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Molex, Inc. F1Q09 (Qtr End 09/30/08) Earnings Call Transcript

October 28, 2008 | about: MOLX

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Molex, Inc. (MOLX)

F1Q09 Earnings Call

October 28, 2008 5:00 pm ET

Executives

Neil Lefort – Senior Vice President, Investor Relations

Dave Johnson – Chief Financial Officer

Martin Slark – Chief Executive Officer

Liam McCarthy - President and Chief Operating Officer

Analysts

Matt Sheerin - Thomas Weisel

Amit Daryanani - RBC Capital Markets

Brian White – Collins Stewart

Steven Fox - Merrill Lynch

William Stein - Credit Suisse

Jim Suva - Citi

Shawn Harrison - Longbow Research

Carter Shoop – Deutsche Bank

Anil Doradla – William Blair & Company

John Harlow – Barrow Hanley

Alexander Paris - Barrington Research

Phil Marriott – ASB Advisors

[Glen Fermit – Broadview]

Presentation

Operator

Welcome to the first quarter 2009 Molex, Inc. earnings conference call. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions)

I would now like to turn the presentation over to your host for today’s call, Mr. Neil Lefort, Senior Vice President of Investor Relations. Please proceed.

Neil Lefort

Thank you and thank you to all of our participants for joining us today. With me on the call are Martin Slark our CEO; Dave Johnson our CFO and Liam McCarthy our President and COO. This call is being recorded and is available in telephone replay by dialing the number supplied in the press release. The call is also available live and in replay by accessing our website.

Please note we have added slides to our presentation and those wishing to view the slides can do so on our website under the investor section. As usual, we would like to limit the call to one hour and in the Q&A mode we would like to ask for one question per participant and one follow-up question. Thank you.

Now, looking at page one of our slides which is our forward-looking statements statement, I will just read a condensed form of that statement.

Statements in this call that are not historical are forward-looking and are subject to various risks and uncertainties that could cause actual results to vary materially from those stated. Forward-looking statements are based on currently available information and include among others the discussion under outlook. Other risks and uncertainties are set forth in item 1A, Risk Factors in the company’s form 10K for the year ended June 30, 2008 which incorporated by record and in reports that Molex files with the Securities and Exchange Commission.

These comments during this call speak only as of its date as to it's date and Molex disclaims any obligation to revise these forward-looking statements or to provide any updates regarding information contained in this release resulting from new information, future events, or otherwise.

Just to remind everybody on page 2 disclosures in this conference call regarding earnings per share excluding restructuring charges which is a non-GAAP financial measure, are available in the investor section of the company's website. In addition are included in the slides used during this call.

Now, I'm going to turn it over to Martin who will review the revenue.

Martin Slark

Thank you Neil. Good afternoon everybody. If you’d now like to turn to page three I’d like to mention that at the beginning of today’s presentation the majority of our prepared remarks today will be to provide information on what is being done to restructure and cut costs and also to leave additional time for your questions at the end. So we are going to spend less time talking about specific growth rates by market, etc.

As we are all aware it is difficult in this environment to have much predictability in revenue and orders. Revenue of $879 million was below our initial expectations but very close to our revised outlook. Revenue increased 5.9% versus the prior year with the results in constant exchange rates being approximately flat.

If you now turn to page four we will look at our revenue growth by industry. The automotive and industrial markets, which will come as no surprise to anybody, were disappointments with sequential declines of 16% and 9% respectively. The data market was more stable, however we had expected a better sequential result going into the quarter. We continue to see growth in the notebook area but it is slower pace and increasingly driven by the value segment of the market.

Demand is holding up better in the storage market, however growth has been lower than we expected at the beginning of the quarter. The server market also slowed primarily due to our customers reporting lower capital expenditure by their own customers, especially from financial institutions, government entities and their own private sectors.

Overall growth remains strong in telecom with the mobile handset business up very strong double digits both sequentially and year-over-year. The telecom infrastructure basis was also up nicely on a year-over-year basis, however it slowed down sequentially due to primarily issues mentioned previously for the data infrastructure markets.

The consumer revenue was up year-over-year primarily due to new customer wins but revenue declined sequentially as our customers remained very cautious in procuring components in today’s tough economic climate.

If you’ll now turn to page five, we were disappointed in our order rates with again automotive and industrial both being significantly below our previous expectations. More modest declines were seen in data and telecom. Orders in the consumer electronics market increased sequentially however the increase of 2% was also below previous expectations heading into a normally stronger December quarter.

Lead times have contracted and inventory is being avoided throughout the supply chain. While order rates could still improve in the current quarter as customers produce for Christmas, they will likely remain extremely cautious to avoid surplus inventory and the resulting higher retail price discounts that result from having excess inventory on the shelves.

Now Dave will review the financial results and our restructuring program.

Dave Johnson

Thank you Martin. Page six shows our summary P&L for the quarter as compared to the prior year quarter. Martin has already made comments on the revenue results so I won’t provide any further details at this time for revenue.

