安費諾 (APH) 2012 Q2 法說會逐字稿

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

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

(Operator Instructions)

Until then all lines will remain in a listen-only mode.

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, and good afternoon.

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

I'm here together with 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 Adam will then give an overview of the business and current trends.

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

The Company closed Q2 achieving new records in sales and earnings per share.

Sales were $1.061 billion and EPS was $0.86, both beating the high end of the Company's guidance.

Sales were up 4% in US dollars and 6% in local currencies compared to Q2 of 2011.

From an organic standpoint, excluding both acquisitions and currency impacts, sales in Q2 2012 were up 2% versus last year.

From a sequential perspective, sales were up 8% in US dollars and a strong 7% organically from Q1 of 2012.

Breaking down sales into our two major components, our Cable business which comprised 7% of our sales was up 2% from last year and up 3% from last quarter.

The Interconnect business which comprised 93% of our sales was up 4% from last year and 9% sequentially.

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

Operating income for the quarter was $206 million compared to a prior year income number of $215 million as reported and $197 million excluding one-time items.

Operating income in 2011 included income of approximately $18 million relating to an adjustment to reduce a previously recorded contingent payment obligation for 2010 US-based acquisitions.

Operating margin was 19.4% in Q2, which is up from 18.9% in Q1, a strong sequential conversion margin of approximately 26% from Q1.

The Q2 ROS level of 19.4% is equal to the Q2 2011 ROS excluding the impact of one-time items.

Operating income in both years is net of stock option expense of $8 million in the 2012 quarter and $7 million in the 2011 quarter, about 0.7% of sales for both time periods.

From a segment perspective, in the Cable business, margins were 13.8% up from 12.8% last year.

The margin improvement relates primarily to lower relative material costs.

From a sequential standpoint, Cable margins declined from 14.5% in Q1 primarily as a result of a less favorable pricing environment and product mix.

In the Interconnect business margins were 21.6%, equal to last year and up from 21% last quarter.

The Interconnect operating margin improvement from last quarter primarily reflects the positive impacts of higher volume and cost reduction actions.

We are very pleased with the Company's operating margin achievement in the quarter.

2012 continues to be a more balanced operating environment from a cost inflation and demand perspective.

And in that environment, the Management team has achieved strong sequential improvement in operating margins both in Q1 and Q2, and remains fully committed to further margin expansion as business volumes grow.

We continue to believe that the Company's entrepreneurial operating structure and culture of cost control allows us to react in a fast and flexible manner.

Thereby constantly adjusting the Business to maximize profitability in what clearly continues to be a very dynamic environment.

Interest expense for the quarter was $15.1 million, compared to $11.4 million last year, reflecting higher average debt levels from the Company's stock buyback program and the higher interest expense associated with the Company's January senior note offering.

Other income was $2.6 million, up from $2.1 million, primarily as a result of higher interest income and higher levels of cash and short-term cash investments.

Our effective tax rate in the quarter was 26.8% compared to approximately the same rate in the second quarter of last year excluding the impact of one-time items.

For the full year 2011, excluding the one-time items, the Company's effective tax rate was also 26.8% and we currently expect a similar rate in 2012.

Net income was approximately 13% of sales in Q2, and EPS grew 9% over last year excluding one-time items, a very strong performance.

Orders in the quarter were $1.052 billion resulting in a book-to-bill ratio of approximately 0.99 to 1. In addition, in the second quarter the Company completed the acquisition of Deutgen Group a German manufacturer of high technology precision injection molded components primarily for automotive applications with annual sales of about $25 million.

The Company continues to be an excellent generator of cash.

Cash flow from operations in the quarter was $127 million.

For the six months, operating cash flow was $292 million or 109% of net income.

The Company continues to target cash flow from operations in excess of net income.

From a working capital standpoint inventory was $675 million at the end of June, up 3% over the March quarter.

Inventory days declined 5 days to 83 days and are now comparable with prior year levels and back to the low end of the Company's historical range.

We're very pleased with the reduction in inventory days in the quarter.

Accounts Receivable was $840 million and day sales outstanding increased 1 day to 71 days at the end of the quarter.

Accounts Payable was $432 million and from the days perspective was down 1 day at 53 days from March.

Overall we're very pleased with the Company's working capital achievement in the quarter.

The cash flow from operations of $127 million, along with borrowings under the Company's revolving credit and receivables facilities of $149 million and proceeds in related tax benefits from option exercises of $18 million were used primarily for Capital Expenditures of $32 million.

The purchase of 2.1 million shares of the Company's stock for $119 million, payments of $82 million relating to acquisitions, including the acquisitions of Nelson Dunn and Deutgen, dividend payments of $17 million and an increase in cash and cash investments of $37 million in the quarter.

The Company has approximately 3 million shares remaining under its 20 million share buyback program that expires in January 2014.

At the end of the quarter cash and short-term investments were $780 million, the majority of which is held outside of the US.

Total debt for the Company was $1.5 billion, bringing net debt to approximately $764 million at the end of June.

At quarter end borrowings and availability under the Company's revolving credit facility were $348 million and $652 million respectively and our leverage and interest coverage ratios remain very strong at 1.6 times and 19 times respectively.

EBITDA in the quarter was approximately $249 million.

From a financial perspective this was an excellent quarter.

Adam will now provide an overview of the Business and current trends.

Well thank you very much, Diana, and I'd like to add my welcome to all of you here today on the phone.

I'm going to spend a few moments to highlight some of our second quarter achievements that Diana just reviewed.

Then I'll discuss our trends and progress in our served markets and then finally I'll make some comments on our outlook for the third quarter and the full year, leaving time for some questions at the end.

We're very excited to report record orders, sales and earnings in the second quarter, exceeding high end of our guidance despite ongoing uncertainties in the global marketplace.

Our revenues in the quarter increased 4% from prior year and 8% sequentially achieving a new sales record for the Company of $1.061 billion.

And as Diana mentioned, orders also reached a new record of a $1.052 billion representing a book-to-bill just under one-to-one.

