thank you very much, and I think we have one more question here to take.

Okay.

Our final question comes from Amit Daryanani.

Please state your company name.

Your line is open.

RBC Capital Markets.

Thanks.

Martin, just a quick question.

You've spoken a few times about application-specific products on the call.

Could you just talk about what percent of your total revenues from Amphenol comes from application-specific product versus standard, and what's the margin profile for the two?

Application-specific products are products that are being developed for the next generation products of our customers and usually those are not just specials, they are products that are introduced for a broader customer base eventually as products proliferate across.

And that is important to understand, because the margin characteristic during the initial phase is higher than your average and as the product then goes into volume production, as the product goes -- and being used across a broader base of customers, then the margins tend to come back to the average of the company.

And we're not really following so much the percentages, what is application specific and what is not application specific.

What we are following very closely is how many new products are we introducing in a appeared of two years since we have [inaudible] of our product somewhere targeted between one and two years.

We are -- in that window, we want to see how many new products are we rolling out that that is a good measure.

At this juncture, in the first quarter, the percent of our total sales from new products is in excess of 20% -- somewhat over 20% at this point in time, which is a little bit higher than historical and therefore we are very confident in having a period where margins can expand moving forward.

And, obviously, we continue to drive these new product because the mix of these new products, as well as the ones that are more maturing over time, some maturing over 10 years, other maturing over half a year, depending on what market segment.

The mix of this is always the one that we are measuring very closely to keep the margin in average at these high levels.

Fair enough.

I guess a follow up to that would be, it's slightly higher than 20%.

How much of that is handset-specific new products, as I would imagine those would be the ones that would be half year or less at a product life cycle?

Certainly, handsets has a much faster turnaround of new products than others.

But also in the handset business you see longer life cycles because they are so called platform products, which survive more than one model and -- and are used maybe two, three, four years, and the new methodology in handsets now is to build scalable products.

Scalable meaning nothing else.

They can be used across many models over many years, as long as they can be scaled to the different sizes in terms of thickness, in terms of widths, and so forth, to the need of the customer, but doesn't really change the electrical characteristics, and so forth of the product.

And that gives it a longer life cycle, as well as in this - in this market.

Alright.

And then, could you just go back and look at the TCS acquisition.

I think when you acquired the business, you had a few underperforming assets, I think the PCB and enclosure business from TCS.

Do you have any thoughts if you would look to divest over a period of time?

Because I imagine those numbers are still well below the corporate numbers.

Well, we have certainly done quite some work on this, because today we are very, very happy to have a complete integrated capability between flex spring, rigid flex, as well as rigid boards that we can develop essentially all the barriers laminated and so forth.

So that is helping us, especially in the regional markets of the military segment to develop complete interconnect solutions for our customers, where we can provide not only discreet components, but a complete integrated package to them that some of our customers define ultimately that Amphenol has become a megasupplier, because we are supplying, not only the IOs, but also -- but everything that is on the board and everything that flexes and is rigid and is settled on the board as well.

So it has become a very integrated solution -- has helped us to become a very integrated solution provider.

It overall generates very good margins.

That makes sense.

Just my final question, the depreciation amortization expense, how much was flown through the COGS versus SG&A this quarter?

There is -- it's roughly 90/10, but if you -- if you go into the 10K, which we filed in March, you'll see a full break out of cost of sales on that basis for all four quarters of 2006, if that helps.

I guess I was hoping to get for the Q1 -- for this quarter's numbers, more than the historical.

I --

It's -- it's reported in cost of sales and SG&A to start with, and we have historically reclassified it out.

Alright.

Yes.

Alright, got you.

So the split is 90/10, so that doesn't change.

Roughly.

Alright.

Thanks a lot.

Thank you.

With this we have to conclude our conference call.

We certainly look forward with a lot of confidence into the second quarter into 2007.

And we would like to thank you for your interest, and we'll keep you informed about the progress of the company.

Good-bye.

Thank you.

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