Molex F4Q09 (Qtr End 6/30/09) Earnings Call Transcript

| About: Molex Incorporated (MOLX)

Molex Incorporated (NASDAQ:MOLX)

F4Q09 (Qtr End 6/30/09) Earnings Call

August 05, 2009 11:00 am ET


Steve Martens - VP of Investor Relations

Martin P. Slark - Vice Chairman of the Board, Chief Executive Officer

David D. Johnson - Chief Financial Officer, Executive Vice President, Treasurer

Liam G. McCarthy - President, Chief Operating Officer


Amada Anani (ph) - RBC Capital

Anil Doradla – William Blair & Company

Steven Fox - CLSA

Brent White (ph) - Tykon Deroga (ph)

Bill Florida - Advisory Research

Unidentified Analyst

Ahmidad Mosy (ph) - UBS

Jim Suva - Citigroup


Steve Martens

Good morning, everybody, and welcome to the 2009 Molex Analyst Meeting. For those of you whom I haven't met, my name is Steve Martens, and I'm the new Vice President of Investor Relations for Molex. I'm looking forward to working with you all in the future to promote and market Molex to the investment community.

I'm joined on our stage today by our executive teams, Dave Johnson our CFO, Liam McCarthy our COO, and Martin Slark our CEO. And now I just want to go over the agenda for today.

The first portion of the meeting consists of a review of June quarter and full year results. This will be followed by an update of the global restructuring program and other initiatives by Liam McCarthy and a summary of the Molex growth strategy by Martin Slark. We'll then have a Q&A session before we break for lunch so I'd ask that you hold all your questions until the end of the morning session. In the afternoon we'll have three sessions where we cover current trends and initiatives in our key markets followed by a wrap-up of the meeting.

Before we turn our attention to the quarterly results, let's review our Safe Harbor statement. During the course of this presentation we will be providing forward-looking information and referring to non-GAAP measures. Please read carefully the forward-looking statement section of our press release, Form 10-K, and the related slide presentation, for an understanding of the risks and uncertainties associated with forward-looking information and the reconciliation of non-GAAP to GAAP.

And now Martin will review the revenue results for the quarter.

Martin P. Slark

Thank you, Steve, and good morning, everybody. Thank you for spending your day with us. Hopefully we can share with you some interesting information that will give you a better feel for how Molex is doing in the current environment and our plan for the future.

I'm going to talk very briefly about the trends that we saw with revenue and bookings in the last quarter and then Dave Johnson is going to give you a lot more details about the actual financial results for the quarter. I'm going to come back at the end of the morning and talk a lot more about what our strategy is for future growth and then we'll obviously be happy to answer any questions that you have.

If you look at the last quarter, as you know we reported venues of $570 million, so we're at the upper end of the range that we gave at the beginning of the quarter. What's interesting about the quarter, and I'm sure you've seen this from other companies you've followed, is we have started to see a recovery in terms of the incoming order rates. But if you look last quarter, the bulk of the revenue that we shipped was actually ordered in the same quarter. We had about an $85 million increase in the quarter, and that was based on orders that were received primarily from March through June. If you looked at our backlog you could see it stayed fairly flat.

If you look at what has driven that, I think there are a number of underlying factors. First of all in several end segments that we serve, it is clear that inventory levels were run down to a very low level, so there's some restocking going on and we're seeing that particularly in distribution and some of the other channels that we serve.

Secondly, there have been a number of incentive programs offered around the world; the automotive market, the Cash for Clunkers program that you're very well aware of here that's clearly been overly successful. What hasn't had as much publicity, I think, is there've been similar programs going for some time in Europe, and if you look at the consumer markets in Asia, there have been significant incentives provided for Chinese consumers to buy consumer electronics goods. So those short-term incentives have also driven some short-term demand.

And lastly we have started to see through particularly our consumer electronics customers, the start of builds for the Christmas season. I think the question that we can't answer today is how sustainable is all of that? What we do know is, based on the trends that we have seen in July, the incoming order rate is continuing to increase and it is very broad based. But frankly on a personal observation basis, I have not seen tremendous change in consumer sentiment here in North America, so you have to question is it sustainable in the long run. But certainly as I'm going to show you in a second, our bookings trend has been consistently going up and it's continued into this quarter.

If you look at the change in revenue by end market segment, what you can see is on a sequential basis it was up in virtually every end segment with the exception of telecom. And the primary reason for that is really because of relatively low unit growth in the cell phone market. The cell phone market, as you know was up about 2% on a sequential basis.

Automotive revenue increased significantly, based again on automotive plants restarting production, a number of them particularly here in North America were shut down and they were brought back online, and these incentive programs kicking in.

If you looked on the year-over-year basis, our revenues were down 35% which we think is pretty consistent with what's happened to the overall electronics industry on a year-over-year basis.

If you look at the auto trend, auto's continue to improve and this produced for us, the first positive book-to-bill ratio in several quarters. Our strongest auto increase, without question, came from the Asia-Pacific region, and in the Asia-Pacific region our orders were up over 30% versus the third quarter of our fiscal year.

In addition, the recent order trend that we've seen in distribution suggests that customers are becoming a little bit more positive about putting more inventory back in place, and our view is that as we go into the September quarter, we expect that bookings number to certainly want to exceed the $600 million target.

On a sequential basis, those bookings were up 21.4%, but they were still down 32.4% year over year, but as we start to get in the coming quarters, the comparisons are going to get very different. So we're very happy to see that positive momentum, and our biggest challenge obviously is to keep that going.

If you look at the monthly trend, I think what that shows you is after what was a very challenging period going into last Christmas when the low point of our bookings was the 144 we recorded in December, but frankly a lot of our customers were shut for the month of December or several weeks of it. Every month since then we've basically seen the auto trend improve and that has continued into the month of July and so we've seen that pace accelerate as we are moving forward so we are certainly pleased and excited to see that happen.

If you look at the auto trend by end market segment, as you'll see here, again it was very broad based and it's across every single end market segment with exception of industrial, and I would make two comments there. Number one, that data is a little distorted sequentially because we had a very large order in the third quarter from an exploration company in Europe so that distorts that number.

But I would tell you, a lot of our industrial business comes out of Europe. And if you look at what's happening geographically to demand, there's no question Asia is strongest, the US is flattened out and starting to pick up more so in certain segments, and I will tell you, Europe is flat and probably still getting worse. Certain segments in Europe are really struggling, and I think if you look at the inflexibility of the labor markets in Europe, it's going to be very hard for them to adjust in the same way we see in other places around the world to the change in end demand. So good broad based improvement, I think, in bookings across all of the end segments.

Let me now introduce Dave Johnson who's going to talk about the financial results, and I'm going to come back and talk in more detail about our segment strategy and a growth strategy in a minute. Thank you.

David D. Johnson

Thank you, Martin, and let me add my welcome to everyone. It's nice to have you here in our headquarters and we hope that this day is very interesting for all of you. I'm going to start with the P&L for the quarter and the top line revenue as Martin showed in his slide was $570.6 million, that's 12% above the March quarter and at the high end of our range. Our range for this quarter was 525-575 so we're really very pleased with the revenue results for the quarter.

Gross margin was 24.1%, an excellent gross margin coming after the 18.5% that we had in the March quarter, and that's both because of our good followthrough on the revenue, but also the results of our restructuring program.

SG&A at 24% is down from the March quarter clearly, which was 27.5%. Also in absolute dollars, which you'll see in a few minutes, our SG&A was actually improved versus the last quarter. And if you look at the gross margin at 24.1% and the SG&A of 20%, obviously that implies a very slight operating profit before we get to the restructuring and impairment line.

We had $216.6 million of restructuring and impairments and we'll go through that a bit more on the GAAP to non-GAAP slide in just a minute. Interest income and other income were both down from last quarter, but not really of a material nature. Dropping down to the effective interest rate we had a tax charge of $4.5 million in the quarter on a pretax loss of about $215 million, so a very, very unusual tax rate. The biggest thing on a GAAP basis is that the goodwill impairment, we get no benefit for the goodwill impairment and I'll go through the tax rate for the non-GAAP tax rate in just a minute.

Dropping down to the bottom line, EPS was a loss of $1.27 and we'll start with that going to the next page showing the reconciliation of that $1.27 down to our non-GAAP EPS. So we're beginning with a pretax loss of $215.3 million versus our restructuring charge, and here we're showing three different elements. If you look on our P&L we break this into two categories, but I think for better clarity I'd like to break it out into three categories for this purpose.

The restructuring charge is $28 million. That is specifically related to our restructuring program. I've got a slide later on that explains the financials of that in some more detail and then Liam will also go through the restructuring program in quite a bit more detail later on in the day.

The next two, the intangible impairment as well as the goodwill impairment are related to our industrial business. That business has dropped off quite sharply over the last couple of quarters. At the end of the year we go through our impairment review and based upon that analysis we determined that it was appropriate to impair the goodwill for that business.

When you look at that business unit there's still about $15 million in goodwill left after this impairment and when we look at the entire business from Molex, there's only $130 million of goodwill so we've had two goodwill impairment write-offs during this year. The net result though is we've got just $130 million of goodwill left on our balance sheet.

Adding back those two items we get to our non-GAAP pretax profit of $1.3 million and let me say here that compared to where we thought we were going this quarter, that's a very good result. We had a pretax loss last quarter on a non-GAAP basis of $42.2 million and we were struggling to get back to breakeven as you all know and I think the point is we got there and then some and we're very pleased with that recovery.

As this shows in the bottom line, the non-GAAP EPS loss is $0.09, and what that implies of course is a significant tax charge, even though we had a very small pretax profit. During the quarter on a non-GAAP basis we had a tax charge of about $17.8 million and the basic reason for that is we've got losses in certain locations that are caused by the big downturn in the industry and under the accounting rules we are unable to take the benefit of those losses in the current quarter. So we put up valuation allowances for those losses and hopefully in the future as those locations return to profitability, those valuation allowances will be reduced.

In addition we had, at the end of the year we go through our analysis of our FIN 48 analysis of uncertain tax positions and we put up a few additional reserves for FIN 48, primarily because of positions we've taken in China where we're uncertain about our ability to create those benefits in the future and we put those up.

So I say the way I look at this is that certainly there was a tax charge in the quarter, but I look at the tax charge of being about the $0.09 or $0.10 effect on the quarter.

