安費諾 (APH) 2007 Q3 法說會逐字稿

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

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

(OPERATOR INSTRUCTIONS) Until then all lines will remain in a listen-only mode.

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

If anyone has objections you may disconnect at this time.

And I would like to introduce today's conference host.

Ms.

Diana Reardon, you may begin.

Thank you.

Good afternoon.

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

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

Third quarter results were released this morning.

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

We'll then have a question-and-answer session.

The Company had a record third quarter, exceeding the high end of the Company's guidance in both sales and earnings per share.

Sales for the quarter were $734 million, up 15% in U.S.

dollars and 13% in local currencies over the third quarter of 2006.

From a sequential standpoint sales were up 7%, a very strong performance in a quarter that is typically softer from a seasonal standpoint.

At the end of the quarter the Company completed the acquisition of a United States manufacturer of interconnect products for the geophysical exploration industry, with annual sales of approximately $35 million.

We're excited about the growth potential created by this excellent addition.

Breaking down sales into our two major components, the interconnect business, which comprised 90% of our sales in the quarter, was up 16% compared to last year.

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

Our cable business, which comprised 10% of our sales, was up 7% from last year as a result of increases in broadband cable television markets.

Operating income for the quarter was strong at $143 million compared to $114 million last year, excluding from last year's number flood-related charges of about $6 million.

Operating margin was 19.5% compared to 18% last year.

The operating margin improvement relates primarily to increased margins in our interconnect business.

From a segment standpoint, in the cable segment margins were 12.7%, up 30 basis points from last year.

The margin increase relates primarily to the impact of a higher mix of specialty products and increased production levels in low-cost facilities.

In the interconnect segment margins were 21.9%, up 150 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 was 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 interconnect solutions combined with a very strong focus on all elements of cost.

Overall we're pleased with the Company's margin achievement.

Interest expense for the quarter was $9.4 million compared to $9.3 million last year.

Average debt levels in the quarters were about the same and the majority of the interest rate exposure is hedged.

Other expense was $4.7 million compared to $3.6 million last year.

The increase from last year relates primarily to increases in minority interest expense, partially offset by higher interest income.

The Company's effective tax rate in Q3 was 29.2%.

This lower rate includes both a reduction of prior-year tax reserves and a more favorable mix of income from lower tax rate jurisdictions.

We now expect the Company's effective tax rate to be approximately 30.5% in the fourth quarter, bringing the effective tax rate for the full-year 2007 to approximately 30%.

In the third quarter of 2006 and for the full-year 2006 the Company's effective tax rate was 30.3% and 31.5%, respectively.

Net income in the quarter was $91 million, approximately 12% of sales, an indication of our excellent profitability.

On an industry-comparative basis profitability continues to be very strong.

Diluted earnings per share for the quarter was $0.50 per share, up 28% from $0.39 last year, excluding the $6 million in flood-related charges from the 2006 results.

Earnings per share as reported in Q3 2006 was $0.36.

During the quarter we generated a strong cash flow from operations of $109 million.

This cash flow is after a voluntary contribution of $20 million to the Company's U.S.-defined benefit plan.

The cash flow from operations, along with $31 million in borrowings under the Company's revolving credit facilities and $9 million of proceeds from the exercise of stock options, including tax benefits, were used for capital expenditures of $25 million; stock buyback of $35 million; acquisition-related expenditures of $32 million, primarily relating to the acquisition that I previously mentioned; $2.7 million in dividend payments; and an increase in cash of about $54 million.

The balance sheet is in good shape.

Accounts receivable days sales outstanding were 68 days at the end of September compared to 66 days at the end of the year.

The translation impact of a weaker dollar added about a day to the receivable balance at the end of September.

Inventory days declined to 83 days from 85 days at the end of the year.

Our debt balance at the end of the quarter was $717 million compared to $680 million at the end of '06.

The Company's leverage and interest coverage ratios remain very strong at 1.3 times and 15 times, respectively.

EBITDA for the quarter was approximately $170 million and the Company had availability under its revolving credit facility of about $280 million at the end of September.

The amount of receivables sold under our receivables securitization program was $85 million at the end of the quarter, the same level as at the end of 2006.

Orders for the quarter were $756 million, a book-to-bill ratio of approximately 1.03 to one.

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 and thank you all for joining this conference call at the occasion of our earnings release.

As Diana just mentioned I will give you some highlights of our achievements in the third quarter, discuss the trends and the progress in our served markets, and comment on the outlook for the fourth quarter and for the full year of 2007.

First, some highlights.

We're extremely pleased with the third quarter results.

They were strong in all respects.

New records in sales and earnings, we were able to sustain the long-term trend of achieving industry-leading growth and profitability.

And we, most importantly, further strengthened our competitive position across our served markets.

This, combined with our opportunities that we see in front of us, will continue to give us a very positive outlook for the rest of 2007 and as we move into 2008.

A few comments to the sales.

Sales increased a strong 15% over prior year.

Obviously currency helped somewhat in that by two points, so in local currency, it was 13%, as Diana mentioned.

This is a very strong performance in a generally moderate demand environment.