Gross margin of 29.7% is roughly in line with the 29.8% in the prior year. SG&A of 19.8% is down 50 basis points from the prior year reflecting our cost reduction efforts in this area. The effective tax rate for the quarter is 32%. This is in line with our guidance but 2 percentage points higher than the prior year due to the reduction of foreign tax credits that were used to bring down the rate a year ago.

GAAP EPS was $0.25. Of course this includes the restructuring charge of $21.8 million that we will see in the next slide. Page seven is our GAAP to non-GAAP reconciliation. The only non-GAAP adjustment to report this quarter is the restructuring charge I just mentioned which had an impact of $0.09 in the quarter. After adding back the $0.09 to GAAP EPS our non-GAAP EPS becomes $0.34, just above the mid-point of our revised guidance range.

Our balance sheet metrics are on page eight. Clearly at times like these we are very pleased to have such a strong balance sheet. With cash of $472 million, total debt of $256 million we are in a great position to weather the current liquidity crisis. Though we are carefully monitoring the health of our customers and suppliers we are not concerned about our own liquidity. We have also evaluated the credit worthiness of the banks we deal with on a global basis and we have moved cash selectively in response to this evaluation. We have put in place more restrictive policies with respect to customer credit terms as a result of this current environment.

Both accounts receivable days and inventory days are in line with last quarter although inventory days have picked up to 79 days as the result of our restructuring activities. Even though 77 receivables days outstanding may seem high compared to other companies this is driven by our customers in Asia where standard terms are much longer than in the United States.

Our gross margin trend is reflected on the graph on page 9. The declining gross margin to 29.7% after three consecutive increases reflects the sudden sequential revenue decline as well as higher commodity costs in the current quarter versus the prior year quarter. The impact of these higher commodity costs, primarily copper, reduced gross margin by roughly $7 million in this quarter versus the prior-year quarter.

The slide on page 10 explains this a little better. The average price we paid for copper increased just 7% between the first quarter of last year and the September quarter we just completed while the average price of gold increased almost 30% and the price of crude oil increased almost 60% between these two periods. More importantly though, the current price of all three commodities has plummeted since September with copper coming down the most by 53%. We expect to see the positive impact of these price changes start to reflect in the P&L in the December quarter but with the larger impact in the March quarter.

On page 11 we show our SG&A trend as a percent of revenue which is at 19.8% for the current quarter and in line with our expectations. In absolute dollars, SG&A has reduced sequentially by approximately $5 million.

Page 12 illustrates the trend in capital expenditure as a percent of revenue. The 5.4% result for the quarter is the lowest level in the recent history and in absolute terms is $45.3 million of capital expenditure. We continue to achieve efficiencies in our capital spending due to our new product division structure but we are also deferring non-critical expenditures due to the current economic environment.

Please turn to the restructuring slide now on page 13. We haven’t changed the outlook of our overall restructuring program. Still, charges of up to $140 million and cost savings of up to $120 million. We have, however, begun to accelerate the execution of the various projects and have made numerous internal announcements. To date we have incurred restructuring charges of approximately $90 million and have recognized cumulative savings of approximately $35 million. The sequential incremental savings in the September quarter are relatively modest but with the acceleration of activity we expect total incremental savings in fiscal 2009 to be approximately $30 million as compared to fiscal 2008.

Please turn to page 14 which details the current quarter actions for our restructuring program. In recent days we have announced that our transportation products division has begun the consultation process with the Works Councils in France and Germany to review the proposed closure of our automotive plant in Villemur, France and the proposed downsizing of our design center in Ettlingen, Germany. Just today we announced the planned closure of two North America industrial operations, one in Mississauga, Canada and one in Kalamazoo, Michigan and the significant downsizing of another industrial operation in El Paso, Texas.

On October 2 we announced the planned closure of a manufacturing facility in Tochigi, Japan. There are numerous other actions being taken on a division by division basis but these are the key projects for the quarter.

Now I’ll turn the call back over to Martin for the outlook.

Martin Slark

Thank you Dave. Our outlook is on page 50. We obviously have limited visibility to forecast revenue beyond one fiscal quarter. As a result we will just provide guidance for the second quarter at this time. However, we currently believe the operating results of fiscal 2009 will be below the range provided in our outlook provided on August 5, 2008. We caution investors not to rely on prior estimates.

Now looking just at the December quarter we expect revenues for the second fiscal quarter ending December 31, 2008 will be in the range of $750-800 million and earnings per share will be in the range of $0.18 to $0.22. These estimates include a restructuring charge of approximately $0.04 per share. While we cannot change external events we can utilize our 70 years of experience in managing through adversity to lessen the impact of the current economic downturn and to emerge from this situation in a stronger competitive position.

We will continue to expedite the restructuring program and continue to implement operating cost reductions and spending postponements. We will reduce capital expenditure to a level more in balance with current demand and we will push for every benefit we can realize from the declining cost of raw materials. We believe our financial strength will lead the industry. Our balance sheet is strong and we are ahead of the game by already having begun a comprehensive restructuring program.

This concludes our prepared remarks. We will now open the line for questions.

Question-and-Answer Session

Operator

(Operator instructions) The first question comes from Matt Sheerin - Thomas Weisel.

