安費諾 (APH) 2010 Q1 法說會逐字稿

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

Following today's presentation there will be a formal Question and Answer Session.

(Operator Instructions) At the request of the Company today's conference is being recorded.

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

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

Diana Reardon.

Ma'am, you may begin.

Thank you.

Good afternoon.

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

I am here together with Adam Norwitt, our CEO, and we would like to welcome everyone to our first quarter call.

Q1 results were released this morning.

I will provide some financial commentary on the quarter 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 strong first quarter achieving sequential growth in sales and earnings per share and exceeding the high-end of the Company's guidance.

Sales were $771 million, up 2% in US dollars and 3% in local currencies over the fourth quarter of 2009.

A strong performance in a normally seasonally softer quarter.

Compared to last year, sales for the quarter were up 17% in US dollars and 14% in local currencies.

From an organic standpoint, excluding both acquisitions and currency effects, sales in the first quarter 2010 were up 11% over last year.

Breaking down sales into our two major components, our cable business, which comprised 9% of our sales in the quarter, was up 16% in US dollars and 10% in local currencies over last year and up about 7% from last quarter.

Sales grew in all regions.

The Interconnect business, which comprised 91% of our sales, was up 17% from last year and 1% sequentially.

We continue to see strengthening demand in the majority of our markets.

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

Operating income for the quarter was $145 million.

Operating margin was 18.8% compared to 16.8% last year and 18.3% last quarter.

Operating income is net of stock option expense of approximately $5.4 million this year and $4.8 million last quarter.

This is about 0.7% of sales both in Q1 2010 and Q1 2009.

From a segment perspective, in the cable segment margins were 14.9%, up from 13.5% last year and down from 15.5% last quarter.

The margin decline from last quarter relates to both higher relative material costs and the impact of price reductions.

In the Interconnect business margins were 21.1% compared to 19.3% last year and 20.6% last quarter.

The improvement in margin reflects the benefits of proactive and aggressive cost control, as volume begins to ramp back up.

Overall we're extremely pleased with the Company's operating margin achievement of 18.8%.

This represents the conversion margin on incremental sales over Q1 2009 of 31%.

We continue to believe that the Company's entrepreneurial operating structure and culture of cost control will allow us to react in a fast and flexible manner to achieve strong operating leverage and profitability going forward.

Interest expense for the quarter was $10 million compared to $9 million last year.

The increase over the prior year relates primarily to the inclusion in interest expense of fees on the Company's receivable securitization program in accordance with the adoption of new accounting rules effective at the beginning of the year.

In 2009 these fees, which totaled approximately $400,000, were included in other expense.

The remaining increase in interest expense is due to higher average interest rates in the 2010 quarter.

In the first quarter the Company had an effective tax rate of 26.1% compared to a rate of 24.1% in the first quarter of 2009.

Both years reflect the benefit of reductions in tax reserve amounts relating primarily to the completion of prior year audits.

From an EPS perspective, the lower tax rate added $0.01 per share in the 2010 quarter and $0.02 per share in the 2009 quarter.

Excluding these adjustments, the effective tax rate is approximately 27.5% and we currently expect the same rate in the second quarter of 2010.

Net income was $98 million in the quarter, approximately 13% of sales, a very strong performance.

Diluted earnings per share as reported was $0.56 in the 2010 quarter and $0.43 in the 2009 quarter.

Excluding tax adjustments in both quarters, earnings per share grew 34% to $0.55 in the first quarter of 2010.

Orders for the quarter were $829 million, up 8% sequentially and 31% from last year resulting in a very strong book-to-bill ratio of approximately 1.08 to 1 in the quarter.

The Company continues to be an excellent generator of cash in all cycles.

Cash flow from operations was $114 million in Q1 or 114% of net income in the quarter.

Cash flow from operations along with proceeds and related tax benefits from option exercises of about $4 million was used primarily for capital expenditures of $19 million, acquisition related expenditures of $3 million, dividend payments of $3 million, a $33 million reduction in debt, and an $8 million increase in short-term investments.

In addition, cash and cash investments increased by $47 million in the quarter.

In addition to the very strong operating cash flow and $602 million of availability under the Company's revolving credit facility, the Company had cash and cash investments that exceeded $430 million at the end of the quarter.

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

The Company also has a $100 million receivable securitization program that the Company plans to renew at its expiration in May.

In accordance with previous accounting rules, this facility was accounted for off balance sheet as a sale of receivables.

Effective January 1, 2010, those rules have been changed bringing the facility on balance sheet.

And at the end of March borrowings under the facility were $49 million and are reflected as short-term debt.