We're very pleased because the growth was very broad-based across our end markets, as well as our geographic regions in which we do business.

The growth was particularly strong in the military and commercial aircraft market, in the automotive market, and in mobile phones or generally mobile devices.

We're very pleased, especially, with our sequential sales increase of 7% from the record level Q2 into a seasonally slower quarter Q3.

This is an outstanding performance and just reflects the strength that we have built in the various market segments that we are serving.

Most of this growth that we have generated and the majority of it was organic growth.

Diana mentioned that we made a small tuck-in acquisition.

It was essentially completed towards the end of the quarter, so the contribution from that acquisition was very minimal to our growth in the third quarter.

But we are very pleased with having added [Stewart Enterprises], a Texas-based company, to our portfolio, especially for the industrial market.

Stewart Enterprises is a leading supplier to the geophysical exploration market and complements very strongly our already-strong position in the oil and gas and power generation markets.

It's a truly tuck-in acquisition of the nature that Amphenol likes to see.

It meets all the criteria that we always look for these smaller acquisitions.

First of all, they're very complementary and add into a marketplace where value-added opportunities are important, which generate good margins.

So it's a company that is really not in the mainstream of commodity products.

It allows Amphenol to add significant value to essentially locally operating company in Texas with our broad expansion opportunities that we have for that company in the international market.

Most importantly, it adds very fine management, management that has been there as the founders of the business and will continue with us in the future.

And it is accretive.

This was one of the small tuck-in acquisitions that we certainly were working on for some time and it's always difficult to convince entrepreneurs and the founders who want to become part of a larger organization.

But I'm very pleased to say that our acquisition pipeline continues to expand and we are very confident that additional acquisitions will happen over time as a complement to our strong organic growth.

In the quarter profitability and cash flow also remained strong.

We were able to further expand our leading operating margin to 19.5%.

This is an excellent achievement, considering that the price down pressure from the customers persists and in general costs continue to rise.

However, with our continued strategy to focus on the value-added opportunities in the electronic markets, with providing advanced technologies that create value with our customers, and certainly with our continued stringent and innovative cost controls, we believe that there is continued opportunity for further margin expansion as we move forward.

EPS reached a new record of $0.50 a share, 28% over prior year, which is approximately a rate of growth twice the rate of our sales growth.

As you all know, this is our target that we have over a period of time.

This EPS growth reflects our strong operating leverage in the business.

Amphenol remains also a strong generator of cash.

$109 million in the third quarter is an outstanding achievement and equals almost -- essentially exceeds a little bit our net income, which was over 12% in the quarter, which is another indication of the strong financial performance of the Company.

This sustained performance of our industry-leading growth and profitability we believe is a direct result of the diversity of our Company in terms of its market, the very broad customer base that we serve in each of our served markets, the product range that is tailored to each of these markets, and the diverse geography.

We have built in each of these markets a competitive strength that allow us to effectively compete against a set of competitors that we meet in each of these market segments and they're usually not the same.

The results are also a direct result of our close relationships to our customers as a preferred supplier that allows us to be involved with the next generation product at an early stage and create value for our customers.

Another value creation that drives margins and also growth is our strong emphasis on technology.

We are providing to our customers, and we try to provide always value in form of complete interconnect solutions and advanced technologies that allow and enable our customers to enhance the performance of their own equipment.

Another result that we -- why we attribute these performance to is our ongoing programs of cost control, and they go far beyond just looking for low-cost labor.

It is to look for low-cost overhead in general.

It is look for finding new materials that are lower cost but have better performance, and many other areas that we are focusing on.

Our global footprint is a true advantage because it allows us not only to be very close to the design centers of our customers, but it also gives us access to low-cost labor and in many instances access to new emerging markets as well.

70% -- over 70% of our labor force -- total labor force head count is now in low-cost areas.

Last not least, all of this is driven and managed and by a very, very strong entrepreneurial and agile organization and management team.

A brief word to the trends and progress in our served markets.

We're very pleased to again be able to achieve a double-digit market in a generally more moderate demand environment, as I said earlier.

But in some of the market segments we see good demand strength, and military and aerospace is one of them.

It represented 19% of our sales in the third quarter.

Sales increased a strong 40% over prior year.

But when adjusting for the flood, the increase is estimated around 21% year over year.

This strong growth is certainly a result of a very healthy demand environment on a broad basis, both in commercial aircraft as well as in the mili -- on the military side itself.

We all have heard about the delay of the Boeing program by another six months.

For us these delays are just the normal life.

We know about these delays that come along, whether it's in commercial aircraft or whether it's in military, but our broad program participation in general in military, as well as in commercial aircraft, will allow us to have a strong continuation of our growth in 2007 and into 2008.

We don't see any major impact coming from that delay.

A delay of six months in a ten-year program before it goes into production is really a minute thing for Amphenol to face.

The industrial market represented 12% of our sales in the third quarter and the sales increased a strong 9% over the prior year.

We continue to benefit from our strategic focus on growth markets in the industrial area.

One of them is the oil and gas and power generation market, and with the addition of Stewart Enterprises and the geophysical exploration market, we're expanding further our opportunities in this generally very strong market.