We find it especially rewarding that our intense focus on managing all elements of profitability have lead to further expansion of our operating margins to 19.4% return on sales.

I'm very proud of the agile entrepreneurial Amphenol organization.

All of whom are capitalizing on the opportunities that are being created by the ongoing electronics revolution, while at the same time demonstrating the strength and discipline necessary to drive strong operating performance in any economic environment.

In addition, we're very pleased that our successful acquisition program continued in the second quarter.

As Diana mentioned in June, we completed the acquisition of the Deutgen Group, a German-based manufacturer of precision molded components for the automotive market.

This acquisition, with annual sales of approximately $25 million, builds upon our expanded offering of products to the automotive market, and in particular it enhances our capabilities in advanced molding technologies for this important sector.

The acquisition is consistent with our ongoing and long term strategy of acquiring complementary companies with strong management, leading technology, and in particular, an excellent market presence.

As we welcome this excellent new team to Amphenol, we remain very confident that our acquisition program will continue to create significant value for Amphenol in the future.

Turning to the trends in our progress in our served markets, I think once again our results in the second quarter confirm that Amphenol's end market diversification is a tremendous asset for the Company, especially given the widely reported uncertainties in many of the world's economies.

Turning first to the military market, that market represented 14% of our sales in the quarter, and sales declined by 9% from prior year on continued conservatism by defense customers, driven in particular by the ongoing budget uncertainties in certain western countries.

On a sequential basis, sales were up slightly, as our new technology solutions offset the impact of an overall moderation in spending.

In the third quarter we expect demand in the military market to show some typical seasonal declines.

Nevertheless, while there remains uncertainty in many of the defense budgets in developed economies, we continue to make progress in creating new, high technology solutions for advanced military electronics, and we're especially encouraged to be seeing continued indications of investments in these new electronics by the military.

The commercial aerospace market represented 5% of our sales in the quarter, and sales continued to increase strongly from prior year growing by 14%.

Sales were slightly moderated on a sequential basis due to certain inventory adjustments by customers in the commercial air supply chain.

There is a significant technology transition that is occurring in the commercial air markets.

New airplanes are adopting innovative electronic features and are incorporating, in particular, new higher technology interconnect solutions to enhance fuel efficiency and improve passenger experience.

This all creates a great opportunity for Amphenol.

Looking forward, while we expect normal seasonal moderation in the third quarter, we have a very positive long term outlook for the commercial air market in the second half of 2012 and beyond.

The industrial market represented 15% of our sales in the quarter, and sales increased a very strong 17% from prior year and 20% sequentially, as we benefited from the Nelson Dunn acquisition, as well as from a further strengthening of organic demand in the many diversified segments of our Industrial business.

Our ongoing focus on developing new technologies, combined with our acquisition program, has resulted in the industrial market reaching a new high of 15% of sales in the quarter.

We continue to make excellent progress broadening our interconnect product offering and increasing our penetration of the many exciting growth segments of this market, including in the second quarter alternative energy, oil and gas, and heavy equipment.

Although we expect sales in the industrial market to moderate seasonally in the third quarter, we look forward to continued strong momentum in this important sector.

The automotive market represented 11% of our sales in the quarter and sales increased a very strong 35% from prior year and were down slightly on a sequential basis, as we expected.

We are benefiting from a continued increase in vehicle production volumes and new electronics applications, together with the important contributions from our recent automotive acquisitions.

We have been very successful in our drive to broaden our automotive product offering both through our internal technology developments and our continued focus on acquiring complementary companies in this market including the acquisition in this quarter of Deutgen.

We expect demand in the automotive market to remain stable in the third quarter and we look forward to further long term progress as we take more advantage of the ongoing revolution in automotive electronics.

The Mobile Devices market represented 17% of our sales in the quarter.

Sales decreased 4% from prior year as increased sales of products into new, mobile computing platforms was more than offset by reductions in sales of mobile phone-related products due to dynamics in that segment.

However, we're very pleased that sales in the mobile device market increased sequentially by a strong 13% as we realized benefits of our strong position with advanced technologies in many new complex devises.

We expect in the third quarter to see a significant increase in demand in this market, driven by releases of new products by a diverse array of mobile device makers who are incorporating our high technology solutions into their new devises.

We're very excited by our strong position in new, smart, Mobile Devices.

In particular, in mobile computing products including tablets and laptops and the potential that these create in the second half of 2012 and beyond.

The mobile networks market represented 10% of our sales in the quarter, while sales decreased 12% from prior year on continued conservatism in that segment, we were pleased to see a sequential increase of 11% from first quarter.

We're very encouraged to have achieved two consecutive quarters of sequential growth in what has been a very challenging wireless equipment market, a clear indication of our strong technology position in next generation base stations.

Although we expect demand to moderate somewhat on a seasonal basis in the third quarter, we look forward to further long term strength, driven by our broad design in positions on new equipment platforms, as well as by our strong presence with wireless operators around the world.

The information technology and data communications market represented 21% of our sales in the quarter.

Sales in this market increased a strong 12% from prior year and 13% sequentially, with strength driven in particular by products used in servers and networking equipment.

We benefited in the second quarter from several releases of next generation data center equipment incorporating a broad array of our leading high speed and power interconnect technologies.

As our customers continue to strive for new levels of equipment performance, in order to handle the dramatic expansion of data traffic that they are seeing, our pipeline of new design opportunities with our next generation products continues to strengthen.

We do expect in the third quarter to see a slight reduction in sales as some customers in this market have moderated their short-term outlooks based on an increased level of uncertainty in the marketplace.

Nevertheless, we look forward to further long term gains as our high technology solutions are increasingly adopted in customers' new systems.

Finally the broadband market represented 7% of our sales in the quarter.

Sales decreased slightly from prior year and were essentially flat on a sequential basis, in what is a stable demand but somewhat less favorable pricing environment among cable operators.

Nevertheless we continued to broaden our technology offering with new cable and interconnect products at the same time as we are strengthening our position in international markets.

We expect demand in the broadband market to improve slightly in the third quarter and we look forward to realizing further benefits from our diversification efforts.

