Here’s the entire text of the Q&A from Molex’s (ticker: MOLX) Q1 2006 conference call. The prepared remarks are here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.
Question-and-Answer Session
Operator
Operator Instructions Your first question comes from Steven Fox of Merrill Lynch.
Q - Steven Fox
Hi, good afternoon. First quick question have you reserved fully for Delphi now. According to their bankruptcy filings they owe you about $8 million.
A - Martin Slark
Steve, thanks for the question. Let me ask Dave Johnson to review with you the steps that we took relative to the bankruptcy and how we accounted for that.
A - Dave Johnson
Steve, as you probably can tell from our prepared text, that we took a $5.7 million charge in the quarter. That was for the Delphi bankruptcy. So roughly 70% of the $8 million that you cited we have provided for.
Q - Steven Fox
Would you come back next quarter and reserve more or do you think that's it for now.
A - Dave Johnson
That is our best estimate of what the reserve is at this point in time.
A - Martin Slark
I think, Steve, the reason for that is that under the bankruptcy law the shipments that we made in the ten days prior to their filing are deemed as preference payments. We have the expectation to be able to collect those. The difference between what we've reserved and the total debt that you saw on the website is largely accountable for those preference payments.
Q - Steven Fox
Got it.
A - Neil Lefort
Steve, preference payments is perhaps not the right word but that's exactly correct. Shipments to us in the last ten days are protected so that we would get payment for those and that's the difference.
A - Dave Johnson
The term is a reclamation claim.
Q - Steven Fox
Okay. And then you talked about the restructuring. Can you go back and talk a little bit about how the move of production out of Japan into China worked out and where your utilization rates stand in Japan right now?
A - Martin Slark
Yes, I would be happy to cover that area, Steve. As you know we opened a new plant in Dalyan in northern China about a year ago. We ramped that plant up to the point where last June it was actually shipping over a billion yen per month and it continues to grow. And what we have been doing is moving production that we had subcontracted on the outside into our Japanese plants and then moving products that needed to be hand assembled either in the Japanese plants or those outside vendors or semi-automatic assembly to the Dalyan facility. So our plants in Japan, with the strong growth of the consumer market around the world and also the handheld device area, much of which we support with those micro miniature products, the utilization in Japan is still very, very high. In fact we have some capacity issues on some products that we are shipping around the world today. That is really helped us, I think, both in terms of more efficiently producing products and keeping our plants fully utilized.
Q - Steven Fox
Thank you very much.
A - Neil Lefort
Thanks.
Operator
Thank you. Your next question comes from Yuri Krapivin of Lehman Brothers.
Q - Yuri Krapivin
In terms of the December quarter outlook, could you please share your expectations for the consumer, automotive and data markets. It appears that you expect the consumer market to improve but what about data and orders.
A - Martin Slark
Thanks, Yuri. Let me just talk about each of the market segments and what we are seeing relative to sequential growth. If you look at the mobile sector, as we said, that was very strong for us in the last quarter. And based on forecasts from our customers, we're anticipating that that will be sequentially stronger again in the December quarter. The data markets were weaker year-over-year, but were up sequentially from the June quarter for us and we expect that to continue as we go into the December quarter, particularly based on stronger bookings from the CM's in September. So our expectation is that those data markets will strengthen again in the December quarter. Auto was globally weak, but was up year-over-year for us because of the new product sales we had to Ford. I would say that is the segment that we are most concerned about because, obviously, with the turmoil in the automotive market, both in North America and in Europe where they've announced layoffs at Volkswagen and DaimlerChrysler, et cetera, we're expecting that market sequentially will be weaker as we go into the December quarter. If you look at the telecom infrastructure market, which was the other market I mentioned earlier, we see that continuing to grow, but obviously at a fairly modest rate. We're just pleased to see that telecom infrastructure market, having been down for so long, starting to come back with some good steady growth. And the consumer market we expect this to be the strongest quarter of the year, as they continue to ramp up products going into the Christmas selling season.
Q - Yuri Krapivin
Okay. That's helpful. Thank you. I have one follow-up question. In terms of the savings that you targeted for this year, $10 to $15 million, those were net of the transition costs, so could you quantify the transition costs in the quarter, if there were any?