As we go forward we expect that next quarter and throughout 2010 we'll have a tax rate of approximately 34% so we're getting back — as we come out of the big downturn there may be some anomalies in terms of the tax rate because at very low levels of income, that plays havoc on the rate, but I think from an overall perspective we should expect to be at the nominal rate that we've been at, at about 34%.

The next charge shows the results for the full year. On a full year basis our revenue was $2.58 billion. Now that's down about 22% from fiscal 2008. In absolute dollars it's down by almost $750 million. And to put that in perspective that's more than an entire quarter of results for us. A very significant drop-off for us, not unlike what we saw across the industry and through our customers' businesses, but for us obviously that was the impetus for all of our cost reduction activities and the things we've gone through this year.

The restructuring and impairment line here is $415 million. That included an impairment that we took in the second quarter for our automotive division and as I said, at the end of these impairments we're now down to just a $130 million goodwill on the balance sheet.

The only other area that I want to point out on the full-year results is the line for other income. That is up to $25 million, about twice what it was last year. We had an exchange gain in the second quarter which was about $12 million overall that was related to the strengthening of the dollar at that point in time and that's a bit of an anomaly that we won't probably be recurring.

The next chart shows our primary balance sheet metrics. Our net cash position is still well above $200 million and in fact, our net cash position decreased by only $7 million versus the last quarter. We are expecting a much bigger drain in cash during this quarter because of our revenue growing up and the working capital requirements that that drives. But as you'll see in a minute, the success we had with both receivables and inventory really kept that in check and our cash position is still very, very strong.

During the quarter we put in place a new credit facility. The revolving credit facility, a three-year term facility for a total value of $195 million. At the end of the quarter we had just $25 million drawn on that so we've got $170 available on that line of credit. It's a facility that's led by JPMorgan. We have five other banks in the group including Standard Chartered, Northern Trust, Royal Bank of Scotland, and HSBC. It is a very, very good bank group, very global in nature, and really fits well with the Molex business plan.

The reason we did this was number one because of security. Just to make sure that during these difficult times that we had enough committed capacity for capital that in case we needed to draw on the line, we could do so, but secondarily as we see the recovery start to take shape, we are now in a position to be able to use that line to do acquisitions and to plan a bit for our growth in the future so that's the reason we've done it. We pay about LIBOR plus 250 basis points today. We think that the terms are quite fair and you'll see from — we filed an 8-K on this credit agreement. I won't go into great details about it now, but you'll be happy to take a look at that. We also filed our 10-K last night and you'll be able to see more information in the 10-K.

I mentioned the receivables in inventory were in good shape. Receivables especially, we had really had great progress ever since the downturn and really ratcheting down on our collection activity. We've had very, very few write-offs. We've had some customer bankruptcies, but most of those have been extremely minor in terms of the impact on Molex. I'll remind you that we have credit insurance for most of our US customers and most of our European customers so that certainly helps, but we've also managed the days down, I think very well during this crisis. Since December we've seen both days and receivables and inventory come down in each of the quarters.

Inventory, in fact for this quarter, is even a better result. Inventory came down both in absolute dollars and as a number of days and we're seeing that coming down quite significantly. And that's also in the face of us putting up inventory in certain locations, building inventory because we are moving production in connection with our restructuring program.

So in some locations we're having to build inventory, but in others we're really managing the inventory to come down. Another data point that we often talked to this group about is our hub inventory which is our vendor managed hubs where we have our inventory on consignment at customer locations at other locations that are pulled from those locations, and we watch that carefully because that would be a sign of inventory really rising and back in December it did really rise. It rose to almost 50 days. We are now at well below 30 days and those inventory days have come down in each of the last five months, six months since December.

The capital expenditures for the quarter were $50.3 million and as we say in the press release, about $14.5 million of that spending was related to restructuring that we have, especially in Japan, we've closed two locations in Japan and are moving production to two new locations. We've had to do some rebuild of those locations, some expansion, we've brought in some new equipment to be more efficient to save the overall cost, and that was about $14.5 million. Trend wise I think our capital spending is still good and we'll discuss that a bit more in just a minute.

Research and development of $39.6 million for the quarter is up almost $5 million from the March quarter, but about half of that — and we said it was going to go up. If you'll recall, we talked about that going up in the quarter. About half of that increase is due to two new technology initiatives that we've invested in. One is acoustic technology that's for the Japanese consumer market and the other is for the solid-state lighting market and you'll hear about both of those later on today from Martin.

And finally our cash flow from operations was about $60 million and free cash flow was also positive in the quarter.

The gross margin trend is one that we are very pleased to see the growth back to 24.1% after being at a low of 18.5%, and that is really based on two factors. Last time we got together we talked about our 50% fall through model which means that if our revenue goes up by $10 million we would expect our gross profit to increase by about $5 million and that's based on roughly a 65% variable cost in our cost of sales.

In this quarter we certainly had good followthrough from our revenue. We also had about $9 million of sequential improvement in our fixed-cost structure because of our restructuring activities. For the entire quarter we saw a sequential improvement of $12 million, of which $9 million impacted cost of sales and $3 million impacted SG&A. But a very, very good trend in our gross margin.

As we look forward to next quarter we would expect that to continue. That followthrough model should continue and we should see an incremental improvement in our gross profit because of that followthrough.

Now there's several topics we always talk about in gross margin, one of which is price erosion. We saw a slight increase in price erosion this quarter versus last quarter, but when you look at the overall trend over the last three years, I really would suggest that our price erosion has been fairly consistent. 2009 versus 2008 versus 2007 for each of the last three years, our price erosion for the full year has been just about 4% and we say that 4%-5% is where we think we should be and works with our business model. That's really where it's been for the last three years.

Commodity costs are starting to increase, though in the quarter itself we had very, very little impact of commodity costs, and for us the two biggest ones, just to remind the group, are gold and copper. I would expect though, because they are increasing and increasing quite sharply right now, that we could see potentially a $2-$3 million negative impact in the first quarter because of higher gold and copper prices.

Now we have put our hedges in places as we have done every year this time. We have a hedge of about 25% of our copper spend in place. That hedge was put in place at a strike price of $2 and copper yesterday closed at $2.79, so we're already well in the money for that hedge. And the way that hedges work, just to remind the group, it's a cap. We have an option that works that if the price of copper goes above $2, we benefit financially from that hedge. We then pay the higher copper price, but we get a financial benefit from the hedge. And if the price of copper goes below $2 than we benefit from the lower price of copper and the hedge is not worth anything to us.

We've also hedged our gold, roughly 45% of our gold spend for the quarter. The strike price for the gold hedge is $926 per troy ounce and gold is now trading, I think yesterday at $966, so that's also now in the money going forward.

The next charge shows our SG&A spending both in absolute dollars and as a percent of revenue. I'm going to focus mostly on the absolute dollars because the percent of revenue is really skewed because of the lower revenue levels that we've seen over the last couple of quarters.

Starting with the big picture, looking at all of 2009 versus fiscal 2008, our SG&A spending is down by $78 million. So year over year, a reduction of $78 million and we have gone through a lot of actions, a lot of hard work, a lot of, I think appropriate changes to our organization to get to this level of SG&A, but I think when you look at it in another way — look at the fourth quarter of 2009 versus the fourth quarter of 2008 and take that run rate times four, the actual run rate reduction in SG&A is about $140 million. That really emphasizes what actions we've taken to reduce our SG&A.

When we look forward to next quarter and maybe I should start by saying that we said to this group last quarter that we thought SG&A would be roughly $140 million. We obviously did better than that coming through with $136.7 million. My thought is for next quarter is we'll be at about the 140 again. We believe that 140 is the right place to be and as the market is starting to come back, we'll be adding some SG&A in response to the market growth so my target is roughly 140 for the first quarter.

When you look into the second quarter, we'll be seeing about a $5 million increase in SG&A for that quarter as well, and the reason for that is that we have, as I think we've announced to everyone here, we cut our salaries for virtually every salaried employee in the company back in February, and our intention is now to reinstate those salaries in the second quarter, and that's about a $5 million impact for that quarter.

This chart shows the capital expenditure trend also both in percent and in dollar terms. If you look at the entire year, our CapEx spending was $179 million or roughly 6.9% of revenue, down from prior years, bu up a little bit because of the restructuring spending that I mentioned just a minute ago in the fourth quarter in particular. As we look forward to next year, we are going to continue to keep a lid on capital spending, even as the market comes back. We believe we've really changed with our new structure our capital spending patterns, and we believe that our capital spending should be in the range of 6%-6.5% of our revenue for fiscal 2010.

This chart describes, from a financial perspective, our restructuring program. And I mentioned that Liam will go into a lot more detail about the actual program itself, but let me just start with kind of the financials so we're all on the same page before we get to that. The total program has not changed. We still believe that our cost for the entire program will be between $240-$250 million, and for that we believe that our savings will be in the range of $190-$210 million, so midpoint of 245 of cost and $200 million in terms of savings.

In the fourth quarter we had a charge of $28 million for restructuring. That's actually lower than we thought it would be, mainly just because of timing. But the benefit is we had, in terms of savings, about $2 million better savings that we thought we would get going into this quarter.

For the full year this year we had $131 million of cost, and of that 131, about $106 million of that is cash restructuring that is primarily for severance and those types of cost, so roughly 80% in this year was cash basis.

Looking forward, I think the most important thing is to look at the savings that we're building into our forecast and our budget for 2010, and there's $88 million of year-over-year benefit that we see coming into 2010 from our restructuring program. And I think sometimes it's hard to see that year-over-year so let me describe how that works sequentially. It might be a little bit easier to think about that savings on a sequential basis.

We talked about last time we had an $8 million sequential benefit in Q3 versus Q2 of this year. This time we had a $12 million sequential benefit in Q4 versus Q3. We thought it would be 10, but it's become 12. In the first and second quarters of next year we expect a $3 million sequential benefit in each of those quarters, so three more in Q1, three more in Q2, and then $4-$5 million sequential benefit in each of Q3 and Q4. So ramping up as the year goes, fairly consistent, we're really getting a lot more clarity in terms of the cost savings and the impact of that in our P&L.

Overall we believe that the overall program, about 60% of the benefit goes to cost of sales and about 40% goes to SG&A.

Now once we've been through with the entire restructuring program, and this is a slide that I think I promised in our last call, is what does it look like? What does the model look like going forward when we get through the entire program? And this is looking at — I'm not going to predict for you today when we'll hit the $700 million or the 750 or the $800 million, but I'd like to say that of these different breakpoints of revenue, this is where we believe the gross margin SG&A falls. So at a level of $800 million, we believe that our gross margin will be 32%, our SG&A 18%, and our operating margin 14%.