In summary, with respect to the second quarter, I'm extremely proud of the Amphenol organization as we continue to execute well in what is very clearly a challenging and dynamic market environment.

And in particular, we're very pleased with the Company's new records in sales and earnings, as well as the expansion of our already industry leading margins.

Amphenol's superior performance is a direct reflection of our distinct competitive advantages.

The Company's leading technology, our growing position with customers and the many diverse markets that we serve.

Our presence around the globe, a lean and flexible cost structure, and, most importantly, an agile and entrepreneurial Management team that thrives in every economic cycle.

Now, turning to our outlook.

Based on normal seasonal patterns, as well as current exchange rates which incorporates the relatively weaker Euro, we now expect the following results.

For the third quarter we expect sales in the range of $1.080 billion to $1.100 billion and earnings per share in the range of $0.87 to $0.90.

For the full year 2012, we expect sales in the range of $4.210 billion to $4.250 billion and EPS in the range of $3.38 to $3.44.

For the full year, this represents sales and EPS growth of 7% to 8% and 11% to 13% respectively.

This increase in full year guidance incorporates our strong second quarter results, as well as a positive outlook for the second half which more than offsets the significant translation impact from the weaker Euro.

Given the many uncertainties in the global economy we're very encouraged by the strong outlook in sales and earnings which reflects in particular the value of the diversification of Amphenol.

The ongoing revolution in electronics continues to create many opportunities for our Company and I am confident in the ability of the outstanding Amphenol Management team to continue to capitalize on these opportunities to grow our market position and to expand our profitability, and thereby to drive continued superior performance for Amphenol.

Thank you very much and operator at this time we would be very happy to take any questions that there may be.

Thank you.

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

(Operator Instructions)

Jim Suva, Citigroup.

Thank you and congratulations there to you and your team at Amphenol for just absolutely great results, especially considering the macro environment.

Thank you.

Adam and Diana, can you talk a little bit about on the M&A side it looks like your last few acquisitions have been focused on the automotive industry which traditionally has not been as big of a focus for the Company, and I think right now if my math is correct it's around 11% at Amphenol.

The outlook for this, do you see this growing to be a more material part of Amphenol going forward, like could it eventually be a quarter of the Company or something like that?

And then in the same vein of Amphenol and automotive, one has to be conscience of many of the other automotive connector and supplier companies don't generate the profitability that Amphenol does yet you continue to post an industry high profitability.

Can you help us understand, is the profitability of automotive below your sector average, at your Company average, and why would you be out reaching all those other ones, competitors?

Thank you.

Well thank you, Jim.

That is a lot of questions in one and I'll see if I can remember them.

Well, I think your question started off to say that we have made some automotive acquisitions and yes it's true.

We have made several.

Obviously the acquisition of Nelson Dunn was very different.

That was in the industrial oil and gas market but we're very pleased with the acquisitions that we've made.

And if we go back and look at the evolution of our automotive business, it has been always our strategy and it is today to participate in those areas of the automotive market where we can create the value with our customers that thereby allows us to realize the returns that we expect for Amphenol.

That strategy has not changed by one iota through these acquisitions.

What has changed though in that time period is there has been a real revolution of electronics in the car driving new applications, new functionalities, whereby the Amphenol technology offering allows us to create value for those customers.

And thereby to realize the returns that we expect, and the returns in our automotive business, we don't talk about what they are by each market but certainly, they're very strong and we're very proud of those returns.

If we look in a car today, a car in my mind has essentially become a host for new electronic features and whatever those features may be, whether it's onboard electronics in the cockpit, whether that is new engine control, whether that is new transmission controls, whether that is hybrid electronics drives that go into cars.

What is common with all these new applications that we're participating in and what is common with the acquisitions that we have made to that end is that these are new functionalities where the interconnect products have a more challenging technology to them.

And thereby there is more value to be created with the customer, so this is a very consistent strategy.

I think we have made kind of a change in terms of having those more acquisitions but that is really going along with the fact we have seen the real explosion of new electronic opportunities in the car and we have made also great gains organically in that market at the same time.

So I think this is not a change, Jim.

We're very excited about it.

Could it be 25% of the Company I think you said, and look, we're very proud of diversification of Amphenol.

We don't have any markets today that represents 25% of our sales and I think we look to continue to be a very diverse Company, could automotive be slightly more than it is today or slightly less?

Absolutely.

We don't set a sort of a goal for that but what it will be is it will always be focused on those products where we can create value and thereby can realize the returns that we want.

Great, thank you and congratulations to you and your team there at Amphenol.

Thanks so much, Jim.

Appreciate it.

Sherry Scribner, Deutsche Bank.

Hi, thank you.

I just wanted to dig into your guidance a little bit.

At the mid point you guided revenue up about 2.7% and then when we look at the segment commentary, I think from what I was writing down, it looks like you're only expecting the mobile devices segment and the broadband segments to be up with everything else moderating I think was what you used.

I just want to make sure I understand that and also in terms of the auto segment, you commented that that would be stable but I would expect that to be up with the acquisition so maybe some detail on the segment guidance as we move into September.

Sure.

I think you're referring specifically to the guidance for Q3, is that correct?

Yes, I am, yes.

Okay, and I think that the market growth that you described is pretty much right on from a sequential perspective when we look at the growth as Adam said.

And the comments that he made we do expect to see a significant increase in mobile device sales based on the expectation for our participation in a broad range of new programs that we expect to ramp up.

We expect for I'd say about 50% of the markets that tend to have a seasonally softer quarter in the summer, the defense markets, [comair], industrial, auto, we expect these to be slightly down sequentially and others to be slightly down to flat.

From an automotive perspective, we also have the phenomenon in the quarter as I think you know relative to exchange and specifically to the impact of the Euro and so that is a negative from a sequential perspective.

That's more pronounced actually in the automotive market and essentially offsets the positive impact of the small acquisition that we made, so that's why automotive without the negative impact from the Euro would to your point the acquisition would be up sequentially.

Does that help?

Okay, thank you.