A - Martin Slark
Dave Johnson is going to take a stab at that in terms of what you're really asking is in addition to the one time restructuring costs what costs do we have operationally for the transitions?
Q - Yuri Krapivin
Exactly.
A - Martin Slark
Yeah.
A - Dave Johnson
Yeah, I don't have that information in front of me. I would be happy to get back to you with that data, but it is, I think the most important is the net number that was given to you.
A - Martin Slark
I think, Yuri, they were not material for the quarter. They will be probably slightly higher in the March quarter, as we start to complete some of these things. I think the vast majority of those costs were captured in the restructuring costs this quarter.
Q - Yuri Krapivin
Thank you.
Operator
Thank you. Your next question comes from Jeff Rosenberg of William Blair.
Q - Jeff Rosenberg
Good afternoon. When we look at the $0.29 that you earned if you back out the one-time items and compare that to your guidance, it seems to be implying with the revenue growth that there is, margins might be lower. Is that a, is that true on the operating line or is it a non-operating issue or could you maybe give some color there on just profitability expectations for Q2?
A - Martin Slark
Actually, Jeff, when we looked at the first quarter, we were fairly pleased with where we were revenue-wise. It was about what we anticipated. We were obviously very pleased with the strengthening of the bookings. And actually on an operating basis, if you looked at the earnings prior to the write-off that we took for the debt in the automotive market, that was above where we'd anticipated being. So we were fairly pleased with those earnings on an operating basis. And obviously we had to back them down based on the reserve that we took.
A - Neil Lefort
I think, Jeff, too, it is where we find ourselves within the range. We've given a range. We report for the quarter a single number. The quarter was $0.29, as you said, if we reconcile those two items. The range of the guidance if you include the restructuring charge, which would be in the $0.29, adding that back would be $0.27 to $0.30. We've given a range and I think at this period of time we think it is a good range and I don't think you should infer too much in terms of margins at either end of that range.
A - Dave Johnson
And, Jeff, we said if the prepared part that we expect the margins to grow throughout the year. It is, we could see a slight improvement in margins in Q2. That would imply then that our SG&A would be going up somewhat, that we do have as we are planning for the growth in the business some additional costs coming in the SG&A line as well.
Q - Jeff Rosenberg
Okay. And then as a follow-up, I guess, I will ask for an update on pricing relative to historical levels. Are you seeing any greater price stability with all the inflationary pressures in the market?
A - Martin Slark
Yes, Jeff, we are actually. As you well know, we typically talked about price erosion being in the range of 5% to 7% based on the data we get off of our SAT system. We actually saw price erosion in the last quarter below the lower end of that range. We think that what we're being able to do, I think, is hold back on some of the normal price erosion because of customers are at least accept that with raw material costs going up, our ability to reduce costs are not as great as they might have been in the past.
Q - Jeff Rosenberg
Thanks very much.
Operator
Thank you. Your next question comes from Thomas Dinges of J.P. Morgan.
Q - Thomas Dinges
Hi, Martin. Real quick to follow-up on the last one, where you mentioned raw materials costs. Can you quantify as best you can what the draft was on rising materials costs on the gross margin side compared to the quarter that you guys printed a year ago. Because obviously you had some modest increase in the gross margin this quarter so mix probably helped a little bit. But just to think about what the materials had gone up maybe on a year on year basis and then what have you guys assumed in your forecasts over the next quarter as maybe there is a little bit of a lag effect here and some price increases that some of the guys are still trying to push through, might hit and than I have a real quick follow-up on the balance sheet.
A - Martin Slark
You cleverly managed to get about six questions into the first one there.
Q - Thomas Dinges
Hope you got them all down. I will throw them back at you.