Now to put that in perspective, a year ago in the fourth quarter of last year we had revenue of 872. So about 10% — this model is 10% less revenue than we had a year ago. At that point we had an operating margin of 11%. So on 10% less revenue we have 300 basis points more operating margin. That really demonstrates the leverage that we've achieved by this cost-reduction program.

And now finally let's talk about, coming back to the current time, looking at our outlook for 2010. As we've said at the outset, the revenue has been quite strong through the fourth quarter. Bookings have been strong and we see bookings continue to be strong in July, and based upon that we believe that our revenue for the first quarter is in the range of 590-630. At the midpoint of that range that's a 7% sequential increase. We had a 12% increase in Q4 and now we're seeing a 7% increase in the first quarter. That we believe, and a 34% tax rate, should give us a range of $0.04 to $0.10. So at the midpoint of that range it's a $0.07 EPS and if you adjust out the tax charge for our non-GAAP numbers for this year, for this quarter we were at zero. So going from zero to $0.07 is our forecast going forward.

Visibility is getting better. I think that the long-term visibility though is still quite weak, and we are not at this point in time going to provide guidance for the full year, but rather provide you guidance for this next quarter.

And with that I'd like to introduce Liam McCarthy to talk to us about operational issues and restructuring.

Liam G. McCarthy

Thank you, Dave. Good morning. I'd like to now update you on the status of our restructuring program, but in addition to that I'd also like to update you on key operational initiatives that we are taking and driving to improve our business.

While fiscal 2009 has been a very difficult year and a challenging year, it has also been a year where we've made major operational and structural and process improvements. And I will update you this morning on the progress of restructuring as we complete the remaining projects this year in what has been a comprehensive three-year restructuring program. I will also update you on the changes that we've made to our divisional structure as we adjust to be a leaner, faster, and more efficient and effective company.

And during this difficult time period, we have stayed the course in terms of driving significant continuous improvement throughout Molex. We've done this through our Global Lean and Six Sigma program, through leveraging our global SAP infrastructure in terms of global process improvement, and we've done it through several strategic initiatives that I'll talk about. So this is the material I will cover with you this morning.

So let's start with restructuring. Our global restructuring program encompasses over 100 projects, 80% of these are finished now and the remaining 20% will be completed this fiscal year 2010. This restructuring plan includes the closure of 14 plants. The remaining 14 plants of which are currently in progress, so they're currently being done this fiscal year 2010. So a total 14 plants, five of which are going to be done 2010.

The focus of our plant closures has been to position operations to be in a far more competitive position going forward. So that's the main focus of all of our restructuring. Now that this means, it means a consolidation into fewer, but larger, cost-effective plants, thereby leveraging economies of scale.

It means a significant rationalization of our automotive and industrial operations, and they're the operations within our business that need restructuring the most. It means tightening operations where our SG&A cost structure is high and coincidentally, a significant amount of that is also in the automotive and industrial area.

So our plants post restructuring, the focus is to have larger, leaner, higher-utilization plants, where we can drive higher return on net assets and be in a far more competitive position to serve our customers and win business going forward.

We have worked with our restructuring program to get the right balance, the balance between cost and technology. We are getting close to where we are 60%-70% of our capacities in lower cost countries, but at the same time our plants in higher cost locations, they play a very significant role for Molex in driving revenue, in driving new technology, and in dealing with complex processes and products.

These plants in higher locations such as the US and Japan are larger plants now, and they run at higher utilization after the restructuring program is complete because we consolidate and leverage that. How do we do that? For instance, if you take our Kagushima plant in Japan, a very large plant, highly efficient, it runs 24 hours a day, seven days a week, with unmanned shift in the moulding area, for instance, at nighttime. So they introduce how to maximize the cost and efficiency of the plant.

All of our plants after restructuring, all the major plants are fully vertically integrated plants. In other words they've got stamping, plating, molding, and assembly, and that allows them to respond to customers faster and with a better cost structure.

Two tremendous assets for our future are our new facilities in Chengdu in Vietnam. The smaller of these operations is our plant in Hanoi in Vietnam. It has made a great start and is part of our micro products division and it's a very cost effective plant with a great work force committed to customer quality. This plant was setup to meet the needs of our Japanese customers who are increasingly moving operations into Vietnam.

We moved into our new facility in Chengdu this fiscal. It's a 1.1 million square foot plant. It's the largest plant we have by far. It is already being audited by many of our key customers, customers from Japan, from the US, and from Europe, and all of them have rated this plant with extremely high scores. It's certainly a top class facility.

In the Chengdu facility we also have a global tool room that has made a very big impact in such a short period of time. For example, it supplies mold spares that will cost 70% less than what it costs in the US. It provides tools that are very complex, and with high quality, and it can turn molds in two to four weeks. It's a global tool room serving our commercial products division and their plants in the US, Singapore, and Shanghai, a significant asset for Molex as we go forward.

So although we have done significant plant restructuring with our closures, with the addition of Chengdu and Vietnam, our total manufacturing square foot has not reduced. In the year 2000, 41% of our sales were in Asia and now it's 55%. As you can see here, our footprint in Asia is 4.5 million square foot after restructuring. That's 60% of our total, while Europe reduces down to 10%. This is a significant shift to address cost and also to have a footprint where our customers want it going forward.

The result is a better balance in operations which positions Molex for greater growth in Asia in the future. It makes our operations larger, leaner, and more competitive going forward.

Our restructuring cumulative savings will reach $200 million as Dave has already pointed out in fiscal 2011, relative to the restructuring cost of $245 million. It's a relatively quick return on investment, but this shouldn't minimize the amount of planning and the hard work required to get this accomplished. In this regard, fiscal '10 is indeed a very challenging year. The product transfers and plant closures are complex and involve risks, but we will handle this and we will bring this program to a close as planned in fiscal '10.

David has talked about the sequential quarter on quarter savings. The entire restructuring program over three years adds to a cumulative $200 million as he said, and our plan is to achieve $88 million year-on-year savings in fiscal '10, and the final $30 million rolls in, in fiscal '11, to reach the cumulative 200.

40% of our restructuring savings are in the SG&A area and 60% are in cost of sales. Cost of sales and SG&A are being attacked on a number of dimensions in Molex. Restructuring with a cumulative saving of 200 million plays a significant role, but it's not our only focus. Leading the global division structure is part of it, leading supply chain structures and consolidating planning and administrative hubs and warehouses is part of it, driving continuous improvements to our Global Lean and Six Sigma plays a significant piece.

And driving growth and return on investment in sales and in product management and in product development is really essential. All of these play a significant role in terms of attacking our cost of sales and our SG&A.

So that's enough about restructuring. Let me just move on and talk to you a little bit about the actions we're taking to streamline our organization's structure. Clearly one part of this is a consolidation from five global product division down to three, and the other part of it is moving to a hub and satellite structure for our design, distribution, management, and warehouse, and customer service processes. So at a high level there's two dimensions that I'd like you to remember as I talk about this.

So during the course of this fiscal we reduced our global product divisions from five to three, and we did this for a number of reasons and I'd like to take just a few minutes to explain why. First and foremost we did it to lean our cost structure and reduce our SG&A. Second we did it to align each of our plants fully with one of the three product divisions. This is to make each plant and make the process much more effective in terms of assigning clear ownership and accountability for plants. And this drives faster decision and more effective plant operations management.

Third, the industrial piece of our business, what was in the APEP division, the automation and electoral products division. That business unit did not have any plants in Asia under the five division structure. Now as we consolidated that in with the integrated products division, that business unit can leverage fully the integrated product plants that we have in China, in Thailand, and in Taiwan. Again, there's a synergy there that we're trying to leverage between integrated products and the APEP business unit.

The other point I'd like to emphasis is that major plants, for instance our Chengdu plant, that plant was facing the prospect of having to report to two separate division under the old structure. With the three division structure, that plant is now fully under the management and ownership of the commercial products division and that is good for the plant and it's good for the process, and again it's much more effective.

And the other point I'd like to make is that our transportation products division and our commercial products division, we consolidated them. As we do that, we raised the bar for automotive projects in terms of capital allocation from a division perspective. Such capital allocation competition is an important part of improving RONA, return on net assets. And CPB investments going forward will have to compete harder for such capital.

These are all good reasons why we've consolidated from five divisions down to three. The three global product divisions that we now have are, first and foremost, our micro products division, and there's been no change to this division. This division is focused on fine pitch micro miniature product. The president of the MPD division is Katsumi Hirokawa and he's based in Japan.

The commercial division is now the combined-commercial division. This is a combination of commercial and transportation. The President of the Commercial Products Division is Jim Fleischhacker, and Jim is based in Singapore.

Our integrated products division, which is a combination of IPD and APEP as I've already said. There's very good synergy from this consolidation and the President of this division is Michael Nauman who's US based.

The other point I emphasized when we got onto this section of structure was we're trying to move more in the direction of moving to a hub structure for design, logistics, and customer service, and let me explain a little bit about that and what a hub is.

A hub is basically a center of excellence. It's where you consolidate into a particular point and we have set about trying to have a number of centers of excellence for these processes related to the company, some related to division, some are global. In terms of why do we have this concept of hub structure, it reduces the overhead and the SG&A cost, it eliminates deportation of unnecessary processes, it provides 24-hour support capabilities, increases standardization, it leans our processes, and it increases the capability and knowledge at a site to service our customers.

So it's a key element in terms of addressing the complexity of our business practices, and as we try to leverage global best practices, the hubs play a significant role.

Let me explain this a little bit further. For instance, if you take a design hub. You have three global product divisions and each division will have one or two significant design hubs, in some cases one. And that design hub, if you take it from a product development point of view, that design hub has got the brain power and the knowledge of the division. It's got great capacity, it's got high capability, in the hub, and we try to maximize design standardization, tool standardization, material standardization, and best practices when it comes to design in the hub. At the same time the division will have satellite design centers that are located closer to the customer, and those satellite design centers, their function is to capture the voice of the customer quickly, turn concepts quickly, and where they need help through the hub, to leverage help from the hub.

