安費諾 (APH) 2009 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).

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

If anyone has any objections, you may disconnect at this time.

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

Diana Reardon.

Ma'am, you may begin.

Thank you.

Good afternoon.

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

I'm here together with Martin Loeffler, our Executive Chairman and Adam Norwitt, our CEO, and we would like to welcome you all 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 current trends.

We'll then have a question and answer session.

The Company achieved second quarter results that met the high end of guidance.

Sales for the quarter were $685 million, down 19% in US dollars and 16% in local currencies over the second quarter of 2008.

Compared to Q1 2009, sales were up 4% in U.S.

dollars and 3% in local currencies.

From an organic standpoint, excluding acquisitions and currency, sales in Q2 of 09 were down 21% compared with sales in the prior year and down 1% from the prior quarter, a strong performance in a difficult economic environment.

Breaking down sales into our two major components, our cable business, which comprised 9% of our sales was up 10% from last year and down 16% in US dollars and 11% in local currencies from last year, reflecting a slowdown in spending particularly in international broadband, cable television markets resulting from the weak economic conditions.

The interconnect business which comprised 91% of our sales was down 19% compared to last year and up 3% sequentially.

We experienced year-over-year declines resulting from low end market demand in most markets; however, we also realized sequential improvements in the majority of our markets in Q2.

We continue to believe that the Company's performance benefits from its market diversity and the strength of its technology.

Adam will comment further on trends by market in a few minutes.

Operating income for the quarter was $115 million compared to $168 million last year.

Operating margin was 16.9% compared to 19.9% last year.

Operating income is net of stock option expense of approximately $5.2 million or 0.8% of sales in Q2 of 09 compared to $4 million or 0.5% of sales in Q2 of '08.

From a segment standpoint, our cable margins were 15.8% up from 11.5% last year.

The margin improvement is a result of the positive impacts of lower material costs and operational cost reduction actions, which more than offset the impact of lower sales volume compared to the prior year.

In the interconnect business, margins were 19.3% compared to 22.3% last year.

The achievement of these strong margins given the current economic environment and reduced volume levels is a significant accomplishment.

Our operating units continued to react quickly and appropriately to current demand levels and continue to adjust all elements of cost in a proactive fashion.

In this regard, during the quarter in addition to actions taken relative to procurement and material usage the Company reduced overall headcount by approximately 6%.

Overall, we are very pleased with the Company's operating margin achievement of 16.9% in the quarter and believe that the Company's entrepreneurial operating structure and culture of cost control will continue to allow us to react in a fast and flexible manner to preserve strong profitability going forward.

Interest expense for the quarter was $9.1 million compared to $9.9 million last year.

The decrease from the prior year relates primarily to lower average rates in the 2009 quarter.

Other expense was $400,000 compared to income of $134,000 in the second quarter of '08.

Other expense is comprised primarily of bank fees, fees on the Company's receivable securitization program and interest income.

The Company had an effective tax rate of 27.5% in Q2 of 09 compared to 29% in the second quarter of 08 and a rate of 27.5% for the full year 2008.

We currently expect a tax rate of 27.5% for the third quarter of 2009.

Net income was $75 million(Sic-see press release) in the quarter approximately 11% of sales.

A very strong performance on any industry comparative basis, particularly in the current environment.

Diluted EPS for the quarter was $0.43 per share down 30% from last year.

Orders for the quarter were $666 million, a book-to-bill ratio of approximately 0.97 to one, the lower book-to-bill ratio in the quarter relates to lower order levels in the mill arrow and industrial markets, due primarily to lower distribution demand as well as seasonally softer orders for Q3 shipments in North America and Europe.

Order levels in other markets were at or above sales levels.

The Company continues to be an excellent generator of cash.

Cash flow from operations was $142 million in Q2.

Cash from operations was reduced by approximately $12 million as the Company lowered the amount of receivables sold under its securitization program.

Cash flow from operations was used for Capital Expenditures of $14 million.

Acquisition related expenditures of $10 million relating to prior deals, repayment of borrowings under the companies revolving credit facility of $51 million, dividend payments of $3 million, and an increase in cash on hand.

In addition to its strong operating cash flow and cash investments of approximately $221 million, the Company has additional liquidity in the form of availability under its $1 billion revolving credit facility, which expires in 2011.

Availability under the facility was $186 million at the end of June.

The Company continues to have more than sufficient liquidity to meet its needs.

Borrowings under the facility were $814 million at the end of June, of which $650 million are swapped to fixed rates through December of '09 and July of 2010.

The remaining borrowings are at a spread over LIBOR.

The Company also has a $100 million receivable securitization program that expires in May of 2010 under which $79 million in receivables were sold at the end of June.

Receivables sold were at a spread over commercial paper rates.

The Company had a very strong performance from a balance sheet perspective in the quarter which contributed to our cash flow.

Day Sales Outstanding improved two days from previous levels.