A - Martin Slark
No, that's okay, don't worry. Let me say a couple of points relative to what we're seeing in the materials area. Firstly, if you look at our overall material costs as a Company and look at it this quarter versus the same quarter last year, it was basically flat. We were able to hold down material costs. If you look at the commodities that we buy and you just look at the market costs of those commodities, we track that through our purchasing group and if you look at it year-over-year, compared to the average price for the same quarter last year, gold was up about 9.5%, copper was up about 29% and crude oil or I think naphtha for the real derivative of that which drives our plastics was up about 30%. We've obviously seen over the last two years continuing rises in raw material costs. It has moderated, the rate of increase has moderated somewhat earlier in the year, but since the hurricane issues, it's obviously started to escalate again. We think that we are okay in terms of holding our material costs for this second quarter. I think projecting beyond that we are going to have to see what happens because what we've seen just recently in the last week or so is some moderation particularly in the oil price. We think we are reasonably well off through Q2 and I think we'll have to see what happens when we get to the third quarter. And we can certainly update that at the end of the second quarter.
Q - Thomas Dinges
Okay. And then one quick one on the balance sheet. This is the first quarter in about two years you guys consumed a little bit of cash and obviously you spent a little more on the CapEx to support some efforts that you're doing with the global manufacturing realignment. Can you talk about where you think that will be in the next quarter, will we see a reversal there and, as you mentioned, you guys have roughly about 10% to 12% of your production now in kind of VMI hubs and the DSO is lower. Would shifting a lot more in there, is it customers who don't want to do it or is it something that you aren't able to quite push down, because it seems like that would be an area where if you could push more customers into that vein, it might accelerate the cash cycle a little bit for you.
A - Neil Lefort
Tom, I'm going to start answering the easy part of that question then turn it over to Dave for the tougher part. And I just remind everyone, we did spend $50 million which is above what we would normally spend. I think we spent 35 million on the prior quarter on the stock buyback and I can't give any forecast going forward but I can say we remain very optimistic and enthusiastic on the stock buyback. The other items and the working capital I will turn that over to Dave.
A - Dave Johnson
Okay. I won't try to forecast where the cash accounts will go next quarter. But I will say that we still have, obviously, a very good positive cash flow. We had some use of cash in the quarter for receivables as we built our business, but I think our DSO is trending flatter. Inventory turns are also trending flat. We may, as we've said on previous calls, have a bit of an increase in inventory throughout the year as we go into the move cycle as we transfer production from facilities that are closing down to other facilities. We might expect a little bit of that. I would say most of it will be driven upon the buyback that our cash flow is still positive and if our CapEx comes back down we should see free cash flow, positive free cash flow in the quarter.
A - Martin Slark
If terms of the vendor managed inventory and could we push more of our inventory in that direction, we would be happy to do that. Typically that VMI approach is done with our larger customers and there is not just the issue of putting the VMI in place. There is also the issue of providing the necessary computer linkage for the forecast, et cetera, and it tends to work well, obviously, with larger customers where we have a fairly tightly managed supply chain with them. We're happy to do it because once you have that in place it is another way of retaining a customer because you're providing them not just the product but also a service that is not that easy to manage and not everybody is capable of doing that, and obviously with the very strong computer networks we have around the world we're able to do that very well.
Q - Thomas Dinges
Thank you.
Operator
Thank you. Your next question is from Douglas Pratt of Mesa Capital.
Q - Douglas Pratt
Could you give us a sense of what assumptions you're making in terms of non-commodity based cost saves? In other words, if you look past the weight of commodity increases, you talked about gold and copper, et cetera, what do you see your ability to reduce costs outside that? In otherwards, margin expansion would come through other areas of the business?
A - Martin Slark
The only other things that we buy are obviously equipment, et cetera, and we have, as you know, opened up a tool room in India. We are increasingly buying more of that equipment in Asia. And I think that's good because you typically get more bang for the dollar when you're buying those hot assets in that part of the world. We view, as more business moves to Asia, that being something which will positively help both our costs and our return on assets. The other area about business which we have to look at is the components that we buy for our value added business, which is roughly 20% of our sales. And I would say there that's similar to the way we sell to our end customers. You see some price erosion there as the volumes increase and our ability to leverage global volume there is the key to trying to drive those down. Our model going forward is we've assumed for the second quarter that we can hold our raw material costs and we're going to have to recast that, obviously, when we get to the third quarter and we see what happens in the various segments that you raised.