But if we were trying to get through processes where we leverage material and standardization of material where we try to get to low-cost tooling, it's very important to have the teamwork of working from the consolidated design center point of view. That's where the hub brings us. At the same time, the satellites allow us to stay close to the customer when acting uniform with the hub. We have the same principle which applies to logistic hubs. If you look at our global logistics function, it's a global process and (inaudible). But we are setting up in a regional basis, one, or in some cases two, regional hubs for the distribution of our product, and we do that so that we can leverage ocean freight more, we can reduce the shipping lanes, and we can have better planning of our product intercompany, and that we can enable warehousing to be outsourced where that makes sense.

We do the same process for customer service where we want to leverage best practice. Working with our customers now when they deal with forecasts, when they deal with VMI and many, many practices, and they deal with contract manufactures, OEMs, et cetera. It's a complicated supply chain and hubbing to our customer service centers, customer service centers of excellence, fewer but more significant in terms of size, those customer service play a vital role in terms of leaning and driving best practice towards the company. These are very significant in terms of generating operational results.

Let's move onto the other key areas of key initiatives that we're driving for continuous improvement in the company. In addition to new products which Martin will cover, we are concentrating on a number of key areas in the operational space to drive continuos improvement. First and foremost I will talk about our global lean and six sigma program, I will talk about what we're doing to significantly improve our pricing system and the process. I will talk a little bit about what we're doing in terms of our investments into environmental management systems because that's increasingly more important from an operational perspective, and also I will talk about the many programs that we're working to improve our capital spend and capital efficiency.

Let's talk about global lean and six sigma. We had a lean and six sigma initiative going on in Molex for many, many years. However since fiscal '07 we launched a global lean and six sigma program. It was a much more structured program, better definition, and we've invested in that program significantly to get good results. And we've achieved some tremendous results. We are now three years into the program and to date we've run well over 1,200 projects completed under lean and six sigma and we've achieved, to date, $80 million of savings from this program. This is happening through the reduction of waste, improvement of quality, and focusing on improvements that make a difference to our customer, and we continue to invest and achieve significant year on year improvements through this program. It's really an exciting program.

As I've said, we have $80 million of savings since we started the program in FY07. This fiscal year we set a goal of $60 million to achieve and I expect that we will achieve that. We have over a thousand people trained on lean and six sigma. We have 80 dedicated fulltime black belts working on continuous improvements and we've got 660 or so green belts, and the rest are working on lean. So it's a tremendous organization commitment. The investment to date has been very reasonable as you can see from this chart here and the cumulative savings continue to go up year on year.

The organizational commitment and support has been tremendous, hence the return his far exceeded our expectation. Equally important since we introduce global lean and six sigma, our customer quality metrics have improved by over 40%. So this investment helps us to combat the impact of price erosion, it helps us to eliminate waste and improve operational efficiency on many, many different fronts, and can be leveraged on the cost of sales side or it can be leveraged equally so on the SG&A side. It can be leveraged to improve our revenue. It's a fundamental investment in the people and infrastructure of our company.

Our focus on improvement is not only on operation cost and SG&A, but it's also on top line, and in particular I'd like to draw your attention to what I would say to the key area of intelligent pricing. Pricing plays a key role in our business. It plays the key role to leverage volume and growth to win with standard products and the strategy of how you go about doing that. It plays an important role also in terms of getting a better return in terms of what I would call value pricing where we offer unique technology or unique products.

Pricing to reflect the challenge of low volume, high-mix, to make sure that we get a good return on such product, pricing to reflect the more complicated terms and conditions sometimes get imposed upon us, we need to leverage them into the pricing model so that we don't give away all of that for free.

And pricing is very important to leverage to make sure that we don't have any leakage of profit going to the company through poor administration of pricing. As a result, we're investing in this fiscal in a significant upgrade to our SAP systems in terms of capability, and also in terms of our organization structure and resources to leverage pricing. And we expect to see the benefit of this in the coming years.

As consumers and as governments place greater importance on higher environmental standards, so do our customers. Molex is well positioned to service these needs as we have a very mature Ecocare program, and it is capable of servicing customers very quickly — their information needs with the product that they want to our website which is ranked one of the best in the industry.

Customers are increasingly eliminating suppliers who don't measure up in this space. Molex is a leader in the environmental management, and each year we continue to work hard to each even higher standards.

The change from a regional structure to a global product structure was a very important part of reducing our capital spend. We now avoid duplicating tools in each region and multiple countries like we used to do when we had the old regional structure, and it was hard under the old regional structure to drive standardization programs.

We're now standardizing on tooling because for each division, for our 100,000 products, only one division owns each one of those products. So as they look at a product or a product line or a product family, they look across the company and say what is our strategy for this product, how to get the best cost, how to invest wisely to get the best return on net assets, how to drive standardization of tooling, standardization of component design, how to minimize the capital investment, modular assembly machines, reusable tooling — all of these ideas are part in parcel of what the division's drive now to try and drive down the cost of what we invest in capital.

Also for some products with very low and very short life cycles, under the old structure sometimes we'd have a plant in a high cost location investing a lot of capital to try and automate such a product to bring it to success only to find that the product life cycle was short and then we have too much capital tied up in the program.

Under the new structure, every division has got plants in low-cost countries and where it doesn't make sense to commit that capital, we don't. All of these are important dimensions to improving our capital spend and achieving the goal that Dave has talked about.

In addition we have now two large tool rooms. I've already talked about the tool room in Chengdu which is part of the CPD or the commercial products division, and we have one very large tool room as well in Japan for our MPD division. Both are highly capable, fast, and cost effective, and all of these initiatives that I've talked about, all of them are what contribute to the reduction of our capital spend as a percent of revenue.

In 2006 we were at 9.7% of our revenue and capital. 2009 we're at 6.9. We continue to make this a priority. Our focus is on proving the RONA metrics across our divisions. Our new product planning process is now much more focused on leveraging global plants in the division to maximize RONA.

Capital spending is vital in driving new product development in our business, so capital is good. What's important is to drive the efficiency of how we spend on it to get a better return on each dollar we spend to drive up the return on investment for our shareholders.

In summary, the restructuring and the operational initiatives that we've been driving are very significant. Our 2010 manufacturing footprint is well positioned to service the growth which Martin will cover.

With these initiatives coming to fruition, customers are now seeing Molex with larger more cost-effective plants, high technology and high quality plants, and very much what I would say, best in class operations. So yes it's been a difficult economic environment, but at the same time operationally it's been a time of great change and it's been hugely strategic for Molex.

One of our objectives coming into this recession was to come out of it far stronger than we came into it. We're definitely on track to do that. Thank you very much.

I'd now like to turn you over to our CEO Martin Slark who will talk about Molex's growth strategy.

Martin P. Slark

Thanks, Liam, and good morning, everybody. This final session and then we're going to open up a Q&A session before we have lunch. I'm going to try and talk a little bit about the top line growth, what our opportunities to grow by market and also what are some of the different strategies which you're trying to adopt to grow faster in certain areas.

When I talk about this I'm going to break it down into three areas. I'm first of all going to talk about organic growth, something that I think Molex has historically been very good at. If you look back over the last 30 years, I think we consistently demonstrated the ability to grow fast in the market and I'll tell you how we believe we can keep that going by doing some things the same as we've always done them, but doing some things a little different in the future.

I'm going to talk about some new market areas we're focused on, and in particular, some key initiatives that I'm going to talk about briefly this morning, and then in this afternoon's sessions you're going to hear a lot more details about these initiatives that we think open up some new market areas for us that we've never been in before that leverage some of the technology that Molex has within our organization. And then lastly I'll talk about the role of acquisitions both to date and going forward as a company.

If you look at organic growth, if you look at the top 300 electronics companies around the world, we already serve about 70% of those so we're already ranked a top supplier to most of those companies. Now interestingly enough, many of you are aware of the Molex GAM program that we have, our global account program our top 20 customers, and you're probably also aware that if you look back over the last three years, a number of those companies, without mentioning any names, have had significant troubles in terms of growing their revenues and have obviously had a significant impact on our revenue growth as well. There are a number of companies that were booming in 2006 that have struggled over the last few years.

Now if you look at those global accounts, we think it's very important for us to maintain a strong relationship with them, because despite what they might do in terms of short-term revenue and profit growth, those are the companies that often drive new technology, and it's important for us to work with them to bring out leading-edge products we not only sell to them, but we're then able to turn around and sell to second and third tier companies within the same markets.

But one of the things we realized, particularly over the last couple of years and this sounds very simplistic, but it's very, very true, and our SAP system really helped us do some of this analysis is if you look at some of the companies that we make a good profit with, there's a very good correlation between how much money they make and how much money we make. And if you look across our customer base, I'm sure you can look at some of our customers and realize that those companies are really struggling to make money both in the long run and particularly in today's economic environment. It's very hard with some of those major companies in those markets that are under a lot of pressure, automotive in particular, to generate a satisfactory return.

So one of the things that we did is we looked at the degree to which our market is very fragmented. We have some 10,000 customers that we deal with around the world, 100,000 through distribution, and we said in addition to those 20 global accounts, let's pick 50 other customers that are growing rapidly, but are also very profitable in their own segments, feeling that we had the opportunity to grow our own sales and profits with those organizations.

And so we went through that analysis which started in fiscal year '07 and picked 54 accounts that we wanted to focus on as a company. Many of those were already customers, but we had a relatively low share and what we did as a conscious step, we started to redeploy some of our sales resources around the world to make sure that we could do a better job of covering those companies and leverage our sales for those organizations.

To give you some sense of the success of that program, we've already explained that last year in the current economic climate, our overall revenues dropped 23%. Those 50 customers, those focus accounts grew 2% in last year's market. And if you look at the recovery in our bookings over the last quarter, this is where a lot of that growth is coming from and why we're very excited about this program because one of the ways that we can leverage our global SAP system is to really drive which accounts we go after and how we focus our resources on the companies that gave us the chance for profitable growth.

Looked at another way, those 50 customers have actually gone from 40% of our revenue in fiscal year '07 to 21% of our revenue last year, and I guarantee you, that will be a bigger percentage in the year ahead. The benefits to us and to our shareholders is that we typically don't have to tool new products for those customers. We're typically able to take existing products that we have either in their current form or in some kind of modified form, and be able to sell them to those organizations, so we're leveraging existing capital expenditure.

The other difference is they're obviously, in relative terms, relative to our GAM accounts, smaller companies that we have in relative terms, more pricing leverage, so that helps us to drive better margins. And clearly to the extent that we can end up with 70 or 80 very larger customer of ours, it diversifies our risk and when you see business downturn, you're not so dependent on any one customer.