At the end of December approximately $82 million of receivables were sold under the facility and under the previous accounting rules were excluded from the balance sheet.

The Company's credit ratios and ratings have always treated the facility as debt and are therefore not affected by this accounting change.

The Company continued its strong focus on working capital management in the quarter.

Day sales outstanding were 66 days compared to 64 days at the end of December, up two days and within the normal range for the Company.

The increase of two days at the end of March reflects the heavy weighting of March sales in the quarter.

In addition, inventory in the quarter increased two days to 82 days at the end of March from 80 days at the end of December.

The increase in days relates primarily to inventory preparation for a sequentially stronger Q2.

Debt was $802 million at the end of March compared to $753 million at the end of December as reported and $835 million if adjusted for the classification change from our receivables securitization program.

Debt was therefore down $33 million in the quarter.

Net debt was $370 million at the end of the quarter compared to $450 million at the end of December on a restated basis.

The Company's leverage and interest coverage ratios remain very strong at 1.23 times and 14.7 times respectively and EBITDA in the quarter was approximately $176 million.

From a financial perspective, we're certainly very pleased with the strength of the Company's performance in the quarter.

Adam will now provide an overview of the business.

Well, thank you very much, Diana, and I would like to add my welcome to all of you for joining our customary call at the occasion of our Q1 earnings release.

I plan to spend a few moments to highlight for you our first quarter achievements, discuss several of the trends and progress in our served markets and then comment on our outlook for the second quarter of 2010.

We'll then have time at the end for some questions and answers.

The first quarter was a very strong start to 2010 for Amphenol, as we returned to our first quarter 2008 revenue level by capitalizing on an improving demand environment to further expand our position in our end markets.

Revenues in the quarter increased 17% from prior year and 2% sequentially in what is typically a seasonally lower quarter, representing our fourth consecutive quarter of sequential growth.

We're particularly encouraged by the strong order levels that Diana discussed with book-to-bill of 1.08 to 1.

We were also especially pleased to achieve strong operating leverage on our incremental sales in the quarter leading to further expansion of our already strong operating margins to 18.8%.

And as Diana mentioned, we continued to generate excellent cash flow of $114 million in the quarter.

These results are all a direct reflection of the strength and discipline of our agile organization and our entrepreneurial management team.

That cash flow that we spoke about also allowed us in early April to complete the acquisition of a Taiwan and China based manufacturer of specialized industrial Interconnect with annual sales of approximately $25 million.

This exciting acquisition expands our already leading positions in harsh environment Interconnect for a diverse range of industrial applications, including in particular lighting and alternative energy applications.

This acquisition is very consistent with our ongoing strategy to find complementary companies who have strong management, leading technology, all with an excellent market presence in their particular markets.

We're very optimistic that our continuing acquisition program will create value for Amphenol in the future.

Now I would like to turn to discuss some of the trends and progress in our served markets.

In general we're very pleased that our ongoing strategy of diversification enabled us to not only achieve strong year-over-year growth, but as I mentioned to return back to our first quarter of 2008 levels, which we believe is a significant accomplishment.

The military and aerospace market represented 21% of our sales in the quarter.

Sales in that market increased 7% from prior year with continued strength in military avionics, ground vehicle and communications programs.

Our ongoing leadership in all Interconnect technologies related to these and other expanding segments of the Mil/Aero market has positioned us well for important new programs and upgrades that are planned around the world.

In addition, our leading position in Interconnect for commercial air applications will serve us well as that market begins to recover.

We expect demand to further strengthen in the second quarter and look forward to a strong long-term outlook for the military aerospace market as electronics continue to proliferate in all categories of military equipment.

The industrial market represented 11% of our sales in the quarter.

Sales increased 17% from prior year and increased a strong 17% as well from the fourth quarter.

This was the second straight quarter of double-digit sequential improvement in our industrial market.

We have benefited from a recovery in many segments of the industrial market, including especially medical, rail, and transportation related applications, as well as from our strategic focus on new products for alternative energy applications.

We are especially encouraged by strengthening that we have seen in the distribution channel for industrial, where we have not yet seen significant inventory restocking but rather have seen full sell through to end customers.

We expect further improvement in the second quarter for the industrial market and are optimistic that our efforts in the growth segments of this market will continue to build momentum in the future.

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

Sales increased a very strong 64% from prior year, as vehicle volumes normalized following the significant declines experienced in 2009.

No question that the last eighteen months have been thrilling in what is our smallest end market.

Beyond the widely recovered -- beyond the widely reported recovery in the worldwide automotive market, we are excited by our participation in the beginning ramp ups of new hybrid vehicle platforms.

