安費諾 (APH) 2008 Q2 法說會逐字稿

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

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

(OPERATOR INSTRUCTIONS) Until then, all lines will remain on listen-only mode.

At the request of the company, today's conference is being recorded, and if you have objections, you may disconnect at this time.

I would like to introduce today's 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, our CEO; and Adam Norwitt, our COO.

We'd like to welcome everyone to our second quarter call.

Q2 results were released this morning.

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

We'll then have a question and answer session.

The company had a record second quarter, exceeding the high end of the company's guidance in both sales and earnings.

Sales for the quarter were $847 million, up 23% in US dollars and 19% in local currencies over the second quarter of 2007.

And from a sequential standpoint, up 10%.

Organic sales growth, excluding acquisitions and currency effects in Q2 over the prior year, was approximately 15%.

During the quarter, the company completed the acquisition of a US manufacturer of audio interconnect products for the military market with aggregate annual sales of approximately $14 million.

We are excited about the growth potential created by this acquisition.

Breaking sales down into our two major components, the interconnect business, which comprised 91% of our sales in the quarter, was up 25% compared to last year.

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

And Martin and Adam will talk more about that in a few moments.

Our cable business, which comprised 9% of our sales, was up 7% from last year, primarily as a result of increases in international broadband, cable, television markets.

Operating income for the quarter was strong at $168 million.

Operating margin was 19.9%, compared to 19.4% last year.

The margin improvement relates to increased margins in the company's interconnect business.

From a segment standpoint, in the cable segment, margins were 11.5%, down from 12.7% in Q2 of '07, and down sequentially.

The margin reduction reflects the significant impact of higher material costs, primarily aluminum and plastics, a portion of which has been offset by price increases, the last of which was implemented at the beginning of this quarter.

In the interconnect segment, margins were 22.3%, up 60 basis points from last year.

The achievement of the strong margin, given the current inflationary cost environment, is a significant accomplishment and reflects the company's dual focus on driving strong top line growth of higher margin performance-enhancing products, in addition to a very strong focus on all elements of cost.

Our operating units around the world continue to work hard every day to keep our overall cost structure low, providing the company with increased flexibility in dealing with market conditions.

Overall, we are quite pleased with the company's margin achievement.

Interest expense for the quarter was $9.9 million, compared to $9 million last year.

The increase over the prior year relates primarily to higher average debt levels in the 2008 quarter, reflecting borrowings to fund Q1 stock repurchases.

Other expense was $2.2 million, compared to $3.6 million last year.

The decrease from last year reflects decreases in fees on the company's accounts receivable securitization program and higher interest income.

Our effective tax rate in the quarter was 29.5%, the same effective tax rate as in the first quarter and for the full year 2007.

In the second quarter of 2007, the company's effective tax rate was 30.5%.

Net income was $110 million, approximately 13% of sales, a very strong performance on any industry comparative basis.

Diluted earnings per share for the quarter of $0.61 was up 33% from last year.

The company continues to be an excellent generator of cash.

Cash flow from operations was $96 million in Q2.

For the six months ending June 30, operating cash flow is approximately 99% of net income.

The cash flow from operations along with $13 million in proceeds and tax benefits from option exercises were used to fund capital expenditures of $31 million, acquisition related expenditures of $29 million relating to both the acquisition in June, and the payment of liabilities relating to prior acquisitions.

We reduced debt by $33 million in the quarter, and paid $2.7 million in dividends.

In addition, cash and short-term investments increased about $13 million to just under $200 million at the end of June.

The balance sheet continues to be in good shape.

Accounts receivable days sales outstanding were 69 days at the end of June, up 3 days from the end of Q1 and at about the same level as at the end of 2007.

Inventory increased about 4% from Q1 levels, and inventory days came down as we expected to about 82 days from 87 days at the end of March.

Debt was $820 million at the end of June, compared to $723 million at year-end, reflecting borrowings to fund the stock buyback in the first quarter.

Debt was down from a sequential standpoint by $33 million, from the end of March.

Our leverage and interest covered ratios remains very strong at 1.2 times and 16 times respectively.

EBITDA in the quarter was $198 million, and there was $170 million of availability under the company's revolving credit facility.

We continue to have about $85 million in receivables sold under our receivables securitization program at the end of June.

Orders in the quarter were $840 million, a book-to-bill ratio of 0.99 to 1 for the quarter, bringing the year-to-date book-to-bill ratio to 1.02 to 1, the same ratio as last year.

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

Martin will now provide an overview of the business.

Well, thank you very much, Diana.

Thank you all for joining our traditional call as the time when we release our earnings.

Welcome.

As always, I will highlight some of our achievements in the second quarter of 2008.