Now we have always, I think, had a pretty good diversification of our business, but this is really driving this even more. It's about not getting the $100 million customer, it's having a lot more companies out there that you're doing $10-$20 million with. And given the growth of the electronics industry around the world and the various segments we're in, there's a lot of companies' that we can go after that we believe we can generate this success with.

If you look at our business today and you look at these pie charts, I want to highlight two points because I think they're very important to Molex's recovery from this downturn. First of all if you look at our sales by geographic region, you'll notice on the pie chart on the right there that we now have over 55% of our sales in Asia.

Of the US based connector companies, we have by far and away the highest percentage of our sales in Asia. And I think if you look at all of the economists that are writing today about where's the global economy going, one of the things that they're all very consistent about, even though they might talk about the pace of recovery or when it happens, is they're all saying there's no question that Asia is going to come out of this faster than the rest of the world. And one of the key trends that we've seen for the first time last year, more of the electronics that was made in Asia stayed in Asia. And whereas when I lived in Asia in the mid-'80s through the mid-'90s we were very dependent upon North American and European export markets for our customers, there's a lot more of the electronics that's made in Asia which stay there, and I think the growth in that market becomes a lot more self sustaining, and you'll clearly see those markets recover faster in the current downturn.

The big difference there I think when you think about the stimulus packages that the Asian governments have put together, is the Asian consumers do not have the debt burden that you see in North America and Europe. So you give an Asian consumer the chance to go out and buy a product at a significant discount, they're out there doing that. We believe very strongly that we are very well positioned to take advantage of that growth opportunity in Asia, given how long we've been there — in Japan since the late '60s and in China since 1982. No one has the network in Asia that we have and the ability to capitalize on that opportunity.

If you look at our spread by market, you can see that we have a pretty good spread in terms of end industry. So we think our diversification there is very valuable and will help us as we move forward. The challenge I think we've faced is that if you look at this downturn, I had, like the rest of you, lived through the tech bubble bursting when we saw our market go down 20% in '01 and another 10% in '02, which was as 30% decline over a two-year period, we all felt that that was the worst decline we would ever see.

If you look at Molex's business, it actually held up reasonably well through last October, and our income order rate effectively dropped 50% in 60 days. I don't think any of us have seen anything like that and hopefully it will never be repeated. As a result, the second half of our fiscal year was, without question, the worst period in the history of the connector industry. What's good, I think, is we're starting to see things climb back, and the challenge for us is how to do we optimize on those growth opportunities around the world?

So let me talk about each of the end markets, and you're going to hear from our Industry Marketing Vice Presidents in greater detail about each of these end segments, where we think the growth trends are coming from in terms of the key customers we service, but also where are the growth opportunities for Molex as a company?

There's really, I think, three trends if you look at the data markets. First of all is the growing amount of data that is being transmitted around the world by the Internet. I mean that is just a staggering amount of data that's being transmitted and it's requiring increased investment in infrastructure on a global basis.

Secondly and particularly in the medical industry which I'm sure you've seen here in North America, there's a requirement to store more and more data. Now if you're companies are like Molex, one of the things that we have done during these economic downturns is we delay the replacement of PCs across our organization. The thing we can't delay is the storage data that we have to store because you've got to put it somewhere and the amount of email traffic that's there just drives increased usage of storage hardware.

And then the other trend that's underlying all of this is the increasing trend towards mobility. To the extent that companies are replacing PCs, they're not replacing it with a desktop, they're replacing it with a laptop. And as you know, last year we saw more laptops being sold than desktop PCs. That trend isn't going to go away. It's absolutely going to continue.

If you look to each of those segments, we serve the industry leaders in each of those markets, and one particular segment we're particularly excited about is if you look at the next generation laptop and notebooks, we have a very strong position in the sockets that will be used for the microprocessors in those devices. We've never been there before, you're going to hear a lot more this afternoon about why our content in those next generation devices is a lot higher than it's been in the past.

The last point I would make about this data segment, and this is something that our customers have been feeding back to us is that since the tech bubble burst, a lot of companies have been delaying the replacement of their infrastructure and there is a lot of pent up demand out there that if the economy comes back, I think you're going to see some of the industry's leading players in this segment see a pickup in their demand as people start to replace infrastructure that they do, and you certainly see that in our customers. In even our own organization I think people have delayed capital spending here, but eventually has to come back as the economy recovers.

If you look at the mobile market, let me talk about that in three ways. First of all what's been very well publicized I think, is the deployment of infrastructure in the developing world, where clearly people are not going to go to fixed-wire communication. You're going to see increased use of cellular infrastructure around the world and you're seeing the Chinese government in particular, invest in that infrastructure as part of their stimulus package.

The difference in that part of the world though is there is a very conscious drive to get Chinese supplies, companies like Ware (ph) and Zonzing (ph) to win that business. So being strong in Asia, being able to design into those companies locally, is very critical if you want to win your fair share of that business, and there's no question that Ware is going to become a global leader in this market.

The other trend you're seeing is when the tech bubble burst, everybody talked about the amount of fiber there was around the world that wasn't lit up, that wasn't being used, and there was discussion about the fact that there was 98% of that capacity was sitting there idle. Thanks to YouTube and the amount of video that's not being downloaded, that capacity is being used up. We're seeing some pretty good demand coming back into that fiber business. And the amount of data and the speed at which people want to transmit that data around the world is going to drive increased fiber usage. We're reaching the limits of what can be done with copper interconnector around the world.

Let me lastly in this sector talk about the mobile phone market because I think since the tech bubble burst, that has been one of the most exciting segments because it's been the place where people have seen, in some cases, 20% year-over-year growth. The projection this year I think is that we're probably going to see unit growth shrink by 10%, but it's still a billion plus units that are going to be produced around the world.

But the big change here, and I think the one that is most important from a connector perspective and perhaps from an investor perspective as well is the focus before used to be on who had what share relative to the number of units they produce. If you look at this market today, there are two leading players in the smart phone market that I don't need to tell you who they are, who today are approaching only 20% of the unit demand, but they control 50% of the profitability in the cell phone market.

Now we've talked before about the fact that the opportunity for us in automotive is not about the number of cars, it's about the content. And if you look at a low-end voice only phone, the connector content in those phones can be as low as $0.30 or $0.40. if you look at the latest high-definition cell phone that allows you to download streaming video off of the Internet onto it, you can have $15 of content in one of those phones.

So what the device is and how much content you have in it, is a lot more important today than how many units it produced, and I think what you're going to increasingly see happen is an increasing trend towards people buying more and more smart phones with more and more capabilities.

And what we've tried to illustrate on this slide I think is you've got different companies coming at this market from a different position. You're seeing the cell phone companies trying to figure out how do they produce as mart device that has more and more functionality, and you're seeing the traditional laptop and notebook suppliers, particularly in Taiwan, figure out how do they produce those devices at a small enough footprint so that you'll carry that around. And what people ultimately are trying to do is my guess is everyone of you in this room are probably carrying around a Blackberry for business use, an Apple phone because you happen to like it and it's cool, and a laptop because you still can't do a lot of the things you want to do on your cell phone.

Eventually we're all going to carry around one mobile device that's going to enable you to do all those things. The good news for us, I think, is the connector content in that integrated device is tremendous. So our goal has got to be to lead with the companies that are going to dominate that market as it converges on a single device.

Let me talk about a market that's a little less exciting, and that's automotive, which without question has been the most challenging market for us in recent years, and let me explain why I think it's particularly challenging, and I don't think Molex is the only company that faced this challenge to do well in this market.

Unlike the computer and telecom market where you can design in a product to one of the industry leaders and typically sell it to multiple players in that same end segment. Very often in the automotive market, particularly in North America, you're designing a custom special product where you are the only supplier and you are relying upon that automotive company producing the volume that they told you were they going to make.

Now there's no surprise in recent years, particularly in North America, many of those companies have come nowhere close to the volumes that they thought they're going to produce. That leaves you stuck with a product that you can't sell to anybody else and depreciation on that asset that's clearly being underutilized.

We believe, and I'm going to show you some data in a second, that global automotive production will be down 20% year over year, having been down 5% in volume terms. That doesn't sound as bad as some of the things you read about in the paper and that is because automotive production globally has actually been reasonably strong. The real hit has been here in North America and I'm going to show you some data of what's happened in some other countries around the world. Even if you look at Ford, GM, and Chrysler, you'll notice their results outside of North America and Europe are a lot better than they are here in North America.

The ongoing challenge is going to be to take advantage of the increased electronic content in those vehicles. Going forward, somebody is going to be producing 60 million plus vehicles around the world and the electronic content in those vehicles will continue to increase, through telematics, through safety and convenience applications, and the opportunity for electronics companies like Molex is a lot of that content is in the cockpit. It's not the old wiring loom that you used to look at before.

If you look at the data in terms of where the car volumes are going to go, the overall volumes will be down by 20%, but if you look at '09, what you'll notice on that chart is for the first time ever the volumes of cars produced in China will exceed the number of cars produced in North America. That trend will not change. You're going to continue to see more cars produced in Asia and consumed in Asia, and I think the interesting challenge is I don't think too many people in North America are going to buy the $3,000 Tata Nano. I've had the privilege in one of those, you wouldn't want to be hit in a Hummer when you're sitting in one of those things.

But what I think they've looked at in North America is nobody's figured out for that model in Detroit, what happens as the price point of cars drops dramatically versus where it was a few years ago? And clearly with increased Asian competition, that could well happen.

What we've seen is that Molex was very dependent upon North America with some presence in Europe. If you look at us today, our business is very rapidly approaching a point where it's one-third North America, one-third in Europe, and one-third in Asia. And clearly growing that Asian part of our business is our key focus.

And leading off what Liam talked about is we will, at the time our restructuring is done, have one automotive plant in North America, one in Chengdu in China, a single global design site and satellites close to our target customers. That will give us a much leaner cost structure in order to go after this market, and particularly in Asia we think we can sell more standard products across multiple car platforms which will enable us to drive much better returns from this market going forward. This without question has been the most challenging market for us, and certainly a big thrust of our restructuring we'll be talking about has been to refocus the company and put us in a position to succeed in this market going forward.

The reason we didn't abandon it is that this still represents about one-quarter of the global connector market, and if you want to be the world's leading connector company, you can't afford to walk away from a quarter of the market, but we need a different strategy to make satisfactory returns out of it going forward.

