安費諾 (APH) 2008 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).

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

If you have any objections, you may disconnect at this time.

I would now like to introduce today's conference host, Ms.

Diana Reardon.

Ma'am, you may begin.

Thank you.

Good afternoon.

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

I'm here together with Martin Loeffler, our CEO; and Adam Norwitt, our COO.

And we'd like to welcome everyone to our third quarter earnings call.

Q3 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 current trends.

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

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

Sales for the quarter were $864 million, up 18% in US dollars, and 16% in local currencies over the third quarter of 2007; and from a sequential standpoint, up to 2%.

Organic sales growth excluding acquisitions and currency effects in Q3 over the prior year was 12%.

Breaking down sales into our two major components, the Interconnect business, which comprised 91% of our sales in the quarter, was up 19% compared to last year.

Interconnect sales increased in most of the companies end markets.

Our Cable business, which comprised 9% of our sales, was up 4% from last year as a result of increases in international broadband cable television markets.

Operating income for the quarter was strong at $171 million compared to $143 million last year.

Operating margin was 19.8% compared to 19.5% last year.

The margin improvement relates to increased margins in the Interconnect business.

From a Cable standpoint, the Cable segment margins were 11%, down from 12.7% in Q3 of 2007 and 11.5% in Q2 2008.

The margin reduction reflects the significant impact of higher material costs -- which for this business are primarily aluminum, plastics, and copper -- a portion of which has been offset by price increases.

While plastic costs have continued to increase, metal prices have declined at the end of the third quarter.

In addition, the company recently implemented further domestic sales price increases.

To the extent material prices stay at current levels, we would expect some margin improvement in Q4 as a result.

The Interconnect segment margins were 22.3%, up 40 basis points from last year.

The achievement of these strong margins given the current inflationary cost environment is a significant accomplishment and reflects the Company's dual focus on driving strong topline growth of higher margin performance enhancing Interconnect solutions in addition to a very strong focus on all elements of cost.

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

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

Interest expense in the quarter was $9.8 million compared to $9.4 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 $3.3 million compared to $4.7 million in Q3 of 2007 and $2.3 million in Q2 of 2008.

The decrease from last year relates primarily to decreases in fees on the Company's accounts receivable securitization program, and higher interest income.

The increase for Q2 relates primarily to higher minority interest expense.

The Company's effective tax rate in the third quarter was 28.6%, down from 29.5% in the first half of 2008.

The lower tax rate reflects adjustments to tax reserves relating to the completion of the audit of certain of the Company's tax returns.

For the third quarter and the year 2007, the Company's effective tax rate was 29.2% and 29.5%, respectively.

We currently expect a tax rate of 29% for the full year 2008.

Net income was $113 million, approximately 13% of sales, a very strong performance on any industry comparative basis.

Diluted earnings per share for the quarter was $0.63, up 26% from last year.

The Company continues to be an excellent generator of cash.

Cash flow from operations was to $105 million in the quarter.

This is net of a $20 million contribution to the Company's US retirement plan.

For the nine months ended September 30, operating cash flow was approximately 97% of net income.

The cash flow from operations and $34 million in proceeds and tax benefits from option exercises were used to fund capital expenditures of $33 million, $1 million in acquisition-related expenditures, debt reduction of $48 million, and $5 million in dividend payments.

In addition, cash and short-term investments increased $47 million to $247 million at the end of the quarter.

In addition to its strong operating cash flow and cash investments, the Company has additional liquidity in the form of availability under its revolving credit facility.

The Company's $1 billion revolving credit facility is provided by a 25-bank group and expires in 2011.

Availability under the facility was $225 million at the end of September.

The Company has more than sufficient liquidity to meet all of its needs.

Borrowing under the facility was $760 million at the end of September, of which $650 million is swapped to fix rates through December 2009 and July of 2010.

The remaining borrowings are at a spread over LIBOR rates.

The Company also has a $100 million receivable securitization program under which $85 million in receivables were sold at the end of September.

Fees on receivables sold are at a spread over commercial paper rates.

As a majority of the Company's borrowings are at fix rates, we do not anticipate that the current tightening of credit markets and the related elevation of short-term rates will have a significant impact on the Company.

The balance sheet is in good shape.

Accounts receivable days outstanding were 70 days at the end of September, up one day from the end of the second quarter, reflecting the normal heavier weighting of sales in Q3 toward September.

Inventory increased slightly from Q2 levels, and inventory days remained at 82 days.

Debt was $771 million at the end the quarter compared to $722 million at year end, reflecting borrowings to fund the stock buyback in the first quarter.

Debt was down about $48 million from the end of Q2.

The Company's leverage and interest coverage ratios remained very strong at 1.1 times and 17 times, respectively; and EBITDA in the quarter was approximately $201 million.

Orders for the quarter were $865 million, a book-to-bill ratio of approximately 1 to 1.

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

Before Martin and Adam provide an overview of the business, I would like to make a few comments relative to the impact of foreign exchange rates and tax rates on our Q4 guidance.