Matt Sheerin - Thomas Weisel

Regarding the guidance, which I know is down more than seasonal. Would we expect then that the industrial and automotive markets which were the weakest in the September quarter also to be very weak or are there any signs of stabilization in those markets?

Martin Slark

Let me take the two markets separately. I think if you look at the automotive market and you look at the macro conditions in the market out there it is hard to imagine leading into Christmas and with the challenges the automotive companies have that really started here in North America but now I think have spread significantly to companies in Europe and you have heard about significant shut downs over the holiday periods there and now seeing some impact in Asia. There is going to be some recovery in that market in the current quarter. When you look at the industrial market I think that is a different picture because we have seen within the industrial markets there are some segments such as heavy duty vehicles, low automotive transportation, some alternative energy markets and things like that which are actually relatively strong. But the weakness interestingly enough we included in our industrial market equipment that we sell in the automotive plants, so the wiring systems that go into the automation equipment in those plants and obviously those sectors remain weak.

So I think the industrial market it depends a little bit on the balance of business. I think we have been more hopeful about some spots of growth opportunity there and the automotive market has got lots of publicity though there is not much hope for growth there in the next few months.

Matt Sheerin - Thomas Weisel

Distribution also, I believe plays a pretty big role in your industrial area, right? I know they have been very careful about inventories so I think that probably plays a part in it too right?

Martin Slark

It does. I think what we have seen is everybody in the current economic climate is very, very careful with their inventory levels and you are absolutely correct, generally speaking about 26% of our revenues totally go through distribution but the industrial sector is upwards of 70%.

Matt Sheerin - Thomas Weisel

My follow-up just regarding your commentary about materials pricing and your costs coming down I know it is going to take a couple of quarters before you actually see that. ASP’s have as you know held up pretty well and in fact in some cases have gone up. Would you expect to see customers come back to you in a quarter or two asking for price concessions because they have seen your costs go down in addition to the competitive environment we are in?

Martin Slark

I think the big trade off for us is obviously not just what happens with raw materials prices but what happens with pricing to customers at the same time. I think over the last 3-5 years we have seen dramatic increases in raw material costs and it has been hard to pass those on. Clearly it is going to take awhile for these reductions in raw material costs to filter into the market and I think we have an opportunity there to help our margins and obviously for some period of time we are not going to pass those on to our customers. We certainly view the reductions in raw materials as being a positive and if you look back in the history of our industry with stable raw material costs it has been much easier for us to generate more acceptable profit margins. I think the dramatic increases in the last year have been a real challenge. So just getting back to either reductions or stable raw material costs would really help us in general I think.

Dave Johnson

I just want to add as we look at the automotive and industrial markets in the analysis included in our comments we talked about the consumer lines and this is usually a quarter in consumer where customers would be ordering from us in a sequential increase every month as they start to prepare for their production into Christmas. I think what we are seeing and what everybody is seeing is that customers are very conservative. No one really wants to get stuck with inventory. They are waiting until probably the last moment to decide what they are going to be doing for Christmas and that gives us very little visibility and lead times come in there so they may still do more for Christmas. We just don’t know. I think they are all wanting to make sure they don’t produce too much because then they are all stuck with discounts at the retail level and things like that. So the consumer too is really something we lack visibility in and this is the quarter where our customers usually do most of their production.

Martin Slark

Let me add one other comment which I think is relevant. I think everybody is very interested in what do we see in terms of end-demand. We all lived through the 2001/2002 tech bubble burst and in that period we saw dramatic cancellations and reversals of orders. We are not seeing that now. We haven’t seen any cancellations of any significance. What we are seeing now is just very conservative order rates. So it is consistent with I think a very weak economy.

Operator

The next question comes from Amit Daryanani - RBC Capital Markets.

Amit Daryanani - RBC Capital Markets

We are seeing the end market right now with things obviously slowing down quite a bit. In the past you have talked about acquisition becoming a bigger part of the growth profile. Could you talk about given the cash position you are in does the desire to do bigger deals than you have done in the past become a priority in 2009 for Molex?

Martin Slark

Let me just explain where we are with acquisitions. As you know we completed the acquisition of Flextech, which is a manufacturer of flat flex circuitry right at the beginning of this quarter and we also completed a joint venture in a company in Turkey, HCS, which is supplying wiring and cable to our structured cabling business. We have a pipeline of other opportunities we are working on but our focus is on specific end markets and technologies we are interested in. Our strategy has always been that we will acquire gains in technology or presence in the market. We would not acquire just to add size. Certainly our cash position now gives us the chance to do that at a time when other people would find that very difficult. I would stress though that people might think the valuations will come down dramatically but a lot of the companies in our sector are privately owned and you really have to build relationships with those owners over a period of time and you don’t see those valuations dramatically shifting in a short period. We certainly believe that will continue to be a part of our growth plan and we are certainly in a position to do that going forward even in tough economic climates.

Amit Daryanani - RBC Capital Markets

Maybe we can just go back to the guidance on the revenue side. You guys have been talking about down 7.5% sort of the mid point on a year-over-year basis. Could you just go through the 4 or 5 key end markets you have and what you expect on them on a year-over-year basis?