If you look at the consumer market which is clearly Molex's biggest strength, there are three really driving things here. First of all the increased transition from analog to digital devices, and if you look in the average western home today, and you can go home tonight and count them, there's roughly 25 digital devices in all of our homes. If you look in the average Asian home there's about three. If all that happens in Asia is the Asian consumers who are on a purchase-price parity basis are getting closer to US and European standard of livings go out and start closing that gap, the pent up demand for digital devices in Asia is very significant.

What's adding to that in terms of the standalone digital device is the process of starting to network those devices within the home. The concept of being more environmentally friendly, and just the growth in population the BRIC countries, Brazil, Russia, India, and China, and the driving desire to raise their standard of living is going to help the growth in this market.

If you look at this consumer market where I think we are probably stronger than any of our major competitors, we have the ability here to leverage all three of our divisions. The division in Japan clearly is a world leader in micro miniature technology. The commercial products division is able to supply the products that are needed for the networking industry, and our value-added division is supplying a lot of value-added subassemblies. It really supports the fact of why we want one sales force selling all of our products to all of the major customers in this market and how we can leverage the expertise we have, particularly in standard leadership and being cost competitive on a global basis.

One of the products you're going to see at lunchtime is one of things that people are trying to do now is download from their cell phone, high definition images onto their TV. The micro miniature HDMI connector that was developed by the consumer industry, Molex owns that standard. And if you look across the standards committees, we are increasingly winning those standard products, and that enables us to do two things. First of all, we can be first to market with that standard product, and secondly, license that standard product to other players in the market, but we don't have to license the derivatives.

So the modified products of those standards that are used by many companies in Asia, we are able to sell those on an exclusive basis and protect them with industry-driven standard technology.

If you look at the industrial market, this is the market for us that I think has a lot of presence in Europe and is clearly seeing the worst of the downturn currently. The opportunity going forward here is to integrate what we got from Woodhead in terms of electrical products that are sold to a different customer base than we had in the past. With the electronics that Molex has — so when you're seeing those industrial controls you're seeing increasing electronic content in those and the desire to network those around the factory.

In order for us to get benefit from that Woodhead acquisition, which we're excited about going forward, we've got to sell Woodhead and Molex technology into those new customers that we never covered before. It is a very different market for the other markets we're in, in that it is high mix, low volume. Whereas if you think about the consumer and data markets we're in, it's completely the reverse of that and we think that with the new structure we have in place we will be able to drive using increased Molex technology across a broader base of customers.

If you look at new products, we have always been an industry leader in terms of the number of new products we release. Our goal is to generate 20%-30% of our sales every year from products we've released in the last two or three years. Even though we've talked a lot today about trying to reduce our capital expenditures as a percent of sales and use that CapEx more efficiently, we have no intent of cutting back on our R&D investment. One of the things I'm going to talk about later is that we, typically coming out of these downturns, grow faster than our competitors, and one of the reasons is we continue to develop new products during market downturns that give us the ability to win new designs as the market recovers.

We launched last year 194 new products and we'll go over 200 in the year ahead. And as you see in the displays, we are increasingly becoming a global leader in the standards industry which helps us drive a lot higher volume sales in many of these products.

Now let me talk about some new markets that we've focused on and then talk about some new initiatives that I think you'll find particularly interesting this afternoon. We are, without question today, a very small player in the military and aerospace market. We've talked about it for awhile, but it's less than 1% of our sales.

The exciting thing for us though is that if you look at our fastest growing customers last year, five of those were out of this market. And the design in cycle here is very long. So if you look at our revenue, we haven't accomplished a much as we'd like, but if you look at our design in pipeline and the customers we're now selling to and the organization we have in place, this will continue to grow. But on the specific market areas that we're focusing on and it'll be based on this continuing conversion from mil-spec products to commercial off the shelf products, and we believe we are well positioned to take advantage of that opportunity. And I think particularly as the military is going to come under greater pressure to spend dollar wisely. They've probably been through an era where there's been a lot of dollars pumped into that market and you would argue that the current administration is going to be more critical about how that money is spent and they're going to want to get more of that value for money out of that military spending. So we think the commercial off the shelf initiative that is not growing as fast as people thought, could grow faster in the years ahead.

The medical electronics opportunity is really driven by the fact that many of us in this room, baby boomers are getting older unfortunately, and increasingly, electronics is being used as diagnostic equipment. We have always had connectors in things like MRI machines, but they don't make that many of those. The opportunity is when they start giving you a handheld device to take home, which you're probably seeing with blood glucose meters, and given the opportunity to download data from that device to the Internet so you can interact with your doctor on a remote basis. Or you start to see what we're seeing in hospitals today, the network hospitals beds around the hospital, the digitization of x-rays — this is starting to drive a much bigger opportunity for us than was there in the past.

The design in cycle was long, but once you're approved, the products are made for a very long time and we've started the process now of getting our facilities around the world certified so they can sell into this market and the first facility that has been certified to sell directly into that market is one of our operations in Asia. We're going to be supply 35 products into value-added cable assembles into that medical market.

We think this isn't huge dollars in terms of revenue relative to some of the other markets, but it's very good margin business for us and it's very easy to protect as we go forward.

Let me talk about two key initiatives that we think are very interesting. Molex in the last year or so has entered into a joint venture with several of Japan's leading consumer electronics companies to develop next generation acoustic technology. Now we're going to give you when you leave here today, a set of headphones that Molex helped develop. But we don't want you to walk away with the idea that we're going to get into the headphone business. That's just an example of how that technology can be used. What we're excited about is when you look at the number of plasma TVs and number of plasma screens there are round the world, is we're working with those Japanese companies to embed the sound into the screen, and we will be supplying the subassemblies that are used into that market. If you think about dollar content that we would then have in those displays, it goes up by an order of magnitude. It capitalizes on our micro miniature expertise, it capitalizes on our relationships with those Japanese consumer electronics companies, and we're using some patented technology that we believe we can protect from a margin perspective as we go forward.

And the second of these two initiatives is our solid-state lighting initiative. Most of you I'm sure have read about the transition that's taking place from traditional to LED light bulbs. Now we are not going to become a light bulb company, but one of the challenges with LEDs is how do you dissipate the heat from that LED and how do you focus the light?

We have taken some patented technology we have where we plate metal on plastic that enables us to socket the LED and dissipate the heat and eliminate any of the other componentry that you typically see with an LED light bulb.

Now I want to put these initiatives in perspective in that if you look back in Molex's history, we have in the past internally venture capital funded a fiberoptics business that is now a several hundred million dollar business, a high-performance cable business that's also several hundred million dollars, and our antenna business that went over $100 million last year as well.

When you look at the ways you can grow, we've been good at organic growth, and I think we're very good at funding these startups in new technology areas and we're funding two of them this year and we're excited about both of these. Are they both going to be blockbuster successes? I don't know. But certainly out hit rate with these type of initiatives has been very high and we can intend to do more of them, but be very disciplined about at what point do we get out and at what point do we continue to put money in.

The market for these light bulbs or this whole LED lighting initiative around the world is bigger than the connector market. So we don't need to get a very big part of this market, particularly not in the consumer part, but as you get involved in commercial lighting, to generate significant revenue and profitability of the company.

And what we've tried to highlight just on this slide is if you look at the picture on the left, it shows you how a typical LED light bulb is put together today, and if you look on the right, that is the Molex solution. When I tell you that we've had companies like Philips and GE and others visit us because of this technology, it gives you some sense about how excited people are about the technology we have here. So we see this as a significant opportunity that you'll hear more about this afternoon.

Let me last of all talk about acquisitions and what role we think they will play in our future going forward. We've tried to change, and I think necessarily so under our new global structure, the way we approach acquisitions. Like many companies I think, we used to look at companies that were for sale and determine whether or not they were of interest to us and often get involved in competitions to buy those organizations. Very hard to get a good acquisition out of those activities and we had a centralized group that did that. Part of what we've now done is our three product divisions now own the process of saying they have got to figure out how they grow faster in the market either by organic growth, these new venture startups, or through acquisitions, and they are responsible for identifying, negotiating the purchase of, and integrating those acquisitions.

We did that with Polymicro which is the company that enables us to internally (inaudible) which we got our money back on in the first year after we acquired on it. We've done the same thing with Aflex Tech which began in micro, and buying Motorola's antenna resources in Europe. So a very different approach than we've taken in the past, but clearly an area where we need to get better and an area we need to generate better returns.

Our focus going forward is going to be in the RF area where we have a pipeline of opportunities we're looking at. Acquisitions that we'd like to make in the medical electronics market, because that's a unique customer base where you need contact with those customers and the approvals, and we'd like to backward integrate into the wire and cable market because we own a lot of the IO standards that you see, but increasingly customers are saying don't sell me the connector, sell me the cable assembly, and often the value of the wire and cable assembly is more than the connector. So if you want to be cost competitive, you want to be able to supply an integrated solution, and we will certainly source that wire and cable out of Asia in order for us to be competitive globally.

Having the global products division focused on this we think also enables us to integrate those operations much faster and get better return on our investment.

So let me summarize before we open it up for question and answer. The last year is without question been the most challenging one in the connector industry. I think if you step back and you look at the 23% reduction in our revenues and you look at the industry data in terms of what's happened to the broader connector market, our decline in sales is pretty consistent with what you've seen across the entire market.

If you look at where the market is recovering, we believe we are well positioned to benefit from that recovery based on both the geographies and the end markets that are likely to drive growth.

To supplement our traditional organic growth we're going to go to the next level of focus accounts to help us further di versify our customer base and hopefully grow faster or more profitably, and we'll continue to focus on some new initiatives that drive internal technology that we have and (inaudible) and SSL are just two examples of that.

And I think one of the benefits that we have, and if you look at the top 10 connector companies in the world, we have far and away the strongest balance sheet of the company, so we are very well positioned I think, as the market recovers, to take advantage of acquisition opportunities as and when they occur.

I want to end with this slide because I think it illustrates the point we've been trying to make. If you look back to the downturn that we saw in the early '90s, the downturn we saw in '98, and the tech bubble bursting in 2000, the two or three years following one of those downturns have always been years when Molex has grown faster than the market and have had very successful periods. And we could have taken this chart back 30 or 40 years and you would have seen the same thing. There are things that we're trying to improve about our business model and the way we operate, but the fact that we continue to invest aggressively in new technology, have a world class organization globally, means that when a market goes down and we continue to work with those customers, we're the first ones to benefit when the market comes back and we're absolutely confident that you're going to see the same trend again.

I have no idea what's going to happen with the global economy in the next couple of years, but if it grows and the connector market grows with it, Molex will grow fast in that market.