As is the Company's practice, our guidance is based on foreign exchange rates at the time guidance is given.

Accordingly, the new Q4 guidance incorporates a much stronger US dollar relative to the Euro and the Korean won than the guidance given in July.

This has the impact of reducing US dollar sales for Q4 by about 4%, or $35 million, versus the prior guidance.

In addition, on a quarter-over-quarter basis, Q3 versus Q4, the translation impact is a reduction of about 3%.

I would also like to point out that the tax rate assumed in the Q4 guidance is about the same as the rate in Q3, or 28.5%, bringing the tax rate for the full year to about 29%.

Martin and Adam will now provide an overview of the business.

Well, thank you very much, Diana.

Thank you all for joining us at this traditional conference call at the time of our earnings release.

As in the past, I will highlight some of our third-quarter achievements, and Adam will then discuss the trends and the progress in the markets that we serve.

I will close with comments on the outlook for the fourth quarter and the full year 2008.

Overall, we are extremely pleased with the third-quarter results.

They were strong in all respects.

We set new records in sales and earnings, and we sustained our long-term trend in industry-leading growth and profitability in an environment that is increasingly challenging and unstable.

We are also very pleased that Amphenol was, in the third quarter, recognized for its sustained and consistent performance over many, many years by inclusion of Amphenol stock in the S&P 500.

Some highlights to sales.

Sales increased a strong 18% over prior year in a truly uncertain demand environment.

Growth was broad-based across nearly all of our served markets, and the strongest growth, we achieved in the global communications market, including the mobile device and mobile infrastructure markets, as well as in the military and the aerospace markets.

We're very pleased also that sequentially we increased our sales by 2% over our record achievements in the second quarter.

This is particularly pleasing, as typically the third quarter is a seasonally slower period.

It's hard to say in our current environment what is typical.

But clearly, we're very pleased about that sequential increase.

This increase over the second quarter was primarily driven by some earlier than expected increased demand in the mobile device markets, and some effects from the infrastructure rebuild, especially in cable, following the hurricane in the Southwest.

We're very pleased with these results, as they are clearly showing that we continue to gain position through a strong focus on advanced technology across all of our served markets.

Our new products are really gaining momentum, and we're very pleased to see that customers accept them on a broad basis.

We're also benefiting from our diversity and broad global presence with our continued strength in emerging markets.

India, China, South America, and Africa are clearly contributing strongly to the growth that we've been able to achieve.

Also, the pipeline of acquisitions continues to be healthy.

We haven't seen in the kind of talking acquisitions that we are talking about and that we are looking for, any change really in valuations at that point in time.

Obviously, owners and entrepreneurs have no opinion what prices they would like to sell their companies on.

Timing of some of these irons that we have in the fire is not very easy to predict.

But we're confident that our acquisitions strategy is very much alive.

We're also very pleased with the continued profitability and cash flow, which ere remained strong in the third quarter.

We achieved a strong 19.8% operating margin, despite a continuing difficult cost and pricing environment.

Yes, we have seen commodity prices and costs coming down, but we feel that there's a strong lag between what we're buying, which are converted material, to the pure commodities pricing that is established.

We're very pleased with the strong increase of EPS, 26% over prior year to a new record of $0.63 a share.

Net income as a percent of sales was 13%, which is another indication of the financial strength of the Company.

Diana mentioned that our cash flow remained also strong at $105 million, essentially net income, especially -- and mostly of that reinvested in our business -- $33 million in new capital for new products that certainly drive our future growth.

We feel that the strong profitability is a direct result of our excellent operating leverage on incremental sales.

It is our continued focus on high value added segments of the markets, and our continued scrutiny of all elements of cost.

Most importantly in this environment, though, it's a result of our dynamic organizational structure that allows us to adjust very, very quickly to changing market environments.

Adam will now comment on the trends in the various market segments.

Adam?

Thank you very much, Martin and Diana.

Just to reiterate what Martin said, we feel very pleased with our strong performance in the third quarter.

And this performance really was a result from our focus and our continued focus on performance enhancing technologies for our customers, a strong drive for end-market diversification, and a continuous drive for geographic expansion.

Amphenol continues to make progress in all these areas which have helped to create these strong results in challenging circumstances.

I'll now review the progress in each of the served markets in which we participate.

The military and aerospace market for Amphenol represented 19% of our sales in the quarter, and sales increased in the market a very strong 18% over prior year.

Demand remains healthy in the military aerospace market, driven in large part by continued military equipment deployment and refurbishment, including especially that related to ground vehicles and new communication systems upgrades.

While we see that distribution, which is an important channel for that market, may be conservative with their inventory positions in light of the general economic conditions, we still feel good about the momentum in that market.

Although the timing of government funding releases could impact demand in the short term, we believe that our broad program participation in all segments of the military and aerospace market will drive growth into 2009.

In the industrial market, which represented 11% of our sales, sales increased 8% over prior year.