Earlier in the second quarter, we made an announcement relative to management succession and we will provide some additional comments on that point.

Adam Norwitt is together here with us today.

He will discuss the trends and the progress on the various markets that we serve, and I will summarize with our outlook for the third quarter and the full year 2008.

Some highlights first of the second quarter.

We are extremely pleased with the second quarter results.

They are very strong, reaching new records in sales and earnings.

And I'm very pleased also and the organization is pleased to continue and to be able to continue the long-term trends of achieving industry-leading growth and profitability.

Sales increased a very strong 23% over the prior year in the generally modest and somewhat modest and somewhat lumpy demand environment.

The growth was very broad based in all of our served markets.

The strongest growth, though, was achieved in the global communications market, especially in the mobile device, and mobile infrastructure markets.

Also very strong, the military and the commercial aircraft markets.

We are also pleased that sequentially our sales increased a strong 10% over the first quarter, in part due to the traditional seasonality, but in part due also to share gains.

And we believe that our share gains are really achieved through a strong focus and by continued strong focus on advanced technology, providing performance-enhancing interconnect solutions to our customers across all of our served markets.

We continue also to benefit from our diversity, and our broad global presence and especially we are pleased that our investments and resources that we have put into emerging geographies and markets of bringing good returns with strong contributions to our overall growth.

Adam will talk about this in a little bit more detail.

We continue also our acquisition strategy -- the pipeline is good and healthy, and we were able to complete one additional acquisition in -- at the end of the second quarter, actually the end of June of 2008.

And we are excited about this addition, because it is one of the typical Amphenol acquisitions where we believe we get an extension of our product line in a market that is a target market for us, the military market.

And in addition we can add value to this small company with approximate annual sales about $14 million, and bringing them a much, much better customer base, not only in North America, but on a worldwide basis.

Their strength in this audioconnect which is used in communications equipment in harsh environments is going to help us to penetrate our customers even further.

Profitability and cash flow also remain strong in the second quarter.

Operating income margin, as Diana just mentioned, expanded to 19.9%, just a touch below the 20% mark that we are clearly aspiring to reach.

And we achieved that margin expansion clearly in a very difficult environment, in a difficult environment insofar as cost in all areas is going up, whether it is wages, whether it is transportation cost, whether it is commodities.

At the same time, the customers continue to be relatively reluctant to accept price increases.

However, we certainly work with our customers to try to achieve that on an ongoing basis.

Our EPS increased a strong 33% over the prior year to a record $0.61 a share.

And cash flow remains strong, with $96 million, and we reinvested, essentially, that cash back into the business to fund our growth and expansion.

We believe that the strong profitability is a direct result of our excellent operating leverage on incremental sales, as well as the focus on technology and the high value end of the spectrum of the market.

And on a continued living, the costs that we incur, living in the sense of putting scrutiny on all elements of cost to make sure that we have excellent productivity and flexibility in costs throughout the company.

A brief word on the management succession plan that was announced just a few weeks ago.

This management succession plan is certainly no amount of surprise to anyone, and if nothing else, it's a continuation of the evolution of the organization that we have engaged several years back, when the company was growing and expanding and certainly need a strengthening of management and we continue on that path as you move forward for further growth.

In this announcement, we said that Adam Norwitt, Amphenol's current President and Chief Operating Officer -- probably well known to many of you will be appointed the Chief Executive Officer at the beginning of 2009.

He will then become President and Chief Executive Officer of the company.

He will also be appointed to the board of directors and we decided to increase the board by two seats, with one additional outside independent director joining our board over the next several months.

I, myself, will assume a newly created position, which we call the Executive Chairman, with particular emphasis on our strategic direction, and the further development of our leadership team.

This management succession clearly creates and ensures a smooth transition of management responsibility, which has started several years back, and it ensures a continuity in the pursuit of our strategic vision, to be the interconnect technology partner of our customers, in their electronic markets as a whole.

We are very pleased, and I'm excited about that management transition, which I can report to you since the announcement that it was very well received, obviously not unexpected within the company and very, very well received by our customer base across the world.

With this, I would like to pass on the word to Adam, who will comment on the trends in various market segments.

Thank you very much, Martin.

As Martin said, we are very pleased with our progress in the quarter and with the results of the quarter.

And in general in our served markets, those results have been driven by three things, the focus on technology -- as Martin said, our continued drive to create performance enhancing solutions for our customers -- our end market diversification, and importantly in this quarter, our geographical diversification and focus on emerging markets within those end markets.

First, the military aerospace market represented 20% of our sales in the quarter, and in that market, sales increased a very strong 24% over prior year.

