Molex F3Q08 (Qtr End 3/31/08) Earnings Call Transcript

Molex Inc. (MOLX)

F3Q08 (Qtr End 3/31/08) Earnings Call

April 22, 2008 5:00 pm ET

Executives

Neil Lefort - SVP

Dave Johnson - CFO

Martin Slark - CEO

Liam McCarthy - President and COO

Analysts

Matt Sheerin - Thomas Weisel

Jim Suva - Citi

Amit Daryanani - RBC Capital Markets

Shawn Harrison - Longbow Research

Steven Fox - Merrill Lynch

Neil Stein - Credit Suisse

Aaron Hosak - Morgan Stanley

Alexander Paris - Barrington Research

Jeff Rosenberg - William Blair & Company

Yuri Krapivin - Lehman Brothers

John Lopez - Falling Oak

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the third quarter 2008 Molex Incorporated Earnings Call. My name is Amity, and I will be your coordinator for today. (Operator Instructions) I would now like to turn the presentation over to your host for today, Senior Vice President of Molex Incorporated Mr. Neil Lefort. Please proceed, sir.

Neil Lefort

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

Please note we have added slides to our presentation and those wishing to view the slides can do so on our website under the investor section. As usual, we would like to limit the call to one hour, and in the Q&A mode, we would like to ask for one question per participant and one follow-up question. Thank you. Now, let's begin with the review of our forward-looking statements which is page 1 of our slides. I am just going to give an abbreviated reading.

Statements in this conference call that are not historical are forward-looking, and are subject to various risks and uncertainties that could cause actual results to vary materially from those stated. Forward-looking statements are based on currently available information and include among others the discussion under fourth quarter outlook. This conference call speaks only as of its date as to it's date and Molex disclaims any obligation to revise these forward-looking statements or to provide any updates regarding information contained in this conference call resulting from new information, future events, or otherwise.

On page 2 of our slides we have a description of our non-GAAP financial measures disclosures in this conference call regarding earnings per share excluding restructuring and other adjustments, which is a non-GAAP financial measure, are available in the investor section of the company's website, the earnings release and in addition are included in the slide used during this call.

Now, I'm going to turn it over to Dave Johnson, our CFO.

Dave Johnson

Thank you, Neil. Our financial summary is shown on page 3, our net revenue of $822.3 million was 1.9% ahead of the prior year quarter, but only after a significant foreign currency translation gain. Gross margin improved sequentially about 30.9% reflecting operating improvements as well as our previously announced restructuring activity.

SG&A was 20.4% including a $3.8 million foreign exchange transaction loss, which is due generally to the weakness of the US dollar. Without the exchange loss, SG&A would have been under 20%. Investment income related to equity earnings from our joint ventures was $4.5 million as compared to $2.1 million last quarter. This is a higher than normal level and should revert to the $2 million to $3 million level next quarter.

Interest income of $2.1 million was as planned and one item that we want to highlight is the increase in the effective tax rate for the quarter from our forecast of 30% to the actual rate of 42.1%. This change was triggered by the filing of our 2007 US tax return during the quarter and then by a reconciliation that we did of our foreign tax credit position.

As a result, we lowered our estimate of the 2007 and 2008 tax benefit that we will realize from foreign tax credits into the corresponding charge of $10.5 million this quarter. This charge has been treated as an adjustment to arrive at our non-GAAP results and we will show you this on the next slide.

In addition, you had probably read about the recent announcements regarding changes in tax laws in China. We are unsure as to the final tax regulation extending from these announcements. We have increased the tax rate assumptions for several of our Chinese subsidiaries to the rate of 25%. And as a result our expectation for the effective tax rate in the fourth quarter of this year is in the range of 30% to 32%.

Page 4 is our GAAP to non-GAAP reconciliation. We have two items to report this quarter to our non-GAAP EPS of $0.28 per share, we add back the pre-tax restructuring charge of $6.4 million or $0.03 per share. And then, we also add back the tax charge, which I just mentioned of $10.5 million or $0.06. After adding back these two items, we arrive at a non-GAAP EPS number of $0.37 per share, which was $0.02 above the mid-range of the outlook for the quarter as we communicated on out last earnings call.

Our EBITDA reconciliation is shown page 5. Starting with our GAAP net income of $50.3 million and adjusting for interest income taxes and depreciation, we report GAAP EBITDA of 18% and non-GAAP EBITDA of 18.8% after adding back restructuring charge.

Page 6 shows our key balance sheet metrics. Cash increased by $50 million, but our net cash position, net of short and long-term debt was lower by $34 million primarily as a result of utilizing $54.4 million for the stock buyback.

Accounts receivable increased by 4 days to 79 days, primarily due to the temporary condition resulting from our distribution consolidation activity in Asia in connection with our restructuring project.

Inventory days increased 8 days to 79 days. In absolute dollar value, inventory increased by $47 million, half of which was related to foreign exchange and the balance related to increases to support the revenue level expected in the fourth quarter as well as inventory builds to support the transfer of production for our restructuring project.

We are also planning for increases of certain inventory in China around the timing of the Beijing Olympics to ensure that there will be no disruptions from the games.

In addition, customer consigned inventory remains in good control at below 30 days for the quarter. Total debt of $221.6 million increased by $83 million, due primarily to exchange on our Yen denominated borrowings and also a $65 million short-term loans that we took out to support our stock buyback program.

During the quarter, we purchased 2,085,000 shares of Class A Common Stock and 325,000 shares of Common Stock at a total cost of $54.4 million. Capital expenditures of $61 million and R&D expenditures of $41.7 million were inline with our expectation. Year-to-date, capital expenditures have been reduced to 6.7% of revenue compared to 8.8% for fiscal 2007.

Now on page 7, we show our gross margin trend graphically for the past five quarters. Gross margin of 30.9% for the current quarter increased by 80 basis points sequentially. This year gross margin has steadily increased from 29.8% in Q1 to 30.1% in Q2, and now 30.9% in Q3. The sequential increase in margins was due to the impact of operational improvements from Lean Six Sigma initiatives from restructuring activities and due to lower price erosion from our customers.

Cost reductions related to our restructuring activities reduced cost to sales by approximately $4 million in the quarter and price erosion retreated in the quarter to under 4%. We also felt the impact of improved quality performance in the quarter and therefore, the absences of some cost that impacted margin in the December quarter.

