Welcome to the Conference call for Amphenol Corporation. Here is Ma’am Diana Reardon to introduce today’s conference.
Diana Reardon
Good afternoon, my name is Diana Reardon and I am Amphenol’s CFO. I am here together with Martin Loeffler, the CEO and we would like to welcome everyone to our Fourth Quarter Earnings call. The fourth quarter results were released this morning. I will provide some financial commentary on the quarter, and Martin will give an overview of the business and current trends. We will then have a Question and Answer session.
The company had a record fourth quarter exceeding the high end of the Company’s guidance in both sales and earnings per share. Sales for the quarter were $777, of 18% in US dollars and 14% in local currencies over the fourth quarter of 2006. And from a sequential standpoint, up 6%.
At the end of the quarter, the company completed two acquisitions with aggregate annual sales of approximately $45 million. The acquisitions include the purchase of an 80% interest in a northwest China based manufacturer of interconnect products for the wireless communications market and a Chinese manufacturer of precision interconnect products for IT and consumer products applications.
In addition, during the fourth quarter, we acquired the remaining 30% ownership interest in one of our Korean manufacturers of handset related products. We are excited about the growth potential created by these excellent additions.
Breaking down sales into our two major components, the interconnect segment which comprise 91% of sales in the quarter, was up 20% this year. Interconnect sales increased in all of the company’s end-markets. Our cable segment which comprise 9% of our sales was up 3% from last year as a result of increases in broad band cable television markets. Operating income for the quarter was strong at $154 million compared to $125 million last year. Operating margin was 19.7% compared to 18.9% last year. The margin improvement relates primarily to increased margins in the interconnect business. From a segment standpoint in the cable business, margins were 12.1% the same as last year and down from 12.7% in Q3 of 2007, primarily as a result of lower sales volume.
In the interconnect segment, margins were 22% up 70 basis points from last year and 10 basis points sequentially. The achievement of these strong margins in the interconnect business reflects the company’s continued focus on the introduction and growth of higher margin application specific interconnect solutions combined with a very strong focus on all elements of cost.
Overall, we are very pleased with the company’s margin achievement.
Interest expense for the quarter was $9.5 million compared to $9.3 million last year, the increase resulted from a slightly higher average debt level in the 2007 quarter. Other expense was $3.5 million compared to $4.7 million in Q3 of ’07 and $2.8 million last year. The increase from last year relates primarily to increases in minority interest expense partially offset by higher interest income. The decrease from Q3 relates primarily to a reduction in minority interest expense resulting from the purchase of the minority stake in our Korean companies that I referred to earlier.
The company’s effective tax rate in Q4 was 28.8%. The tax rate for the full year 2007 was 29.5%. In the fourth quarter of 2006 and for the full year of 2006, the company’s effective tax rates were 30.3% and 31.5% respectively. The lower rates in 2007 primarily reflects a more favorable mix of income and a change in the company’s cash repatriation strategy.
Net income was $100 million in the quarter, approximately 13% of sales. An indication of our excellent profitability. On an industry comparative basis, profitability continues to be very strong. Diluted earnings per share for the quarter was $0.55 per share up 28% from $0.43 last year.
During the quarter, we had generated a very strong cash flow from operations of $133 million. The cash flow from operations along with $5 million in borrowings under the company’s revolving credit facility, $50 million in proceeds from the exercise of stock options was used for $27 million of capital expenditures, $7 million of stock buy-back, acquisition related expenditures of $110 million primarily relating to the acquisitions that I have just mentioned. $2.7 million in dividend payments and an increase in the cash balance of approximately $19 million.
In conjunction with the Q4 acquisition, the company also recorded a liability for additional purchase price of approximately $40 million that will be paid in the first half of 2008.
The balance sheet is in good shape. Account receivable day sales outstanding were 69 days at the close of the year compared to 66 days at the end of last year. The translation impact of the weaker dollar added about a day to the receivable balance at the end of the year. Inventory days declined to 80 days from 85 days at the end of 2006. And debt was $723 million at the end of the year compared to $80 million at the end of 2006.