We are very pleased to see that the demand remains healthy, driven in part by the military equipment deployment and refurbishment of those equipment, including ground vehicles and new communication system upgrades.

As well we see strength in the product for commercial aircraft, with strong backlogs within our customers within the commercial aircraft market.

We see continued broad program participation across all of these segments in the military aerospace market, continuing to drive growth in 2008 and beyond.

As Martin mentioned, consistent with our strategy, the Nexus acquisition is accretive and adds good management and creates a strong platform for growth in audio-related products for the military aerospace segment.

The next segment, industrial, represented 13% of our sales in the quarter.

Sales in industrial increased 15% over prior year.

In that market, we saw strong OEM program gains in oil and power and gas applications which were partially offset by some moderation of demand in the North American market for industrial equipment.

We continued to see a proliferation of embedded electronics in industrial applications, driving demand through 2008.

We see strong markets in energy, and as we see a transition of products moving from electrical to electronic interconnect, we feel optimistic about this market for the long term.

The automotive market represented 9% of our sales in the quarter, and sales increased 12% over prior year.

While we expect the normal seasonal softness sequentially in Q3, we expect to offset a slowing in vehicle production with ramp ups of new products at new customers throughout the rest of this year.

We are very excited about the longer term outlook due to the increased electronic content in cars, including most notably our broad design wins in hybrid vehicles, as well as the continued proliferation of electronics into multiple platforms of cars.

In the broadband communication over hybrid fiber coax networks, which represented 10% of our sales in the quarter, sales increased 11% over the prior year.

As Diana mentioned, we implemented a cable price increase of 7% to 8% in Q2, as well as additional surcharges at the quarter end to partially offset the effects of continuing zero cost increases, which at this point show no signs of slowing.

We expect demand in third quarter in this market to be stable and driven by strengths in overseas market as well as notably increasing high technology interconnect content, which we see in the broadband equipment, in the head end of all of the MSOs, finally by the continued success of new broadband services.

We are especially excited about the interconnect content and our ability to enhance the performance of that content with innovative new interconnect solutions.

The information technology and data communications market represented 24% of our sales in the quarter.

Sales in that market increased a very strong 16% over prior year.

This is driven by accelerating new customer and product rampups with our diversified customer base and a broader portfolio of products into those customers.

We continue to build on our distinct competitive advantage of operating a complete interconnect system architecture into the wide variety of applications across this market.

While we do see some moderation of demand in certain segments, we are very optimistic that our continued achievement of broad design wins with the new high speed products gives us strong confidence for further expansion of our market position in this segment.

We have worked for two years to gain broader position on the building materials through the acquisition of TCS, and we start now to see the benefits of those efforts over that time period.

The mobile networks market represented 13% of our sales in the quarter, and in this market, the sales increased a very strong 36% over the prior year in a market which still continues to have somewhat moderate growth.

We are benefiting in this market from strong demand in site installations, especially demand in emerging markets, as well as from our broad presence on the higher volume, low cost base station platforms.

We are able to sell into both of those markets installations and equipment a broad array of products from around the world with Amphenol.

We saw especially strength in India and China this quarter.

While we do expect a seasonal moderation in the third quarter, we feel very good about subscriber growth and new data servers providing good future outlook for mobile networks.

There are new networks continuing to be built, higher data content and higher speeds required in those networks which provide a great deal of optimism for the future.

The mobile devices market represented 11% of our sales in the second quarter.

We were very, very pleased with this market where sales increased a strong 50% over prior year.

We continue to drive our growth with successful introduction of innovative new products.

Our new products on the newest platforms of our customers are creating strong platforms for growth in the future, on a broad variety of phone platforms.

We are excited about these new design wins, driving growth throughout 2008 and feel good about this market as we move into the second half.

So in summary, again, our diversification, geographical end market has created strong growth in the quarter and we feel very good about that progress.

And now Martin will provide some comments on the outlook for the rest of 2008.

Well, thank you, Adam, and obviously, from the comments of Adam, we can really just see that we continue to see strength in our business despite the generally very moderate demand environment.

And we are very proud of our organization as we continue to execute well, achieve superior growth and profitability in truly a challenging environment.

I think -- and we all believe that in such an environment, Amphenol's distinct competitive advantages will serve us well.

These advantages were mentioned several times already -- advanced technology, our global presence worldwide, as well as our lean and flexible cost structure and our own management style.

While general economic conditions are uncertain and why we still remain very alert to any changes in the general environment, and as well as in the specific markets that they deserve, we are very confident in our own ability and the ability of our organization to take advantage of many opportunities that you see in front of us.

Accordingly, we are raising our outlook for the full year 2008, and expect the following based on same economic exchange rates.

For the full year 2008, we expect sales in the range of $3.278 billion to $3.308 billion, an increase of approximately 15% to 16%.