Raw materials continue to be a challenge and -- regarding our ability to improve gross margins. We spend approximately 15% of our cost of sales or 35% of total material cost on gold, plastic resin and copper and that is copper in the form brass strip use to stamp terminals.

Although we have had 40% of our gold hedged all year long, the cost of the other 60% has increased by 41% since June 30th. And the increase in just a last quarter was about 10%. Copper has increased by 12% since June 30, but after dropping at mid-year it has increased in the last quarter by 27%. In response to the continuing escalation of commodity cost that impacts our business, we expect to implement focused price increases prior to the start of our next fiscal year. Though the raw material environment continues to be challenging, we believe that we can continue to improve from the current levels, and we expect a sequential improvement again in gross margin in the fourth quarter.

Page 8 shows the trend of our SG&A expense as a percent of revenue, the current level of 20.4% is consistent with the SG&A suspending pattern over the last five quarters as shown. The 20.4% there was a little higher than we would have expected because of unusually high foreign exchange losses that are classified in SG&A. Without the foreign exchange losses our SG&A percent for the quarter would have been 19.9%.

We continue to focus on reducing SG&A spending, and we expect to see a slight sequential increase in absolute SG&A in the fourth quarter and a corresponding decrease as a percent of revenue due to the planned sequential increase in volume.

Our capital expenditure trend is depicted on page 9. As a percent of revenue we were at 7.9% a year ago, 9.8% in Q4 of last year, and then in conjunction with the reorganization and focus on capital spending efficiency, we reduce this to 6.2% in Q1, 6.3% in Q2, and now 7.4% in Q3. The sequentially increase in Q3 is primarily due to the cost associated with nearing the completion of our Chengdu China facility, which will be opening in the fourth quarter. On a year-to-date basis we are running at 6.7% of revenue, as compared to 8.8% in the prior year and versus our pre-reorganization level of about 9% to 10%.

Page 10 is our restructuring slide. In the quarter, we took a charge of $6.4 million, most of which relates to termination benefits at our headquarters in Illinois and in several locations in Europe. The cost savings in the quarter increased sequentially to $8 million, of which, approximately $4 million impacted cost to sales and the other $4 million impacted SG&A. We have forecasted our Q4 restructuring charge to be at or higher than the Q3 level.

The specific events that have taken place during the quarter that we can discuss publicly are, we completed the main construction of our multi-division plant in Chengdu China. And we are set to begin moving production into this facility during the fourth quarter. This is a key enabler for much of our restructuring activity. In addition, we finalized the consolidation of our warehousing and customer service organization in China, and have begun a similar project in South East Asia for our warehouse operations in Singapore, Malaysia and Thailand. When these changes are complete, we will have significantly streamlined our global logistics and warehouse operations.

With that, I will turn the call now over to Martin.

Martin Slark

Thank you Dave and good afternoon everyone. During my section, I am going to talk about our revenues on bookings and provide some color on our growth by market. If you would please turn to page 11 of our presentation, I will go through the revenue trends. Based on our expectations at the start of the quarter, our revenue was a little disappointing, but we were within the low end of the range of our guidance. Two key external factors impacted the quarter, the American Axle strike reduced our planned sales to General Motors this quarter by $7.5 million. In addition, our structured cable business unit saw project delays relating to the construction industry that reduce revenue by about $8 million.

Our reported revenues were up about 2% year-over-year. When looking at the year-over-year growth, its worth noting that included the prior year quarter was revenue from the AI division of Woodhead, and cable assembly operations in Brazil, both of which have been divested.

At the end of the third quarter, we are also pleased to announce that we signed an agreement to acquire a manufacturer of flat flex circuitry based in Asia. We expect this transaction to close in Q4 and to positively impact our revenues by about $30 million next fiscal year. The acquisition of this company will significantly enhance our ability to provide an increased range of integrated sub-assemblies to a broad range of market. By the end of fiscal year '08, we anticipate being able to announce additional strategic acquisitions of a similar size.

Looking at our growth in revenue by industry, please turn to page 12 which has a summary chart of our growth by segment. Despite the impact of the strike, we were pleased with our automotive business growing at about 3.6% sequentially.

Gains here are coming primarily from higher electronic content and new design wins, especially in the Asia specific and Europe regions. Both data and consumer markets displayed their normal seasonal patterns being down from the December quarter. In the PC area, we continue to see growth in Asia and Europe, but with more difficult demand conditions in the US.

Within the markets, the transition from desktop to notebook continues, which we believe is a good long trend for Molex because the increased used of small form factor connectors and significantly less standardization and architecture within the notebook sector. Recent estimates have the notebook market passing the desktop market in units shipped sometime in the next two quarters.

Our growth in the telecom sector was primarily in the infrastructure part of the market this quarter. Industrial continues to see slower growth, primarily because of lower growth in the semiconductor test equipment sector, and also, in the US-based commercial and home construction markets. Some of the decline relative to the prior year was covered in prior calls. And as I've mentioned before includes the divesture and exceeding the poor margin business into industrial sectors.

I would like to stress, however, that a Woodhead business does continue to grow on a year-over-year basis, and that declines in this market have nothing to do with our Woodhead acquisition. We've added the medical electronic sector as a separate sector growing -- our growth in this sector was quite strong, while it only represents 2.7% of our total sales, we expect this market to significantly increase in the years ahead. This is due to the demographics of an aging global population and the expectation, that there will be higher growth in small home monitoring equipment, which will included our digital micro-miniature, optical and FLEX products.

Turning now to page 13, we were very pleased with our new orders, which were increased 4.5% sequentially to a new record. And as you can see, our orders have now increased sequentially in each of the quarters during the current fiscal year. The $898 million reported this quarter was a new record for the Company.

The 1.09 book-to-bill ratio supports our outlook for strong finished of fiscal year and our backlog is now up 33% year-over-year, which we think is a good indicator of continued growth beyond the June quarter. Obviously, there was a positive impact due to the weakness of the U.S dollar, especially when you look at year-over-year comparisons on the strengths of the backlog. However, it's worth pointing out that even in constant dollars, our backlog is up 24% year-over-year.

We are fortunate to have a significant amount of our business in the economies outside the U.S. We believe this bodes well for stronger and stronger currency translation.

Turning now to page 14, I'll review our growth in orders by industry. We were very pleased with the overall strength of new orders and also by the diversification that with solely growth in nearly all industries.