The company’s leverage and interest covered ratios remain very strong at 1.2 times and 15 times respectively. Fourth quarter EBITDA was approximately $182 million and availability under the company’s revolving credit facility was $275 million at the end of the year. The amount of receivable sold under our receivable secure division program was $85 million.
Orders for the quarter were $766 million, our book to bill ratio of approximately 0.99 to 1. Certainly from a financial perspective, it was an excellent quarter. Martin will now provide an overview of the business and current trends.
Martin Loeffler
Thank you all for joining our traditional conference calls at the occasion of our earnings release. I hope you had all a very good start into the New Year and I am glad to wish you all a very happy, healthy and successful 2008.
The following I am going to highlight Fourth Quarter achievements discuss very briefly the trends and the progress in our certain markets and comment on the outlook of the first quarter for the fourth quarter and the full year 2008.
Some highlights of the fourth quarter. We are extremely pleased for the Fourth Quarter results and the results for the full year of 2007.
We achieved new records in sales and earnings for both the fourth quarter as well as the full year. We maintained our long term trend in industry leading growth and profitability. We further gained position across our served markets while driving the lower cost and improved margins. As far as sales are concerned, Diana already mentioned that sales was at a strong 18%, somewhat helped by favorable currency rates. In local currency, their growth was a very strong 14% of our prior year and 6% sequentially. The growth was very broad based across all of our end-markets in geographic regions.
The growth was particularly strong in mobile devices, in mobile networks as well as in the military and commercial aircraft markets. Geographically, our strongest growth areas was again Asia. The growth was essentially achieved through organic expansion which reflects our broad competitive strength. We have made through acquisitions in the fourth quarter, which had no material impact on the sales and profit of the company, but we are very pleased with the addition of these two Chinese companies that will broaden our presence in our target markets. The aggregate sales are approximately $45 million in 2007.
The first company which is located in Xian which is in the northwest of China brings complementary strength in our leading radiofrequency and microwave operations. The particular strength of this new company is in the build out of the 3G networks of the Chinese version, PDS CDMA. This complement is the strength of the company where we have leading positions in all other kinds of network technologies.
The company is also located in a much lower cost area than may of our other Chinese companies and thereby bringing additional opportunities for low cost. In addition to this, it is an outstanding source of labor, both direct as well as skills as they have excellent universities especially strong in radio frequency and microwave technology. We are very pleased with that addition. The second company is located in Zhejiang where we have already several operations, and they add a complementary range of precision interconnect, which are targeted for the IT and consumer market including the handset market. Both of these acquisitions are very consistent with our strategy of Korean companies with excellent capabilities, complementary strength. Both of them will be a accretive and they add good management. We are clearly very excited about the value that we will be able to add to these companies as they become part of Amphenol.
As far as profitability is concerned, it remains strong with cash flow. Operating income margin expanded from prior year as well as sequentially to 19.7% despite a continuing difference of cost and pricing environments.
EPS increased again a very strong 28% over prior year to a new record of $0.55 a share. And cash flow remains strong with $133 million which was applied and again creating value for the company in the form of stock buy backs, in the form of new capitals for tooling for new products, and most importantly for continuing our strategic acquisition momentum.
This sustained trend of strong performance is a direct result of pursuing our vision of truly making an impact on the digital revolution. I call it digital revolution because we are living in an era where electronics is expanding at an exponential pace, not only where electronics was used in the past, but in new applications, like the industrial markets, like markets where electronics has not been used in the past where we find today embedded electronics which will continue to drive growth. The impact we can make as an interconnect company is to develop performance enhancing interconnect technologies so that our customers can develop higher performance equipment and higher performing networks. This is our goal and we have pursued for many years that has brought value to our customers and maintained very strong margins for Amphenol.
Another part of our vision is to further expand our diversified reach. That diversified reach is certainly a very expensive growth motto on one side as well as mitigating economic changes in these various market segments and we continue to expand our customer base, our markets, our geography as well as our product range. Another part of our vision is to achieving excellence in execution. We have done so for many years, and we will continue our strategies of prudent investment that have excellent returns and our programs of quality control so that we can further expand margins.