I would like to point out that this increase above the previous guidance we have takes into contribution not only the better performance in the second quarter, but also a sequential increase of our sales in the second half over the first half.

EPS for the year we expect to be in the range of $2.34 to $2.38, an increase of approximately 21% to 23% over 2007.

For the third quarter 2008, which is traditionally a seasonally slower quarter in the industry, we expect sales in the range of $825 to $840 million and the EPS in the range of $0.59 to $0.61 a share.

The high end of this EPS we would be at the same record level as in Q2 of 2008.

In summary, we are very encouraged by our past achievements, and excited about our potential to continue to create value.

With this commentary from all three of us here, I would like to open it up for any questions that you may have.

Hello?

(OPERATOR INSTRUCTIONS) We do ask that you limit yourself to one question and one follow-up so we can accommodate everyone's questions.

And our first question comes from Jim Suva with Citigroup.

Your line is open.

Thank you, and congratulations everyone for great results and outlook.

The question I have and then a quick follow-up.

First on the question, for Q3, we all know seasonally, it's a little bit slower growth than other quarters of the year, but for the guidance, it looks like you are actually guiding towards a sequential negative or a sequential decline from Q2, which I think was a little bit of a bigger decline.

Are you just building in more conservatism there or some markets a little bit -- giving you a lower book-to-bills or how should we think about that, because I think it's been a long time since you had a negative sequential Q3?

Well, every year is a little bit different, and a traditional year for Amphenol, really traditional is -- I go back in history is the first and the third quarters are somewhat slower quarters, where the third quarter is above the first quarter and that is certainly what we are planning for.

The second and the fourth quarter are usually the strong quarters, and the fourth quarter strong as the second.

And that's what we are planning for as well.

I know, as you do, that over the last few third quarters we were able to achieve certain better performances or at least the same level as Q2 or a little better.

But that is certainly most of the time [written] by certain seasonal strength in the consumer-driven areas, such as the mobile phones and so forth, when they are preproduced like it was the case last year.

That is certainly not something that we are assuming this year, that there will be a flamboyant production in that area that overrides normal seasonality.

So this is just going back to basics, and has nothing to do with caution or anything at that point in time.

And we are very close, especially to point out to get a slightly lower revenue level than the record Q2, the same income and EPS in our guidance is certainly an indication that we are very confident in our profitability and the opportunity to continue to create value.

Great.

A quick follow-up.

Can you comment with the election coming up in November, should the US exit the war or do some type of change there, how should we think about your footprint, which in military has been very strong?

When that equipment comes back, should there be an exit there?

Do we look at a refurbishing or you have to rewire and refurbish equipment, or how should we think about the magnitude of the election outcome and your footprint with military?

That's certainly a very important question.

It's a big market for us, and Adam, maybe you want to comment on this.

No, obviously, we see that if there was some change to the war strategy, there may some shift in spending priorities.

However, we see a lot of refurbishment spending and we have what we would consider a pent up demand on programs that over the last five years we would have expected to see programs like Joint Strike Fighter or other that we haven't seen because of an allocation of spending towards the war.

So we can't necessarily predict what spending levels will be.

We do see strength in the potential for demand in the larger programs that have been delayed.

Our next question comes from William Stein with Credit Suisse.

Your line is open.

Thanks.

First, I just want to clarify that last comment.

Adam, are there any programs in that end market that represent more than 5% of sales?

Anything that could potentially roll over any time soon that we could see as a headwind as we exit '08 and enter '09?

No, nothing is that material to us in any given program.

And Adam, another one for you.

Obviously, with the upcoming change in your responsibilities, you have some big shoes to fill as Martin has done a great job with the company.

Can you give us an idea as to what we might expect to see under your leadership?

Any meaningful or even more subtle changes in the company's strategy?

We'll like to hear about that.

Thank you.

Thank you very much for the question.

Look, I think our company has an excellent strategy and we have an excellent management team that's not on this call today as well, who are running our operations around the world.

And I don't see any necessity to change how we are doing things today.

Over the years, obviously, we will continue to adapt the company to the environment that we are in and as the environment changes, we will adapt the company to continue to do better than our competition in that environment.

Also very happy that Martin continues on as the Executive Chairman, and that will keep the continuity of the company that continues this evolution for us.

But I don't see any need to, on January 1, make any dramatic or even obvious changes to the company.

Our next question comes from are Errol Rudman with Rudman Capital.

Your line is open.

I was wondering if you could provide some more detail about the acquisition, in terms of how much you paid and how it will fit in and what the margins are and the growth opportunities.