The rail mass transit market, as well as the medical information -- instrumentation market are other markets that have sustained good growth.

And we expect the trend of growth in these markets to continue, as more and more electronics is being used in these applications.

The automotive market represented 8% of our sales in the third quarter and sales increased a strong 29% over last year.

We all know that most of our automotive business resides in Europe, so currency adjusted the growth in the automotive market was 21%, very strong still, especially considering that we are dealing with a seasonally slower quarter in Q3.

The majority of this growth was driven by the introduction of our next-generation interconnect products for the electronics use in cars.

That include certainly next generation for safety devices, where we have new customer wins and new platform wins to give us a very positive outlook into 2008 with continued strong growth.

Now some of the communication information technology related markets.

First, the broadband communications market over hybrid fiber coax networks represented 10% of our sales.

The majority of these sales are comprised of the coaxial cable side of our business.

Sales increased a strong 9% over prior year, and this is essentially a result of very healthy demand in a typically strong build period.

We believe that the success of the new broadband services over these networks will continue to drive demand, although we expect in the fourth quarter and at the beginning of the first quarter somewhat a tapering off of that demand as we enter a slower build period.

The IT and data communication market is a very large segment of Amphenol, with 23% of our sales generated in that market.

The sales were relatively flat when compared to a very strong third quarter of 2006.

We are pleased, however, that on a sequential basis, the sales in that market were up a strong 4% in a market that has mixed demand patterns and is generally relatively moderate.

However, our new high-speed products are gaining strong momentum, broad acceptance in the marketplace, and certainly have excellent prospects for the future.

Especially as we're now offering to our customers complete interconnect solutions and complete interconnect system architecture, as we call it, that will drive growth for years to come.

Mobile infrastructure markets, we had very strong performance.

It represented 14% of our sales and sales increased by 8% over prior year.

The growth in this generally soft market was essentially driven by our strong performance in emerging markets and by our participation on high-growth platforms in that market.

Long term the outlook is positive.

As the subscriber growth continues there are increased data and multimedia traffic requirements that drive growth, as well.

New IP mobile networks are also encouraging as we see the development coming, and our increasing participation in the TDS/CDMA market in China, which is essentially dominated by Chinese customers only.

No global manufacturers are really participating in that buildout and we have good opportunities in this market to participate as we move into 2008.

Last of our markets -- served markets is the mobile device market, which represented in the quarter 14% of our sales, and sales increased a very strong 30% over prior year.

We certainly benefited from a seasonally improved demand environment, but to a large extent, however, our growth was as a result of the successful introduction of our broad spectrum of innovative products across several customers and a number of new platforms.

We are very encouraged to continue our growth in this marketplace, as it is long-term, very positive outlook as mobility continues to grow around the world.

However, we will continue to deal with seasonalities more than in other markets in that segment.

In summary we are extremely pleased with our progress of enhancing our position across our served markets and we are confident in the ability of our organization to continue the trends that we have right now in our strong performance in terms of growth and profitability.

And we believe that we can continue to capitalize on our leading positions in the diverse markets, capitalize on our superior technology, and capitalize on many new opportunities we have created for ourselves.

On that basis, our confidence and our position in the marketplace and the demands that we see, we have been raising our guidance and outlook substantially for the fourth quarter and the rest -- and for the total-year 2007.

For the fourth quarter, we expect now sales in the range of $740 million to $755 million and an EPS in the range of $0.50 to $0.52 a share.

Obviously, this increased guidance is a result of adjusting for the better results of the third quarter and for a generally stronger outlook for the fourth quarter that -- compared to what we saw in the middle of the year.

For the full year that means that sales are now guided in the range of $2.814 billion to $2.829 billion and EPS in the range of $1.89 to $1.91 for the full-year 2007.

We look forward with confidence to close 2007 with a new record for Amphenol and we are very excited about the future as we prepare for a strong 2008 and a very strong close of 2007.

Thank you very much, and with this I would like to open it for any questions that you may have.

Thank you.

(OPERATOR INSTRUCTIONS) First question from Mr.

Brian White of Jefferies.

Good afternoon.

Good afternoon.

I wonder if you could talk a little bit about the December quarter and what markets you expect the greatest strength and the greatest weakness, sequentially?

That's a very fine question.

Thank you very much.

We usually don't forecast by market segment, but in general, as I mentioned already here, we believe that the military/aerospace market will continue to be strong on a sequential basis.

We believe that the handset market was strong in the third quarter and maybe a little bit seasonally strong in the third quarter than usually expected.

Usually we expect the fourth quarter to be somewhat at that level of strength, so maybe that is more of a flat situation.

And the automotive market, we continue to feel that we will have continued strength as we have seen it in this quarter as well.

The IT market and the data communication market will remain, as I said, somewhat mixed and moderate in its demand.

And for the broadband communication market, as I said, we believe that it will taper off towards the end of the year in terms of its demand, because just as the build cycle.

Okay.

There has been some talk about servers seeing some softness due to financial institutions going through the subprime meltdown.

Wondering if you've seen any softness in the server area?

I wouldn't say that there is softness in a particular area that is -- has a significant impact.