In this market, OEM program gains, especially in energy-related and rail mass transit applications, were partially offset by moderate demand in other segments of the industrial market.

We feel very good about the progress we make, especially in alternative energy applications, but clearly there is some impact in this market related to construction equipment.

We expect these growth segments to continue to drive demand in the industrial market into the future.

The automotive market represented for Amphenol 7% of our sales in the quarter.

Sales in this market were essentially flat to prior year, but were down in local currencies.

We experienced, as expected, a seasonal softness in the market in the third quarter; and in addition, there was a more pronounced slowing in vehicle production, which offset the expected ramp ups of new products at new customers.

The near-term outlook for the automotive market for vehicle production levels is clearly uncertain.

Nevertheless, we're encouraged about the longer-term outlook for Amphenol in this market, due to our increased presence on the electronics build of materials in the car, as well as our strong presence in the new hybrid platforms, which will be coming out over the next several years.

In the broadband market, the broadband communication over hybrid fiber collects networks, this represented 10% of our sales, and sales increased a healthy 10% over prior year.

As Martin indicated, we saw some demand in the quarter relative to rebuild activities from the storm.

But in addition we had ongoing price increases in the market, but which were offset by continued pressure on raw materials, especially that related to plastics.

As in the past, we think that availability of capital could potentially impact the broadband market going forward, and we do expect that demand in the fourth quarter will seasonally moderate.

Nevertheless, we have increasing high technology interconnect content in broadband equipment, which continues to create new opportunities for Amphenol, and we see that new high technology interconnect helping to drive growth in that segment.

The information technology and data communications market represented for Amphenol 22% of our sales.

Sales in this market increased a strong 12% over prior year, which was driven by accelerating new customer and new product ramp ups, as well as increases in our positions with key customers.

We continue to build in this market on our distinct competitive advantage of offering a complete interconnect system architecture.

There's no question that our offering in this market is creating a tremendous momentum among all of our leading customers.

While we see some moderation of demand in certain corporate and carrier related segments of the market, our continued achievement of broad design wins with new high-speed products creates confidence for further expansion of our market positions in the IT and data comm market.

The mobile networks market represented for us 14% of our sales in the quarter, and it increased a very strong 23% over prior year, and this is in a market with very moderate growth.

Most of our customers are reporting flat or very minimal growth, as we continue to take share in this market.

We are benefiting from a strong demand in site installations, especially in emerging markets like China and India, as well as from a broad presence on high volume -- as well as latest generation 3G equipment platforms.

We do expect some seasonal moderation in the fourth quarter, but we believe that subscriber growth and new data services combined with the new design wins that we continue to achieve provide a good future outlook for the mobile networks market.

The mobile devices market represented for us 17% of our sales in the quarter, and sales increased an extremely strong 44% over prior year.

Our strong growth in this market continues to be driven by a successful introduction of a broad range of innovative new products across a wide variety of customers and a wide variety of mobile phone platforms.

We expect moderating growth rates in the fourth quarter, but this is somewhat based on the stronger than expected demand that we saw in the third quarter.

In this market, we're truly excited about the innovative technologies in mobile devices which are driving growth for Amphenol in this quarter and beyond.

With that, I will turn it to Martin, who will now provide some comments on the outlook for the remainder of 2008.

Thank you very much, Adam.

Clearly, in summary, we're very, very proud of our organization as we continue to execute well and achieve superior growth and profitability in an increasingly challenging and unstable demand environment.

In such an environment, our distinct competitive advantage will serve us well -- our leading technology, our increasing position with customers in diverse markets, our worldwide presence, and our flexible cost structure, and entrepreneurial management.

Forecasting in this environment, though, becomes very difficult.

We, though, feel very confident in our own ability and the ability of our organization to meet the challenges and to take advantage of the continuing opportunities that we see in front of us.

Accordingly, as far as outlook is concerned, we're confirming the high end and narrowing the range of our previous outlook for the full year 2008, and expect the following based on stable currency exchange rates -- so the exchange rate that we see at the beginning of this quarter.

For the full year 2008, we expect sales in the range of $3.292 billion to $3.308 billion, an increase of 15% to 16% for the year.

EPS we expect in the range of $2.36 to $2.38, an increase of 22% to 23% over 2007.

This is a very strong -- a new record year for Amphenol, under this guidance.

The guidance for the full year is based on the stronger third-quarter results and a fourth quarter that incorporates the impact of a significantly stronger US dollar, as Diana outlined.

In other words, at the same exchange rate that we had in July, Amphenol would have reported another beat-and-rise guidance at this point in time.

However, the operational performance increase above the guidance that we achieved in the third quarter is essentially offset in the fourth quarter by the currency exchange rates that we are now facing.

So in essence, we really haven't changed our outlook, from an operational standpoint, that we gave in July.

For the fourth quarter, consequently, we expect now sales in the range of $810 million to $826 million at these currency exchange rates, and EPS in the range of $0.58 to $0.60 a share.