And also I was hoping -- first, I would like to just congratulate and thank Martin very sincerely for the leadership and the contribution that he's made to Amphenol over the period of time.

Adam, I wish you great luck and I hope the same level of success as carried in the future as that occurred in the past.

Which is a long lead up to say, Martin, can you outline a little bit greater detail how you are going to spending your time now and maybe you could just amplify what you already said with a few extra words.

Thank you.

Maybe just to take care of the acquisition question, in terms of what was spent in the quarter, about half was related to the June acquisition, and the rest of the spending related to liabilities associated with acquisitions that closed in the prior quarters.

As you probably know, we don't get into discussions about margin and specific profitability levels on these small acquisitions, but we will just say that in most cases, we have been able to grow both the top line, and the profitability of most of these smaller acquisitions through their involvement in the worldwide sales force and also their involvement with the low cost capabilities we have around the world.

And Martin, maybe you can answer the rest of the question.

Sure.

Errol, thank you very much for your kind words.

Appreciate it very much and I'm sure Adam does the same.

We will continue to work here as a team, but it is very clear that as of 2009, Adam will take over the responsibility as the Chief Executive Officer, and thereby have the responsibility for the day-to-day business and the ongoing success of the company.

I will clearly remain engaged with the company as an officer of the company, but in a different fashion as I have been in the past.

And that's expressed in just the simple words that I will continue to be engaged in general strategic direction of the company that was very successful and we feel we there is no need to change it, actually building on it and this is why we'll support the team here, as well as the development of the leadership team in Amphenol.

I think as the company grows and as we have done very successfully over the last several years, I mean, the company has reached in the third quarter -- in the second quarter of this year more than $800 million in sales.

I remember in 1997 -- this is just 10 years ago -- our annual sales reached for the first time $800 million.

So I think it's just portraying that we are a [$3 billion] company now -- our outlook, four times as large.

Obviously we have to develop a management team over that time and that is strong, that is deep, that is broad.

And I think this is some area that I will continue to focus on as -- in my role as Executive Chairman, because as we go eventually to $5 billion and more, obviously the company's resources in that area will have to grow and to develop.

And with all -- with our small leadership team, here at headquarters, with only 50 people at headquarters around, obviously, I will make my contributions in those areas.

Okay.

Our next question comes from Brian White with Collins Stewart.

Your line is open.

I wonder if you could talk about some of the new programs that are ramping in the second half of the year.

That's a very fine question.

There are multitude of new programs per market segment that are ramping, and maybe Adam you want to make a few comments relative to certain segments where it is very important that these ramps really happen in that time period.

Sure.

Good afternoon, Brian.

We see, as Martin said, a real diversity of markets that ramp throughout the year, including the second half.

And if you look at mobile phones, as one example, we continue to see strength in new platforms of SmartPhones as well as midrange phones that utilize our high technology, slide hinges and antenna mechanisms.

We feel very good about those ramp ups.

We see ramp ups also in new energy equipment in the industrial market and we have ramp ups of onboard electronics in cars, just to name three, that are very important to the company, and that we are continuing to monitor very closely.

Thank you.

As you look at the hybrid vehicle market, new programs are ramping in 2009, could you just give us a little color on what you will be providing and how many different customers are you working with?

Yes.

The hybrid is an important market and we are hopeful that those do start to ramp in 2009.

Clearly, every automaker has a slightly different schedule as to when those technologies will be finalized, and those schedules are at some level left to the whimsy of how successful they are at implementing the hybrid technology.

We are working with all the major OEMs, those in Europe, those in North America, some in Asia where we hope to gain penetration.

And what is interesting about hybrids is the technology, and the product technology that goes into the hybrids.

It's a different interconnect technology than what you see in a traditional car, harsher environments and other aspects.

And so we feel good that those are areas where Amphenol can create value and can leverage our high technology and our strong development in the past in harsh environments to be successful.

Thank you.

Our next question comes from Matt Sheerin of Thomas Weisel Partners.

Your line is open.

Yes.

Thank you.

Just a question regarding the raw materials impact on the business.

You mentioned the impact on the broadband cable business, where the margins came down a bit despite price increases.

Can you discuss the impact on the core connector business?

I know as a percentage of cogs, materials are a lower percentage, but still it's pretty significant.

So could you talk about price increases and success that you had there and basically how you have been able to improve margins in that business despite that headwind?

Sure, I think that it is true that the material and raw commodity content on the interconnect side is certainly quite a bit less than it is on our cable business, but you are right to say that it still is a very significant cost pressure.

I think we dealt with it in a number of ways.

Certainly price increases are a very important element, and as you know, are easier in some markets to implement than in others.

But we've had a very strong focus, both at the operating unit level and at the executive management level in making sure that we are able to get the maximum from a pricing standpoint and that we charge an appropriate price for the value that we bring to customers with our products.