Q - Douglas Pratt
And then as a follow up to that, what sort of hedging do you employ for any of your raw material costs and if you do any hedging, how far out do those go?
A - Martin Slark
We don't do any hedging of the actual commodity. We have contracts with our suppliers for the raw materials that we buy and they would vary in length from three months to a year depending on what material it is and who the supplier is.
A - Neil Lefort
Just to give you kind of an example of size of the materials. I think Martin said it well. We have just three basic materials in terms of the construction of a connector. But our cost of sales is about 65% of sales and of that the material is about 30% of that. There is, this is a capital intensive industry, so with higher revenues, as the revenues increase and in combination with the restructuring efforts that we're undertaking, we should have leverage on the gross margin coming out of that.
Q - Douglas Pratt
Thank you.
A - Neil Lefort
You're welcome.
Operator
Thank you. Your next question comes from Carter Shoop of Deutsche Bank.
Q - Carter Shoop
Good evening, I jumped on the call a little bit late here so I apologize if the questions have been asked. I have a few. The first one is do you plan to continue to license the AirMax product from Teradyne and number two would be of that 30% of COGS that is raw materials, can you give us a break out in regards to how much is copper, how much is resin, how much is gold, et cetera. Third one would be your outlook for the auto market, can you talk a little bit about what you saw in the month of September, what you expectations are for the December quarter and we'll stop there.
A - Martin Slark
Okay. Let me just clarify your questions about Teradyne. Teradyne actually doesn't make AirMax . AirMax is a product that's manufactured by FCI. And Anthanol had licensed the AirMax product line it from FCI, that wasn't Molex. Molex actually has a license to produce each of the Teradyne current backplane products which is HDM, VHDM, HSD and GBX. We have license for all of those. Those licenses will continue beyond the Anthanol acquisition, assuming that that is closed. We have a strong relationship with Teradyne and view those as a good product line that we would continue to produce and continue to license. All of the commodities that we buy in terms of the actual absolute dollars of expenditure, copper is probably that the poundage is the largest that we buy. The one that probably has the biggest impact on the price of things that we sell, however, particularly in the telecom markets, is gold. That can have a big impact on the price of a product, particularly when you're adding gold plating to an item which is not all of the products. That tends to be higher end products and some of the plating technologies we have allow us to plate those products more precisely and utilize less gold in those contacts wherever possible. If you talk about the auto market I did talk about that earlier. We said that that was strong for us in the last quarter year-over-year, primarily because of new products sales to Ford. We believe that sequentially going into the December quarter, that is going to be weaker because there will be no continuation of the employee purchase plan. The automotive market obviously is weak in North America. Everybody is well aware of that. It is also weak in Europe.
Q - Carter Shoop
Great. Thanks a lot for that clarification there on the GBX there. Got the names mixed up. In regards to the commodities can you just clarify, you actually spend more money on gold than copper.
A - Martin Slark
No, no, I think we have to go back and research the absolute dollars we spend on gold, copper and plastic. I would guess that our absolute expenditure on copper is the most significant. But the gold fluctuation can have a bigger impact on the price of a product if gold is utilized in that product.
Q - Carter Shoop
Great. And then in regards to the auto market in December, have you actually seen the orders really slow down in December quarter, because my sense is that the production levels for the big two in North America actually aren't suppose to necessarily dramatically slow down in the December quarter. Obviously resales have been quite weak. But it sounds like the inventory building has been offsetting that for the time being. Are you seeing that or are you actually seeing a down tick in the December quarter on a sequential basis.
A - Martin Slark
In terms of the December quarter we're only obviously part of the way through October. So far we have not seen our automotive orders slow down in North America. We are anticipating that that probably will happen between now and Christmas. We had a relatively weak summer of automotive bookings in Europe, but that picked up significantly in September and remains to be seen what happens with European automotive bookings in the second quarter.
A - Neil Lefort
The automotive orders and production rates are obviously very important to us, but our growth in the last quarter really was driven by a customer, Ford, where we really drove that business because we had new product introductions and higher content. So you do have a bit of an offset when you can achieve something like that.
Q - Carter Shoop
Great. Thank you.