Martin Slark

If you look at the automotive market clearly we are anticipating that is going to remain weak and we will be down sequentially. We are anticipating the data market would hold primarily around with strength in data storage and the low end of the notebook market. The telecom market for us is split in two between the cell phone sector and telecom infrastructure, our cell phone business was up about 20% year-over-year and sequentially and what we are seeing there is reasonably good growth in high end phones and in low end voice only devices. It is the mid part of that market that has come under some pressure so we would anticipate those markets will remain relatively stable more so in the cell phone sector with the infrastructure being hit by capital expenditure. As Neil said it is hard to predict. That normally would be a market where we would see sequential growth. We are seeing that being stable as we come out of the quarter and then industrial I covered earlier on. Lastly if you look at some of the newer markets we are in, things like medical electronics and interestingly enough we take these 50 focus accounts we wanted to focus on in emerging markets and year-over-year those 50 focus accounts we identified a year ago were actually up 30%. So there are clearly individual customers in certain end markets that are doing well. I think the key in this particular market climate is to focus on those companies. It is not so much an end sector thing it is a customer by customer specific focus.

Operator

The next question comes from Brian White – Collins Stewart.

Brian White – Collins Stewart

I’m wondering if you could provide us with the certain market percentages in the quarter.

Martin Slark

What do you mean by certain market percentages? You mean the percent of our sales that come from each of those markets? If you look at page five it is actually broken down on that page. It is 16% on automotive, 22% data, 29% telecom, 18% consumer, 12% industrial and 3% medical. It is on page four of the slides.

Brian White – Collins Stewart

If you could maybe walk us through how the quarter proceeded, both how you exited the September quarter and how demand trends in October have compared to September?

Martin Slark

July and August were relatively weak but that is seasonally the case because normally the first quarter is back-end loaded. September was stronger than July and August but not as big a pick up as we would normally see which is why we pre-announced our results once we saw that. October has continued in a roughly similar level so far to September.

Operator

The next question comes from Steven Fox - Merrill Lynch.

Steven Fox - Merrill Lynch

On the cost side, first of all could you talk about your ability to get SG&A back down into the upper teens type of range over the next few quarters given that your sales are going to be a lot lower than you thought just three months ago?

Dave Johnson

We are in the upper teens now certainly but as you point out as revenue declines there will be a challenge there. The things we are doing though we have frozen all of our headcount additions. We are having all the replacement provisions approved individually. We have reduced travel to meetings. We have reduced a number of other things of that nature. The major activities will still be the restructuring and we have accelerated the restructuring process today in addition to the announcement that I made with respect to our industrial business we have also announced some headcount reductions in 4-5 locations in the United States and in other parts of the world. We are taking those actions but it will be a challenge because as revenues come down as a percent that will tend to move up.

Martin Slark

I think you have seen us manage through previous downturns before and we are going to do all the things we usually do in terms of cutting overtime and all the discretionary parts and joint ventures. Certainly we have a certain amount of flex in our SG&A costs so that in a down period we can take out. We are taking all the steps we can to do that as well as accelerating the restructuring plans we had in mind.

Liam McCarthy

Our savings in the restructuring we have put out $100-120 million in savings cumulative and that is the number we are aiming for sure at the high end of that savings. 35-40% of our savings are in the SG&A area. As Martin said that will be a very significant part of it.

Steven Fox - Merrill Lynch

You mentioned the $35 million in savings cumulative through Q1 so if you just said cumulative through the end of fiscal year I wasn’t quite sure I heard you right. Did you say from that $35 million how much more you can realize irrespective of volumes in total cost savings this year?

Dave Johnson

The incremental above 2008 would be $30 million.

Steven Fox - Merrill Lynch

So that is an additional $30 million the rest of the fiscal year?

Dave Johnson

For the full fiscal year including the first quarter.

Steven Fox - Merrill Lynch

How much did you get in the first quarter then?

Dave Johnson

About $10 million.

Operator

The next question comes from William Stein - Credit Suisse.

William Stein - Credit Suisse

Following up on that last question, it looks like you are expecting to get another $60 million of savings for fiscal 2010, am I getting that right?

Dave Johnson

Roughly that is right. $50-60 in fiscal 2010.

William Stein - Credit Suisse

At those levels of savings, maybe you can remind us of the operating margin goals you had stated for fiscal 2010 and 2011 and whether or not you need to adjust those at this point?

Martin Slark

The original goal when we started the restructuring plan was obviously around we talked about 32% gross margin, around 18% SG&A and 14% operating margin. I think the world has changed dramatically since we put that projection together but what hasn’t changed is based on our new global structure we believe we can operate with a smaller number of large integrated facilities around the world, a much more streamlined organization and we think we can spend that capital more effectively and I think you have already seen the benefit of that structure in the way we spend our capital today. We are not duplicating capital around the world and ultimately that is going to help reduce that depreciation which will also help our cost structure. So, we believe that now the economic climate is a lot more difficult what we have to do is push ahead with that restructuring plan, accelerate it where we can such that when we emerge out of this with increased growth you are going to see more flow through to the bottom line which was always our goal.

William Stein - Credit Suisse

No hard adjustment to those numbers at this point?