It's also been important to be creative from the material usage standpoint in that we have had teams of our engineers focused on using less of certain materials and in some cases replacing certain materials that have just had dramatic increases in price that have been hard to offset purely through increases in sales prices.

In addition to, that I think as you know we have focused every day and all of our operating units on every element of cost, which includes those that are material related, and also includes a strong focus on operating expenses and SG&A and these types of costs.

I think given the severity of the environment that we have been on, particularly in the last six months, I think that our operating units have just done a fantastic job in terms of being able to manage through this and still create margin expansion in the business.

Great.

As a follow-up, I know that you have been very successful in continuing to move to lower labor cost regions, specifically recently in China.

Could you talk about plans to expand into lower cost areas in China and other parts of Asia and what's on the plate there?

I think this is an important aspect and we, as you know, like to remain very dynamic and flexible in the sense of where we are going, so we try not to have big roots in the ground with any of our operations.

Therefore we keep them small to have the opportunity to move and we have certainly not only done so already, but we have also additional plans and maybe Adam, you want to give some details.

We are very cognizant of the changes that happened in China.

We have moved some manufacturing towards western China to our factories in Chengdu and Xian.

I think we mentioned in the last call that we opened our third facility in India.

We look for other areas as well.

We look in Vietnam and we are considering also in north Africa, specifically in Tunisia.

We are excited about the potential in these areas and we keep our eyes open for the next area that can provide potential.

Okay.

Thank you.

Our next question comes from Shawn Harrison from Longbow Research.

Your line is open.

Hi, good afternoon.

Just getting back to the third quarter and I think in the prepared marks, it was mentioned normal seasonality, in the automotive and networks business, but maybe you can provide a little bit more granularity in terms of what end markets may be down sequentially?

Well, obviously, we are talking about the $7 million difference on the $827 million situation.

So just taking these two, the mobile infrastructure market and the automotive market alone, that's not a lot of millions of dollars that require a change.

We're certainly not that finetuned to see every single seasonality ahead of time, especially in a market that is relatively lumpy in general, relatively moderate in demand and you can have spikes and valleys.

But in aggregate, in aggregate, I want to stress that we have a strong outlook for the second half.

It's sequentially [up] over the first half in environment, where when you read the press, you would think the dark clouds are coming faster at you than they came in the first half.

So we certainly want to point out that we feel very confident about our technology, which brings also the element of margin all the time.

If you develop a new product, you price it to a margin and the value that the customer wants for this particular equipment, we are only talking about, as we would be, a commodity supply only that would lives only off of price.

Our technology is so important in order to drive margin as much as it is for top line.

So we feel good about the second half, even if growth rates relative to the first half may be lower on a year-over-year comparison.

It's still a continuing of our sequential performance moving forward into the year 2009.

I think just your comments on new products leads into my second question, which is, you could hold earnings flat here sequentially on a decline in sales.

Maybe how much of that is product mix being better or new products?

How much of that is further pricing?

I know a lot of your peers have recently introduced price increases through distribution and can that type of sustained mix improvement occur in the fourth quarter as well if sales are flattish?

Obviously, that's a very important question that you are raising and we have put a lot of thought into this margin situation, because obviously we have headwinds, and there have been (inaudible) with these materials and all the inflationary increases.

But as far as the mix is concerned, it's a combination of many things.

It's hard to pinpoint just one, whether it's new product, whether it is something else.

The aggregate between the technologies and the new products that we are introducing, some effective price increases that we have exercised throughout the first half, will have also some bearing in the third -- in the third quarter.

Our price increases are not just at a given point in time, across all of our markets, but some are staggered and certainly there's an element of it that will help us.

And we certainly have not increased our prices less than what our competitors have announced just recently were due at the beginning of July.

So, I mean, we are there as well with our pricing and we do this on an ongoing basis.

In addition, the cost shifts to lower costs that Adam just mentioned, also has some impact.

So it's a combination of all of those facts that give us the confidence that even a little bit somewhat lower -- higher end of the guidance in revenues, we still can achieve these EPS numbers to meet the record of Q2.

All right.

Thank you very much.

Congratulations on the quarter.

Thank you.

Our next question comes from Michael Walker with Arc Asset Management.

Your line is open.

Thank you.

Martin, I was intrigued by that $5 billion comment you made a couple of questions ago.

I will put that in in my 2010 by-side model.

You don't have to worry about people seeing it.

Well, I'm smiling here too.

And, I don't know how that will stay on the table here but I remember many years ago I talked to our internal organization when we were $1 billion, we had to go to $4 billion, and I think we are well on the road to achieving it, even if at the time I said it, they all rolled their eyes and said, well, how do you get there?