No, that does, thank you, Diana, that is helpful.

Okay, sure.

And then if I could just ask about Telecom.

You guys are doing very well in the Telecom segment and I think most of the commentary we've heard from other companies and some of the equipment makers is that Telecom segment continues to be very weak so I just wanted to understand why you guys are doing so much better than the market in that segment, thank you.

Sure.

That's a very good question.

I appreciate it.

Look, what we call Telecom we call it IT data com.

I think that's the market you're referring to and I think our Company is doing extremely well in that segment.

We grew 12% year over year, 13% sequentially and I don't think you would see that performance from any of the ON customers in that market.

Why is that?

It's very clear for us.

It's coming because of new programs with new technologies.

We are participating on a very, very broad basis, really across-the-board with high speed technologies as these systems have to perform at higher and higher speeds to satisfy the demand for things like video on the internet that's hogging so much bandwidth in the core systems as well as at the enterprise level.

In addition, power has become just a tremendous driver for us whereby we are creating new power solutions that go on to this IT data com equipment to allow them to have a more efficient power consumption which is the real sort of other, the flip side of the data revolution is they're using a lot of power.

And so to the extent that you can create an interconnect solution that enables customers to equip their equipment with a less power hungry system, that allows you to create value for the customers, it allows you to take broader positions on the new platforms and it allows us in the end to outperform the market.

And I think we feel very good about our overall performance.

We have a very broad position in IT data com and we are present essentially with all customers in that market to some degree or another.

So it is really not that we're leveraged on just one customer or one program but rather that we are gaining share with new technology solutions on a very broad basis in that market.

Shawn Harrison, Longbow Research.

Hi, good afternoon.

Just wanted to follow-up on the mobile device strength.

Is that, I wanted to be certain it sounds like it's across notebooks, tablets and phones.

Is that just a third quarter phenomenon or something where you continue to see strength throughout the end of the calendar year?

No, I think first of all you're correct that that is really more across-the-board.

It's not on any one platform.

It's not with any one customer by the way.

It's a very broad position we have on some of these new devices and it's something that was part of what gave us sort of the confidence to raise our guidance both in the third quarter and for the full year.

So that is not just a one quarter phenomenon necessarily and we had strong performance in that market on a sequential basis in the second quarter as well.

It was up 13% in the Second Quarter.

We've done a great job of really diversifying ourselves into high value products.

We talked about over the last several quarters you may of course recall, Shawn, we had a quarter, fourth quarter last year where our sales in that market were actually down more than we would have expected and more than we would have liked, sales in the first quarter were year over year down.

I think we have never rested here.

We've never sort of said well we're not going to keep the focus on creating new technology solutions for these new products and I think a lot of those efforts that our team has been expending over the better part of the year, year and a half are really bearing fruit here in the second and even moreover in the third and fourth quarters of the year.

That's great and then just as a follow-up great margins this quarter within the connector business.

I guess the guidance implies a little bit more limited margin lift in the back half of the year.

Maybe you could talk about the pluses and minuses you're seeing that could lead to further margin expansion in the next two quarters.

Sure.

I think we have a great track record from a margin perspective and as you say we achieved certainly good profitability in Q2.

I mean I think if we look at the last two quarters and go back to the fourth quarter of 2011, we brought margins up from 18.5 in that quarter to 19.4 here in Q2 and there are certainly a lot of things that contribute to that.

Certainly volume and the operating leverage that we're able to produce in the business is the most important part of that.

I think that this comes really through the combination of the strong technology focus that Adam talked about but also a continuous drive for low cost.

The growth from a volume perspective in our ability to convert that at that 25% plus range I think is the most important aspect for our ability to continue to expand margins and this growth opportunity for us is very much driven by the diversity in the business.

The environment right now is certainly one would not say it is completely bullish across all the markets that we serve and I think that it's an environment where there's a lot of volatility in demand.

This actually seems to have become more the norm and I think the diversity we have as a Company allows us to find the pockets of opportunity for growth that are out there like the ones that Adam was just describing.

When we then combined that with the entrepreneurial management style we have as a Company that really maximizes our profitability, that produces this leverage that I think we've seen historically and that clearly we've seen in the last two quarters.

And we continue to include that 25% conversion margin that operating leverage on an incremental sales in the guidance that we gave both in Q3 and in Q4.

There will be some variation in what those conversion margins are.

I think we had a slightly higher conversion margin in Q1 than we had in Q2 but I think we feel very good about the profitability level.

We feel good about the fact that the team is still committed to further margin expansion and that that's reflected in the guidance that we gave.

We always try to do better if we can but I think this 25% conversion margin that we've included is the right guidance and I think it's the right expectation for the second half of the year.

Thanks so much.

Thank you.

Matt Sheerin, Longbow Research.

Yes, hi it's Matt Sheerin with Stifel Nicolaus.

Just another follow-up on that mobility question, Adam.

It looks like your strategy has evolved a little bit where you were very strong in smartphones and my understanding is that as those products become more commoditized you're moving upstream into tablets.

And then now you also mentioned notebooks where you haven't had a lot of presence outside of the RF antennas so could you talk about the opportunities in that space, smartphones versus tablets?

And then also the ultra books, are they representing the big opportunity in notebooks for you?

Yes, that is a very fine question, Matt.

I appreciate it.

No doubt about it, when we talk about mobile devices, we are certainly, our view of what a mobile device is has evolved and I think that evolution is very natural given all of the product transformations that have happened over really the last 48 months, 24 months, whatever you want to say.

We still have a very strong presence in smartphones but we are also very deliberate about making sure that we participate in those products where we can create value.

And I know I've said that several times on the call so I must sound look a broken record but there's no question that there have been some devices that have been released where there's just not the appreciation of the value for the products that we would make and thus we don't want to participate.

Conversely, we have never had a very strong position on computers which evolved into laptops but over the recent time period, those devices have converged more to become more mobile devices.

I know myself, I am on my laptop in the car and it is essentially almost like a phone.