Martin Slark

I think it would be more realistic to put together a projection once we see where the market is going. I think to put together any long-term projection beyond the current quarter given the uncertainty just wouldn’t be appropriate.

William Stein - Credit Suisse

I see that there is a trench of debt I think about $251 million with current maturity. Can you remind us when that is due and if you will refinance that or if you can use cash and be kind of go without the debt going forward?

Dave Johnson

That debt is our 15 billion yen in Japan. It comes due next September. The bank in Japan has told us at least their intention now is to allow us to roll it over if we want to. We also have cash in other parts of Asia that we could use to pay that down if we so decide. So we will be making decisions depending upon the credit markets and depending on other issues later in the year but that should not be an issue for us.

Martin Slark

That debt is at a 1.3% interest rate and our decision about whether we pay it off or not depends a lot on obviously the interest rate we would get to roll it forward if we decided to do that.

Operator

The next question comes from Jim Suva – Citi.

Jim Suva - Citi

Can you talk a little bit about your inventory situation? I believe inventories went up about 2% coming into the quarter for the December outlook where sales are going to be coming down? I believe some of it may be due to some of your restructuring and as you close facilities you probably want some inventories up. Can you tell us whether or not that is true and also the concern about last time we saw a slow down in the December quarter you ended up with some pretty meaningful inventory write downs. Is there concern about inventory write downs and since you are not seeing any order cancellations is it just a matter of time until you see order cancellations and will you be stuck with inventory in your hubs?

Martin Slark

You are absolutely correct, the build up in inventory is about the transfer we are doing and putting buffer stock in place to protect our customers. They are primarily high volume, multi covenant holds and obviously once we have completed the move we can then run that down. Liam may add some more detail to that.

Liam McCarthy

There is for sure some products that are related to transfers because of the risk [inaudible] talked about in terms of that sort of planning process and that is a global issue because we had quite a number of product transfers going on across the world. We need to cover that. We are of course impacted by the volume and the change of dynamics in the bookings pretty quickly over one quarter. We do look at the mix of our inventory though and we see the nature of that relative to [inaudible] type of inventory and most of that inventory we believe is very easy to get to in terms of reducing levels because it is an active product. It is not a slow moving product.

Dave Johnson

You are absolutely correct on the prior history point. That was a little bit different. That was just coming out of the blast of the technology bubble and one market that had really boomed for us was the fiber optic market and that market as you know just collapsed. We had quite a bit of individual customer specific type products that weren’t just going to be sold. This is a little bit different in terms of, I don’t know if it is any better, but the slowing is broader and doesn’t lead us to the conclusion we have that type of inventory at risk nor do we see such a change in one specific market.

Martin Slark

To draw a parallel given your knowledge of the supply chains I think you will remember when the tech bubble burst last time the biggest issue was with custom [inaudible] that were specific to given end programs. We had the equivalent of that in some of our fiber optic inventory. We really don’t have that today.

Jim Suva - Citi

Switching gears to page 10 or numbered slide 10 in your handout where it talks about raw materials, copper, gold and plastics, this is very useful. Can you maybe help us understand the magnitude of each of these three buffets of copper, gold and plastics maybe as a percent of sales, a percent of cost or help us understand the magnitude of which is more important? I believe copper is most important but maybe you can correct me and maybe let me know the magnitude of those?

Martin Slark

We can give you some ballpark data there. Interesting enough the relative importance of these things has shifted based on the dramatic shift in the costs. So Dave will give you some break downs and give you some idea of what the impact will be.

Dave Johnson

I guess to start with an overview, we buy about 130,000 ounces of gold per year. We buy roughly 25 million pounds of copper per year which is within that brass strip and plastic I won’t give you a number on that because it is plastic resin. In terms of spend, actually each three…gold, copper and plastic resin each are all about the same between $25-30 million per quarter. If you look at the cable we buy, the copper cable we use for our integrated products, that would drive copper up to be the biggest user but we don’t include that in our calculations because the price of buying copper cable doesn’t move quite the same as the price of buying brass. Overall, if you take those three items and exclude the copper cable it is about 14% of cost of sales in the current quarter. I think that is kind of a general overview of that situation.

Jim Suva - Citi

A quick housekeeping question, tax rates moved a little lower or moved around a little bit. What should we look for a going forward tax rate?

Dave Johnson

The tax rate we believe for the full year will remain at the 32% level but that would depend upon the mix of earnings throughout the balance of the year.

Martin Slark

I think the comment we would make relative to the raw material is that there is always the time lag between when commodities go down and are a benefit of material to us. So we are expecting the benefit of that will be seen primarily in the March quarter and then more so hopefully in the June quarter.

Operator

The next question comes from Shawn Harrison - Longbow Research.

Shawn Harrison - Longbow Research

I know it is somewhat of Herculean to ask, but if you could maybe look forward to the March quarter given the muted seasonality you are seeing here in the December quarter would you expect to see less of a sequential decline than you normally would? I think it is around 2% normally. Maybe would the March quarter be more flat potentially?