In addition, the Company's continued focus on inventory resulted in a further inventory reduction in the quarter.

Inventory decreased 6% from Q1 levels.

Excluding acquisition impacts, inventory is now down 16% from the end of the year.

Inventory days decreased to 83 days from 93 days at the end of March.

We're quite pleased to have further reduced inventory in the quarter and to have returned from an inventory days perspective to a level that's comparable to our achievement at the end of the third quarter of 2008.

Debt was $821 million at the end of June, down from $871 million at the end of March and up from $786 million at the end of the year.

The increase in debt from year-end relates primarily to funding a portion of the acquisition completed in the first quarter.

The Company's leverage and interest coverage ratios remained very strong at 1.3 times and 16 times respectively and EBITDA in the quarter was approximately $147 million.

From a financial perspective we continue to be very pleased with the strength of the Company's execution and a difficult environment.

Adam and Martin will now comment on the business.

Thank you very much, Diana, and welcome to our conference call in conjunction with our Earnings Release.

As Diana just outlined, Amphenol continued to execute well in the second quarter.

We are particularly pleased with maintaining our industry leading profitability and very strong cash flow considering the current low demand levels in the markets.

I'd like to very briefly reemphasize and summarize the strategies that are behind the successful performance that we have during this economic downturn, actually strategies that we employed in all business cycles that has made Amphenol very successful.

First and foremost, Amphenol has and continues to have a very entrepreneurial management style and a very agile organization that is able to respond and to react very quickly to changing market conditions.

That certainly has driven and maintained strong profitability for the Company.

It is our strategy to remain very close to our customers to gain preferred supplier relationships at all levels of our customers organization.

Not only to have access to the volume they have available to us but also to work on the future opportunities with these customers.

It is our strategy to develop performance enhancing technologies to create value for our customers, again a strong driver for our profitability.

It is our strategy to relentlessly scrutinize all elements of cost to achieve superior margins.

It is our strategy to diversify market, product and geography to lower risk and increase our opportunities around the globe.

And it is our strategy to compliment the Company's strength with acquisitions that have the potential to flourish with Amphenol and have a growth potential that is superior within organic growth within the family.

With these strategies, Amphenol has been successful throughout the last three quarters of this very severe downturn that we have seen and we are very confident to emerge as a stronger Company from this slow cycle here as we have seen some stabilization and we are very confident to grow as business resumes into the future.

Adam is now going to talk more about the trends in our business and our achievements in the various market segments .

Thank you very much Martin and Diana and I'd also like to add my own welcome to those of you on the phone and certainly look forward to sharing with you some color to the results that we have released today.

The second quarter was a very good quarter for Amphenol, considering the ongoing challenges and the economic environment, albeit an environment which to us shows some signs of stabilization.

While revenues were down 19% from the prior year, we were able to increase our sales sequentially in most of our served markets.

A clear indication of the benefits of our diversification and the leading technology that we produce for our customers.

We were especially pleased to achieve strong 16.9% operating margins with excellent earnings and cash flow coming from those earnings, which is a reflection of the strength of our agile organization and that entrepreneurial management team that Martin mentioned.

With that I'd like to turn to some of the trends and the progress that we have in the served markets.

The military and aerospace market represented 24% of our sales in the quarter.

Sales in that market decreased 7% from the prior year, with declines in sales related to delays in commercial aircraft production, somewhat offset by moderate acquisition related growth in the military business.

We continue to see the distributors and certain OEM customers in the aerospace market remain cautious in placing long lead time orders ahead of firm governmental funding decisions.

We stay close to those customers to continue to make sure that we are well positioned when those orders do come in.

We are optimistic that our broad program participation together with the ever increasing electronic content in military aerospace equipment will drive performance despite any potential shifts in governmental defense funding priorities.

While we do expect that demand may be seasonally moderated in the third quarter, the long term outlook for Amphenol for the military aerospace market remains strong.

The industrial market represented 9% of our sales in the quarter and sales in that market decreased 38% from the prior year with continued sequential declines.

We continue to experience a broad moderation of demand in many segments of the industrial market related to the general economic slowdown and in particular, the slowdown of activity and infrastructure spending.

Nevertheless we're making excellent progress in exciting areas of the industrial market including most notably alternative energy and rail mass transit.

While we believe that the overall industrial market continues to be and will continue to be impacted by the general economic slowdown, we do expect that these growth segments can help us to build momentum into the future in the industrial market.

The automotive market represented 6% of our sales in the quarter and sales declined 37% from prior year.

Nevertheless we did experience a rebound from low production levels in the first quarter with sales in the automotive market increasing a very strong 24% sequentially in the second quarter.

While we have seen some growth in vehicle production volumes we believe it is still too soon to predict at what level such volumes will stabilize.

The near term outlook is for stabilized demand although there maybe pockets of strength tied to specific government incentive programs.