I mean, you use Skype on it and it becomes essentially a phone that sits on your lap and as those devices have become more embedded with more functionalities, as the ultra books have come along and bridged between traditional laptops and tablets and who knows what's going to come next.

I mean, what do you call a device which is the surface that gets it?

Is that a tablet, an ultra book?

What is it?

So I think that there is a real combining of a lot of different functionalities with one thing in common, and that is that these devises are mobile.

They're connected to mobile networks.

They're connected to wireless networks somewhere.

You can transport them with you and wherever we see the opportunity to enable those devices to have a greater functionality either through the antenna technology, either through our interconnect technology, through some of the other componentry we supply into those products we're going to capitalize upon that.

And I think the team is not fixated on just one customer.

That's one thing that's very, very important.

Our team of engineers and sales individuals and the factories, they're focused on ferreting out every opportunity in that industry because the one strategy that we have not changed is we're not in the business of picking which is going to be the winner.

We're in the business of maximizing our content on attractive platforms and then letting in the end the marketplace to decide what the winner is going to be.

And if we've done a good job of getting our position then we'll win with whatever that winner may be so I think it's a very exciting market for us.

It has been an exciting market for us.

17% of our sales in the quarter and we look forward to strong momentum here going forward.

Great, and just a quick follow-up, Diana.

What percentage of your auto business now is in Europe?

Can't give you an exact percentage but somewhere probably a little less than two-thirds or so but it would be in that range.

Wamsi Mohan, Bank of America.

Yes, thank you.

Good afternoon.

When you look at the mid point of guidance both for the third quarter and full year it implies a flat sequential Q3 versus Q4 and I'm just wondering, is that because you're seeing something in particular that will drive below normal seasonality?

Is there something like a pull in effect that you saw in Q3 in mobile devices last year, something similar to that or is it just lack of visibility for now?

Yes, I think that from a sequential standpoint there is a slight difference between the two quarters but to your point, not much.

I think this is what we see when we look at a very detailed forecast level what the two quarters look like.

I think as Adam said, we expect to see a significant ramp up in the mobile device market in Q3 here in the near term and I think that that is driving some of the sequential dynamics between Q2 and Q3.

We don't expect the same step function when we look between Q3 and Q4, so I think that this is based on what we expect the sales to look like based on the detailed review of all of the markets that we've done.

At this point when we get closer, we'll see what the quarter looks like at that point in time but we wouldn't expect the same type of significant sequential uptick in the mobile device market in Q4 that we're seeing in Q3 and I think that has some impact with the comparison.

It is not a pull in though.

I mean I think you're referring, Wamsi, to a year ago where we saw that kind of significant pull in from the demand from the fourth quarter to the third quarter.

That's not what we anticipate.

I think the guidance does not anticipate a down fourth quarter but let's not forget there is a lot of uncertainty in the world today and I think this is very prudent guidance given the level of uncertainty that is in many markets and certainly in many geographies around the world.

Okay, thanks, Adam.

That's specifically what I was referring to so appreciate the color there, and then Diana, perhaps you could address how the pricing environment is, I mean copper and gold are down both quarter-on-quarter but gold is still up year-on-year.

Is this environment in which you're still able to increase prices?

Thank you.

Yes, I think that pricing dynamics as you know, Wamsi, vary a lot from market-to-market perspective and I think they continue pretty much to track the pricing dynamics that one would see in the related equipment that we sell into.

So I think in the communications related markets, those prices certainly still trend down.

And I think that what we have seen in 2012, I think we see a better balance between the movements in prices and the movements in cost structure which as you know in 2011, was very much out of balance and this put particularly strong pressure on margins so I wouldn't say that it's an easier pricing environment.

I would just say that it's pricing environment that's more rational, given what we see happening from an input cost perspective.

But as you know, the market is a very dynamic one and seems to be choppy to pick a word from a demand perspective, depending on which market you will look at and that always had some impact on pricing dynamics as well.

But I think that we're able to manage pretty well through the environment as long as cost and price are in balance and I think that's how we would describe how 2012 looks to us as we sit here today.

Craig Hettenbach, Goldman Sachs.

Yes, thank you.

Adam a number of times the macro environment has come up on this call so just curious if you can contrast kind of what you're seeing this summer versus last summer.

Anything from kind of order patterns or customer conversations would be helpful.

Thanks very much, Craig.

Look, I have to sort of plumb the depths of my memory to think back on what it was last year.

I think last year, when we really saw a shift was in the third quarter when there were all these sort of government driven around the world uncertainties that came.

The debt ceiling debate, the Europe and Greece sort of first materializing on the scene.

What we see now is just kind of a general hesitancy.

I think people see the markets, people read the papers and I was in Europe recently and I can tell you, you don't even want to read the papers in the morning when you're in Europe.

At the end of the day though, our customers are in the business that we are in which is creating new electronics for their customers.

And I think we continue to see just a tremendous, tremendous pace of innovation that is happening and I talked about that in the IT market where the pace of innovation is something we've been able to capitalize on very much.

The same is true in the mobile devices market and the same arguably is true across-the-board in all of our markets, so we haven't heard any customers today coming out and sort of singing doom and gloom songs here.

Rather, there is just a general unease about what is going to happen.

I think people don't have confidence in governments anymore to solve the problem.

They aren't sure where markets are headed and at the end of the day that creates that level of unease, at the same time they're making a product customers are thirsting for.

Take wireless infrastructure.

This is a classic market where there's a clear, clear demand by the end consumer to have upgrades in technology.

I mean you just can't go anywhere in the world today and be satisfied as a customer with a mobile device.

The customers all know that.

The operators know that.

The smart ones are driving upgrades at a significant pace.

Others are taking a little bit more of a wait and see attitude.

I think we've seen that market expand a couple quarters in a row and that's a good sign but it's just indicative of the type of general hesitancy that is there.

At the end of the day for Amphenol, we're not running the Company based on macroeconomic trends and forecasts and headlines in the Wall Street Journal.

We're running the Company based on what we see with our customers on new programs, new technologies, and driving the execution and reacting to whatever the macro environment will bring our way.