Martin Slark

I appreciate the question and I can tell you we have obviously spent a lot of time like everybody else has trying to project that forward and we don’t do projections because what we are trying to do is obviously put cost structures in place that would protect profitability even if we saw revenues further decline. I honestly don’t think we have any clue at this point where the market is going to go and we have seen such volatility in the financial markets in the last 60 days and the knock down impact on our industry I think has been pretty dramatic. It is just so hard to tell where this is going to go and I think a lot of it is going to depend on consumer confidence coming out of Christmas, how much inventory is left on the shelf there and what happens in terms of the availability of credit around the world. As we start to see that evolve I think we will be in a much better position and I’m sure a lot of other people will be to predict where the markets are going.

Shawn Harrison - Longbow Research

My follow-up question has to deal with cash, free cash generation. I don’t think the depreciation and amortization was given on the call?

Martin Slark

It wasn’t but we can give you that.

Shawn Harrison - Longbow Research

On top of that I know that you talked about bringing the capEx under significantly below the initial guidance of $230 million. Can you keep it at the 5.5% of sales run rate you had this quarter for the rest of 2009 or is that something maybe I guess is too aggressive to model?

Martin Slark

Let’s give you two bits of information there. Number one, I think the depreciation in the quarter was $63.5 million.

Dave Johnson

If you look on the release it is on the cash flow statement on the release.

Martin Slark

Number two, in terms of the capEx, 5.6% is a little long for us. I would say if the market conditions remain weak then you are going to see it at a similar level. Obviously the bulk of that capEx going forward is dedicated to the new product expenditure we have. We have completed the building of our new plant in Viet Nam and we have also completed the first phase of our facility in Chengdu, all of which is helping us with our restructuring program as well.

Shawn Harrison - Longbow Research

If we look at interest income and other income in this quarter it jumped around a little bit. How should we kind of forecast that going forward?

Dave Johnson

As you know we are not giving guidance out going forward but in that area I would just state that both of those will stay relatively consistent going through the rest of the year.

Operator

The next question comes from Carter Shoop – Deutsche Bank.

Carter Shoop – Deutsche Bank

I wanted to better understand the operating leverage here in the model going down this cycle here. At the mid point of guidance it looks like 7.5% decline in sales and looking forward roughly a 240 basis point decline in operating margins. I wanted to better understand what type of cost savings we are going to see on a sequential basis in regards to the earnings initiatives? In particular I want to better understand what your guidance is for depreciation in the December quarter and also what kind of headcount reductions we can expect to see in the December quarter.

Dave Johnson

Let me start kind of with the last thing first. In terms of the headcount, headcounts that were impacted by the restructuring activities in the first quarter was 518 people. So in total there is 518 and some of those will be in the second quarter and some throughout. That is the headcount impacted. The headcount, I mentioned there were some additional headcount reductions and facility closures that were announced today. That will be roughly another 100-120 people and that would be also coming maybe late next quarter and in the next couple of quarters as those actions take place. Some of those actually take place quite soon. In terms of the leverage, I think you are right in that we are expecting some cost savings in the second quarter. One of those comes from material costs. Actually there are two areas that are pretty clear. One is material costs and one is because of exchange rate. We are seeing with the stronger dollar we are seeing improvements in our transaction benefits from that. So we are seeing a couple of million dollars of transaction benefits and also $1-2 million of better pricing because of commodities. Most of that, as I said, will be some improvement in Q2 but more in Q3 we would see even more benefits in Q3 from the commodities improvements.

Carter Shoop – Deutsche Bank

Do you have a sense on what kind of decline in depreciation you will see in fiscal Q2 versus fiscal Q1?

Dave Johnson

I don’t have that. We don’t give guidance on depreciation but it is probably a slight improvement.

Martin Slark

I think there are two things you can also see happen. We obviously had a certain amount of headcount in our plants that is contract and temporary labor and also part of our labor cost is around overtime so we think that by eliminating that contract and temporary labor and also eliminating overtime we can bring down our people costs as well. As we continue, which I think we have done a good job over the last year or so, bringing down our capital expenditure ultimately that is going to start to drive down the depreciation line particularly when you think about the average depreciation period on our assets is probably in the 4-year range.

Carter Shoop – Deutsche Bank

As a follow-up question, an earlier participant asked about the linearity in the quarter and how October looked relative to September. I believe you mentioned October was at a similar level to September. Can you verify or confirm that is a correct comment? Then following up on that do you usually see October pick up at all from September or is September usually relatively flat with October?

Martin Slark

When you look at the six month period July through December, September and October are relatively the strongest months because you obviously have softer periods in July and August and it tends to make July and August weaker and the second quarter tends to be front-end loaded. When I look at the run rate for bookings that we saw in September we saw them sequentially stronger than August. We saw similar rates so far in October. Again, it is hard to tell where this quarter is going to go because normally this would be a front-end loaded quarter and I think we are still seeing the impact of some of the financial issues on people’s spending patterns as well. So it is very hard to predict where this is going to go.

Carter Shoop – Deutsche Bank

It doesn’t sound like your overall outlook has deteriorated significantly since you pre-announced. Is that an accurate statement?