In addition, our long-term outlook for this market remains very positive, with the general increase of electronics in cars combined with expanding opportunities in Asia and other less developed regions.

The broadband communication market represented 10% of our sales in the quarter.

Sales in that market increased 19% from prior year and strengthened seasonally from the fourth quarter.

We expect this market to further strengthen in the second quarter, as we move into what is typically a more robust buildout period.

And we look forward to new opportunities for growth that are being created by our ongoing development of new cable and Interconnect products for the broadband market, which positions us very well for the future.

The information, technology, and data communications market represented 22% of our sales in the quarter.

Sales were up a very strong 45% from prior year with demand improving across essentially all segments of the information technology market.

Our customers have experienced a significant increase in demand due in part to pent up enterprise IT investments, but more importantly resulting from demand for equipment to support the acceleration of data rich traffic that is being driven by the recent growth of online video and mobile internet devices.

We are very excited about the opportunities that are arising from these important trends.

Demand in this market has increased especially for our high speed and power products that are used in servers, enterprise storage and networking equipment.

We expect further strengthening in the IT market of demand in the second quarter driven by market expansion and our program wins with our new advanced technologies, all of which position us for continued expansion in this market.

The mobile networks market represented 15% of our sales in the quarter.

While sales in this market decreased 3% from prior year, the mobile networks market strengthened sequentially for the second straight quarter, growing 9% from the fourth quarter.

While there was no one-time buildout comparable to the first quarter 2009 China 3G launch, we were pleased to see a sequential improvement in this market, especially related to Next Generation Network upgrades in developed geographies related in part to the expansion and proliferation of new mobile internet devices.

We expect demand in the mobile networks market to strengthen further in the first quarter, as we benefit from our leading position on new base station platforms, as well as our broad portfolio of cell site installation products.

In addition, we're very excited that our expanding geographic presence continues to create new pockets of growth in a very diverse range of emerging markets.

The mobile devices market represented for us 14% of sales in the quarter.

Sales increased 3% from prior year and were down sequentially on expected seasonality.

We anticipate an improvement of demand in the second quarter as device volumes improve and as we capitalize on our strong position on newly released smart mobile devices.

Our comprehensive portfolio of products for mobile devices, as well as our preferred supplier relationships with all major device makers continues to position us strongly for the future.

In summary, with respect to the first quarter, I am tremendously proud of our organization, as we have executed extremely well in what has been a very dynamic demand environment.

Our continued focus throughout all cycles of the economy on reacting quickly to changing customer needs, while ensuring relentless focus on profitability has resulted in the strengthening of our market position and a further expansion of our industry leading margins.

It should be clear to all that the Amphenol recipe does not change with economic cycles.

Our success is a direct result of our distinct competitive advantages, our leading technology, the increasing position with customers in diverse markets, our worldwide presence, a lean and flexible cost structure, as well as an agile, entrepreneurial management team.

As we look forward and based on a continuation of current economic trends as well as constant exchange rates, we now expect in the second quarter of 2010 the following results.

We expect sales in the range of $820 million to $835 million and earnings per share in the range of $0.60 to $0.62.

In this continuing economic recovery I am very confident in the ability of our outstanding organization to capitalize on the many opportunities to further expand both our market position and our profitability.

At this time, operator, we would welcome any questions that there may be.

(Operator Instructions) Our first question comes from Amit Daryanani from RBC Capital Markets.

Your line is open.

Good afternoon, guys, and congratulations on one more good quarter here.

Just a question on your June quarter guide, looks likes sales should be up about 7%, the midpoint.

Could you just maybe highlight some of the segments where you're seeing business potentially being much better than seasonal that is driving that 7% uptick sequentially?

I think -- how are you, Amit?

Good.

We see really in most of our markets a sequential growth.

I think the one market I referenced was automotive.

We don't necessarily see that sequentially growing in the second quarter.

But in our other markets, especially the IT market where we see a strong performance in the second quarter, the mobile devices market which I highlighted.

We also think in that market we have a good opportunity for growth in the second quarter.

But overall we see strong results across the board for Amphenol.

All right.

And then just on the acquisition front, Adam, nice to see we did do one deal last quarter.

I am curious, do you get a sense that given all the tax law changes and the capital gains changes that occur next year, we should see some uptick in deal activity towards the back half of this year, because if you're a privately held Company it probably makes more sense to sell it this year versus next?

I think it depends.

I think if a seller is sort of on the fence as to whether or not he or she would sell and if that seller happens to be in the United States, then maybe on the margin the tax law changes could sort of push him or her over the edge.

I personally don't know that this is going to create a wholesale new dynamic in our sort of pipeline or the speed with which companies around the world are going to sell.