Nevertheless we continue to be encouraged by the longer term outlook in the automotive market due to increased electronics in automobiles and our strong position in the new hybrid electric vehicle platforms which we expect to be released over the coming years.

In the broadband market, we saw sales decrease 14% from the prior year with reductions in particular in international markets.

That market now represents 10% of our sales did experience a strengthening in demand seasonally in the second quarter with sales increasing 10% versus the first quarter.

We continue to have leading relationships with cable systems operators and an increasing broad portfolio of value add interconnect products, both of which position us very well for the future in the exciting broadband market.

We expect the broadband market to further improve seasonally in the third quarter.

The information technology and data communication markets represented 19% of our sales in the quarter.

Sales in that market decreased 33% from prior year due to the ongoing reduced IT investments and continued inventory reductions in the supply chain.

Nevertheless, we did experience a stabilization of demand in the IT market particularly towards the end of the second quarter, with sales up slightly from the first quarter tied especially to carrier related equipment and growth in server platforms.

We remain very excited by our ongoing new program wins which continue regardless of the business cycle based upon our new and advanced technologies.

These new program wins position us very strongly for growth in the coming years and we foresee there should be growth in this market in the third quarter.

The mobile networks market represented 16% of our sales in the quarter.

Sales decreased 12% from prior year periods.

In the first quarter, we experienced the benefits of the China third generation network buildout which did not continue significantly into the second quarter; however our strong performance in support of OEM customers and wireless operators during these urgent buildouts has positioned us very well for future phases of investment, whether they be in China, India, or other exciting emerging markets.

Longer term, we see that we will continue to benefit from demand in installations especially in those emerging markets as well as a broad presence with a broad product portfolio and high volume and next generation equipment platforms.

For the third quarter we expect demand to continue essentially at current levels.

The Mobile Devices market represented 16% of our sales in the quarter.

Sales increased a very strong 2% over prior year in a market with significantly declining unit volumes.

This reflects the strength of our leading technologies across the broadest portfolio of customers and phone models.

Demand was impacted by reductions in end-user demand as well as ongoing inventory adjustments but was offset by growth of our innovative new products augmented by our expansion of our position with key OEMs.

We expect stable demand in the third quarter with potentially some slight improvements as phone makers prepare for 3G related as well as holiday demand.

In summary, with respect to the second quarter, I am very proud of our organization, as we have continued to execute well and outperform the industry with excellent financial strength in an extremely challenging demand environment.

We believe at Amphenol and our entire management team believes that 2009 creates for us a tremendous opportunity for our Company to expand our position in the interconnect market.

In this current environment, our distinct competitive advantages serve us very well.

Our leading technology, the increasing position with customers and diversified markets, our worldwide presence, a very lien and flexible cost structure and most importantly, a dynamic and entrepreneurial management team.

Now, relative to our outlook for the third quarter, based on stable exchange rates as well as some degree of seasonal moderation that we expect in the third quarter, we now expect the following results: We expect sales to be in the range of $670 million to $685 million and earnings per share to be in the range of $0.41 to $0.43.

Even in the current economic environment which continues to have challenges, we are very confident in the ability of our outstanding organization to achieve superior performance, as we continue to take necessary actions to preserve and grow our strong profitability as well as to capitalize on the ever expanding opportunities to grow our market position.

With that, operator, we would be very happy to entertain any questions that there may be at this time.

Hello?

Thank you.

We will now begin the question-and-answer session.

(Operator Instructions).

Our first question comes from Amit Daryanani of RBC Capital Markets.

Your line is open.

Thanks.

Good afternoon, guys.

Congratulations on a good quarter but I guess Adam in looking at the press release you talked about stabilization in the market and historically September quarter has been flat to up a little bit versus we're talking about down 1% of the mid point.

Could you just talk about beyond something from some of the end markets that's driving the sales down sequentially?

Thank you very much for the question, Amit.

I think as I mentioned we believe that there is some seasonality in the third quarter and those markets where we have traditionally in the past seen some seasonality especially the military, aerospace and industrial markets which tend to be more North American and European focused.

Those markets we certainly see seasonality, I think Diana mentioned as well that the books to bill and those markets we saw as not positive in the second quarter which really lead us to believe that we would see that traditional seasonality.

I think in the other markets as well, where you would normally see an uptick, for example, in the mobile phone market, we don't necessarily believe that there will be the same significance of positive seasonality in such a market.

Got it, and then Adam, I was just looking at the cash was really good again this quarter.

Your cash balance when I look historically has only once been higher than the $221 million we're sitting on this quarter.

Given that things are starting to stabilize is the build up in cash just a sign of keeping some gun powder dry for acquisitions in the back half or how should we look at that?

Well I think we're always keeping our eye out for acquisitions and we continue to have an acquisition pipeline that we manage very diligently and aggressively.