The $5 billion is not so far away from $3.3 billion.

Okay.

That's good to know.

A couple of questions for Diana on the margin line.

First was on the cable side.

I'm unclear as to exactly when those price increases took place over the course of the quarter.

And I guess I was a little surprised to see the cable margin decline sequentially -- is that a case of it just hasn't kicked in yet?

And we'd look for margins to go back up in cable in September?

Or should we assume that the price increases on the supply side, the commodity side are so strong that they are overwhelming the price increases on the cable products?

And the other question I had was, at the gross margin line, just noticing that it's kind of been bumping around in your range of 32.6% to 32.8% for the last five quarters in a row.

I'm wondering if for modeling purposes we should think of that as being the range going forward.

Sure.

In terms of the cable margins, we had price increases that occurred at the beginning of Q2 in April.

And as Adam mentioned, there was an additional surcharge related to price increases that were put in place towards the end of the quarter, that the price increase in April being the certainly the bigger of the two.

I think when we spoke last quarter, we did have some expectation if the material costs would have held and we could see some margin expansion, but that didn't happen.

We saw continued pressure on aluminum and particularly on plastics as you know, during the quarter after an increase in Q1 and increase again in Q2.

I think as you said a few seconds ago, the price increases were not enough to offset that.

So we did see a margin decline in the quarter.

I wouldn't, I think, look for a significant change in margin necessarily going forward, unless we see some change in material trends.

Certainly we would like to see another price increase, but we will have to see where that all goes.

Relative to gross margins, I think you're correct that our gross margins as opposed to our operating margins have been within a range for the last few quarters.

We have been able to expand operating income margins and we are very pleased to be able to do that in an extremely tough environment from a cost standpoint.

I think that the gross margin expansion has certainly gotten more difficult in the current cost environment, but we continue to work hard, both on the price increases and actions on costs.

I think as we look out into the next two quarters, Q3, at the high end of the guidance is relatively close to Q2 and so I certainly wouldn't expect to see any significant margin expansion in that environment.

I would think that margins may stay within the range or slightly in improved gross margins as we go through the rest of 2009 here.

I think that we certainly manage the business to operating income margins and I think we still see some opportunity for improvement in terms of the operating income line as we would move into the fourth quarter, where we had some higher volume also.

Our next question comes from Steven Fox with Merrill Lynch.

Your line is open.

Hi, good afternoon.

A couple of quick questions.

On the mobile infrastructure and mobile device side, the growth was extremely strong as you highlighted and you mentioned a lot of reasons for it.

Could you rank what was the biggest drivers in those two areas, just to make sure that I'm clear?

If we look at those separately, if we look on the mobile devices side, clearly new program ramp ups was the core driver for us, using our new technologies.

On the mobile infrastructure side, emerging markets were very strong.

We saw great strength in our [site] installation products.

These are the interconnect products as well as the antenna products that go into a cell site.

We saw probably ranked second the strength in these low cost base stations.

GSM demand continued to be strong in the quarter for us on those platforms where we have gained broad penetration with a complete suite of products into these new base station platforms.

And then just to be specific on the mobile device side, which new technologies would you highlight as having the most impact?

I mean for us, we saw an impact, really on connectors, antennas, and [engines].

It would be very difficult for me to point to one and say that was the driver.

We feel very good about the complete presence that we had on these platforms.

Okay.

And then Diana, just a quick question on cash.

It's at record levels right now.

You guys have usually operated on a lot less cash balance on your balance sheet.

What is the level that you are comfortable operating with and how much excess cash would you say is sitting on the balance sheet today?

We started, I think, back in 2006, we changed the repatriation plan in terms of not bringing back cash into the US from low tax rate operations.

And as a result of that, over time we have begun to accumulate cash in those same places to use for our acquisition program as we look for opportunities in Europe and Asia.

And so that cash is sitting in those places, really waiting to be used for our acquisition pipeline.

And it is not sitting in the US to be used for [desk] service and that kind of thing.

This has allowed to us have a pretty significant reduction in our tax rate.

It's also provided a natural hedge for transactions that we do in those regions.

And so the strategy is to continue to keep the cash there and continue to use that cash.

And as you know, the acquisitions tend to come in lumps.

We closed two deals at the end of the deal in China and we used cash there to fund those.

We used some cash in Europe to fund the acquisition that we did in the first quarter, and we will continue to use that cash up for that purpose as we go forward.

Our next question comes from Carter Shoop with Deutsche Bank.

Your line is open.

Good afternoon.

First question is on the auto market.

I was hoping you could try to better understand some of the upside potential we could see there from the increased presence in the hybrid market.