We see fluctuations in that market throughout the year.

Some months are stronger than others, but we haven't seen a general trend that would suggest that there is softness.

Certainly not with most recent demand that we have seen.

Okay.

And just finally, the margin profile of the acquisition, is it higher or lower than Amphenol?

The margin is about -- has some opportunity for expanding, but obviously it is very close to what Amphenol's is.

Okay.

Thank you.

Yes.

Next question from Mr.

Steven Fox of Merrill Lynch.

Hi.

Good afternoon.

Good afternoon, Steve.

A couple questions.

First of all, Martin, you called out the success you had in the wireless handset or wireless device area.

You mentioned new products.

I was wondering -- and platforms.

I was wondering if we can get a couple of examples of what you were talking about?

Sure.

I'm happy to say that we have developed a very state-of-the-art hinge product that has -- which is for sliding hinge phones, which has had very broad acceptance with the major players, and the ramp-up was very, very strong for these, as these models are going to go out for the holiday season.

In addition, very strong performance in the antenna side of our business, as well as in our traditional connector side where we have strength, so it was relatively broad-based.

But really the new products with the hinges, some of the antennas, as well as scaled products that we have for [SIMs], as well as for the new generation of -- we call it the bottom-entry connectors or system connectors, which are essentially charger connectors, which is getting a totally new life with a total new generation of products.

We all have heard about the standardization in China that is happening, but other companies are following a total different lead, especially relative to data communication that is required out of these phones nowadays.

That's great.

That's helpful.

And then two other quick questions.

This is the second year in a row where the summer quarter has proved to be pretty strong sequentially.

Has anything changed in terms of your customer's ordering patterns or just within your own business units that would explain it, or is it just a strong quarter?

I think the fundamentals haven't changed.

I think Europe continues to be a slower season, and we see that from a sequential performance standpoint.

But what is maybe somewhat novel and that is in the mobile phone business, somewhat like last year, it is a little bit earlier in the season where apparently the comp -- our customers want to prepare for the holiday season rather than having that shift into the fourth quarter.

That is the only one that is really visible in terms of its sequential growth from Q2 to Q3, because the sequential growth was very substantial in the mobile phone segment from Q2 to Q3.

Okay.

And then lastly, Diana, just looking at your balance sheet, the cash level is a little higher that you guys usually carry.

Is there any reason for that and should we expect a debt reduction in the next couple of quarters given where the cash is?

Sure.

I think that we have actually changed our philosophy relative -- earlier in 2006 relative to the repatriation of cash from low tax rate areas in order to drive the tax rate down.

So what we're doing now is we are building some cash in countries where we have a tax advantage from doing that and we expect to execute future acquisitions.

So what you'll see down the road is you'll see that cash used to do acquisitions, as an example, either in Asia or in Europe.

Great.

Thank you.

Sure.

The next question is from Shawn Harrison, Longbow Research.

Hi.

I was hoping we could discuss the raw material environment, both on the connector side as well as the coaxial side.

On the connector portion of the business, rapid rise run-up in gold and -- or oil-based resin prices recently.

Just wondering if there was any consideration of going to distribution with price increases before the end of the year to help offset some of that?

Well, obviously, that is an area -- thank you for the question -- of continued attention throughout the Company.

Obviously, gold is largely used in connector products and the plastic resins and oil-based products, as well, so we watch that very carefully and where opportune, we'll certainly take the actions relative to price increases.

And that's not just limited to distribution, but there whenever it is appropriate and possible.

Obviously there are segments in the market where customers are very -- or suppliers are very hungry for the business, where our customers feel that, and obviously continue to put a lot of pressure on price, so that goes the other way.

But obviously, the general environment on raw materials is not a trend downward, but it's rising.

Even if you're seeing aluminum -- aluminum some improvement, in general the environment on raw materials is still on the rise, as well as it is in wages and [carriers] around the world.

There is inflationary pressure in general, so we shouldn't just focus on the oil and those increases having an impact on raw material only.

It has certainly on payroll expenses, as well.

Is the increase in raw materials, though -- have your peers started to look at price increases in the market that you may be able to follow suit to something similar?

I haven't seen anything of significance across the connector industry that suggests that there is a broad swell of price increases coming along.

But we continuously watch it very carefully and we obviously have leading positions in many of our market segments and as such obviously we would take the lead as well.

Okay.

Second question just has to deal with the good growth in automotive as well as handsets.

The new program wins, was that with existing customers, or are you gaining market share with customers that you previously hadn't engaged with before?

Well it's actually a combination of both.

We have a stronger penetration getting in certain of the existing customers with these new products, where we don't just have only a replacement business phasing out old products and replacing it by new products, but also a broader acceptance across more platforms at these existing customers, such as, for example, Volkswagen, where you have not only Volkswagen but Skoda and Audi and others in that whole group, so there's expansion within the same group, if you want.

At the same time, we have also wins with new customers, especially in Europe with Mercedes and Fiat, that are very positive for the future of the Company.

All right.

Thank you very much.

Yes.

The next question from Mr.

Carter Shoop with Deutsche Bank.

Good afternoon.