Doesn't mean necessarily that there would be one in the third quarter and I think as we've always said that it's impossible to predict the timing for those acquisitions, I think Diana and her team manage our cash very carefully and we're very proud of the cash generation in the quarter and this is really outstanding cash flow generation in the second quarter, $142 million nearly double our net income and this came from an ongoing focus throughout the Corporation on working capital management in addition to really having our earnings show real cash from those earnings, so I think we're very proud of that.

It's not a change in how we manage our cash balances.

It's really rather a reflection that was a very, very strong performance in the quarter.

Our next question comes from Amitabh Passi of UBS.

Your line is open.

Hi, thank you.

Can you hear me?

Absolutely.

Thank you.

My first set of questions had to do with margins.

Diana, incremental gross margins in the quarter were a little lower than I would have anticipated and I'm just wondering is that sort of a function of likely under absorption of fixed costs as you likely continue to work down inventories or are you seeing some incremental pricing pressure?

We are beginning to hear from some OEMs of increased pricing and margin pressure so just wondering if any of that is percolating into your business?

Sure, I'll let Adam comment on pricing but if you're talking from a sequential standpoint, when we look, from an organic standpoint, the sales were essentially flat quarter to quarter and there's some positive impact from translation standpoint and we had some incremental sales in the automotive market and some acquisition impact so I think from a conversion standpoint given those trends one shouldn't expect us to be achieving really anything much higher than what you see in the second quarter results.

I think one thing to emphasize here is I mean these were really outstanding profitability results, when you consider the last nine months what has happened in the business to maintain these margins we're very proud and I think this has come through those ongoing efforts.

Diana mentioned this headcount reduction in the second quarter.

We have essentially over the last nine months reduced our headcount by 21% at the same time as our revenue is essential down by that same amount from the peak in Q3 of last year, so I think there has been a tremendous effort to maintain these margins.

Now relative to pricing, certainly we keep our ear close to the ground and our fingers close to the customer to understand what's happening there.

I wouldn't say that we've seen any wholesale changes in pricing behavior but we're very sensitive to it and how we rebound is we're being very proactive to make sure we can maintain margins even with pricing pressure from some competitors which we certainly start to see some of.

So we will stay very close to pricing.

We will look for discipline around all of our competitors and we will still be very disciplined on pricing but we will be prepared in the event that we need to secure certain business we will be very prepared based on keeping our cost down.

Our next question comes from Carter Shoop from Deutsche Bank.

Your line is open.

Good afternoon.

First question has to do with the restructuring.

Can you discuss how many employees were terminated in the second quarter?

Yes, I think it was about 6% of our headcount so somewhere around 1500 people.

Okay, great and then regards to margins any acquisition last quarter of Times Microwave, do you have a sense on what that did on a sequential basis to your Q2 operating margin?

Was that a little bit of a drag?

We don't really talk specifically about the profitability of the acquisitions.

What I would say is we did have again a small amount of some acquisition related cost like we had last quarter that are in the headquarters line in our segment reporting but other than that, I wouldn't say that there was any significant impact from that.

Our next question coming from Ron Fisher from US Steel.

Your line is open.

Good afternoon.

I wanted to return to the acquisition question from before.

You have a pipeline but I'm just wondering, is there a difference between bid and ask or are you not seeing kinds of properties that you want?

I mean you certainly have the dry powder to do something, so what's going on and what has been going on and what do you see going on in terms of acquisitions looking ahead?

Thank you very much for the question.

I think we manage our acquisition pipeline in a very sort of systematic way which is that we stay close to the entrepreneurs and the owners of these companies and I would say that it's not necessarily a question of price as much as it's a question of getting the right companies and then the willingness of those owners or sellers to sell.

What we have seen is that there are certain larger companies in the industry who are owned for example, by private equity or other sponsors and they may or may not have a desire to sell in a recession because of the timing of the market multiples and at the same time we have seen that entrepreneurs of certain smaller companies find that the Amphenol story is very compelling in a time like this, where we see that time and time again in a business cycle, Amphenol has been able to maintain its operating margins to not go through sort of radical restructurings which could really kill an acquisition from joining of the Company.

That can become a very compelling story in the short-term and in the long term for entrepreneurs and we certainly see the receptiveness of people to talk to us about acquisitions grows in a time like this where they see the resiliency of our Company, but the timing of these is always impossible to drive, you cannot push it.

It comes when it comes and because you are always dealing with the seller who has to make a decision at the end of the day.

Understood, thank you.

Thank you very much.

Our next question comes from Sanil Daptardar of Sentinel Investments.

Your line is open.

Yes, as if you had done the restructuring now and as soon as demand goes back sharply, the current restructuring you had done, is it going to become an obstacle for supplying in the marketplace or it's likely not to be?

No, thank you very much.

I think we don't see that that would be an obstacle.