I mean, bear in mind that we have made acquisitions all over the globe, not just in the United States where I think you're referencing these tax law changes.

But certainly if there is someone on the margin who is making a decision and says, "well, if I sell this year rather than next I save some tax dollars." Maybe that could push him or her over the edge.

Our next question comes from Matt Sheerin from Thomas Weisel.

Your line is open.

Thanks.

Hello, Adam and Diana.

Hi, Matt.

So my first question is just regarding material prices.

I know you talked about a little bit of margin pressure on the cable business because of material.

I am assuming that increasing copper prices plays a role there.

Could you talk just about the any potential headwind you see with copper, not just in the cable business but also in the core connector business?

Sure.

I think that, as you know, the cable business in particular has a very large percentage of the costs that really is raw commodity based and copper certainly is one of the three top materials, but aluminum and actually plastics are used even a little bit more in the product.

And we did and have seen some pressure on margins as a result of that.

I think that we're still achieving pretty good margins in that business and so we are able to deal with a portion of those cost pressures.

But in the Interconnect side of the business, as you know, it is a very diverse product footprint and we use many materials.

We actually don't procure them or even really talk about them on a consolidated business because it really isn't the way that we -- that we run or manage that part of the business.

We view the material pressures as just another element that needs to be managed in the context of overall profitability goals.

And I think as you see in the first quarter the management team did just an excellent job to create operating leverage in the business even considering the fact that clearly there was some pressure from commodities or some pressure from a wage perspective in China.

These things, there is always some sort of pressure on some part of cost in any given timeframe and I think that, as Adam mentioned in his comments, the management team around the world is just really committed to controlling all of the rest of the costs and I think taking a hard look also from a pricing perspective.

And I think the aggregate of all of that is the good conversion margin that you have seen.

So I think as we look into Q2 we don't have a concern relative to margins that would -- where commodity prices would cause us to lower our internal expectations as far as creating good operating leverage next quarter.

Okay.

That's helpful.

Is the pricing environment, given that demand is improving, is the pricing environment a little bit better for you?

So if you do see increased raw materials prices that you could pass those along?

I think that we are very sensitive and proactive relative to pricing, Matt.

And I think certainly pricing is not a science, it is more of an art.

And so it is not that the second a raw material price goes up you can just walk in with the price increase.

That being said, our teams are very focused on this and we have seen from some competitors around the world not necessarily always the best performance.

And so, when you have that coupled with the demands that our customers have, you certainly have a more hospitable pricing environment than, for example, we would have had a year ago.

So I think that there is certainly a focus on pricing, as Diana mentioned, and we will continue to drive that.

Relative to pricing in cable, we have also been very sensitive there and I think we mentioned a quarter ago that competition has in certain cases being leading prices down in that cable segment.

We are again being very disciplined in that market while preserving our position.

And I think the fact that we're able to achieve the margins that we did in the cable segment in particular in the quarter is very impressive when you factor in the raw materials in that pricing environment.

Our next question comes from Wamsi Mohan from Bank of America Merrill Lynch.

Your line is open.

Thanks for taking my question.

Your guidance puts you within striking distance of your peak quarterly revenues from '08.

So should we expect the pace of investments or CapEx to increase over the next few quarters as you build the infrastructure to support this higher level of revenues, presumably higher than the 3% to 3.5% CapEx levels, given that revenues are ramping faster than perhaps expected?

No.

I mean, I think the 3% to 3.5% investment level is an appropriate one to think about even though, as you say, we are growing a little bit faster than maybe we expected when we gave that CapEx expectation at the end of Q4.

The business is not a particularly capital intensive one and we have been able to run the business over a couple decades with this sort of range of CapEx and feel very confident that this year will be no exception to that.

Okay.

Thanks, Diana.

And Adam, you had mentioned last quarter you expected automotive revenues to be down in 1Q a quarter ago, but you cited it as an area of strength.

I guess that's the way it played out, but can you talk about how -- what the sources of strength were relative to your expectations?

And what sort of, I guess, your ultimate (inaudible) in your guidance that is going to be down next quarter?

Any color by geography would be pretty helpful there.

Thank you.

I think what I cited as an area of strength is relative to our year-over-year performance where automotive grew 64% on a year-over-year basis in the quarter.

Sequentially, it was flat to a little bit down in US dollar basis and so I think it did not really do anything different than maybe we had expected it to do.

From a geographical standpoint our automotive business continues to be roughly two-thirds in Europe and one third in North America, but having also now a growing component in Asia, and as I mentioned long-term we believe that that kind of Asian presence that we have can be a tremendous benefit to us in the long-term.