Overall, we are very encouraged -- since we have really not changed what we've assumed would happen sometime this year, later in the second half, a slower demand level -- and very pleased that we are well-positioned, and encouraged by our achievements in the third quarter and prior to build a strong [fundament] or our growth and the potential to continue, especially in this demanding environment, to continue to create substantial value for our shareholders.

Thank you very much.

And with this I would like to open it for any questions that you may have.

(Operator Instructions).

Stephen Fox, Merrill Lynch.

Two questions, please.

One, obviously the economic environment is very uncertain.

I was wondering if you could talk about potential contingency plans for next year if demand was to get dramatically weaker, what you could do to protect your earnings, and any other comments about how you would react in a downturn.

And then secondly, Diana, if you could just give us the amount of cash that is offshore at this point?

Sure.

Maybe I will start with the second question first and then Martin can answer the first question.

The large majority of the cash is outside the US at this point.

As you know, Steve, as far as contingencies are concerned, Amphenol has pursued the strategy in good times and difficult times to continuously focus and stringently review cost levels, and that isn't changed.

In our very distributed organizational structure, we look at all these -- over 60 -- operating units on an ongoing basis to see where the performance levels are, where margin opportunities exist, where cost opportunities exist.

And that will continue.

We are very, very well positioned to very rapidly adjust to any changes in the environment.

So we're not implementing contingents to say, across the board we would cut head count, across the board we would do this.

But we're clearly pursuing the opportunities at this point in time vis-a-vis our vendors to go for cost reductions that are driven by lower commodities and other things, to build in a lower base of cost across the board.

Thanks.

That's very helpful.

Jim Suva, Citigroup.

Can you briefly talk about your cash position right now?

You paid down some debt this past quarter.

Maybe priority uses for cash.

Maybe rank them, debt paydown versus M&A.

And I heard your comments about the pipeline remains robust for activities, for acquisitions.

But yet you mentioned that it seems like some of the family-run or private investors hadn't really seen their valuation multiples come down.

I just wonder if you think that they will, given everybody sees the news every day at night about things slowing?

And do you think that you could actually still have adequate capital to make M&A, or is the use to lever down the balance sheet?

Sure.

Let me just maybe start with the first part of that question.

The Company remains a tremendous cash machine.

We have more than enough liquidity through the strong cash flow, cash on hand, and the availability under our revolver to meet all of our needs.

And in terms of the priority for the deployment of that strength, the first priority that we have hasn't changed.

That continues to be to invest in the business, both from an organic standpoint and to fund the tuck-in acquisition program.

And maybe Adam -- when I'm done answering the cash question -- can talk a little bit more about the acquisition strategy.

We look at the remaining cash flow, and we look at dividends.

We look at debt service.

We look at stock buyback as other options for the Company.

I think, given the current unprecedented turmoil in the credit markets, it really seems prudent at this time when we look at those options to favor the application of operating cash flow to the reduction of borrowings under the revolver, which really maximizes the future flexibility for the Company if we want to deploy that cash towards acquisitions, as an example.

I think we will sort of continue to look at how things play out in the credit market, and adjust the priorities as we feel are appropriate, given how that all ends up.

And just relative to the acquisition environment in general, Jim, I think we don't see that these broad macro trends impact necessarily, as Martin said, the desires or the valuations at which small entrepreneurially run organizations would be sold.

Our strategy all along has been to incubate relationships with strong entrepreneurs who have strong technology in their business, and eventually bring them into Amphenol if it makes sense for both sides.

Oftentimes, what makes sense for both sides is not driven by capital availability or general markets multiples.

It's rather driven by a win/win solution that in many times includes some earnout structures for the acquisition.

So it's actually hard to say that what is on the cover of the Wall Street Journal is driving necessarily the multiples or the valuations of some of these entrepreneurs.

Clearly, for larger acquisitions that may be in the market, the owners, some of which our financial sponsors, could have their behavior changed by the capital markets and the multiples that are out there, and that may cause them to be less or more inclined to sell, depending on their own liquidity circumstances.

And I think, again, we are opportunistic in those cases, and we will keep close to those situations.

And a quick follow-up on your strength sectors of military and aerospace, which have been fabulous.

Can you talk a little bit about -- I mean, we got a strike going on at Boeing right now, but I believe your largest person is actually Airbus there.

And also about military and the election coming up.

Do we face some volatility and uncertainty around that?

Or do you have more longer-term contracts where they are just stable regardless of elections and our position in the war?

I think just relative to -- two parts of the question.

Relative to the commercial aviation market -- and its correct that we have strength at both of the major aircraft makers, in addition to many of the smaller regional jetliner manufacturers, so we have a very diversified base.

The Boeing strike will mean maybe that Boeing produces fewer planes, but relative to the long-term positions that we have gained and that we feel very good about having gained on next-generation jetliners, can it mean some delay in the launch of those planes?

Certainly it could, but that's not necessarily material to our guidance or to our outlook for the business.

We feel very good in the long term about our position on those planes, and I'm hopeful that at some point, Boeing will resolve their strike, and I'm sure they will start to sell jetliners.