I mean, Amphenol has always been run with the culture of having more flexibility in our organization so that we can prosper in good times as well as in bad, and so we have seen in our Company many micro cycles that happen even in good times with certain operations and certain businesses and they are always being adjusted to the appropriate levels and what that volume does is we will certainly hope to happen come back we're very well poised and positioned to come back and because we take the opportunity during this time where we are reducing resources to sometimes take away resources which weren't performing as well, we would expect when things come back we would perform even better.

My question was on the Mobile Devices side I think it looks like you said that you increase your sequential year-over-year growth rate by about 2% in a declining market volume.

Yes.

Does it imply that you have taken market share in that sector and also, when you look in the shape of the growth, if it happens, if there's any macroeconomic recovery, how do you view what the shape of the growth recovery, how do you view what the shape of the growth for you as a Company might be better than what it was in the last cycle or tend to grow in line with the market because generally I think the connector market grows around 8% or so on average so could you just help us understand how you're thinking about it?

Sure.

Relative to the Mobile Devices market I think it would be very clear from our performance and there were even some earnings released today in this market that show that we clearly did gain market position, with the growth as we had of 2% on a year-over-year basis that grew sequentially actually 9% in that market and we clearly don't see that performance coming from either the customers or the competitors in there and that growth has come really very simply from two things: Strong technology and strong relationships with our customers, and we continue to drive those two very simple principles in growing our business over the Mobile Devices market which has grown just fantastically for us for many years and we expect that that continues to have momentum in the future.

Relative to what our performance would be coming out of a cycle, we don't know when this cycle would have a coming out of.

I can tell you that we're not keeping ourselves busy trying to guess when it would happen and what would be the degree of such a recovery, but what we do know is our goals that we have always communicated broadly that we will grow at twice the rate of the industry and we have been successful in doing that for more than a decade and we've done that by following those strategic principles that Martin outlined at the beginning of our call.

Strong technology, strong position with customers, good global presence.

Now one thing I should also mention is the connector market traditionally, I don't know it's necessarily grown at 8%, more in the line of three percent to five percent.

I think we have seen over the long term that has been a more normal growth pattern for the connector industry but what it will be coming out of this environment, I think we will know when we see it and we will be very focused on making sure that Amphenol out performs the industry.

Our next question comes from Jeff Beach, Stifel Nicolaus.

Your line is open.

Yes, hi.

I have two quick questions.

First, on the excellent cable margin that you had, you mentioned helped by lower cost inputs.

Looking out into the second half and even further, do you think you can maintain your pricing versus cost and hold this better margin that you're starting to achieve?

Yes, thank you very much, Jeff.

Yes.

I think we're very pleased with the margins that we've achieved in the cable segment and I think that has come not just because of raw materials but also it's come because of our excellent efforts around the Company to reduce our overhead and to reduce our cost.

We certainly look in this market for discipline and we hope and certainly will be disciplined on our front and we expect there will be discipline among the other participants in this market and with that discipline we would fully expect we continue to drive ourselves to have superior performance.

Great.

Just as a quick follow-up, the Times Microwave is a larger acquisition than many.

How long will it take to fully integrate and is there some moderate or meaningful margin expansion as you fully integrate the operations?

I think it's true, Times Microwave was a somewhat larger acquisition.

It certainly wasn't our largest and the acquisition of TCS was a bigger one but Times is very significant.

What's important to understand about our acquisition philosophy is we do not seek to "integrate" acquisitions in the more traditional sense of the word.

What we seek to do with acquisitions is to open up opportunities and we open up opportunities both on the market side as well as on the cost side, by working with existing management, with their existing customer base, existing resources, to move their technologies into new areas and often times to take some of our existing technologies into their own areas of strength.

So from an integration standpoint I'd tell you it was integrated just essentially the day after closing from an Amphenol definition of integration.

Do we see potential in that business long term?

Absolutely or else we wouldn't have acquired the Company and we certainly hope to see great potential with Times Microwave which we're very very pleased with that acquisition as well as with the team that joined us in that acquisition.

Our next question comes from Vincent Demasco of the Colony Group.

Congratulations of the performance and obviously a different environment.

A question following up from Sanil's.

With the 21% of workforce reductions made, can you characterize maybe the break down of fixed or variable or presuming that the recovery takes hold, how many of those employees would indeed have to be brought back to support demand?

I think it really, it's very hard to say now without just picking a random number because we don't know what a recovery would be, when that recovery would be.

What I can tell you is that when we reduce headcount in the Company we're not just taking out direct labor.

We're taking out indirect and salary and we view that when the business is down by 21%, you have to go back to a time, a point in time when you had such a size of business and you have to create that same resource base in the Company and that's across-the-board and so we are taking out really those people in all of the functions across the Company.

What will have to come back at the time that there is some revitalization in the market, we will judge that at the time based on what the degree is, what geographies is coming, what markets are coming, all of that will really impact our decision about how you will rebuild that infrastructure but we don't have a concern that that infrastructure would be difficult to rebound at the time and there's good potential with that for a good conversion as I mentioned earlier.