Wanted to talk a little bit about the complete interconnect system infrastructure.

You hinted that you're starting to gain a little bit of traction there and that was one of the big selling points of making the TCS acquisition.

I was hoping for you to maybe quantify some of the recent wins, some of the traction, and how that complete system offering is going to enable you guys to continue to gain share in that market?

That's a very good question, a very broad question that we would have to go into a lot of details.

But the general jest is that when you can, at an early stage, sit down with the engineering group of a customer and really talk not only about a segment of the interconnect that is being used but about the whole bill of material, it has tremendous advantages for the customer because it reduces cost.

And as such, we are pursuing that with the customers very heavily without going into the detail where we have these particular wins because some of those are in discussions at that point in time and it wouldn't be opportune to talk about this publicly, but it's very broad-based, I can say.

Broad-based and a broad array of customers, especially in the IT segment and communications -- data communications, as well as mobile communications market.

Mobile communications I mean mobile infrastructure.

It is clearly visible to us that there is an appetite of the customers to have a supplier who can provide that value to them in form of an integrated solution.

It truly provides value because it reduces their cost, but certainly has a potential margin opportunity for Amphenol at the same time.

The same is actually happening in the military side, as well.

Through our integration of the printed circuit board, the rigid boards or rigid flex, as well as the flex print circuit, together with all the components that go along into an equipment is just really a significant advantage to gain market position also in the military segment on a broader base.

Great, that's very helpful.

Second question is about the acquisition outlook.

You mentioned how it sounds like it's becoming a little bit more favorable.

Can you talk about the recent credit crunch and how that might be enabling a few of your potential targets to actually become more excited about joining the Amphenol team?

Well, there are a lot of companies that are out there of the medium size or smaller size that we're looking that would be excited to be a part of Amphenol and the prices there have really nothing -- there was no impact from the credit crunch on those customers -- or on those companies.

The private equity firms usually haven't really participated in these smaller companies.

As far as the larger ones are concerned, we continue to have appetite for those.

It's not just that we're looking for these smaller tuck-in companies and bolt-on companies, but also for larger ones that may become available, but usually that is through an auction and not just through relationship building like we have it with the smaller companies.

So what we are focused on right now is these smaller companies.

The pipeline is good and obviously we are putting some of the money into Asia and in Europe, not just because it helps us in the tax rate, because we see a good pipeline of opportunities in those marketplaces to further add companies that are complement and have the characteristics that we would like to see.

At the same time, if a bigger one comes along, obviously we would very, very much look at them with great interest.

Great, thank you.

Thank you.

The next question from Yuri Krapivin.

Good afternoon.

Good afternoon.

Martin, a question regarding your organic growth rate.

Obviously you've been delivering very solid double-digit organic growth rate this year despite uncertain macro environment and mixed trends in certain end markets.

How confident are you in Amphenol's ability to sustain double-digit growth in '08 -- I mean organic double-digit growth?

Obviously that's something that we are working very diligently and one work that helps us to do this is create a better platform for growth, and that is something that we have done throughout this year and over the last ten years.

We have gained positions in each of the markets that we serve.

We have created a better competitive position there and competitive advantages in each of these markets through our product portfolio, through creating and expanding our customer base in each of these markets.

So with that in mind, that gives us the flexibility.

The diversity that we have in each of these markets is certainly contributing to opportunity for further growth, because we know from experience in all of the markets that we (inaudible) that there's not always one or two winners in that market.

And the more you're able to participate on a broad basis, you can grow with one even if the other one doesn't do so well at that point in time.

So that is certainly one element that is very, very important, and that is continue to work on the diversification of our customer base and the markets that we serve as a growth.

In addition, the technology is advancing.

And as the technology of our customers is advancing, they want new interconnect solutions to support their higher-performing equipment and this is where we put a lot of emphasis.

And this is another area where we have a lot of confidence that we have to offer to our customers more than the majority of our competitors.

And as such, we feel, again, confident that we can grow faster than the market, at least at two times the rate that we always have.

So I am certainly not sitting here and have a crystal ball and knowing what 2008 growth rate will be for the connect industry.

There are analysts and mar -- connector analysts who have some predictions on this, but what we believe is that we certainly can grow faster than the industry and we certainly target and continue to target twice the rate.

Okay.

Thank you, Martin.

My second question relates to backplane connectors.

Recently Tyco Electronics and Molex signed a second-source agreement in the area of backplane connectors, so that agreement covers Tyco Electronics' impact to product line and -- I'm sorry, Z-PACK line and Molex' Impact line.

In your opinion, is it just a standard industry arrangement because customers require double sourcing, or is the intention here to compete more aggressively against DCS product line?

As you know, Molex has been for a long time, and continues to be a partner with Amphenol on backplane product.

On that next generation product, obviously Molex has a product and it is our intention with second sourcing always in this area -- especially in this area that the customer -- that a second source supports the total product line and doesn't just have a cross license so you can add off this product or another offer because which one do you really offer?

We want to make sure in our second sourcing -- and the customers require second sourcing -- we have a second source that totally supports a product line and one product line and that's certainly something that we are continuing to pursue.