I mean, there are aircraft companies who just this week are announcing new orders for 787s.

So I think the program itself will be the very strong.

Relative to military and the funding that is based on elections or otherwise, we're not really in the business of trying to guess what those funding will be.

Certainly, there can be fluctuations in the fundings.

Nevertheless, we believe that there are still the imperatives in the military that we have talked about before, that there is a significant demand for repair and replacement of equipment, and there continues to be a pent-up demand for major programs, which have been delayed over the last five years during the war efforts.

And those programs, whether they be airplanes or radar communications systems or future combat systems and otherwise, will have a future to them.

And when they do have their future, Amphenol will have a very strong position in those programs.

William Stein, Credit Suisse.

Diana, you spoke a bit about the Company's credit position and liquidity position.

That sounds great.

And it looks like there was no significant issue with receivables in the quarter.

But since the quarter closed, have you seen any indication of any slowdown in payments from customers, any problems with receivables that you've seen today or that you're kind of thinking you might see in the near future?

I think that in times like these, people always keep a close eye on the balance sheet.

I think that there certainly isn't anything that we've seen that would be material to the Company in that regard.

And then just quickly, on the end markets, again, is it fair to say that looking at the Q3 results and Q4 guidance that maybe the big -- the one -- or I should say the most surprising thing would be that you saw somewhat of a pull in or earlier demand for the holiday season build for handsets, so boosting this quarter's results and maybe making Q4 a little bit lower than previously expected?

Is that a fair way to kind of summarize the biggest (multiple speakers) in the market?

I think this is not how the outlook is being presented.

I like to really point out once more, we had a stronger third quarter.

There may have been pullin's.

We don't know about this.

We still see mobile phone to be healthy.

At that point in time, we're forecasting a strong growth rate in the fourth quarter, exactly the same growth rate that we had forecasted in July.

So we're not operationally changing our forecast in the fourth quarter compared to what we have done in July.

The only thing that really has changed is that the currency exchange rate has offset the operational gains or sales gains that we had in the third quarter.

I think it's very important to understand that our outlook from July for the full year of this year has really not changed at all.

We always had our mind set that at one point in time this year -- third quarter, fourth quarter -- there would be some demand slowdown.

We had forecasted that all along.

So there is no news relative to this.

The only news there is, that the currency against the Euro went from 1.57 to 1.36.

We had that significant impact on the outlook on the fourth quarter, and it's offsetting the gains that we have.

And that we feel very, very good about, that we don't because of demand really change our outlook.

We're changing it only because of the currency.

Very helpful.

Thanks.

Can I just get any brief comments on the competitive environment today?

I mean typically in these week demand environments, or perhaps what appear to be weakening demand environments, the better companies tends to take share.

And I'm wondering if you can comment on comment on that?

Thank you for that question.

We have certainly gained position in good times.

We have actually gained position even stronger in difficult times.

If I go back to the years 2001, 2002, we have gained substantial market share.

Our structure today, our foundation and our financial strength that we have today allows us to continue to gain position in the marketplace with the diversified presence that we have.

I mean, look at the situation.

About half -- 37% of our sales are in Asia, 37% of our sales are now in North America.

We have grown and moved those markets that had the growth rates, and we're still there, and we'll continue to push this along.

In addition, our technology will help us tremendously in this market, where the customers are looking for performance-enhancing solutions.

We can provide these solutions moving forward.

So we're excellently positioned from a product standpoint, from a geographic standpoint, and from a corporate structure standpoint to outperform and to continue to outperform the industry, moving forward, because we will continue to be very, very much looking at the needs of our customers and servicing them, rather than getting involved in restructuring of our Company.

Amit Daryanani, RBC Capital.

This is actually Ryan Jones.

I'm in for Amit, who is traveling.

I was just wondering if you could talk about the dynamics you're seeing right now in automotive in Asia versus Europe versus North America.

Yes.

As I mentioned earlier, that there has clearly been some moderation in the vehicle production levels, and I think we have seen that moderation really on a global basis.

Our automotive business has more of the business in Europe than in North America, with some also in Asia.

And I think what we feel good about is our position in those customers has continued to grow, and we feel very good about the outlook for the future in terms of electronics.

But the vehicle production levels in all segments have some impact from financing, as well as have some impact from the general economic conditions.

Okay.

That's helpful.

And I just wanted to get one point of clarification.

Diana, I believe you said in the beginning, it's a $1 billion revolver that you currently have outstanding?

Yes.

That is exclusive of the $250 million accordion; is that right?

Yes, that's correct.

So you could potentially flex that in 2009 should you need that cash?

We could potentially, but I would tell you that the bank market as it stands today -- I think the odds of doing that would probably be relatively low as the credit markets stand right now today.

I can't speak to how they will be in 2009.

It's a new credit process that the banks go through relative to that feature in the credit agreement.

Amitabh Passi, UBS.

My first question was -- I think you all lived through the '01/'02 downturn.