Okay, that's helpful.

As a follow-up, on the commercial aerospace side the adjustment inventory, would you characterize that as a pause here and if you can kind of just talk through your expectations once you get through that?

Yes, I think it's actually pretty normal.

The way the commercial air market works is they do these sort of step function increases in either new platforms or production rates and those tend to happen early on in the year and it's not abnormal that when there is kind of a ramp up.

And you recall we saw significant ramp up in the first quarter, we saw some in the fourth quarter, it's not uncommon for the hundreds of companies that are involved in that supply chain to not get it perfect as they go through the annual ramp ups that are happening.

There's no doubt about it that the plane volumes that we're seeing or that our customers are creating today are up significantly.

I mean if you take just the two largest, their volumes of airplanes are up 14%, 15% in what they're producing and delivering on a year over year basis.

But a lot of that tends to happen really at the beginning of the year, they set their production plans, they ramp up the supply chain and then sometimes there is a kind of flex and a little bit of like an accordion effect on the supply chain, when they do that ramp up and it normalizes over time.

So this is the sequential performance to us is not at all a concern.

We view that that strong year over year performance which is something that we expect to continue throughout the year is really indicative of both the increase in unit volumes that we're seeing together with our broader position that comes on the new platforms.

And that's something we continue to look forward to.

You have not really seen a lot of the new airplanes being produced in significant volumes yet and I think that's something still to come at some point.

When they all start being made exactly, when the delays and the kinks are worked out that remains to be seen but we feel very good about that market and our position in the market going forward.

Amit Daryanani, RBC Capital Markets.

Thanks a lot.

Good afternoon guys.

Just maybe want to start off with the OpEx side of the equation.

Things are obviously pretty good this quarter, $120 million OpEx.

How should we think about OpEx run rate going forward and do you still have the cost savings from the restructuring we did late in 2011 that still need to be realized?

Sure.

I think that by OpEx you're referring to what we call SG&A and I think that this is an area that certainly we got a lot of operating leverage on in the quarter.

We're back down to about 12.1% of sales which is essentially where we were in the middle two quarters of last year.

We do really a very good job of managing all levels of costs and we focus on SG&A costs as much as we do on manufacturing costs.

We target SG&A or OpEx to grow about 50% the rate of sales all else being the same in some quarters, if we hit that and in some quarters we don't.

But I think that we do still have some leverage that we will see as we move through the second half of the year both in SG&A and on the gross margin line as we look to work to hit those 25% incremental conversion operating income margins that we have as a target, and that we've reflected in guidance for the Q3 and then Q4 time frame.

Perfect and if I could follow-up, Adam, if you will talk about the handset side I realize you are obviously expecting some strong sequential growth due to ramps in Q3 up.

Could you maybe just talk about how do you have comfort at this point that this could not be a replication of what happened in the back half of 2011 where you had a really strong Q3 but it resulted in a bit of a vacuum in Q4.

Are you more diversified on a product or customer basis that gives you more comfort that doesn't happen again?

Thank you very much, Amit.

I think the simple answer is we are more diversified in new products.

I think the market is more diversified in new products.

I think we're a good reflection on the market and if you just take an honest look at things there is a more diverse market of smart mobile devices today than there was a year ago and clearly, we're present really on a broad basis there.

I think that if we looked last year, there was that expectation of a very significant ramp up coming into the fourth quarter which then didn't materialize.

We don't see those expectations today, so if I go back to a year ago July 17, July 18, I think I've said many times to several of you on the phone that our customers at that point were extraordinarily bullish towards the fourth quarter and were ramping their supply chains in anticipation of a tremendous, tremendous fourth quarter 2011.

We don't see that today.

I think customers are very balanced in their view of the trends in their business from the third quarter to the fourth quarter and thus they are not over accelerating their supply chains and procurement activities which lead to some of what we saw last year.

So from that perspective, look anything can happen obviously but I think the kind of data points we see and the conversations we have with customers lead me to be a little bit more comfortable you are not getting that over-spinning of demand which then could lead to a fall off like we saw last year.

Steven Fox, Cross Research.

Hi, good afternoon.

Two questions please.

First on the broadband business slowing down.

Looks like you were starting to get some momentum there and now you're talking about some price pressures.

Could you provide a little bit more color around what's going on there and sort of your outlook maybe over the next four to six quarters for that business?

And then secondly, Diana, if you just happen to have organic growth for industrial and automotive handy that would be helpful, thanks.

Sure.

Well let me just talk about broadband for a second here, Steve.

I think we have had good momentum there.

Look that market does go in cycles to some extent.

I think that what we have seen is we would have expected the pricing environment in that market to be supportive of further margin expansion based on the competitive environment.

And that's what we did not see, and so when we talk about less favorable pricing environment in the quarter, as I've always said we're going to follow any price increase from the market leader and that just was not forthcoming here.

When we would have expected that one would have taken the opportunity with the material environment that was more normalized to keep realizing the margins that you could realize.

So that's really to that extent.

As we look forward in that market there are clearly a lot of dynamics in the market, whether that is broadband over cable, whether that is in the satellite market, whether that is in over Telecom and there are just a tremendous different array of ways that people are getting broadband into their house today.

We capitalize on all of those and so all that we care about really going forward is, is there further adoption of high speed next generation broadband into the homes?

And that's something where we think there clearly is that consistent trend that would support our participation in the market.

What is the criteria?

The criteria is that you're able to support those new technologies with a strong product offering and that's why the focus of our team in that market has been very consistent, innovation, innovation, innovation.

Getting the right products that can support those new demands that are coming from customers in that market, whatever their end means, whether that is hybrid fiber co-axe, whether that is twisted pair, whether that is satellite, whatever, we want to be there to support the technologies that are there.

And because of that and because we're not just betting on one MSO to be successful or on one satellite operator to be successful, we feel that if we can have a strong technology solution for that market there's great opportunities for growth in the future.

I think with respect to the organic growth rates, Diana, you want to comment?

Sure, the industrial is either year over year organic growth rates in industrial is low double digit and automotive is mid single digit.