That was our past strategy, a very successful strategy.

Gave the market leadership and that is -- continues to be our position in the future.

We feel very strongly about the position of our backplane product that is already in the marketplace, that performs better than any other product that is in the market today in terms of its electrical performance, and we feel very strongly that the positions that we are gaining, which I alluded to earlier, are significantly ahead of anybody else at that point in time.

And we feel very confident that we have strong market position and continued strong leadership in the backplane area -- arena in the future.

Hello?

Yes, thank you, Martin.

I'm sorry.

We were -- thought we were cut off here.

(LAUGHTER)

And the next question from Mr.

Will Stein, Credit Suisse.

Thanks for taking my call.

We saw very strong top-line growth this quarter.

I'd like turn to the margins for a second, though.

I'm wondering why gross margin was down sequentially?

And while there was a nice ten basis point increase in op margins, I've had some questions from investors as to why perhaps it wasn't a little bit more, given the very positive top-line growth?

Go ahead, Diana.

I think that the total conversion margin in the quarter and the margin proven in the quarter -- I'm talking about operating margin now, which is really the way that we manage the business to maximize operating income margin -- we felt was very good and quite strong.

In terms of the mix of gross margin and SG&A in the quarter, just to start perhaps from an SG&A standpoint, we certainly apply the same disciplines to SG&A spendings that we do to capital, investing and any other use of cash.

And I think that our philosophy on SG&A, which includes the movement of quite a bit of the SG&A function to low-cost regions, has helped us to move that SG&A cost down as a percentage of sales over the last couple of years, as we've had this strong top-line growth, and that's something that we will continue to work on to drive those costs down.

From a margin standpoint, depending upon the mix of sales by market in the quarter, depending upon from a seasonality standpoint.

In the summer, as an example, we have quite a number of our factories that have a lot more vacation time and so forth, and sometimes you will get some movement from a margin standpoint in one particular quarter.

But we really measure from a report card standpoint that operating income can -- version and we're quite pleased with that in the quarter.

Is it fair to say it's also related, perhaps, to the mix in cable versus connectors?

I noticed that in the cable segment sales were up 6% sequentially, I think, but op margins were flat.

Was the hit -- not hit, but was the -- the lack of margin expansion there owing to a gross margin --?

The cable segment is really relatively small so I don't think that has so much of an impact, but as an example, the foreign exchange translation can have an impact also on mix because not all of our units are at the average.

And so there are many things during the quarter, mix of sales by market, the foreign currency translation and so forth, that can have some slight shift in terms of the pieces.

We focus our people on the operating income line, because at the end of the day, you want that dollar of operating income from that dollar of incremental sales, and whether you spend it on the gross margin line or spend it on the SG&A line, it still gets spent and when we look at our operating income performance, this is very, very strong.

So there is no, I think, issue out there relative from a margin trend standpoint that anybody needs to worry about.

Very good.

Just one other with regard to the margins.

Diana, you've mentioned a target of 25% contribution margin on new product, which suggests that maybe you get there asymptotically over time.

Is that something that is potentially out there a couple years away or is that a more theoretically very long-term target?

Yes.

I think, as you know, we don't so much like to predict ROF levels in the future.

I think that our first goal is to get to 20% return on sales.

We also talk about this 25% conversion margin goal, where we want at least $0.25 on the dollar for each dollar of incremental sales, and we continue to drive the Company in that direction.

That causes margin expansion as we implement all of the strategies that help us to achieve those goals and we still continue to feel that that margin expansion in the business -- for all the reasons that Martin mentioned, I think, in his prepared statements, we still feel that that opportunity exists in the business.

Great.

And then just a housekeeping question.

Estimated tax rate for next year?

We haven't given a tax rate estimate for next year yet.

In the fourth quarter we talked about a 30.5% rate that brings us to about 30% for this year.

At this point I wouldn't expect the rate to go up, but when we give guidance for 2008, we'll certainly talk about the tax rate at that time.

Thanks very much.

Thank you.

The next question from Tom Dinges of JPMorgan.

Hi, good afternoon, guys.

Good afternoon.

One for you, Martin.

I wanted to just ask a question on top of one of your statements where you talked about the pricing environment was still pretty challenging, and maybe can you just characterize it in two ways?

How much of the pricing environment is challenging, because as you've also alluded to, lots of competitors in different areas -- and there does seem to be somebody always in some areas that you're in who will do something a little bit at a lower price than yourself -- and how much of it is just the customers themselves maybe taking advantage of some of these headlines that are out there about things perhaps being a little bit softer next year and using that to try to get a little bit of leverage with their supply base?

And then I have a quick follow up for you.

Yes.

Well, thank you very much.

Obviously, that pricing question is always in our minds and the minds of our whole organization.

The situation is simple in that way that in general, in the areas where there's a high pressure on the side of our customers to reduce the cost of their equipment, no matter what the environment is, they will continue to come and look for somewhat less costly solutions.

That's both a challenge and an opportunity, because if they want new solutions with higher performance, we can develop a product that has essentially that specification and we can develop it to have high margins as an application-specific solution.