Martin Slark

I think we were obviously expecting a recovery in September that would have been more dramatic than we saw coming out of the holiday period. That didn’t happen. I think now we are trying to understand where does the market go from here? Certainly the outside press and what you are reading about with what is happening with customers continues to be negative. So there is not a lot of good news out there and I think what we are trying to do is say which end markets, which customers and which geographies can we go after to get growth because I think it is going to be a question of getting incremental revenue and market share from wherever you can get it.

Operator

The next question comes from Anil Doradla – William Blair & Company.

Anil Doradla – William Blair & Company

When you look at your handset growth during the quarter which grew I think in mid 20% was that driven mostly by new design wins or greater growth with your existing customer base? Can you give us some color on that?

Martin Slark

You know a fair amount about how our business has been spread across different customers. With the growth there I think it has come from a couple of things. Number one, diversifying our customer base. We were very dependent upon one customer and we have been able to aggressively change that. Number two, increased design wins with some new technologies particularly in the antenna area, winning new antenna designs across some new customers.

Anil Doradla – William Blair & Company

So if I were to look at your top two or three customers can you give an approximate revenue composition? Were they like the top three handset guys were 50% of your handset revenues? Can you give us some more color?

Martin Slark

I don’t want to get into too much detail about where that is coming from. What I can tell you is that there are a number of new companies out there that are involved in the handheld type devices so it is helping the overall revenue in this sector.

Anil Doradla – William Blair & Company

There has been some talk about inventory level build ups especially in emerging countries like Asia and even Latin America. Is that something you guys are seeing or is it something you have not seen?

Martin Slark

The place where we would see that would be in our vendor managed inventory. We have seen a little bit of a build up in terms of a couple of days relative to the prior year and year-over-year quarters but nothing dramatic. Nothing where we would be overly concerned about at this point in time. I think one of the things that is very different, we keep harking back to the 2001/2002 time is there we saw dramatic pick ups in inventory and huge cancellations. Here it just seems to more be people being very, very cautious.

Anil Doradla – William Blair & Company

Let’s say in the next 6-8 months, we don’t know when, but if things turn around which end vertical would you see snap out first? Is there any one particular end market?

Martin Slark

I think if you look at the end markets our expectation is you would see the telecom market so far has held up reasonably well so if telecom, both mobile and infrastructure, let’s just say that continued I think what we would like to see is a snap back in the consumer driven market and the data markets. It is hard to imagine given the structural issues you will see a recovery in the automotive sector in the near future. Another area I think we would look at would be some of the new emerging markets like medical electronics and alternative energy. Those are things as well. You don’t need much of a recovery in some of those segments to have a pretty good pull through in terms of operating results.

Anil Doradla – William Blair & Company

In terms of your market share gains with respect to some of your competitors, as a whole do you see yourselves improving in terms of market share or do you think over the next couple of quarters you see yourselves at same levels? Any color?

Martin Slark

Traditionally when we have had these slow downs, as you know there are 2,000 connector companies out there, and this is the period I think you see the stronger companies typically gaining share because we are able to continue to invest in products, put capacity in place for these new products and some of our weaker competitors find that increasingly difficult to do if they have very stretched balance sheets and things like that. So I think you will see the stronger companies including Molex gaining share during this period.

Anil Doradla – William Blair & Company

Is that part of your guidance?

Marti Slark

No because we have only given guidance to the next quarter. I think when you are talking about assuming we are going to see a prolonged slow down here I think you are going to see that as the slow down continues. But more so the best periods of growth for Molex have often been coming out of a slow down where we see the cumulative benefit of ongoing investment in new technologies when other people have not been able to do it.

Operator

The next question comes from John Harlow – Barrow Hanley.

John Harlow – Barrow Hanley

When I try to take your guidance for the next quarter it seems to me you are referring to an operating margin somewhere between 7.5-8%. When I look at that historically that is a pretty low number with a pretty deep slope. Listening to your comments about variable margins which you said about commodities and average selling prices and the restructuring you have done there are a lot of quarters in terms of fixed costs and I’m sort of puzzled that the margin could get that low that quick.

Martin Slark

I think the reason for that is if you look at our revenues the mid point of our guidance is $775 million. That is down almost $100 million from the revenue that we reported in the fourth quarter. So you have seen in a six month period $100 million in drop there. I think the dramatic nature of the revenue drop is what impacts those margins and as we have said there were material cost benefits which we have only seen those raw material costs come down this quarter and you wouldn’t see them until the second half of the year and also the restructuring we have been talking about the same thing there too. What you’ll see in the next quarter is the impact of the dramatic drop in revenue on a relatively similar cost structure and the things we have been working on which we said was a two-year plan, we always said we would be back-end loaded this fiscal year.

John Harlow – Barrow Hanley

Give me an idea of what your fixed cost is as a percent of total cost would be last year and where you think it will be at the end of December. Higher or lower?

Dave Johnson

The fixed cost compared to last year? It will be probably a little bit lower as a percent of total cost.

John Harlow – Barrow Hanley

But higher as a percent of revenue?

Dave Johnson

Higher as a percent of revenue, yes.

Operator

The next question comes from Alexander Paris - Barrington Research.

Alexander Paris - Barrington Research

On the restructuring you are talking about $90 million costs to date, $45 million over the rest of the year leaving just $5 million during 2010. Given that is consistent with your progress you are pretty much done by the end of fiscal 2009. Does that mean the $50-60 million in savings for fiscal 2010 are really going to come very early in the year?