Which is very strong performance in the environment.

Yes, it is.

Thank you very much.

Thank you, Steve.

Mike Wood, Macquarie.

Hi, great job in the quarter guys.

Thank you.

With the Mobile Devices significant sequential increase that you'd mentioned, is that based on orders that are in your backlog or reflected in that 0.99 book-to-bill or do you also have some more visibility with like requests for price or certain platforms that are coming?

And how long would that visibility last for you?

That market is not necessarily a market where you get 16 week or 12 week or even 8 week lead times on orders.

You work on programs that get released into the marketplace and obviously, customers need to build a supply chain pipeline to support the ramp of new programs and so it's a much more sort of rich interaction with the customers to understand the volumes that are going to come.

It's not just one data point or one order or one forecast from a customer.

It's a very, very comprehensive approach to being involved in the program with the customer, knowing the timing and knowing the volumes they have.

Obviously programs get delayed, programs get accelerated, some are successful, some are not successful, and we have a significant amount of experience dealing with the various dynamics that come in those new programs.

And we're always going to apply some degree of caution to that in terms of how we invest in ourselves, how we proceed with the ramp ups and obviously, how we incorporate that into our outlook for the Company.

Okay, thank you.

Thank you.

Mike Whirley, Janney Capital Markets.

Good afternoon.

I was just wondering if you could give us any commentary on the trends month-to-month through the quarter and into July in China and the US.

I think we have not seen anything abnormal in those trends.

I think if we looked overall for the Company it was a relatively normal quarter in terms of how the months progressed.

The last month of the quarter tends to be a little bit stronger.

There's some vacations in certain places in May, so I think there was nothing abnormal that we would comment on relative to China, US, or for that matter Europe in the course of how the quarter proceeded.

And since the quarter ended, any comments on July?

No, nothing abnormal.

Okay.

Supporting the guidance we've given today.

Okay, and the other question I had was on M&A.

Are there any targets that you might consider that are bigger than what you've done historically, like in the $300 million to $400 million range or are you just a lot more comfortable with things that are like $200 million or less?

I think we've said consistently for many years that size is not a criteria for Amphenol as it relates to acquisitions.

Our criteria for acquisitions is we want number one good people, we want number two very strong technology and complementary technology, we want number three a complementary market position that's really additive to Amphenol and expands the breadth of our offering in one or more of the many markets that we serve.

To that extent, there are plenty of larger companies that are out there that would be attractive acquisitions and I think we're very fortunate to have a financial condition that really sets no limits on size and our mind set also sets no limits on size.

What we wouldn't do is just do one big acquisition for the sake of adding sales to the Company.

That's not the strategy of acquisitions but we would be very excited to proceed with an acquisition to the extent that it were for sale of a Company that really satisfied those criterias that we consistently talk about and emphasize.

Amitabh Passi, UBS.

Hi, thank you.

Two questions if I may.

Diana, first one for you, just on gross margins I think they were flat sequentially slightly down year over year.

Despite sales being up, how do we think about the leverage in the model?

Is it mainly coming through OpEx or is there further room to maybe expand gross margins?

And then Adam just for you on your mobile infrastructure end market I think you said it was up 11% sequentially.

Some of the large OEMs, their commentary has been less than inspirational so just wondering was the upside more on the antenna side, base station side if you could maybe provide color there.

Sure, maybe start with the first question and I think this was a question relative to the components of ROS expansion and you rightly point out that the gross margin expansion as a discrete line item on the P&L has been less a part of the operating income expansion in this quarter and I think that that certainly is true.

I guess what I would say, Amitabh, is we really manage the business to maximize and expand the operating profit and we believe this is really a necessary approach to make sure that all of the costs on the P&L get equal attention by operating Management.

This has been a consistent approach for decades and we feel that this is the right approach to expand operating income return.

We have a really diversified product and market footprint and that results in some products and markets having higher gross margins and higher SG&A and some have lower gross margins and lower SG&A.

And sometimes you have an impact from translation, if rates move around the acquisitions that we do can also sometimes have an impact relative to how their cost structure is.

And so from our perspective ROS expansion is the goal and as is this 25% plus conversion margin on incremental sales and that is something that we have achieved and that's something that we do have still incorporated in guidance for Q3 and Q4.

I think if we talk specifically about the rest of the year, I think we probably will see some contribution to operating margin expansion from both gross margin and SG&A in the second half of the year.

But from our standpoint as a Management team what we really care about is whether the ROS is expanding, not what specifically the gross margin or SG&A does.

We work to maximize the bottom line.

It's a very simple approach.

It's a straightforward one, and we think based on our experience, it's very effective in expanding margins.

Amitabh, with respect to your second question on wireless infrastructure, I think you used the phrase, less than inspiring in terms of the comments over the last couple of days.

I would describe the market has been less than inspiring over the last five or six quarters.

That has been certainly a challenging market.

We are very pleased to have had that growth in the quarter sequentially, 11% up over the quarter.

And I think your question was is that coming from different sales than just to OEMs.

And the fact of the matter is that we had strong performance on both sides of the business, even slightly stronger on the equipment side with the OEMs on a sequential basis.

And I think that comes from just a strong position that we've gotten on new base station platforms.

There has been a real technology transformation that's been going on in that market for the better part of two years now, as the equipment manufactures have migrated to these lower cost, more modular base stations, I think that has had a negative result on them because they're selling their products a heck of a lot cheaper than they ever were before.

It also had to some extent a negative impact on the consent of interconnect products as you go from a big box, you know the size of a refrigerator to something that is not all that much bigger than a server today and a base station, obviously there is a different level of interconnect.

However, what we have seen is as those new base stations get more ruggedized because they're putting them up on tops of towers, they're putting them on tops of buildings, that the new interconnect requirements that are being required now for that new technology has allowed us to gain further position with our customers.

And start to see the kind of fruits of those design-in labors coming through this quarter and last quarter with now two sequential quarters of growth.

Our antenna business continues to be a very strong business.

We have a leading position with some very strong customers around the world.