If they stayed with a product for a longer period of time and competition is there, obviously it becomes more of a standard product and there you have some price pressure.

And in those areas -- it's essentially in the information technology, in the mobile infrastructure, mobile device market where we see that kind of situation stronger than in the other areas, like the industrial market.

The automotive market, as well, has some pricing.

They're very astute, always having two competitors in play, one against the other, in our opinion.

But nevertheless, the industrial and military and commercial aircraft markets are different from these other markets in terms of pricing -- pricing situation, just simply because they are less standard interfaces, number one, and it's a different kind of competition.

Competition tries to maximize their profitability in those areas more than in the other areas.

Okay.

And then you also mentioned that better than 70% of headcount now is in low-cost countries.

You made an acquisition of a U.S.-based company and you talked a bit about some of the -- perhaps some larger acquisitions that you guys are open to.

Is that metric there -- in terms of having better than 70%, is that a minimum threshold that you'd like to see in the size of a larger acquisition in terms of -- do you really automatically want to see that they've already lowered a little bit of their cost structure with that low-cost headcount, or does that really matter at all when you're looking at something larger in size than perhaps what you've been buying over the last year or so?

It's not a prerequisite that they're already there.

Actually we could create a tremendous opportunity if they're not there, because we have the presence there.

We know how to do business there and can get them quickly to this and that would add to margin expansion, because most of these companies that are just in high-cost areas usually don't have the same margins, except if they serve a regional market.

Like the Stewart Enterprise serves a regional market at this point in time and has good margins, but there's opportunity now for international expansion for them.

But there is no threshold relative to this.

It depends really on the mix of markets that you involve, whether they are more regional in character, where customers really insist to have it locally.

There are automotive customers, for example, that insist that you produce in Germany.

They wouldn't accept it in the Czech Republic like many of the other automobile manufacturers do.

They say you have to have automation in the high-cost area and we are willing to somehow work with you, but we want it locally and want to have the control right in the same country.

So it depends on the mix in the markets whether in -- how many people are outside or in a low-cost area or not.

Okay.

Thank you.

The next question from Mr.

Jeff Walkenhorst with Banc of America.

Hi, good afternoon.

Thanks for taking my question.

I think this the seventh quarter where Amphenol has delivered upside on the EPS line, which is certainly what investors like to see.

I'm wondering what really has changed over the last year where we've seen -- where has the upside come from, where have you been surprised?

And we know military has accelerated -- and certainly there's some big spending happening there -- and aerospace is good, but really -- and you've won some new programs.

But what has changed to really push the numbers so much higher in the last few quarters and does that mean that the bar should be set a little bit higher as we look forward?

Well, I think we have a record that goes far beyond a year or a few quarters.

We have ten years of substantial increase in terms of sales, in terms of our operating income and operating performance, and EPS.

A strong record that really goes over three cycles in the business, up and down and up again.

So I wouldn't want to limit it just to this quarter that we have outperformed.

And there were no surprises.

We are a very conservative company.

Even if we are aggressive in our performance targets and how we look at things, we're very conservative.

We have a conservative balance sheet, we are conservative in our outlook.

It is not always very clear to predict whether from a seasonality standpoint in a given quarter, mobile phones will be strong or not or whether certain customers in the military business will exactly order for that piece of equipment that could have a more significant impact in terms of growth and so forth.

So we like to look at this in a conservative standpoint.

Things that truly can be realized and delivered and obviously manage it from a top-line and a bottom-line side in most the graphic way that we can, but at the same time remain prudent in -- both in our outlook, prudent in our investment strategy, prudent in what the Company in general is doing.

Okay, that's helpful.

Another way maybe to look at the question, or think about it, is do you feel more confident today, based on the new programs and maybe improvement at TCS and some of the acquisitions that you see out there relative to a year ago?

Obviously, a year ago there was really some uncertainty of what the market would do in general.

In the meantime, we have grown about -- added to our business $350 million, or will have by the end of the year, which is a substantial, medium-sized company that we have added through organic growth.

What that really means is that we haven't just added revenues, we have added customers, we have added positions on bill of materials, we have added products that drive us into the future, and that gives you some confidence that you have the ability to continue a very strong trend into the future.

So establishing a stronger platform, as I like to call it, for growth is certainly a confidence booster as you look into the future.

But we remain certainly prudent relative to what the electronic market is giving, and I think as a matter of our strategy we work in good times and we right now feel that even if this is a moderate climate, it's still a demand environment which is supported from positive.

We like to manage our Company very lean, ready for any eventuality that comes.

We want to remain very agile to be able to react to whatever changes we see in the individual marketplaces or in the electronic industry as a whole.

Okay, thanks.

One last follow up, if I may.

The commercial aerospace and military segment has been growing about 20% year on year, I think, in the last two quarters and the White House is now asking for about $190 billion, which is a big increase over what President Bush had asked for earlier this year.

Do you think it's possible -- and I think these programs have a lot of bi-partisan support -- do you think it's possible that Amphenol could even see accelerating growth in 2008 for that segment?

Right now I think a 20% growth is a very, very healthy growth and obviously all of this spending will depend where the spending goes.