A - Neil Lefort
You're welcome.
Operator
Thank you. Your next question comes from Phil Marriott of ASB Advisors.
Q - Phil Marriott
Thanks, good afternoon. You mentioned in the data side that you had exited an unprofitable heatsink line, I think, and I was curious as to how significant that line was and sort of related to that, at the analyst meeting you talked about having something along the line, I think, of 50,000 plus different products that you're selling in any given quarter. And at the time you talked about going through the exercise of looking at profitability by product. And I was wondering if you could, I realize it hasn't been that long, but I wonder if you could update in terms of what you've learned from looking at that. Thanks.
A - Martin Slark
We did last quarter sold approximately 54,000 different part numbers, so I think that gives you some indication of the wide range of products we sell to an extremely broad range of customers. The connector market itself is, continues to be very fragmented and none of our business is really very dependent on any one product or any one customer. We have continued to do that analysis and I think the action that we took relative to exiting this heatsink business, which we deemed to be relatively low margin and not a strong product area for us. This particular product we made was an example of some of the action we've taken and we continue to do that. But it is not something we want to comment further on at this stage.
Q - Phil Marriott
Thank you.
Operator
Thank you. Your next question is from Kevin Sarsany of Foresight Research.
Q - Kevin Sarsany
I wanted an update on the restructuring looking at what you're trying to do in North America and Europe and downsizing and getting capacity to meet the demand out there. I was just wondering, with the revenue in North America and Europe in the latest quarter, is that about what you expected? And I was kind of wondering about your flexibility in responding to the ups and downs in demand.
A - Martin Slark
The restructuring that we have done or in process of doing in North America and Europe, as we previously announced, involves of consolidating three plants in North America and, sorry, two plants in North America and three plants in Europe and what we focused on in both of those regions is largely plants which were smaller, non-integrated, less efficient operations and have consolidated those operations into larger plants. When you look at our ability to match demand with supply around the world, you really can't look at that just by region because Molex has significant capability to manufacturer product in one region and sell it in another. I think, and that, we look at our global capacity rather than just look at it by region. There are certain markets, however, within each of those geographies where there is an advantage to supply them locally. That is certainly the case in some of the industrial and automotive markets. So we're gearing at capacity to support those and also some of the newer markets we are trying to penetrate. Generally speaking, we were very happy with the bookings trend in North America and that was running at the level that we anticipated and perhaps slightly better than we thought it might be this quarter. And in Europe I think we were disappointed in the first quarter, but that was consistent, I think, with the economic trends that people are seeing in Europe and also the fact that the summer months in Europe are very difficult, a number of the automotive customers there took longer shut down periods. We saw a pickup there in September and I think we are going to take a look at what we see in terms of bookings trends in the second quarter in Europe but we are going to continue with the restructuring that we had planned there anyway.
Operator
Thank you. Your next question comes from Michael Walker of First Boston.
Q - Michael Walker
Just a question on R&D. I think in the last call or at some point you had said that you expected to spend 145 to 155 in R&D for the year, but you're on a pace, at least so far just in the first quarter to do quite a bit less than that. I am wondering if that's still your target.
A - Martin Slark
Yeah, that is still our target for the full year and I think you will see that accelerate as the year progresses.
Q - Michael Walker
Then have you quantified the total savings from restructuring for fiscal '06?
A - Dave Johnson
We have. Yes. We actually have announced that before, 10 to 15 million is what we expect the net savings to be in '06. And for 2007 we said between 32 and 40 million for '07.
Q - Michael Walker
Is that predominantly the SG&A line?
A - Dave Johnson
That is about roughly 20% in SG&A, the rest will be in cost of sales.
Q - Michael Walker
Okay. Thanks.
Operator
At this time there are no further questions.
Neil Lefort, Vice President IR
Okay. Well, we would like to thank you all for joining in on the call and we just ask everybody out on the call to join us over the next couple of weeks in cheering for the White Sox. Thank you very much and for being on the call and good night.
Operator
Thank you. This concludes today's conference call. You may now disconnect.
Related:
- The prepared remarks from this call are here.
- A list of full conference call transcripts available on the Seeking Alpha Network.
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