And when you couple that with the new and soon to come ramp ups of hybrid vehicles where we have a stronger position on certain of these models coming in the future, we feel very optimistic about where that market can evolve to.

Our next question is from Amitabh Passi from UBS.

Your line is open.

Hi, thank you.

Can you hear me?

Perfect.

Great.

Adam, first question for you.

Just curious to get your perspective book-to-bill 1.08 in the quarter.

At least in my model I think highest level you have seen going back to 2003.

Just from your perspective are you comfortable with book-to-bill remaining elevated or would you like to gradually see it revert to parity?

Any just general thoughts around your perspective of a fairly high book-to-bill, as least higher than we have ever seen in the last five, six years?

Look, I am never going to look at a gift book-to-bill in the mouth there.

We would love to have positive book-to-bills going forward and I think we certainly always are driving our team to have that.

In fact, we haven't had a book-to-bill of this level since essentially I think the beginning of 2000.

So that has been -- that was a very strong book-to-bill.

There are -- we have seen particularly strong bookings in Mil/Aero and industrial.

Some of those is perhaps some catch up from last year when there were reductions in orders in that segment.

But I think overall we have had very, very strong orders in the quarter, which really supports the guidance that we have given for the second quarter, which is better than normal seasonality guidance.

I mean, better than we have had in years past.

So I think we were very happy to have such a book-to-bill and would certainly hope that we could do that again.

Our next question comes from Shawn Harrison from Longbow Research.

Your line is open.

Hi, good afternoon.

First question just has to deal with your comment in the release, Adam, in that you're still -- the recovery still remains a little less than certain.

Maybe if you could comment on what would -- what needs to continue to improve for you to be even more bullish on what you're seeing out there given the positive book-to-bill you're reporting for the March quarter?

Well, I think we say that certainly in a context.

We give very strong guidance for the June quarter with strong sequential growth in essentially most of our segments.

And when we talk about it being less than certain, we are not macroeconomists here and there certainly are things that you see and things that you can read which would tell you what is the shape and the degree of a recovery in the future.

And I think we're not going to put ourselves in a position to say, well, we're going to guess what that degree is going to be in the out quarters.

But certainly the bookings that we have here in the first quarter, what we hear from our customers, is all very, very positive coming into the second quarter and that gives us a good basis on which to have the guidance that we have.

And the orders are clearly the best indication of anything.

Nothing better than an order to tell you what a forecast can be.

Got you.

I guess to that are you seeing better order visibility from your customers in terms of being able to see maybe more than one quarter out now, something of that nature?

I wouldn't say necessarily.

We are, I mean, there are certain instances where customers are ramping up very quickly and they want to get coverage for these quick ramp ups, but I would say in fact we have seen also a lot of very short order coverages.

Customers coming to us on a very expedited fashion asking for Amphenol's help to assist them with a ramp up, whether that be to help a wireless infrastructure or to get IT equipment out, whatever that is we have seen actually quite an increase in these short lead time orders where I can tell you our Company has performed just extremely well.

And this is a very, very critical time period, where if you can as a corporation satisfy customers when they come and ask you for what normally would be considered an unreasonable request, ship us the parts in three weeks.

If you can do that, it can really cement that relationship and allow you to grow your position with those customers in the long-term.

Our organization is extremely focused regardless of the lead time that is given to us by the customer to try to go give that -- get the product to the customer in the time allotted and that means really exercising our flexibility as an organization.

I think we're able to do this.

If you look back over 2009 and the adjustments that we made coming into the downturn, we did not go through big restructuring.

We didn't go decommission factories.

We flexed each of our operations.

It scaled to the size of the business that those operations saw in 2009.

Well, sort of like an accordion, it allows you to flex back.

Rather than having to go recommission tools or reopen factories or do all of these things that can happen to companies, our organization has managed that downturn on an individual basis as an operating unit basis, which there upon allows us now to exercise the same flexibility on the upside.

And so I think regardless of the lead times that we get from our customers, we're very pleased with the performance that we're providing to those customers and we'll continue to do so in the second quarter.

Our next question comes from Brian White from Brian White from Ticonderoga.

Your line is open.

(Technical difficulty) in the March quarter.

Brian, we have a little bit of a hard time to hear you.

You may be on a cell phone.

I will try one more time.

Mobile infrastructure market, where would you see did you see strength in the March quarter?

If I just repeat the question, did you say in the mobile infrastructure market which geography did we see strength in?

Yes.

Okay, yes.

Certainly in the mobile infrastructure market on a sequential basis where we have seen strength is more in the developing geographies.

Where I think as I referenced in my prepared remarks, we have seen a real sort of catch up in demand as the operators seek to create or catch up on capacity for mobile internet devices.