In automotive, where orders increased 6.3%, we continue to gain new design wins with emphasis on interconnects the power train, entertainment and safety applications. We're utilizing our micro product technology to gain major new business wins, particularly in the areas of telematics inside the cockpit of the car.

We have seen our automotive standard product gaining acceptance in new areas for Molex, such as inline body harnesses. We have strong relationships with major tier 1 in game accounts to drive our growth particularly in the brick countries. We're developing very good relationships with domestic OEMs in China and India and these are turning into new wins that will fuel our growth in the future years.

Our data business was up 13% with the strongest growth being in high-end data storage. In telecom, where our orders increased 35.4%, we saw strong growth from both the mobile and the infrastructure sectors. The demand for several infrastructures was enhanced by the needful video bandwidth and here our high speed backed planes fiber optic products are doing very well.

During the quarter, we achieved significant design wins with our high-speed products and our global capabilities helped us to win major pieces of business at several new customers particularly in Asia.

Consumer electronics increased 11.1% with strong growth in the LCD TV, digital still camera and digital single-lens reflex camera sectors. The later continues to increase its global share of the digital camera market. We also saw strong growth in portable navigation devices, where the price advantage, a mobility benefit of providing strong growth, particularly in the automotive sector rather in-dash systems. The trend is good news to Molex, considering the number of products we had designed into these standalone products.

Industrial was basically flat with the prior year, including the divestitures at our low margin business, delay in shipments related to a seasonal product in the seismographic industry and the overall slowdown in the U.S construction market. The longer term trends remain positive with investment in manufacturing automation of robotics and the increasing use of networking in the manufacturing sector for process automation and data collection.

Turning now to page 15, I would talk about our outlook. As you can see, we entered the fourth quarter with considerable bookings momentum. New orders in the third quarter were a record and the book-to-bill ratio of 1.09 supports the optimism in our outlook.

The contribution from the recently implemented global product division organization has exceeded our initial expectations by providing additional opportunities to expand both ourselves and our profits. In addition, the restructuring activities are moving forward with increases in operating margins forecast for the fourth quarter.

For the fourth quarter, we expect revenues to be in the range of $850 million to $890 million and earnings per share to be in the range of $0.36 to $0.40. These estimates include a restructuring charge of approximately $0.03 per share and a modestly higher tax rate as mentioned earlier. The mid-range of our revenue outlook would approximate to a 10% increase from the prior year fourth quarter. We have now had two sequential quarters in a row of double-digit bookings growth, and we expect this to translate into double-digit revenue growth going forward.

The mid-range of our non-GAAP earnings per share outlook, would approximate to a 36% increase in the prior year fourth quarter. Consistent with our normal practice, we will give full year guidance of our fiscal year and in June 30, 2009, in our next earnings scheduled for August 5, 2008, and provide additional information during our analyst meeting, which will be held in Chicago on August 5, in Chicago.

Turning now to the final page, and our summary page on page 16. Before we open the call up for questions, I want you to briefly review some of the important characteristics of Molex as shown in the summary slide on this page. We have a history of four decades of presence in Asia, including 38 years in Japan, and 25 years in China. We expanded into the original four tigers during the 70's and 80's and then added Thailand, Korea, three plants in India and five plants in China. Considering that Asia has the potential to had billions of new purchases of electronic products, we believe this presence has never been more important to Molex.

Currently close to 75% of our sales take place outside the US. As a result our technical capabilities and contact points with leading OEMs are very global in nature. This allows us the versatility to design, manufacture and sell anywhere the customer requires. It also gives us access to stronger overseas demand and the diversification of a global customer base. These are all examples of what makes Molex somewhat unique in the connector industry and the strength we've careful to maintain as we put in place our organization.

Two years ago we began the process to reorganize and restructure our company. The new organization is now contributing to our sales and certainly has contributed to our booking strength. This new structure has helped us remove surplus or redundant cost and has definitely impacted our capital spending, as well as reintegrating our entire organization.

Cost structure and functional areas are becoming more Asia centric and more in parallel to our sales. We've achieved this transition utilizing the strong cash flow of our business and the financial stability and strength of our balance sheet. In addition, we have used our access cash to fund the stock buy-back and to generate close to 28% dividend growth over the past five years.

In summary, we know we have a lot more work to do, but we believe we are on the correct path.

Thank you for listening today's presentation and we'll now open the call up for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Mr. Matt Sheerin with Thomas Weisel. Please proceed.

Matt Sheerin - Thomas Weisel

Yes thank you. My first question to Martin is related to your comments about demand in the quarter. Aside from those two areas where you saw some pushouts, it sounds like revenue came inline with what you had expected. Could you talk a little bit more in detail about what you saw specifically in the quarter, and then on handsets where you've certainly seen some more volatility, but I know that you've worked to diversify your customer base. How did that play out? You're seeing some other suppliers talk about weakness to companies that you serve in the handsets space, so could you talk a little bit about that?

Martin Slark

Sure, thanks Matt and thanks for the question. In terms of the revenue trend, we saw -- if you look at our overall revenues, we saw the typical slowdown during that Chinese new year period. It wasn’t significant, but certainly some of the weather issues I’m sure you read about, impacted some of the manufacturing out of China, and certainly extended the impact of Chinese New Year. And as you probably read, regarding going forward, there is some discussion about limiting the length of Chinese New Year holiday to lessen the amount impact.

But what we were pleased with was that our revenues came back strongly in March, and that our bookings remained consistent throughout the quarter. And certainly when you're reading, what appears to be very US-centric press here, the patent we’ve seen in terms of order demand across most of the segments we serve seems to be fairly strong. In terms of the cell phone market, in particular, sequentially in terms of about cell phone sales that was down slightly, but our year-over-year bookings in the quarter were up and we think that bodes well for the rest of the year.

And as you said, the extent that they were down was attributable primarily to one customer. Without that customer, our revenues would have been up for quarter. And if you look at our cell phone bookings, they are up double-digit as we go into the next quarter. So, with the diversification in place and less dependence on that single customer, we are a lot more confident about our overall cell phone revenues as we project forward for the rest of the year.

Matt Sheerin - Thomas Weisel

Okay, great. And just my follow-up regarding your commentary about price increases hitting in your first quarter. Is that going to be enough or how much will that offset the expected increase of your raw materials, and could you remind us what the lag effect is from when you see spot materials like copper go up when you actually see it from your suppliers?