And most importantly, we continue developing the entrepreneurial agile organization which is very, very important especially in the times of economic uncertainties so that an agile organization can quickly adjust to economic changes that may occur while yet maintaining a very cohesive organization focused to the customers as well as maintaining strong accountability for profits.
With this, I would like to make a few comments on the trends in the market that we serve. The military market represented 19% of our sales in the fourth quarter and we had a very strong sales increase of 19% over prior year. Demand remains very healthy. Supported in part by major military equipment deployment such as the MRAP program. But Amphenol remains very broadly participating in defense programs as we found also further increase in the commercial aircraft production in 2008.
So for 2008, in this market, we continue to see strength and a healthy development. The industrial market represented 13% of our sales in the fourth quarter. Sales increased 19% over prior year and we continued to benefit from our focus on the discrete growth segments that we are focused on, oil and gas as well as geophysical exploration, the mass transit market, medical instrumentation and alternate power applications.
We believe that the proliferation of the embedded electronics in new industrial application will continue to drive growth in those market segments in 2008 combined with our own ability to focus on custom of penetrations in our target markets, yet the motif market represented 7% of our sales. Sales increase is a strong 14% over prior year, since most of these sales are made in Europe, our local currency sales in that area was really 4%.
We expect a moderation in the core production in 2008, but certainly have opportunities to offset these moderations with new customers in at Mercedez, at Fiat, at General Motors with new products, which are already approved and further geographic expansion beyond Europe.
Broadband communication over hybrid fiber coax networks represented 10% of our sales. Sales increased 6% over prior year. As expected, the demand flowed during the fourth quarter due to a seasonally slower network build area. Typically, we would expect demand to rebound towards the end of the first quarter primarily driven and continually driven by the success of new products and services of multiple system operators.
The IT and data com market represented 23% of our sales. Sales increased to a strong 11% over prior year in a general slower demand environment. We continue to build on our distinct competitive advantage of being able to offer a complete interconnect system architecture. This has broader substantial new technology especially new high-speed products, not only the back plane and the back plane assemblies, but also for new IO connectors as well as cable assemblies at total package that is really unmatched in the industry.
We believe that in spite of more moderate demand in the environment, we will have opportunities for further expansion in this market due to our competitive product range and strength.
Mobile networks represented 12% of our sales in the fourth quarter, an increase to a strong 16% over the prior year in a market which continues to be growing at the mid single digit numbers. We expect demand in 2008 not to accelerate beyond those levels, however, we continue build on our ability to expand in emerging markets like India, Africa and to increase our constant reforms, the new cellular base station. In mobile devices, we have sales that represented 16% of our total sales in the fourth quarter. We had a very, very strong fourth quarter close in mobile devices with sales increasing a strong 42% over prior year. We benefited clearly from a seasonally improved demand situation, but to a large extent, the growth was driven and the result of the successful introduction of the broad range of very innovative new products across several customers and many new platforms of mobile phones and mobile devices. We are very pleased with that strong growth since one of our major customers, actually the second largest producer in the world is continuously softening in their own areas which certainly impacted our sales, so we think that this decline, there was very strong growth elsewhere.
We expect to continue growth in 2008 with more traditional seasonal demand pattern which we will see in the first quarter some what slower than the first quarter and then accelerate again in the second quarter into the fourth quarter of 2008.
We believe that we have the ability to continue the growth as we continue to develop very complementary innovative products for that market segment.
In summary, we are extremely proud of our organization for enhancing our market position across all of our served markets while maintaining strong profitability in a challenging environment.
Looking forward, we expect the moderate demand and difficult cost pricing environment to continue as we have seen it throughout 2007 in some of our end markets. Looking forward, we will also assume that currency rates will remain relatively stable. While we continue to hear and read about an increasing general economic uncertainty, we certainly believe that we have not seen any major impact in the demand patterns that we have seen so far and therefore, we remain cautiously optimistic about the short term and very confident for the long term outlook for continued growth and profitability as we can build on a much expanded platform all throughout.