Obviously, the operator spending cycles, they come and they go.

I mean you look today, China and India is not the kind of frothy market that it once was.

The US is not a bad market.

Europe is, there's a lot of uncertainty and you probably read the release today from one of the players in that space that says that in Europe there is macro uncertainty that's driving different spending patterns.

Our strategy there is not to bet on a region.

It's not to pick one of the equipment manufacturers as our only horse to ride.

It's to try to have a broad position across all the operators that we can and across all of the equipment makers that we can with a broad array of product offering in RF products, in fiber optics, in high power, high speed.

And so with that broad power product offering that we have we're able to capitalize to some extent better as these new products take hold and even if those new products are these lower price products that don't necessarily help the sales of our customers.

Got it, thank you.

Thank you very much, Amitabh.

Brian White, Topeka.

Adam, on the mobile device market in the third quarter, do you feel like you're gaining share or is this just a reflection of the marketplace?

Well I think I would say we're gaining share.

I wouldn't expect that the market is growing 30% but gaining share in that market it's hard to say what does that mean gaining share.

Because we're designing totally new products into totally new products and so to that extent is that gaining share or is that not gaining share, certainly we're gaining position in the broader marketplace.

Is it coming out of one person's hide or someone else's hide?

I think that's harder to quantify.

It's a new thing.

And so to the extent that we're making some new antenna or some new interconnect or some new mechanical thing that goes on to these devices, that is kind of a new business that is not coming out of someone else's hands or teeth here.

So typically when one says are you gaining share that means someone else is losing and you're winning.

I think in this case we're winning as the new technology evolves and that's something that has been a real focus for us.

This is not a market where you want to get into just kind of share battles because the pricing dynamics in a market where you get into share battles, there's not going to be any winner in the end for that.

The way to win is with new technologies and with a strong and very dynamic speedy support of these new product ramps.

I think that's one area where we have worked for the better part of a decade to build an organization that is highly responsive, really turning on a moments notice, turning new samples, turning new designs for customers, doing what it takes on a 24 hour a day clock to make sure that our customers can release their products on time.

And thereby they come back to you when they need another new technology and they have another new device going forward.

Hard to say what device is going to be actually in the future.

We talked about how we view that market more broadly today than we did two years ago.

Who knows in two years whether there's going to be some other new thing that's out there that's going to be called a mobile device but what I can tell you is to the extent that there's value for our products to be on it, we're going to work darn hard to make sure that we're present.

Okay great.

Just a follow-up.

Book-to-bill ratio as I remember was 1.05 March quarter, 0.99 in the June quarter.

Just how do we think about that?

It look the like the biggest decline since June quarter '08.

How do we think about that in the marketplace?

I think Brian that the book-to-bill ratio in the first quarter was probably a little bit on the high side, higher than what we ordinarily would see if you look back historically.

I think a 0.99 to 1 book-to-bill ratio in Q2 is not such an unusual phenomenon for us.

So I would say that more the Q1 book-to-bill ratio was probably more on the high side which makes that comparison look a little funny when you look at the two quarters together.

But Q2 in terms of our order levels, we feel good about where they are and we feel that the book-to-bill ratio makes sense relative to the guidance that we've given and so as you know some of our markets are more book-to-bill in the same quarter and that can have an impact on what that ratio looks like.

Okay, thank you.

Sure.

Tony Kure, KeyBanc.

Hi, good afternoon.

Just a couple quick ones here.

You mentioned that the strength in the data com markets into the second quarter and then seems like with the expectation going forward, there's a pretty material shift in sentiment.

Was there some sort of turning event or some sort of time period where you saw a definite shift in more caution out of your data com customers?

Yes, I wouldn't say that there's sort of one turning point.

I think it's just kind of been a general evolution of the sentiment and again, I wouldn't describe that as horribly negative.

It's not that we're saying that market is going to be down double digits in the third quarter.

I think there's just some degree of caution in the third quarter with respect to the end sales of their products.

I think that in addition, there's many new products that are coming on board and to the extent they're sort of seeing are they selling or not selling and that's something that happens also at the time of new product releases with customers.

So I don't think there was a moment where everybody kind of freaked out and said it's all going bad.

It's not at all.

The reason why I made those comments is typically that market would be potentially up in the third quarter compared to the second quarter.

We don't necessarily see that this quarter.

We see it more sort of slightly down to flattish and thereby, that implies to us that there is some conservatism and some uncertainty in that marketplace but this is not, no cataclysm here.

Okay, thank you.

That color is helpful.

And Diana, I think you mentioned helping out the margin was some more cost reductions.

I know it's a normal part of the business in the second quarter but maybe you could maybe scale those for us and how the second quarter cost reductions may have compared to the size of the cost reductions, I think you had in the first quarter or even if you annualize them versus 2011.

I guess just maybe scale how big the cost reductions were relative to prior periods.

I'm not sure that I could give you a quantification on a consolidated basis of exactly how those would compare.

I think that every quarter and every month, each of the operating Management teams work to really minimize the entire cost structure, whether we're talking about manufacturing or SG&A related costs.

And I think that's an important part of where that operating leverage in the business comes from.

So it's really the combination of the volume and that volume then creates opportunity if you do a really strong job of cost control to get that margin expansion that you've seen us achieve in the last two quarters in Q1 and Q2.

And the further margin expansion that we have included in the guidance in the second half of the year.

I think that the Management team is certainly I would say working as hard as they ever have been to create sufficient cost reduction opportunities to keep that margin expansion going.

And certainly I wouldn't say that this is the easiest environment that we're in right now but certainly the team is up to the challenge and are very excited to continue to grow margin as we grow the top line here in Q3.

So that's about as much of a quantification as I can give you.

Thank you.

I'm currently showing no further questions or comments at this time.

Very good.

Well, we would like to express our thanks to all of you for the time today and I'd like to also take this opportunity to wish you all a pleasant summer.

I hope you each get the opportunity to take a little bit of rest from your busy schedules and we look forward to hearing your voices again here in the fall.

Thank you all very much and have a pleasant day.

Thank you.

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