Martin Slark

Yeah. Sure. That's a two part question. So let me answer the price increase part in it, and I'll ask Liam McCarthy to talk about the lag effect when we see material cost increases because it varies by material. Dave, I think, already in the call did a pretty good job of outlining the tremendous increases we have seen in commodity costs, and you're very familiar with that. We obviously somewhat offset that with the hedge that we have in our gold purchases.

The impacts around the world though, has varied significantly because obviously, a lot of the increases had been dollar denominated. So, there is less of an increase in Japan and some of the other Asian countries. And it varies a lot depending on what products you sell. So, we are putting through some price adjustments that will vary by products. It will vary by region, and obviously, will vary by customer.

But our ultimate goal here, and we're confident we can do that, is to continue to push up our gross margin. And we are working hard to get those changes in place and to maintain the trend that we worked hard on this year, and to keep that going next year, which is why we'll put through the adjustments in the current quarter. And then Liam will talk about the lag in the raw material cost increase.

Liam McCarthy

Yes. I guess the copper and gold are quite different. For copper, typically the lag is two, three months, as we luckily get longer lead time obviously in copper, and each (inaudible) order is quite unique to each tool. Gold is very much the commodity, and as the commodity going into a plain line, and we want very much to be just in time to see arrangement there. You already know about our hedge, but delaying any change in price of gold is really almost in the same month.

That being said, why we have those issues copper, as I said is very much strip dependent and tool dependent. So, we don't think much flexibility on the design of the copper will incur the cost. With gold, we always have some opportunity to be more precise and more selective in how we put that on the product. So we're very focused as well on not just pricing goals, but also usage of (inaudible) Dave, would you like to comment on.

Dave Johnson

One final comment there, Matt, when you look at the pricing environment. One is the other dimensions that we obviously look at there, when we look at margin impact is, what's happening with price erosion. And we used to talk about the fact that price erosion within the 5% to 7% range and as I think in recent years, with the raw material cost going up, we said that's trend it down when we talked about being in the 3% to 5% range.

It is currently at the low end of that range, and that certainly helps us as well because even with the larger multinational customers, we actually can't put through a price increase, by holding down price erosion that also helps the margin picture as we move forward.

Matt Sheerin - Thomas Weisel

Okay. Got it. Thanks a lot.

Operator

Your next question comes from the line Jim Suva with Citi. Please proceed.

Jim Suva - Citi

Martin, can you give us a little bit more detail, in you press release you talked about that there was a delay in a shipment in the industrial segment related to a seasonal project. How much was that? What was that all about? And if so, why wouldn't we expect to see a bigger bump in the June quarter?

Martin Slark

Thanks, Jim. It relates to some projects that are tied to seismographic test equipment in Europe. And it is based on a customer's change of design and the release of their product to the market and a bit like some of the delays you are seeing with Boeing and their new Dreamliner. It's based on when they would release that product. We are designed into the product and we will get that business. We're trying predict when that will happen. We're not sure whether we'll see that at the backend of next quarter or in the first half of next year.

Jim Suva - Citi

So, do you have built into the June quarter?

Martin Slark

No, no we don't.

Jim Suva - Citi

So that would be offset, okay. Then as a follow-up, can you talk little bit more now that we're approaching a one-year market restructuring, I struggle a little bit to connect the dots, if I look at your SG&A line, March -- the reported quarter of March we see that its actually your dollar amount of SG&A is up year-over-year and -- up around 3% or 3.2%, and your sales are up around 2%. Can you help me connect the dots that's going through restructuring program? I would expect SG&A grow slower not faster than your sales?

Dave Johnson

This is Dave Johnson Jim. The big item that's in our SG&A that we put out in the quarter is this almost $4 million expense because of the exchange. In fact, we're looking at the classification of that currently. But that certainly skews our SG&A, and in the third quarter drove that up by $4 million. So I suggest that when we do this analysis, we take out the exchange to see the real change in the trend of SG&A.

Jim Suva - Citi

Okay. That helps.

Martin Slark

I think Jim when you look at that picture, one of the things you're pulling to understand is when you look at our multinational sales around the world, most of those are denominated in dollars. So we don't have any currency impact from that as such, whereas if you look at our SG&A cost in Europe and many of the countries in Asia, therein foreign currency that gets translated back in to more dollars. So there is a disconnect, that's where it is.

Dave Johnson

And if I can just -- there is two aspects of these change; one is the exchange loss that I just mentioned that is reported and we've talked about on the script part. And that is the holding of U.S dollars or having U.S dollar receivables overseas that are converted at the end of the quarter, that's that loss. We also have adjusted because of the weakness of the dollar in general when we translate back to the US dollar, we have a big increase.

And this is being happening for the last four or five quarters, you've seen the exchange. I mean if you look at this versus last quarter, the Yen is about 14% stronger than the US dollar versus last quarter, the Euros is about 8% stronger, and the RMB is about 4% stronger. So any of the SG&A incurred in those locations certainly is in a sense being overstated by the translation.

Jim Suva - Citi

Okay. And as a quick clarification. If I remember right your gold hedge expires at the end of June, is that correct and if so should we then expect to see a little bit of an additional headwind from gold cost, seeing what they've done what they've done?

Martin Slark

Good question Jim, our plan obviously and one of the reasons that pricing adjustments were going through this quarter is to offset that. And our expectation is to be able to do that at this point.

Jim Suva - Citi

Okay. Thank you.

Operator

Your next question comes from the line of Amit Daryanani with RBC Capital Markets. Please proceed.

Amit Daryanani - RBC Capital Markets

Thanks. Guys, just a question on the sales guidance, looking at about 10% year-over-year growth could you just talk about how much of that is FX versus organic? And just on an organic basis what end markets do you see providing with the best tailwind in June versus the one that doesn’t have a headwind?

Martin Slark

Let me give a shot at trying to talk about where we think the best growth is coming from, from the market perspective and while I’m doing that table, do the best to try and breakdown the growth rate between organic versus translation of currency. If you look at the growth, we think the strongest growth in the next quarter is going to come primarily from the telecom sector. We’ve seen very strong growth there in infrastructure. There is a big drive around the world right now to put in telecom infrastructure such that you can download video to mobile devices, and in particular there is a lot of demand driven around the Olympic Games to be able to do that. And so, we think that infrastructure market and we think the cell phone market is going to be sequentially significantly stronger going into that market. We also think, for us, that we are going to see based on orders once and good growth in the data and medical sectors as well.