These assumptions are really reflected in our strong guidance for 2008, which assumes sales increases to continue at about twice the rate of the expected industry growth, with continued leverage for improved profitability. For the full year 2008, we expect sales in the range of $3 billion and $100 million to $3 billion $1.75 million of sales or 9% to 11% sales increase.
Our EPS, we assume and guide to be in the range of $2.18 to $2.25 a share or 12% to 16% increase. In the first quarter, we expect a seasonally slower period than the fourth quarter, but in line with our historical experience. Expect sales in the range of $740 million to $755 million and EPS in the range of $0.50 to $0.52 in share.
We are very excited about the future development of Amphenol and confident in our ability and the ability of our organization to face the challenges of an increasing uncertain economic environment and to take advantage of the many opportunities in front of us.
With this, I would like to open up the session for any questions you may have.
Operator (Operator Instructions)
Your first question comes from Mr. Will Stein of Credit Suisse. You may ask your question.
William Stein – Credit Suisse
These assumptions are really reflected in our strong guidance for 2008, which assumes sales increases to continue at about twice the rate of the expected industry growth, with continued leverage for improved profitability. For the full year 2008, we expect sales in the range of $3 billion and $100 million to $3 billion $1.75 million of sales or 9% to 11% sales increase.
Our EPS, we assume and guide to be in the range of $2.18 to $2.25 a share or 12% to 16% increase. In the first quarter, we expect a seasonally slower period than the fourth quarter, but in line with our historical experience. Expect sales in the range of $740 million to $755 million and EPS in the range of $0.50 to $0.52 in share.
We are very excited about the future development of Amphenol and confident in our ability and the ability of our organization to face the challenges of an increasing uncertain economic environment and to take advantage of the many opportunities in front of us.
With this, I would like to open up the session for any questions you may have.
Operator (Operator Instructions)
Your first question comes from Mr. Will Stein of Credit Suisse. You may ask your question.
William Stein – Credit Suisse
I am just trying to make sure I understand your guidance. I know you have addressed it in your comments, but I just want to make sure I understand. Your guide is essentially for sequential decline of about 4% endpoint to the top line, normally we see down 1% plus you have some acquisitions, I want to make sure I understand, you are saying you are not seeing weakness in your customer forecasts, but you are taking an opportunity to provide some what more conservative guidance because of the economic data you are saying? Do I have that right?
Martin Loeffler
I think, this is a very good question. It is a very broad questions because there are so many variables that go into this consideration of giving some guidance, obviously, we have not seen any significant change in the demand pattern, however, seasonally, we have seen a very strong quarter for mobile phones and we believe that this will slow down in the first quarter somewhat. We have seen the slow down in the broadband area seasonally and we expect that not to ramp up before the end of the quarter, so those are just two quarters, network build outs, we also feel that there is some uncertainty more than normal, not that we have seen a change in the demand pattern, but there is more uncertainty expressed by our customers, what that will be, so three of these major segments that we have certainly have concerns and for that reasons, we are just a little bit more prudent in the guidance.
In addition, just to make sure, really to the comparison between fourth and first quarter. The fourth quarter was a very, very strong quarter and as such, you can say, yes, it is 4% down against this very strong quarter, but in average, I think we have seen, depending in the strength of the fourth quarter, some were between zero and 5% decline historically, so it is certainly not outside of the norm what we would usually expect.
William Stein – Credit Suisse
Okay, that is very helpful. Thank you. Just one follow up. I appreciate your mentioning the MRAP program in the airspace defense side market, what are you seeing from that program today as far as the patterns. There has been somewhat of a controversy in the news as to the ramping currently and we may see the borders fall off. Are you concerned that that may drive a very strong first half for the fall off, and the second half for a very significant demand pattern there?
Martin Loeffler
Certainly a very important program, thank you for the question. MRAP obviously has been driving growth already in 2007, at this point in time, the military and defense department cannot get enough of these vehicles, so we have not seen any indication that there would be a slow donw. The only question mark which is out there is how many additional vehicles will be funded throughout 2008, but right now, we have strong orders in the fourth quarter for deliveries in the first quarter and the first quarter is already very solid on this, and in addition, I would like to stress again, MRAP is just one of the many defense programs that Amphenol is supporting so changing it, usually those are not massive changes amongst these programs, do not usually have a material impact on the continued strength that we see in this market.