Thank you very much and let me now open the floor to questions and we'll do our best to answer those. We're going to pass around some microphones as well. Go ahead.

Question-and-Answer Session

Amada Anani (ph) - RBC Capital

This is Amada Anani with RBC Capital. I just had a question about your guidance. It looks like we're talking about 7% sequential growth. Historically it seems to be sort of flattish in the September quarter, can you just talk about from an end-market perspective what is going to drive that growth, and the best you guys can gauge, can you talk about how much of this is end-market demand versus inventory replenishment.

Martin P. Slark

Let me answer the last bit first of all. I think the last bit about how much of this is end-market demand is very hard to judge. What I think we are seeing is a combination of inventory being restocked because clearly if you look at some of our vendor inventory programs around the world, the number of days went down to a very low level and distribution inventory, which we get visibility through our computer system, were very low as well.

And you've seen, as I said earlier, I think a certain amount of demand is being driven by these incentive programs. Now the question is, does that keep going when the incentive goes away? I mean clearly people in the US today are replacing cars which they weren't doing a few months ago because of the Cash for Clunkers program. How long that program continues is up to Congress I guess.

So my sense is, and I think you all have a better feel on the global economy than I do, is that consumer sentiment is getting a little better, particularly in North America. And the people — simple things are looking at their 401(k) and their not plummeting down so I think the whole psychology is starting to change a little bit and I think that helps.

And I just spent a couple of weeks in Asia and there's no question in Asia that consumer sentiment is a lot stronger. So I think some of what we're seeing is the environment getting a little better. It certainly stopped getting worse, but I think the speed of the recovery that we've seen in terms of sequential increase, some portion of that is clearly a correction from the inventory issue so I think it's a mixture of both, and honestly I think we're going to have to — that's why we really gave a quarter's guidance. I think we have to look at quarter to quarter and see where it goes.

Anil Doradla – William Blair & Company

This is Anil Doradla from William Blair. Quick question to Dave is you talked about after you come out of the rate structure program you walked us through some scenarios of margin and how it looked. Can you walk us through — I know, I mean from a timeframe point of view, given that you've got the restructuring work to be done combined on that the variabilities and the macro environment, best case scenario worst case scenario?

David D. Johnson

Over what timeframe? It all depends on the revenue growth of course. So what we took was we took out fourth quarter internal budget for this year which would be less than the low end of that $700 million, and used that as the base to then lever that up to those. So I'll give you that information, but I think in terms of trying to say what's worst case or best case, I mean I don't know. I've done a case of $600 million which certainly is worst case. We've got a case that goes up to 850 which I didn't show, but it all depends on timeframe and it's really up to the market forces over the next year and some of the success that we have, but I think it's very much market driven.

Anil Doradla – William Blair & Company

Follow up — you talked about smart phones and notebooks and all that stuff, from a content point of view can you give us some sense by how much — by what factor is it like 5X or 6X over a regular phone in terms of content?

Martin P. Slark

Yeah. I think actually I quoted the example of when you look at a low-end voice only phone that's being sold in China or India today, the connector content in that is significantly less than a dollar. If you look at a high end phone that has streaming video capability, you start looking at the fact that you can have a camera socket you could have — one of the things that's driven sales for us has been the antennas that are there which is embedded on the back casing.

You could have socket for the color display that is there, board-to-board product, battery product — I mean you can get up into the teens in terms of dollar and content, particularly if you end up with either an optical or a micro coax connector and cable assembly between the two halves of the phone, so it's dramatically different.

And that's why I said where — and we did the same thing. I think whereas before you'd look at units of cell phone growth, it's really more about can you get the content and drive up your content in the new products that are being released?

Steven Fox - CLSA

Hi, Steve Fox with CLSA. Martin, two questions. One, I think you mentioned in the beginning that orders out of Asia were up 30% quarter over quarter, can you dig into that a little bit more and describe what happened there?

And then secondly it's hard to get a — given how you consolidated the businesses over the last year it's harder to get a view of what profitability really looks like on your auto business, and so where are we, how much more improvement is thee? Is it at an acceptable level or is it all about volumes going forward?

Martin P. Slark

Sure. In terms of Asia, as you know, we geographically in the past talked about Asia Pacific South which is the whole of Asia except Japan and Korea and then Asia Pacific North being Japan and Korea. The fastest growing was APS, and that was in excess of the 30% number. The APN number was way above 20%, but we aggravated them out and if you look at Asia in total it's about 30% growth in the whole of Asia on a sequential basis. And as I said before, if you look at some of the segments we're strong in, I think consumer and (inaudible) an things like that, some of the incentive schemes out there I think have driven demand. And the interesting thing when we've talked to customers is the fact that what they are producing is being sold increasingly within Asia.

If you think about it, it's clearly not based on them shipping them to Best Buy here in North America. So that's been an interesting trend and we've been encouraged by that. And I think as you see the extent to which the Chinese government in particular are trying to maintain solid growth — I mean we're still talking about 8%-9% economic growth in China today. That's pretty encouraging relative to what you see elsewhere around the world.

Relative to automotive profitability, and I think I tried to highlight the challenge that there exists in that market in terms of idle capacity and the depreciation impact of that when you're not selling it. And of all of our business if you look at the market segments, that will clearly be the one that would have the worst profitability and I think we've been open about that in the past. And I think some of our various competitors around the world have also talked about how the downturn in that market has a big impact on their overall profitability.

I think as the volume comes back and you combine that with the restructuring that we've done and the increased electronic content where I think we benefit from that and we start putting more of these airbags in these cars and they start putting more telematics in the cockpit, we've got three trends there that I think are all positive because the incremental volume if you do nothing else is going to drive greater fall through anyway. That fall through is going to be even better when you've got a reduced cost structure.

Now you've probably noticed on the analysis that Liam put up, is some of the plants that we're eliminating this year of (inaudible) automotive. We're getting out of those. And the challenge with some of those automotive facilities of course is moving that production and doing it in such a way that you don't lose the revenue at the customer.

Brent White (ph) - Tykon Deroga (ph)

Yes. This is Brent White of Tykon Deroga. A quick question on manufacturing square footage here. It looks like in fiscal '10 you're going to have 7.4 million square feet, similar to fiscal '07. You've done a lot of restructuring, sales are down about 30%. It's surprising that there isn't a decline in square footage, especially in Americas.

Martin P. Slark

Let me ask Liam take a stab at that because Liam's looked at that in detail, and the if necessarily I'll add to it.

Liam G. McCarthy

Yeah. Well, I think we don't have too many plants in the Americas, but they're quite big and very highly technically capable. They're very profitable plants. They're high utilization plants and if any of you ever get an opportunity to visit our operations in Little Rock or Lincoln, you will see that they are world class plants.

So we see no benefit operationally to considering to reducing those plants. As a matter of fact, our significant assets for the Chengdu facility is a 1.1 million square foot facility. About 60% of that facility has got the full infrastructure in it and the other 40% in it has go the shell and it wouldn't take too much to fill out that infrastructure.

Our objective is not to have a Chengdu facility and to just load it overnight. The intention with that facility was to add a large critical mass in the west of China where the labor turnover is much lower, the skill set that we've got so far has been extremely high and it's very much a more forward-thinking investment so that as we start to add chunks of revenue of $300-$400 million a year, then we're already ahead of the game. So it's really from that strategic point of view that we have positioned ourselves forward in Asia and addressed the problem operations which, as Martin said, is really our competiveness and the cost structure associated with automotive.

We have closed plants reducing this fiscal year.

Brent White - Tykon Deroga

And when we think about the utilization rates in Americas versus elsewhere in the world you're saying they're higher or lower today?

Liam G. McCarthy

Our utilization rates in our high-tech plants which I would include Tiger Shima, Zizhoka (ph), Singapore, Little Rock, Arkansas, Lincoln — those type of operations, they're all high-tech operations. The utilization on those operations is good.

Of course with volume dropping off significantly in October, of course utilizations go down, but you don't make this type of decision because of what happens over three months in terms of a very significant technology asset that we have in those operations. So their cost structure is good, their automation is good, and we intend to fully leverage them as part of our total asset base of the company.

Brent White - Tykon Deroga

And just finally, Chengdu, that will be filled with business moving from other plants at Molex or new business primarily?

Liam G. McCarthy

It's part and parcel. Some new products that we're investing, as I said earlier, they have a short product life. They will be more people intensive, they will be more semiautomatic type processes. Those products will go straight into Chengdu. We have products that are being made in Dongwon today in our IPD plant which will move over to Chengdu. We have products today that are being made in European plants in automotive that will — as those plants close down, a significant amount of those will also move to Chengdu.

So it's a question of leveraging the multiple capabilities for that site. We've got to, as I say a fabulous tool room which allows us to bring fast tooling to market, support new product development, it's a critical asset for that commercial products division. So if you get a chance to see our facility in Chengdu, it's copied in terms of Japanese manufacturing approach, it's a fine plant, and I think it's an important asset for the commercial products division, automotive, and I would say data. That's what you're going to see in terms of product composition of our Chengdu plant. Tool room there though is a very important asset of that plant and to the entire commercial division.

Bill Florida - Advisory Research

It's Bill Florida from Advisory Research. I wondered if you could give any more insights on how you organized the R&D program? For example, are some of the segments more attractive in terms of their gross margin? I'm talking about the industry segments. Does that guide how you allocate the R&D to those sectors and yeah, I think I'll leave it there, thanks.

Martin P. Slark

When you look at the R&D, each of those product divisions if you think of the three divisions, are all responsible for designing and developing their own products and if you're a president of one those divisions as Liam talked about and runs each one of them, the key goal for you is how can you grow revenue? And the best way for you to do that — I mean if you look generically where the growth comes from, is by designing and developing new products, getting them to market ahead of competition.

I think when you look across those product areas and you look at them which are more R&D and capital intensive? Clearly you can look at some of the markets and you'd say things like the data markets and the consumer markets are inherently faster turnaround din terms of technology and so you have to be in really next generation designs literally every year in order to maintain that revenue flow, versus you're in the medical market you could win a design and once that product goes into production you know you'll be there for an eight or 10 year period, and same thing with automotive. So there you get the spread of the R&D effort over a much longer period of time and so it varies a lot by industry.