Amit Daryanani - RBC Capital Markets

All right. And just from the raw material perspective, could you just talk about the magnitude of price increases that you are looking at? And just as an extension of that, given how volatile raw material has been, have you guys explored or looked at how you potentially escalated in some of your contracts?

Martin Slark

And so, what did you mean by escalated the contract?

Amit Daryanani - RBC Capital Markets

You know essentially do you have ability to pass on all the raw material cost, or go to a cost that’s raw material escalation basis for your pricing?

Martin Slark

Okay. Sorry. We actually have that in place for certain end markets. If you look at the automotive market and some of the others that we are in, there are raw material added in those sectors. When you look at some of the market sectors that I would say are consumer-driven, where there is an expectation that all the end products are going to come down in price year-over-year, there you've obviously going to negotiate those price increases.

And then as I said earlier in the call, the price increases are going to vary significantly based on geography, because there's a much bigger impact in the dollar denominated countries of these raw material cost increases. There is less of an impact when you get to Japan where they are buying those raw materials in Yen and things like that. And there’s, it's also going to vary a lot by product, based on the material content of those. I mean we made a significant number of products that have no content. We make a large of plastic housing that don’t use copper. So, there is significant variance there with very targeted by product, by region, and by end market.

Amit Daryanani - RBC Capital Markets

And just a final [crack]. I think I am going to hop off after that. What is the dollar amount from these program for [sharpen] in the industrial segment in the March quarter?

Martin Slark

I don’t want to talk specifically about our specific elements there, because I think that’s getting to a very granular detail about which customers and which product and what they were. I think you could see there the disconnect without overall target growth rates in that market. So, I think you can probably interpret that in to.

Amit Daryanani - RBC Capital Markets

But in the last you had 16% headwinds from exiting some low margin business in the industrial side. Was it comparable this quarter results. Our EBITDA from 18 to 16 would be the program pushed out?

Martin Slark

Sorry, can you repeat that question?

Amit Daryanani - RBC Capital Markets

Last quarter you guys at 16% revenue, there is a headwind in the industrial segment because as you guys were exiting some low margin business in the industrial segment comparable this quarter?

Martin Slark

What’s different this quarter to the last one, is that if you look back a year ago, Molex, when it acquired Woodhead as part of that division, which was called AI, that made cable assemblies, that was similar to the product that we made internally ourselves. And if you remember, we divested that division at the beginning of the third quarter last year. So, that revenue is within at the end of the last, third quarter last year. So, that revenue within last year third quarter isn’t in this year.

The other part of that market which is down significantly, which you will find consistent with the market is a big chunk of our industrial cells going to semiconductor test equipment, and that market has obviously been tough both here in the US and Japan.

Amit Daryanani - RBC Capital Markets

All right. Thanks a lot.

Martin Slark

Thank you.

Operator

Your next question comes from the line of Shawn Harrison with Longbow Research. Please proceed.

Shawn Harrison - Longbow Research

Hi. Good afternoon. First question just getting back to the raw material price increases. You would expect those to be completed in time to offset the expiration of the gold hedge and that we should expect increases beyond what you've already done through distribution or is this on top of that as well?

Martin Slark

We haven't put through any increases through distribution in the last six months. So I am not quite sure which ones you are referring to there.

Shawn Harrison - Longbow Research

So this would be a new increase…

Martin Slark

What we're doing and we started work on this at the backend of last quarter. We have based on different customers segments, the requirement to give some customers 30 days notice in any change. And so the intent is that that is in process today, such as the increase will be in place before the fiscal year starts.

Shawn Harrison - Longbow Research

Okay.

Liam McCarthy

But one thing Shawn about the hedge, we've known about that and talked about that for probably the last two calls. So unlike maybe raw materials going up in the future, we had a note about there. We knew that the hedge was going to expire. So we've had more than adequate time to do the planning on the price increase.

Shawn Harrison - Longbow Research

Okay. The follow-up would be just on the restructuring, the range of saving is still $75 million to a $100 million, is there any update to that range whether it'd be more toward the higher end or lower end, and kind of a mix of savings?

Martin Slark

I'll let Liam answer that question, because he has been driving that whole process. What I can say is that we believe those estimates are still very accurate. And a key part of driving the next phase of this was the opening of the Chengdu facility, which will enable us to move production of some key product lines into China and create the capacity there to do that, but I'll let Liam add some additional comments.

Liam McCarthy

I mean Martin has pretty much answered it. But a range is still the range. Obviously, we're pushing as hard as we can to be on the high-end of that range. And we've got sufficient momentum and we're adding currently to it as the global divisions each address their part of that. And all I can say is it has momentum, but (inaudible) dimension to us but there is a number of other [pieces] that are very important relative to the each of the divisions working out their product plans and product transfers, and they are well on their way. So there would be a significant amount of activity, and that was in FY'09.

Shawn Harrison - Longbow Research

With the linearity more push towards -- more back invaded still in terms of the brand of the savings for 2009.

Liam McCarthy

Yeah, I guess. That means obviously this transfers are slower and that we planned well, and we want to make sure that we don't associate any customer disruption with any transfers in our restructuring. So as a result, yeah, it could be probably closer to more in the backend, but still we've a lot activity currently underway, which will help us as well in the first half. But as you say, it will be slightly more in the second half of the year.

Shawn Harrison - Longbow Research

Okay. Thank you.

Operator

Your next question comes from the line of Steven Fox with Merrill Lynch. Please proceed.

Steven Fox - Merrill Lynch

Hi, good afternoon. A couple of questions. First of all, I was wondering if you could actually provide a little bit more detail on Chengdu. So I guess you're saying that it's actually helping earnings even as it just ramps up from zero production this quarter and how does that happen, like what production is moving in there from what region? And then, I have a follow-up.

Martin Slark

Well, I don't want to get into the specifics about what's really moving into that. I think we have currently over 2,000 people in Chengdu, the new facility that we're moving into it May. We have two of our larger divisions - Transportation Division and the Commercial Products Division – in which we significantly invested in Chengdu.