We take the opportunity when we're making such reductions to take out costs that should maybe be taken out anyway.

So would you say the lions share of the reductions made were more on the cost of goods side or on the SG&A side?

I think we've made reductions in all areas.

I wouldn't say exactly which is which.

Our next question comes from Shawn Harrison of Longbow Research.

Your line is open.

Hi, good afternoon.

I was hoping to talk a little bit about the military market.

It sounds like right now, distributors and customers are somewhat unwilling to place orders for longer lead time products.

Do you think as dynamic as we get into the fiscal 2010 government budget year for the military goes away and you could see more normalized dynamics?

Personally, I think that the order tendencies in the military aerospace market, you may see some sort of a shift because of these changes.

Whether they come back to placing longer lead time orders or not for us is really not so important.

I think our organizations are ready to execute regardless of the lead times.

We've done an outstanding job over the last nine months at reducing our lead times so we can support these more urgent needs.

You see with the various programs that get announced, they announce the program, they announce the reward and they want the deliveries, to start right away.

We've seen this for example, in the military vehicle programs that have been recently announced so I think we're very well positioned regardless of whether military supply chain customers revert back to the more traditional long lead times or maybe they migrate slowly towards order patterns that we see more typically in other markets.

For us it's really not important but clearly what we have seen and why that negative, one of the drivers of that negative book-to-bill that we saw in the market has been this kind of change in the buying patterns, whether that change goes away or stays permanent, to us is not so relevant but it may indeed be permanent.

Just secondly, regarding your expanded RF portfolio maybe if you could quickly highlight how you potentially would be able to cross sell those products with your existing portfolio that you had before the acquisition of Times and just how that would lead to market share gains as we look out over say the next 12-18 months.

Sure you're talking about radio frequency or RF, and we're very proud in Amphenol to be the world leader in RF technology.

It goes back really to the very first RF connector, which was invented by an Amphenol engineer back in World War II and since that time we have always been very focused on this as a core underlying technology of Amphenol and the acquisition of TMS is really so complimentary to that with their strong leadership in certain areas of RF technology in the aerospace.

We have a leading position in RF in all of the major markets that where RF is used whether that be in the wireless infrastructure market, whether that be in internet related hardware, industrial or especially now with TMS in the aerospace market, it's a point for us which is a tremendous value creator for the Company and it allows us with customers to present a suite of products in addition to RF which is a broad and the broadest product offering.

Because RF tends to be more of a niche product in many cases where customers are buying from niche suppliers and the fact they can come to Amphenol for a more complete solution, especially in that military aerospace market we already see signs that has a great receptivity from the customers.

So we're very pleased with that and we're very optimistic and very fortunate to have such a broad RF portfolio.

Our next question comes from Jim Suva from Citigroup.

Your line is open.

Good afternoon.

This is Jason Brueschke calling in for Jim.

Hi, Jason.

Just maybe a little bit more of a pointed question or a way to pose the gross margin question, do you believe that the inventory burn you've seen over the last couple of quarters has created a drag on your gross margins and if so, given a stable demand environment, when would you expect to be done with the inventory burn, and then I've got a follow-up question.

Yes, I think I mean clearly, production levels in fully integrated manufacturing facilities have some impact on margins and clearly, all production facilities have some level of fixed cost so I think certainly from both a theoretical and practical standpoint you may have lower volumes when you're taking inventory down yes it has some impact on margins.

I think that whether at this point we've been able to achieve inventory days that in the low 80's which really was our goal whether we have some inventory reductions following what we were able to achieve in Q2 in Q3 we very well will I think work to keep data at least at that level if not push them down more.

I think it's a little bit hard to talk about impacts on margins.

At this point we've given guidance for the quarter that the high end is flat, so I think that's inherent in that guidance is our margins that are comparable to what we've just achieved in the quarter and I think as Adam has said a few times on the call we consider these margins to be extremely strong and are continually working through cost reduction actions to be able to maintain those margins at these levels of volume.

I think at the point that volume starts to increase, we would expect to be able to achieve the conversion margins that we've had in the past in the Company consistently for a long time and that's 25% conversion margin on incremental sales, but I think that it will be important for us in order for us to be able to achieve those goals, the volume component will certainly be an important factor.

Perfect and then just a couple of quick questions on the demand front.

I understand that the military is going to deploy some new MRAP vehicles.

I wanted to know if you have any content in those vehicles and what the timing of any rollouts on that might be and then just expectations on the 3G buildout in China, it sounds like Q2 wasn't much, Q3 not much there but it seems listening to some of the semi suppliers that Q4 may see some incremental demand and I was wondering if you have visibility out that far?

Sure.

Thanks very much.

Just relative to the military vehicle, what's now referred to as MATV is the sort of latest generation, smaller MRAP that is being used and deployed in Afghanistan, I think everybody is probably aware there was an announcement awarding the program and we certainly have content and have had content with all of the players so as usual in these circumstances, we are not heavily vested in one or another who's going to win such a program.