Conventional wisdom appears to be that this current environment we're in is unlikely to be as severe as the previous recession.

So I just wanted to get your perspective.

We're seeing a pretty rapid deterioration in the environment, and just how you are thinking about this downturn versus the previous downturn.

Well, obviously are not -- we don't have the crystal ball of any sort here.

However, the downturn in 2000 was really a very technology-oriented bubble, where we knew that many of our customers would have lower demand, and we knew where to focus and to prioritize, because we knew where the problems were coming from.

In this environment, where we have a financial bubble, so to speak, or crisis, I would like -- which is globally expanded, there the situation is different, because we don't know what the ripple effect of this financial situation is relative to our own customers, relative to the suppliers of these customers, relative to our competition.

Obviously there is more uncertainty than it was then.

It was very clear that there was a technology bubble -- what do you have to do.

This time, it is somewhat different.

What the ripple effects are going to be is to be seen, and that's the reason why we say that forecasting is difficult.

That's why we're saying we are well positioned to adjust rapidly to whatever is needed.

We see, for example, in our mobile business, a 50% increase, close to 45% increase, in the third quarter over last year, while the mobile market itself, according to what Nokia has reported today, is up about 10% this year, which means clearly that we continue to gain market share.

We may not grow as fast in the fourth quarter by 50%, but a 20%, 30% growth is still a significantly higher growth than ever, even if it would be slower.

So we have to put it all in perspective where we are, and I think we are well positioned to move forward, strong and have a very strong outlook for the fourth quarter, and we're confident for the future.

Thank you.

And just one follow-up question.

I'm just wondering, as you talk to your distributors in the supply chain, are you hearing or beginning to see any impact of the credit crunch on them that's potentially impacting their ability to take product from you?

This is a very good question.

We haven't seen the credit crunch in that sense that they wouldn't buy inventory from us.

But obviously, there is a more conservative, let we say, look at inventory -- taking or not taking -- in the distribution channel.

That is prudent on their side.

It's also prudent on our side, because we don't know where the business is going, up or down.

So I think we're both prudent on that side to observe what the situation will be, and that will be healthy for both of us.

Jeff Beach, Stifel Nicolaus.

I've got two questions.

One easy one.

Can you give us the dollar amount of acquired revenues?

And then second, it appears as though you've had some good benefit in your mobile infrastructure and devices from the summer Olympics this year.

Are you going to face some pretty tough comparisons as you go through 2009 in this business?

Just the first part of the question -- if you look on a year-over-year basis, acquisitions added about 4% to growth, and foreign exchange added about 2%, so the organic growth rate is 12% over the prior year for the quarter.

And relative to the question about mobile infrastructure, I think initially, before the Olympics, many were saying that there would be a pre-Olympics slowdown and a post-Olympics acceleration, and some said the opposite.

I think in sum, we haven't necessarily seen such a meaningful impact.

Our mobile infrastructure business has had benefits really on a global basis.

We've seen strength in Latin America.

We've seen strength in India.

We have seen some strength in China, and strength also in other areas of the world.

Our presence in mobile infrastructure is very broad based.

We are on all of the major platforms.

We've had -- we've seen good strength on some of the local Chinese players as well in many of the next-generation -- third-generation equipment.

In China, there is also still the looming third-generation investments that can happen.

And so I believe -- and we believe -- that the outlook for that market is still quite a positive outlook.

[Sean Connor], SAS Advisors.

Just one quick question.

That is, looking at previous downturns in your operating margins, back in like 2001 they were down roughly 370 basis points from kind of peak to trough, and in the last downturn, kind of June '05 to March '06, you were down roughly 210 basis points.

As you kind of look out over the next six to nine months in this current downturn, would you think that you would be able to manage your op margin to even -- to decline less, or do you think somewhere between the last two declines of roughly 210 to 400 is more realistic?

We're certainly at this point in time not forecasting any of what could happen in 2009.

I think it's a little bit premature.

We're waiting in the fourth quarter -- how the turmoil is shaking out.

But in general, I think it's not easy to compare the 2001 and this downturn, because the majority of the downturn in 2001 happened in our Cable business.

It didn't happen in our Interconnect business.

And the Interconnect business this time is much larger as a percent of the total than it was then.

So direct comparisons would not be appropriate at that point in time.

Obviously, volume always plays -- can play a role on margins, but as I said, we have always an eye on the flexibility of our organization and will there be able to minimize any volume changes or maximize leverage, as where it is appropriate to come out with very strong margins.

We're starting any very, very high base.

Just one follow-up.

If you can -- just kind of putting it a different way, would you say your cost structure now has more or less fixed costs versus the last couple of downturns?

Our cost structure is very much flexible, as it was then.

It is actually more flexible today than it was then, because we have more in low-cost areas than we had at the time when that started, because we just moved into these low-cost areas where there is clearly more flexibility.

But a direct comparison -- we didn't even make that, a direct comparison.

We are looking more forward in what we have today and what we have to do in order to maximize our profitability.