We also have quite a very sizeable forecast two room there, which has been our division in terms of ramping up tooling and also doing some other goods cost, which is helping us in the CapEx spend, and it's also helping the facilities that are already underway in Chengdu. But, clearly, as I said, we move into the new -- we're currently using leased space and from mid-May it will be our own space in that facility to work. It's a top class plant, very large and its been quite an exciting project. But in terms of getting some, I suppose, traction in terms of operational cost improvement, I would expect to see more of that in FY '09.

Steven Fox - Merrill Lynch

So, then, just two quick follow ups. When you talk about the cost savings overall for the June quarter being higher than the March quarter, is the large portion of that coming from Chengdu or not really? And then as the -- I am sorry.

Dave Johnson

Steve, no. The real benefit of Chengdu will be next fiscal year. There are good cost savings that are projected in the fourth quarter, our activities they are all already on their way outside of that.

Steven Fox - Merrill Lynch

Okay. That's helpful. And then, just one last question on foreign exchange. So I am not quite sure there was number puts and takes. When you look at the impact on earnings from Forex in this quarter and in your outlook, was it a benefit or a deterrent?

Dave Johnson

Steve, this is Dave. The impact on the exchange loss, as I said in SG&A was $3.8 million that was deterrent in total. We also had a transaction impact and I from time-to-time have given you a rough estimate of that, and that’s about a $3 million loss as well. And that comes from purchasing in currency other than your own such as Europe buying from the US, or in Asia selling in US dollars and that transaction loss was about $2 million. So between the two, the transaction loss has really shown up in cost of sales and the exchange loss was in SG&A. I don’t have the exact number for the ordinary translation which translating from foreign currency back to the US, but that’s probably just a couple of million dollars. So, overall impact would be negative on the quarter because of exchange.

Steven Fox - Merrill Lynch

And negative on the June quarter also Dave?

Dave Johnson

Well, it depends what happens to the dollar. I mean, really, it's a big movement and this, I mean, I would say that's a very, very strong movement in this quarter, and the exchange, the total was about $7 million. I don’t expect, its hard predict that, but its hard to believe it will be the same over again, but maybe some headwind because of the exchange here.

Liam McCarthy

It's very difficult to [analyze] under that. See because when you think about it, you ask for benefiting in bookings and revenue from the translation from the weaker dollar, but that's also driven up the cost of the commodity prices that we are paying. You know certainly I don't think [gold] that, copper impressive outside the dollar have got as much. So, it’s really difficult then to be able to calculate what's the affect on the gross profit margin from just that practice. So I think with the currencies we know where we are, and I think we're obviously benefiting on the revenue line and the booking front from translation. But if you look at different things like raw materials that has provided some of kind of an offset to us because of the dollar pricing.

Steven Fox - Merrill Lynch

Okay. Thank you. Nice job.

Dave Johnson

Thanks Steve.

Operator

Your next question comes from the line of Neil Stein with Credit Suisse. Please proceed.

Neil Stein - Credit Suisse

Thank you. Dave there was about $2 million or $2.5 million higher interest income than expected that seem to have given about a $0.02 lift to earnings this quarter and this thing you mention in the prepared remarks that that goes away next quarter. Can you help us understand what drove that, why it came and why its going away?

Dave Johnson

Sure, its not interest income, it is income from our joint ventures. We had about four joint venture investments that we account for in the equity method, and that's income from that. One in particular that has been -- that was ramped up and was very profitable in the last two quarters and because we are on kind of one quarter lag, we had a bit of a make up in this quarter plus from the last quarter plus the actual results for this quarter. But my estimate is we'll be back to the range of $2 million to $3 million in the next quarter.

Neil Stein - Credit Suisse

So there is a catch up, so you kind of have two quarter benefit -- two quarters worth of benefit this time and…

Dave Johnson

Let's say one-and-half quarter benefit.

Neil Stein - Credit Suisse

Okay. So it goes back to the previous level by 2.5 million going forward.

Dave Johnson

Yes, that's right.

Neil Stein - Credit Suisse

Okay. Then the other question was about the high book-to-bill in the quarter, can you remind us of what the real feasibility in the business is with regard to the backlog, the bookings and might any of that better than normal kind of book-to-bill level deal in to the price increases that are coming or anything else you think that might be impacting that, that you can help us understand it would be appreciated.

Martin Slark

Sure, actually we don't think that that's the case, and the reason for that is that. If you look at the lead time given by our customers and we can look at that based on the incoming orders coming in. That actually declined during the quarter. So actually our overall visibility if you like is actually less than it was a quarter ago. It appears as though we're getting orders in which showed a lead time requirements coming in from those customers. So there's nothing there that I think would lead us to believe that (inaudible) if you like is being pushed out.

Neil Stein - Credit Suisse

I guess so its not orders for future quarters, it's orders -- that the bookings that you got that you talked about were either already shipped against or would be shipped against the current quarter?

Martin Slark

Should be shipped in the current quarter and I know based on prior trends early into the following one, but certainly we believe that our revenue projection in Q4 is supported by another bookings that we saw in the last quarter and the continuing trend.

Neil Stein - Credit Suisse

Great, thank you.

Operator

Your next question comes from the line of [Aaron Hosak] with Morgan Stanley. Please proceed.

Aaron Hosak - Morgan Stanley

Great, thanks. Most of my questions have been answered, but just on the gold hedge again, can you tell us, do you plan to put a new gold hedge in place when this one expires. I know you're still planning to hedge 40% of your gold cost at current prices or do you think you made it differently?

Martin Slark

Great question, the answer is that we actually will have started this fiscal year putting place some additional hedges. We obviously have to be careful about what level of hedge we put in because its based around the level of the raw materials we actually purchase. We're not interested in a financial hedges as such, what we're doing is buying a hedge against the volume of gold that we actually purchased and trying to link any hedges, for example, something like copper to the actual volume of copper we buy as well. And so, as our new fiscal year starts, we will try and locate appropriate hedges there to eliminate any downsize risk felt from those materials over the fiscal year. We think we've put in place a process now, whereby doing that, we can have a greater certainty as we move into the fiscal year relative to raw material costs.

Dave Johnson

And if I could just add one comment to -- we've put in place a cap, so that if the price goes up, we're protected but then if the price comes down, we are able to take a benefit from that reduced price as well.