And so we have seen more strength there.

Now obviously, a good portion of our mobile infrastructure business goes to OEMs and we don't always know exactly where those OEMs are shipping, the end bay stations.

But certainly what we see from our [sell side] installation business, antennas and interconnect products, is that in those developing geographies we see some more momentum there as opposed to what we saw a year ago in China with the buildout there of 3G network.

Our next question comes from Steven Fox from CLSA.

Your line is open.

Good afternoon.

You've had some interesting questions around what this year could hold.

It is kind of interesting how strong the quarter ended.

I guess, Adam, if you could just sort of step back and talk about which markets feel like they're more in a cycle right now and where we should be paying most attention to maybe short-term trends over heating relative to demand, what markets you feel good about for the rest of the year?

I think just relative to the second quarter and, Steve, we're not giving guidance for the full year, but relative to the second quarter we feel very good about all the markets with the exception that we don't foresee that the automotive market would grow sequentially in that quarter.

I think the question on over heating is certainly one of is there kind of a bubble of demand?

And if you just look at, for example, the IT market which grew 45% on a year-over-year basis, certainly there is some element of pent up demand and if it were nothing else it may cause one to think that that's kind of a bubble.

However, what we have certainly seen is the data traffic that has expanded over the last twelve months has made, has added on to the investment plans of enterprises and carriers from an IT standpoint making us more confident that this is not actually a bubble that we see in the internet, that there is really an increase in investment requirements for companies who are managing their data centers, for carriers who are carrying the traffic.

All of it really driven by this explosion of more data rich content, whether that be through mobile devices or otherwise.

And so the IT market in particular is one where we certainly have seen great strength and we anticipate more strength here in the second quarter.

And there seemed to be real structural reasons why that strength should continue and not necessarily be just a bubble.

Great.

That's very helpful.

Thank you.

Thank you very much.

Our next question comes from Jim Suva from Citi.

Your line is open.

Thank you and congratulations, everyone.

Thank you, Jim.

I have a quick clarification question for Diana and then a followed up more question for Adam.

So maybe Adam can prepare his answer as Diana has the quick clarification question.

The question for Adam, I just want to make sure does your guidance include kind of a -- and I know you don't want to talk about customer specifically because that would be inappropriate, but there has been a lot of talk about China slowing its 3G buildout, specifically with China Telecom cutting its wireless by about 50% and China Unicom by about 35%.

So maybe not talking about customer specifics, but more on a geographic region.

Does your guidance include kind of the slowing or cooling off of the China there?

And then secondarily, as a follow-up to that, can you help investors feel more comfortable about not signs of double ordering, especially since you're at book-to-bill the highest point in ten years.

And the clarification question for Diana is, Diana, for your tax rate guidance you said you expect the same rate.

I just wanted to make sure, was that the same rate meaning like a 27.5 or the same rate closer to 26 that you had given the adjustment in your taxes?

No, 27.5 assuming that there would be no adjustments in the second quarter.

Great.

Thank you.

Diana gets off easy but I will, Jim, address for you my two questions here.

I think your first question was relative to does our guidance envision kind of what has been already announced about China 3G and I think the simple answer to that is yes, it does.

We certainly do consider all the information that is available to us at the time we give such guidance.

And we are very close to what's happening in China with all of our operations on the ground there and we are very mindful of what's happening.

I think these CapEx numbers that come out in China have to be read a little bit carefully because CapEx as you know, Jim, when it starts for a network buildout there is a higher proportion of that capital that goes into tower construction, land preparation and what I would call sort of non-electronics.

And then in the follow-on of a network sort of an optimization stage the electronics component of CapEx becomes a little bit bigger.

So I think I would be careful to necessarily read those sort of 50%, 35% numbers that you referred to as kind of dollar for dollar references to the electronics industry.

But as I mentioned on, I think, a prior question, we have seen strength in the wireless infrastructure market, especially in developed economies.

Wherever there are new smart mobile devices that are creating new burdens upon the networks, there seems to follow quite quickly capital spending that drives equipment spending to our customers.

And because of our unique position participating both with OEMs as well as directly with the carriers in the mobile infrastructure market, we have a very good sense of where that is coming and one area that I emphasized in my early remarks is these new geographies.

And these new geographies, China is no longer what I would call necessarily a new geography.

Places like Africa, the Middle East, where we see real expansions in wireless.

And not to mention India, which has been slower market this year, but where you're probably familiar over the last two weeks they have been having what have seemed to be quite successful auctions of their 3G spectrum.

And that gives optimism that at some point you will have an India also with the numerous operators that are there, nearly twice the operators as you have in China, a 3G buildout.