We try to make sure that we have strong position and a leadership position across all of the participants who are bidding for a program like this and that has certainly been the case with MATV.

Of course once that award is made, we will certainly try to even further grow our position in that and we think this can be a very strong program for Amphenol in the future.

Relative to 3G buildout, it is correct.

We saw a tremendous amount of demand in the first quarter and I wanted to emphasize one thing.

This 3G buildout in China was very significant for us in the first quarter and we were able to satisfy demand of our customers with a level of speed that even they did not anticipate.

This demand came quite suddenly after the Chinese New Year which would have been sort of mid February time frame and our factories, our staff, our engineers were poised and ready to capture that business and we did just a fabulous job to service all of our OEM and operator customers in a time frame actually that even surpassed our own expectations and that lead actually to having somewhat less demand for us in the second quarter when maybe there would have been others who weren't so quick to respond to the demand who could have still experienced demand.

Now, what will happen with China 3G for the remainder of the year I think is very hard to say at this point.

We certainly saw the announcement a couple days ago relative to the next TDS CDMA contract and we will stay very close to those customers to make sure that we have good position.

What I know is that because of our performance in the first quarter on behalf of all of these customers, we're very very well positioned that at the time that the next 3G bid or buildout or construction happens in China, we will really be the first phone call for those customers and we will have if anything a broader presence on those platforms than we had before because they need suppliers who can respond quickly with good quality, with strong technology and really have a broad portfolio of products and we proved we could do that in the first quarter and I'm confident when it comes around again we'll be there for those customers.

Our next question comes from Stephen Fox, CLSA, your line is open.

Hi, good afternoon.

Just going back to the distribution situation, can you give us any kind of sense on how much you think the sell in is different from the sell out at these smaller distributors and when do you think they will be at what they would consider more reasonable inventory levels going forward and you'll be shipping through demand?

I think we certainly in the fourth quarter of last year, the first quarter of this year, we saw that the distributors were quite aggressively drawing down their inventory.

At the same time, I think the OEM customers of their contributors have also been drawing down inventories and reducing lead times relative to the aerospace market so we have seen that gap between what you would term the sell in and the sell-through has diminished and it may even be the case we're seeing largely the sell in and the sell-through be similar at this point but it doesn't mean that demand upon those distributors has necessarily strengthened and I think we have seen also because of our own execution capabilities that we're able to respond with shorter lead times and in some cases even their OEMs who because of that come directly to us and we monitor it very carefully, we're very close to our distributors, very close to all of them regardless of big or small and we will continue to monitor to make sure that we're able to capture all of those orders they bring to us.

Okay, great and just in terms of the auto restocking that you referenced, what kind of indications are you getting from your auto customers about the under supplier how long you could see a restocking build go on, etc.?

I think it really is region by region.

We certainly saw in the second quarter some of the impact from I think the English term for it is Cash for Clunkers.

There's a German term that sounds very similar where there was significant stimulus money spent especially in Germany, France and Italy and that continues to be ongoing.

There's some question relative to what has been the real impact of the stimulus programs.

Have they created replacement demand or have they created new demand?

And there are some data points that would tell you that the average age of some of the buyers in this Cash for Clunker is much lower than normal which could tell you maybe there's new demand created so what that means in terms of future volumes, what it means in terms of the U.S.

volume where there is a somewhat smaller than German program for Cash for Clunkers that's being discussed we really don't have a good read on that today.

I think inventories and certain geographies are still very high.

If you look in the United States, US car makers don't have low inventories today.

It's quite a bit lower in Europe and whether that will be rebuilt or whether they just continue to supply on an ongoing basis we'll stay close to it but I couldn't tell you exactly what will happen.

Our next question comes from William Stein of Credit Suisse.

Your line is open.

Thanks.

I'd like to just dig into the wireless infrastructure segment for a moment if I can.

Sure.

Where you have products that are targeted both to the equipment OEM and also the carriers, can you talk a bit about where you see relative strength or weakness between those two and where the Company intends to be better positioned?

I think we're very well positioned in both and I wouldn't say either both OEM or carrier has a different dynamic.

The different dynamic between OEM and carrier is one of geography, which is that the carrier or the OEMs are not as geographically based so you're shipping to the dozen or so companies that are out there and they are based in their own certain geographies and you don't always have a perfect read from them as to where that base station ends up going so it's a little bit less susceptible to the geographical variations.

On the carrier side, you're dealing with a carrier in a certain geography so to the extent there's strengthen that geography then you would certainly see a pick up from such a customer but relative to our position we have an excellent portfolio of products in both of those segments, on the OEM side we have essentially the broadest portfolio of interconnect products in everyone of our technologies whether it be fiber optics, RF, as was mentioned earlier, data, power products.