Is this an end market that we could see double in size over the next three to four years?

Yes, if you mean the total automotive market, I don't think that I could say that it would double, but certainly we see strength in hybrids.

I don't know that you will see strong contributions from hybrid, really in a full ramp phase until 2010 when those models come out.

Most of the car manufacturers are signaling that that will be the year when they will have a full complement of hybrid cars, but we expect to see some of the car models being released next year.

And, you know, with the price of oil and therefore gasoline being what it is, there could be some acceleration of that.

But I wouldn't expect a meaningful, full suite of the products until 2010.

As a follow-up, I wanted to talk about the acquisition pipeline.

When you look at all the potential targets right now in the pipeline, I was hoping for you to, A, quantify how many companies you are looking at, and then B, try to break them down into two buckets, one being a bucket with revenue of less than $150 million per year and then the other bucket being over $150 million in revenue per year.

Thank you very much for that question.

Our pipeline is broad enough that it ranges from very large funds that could potentially come on the market as you always say to those medium sizes that you are mentioning, as well as the smaller ones.

And I don't think I have the numbers by heart here to say how many in each our buckets are.

But the pipeline consists of those, and we are certainly looking at all of these opportunities as we go along, as long as they remain accretive to the company, as long as they remain complementary and not require any significant restructuring, and overlaps that we couldn't manage and like to see in the company.

And we would like to see management, very talented management to join the company as well as we go there.

And if you look at priorities, in all of our seven markets that we really serve on a global basis, there's opportunity and some opportunity in the pipeline.

So also from saying where's the priority, it will happen when it happens, because all of those areas are significant and open to opportunities for further expansion if we acquired those companies.

We have certainly not the strategy just to acquire for revenue, again, just adding revenues.

It's very important to us that the company adds value to Amphenol and we can add value to this company.

That's been an extremely successful strategy for the company and that's the strategy that we intend to pursue as we move forward.

Our next question comes from are Amit Daryanani from RBC Capital Markets.

Just a question about the auto segment, I think it was up about 12% to 13%.

Could you talk about how much it was up on a constant currency basis?

It was much smaller growth in a local currency basis.

All right.

I guess could you tell us how much of Mil/Aero segment is driven by the commercial Aerospace side and do you guys have any exposure to the aftermarket part of that business, and the aftermarket services and repair on the commercial side?

Sure from a percentage standpoint, Mil/Aero totals about 20% of sales and roughly 5% is commercial.

Adam, do you want to answer the other question?

Sure.

I think there's not such great exposure to the aftermarket and to the extent that there need fair connectors, certainly we would sell them through distribution into that market, but that's not a meaningful part.

We really look at new jetliner production.

All right.

If I look at the growth numbers we have out right now, you have had really good growth in the first half, between 11% (inaudible) in Q1 and Q2, but if I break apart the back half, we are looking at 7% to 8% or in line with the connector industry averages.

Could you explain the degradation on a year over year organic growth basis in the back half of '08?

That's a very fine question.

First of all, we have maybe different views of the industry growth that you are referring to, certainly our growth in the second half is still, in our belief, significantly above the industry growth that we have planned.

For the whole year, I am very confident that we are looking at growing at twice the rate of the industry and I think this is a very strong performance, very much in line with the strategy that we have in the past.

I think we should look at one thing here primarily, is the second half of this year -- there were a lot of questions in our minds when we were met and talked in January and February, we were cautious about it in some way when we first gave the guidance about that part of the year.

Even if we see this uncertainty continuing in a macro economic sense, even if we see the headwinds on costs to continue, we are planning for a very strong second half of this year, even if year-over-year comparison may come out to the numbers just mentioned.

But it's a very strong performance, certainly, from our perspective, and certainly as far as year-over-year growth rates are concerned above the industry.

All right.

And just to clarify, there's no FX contribution built into the back half, right?

No.

No.

This is assuming the exchange rate remains essentially constant.

Perfect.

Thanks a lot.

Congratulations on the quarter, guys.

Thank you very much.

Okay.

I have one final question, William Stein with Credit Suisse, your line is open.

Just a follow-up.

Can you talk a little bit about your geographic exposure within the automotive end market?

That's a very straightforward question here.

We usually don't break down our market segments by geography but the majority of business is in Europe and at this point in time, with the second one being in North America, and really starting off in Asia, at this point in time and seeing some penetration, primarily through transfers of technology from Europe into the Asian countries.

That's really helpful.

Thank you.

Thank you.

With this, we'd like to conclude our conference call for our earnings release of the second quarter.

We thank you all for your interest, for your interesting questions, and we will continue to be very closely updating you on the progress of our company.

Thank you very much, and good-bye.