Liam McCarthy

Obviously we have a high intensity of programs going on at the moment that we have announced just over these last few days and we have more to do. We said we had of the total number of 70 programs we had about 30 programs to complete. We still have a number to cover and these will be announced in the next two quarters. So, I would say you can realize those savings but maybe into Q1 of next year and moving forward.

Dave Johnson

I would characterize it that you are right, most of the charges will be taken by the end of 2009 but when we take the charge for a plant the closings kind of take place over the next period of time. It’s not the announcements are made and then the actual activities still take place over time. When I look at our estimates for the savings they are actually fairly even in the quarters for fiscal 2010. There is a little bit less in the fourth quarter but in the first three quarters they are probably about the same in each of those quarters.

Martin Slark

A good way of illustrating that is we announced in the beginning of October the closure of one of our plants in Japan and that revenue is going to be moved to facilities in Viet Nam and in China. The closure was announced October 1. The complete move overall of those products, which is a significant number of tools, etc. takes all the way around until February or March of next year so you will see the benefit of that in the fourth quarter. When you see these announcements of costs being taken based on the accounting rules there is also a six month delay before you then start to see the operating benefits.

Alexander Paris - Barrington Research

In the same area, you are trying to reduce your overall footprint but I see you guys have the Japan plant and the two in Europe and building a new one in Viet Nam. When you are all through with this I know your international business is about 70% does the international, just because of the restructuring, does that go up? Second, what percentage of your business will then be in low cost areas?

Martin Slark

When we are finished with restructuring we will have about 70% of our manufacturing in low cost labor countries. A higher percentage of our production capacity outside of North America. I think that largely reflects the fact that if you project out where the demand for electronic components is going to be in the next five years more of that growth is going to be in Asia. I think our manufacturing footprint will reflect that. The other thing you are going to see in the end of that period is we will have a smaller number of larger, integrated plants. I think the strategy we had before where we had a lot of very small facilities between every country around the world, given the way trade barriers have come down and logistics have improved we don’t need to do that. The profitability of those larger plants where we can leverage things like plating facilities and test labs, etc. is just so much better. So I think we are lined up with a much easier footprint to manage that will be more concentrated in low cost countries and more focused in the markets where we are seeing the growth taking place.

Alexander Paris - Barrington Research

What percentage are you now in low cost manufacturing? Obviously Europe is not a low cost.

Martin Slark

No, when we talk about low cost we would be talking about Mexico, Eastern Europe, all the low cost countries in Asia. So we would exclude Japan from that, etc. Today we would be roughly 60% and we would be over 70% by the time we were done with this plan.

Alexander Paris - Barrington Research

Overall international would be over 70% too?

Martin Slark

It is 73% last year outside the U.S. so it would be higher than that.

Liam McCarthy

Martin makes a very important point that the restructuring is not about just moving things to low cost countries. It is also about leveraging economies of scale. If you take for instance intense pressure that transportation, the automotive industry is supplying to suppliers today, this is very tremendous pressure. Typically in the past we serviced that business by pulling a lot of capital into many plants around the world and that model is no longer competitive in the transportation sector. It means we have to look at a model where we invest less capital in the automotive type business and we leverage economies of scale into bigger operations and fewer operations. So it is not about what we think about low cost countries. That is part of it, but it is also about leveraging economies of scale. Part of the capital expenditure reduction you are seeing is more just realizing because we are not putting as much capital into programs for automotive customers where we find out several years later the customers didn’t need the original committed volumes in the program. So we are reluctant to add capital to certain customers and certain businesses until we know the volume is there and more predictable. That is why we want to have scalable, low cost plants where we don’t put too much capital into them and at the same time we leverage fewer plants for leveraging economies of scale. That is part of the approach to getting to be more profitable in the automotive space and that is part of the logic behind our restructuring.

Martin Slark

When you look at the overall plan when we started this process we had about 8 million square feet of manufacturing space around the world. When we are done with it we will have about 8 million square feet of manufacturing space too it is just going to be in very different places and concentrated in a smaller number of places.

Alexander Paris - Barrington Research

In relation to a question someone asked earlier, your depreciation and amortization is probably not going to go down if your square footage is going to stay the same?

Martin Slark

It will because what drives the depreciation and amortization is not the factories because you can depreciate those over 25 or 40 year periods depending on what country you are in. What drives it is the investment in new product tooling. What we used to do in our old structure was duplicate tooling in multiple geographies. Now each product line is going to be centered in the location where we can manufacture it most cost effectively. That is why our capital expenditure as a percent of sales has come down dramatically. At one point it was 14% of sales. This last quarter it was only 5.6%. So that is why I said you are going to see that happen over a 3-4 year period because the depreciation period on that equipment, molds, guides, assembly machines is typically in the 4 year range. So the manufacturing part doesn’t impact that negatively but the better use of tooling around the world does impact it very positively.

Liam McCarthy

Also not committing to high tooling programs until we know the customer volume is more predictable.

Operator

The next question comes from Phil Marriott – ASB Advisors.