And on the carrier side we have a strong suite of interconnect products as well as base station antennas which really has tremendous leading edge technology combined with a very cost effective solution by making it in low cost areas, so we feel very good about both of those markets and our position in both of those markets and again because of that service that we have shown to customers that we can deliver we believe we're very well positioned going forward that when there are these incremental spikes in demand.

Thanks Adam, and then just to follow-up if I can, you mentioned a bit about strengthen automotive of Cash for Clunkers, and are you seeing effects of any other government stimulus packages and do you anticipate any kind of helping demand in the next quarter or two?

I wouldn't say that we have seen anything else that has such a tangible impact.

Certainly we monitor the stimulus programs very, very carefully.

One area of that which we are keeping very close to is relative to alternative energy and hybrid electric vehicles where there seems to be money flowing for example, to battery technology in certain geographies.

There seems to be money flowing towards construction of alternative energy facilities and there, Amphenol has a very strong technology base and we're growing our position with great focus throughout the Company in those markets.

Now in general, do you see kind of the shovel-ready industrial demand that it's creating?

I think our numbers in industrial would show you we haven't seen anything very specific there.

Are we hopeful something would come?

Certainly we're very hopeful for that.

It doesn't seem that these kind of proverbial bridges and tunnels and roads have launched as quickly as some of the other stimulus that we would hope.

We'll keep very close to that.

I think our position in the industrial market for heavy equipment and others is a very strong position and we're very mindful that if there was certainly a spike, we would be ready as we have really taken a lot of efforts over the last several years to enhance our competitiveness in those industrial products through significant investments in China, upgrades in our technology and we're very well positioned in that industrial market to the extent it comes back and if it comes back through stimulus that would be even better.

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

Your line is open.

Yes, thanks.

You've answered most of the questions here.

Very good.

But I do have a couple I'll throw in.

One, on your commentary on Mobile Devices being flattish when it's normally up seasonally, do you think there's inventory issues at customers or are they just being conservative given the macro environment and how are you positioned within the different segments, low end smart phones and mid range?

Sure.

Well, I think our guidance for that market is not so materially different than the guidance that was given by the market leader also this morning and we gave ours concurrently so I think we kind of matched a little bit our feelings about that market.

I think our position in the market in various phones is strong across-the-board.

We have strong position in low range phones, mid range phones and excellent position with smart phones which still continue to grow smart phones.

The smart phone volume in the second quarter appear to have grown by 10% while the rest of the market in unit volumes was down by maybe more than 10% so that work that we have done to position ourselves across multiple platforms and across these categories has been successful.

Even on the low end phone there's a thirst among the customers for good technology, which is a technology that can not necessarily create functionality but one that can create cost advantage so we have worked very hard in those and see great receptiveness from customers.

And then my second question just going back to your commentary about cost cutting and operating leverage.

Obviously you're around $200 million lower revenue run rate a quarter but as we think about going through the cycle and getting back to the revenue run rate you were at a year ago, would be expect margins to actually be better than they were given your costs are so low now?

I think that we would all be happy to get back to the margins that we were at last year at those volume levels, so I think that we keep a very variable cost structure.

We take costs down when it's appropriate to lower volumes and we would add some of those costs back as volumes move up towards where they were last year but I think the profitability we've achieved at these low volume levels is very very strong.

I think that the conversion margin goals that we have of 25% which we would expect to be able to achieve as volume starts to come back would get us back to even stronger levels of ROS at higher volume levels and I think that's what should be expected.

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

Our last question comes from Amitabh Passi of UBS.

Your line is open.

Thanks.

I just had one last question Adam for you, sort of big picture question.

Yes.

You've been fairly aggressive in trying to right size your business based on sort of end market demand trends.

Some of your larger competitors have taken similar actions.

I'm curious as you look across the industry as a whole are you seeing industry as a whole sort of being fairly aggressive and swift in terms of right sizing the businesses or are there still concerns there might be quite a bit of excess capacity and generally how do you view this whole supply-demand balance and the notion of excess capacity?

Yes, I think everybody will do what they feel is appropriate.

We certainly run our own business in a way that says that we're going to take our costs down rapidly.

When we take cost down it doesn't necessarily mean that we are taking "capacity" down.

We're not decommissioning factories, we're not putting machinery in closets or trying to sell it in scrap markets.

I mean we continue to have that kind of dry powder if we need it to come back.

What others are doing I don't try to stay so close to know what's in their heads in terms of that.

I think just when you talk about supply and demand you really talk about price and I mentioned earlier that we are very sensitive to pricing moves of our competition and we believe that through very aggressive and proactive cost measures we've taken that we're prepared in the event there were somewhat more irrational pricing movement from our competition we'll be ready for that if we need to be but we will be very disciplined on price irregardless of any supply-demand imbalances.

Okay, appreciate it.

Thank you.

Thank you, all, very much.

We appreciate your interest in the Company and wish you a very pleasant rest of the summer and a pleasant third quarter.

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