William Stein – Credit Suisse
Operator (Operator Instructions)
Your next question comes from Amit Daryanani of RBC Capital Markets. You may ask your question.
Amit Daryanani – RBC Capital Markets
I have a really quick question on the acquisitions. It looks like we are paying about three times sales for these two deals. It seems a bit more expensive of what it has history paid up. Could you maybe just talk about the margin profile of these companies and the growth expectations?
Diana Reardon
A portion of what we paid in the fourth quarter has to do with the purchase of the minority interest of one of our Korean handset companies. That was a fairly large company and so they have a good chunk of what we paid in sort of how that relates to that deal, which reduces minority interest with that sale.
So I do not think that the profile relative to earning multiples that we paid for that our new acquisition for us was significantly different than what we paid in the past.
Amit Daryanani – RBC Capital Markets
And then just into the margin profile of the revenue growth rates of these companies, are they in line with Amphenol. I am trying to see the accretive to the overall numbers or?
Diana Reardon
I think as Martin said in his comments, we expect both of the acquisitions to be accretive, as you know, the range of margin profiles vary, but these are certainly the companies that we expect to be accretive.
Operator
Your next question comes from Mark Hasenberg (ph) of Nottingham Capital. You may ask your question.
Mark Hasenberg - Nottingham Capital
As I get older, I cannot remember things as well as I used to. The first quarter of last year, as I recall was a very, very strong quarter. I think it was up like 40% is that correct?
Martin Loeffler
As last year, we grew essentially a little bit over the fourth quarter and the whole seasonality of 2007, I am glad that you asked that question is somewhat distorted from historical patterns because we had sequential increases every quarter in 2007, which was driven a lot by new product introductions as well as some of the real big wins throughout the year and we are not forecasting similar situations, so in our guidance, but the potential of the company has grown and as such these potentials still exist for us to continue in 2008.
Mark Hasenberg - Nottingham Capital
But I recall, I mean, being a very strong quarter, it is a very difficult comparison, do you remember why it is just a roll out of new products?
Martin Loeffler
Last year, we had a continued strength in the mobile phone market in the first quarter that we did not have usually and that was one clear indication as well, in addition, we had some rebounds from the flood at that point in time, so those are maybe two major elements that contributed.
Mark Hasenberg - Nottingham Capital
Sorry, I forgot about the flood. The other thing, I mean, the checks I have done particularly with distribution show that inventories are low. Inventory turns are high, that the customers have loaded up with products, I know you have a very pretty good window into what is happening in the military area through your distributors, what is your feeling about inventories in the market place?
Martin Loeffler
Our feeling relative to our major distributor is that they have night over stock, no under stock. At this point in time, they are just approximately at the same level that they have always been. We have not seen, we have not seen any material change in any of that at this point in time with our type of products.
Operator
Your next question comes from Matthew Sheerin of Thomas Weisel, you may ask your questions.
Matthew Sheerin – Thomas Weisel
Martin, I like to just ask a question regarding handsets. You have had very strong growth and big share gains there. Could you give us an idea of your exposure to the various players by percentage? For instance, what the top five players represent as percent of handset share and then looking into a way until you see additional opportunities for share gains and are you seeing dollar content, your dollar content improved because of the new products you discussed?
Martin Loeffler
The handset business is a very important part of our business and it has grown over the years and expanded in diversity. You asked about percentages relative to our various customers. Obviously, we always proportion it with our sales, with the ranking of these major customers in the market place.
In addition, we are serving those that are not usually on the map like several of the Chinese manufacturers that are growing as well and the Taiwanese manufacturers and so forth so, the essence of our mobile phone business is that we have a very broad, very diversified in terms of customer base, almost pro-rated according to the ranking they have in terms of sales and in addition, that we have a very broad participation within each costumer on models, which gives us tremendous diversity and therefore we were able to go through the year 2007 strong as one of the major players and that market really had a downturn and we grew the business very strongly throughout the year, certainly in excess of the market.
GB/18 January, 2008
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