Now relative to your question on double ordering, I think we are sensitive to that, at the same time we don't have a perfect insight into our customer's warehouses.

Where we do have insight is with our distributors and distribution, which represents about 15% of our total sales.

We have not seen any material inventory builds in the distribution channel, which you may expect to see in such a time.

And that has told us and what we have heard from our distributors is that they really are buying products to satisfy end demand.

And when we talk to customers, when I personally go out to customers, what we have heard consistently is that the customers are buying our products to satisfy real end demand that is coming from the enterprises to consumers and the carriers of the world.

Our next question comes from Lou Miscioscia from Collins Stewart.

Your line is open.

Okay, thank you.

That hit on my question, but let me just go one step further.

When you look at above normal seasonality you have now and I know that you're not giving guidance for the rest of the year.

So maybe just give us a thought as to your view collectively for the industries that you serve as to how long do you think that they will be looking for above type of seasonality as we go through the other year?

Do you think you will start to normalize post in third quarter or do you think it will be strong all through the fourth quarter?

Yes, I think -- again, we're not giving guidance, as you correctly stated here.

But I think we have seen real strength here going into the second quarter, which is above seasonality.

Typically in the third quarter we would have a normal seasonality in our aerospace and industrial business, especially in Europe and North America.

And I don't know whether we would see that this year.

I think it is a little too early to tell, but there are signs, maybe, that you wouldn't see that.

And so the normal seasonality that we would normally have in the third quarter, I think it is too early to tell, but the signs so far would tell you that there is sequential strength in those markets that would typically drive that seasonality.

So maybe one could conclude that you wouldn't necessarily have that.

I am sorry if I missed it before, but could you also comment on demand from Europe?

What are you seeing over there?

Obviously that's been behind the US in general.

Yes, actually Europe performed very well for us in the quarter on a sequential basis and that certainly has helped.

Our European business does have a stronger element of automotive and industrial to it.

And our industrial business growing 17% sequentially in the quarter certainly Europe is a component of that.

And so we saw in Europe strong single-digit growth on a sequential basis, as well as year-over-year growth in Europe and so we're very encouraged by that because certainly Europe and North America in 2009 had more challenging years.

(Operator Instructions) Our next question comes from William Stein from Credit Suisse.

Your line is open.

Thanks.

First regarding Europe again, there is currently some travel restrictions there, as I am sure you know about them.

Wondering if that has any impact on your business.

Do you think it is going to affect the current quarter?

I think we certainly have been very sensitive to this and I was on the phone just this morning with someone who finally caught a flight home after spending a very pleasant weekend in Paris.

But what I can tell you is so far we have seen nothing of any significance from our customers.

What we do understand is that we have new logistics tracks, which are being explored.

Companies who are shipping through southern and southeastern Europe, places all the way as far as Istanbul.

And so maybe some of the trucks have to travel a little bit farther than they used to from Frankfurt and Paris.

But we haven't seen any significant either warning signs or any real disruptions to production from our customers.

We certainly have in place and are putting in place contingency plans as this cloud of ash sort of hangs over Europe for an extended time period.

But at this time we don't see any real meaningful impact on any of our customers and that's what we're most sensitive to.

From our own perspective, we have good contingency plans if need be.

Great.

And then another question if I can.

In the press release you noted you're expanding the Company's growth opportunities through accelerated efforts to penetrate new markets, customers and applications.

And in the past we have seen some of this and I'll cite moving from connectors into things like antennas in OEM products.

Then also the Jaybeam acquisition where you're selling what I think of really as capital equipment to the carriers.

So I am wondering if we should read this as a thought that over time we should see Amphenol expand into yet additional product categories that maybe are somewhat far afield from connectors?

I think I wouldn't read this to be that we're suddenly changing our product focus as an interconnect company.

Certainly there is a big portion of our sales which are what we call value add and that has been a strategy that we've had for more than a decade to expand our total solution offering to customers.

In terms of not just selling a discreet Interconnect product, but rather selling an interconnect solution.

That interconnect solution ranges from anything from a cable assembly on to more sophisticated products and into antennas, as you mentioned, and Jaybeam as an example selling bay station antennas, which is just another extension really of an antenna being a wireless corrector from our prospective.

And so I would not certainly say that we have an intention to totally change our business model and go after different things here.

But our quest to satisfy the larger bill of materials and get a broader presence with our customers on their bill of materials for interconnect, that is an unending quest that we have.

It is a core strategy across all of our organization.

And when we talk about new products and new markets and new technologies, there is a tremendous opportunities still remaining within interconnect.