The thing that we tried to do though is a couple of things. First of all, each of those divisions has a number of hubs where you've got a critical mass of engineering resources including test labs and things like that and you don't want to replicate around the world. But then what you also had is either satellite engineering groups that are close to the customer as we do in San Jose for example, for very good reason, or the base scenario which we have with a lot of our customers today which is we actually have a resident engineer inside the customer themselves.

And so there's kind of three levels of resources; resident customer, resident satellite engineering team that respond fast, and then the hub groups that really actually do the product and process development that ultimately goes into the plant.

The good news with our new global structure is we can design it anywhere and then make it anywhere it makes sense. They don't have to be tied together, whereas in our old geographic structure all that was done in one location and you weren't necessarily either designing it where you had the expertise or making it where you had the best (inaudible).

Unidentified Analyst

I have a few questions. One was a point you were making on the pricing initiative. I wasn't exactly clear what the mechanism for that is and really what the output or what the gap that you're focusing on to close, how significant that is.

The second one is I want to make sure when you talked about integration, wire, and cable, I mean there is obviously excess capacity in that business as well. Are you saying you want to actually draw wire and sheathe it, or you're just going to contract out to existing manufacturers to control output? And then the last question is just you talked about very clearly on the two new ventures — one you've got a consortium with partners, the other you don't. Do you need a similar consortium on SSL to keep pushing that, or in that case you're more than willing to fund it all yourself and wait until there's a commercial outcome?

Martin P. Slark

Okay. If I can let me take them in reverse order and remind me if I don't cover each of these. Relative to the partner part of it, in fact, you'll see when you hear about SSL this afternoon is that we have partnered with — our concern there because we've never been in the lighting market is how do you get to market with those products because of the different customer base. So we partner with Leviton here in North America to sell that. We actually are picking a different partner in Europe. And because of the market being different we'll probably go direct to market ourselves in Asia. And so I think there it's really managing the channel that's more important.

The reason for the partnering on the SX part of it is really working more closely with the customers to generate that next generation technology, and as they, as you've seen in North America, reduce their supplier base, they're trying to work with a smaller group of companies that provide bigger content to their end product and that's a logical extension of that and it's got us into — there were some very small companies in that acoustic area in Japan that weren't particularly strong and it's enabled us to partner with those end customer to not only supply interconnects, the acoustics and the interconnects that go with it, so just rack us up the dollar content we have in those displays and it's clearly a huge growth opportunity for LCD and plasma displays as we build that in.

Relative to your question on wire and cable, we're not going to draw copper wire, but we could well get into producing the wire itself that is used (inaudible). So for example if you look at the HDMI cable assembly that's used to connect the cell phone to the plasma TV, these aren't exact numbers, but often the dollar value of the connector is less or similar to the writing cable itself so you want to be competitive supplying the whole thing. You want to be able to own more of that building material.

Now, we today source a lot of that wire from other vendors, but in some of the specialized areas we're in, we'd like to be able to own more of that content. Now the low-end hookup wire, we'll continue to buy. The specialized stuff where you are perhaps providing a matched impedance cable assembly to an end customer where you're guaranteeing the entire assembly, we want to be able to do that guarantee the quality of it, and own more of the billing material. So we're really backward integrating in parts of it where we think we can generate satisfactory margins. The low end of that, as I'm sure you've highlighted, is not where you want to be.

And then the first question you asked, if my memory serves me correct, was about pricing. We have put in place a package of (inaudible) Vendavo and the reason we have done that, and again I think it's a benefit if our global system around the world is we started to analyze our pricing. One of the challenges that we found is we could actually get to the point of — I illustrate two points that just illustrate the opportunity.

You would imagine if you went out and looked at a product you're selling, a high volume product, and you actually planted the data and said at this volume, what price do you sell at? You would see a logical price curve. When we put that data together it was pretty random so there was an opportunity to manage that price curve and also manage the life cycle of it far more effectively than we did in the past. And then the other challenge that we wanted is where we developed proprietary technology, particularly in Japan and in North America, is to make sure that as that business transitions to Asia, we don't undercut ourselves when we're selling those products. And so having better pricing tolls in place, our new global structure — we've said to our global product managers, of which there are about 280 of them, the challenge of a global product manager is we want you to sell your capacity for the best price you can get anywhere in the world.

But they didn't have the tool to be able to do that and this has really given them the tools to look at and analyze what pricing are we selling at and we can differentiate by geography, by channel, we can give a much better margin analysis, and so we think it will enable us to sell that capacity more effectively.

Unidentified Analyst

With that information, help me understand now that you identify the gap, does it take three years, does it take five years, to say now we've managed and eliminated that gap?

Martin P. Slark

There are other companies who've used similar software tools in end markets who was, by virtue of putting in these kind of software tools have generated a material impact on their gross margin within a two year period and that's the challenge we've set ourselves.

Liam G. McCarthy

I think the point we were trying to get across with pricing was that it's an area of continuous improvement and it's one of the initiatives that we're working on in the area of continuos improvement so it's not all a cost-base approach of continuos improvement. We're trying to improve our costs of course. We're trying to improve the new product development process. We're also trying to improve how we manage this pricing.

As Martin said it's a very complicated area. We get thousands and thousands of price requests that we need to manage everyday and the intelligence adding more intelligence that profit from driving the continuous improvement mentality to pricing is an area that we also want to bring to your attention that we've investing our time and energy to make it better, and hopefully to get the results that Martin has talked about.

Unidentified Analyst

My point is (inaudible) —

Martin P. Slark

Correct, absolutely correct, which is why we continue to invest in that software in that initiative. We could give you tons of examples, but I'll give you one other example which is if you think about the number of times a customer comes to us and says we're going to buy a million of these pieces, what price can we get, and we give him that and then you go back a year later and found he only bought 100,000. We could have much better contract management tools in place to go back and say if you don't reach that volume, we'll come back and adjust the price. And particularly with some of the channels we use, that pricing management tool will help us a lot.

Unidentified Analyst

So you identify the gap as (inaudible) back in a couple of years or how did you quantify the capability?

Martin P. Slark

We benchmarked our pricing capability against companies that are in more pricing sensitive industries that we're in. Because if you think about it, I mean the connector industry historically has had 3%-5% price erosion, and I would say relative to some other industries had reasonably healthy margins.

So we went out and benchmarked ourselves against some other markets where pricing is far more sensitive, looked at what they were able to do, and the goodness with Vendavo is they're an SAP partner so it integrates back into our SAP backbone and so that was one for the reasons we picked that particular tool and we certainly believe this is a significant opportunity. I don't want to get into particular dollars, but as you quite rightly said — I mean you hit the nail on the head. Every dollar we save there is worth three dollars somewhere else. And we said when we look at that income statements let's drive the top line, drive the growth margin retention so that what we do get is going to flow through far more strongly through that reduced cost structure.

Ahmidad Mosy (ph) - UBS

Ahmidad Mosy (ph) here with UBS. I had two questions for Dave. The first one was just going back to your target business models, the 800 million revenue run rate, 14% operating margin kind of implies OPEX at today's level, $144 million or so. So I'm just struggling to see how do you sort of grow revenues at 30% yet have such (inaudible) control in OPEX when we're beginning to see some OPEX creep into the first two quarters of 2010?

And the second question was just related to your incremental gross margin of 50%. Is it reasonable to assume you stand that level for say, most of 2010, but then beyond that you maybe revert back to your historical average which is closer to 35%, or do you think you can do 50% for a much extended period?

David D. Johnson

On the first question you're right, that model at 800 million implies about $145 million SG&A which I talked about how to get to that in Q2. What you're not showing is the sequential improvement in our cost reduction program throughout the rest of the year that I talked about as well, so we have factored that into our model. We've factored that in which is then offset by the growth in the business. But that is our key focus as we've got to keep our SG&A at that level. That is a prime objective of ours.

Growing the top line, keeping the pricing strong, but that SG&A focus is very, very strong, but you've got to show the reduction from the cost-reduction activities as well to make that model work.

The second question in terms of the follow through, yeah, over time it will reduce. I don't think to the 35% rate. I think 15% we're seeing is pretty good, and that really depends mostly on mix between different areas there. We talked about our mix in automotive, we talked about our margins which are very strong in data and consumer. It will depend upon the growth mix, but if the mix stays about the same, 50, 45, 40-50 is probably, even after the higher growth, is probably reasonable. It will depend at that point on the mix.

Martin P. Slark

Let me do this, let me take two other questions and then we're going to break for lunch. We have another Q&A session at the end of the industry breakout. We're also going to split up amongst all of you at the lunch table so we're happy to answer questions at lunchtime too, but we don't want any of you to starve to death while you're sitting here. Go ahead, Jim.

Jim Suva - Citigroup

Thanks. This is Jim Suva from Citigroup. In the past looking at Molex's past actual results such as December '05 and '06 when Molex actually had sales rates at $750 million so kind of along the lines of your sales rate that you laid out in your goal. But compared to the post-restructuring goal that you're laying out, it looks like in those past levels that gross margins were 200-300 basis points higher than you're comparing to your goals post the restructuring. Can you maybe help us understand or connect the dots why post restructuring appears at this point that you're not making it back to the prior profit levels you did in the past? Is there something structurally that's changed such as mix or profitability, or I guess I just don't understand why coming out of this at the sales rates you're not seeing higher profitability with less plants and more costs in lower cost areas.

Martin P. Slark

Let me take a stab at that and I'm sure Dave can answer it, and Jim, I guess I should thank you because you included the same question in your media analysis last night over the Internet so we've had some warning you would ask that question (laughter). Thank G-d for the Internet.

The answer to your question and I actually went back and looked at the data and it's very clear. If you went back and if you looked at December of '06, go back and look at what the price of copper was and what the gold was at those times versus today and the single biggest issue, and I think you've see it across the whole industry and Ron Bishop is sitting there and he can certainly help you with some of that data is if you look at some of the leading connector companies that's selling to the data and consumer markets, the key raw materials are copper and gold and then plastics and they have all rocketed over that period, and so that's the single biggest difference. I think if it's in the gross margin it's in the material cost line. We actually look at the income statement now or the one we projected forward. The only line that's negative is metrial cost. And thanks for warning me too.

Why don't we break for lunch now and we're going to spread out amongst you on the tables here. Lunch is actually in our cafeteria behind that wall that's got the trees and things on it. You can go back there and pickup whatever it is you would like to eat. Behind that wall there's also some beverages. Feel free to spread out amongst the tables here. If you enter the serving area to your left and then come back and the tables here are on the right we'll break for probably 45 minutes and then we'll come back and do the industry sessions. Thank you.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: Thank you!