Does it go into the procurement of equipment, or does it go into spending of payroll or whatever, troops deployment and so forth.

There are so many areas where money can be spent that is not as easily predictable for us.

What we see, however, at this point in time, very strong, accelerated programs, especially on the upgrade of ground vehicles that have bomb detecting equipment and so forth that we are not going just to have one car after the other being bombed and exploded in Iraq, for example, but they are preventive measures, so there are accelerated programs right now to drive growth higher.

Whether that kind of particular situation will continue, time will see, but we will -- we are very confident that growth will remain strong in that segment.

Okay, very good.

Good luck, guys.

Thank you.

I think we have maybe two more questions.

Very good.

You have two questions in queue.

Amit Daryanani, your line is open.

Thanks a lot.

Good afternoon, guys.

Good afternoon.

Just a question on the handset segment.

You guys have clearly seen a very good sell-through through the build season in Q3 up.

I'm just curious -- do you get a sense of the slowdown of the deceleration we see in Q4 and Q1 would be a little bit more pronounced this time around than the years past?

If I would know how many phones -- I'm sorry for that answer, but how many phones subscribers and consumers are going to use, I would love to know that as well.

But right now, with the new programs that we are involved in with the broad customer base and the many models that we're involved with with these new products, I think we're able to moderate any very significant declines through the fourth quarter and as we move into the first quarter like we have been able to do in the past.

So it may not be as pronounced if it comes because of really gaining position in some of these areas and of models where we have confidence that they will be sold.

Fair enough.

And then just a question.

The Stewart acquisition, could you just talk about what the revenue growth dynamics are for that company?

And also just to clarify, you're buying the use and connectors division of Stewart cable, as well?

Yes, to the second question.

(LAUGHTER)

The first question is the revenue profile, as Diana mentioned earlier, is about $35 million of annual sales.

Is that '06 number, by the way?

Pardon me?

That's a 2006 number, right?

That's just a rough number.

A rough annual number for --

-- what annual sales are.

Yes.

All right.

And then, Martin, just a question here.

Historically you've spoken about Amphenol achieving 1.5 to two times connector market growth.

I think on today's call you've spoken about getting to about two times connector market growth in 2008.

So I'm just wondering what's given you the confidence to get to the high end of that run rate?

Are you seeing better market share gains or is there some acquisitions that are pretty close to the finish line that give you confidence?

No, I think we usually don't talk in this growth rate we're adding in acquisitions, but obviously if we look at 1.5 to two times, I right now feel that we have good organic growth.

We have accelerated and be able to accelerate our organic growth over the past, which is a good sign because it really means that the acquisitions are complementary and the main driver is the organic growth.

A few years ago there was a question of, can you not organically grow faster?

I think we have proven very strongly that we have strong organic growth and with the positions that we have, as I mentioned earlier, we are very confident to continue to grow.

Obviously, we also see a pipeline of these tuck-in acquisitions that could help to achieve, or exceed the two times, as I mentioned earlier.

Got it.

Then just, Diana, a quick question for you.

Inventory was up about $21 million sequentially.

How much of that was because of the Stewart acquisition?

It would only be a few million dollars.

There was -- in the quarter because of the way the dollar moved, got weaker as the quarter went along, so the foreign currency impact on the balance sheet was a little bit bigger this quarter than we've seen in the past.

But even with all that, the inventory growth was less than the sequential sales growth, so we think the inventory performance was not too bad in the quarter.

Q4 tends to be sequentially up, so we do tend to have some advance in terms of anticipation for Q4 also.

Fair enough.

Thanks a lot, guys.

Thank you.

So this is --

The final question is from Jim Suva of Citigroup.

Great.

Thank you and congratulations, everyone.

Martin, earlier you mentioned about the acquisition pipeline was very strong and I remember a couple quarters ago we had talked about China was seeing a little bit more regulatory paperwork or timeline.

Can you update us, does that make it so you're a little bit less opting for China, or is it just more of a process to take longer, because it seems like you're definitely setting aside some cash in that area?

I couldn't have expressed it better than you.

It's more the process than our appetite.

Clearly, we are looking at opportunities in that country, but not only in that country.

Obviously, Asia is big.

We are just opening -- and that has nothing to do with acquisitions, but a third facility in India because we see continued, significant expansion.

We're exploring new low-cost areas outside of China as well.

Not to be only dependent on those.

And we're moving more and more towards the rest of China, where total cost and labor pool and skilled people are more readily available than in the east of China.

So there's a lot going on in that area and that includes, obviously, acquisition targets as well.

And your pipeline versus, say, six months or 12 months ago, has it been stably strong or increasing or how should we think about that from a conservative --?

You should think about that, in my opinion, that the discussions that are taking place with companies are firming up as opposed to being targets, just loose discussions, and conviction going on.

It's more of a -- more intense discussions that are taking place.

So what I'm saying, the pipeline is strong, means nothing else, that it's more solid in terms of the discussions than six months ago.

Great.

Thank you and congratulations, everyone.

Thank you very much.

And thank you all for your interest in Amphenol and we look forward to talking to you soon.

Thank you.

Good-bye.

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

Thank you.