Aaron Hosak - Morgan Stanley

Okay, great. And were you guys also implying that you plan to hedge copper this time?

Dave Johnson

We are -- we intend to. Yes. We are looking at that now and we intend to do that for the next fiscal year as well.

Aaron Hosak - Morgan Stanley

Okay, great. Thank you.

Operator

The next question comes from the line of Alexander Paris of Barrington Research Associates. Please proceed.

Alexander Paris - Barrington Research

Just looking at the restructuring, it looks like you've gone out along, far enough where the savings are from hereon now will exceed the ongoing cost. One, is that true, and second off, could you look at the operating and gross margin as they are now and where roughly you would expect them to be when you're done with the restructuring program?

Martin Slark

Sure. I think your observation of the restructuring savings of gaining momentum is one that we would agree with, and certainly, we expect that to continue as we get into the second year of the activity and when we started it, we said it was a two year process. And we talked about the fact that when we're at the end of the two year period, our goal was to get back to a 14% operating margin, and all of the activity we're working on is obviously targeted at getting to that level. Certainly the raw material cost have made that more of an challenge, but we are continuing to work hard to getting back to that and we think that the ongoing restructuring in year two of the program should continue to help both our gross margin and our SG&A.

Alexander Paris - Barrington Research

Alright, thank you. I think this is short question but difficult answer I guess. Just looking at the difference between, it was at the world economy, US coming down other places maybe slowing, but then your overall electronics industry tends to sometimes have its own cycle like you just went through a big inventory correction and then semiconductor equipment is still under pressure. But you are just looking at the, forget about the economy, just looking at your end market electronics, where if you could say, where would you be in terms of the cycle. Are you at the bottom where its kind of, you can look for the deal electronic cycle to be improving or you kind of in the middle of the cycle?

Martin Slark

As you said that’s a simple question, and its probably a real tough one to answer. And I have to tell you that company like you, if you read the paper every day, you get pretty depressed about the state of the US economy and have a pretty negative view of what's going on and around the world. And I think when you look at a lot of electronics companies not all of them, because there is certainly areas of weakness being identified, and even in our own results you can see certain segments that are not as strong. But it seems as though, the increased use of electronics around the world is continuing to drive demand. I think the growing number of consumers with spendable income in Asia is driving demand for consumer electronic products. And so, I think our expectation is that the US economy is probably going to slow this year, and that there will be some knock on impact in other regions around the world. But there is enough of a disconnects in the electronics markets and other sectors around the world, that there is going to be growth opportunity.

Liam McCarthy

I really agree with the Martin on that, because if you look at some of the markets within industrial and other ones like that may have this cycle, and certainly there will be a cycle in the developed markets. But, what's really going on here is the entrance of the new consumers and the new purchasers in the Asia-Pacific region that have ever been in this segment before, and arguably entering the demand. So that's I think one of the key things for us is capitalizing on the Far East business and capitalizing on our design capabilities with the US technology companies that are gaining share and supplying a lot of products into that region. So I think its changing the cycle. So we all have to stay tuned I think for that.

Alexander Paris - Barrington Research

But as far as the -- there has been enough bad news on the economy and then in the papers and a high degree of business caution. I think, can we at least say that inventories generally around the world are under fairly good control or maybe even low?

Martin Slark

I think, you've obviously looked through the other tech bubble bursting when inventories were extremely high, and that we have seen some other cycles in certain sectors and market. Well I think a couple of years ago, we saw a buildup of inventory in the cell phone market. We are not seeing any significant inventory buildup at this point in time. So I think, we believe the demand we are seeing in terms of the incoming orders is represented into the end demand. So, I think, that is encouraging. Now, buried within that, I think, based on some issues in the financial services sector, I think, some elements of it is that the data products are going to slow down. I think the housing market is certainly impacting appliances here, and I think some parts of the industrial market, particularly semiconductor test equipment alone. But I think the underlying trend is still positive, and over and above that, I think there are some specific segments like telecom infrastructure to support Video-on-Demand, like medical electronics that give opportunities for increased growth above that underlying trend.

Alexander Paris - Barrington Research

Okay. Thanks very much.

Operator

Your next question comes from the line of Mr. Jeff Rosenberg with William Blair & Company. Please proceed.

Jeff Rosenberg - William Blair & Company

Hi. Could you just -- I missed some of the details in which you said about acquisitions going forward, did you say, Martin, that you expect to do a couple more that are similar in the size of the one you just closed by the end of fiscal year or could you clarify what your -- or repeat what you were saying there?

Martin Slark

What we've done Jeff, is we have signed an agreement in the third quarter to acquire an Asian manufacture of Flex circuitry. And that deal, we would expect to close in the fourth quarter and we would expect to sign a couple of additional agreements during Q4. And obviously, when they would close, it was probably be early in the new fiscal year, but we have a pipeline that we're working on. And we would think by the time we announce our fourth quarter results, we would be talking about two additional transactions of minerals.

Jeff Rosenberg - William Blair & Company

So I was just kind of thinking back to last year's Analyst Day, I mean, is this something we should think of as a different orientation from your perspective towards acquisitions or has there been a change in without their relative to how the company has looked to historically as acquisition opportunities?

Martin Slark

Both Jeff, I think you remember last year's Analyst Meeting, I said if you look back at Molex, not historically 90% of our growth is been organic, and 10% is been acquisitions. And I said I didn't see that flip-flopping, but I expected the ratio to shift 70% organic, and 30% acquisition.

And then also I think that with the very strong balance sheet we had and what's happened recently in the credit market, we've seen some of the multiples come down and we think for a company that is as strong as we are balance sheet wise. There are some very good opportunities out there. And we know there are some strategic gaps in our product portfolio. And th,at we believe, we can quickly fill with the appropriate acquisition.

So, yeah, I think, we sign posted year ago. We're going to do more in this area. And this is an indication of some of the things expected to going forward.

Jeff Rosenberg - William Blair & Company

Okay. And then just -- I also just wanted a quick clarification. I mean, Dave, when you said that we should look for SG&A to go down as percentage of sales in the fourth quarter, is that from the absolute number you reported including the foreign exchange effect of 20.4, is that more from the normalized number taking out that item, the 19.9?

Dave Johnson

I said that the SG&A would increase on an absolute basis but it would decrease on as a percent. So it will be below the 19.9% that I said was adjusted for the exchange.