Matt Sheerin, Thomas Weisel Partners.

I'd actually like to go back to the question that everyone seems to be asking concerning your guidance, which is relatively very strong.

If you look at other suppliers, some quality semiconductor companies for instance that have already reported, that are looking at down 10% to 20% quarters in Q4 even with a very broad customer base, a lot of companies saying that they've seen orders fall off from OEMs in distribution in the last few weeks, you don't seem to be seeing that margin.

And of course, you are one of the best companies in your sector, and you've been taking share, etc.

I understand that.

I also know that the connectors companies tend to lag the cycle, lag behind semiconductors in last cycle.

So I'm just trying to get a sense of, is it market share?

Or will you perhaps see it later?

Or basically just what's going on?

Well, it's very difficult to know what is going on.

We're not all -- all of our competitors in the same segments, and so forth.

We don't have the same breadth of new products, and so forth.

So it's hard to compare.

But what we know about ourselves is that we wouldn't provide this strong forecast that we have at this point in time if we were not confident in achieving this, even if forecasting is very difficult, even if all is very unstable.

But we're just very confident that we can adjust rapidly.

We are confident in our new products -- deliveries that we have in front of us, and in a the markets that we're positioned.

We're not only diverse, but in markets that have still good growth potential.

So I think these elements are still strong and working for us, and therefore we have the confidence to make that outlook at this point in time.

Okay, great.

Just a follow-up for Diana regarding the weakness of the Euro versus the dollar.

You talked about the impact on revenue.

Is there a commensurate impact on your cost there?

And is that equal to your revenue so that there wouldn't be a negative impact on operating income?

Or would there be?

I think if you think from an ROS standpoint, there's not necessarily a negative impact from an ROS standpoint, because the costs certainly have -- are impacted by the same exchange issues that the sales are.

So if you want to think about the operating income effects impacted at about the average ROS percentage, that would probably be close.

Brian White, Collins Stewart.

Yes, Martin.

When we look into the December quarter, you're guiding down I guess 4% to 6% sales will decline, and the currency impacts that.

But what markets do you think will actually rise sequentially?

Well obviously, in totals, if you look at the growth in the fourth quarter, currency adjusted, it's about 6% year-over-year.

We still feel that the mobile phone business has, even if we're not forecasting by segment, I give you just a general guess here, the mobile phone business still has potential for improving year-over-year and contributes, as the military aerospace market has certainly that characteristics.

We're looking at the IT market.

The only market where we believe that there will not be a contribution to growth is probably the automotive market, and that may have the most significant impact on a slower growth.

But it's kind of [scampering] everywhere a little bit, as we predicted it already in July, as we predicted it in April.

I remember that at one point in time there would be a slower demand cycle, and that is a little bit broader.

But there are still buckets of growth that are very significant in the fourth quarter.

And Martin, I just want to be clear.

If you look at quarter-to-quarter growth, you think handsets will grow quarter-to-quarter?

I think, Brian, from a sequential standpoint, I would say that we're really not expecting to see any market segment have a sequential growth from an organic standpoint.

Okay?

I think handsets in particular was very strong in the third quarter, and we wouldn't think that we would see continued sequential growth in the fourth quarter.

(multiple speakers)

Sure, exactly.

And then when we think about just trends in October, what did we see?

Did demand slow down?

Was it kind of flat?

In September did it pick up?

How do we think about the trends in October?

Well, October just has started, and obviously we wouldn't give that guidance three weeks into the month that we have if we wouldn't feel that we can reach our goals.

And usually the distribution in the fourth quarter is a little bit different than the distribution in the third quarter.

In the third quarter we have usually a stronger September month, while obviously in this quarter, October is an important month, a lot of workdays and so forth.

And we're right on track so far with that guidance that we've given.

Okay.

And just finally, Martin, you talked about new products.

Where are you most excited, and where do you have the wins that we should see the most ramp over the next say six to 12 months?

And in what market segments?

Well, you probably hear from my voice that I continue to be excited about across the board.

Demand environments in the various market segments may differ, but I'm excited that our focus on providing leading technology and technologies, our Interconnect solutions, to our customers is across all these market segments.

It's not just focused on one.

And I think with the demand cycles that we have, we see different growth rates.

But a lot of that is driven by bringing these new solutions to our customers.

And so I didn't want to point out one or the other.

Obviously, if you have a 50%, 40% growth in mobile phones, it's exciting.

But in other areas where there's no growth or very moderate growth, like in mobile infrastructure, and we have the ability to grow 23%, I can be equally excited about it and will continue to be excited about it, because we're well positioned in these emerging markets and with the technology and with a flexible cost structure, across all of our market segments.

Shawn Harrison, Longbow Research.

Getting back to the raw material environment, if you were to see metal prices hold at the current level and oil prices kind of stabilize here as well, when would you expect to see the benefit from lower raw material costs flow through your P&L?

Thanks very much for the question.

I think as Martin explained earlier, we've seen some mixed impact of raw materials so far.