As we look across all of the new applications that are there, the new smart devices, smart mobile devices, alternative energy, the new military applications that are there.

We see just tremendous opportunity in those markets that we occupy.

And bear in mind, even with the strong performance that we have, we do not have 100% of the interconnect market, far from it.

And so we see just tremendous opportunities that all come along with this proliferation of electronics.

And the proliferation of electronics is something that impacts all of the markets that we have discussed here.

You see this just across the board, whether that be in a jet plane, whether that be in a car, whether that be in a data center, whether that be in your hand in a mobile device.

All of these have new electronic functionalities which are driving new applications and demands for new technologies from us, new interconnect technologies.

And so there is plenty of room for us to continue to drive that diversification strategy without having to kind of stretch and do something that is neither attractive to us nor known by us at this stage.

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

Your line is open.

Thanks.

Had a couple quick follow-up, guys.

Sales actually are starting to come back into the model.

Could you just talk about how do you expect the headcount increase to happen over the next few quarters.

I think at the bottom of the cycle we had about 25,000, 26,000 employees.

You've done a 17% headcount reduction.

Where are we today in terms of total employees and how does that ramp up over the next few quarters?

We don't, Amit, really model headcount on a consolidated basis.

I think that it just depends to some extent of how sales grow.

Certain parts of the business are more people intensive than others.

I think at the end of the quarter we had about 34,000 people at the end of March, which would be reflective of really of sort of that March demand level and not necessarily the quarter demand level.

The headcount will be adjusted on a unit by unit basis as appropriate to meet the needs of each particular piece of the business as we grow here during the remainder of 2010.

I think we do overall a pretty good job of keeping costs in line and that includes costs related to people and so I think that each of our units will make the appropriate adjustments as we scale back up during 2010.

I couldn't tell you exactly what the headcount would be at the end of each quarter.

I think one thing that's important to emphasize on this headcount is we did of course grow headcount in the quarter with especially with the strong March leading into the strong second quarter outlook, but all of that growth came in low cost areas and in fact our headcount in high cost areas was reduced.

And today we have nearly 80% of our headcount in low cost areas.

So that is certainly something that we're very proud of.

And that goes back to, as Diana said, a lot of prudent on the part of our management team in terms of only adding the headcount to where it is necessary to increase production.

Got it.

And then just a quick question for you guys.

Would love to understand what would be the trigger point for Amphenol that you start going back and starting to provide annual guidance much as you guys have done historically.

This is a great question, Amit.

I am not sure that we could tell you exactly what the trigger point would be.

I think that we're certainly extremely pleased with this first quarter.

We feel like, I think, certainly good about the performance.

We feel good about the booking trends.

We feel good about the guidance we have given for Q2.

And I think as time goes on and things become more clear, we may at that point give some consideration to giving guidance that goes out beyond one quarter, but it just seems to us at this point that this makes the most sense and so this is the path that we will continue to take here in the short-term.

Our next question --

Go ahead.

If there is one last question we would take that now.

Our last question comes from Amitabh Passi from UBS.

Your line is open.

Hi, thank you.

I just had a quick follow-up for Diana also.

Diana, just looking at your Interconnect segment, it looks like in the March quarter revenues were back to the level seen in early 2008, say March '08.

Margins are still about 100 basis points lower.

Just wondering, what do you think it takes to sort of get margins back to the levels you were seeing in 2008 at comparable revenue levels?

I think that certainly that's a very valid question that you asked.

But I would just start out by saying that I think we feel really great about being able to achieve the margins that we have achieved overall, but also in the Interconnect segment specifically in the first quarter.

Let's just think about what the business has been through in the last twelve months here.

We have dealt with just a very significant buildup in volume through 2008 and then a significant reduction in volume in 2009.

And it is clear as we manage through that and I think that the management team did a fantastic job to achieve in all of those quarters excellent profitability levels given the challenges that they had to deal with.

I think that we certainly did make the decision not to cut out all of the resources that we had put in place in mid-2008 when we were really on a different trajectory from a sales perspective.

In the interconnect business we do carry some expenses related to new product development and front end type costs that we felt made sense to keep in place during the recession in 2009.

I think we have achieved excellent conversion margins in the first quarter and the management team worked very hard to achieve that.

I think we will see good conversion margins as we continue to grow.

I think the operating leverage in the business will continue to come through and I think the differences that you mention will become much smaller as we grow from a top-line perspective and give the same attention to detail on costs that will allow us to, I think, get back to those types of profitability levels in the future.

Very good.

Well, thank you all very much for joining our call.

And we wish all of you a pleasant completion to the day and look forward to talking to you again in three months.

Bye-bye.

Thank you.

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