Jeff Rosenberg - William Blair & Company

Yeah. I just wanted to know what the base was. So the starting point is 19.9. Okay. Great. Thanks.

Operator

Your next question comes from the line of Yuri Krapivin with Lehman Brothers. Please proceed.

Yuri Krapivin - Lehman Brothers

Good afternoon. Question about the handset market, the comments from some of the leading players in that space suggest that. Again, when we'd be seeing a shift towards lower end phones sold in the emerging market? And last year, handset mix created some headwinds for you. You appear quite positive on the handset market, but how do you think about product mix within your handset portfolio going forward?

Martin Slark

Good question, Yuri. I think, compared to a year ago, our mix of end customers has changed significantly and I think the comments you've heard about concerns about lower demand for some of the high end phones have come predominantly from some of the U.S, European players. Where we have seen some strength there, actually it's from some of the Japanese companies and some of the Korean companies at the high end of the market.

But I think the expectation that is if you talk to all those companies overall, they still believe that for the full-year, we could see low double-digit growth in that market. I think again, its going to be buyers towards low end phones because of the growth in Asia. But I think our diversification of customer base is going to help us going forward here versus a couple of years ago, where we weren't very dependent upon a single customer. I think that has obviously dramatically changed in the last two years.

Yuri Krapivin - Lehman Brothers

Great. And then my other question is related to your Chengdu facility. As far as I recall, it's about $1.1 million overseas, as you look over the next 12 months, do you have similar size investment projects in mind that could require significant cash outlays?

Martin Slark

Yuri, no. I mean, when we laid out the two years restructuring plans, the big addition of bricks and mortar in that plan was the addition of this Chengdu facility in the west of China. And built into our CapEx already this year is a significant portion of that cost. The only other country that we are in the process of opening up, that we've already announced, is I think you know is Vietnam.

But that is much smaller facility, that's initially targeted to supporting Japanese customers on the divests to move that at support end. And that's obviously a growing market too. What I think is that a number of the Japanese customers don't want to be so dependent on the China market. So, when you look at our CapEx this year, built into that has been the Chengdu cost. And overall, as you've seen, the CapEx has come down as a percent of sales even without built into it.

Yuri Krapivin - Lehman Brothers

Right. Thank you very much.

Liam McCarthy

Yuri, in terms of -- just add on to the question of Jeff actually asked and your question on Chengdu. The SG&A the foreign currency transaction cost that Dave was talking about. Some of that is caused by us manufacturing outside of China and selling products in China and the currencies are stronger in the countries that we're manufacturing in and reporting. With Chengdu now and it's certainly not going to happen in June quarter, but one of the benefit, Chengdu is that we will localize much more production there. And we will be able to then reduce the transaction effect on the foreign exchange.

Operator

Your next question comes from the line of [John Lopez with Falling Oak]. Please proceed.

John Lopez - Falling Oak

Hi. Thanks. I just had a couple of sort of nick-nack questions on the numbers. The first, I apologize if you have discussed this, the receivables that you [serve] basis broke above 80 I think for the first time ever certainly in the last couple of years. I am just wondering if that's structural or just a function of that this quarter looked.

Martin Slark

No, actually, it's related to specifically to we talked in the call about consolidating some of that customer service centers in China. So it relates to some collection issue in China, which should be cleaned up in the current quarter. So, its a quarter specific issue, and I don't think it's a trend that you would see continue.

John Lopez - Falling Oak

Okay. Got you. And was that same trend responsible for the inventory days?

Martin Slark

No, the build up in inventory is based on the some of the production moves that we are planning to make with the opening of the new facility and making sure we don't disrupt customers who are been supplied in the current location we are supplying those products. So I think you will see -- you should see that all of that come down by the end of the fourth quarter and the inventory come down if not by then by early the first quarter next year.

John Lopez - Falling Oak

Got you. Okay, I apologize for this. The third question I had and I apologize this maybe just as dumb. If I just look at the change in your bookings relative to change in the backlog, the spread between the growth and both of those is very wide. It's never been this wide. And I am just wondering why such a large change quarter-to-quarter in your backlog on a relatively smaller change quarter-to-quarter in your orders?

Martin Slark

Actually, that is difference I hadn't actually looked at. I can only assume that part of that may well be some of those orders being schedule for the early part of Q1 of next fiscal year, but I think as we said I think the order backlog that we have is the key that I think supports the revenue projection we've given for the current quarter. We'll take another look at that, but I can only assume that's the reason why.

John Lopez - Falling Oak

Okay. But just thinking to the competition of the backlog just to add generally, do you have a lot of business that is in the backlog, that's beyond the current quarter?

Martin Slark

No, actually, relatively little. I mean, because as you probably know a huge portion of what we ship in a month is booked in the same month. And if you look at the total size of our backlog compared to the projected revenues for the quarter, when we put to get our estimate for revenues for the quarter, we've really got to look on what we think the incoming order trends are and look at the backlog as well. I mean, the average lead times for incoming orders from customers, right now, is globally for us is about 16 days.

John Lopez - Falling Oak

That's all sorts of I understood the business. That's why that number jumped out of me. Okay. And very last one, if I just look at your reserves relative to your receivables is been creeping up, you are reserving about 5.5% of receivable dollar. A year ago, you were reserving by 4.5%, is that anything specific? Is that customer quality or composition? Or is it just statistical noise? I'm just wondering if it is anything to those?

Dave Johnson

It is surely, as you said noise nothing to read into that.

John Lopez - Falling Oak

Okay. Thanks very much for the help.

Dave Johnson

Right.

Neil Lefort

Okay. For everybody on the -- still on the call -- we have a lot of people still on the call, we have one question more in the queue and we'll take that and then, I think, we'll call off the call.

Operator

Your final question comes of the line of Jim Suva with Citi. Please, proceed.

Jim Suva with Citi

Hey, quick follow-up on your book-to-build of 1.09, very strong, is that push-out of that order you'd mentioned was pushed out in Industrial segment, is that included in the 1.09?

Dave Johnson

No, it's not, Jim. That's not involved in that at all. It had no impact on that as whatsoever.

Jim Suva with Citi

Great. Thank you very much for the clarification.

Dave Johnson

Okay.

Martin Slark

Thank you very much everyone for being on the call today, and we can certainly be available if any of you would like to call in independently for follow-up questions. But thanks very much.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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