Obviously, gold has not gone in the right direction, and gold is a very significant component of an interconnect device.

And plastics also have seemed to go up rather than down.

But there have been some moderation in materials such as metals.

For us, as there is this conversion that happens to the materials, there is a lag effect.

And we certainly see in our guidance that there may be some benefit of materials in the fourth quarter, and we hope to push our suppliers to get further benefit in the future

You should bear in mind that our customers are also not blind to the fact that raw materials are there, nor are the competitors.

So we would expect to see also further pricing pressure as raw materials become more relaxed.

But our goal certainly is to capture as much as possible of the benefit of the raw materials reduction going forward.

Very hard to pin exactly the dates on which we will achieve that.

Okay.

But it sounds like if things hold here, maybe it's more of a 2009 potential benefit for you than (multiple speakers)

Well, we are already guiding in the fourth quarter some improvement in our margins.

On lower revenues.

Okay.

And then just secondarily, you had touched on the pricing dynamic.

I don't believe most connector manufacturers are able to pass through the full impact of these rising raw material costs.

So we shouldn't expect to see a full rolloff here on the way back down, if raw materials continue to hold these levels; correct?

Well, again, it really depends on the type of customer and the market that you are in.

With some customers you have annual contracts where there's even a very significant lag in terms of when you can adjust the pricing.

But I think we will try at all costs to maintain pricing in those markets where we can, and keep the greatest share that we can of the benefit of the raw material.

Carter Shoop, Deutsche Bank.

I wanted to touch base on the cash balance.

Diana, you mentioned that the majority of it is offshore right now.

Could you help the listeners here on the call understand how much cash you need on the balance sheet now kind of for day-to-day operations, given that a lot of cash is overseas?

Yes.

We really don't need much cash for day-to-day operations.

We generate a tremendous amount of cash every year, so we have on any given day perhaps some small needs, but we do have the revolving credit facility here in the US, and some small amount of cash.

And then we have cash in all of the countries that we operate in, along with in some cases some small local credit facilities.

But the business is not such that it needs a tremendous cash infusion from an operating standpoint.

It's more of an issue of figuring out how to best deploy the cash that is generated by the business.

So theoretically, we could see the balance sheet having about $50 million in cash if we were to deploy it elsewhere in the near term?

Well, if you go back to prior to the time that -- when we used to repatriate all the cash back to the US to pay debt down, when the Company was more highly leveraged, the cash balance was probably up around that size, somewhere between $50 million and $80 million, roughly.

And I'm starting to understand if we can get back to those levels, even though we have a lot of cash now (multiple speakers)

I'm not sure why we would want to necessarily get back to those levels.

I think we would get back to those levels when we deploy the cash that we have these other jurisdictions toward funding our acquisition program in those regions.

The cash is being kept in areas that we do expect to make acquisitions.

With a tuck-in acquisition program, that's an important part of the strategy.

So I think that the reduction of the cash balance would most likely be in conjunction with the closing of a deal in that particular region.

Ok.

That's helpful.

As a follow-up question, can you maybe discuss what sort of actions, if any, you have taken or you are planning to take to incorporate for the deteriorating macroeconomic outlook.

Well, if you are asking the question whether we have contingency plans in place, as I mentioned earlier, obviously Amphenol is number one, a very strong generator of cash.

That's already one thing.

In at this time, cash is king, and we generate a lot of cash.

The other thing is that we are organized and structured in a way that allows us to be very flexible in adjusting to changing environments in every country that we're doing business.

So we're not going to have across-the-board contingencies, but trying to maximize what we can right now as far as material is concerned, adjusting our expenses, head count, and so forth according to the needs of the business.

Some businesses are growing.

They need more resources.

And others are declining.

They need less.

We're structured to do this on an individual basis, very correctly, rapidly, and with low cost and no restructuring charges.

We have done it over all these years, and we will continue to aim for that.

As a follow-up to that if I may, last question.

When you look at the several potential bolt-on acquisitions which are in your pipeline, how many of those could you potentially close on over the next six months?

Are there one or two deals that you are pretty far along in the negotiation process?

Or is more, five or six?

Well, I would like to know this myself.

The thing is, the challenge is always to know really when is the timing.

We are -- as a mentioned, have a healthy pipeline.

We have a lot of irons in the fire.

When they ultimately close is very difficult to predict, because they are, as you look, smaller companies where some smaller changes can add longer delays.

Therefore, to make a prediction would be difficult.

But we're very confident, and we have seen in the past that sometimes acquisitions come in a kind of a cluster.

Sometimes you make more in a short period of time, and then there is a period where there is not as many.

So I'm confident that there is opportunity to make -- close some of the acquisitions in the next six months.

We'll take just one more question, if there is one more.

I have no further questions in the queue.

That's great.

Thank you very much.

Well, thank you very much for all -- for your time, for listening to Amphenol's progress, and we continue to be in touch with you as we move forward.

Thank you very much, and good-bye.

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