Molex Incorporated Management Discusses Q1 2013 Results - Earnings Call Transcript

Oct.23.12 | About: Molex Incorporated (MOLX)

Molex Incorporated (NASDAQ:MOLX)

Q1 2013 Earnings Call

October 23, 2012 9:30 am ET

Executives

Steve Martens

Martin P. Slark - Chief Executive Officer, Vice Chairman, Member of Executive Committee and Member of Stock Option Plan Committee

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

Analysts

Sherri Scribner - Deutsche Bank AG, Research Division

Amitabh Passi - UBS Investment Bank, Research Division

Mike Wood - Macquarie Research

Shawn M. Harrison - Longbow Research LLC

Wamsi Mohan - BofA Merrill Lynch, Research Division

Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division

Jim Suva - Citigroup Inc, Research Division

Craig Hettenbach - Goldman Sachs Group Inc., Research Division

Anil K. Doradla - William Blair & Company L.L.C., Research Division

Steven Bryant Fox - Cross Research LLC

James M. Kisner - Jefferies & Company, Inc., Research Division

Amit Daryanani - RBC Capital Markets, LLC, Research Division

Brian John White - Topeka Capital Markets Inc., Research Division

Michael J. Wherley - Janney Montgomery Scott LLC, Research Division

Anthony C. Kure - KeyBanc Capital Markets Inc., Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Fiscal Year 2013 First Quarter Molex Incorporated Conference Call. My name is Lisa, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Steve Martens, Vice President of Investor Relations. Please proceed.

Steve Martens

Thank you, Lisa. Good morning, and welcome to our September 2012 conference call. Joining me today are Martin Slark, our CEO, who will provide a summary of the quarter and commentary on end markets; and Dave Johnson, our CFO, who will provide details on financial performance. You can access presentation materials and a replay of this call through the Investor Relations section of our website, www.molex.com.

Slides 1 and 2 of the presentation contain our Safe Harbor statements. During the course of this presentation, we will be providing forward-looking information and referring to non-GAAP measures. Please read carefully the forward-looking statements of our press release and Form 10-K for an understanding of the risks and uncertainties associated with forward-looking information and a reconciliation of non-GAAP measures to GAAP.

And now, I’ll turn the call over to Martin.

Martin P. Slark

Thank you, Steve, and good morning, everybody to the call. If you'd like to turn to the next page of the presentation, I'll give you a quick summary of the current quarter.

Given the current economic climate, which has been well-discussed by many other people the last couple of weeks, we believe that our September 2012 quarter was a reasonably strong one for Molex. We launched several new products, and we continue to work on additional projects that we believe will drive above-market growth for Molex this fiscal year.

Our customers recognized our strong engineering and manufacturing capabilities and continue to bring us their interconnect challenges for us to resolve them for them. New products played a key role in our sequential growth this quarter and propelled the company to new records for all incoming orders.

While we move forward with our growth strategies, the economy that we operate in is becoming more and more uncertain. End customers are taking a conservative approach to managing their businesses, deferring hiring and investment decisions and tightly managing their inventories. This has resulted in a choppy business environment. We are monitoring our business closely, and we'll take appropriate steps if our revenue starts to slow down.

However, in the interim, as Molex has always in the past, we'll continue to invest in R&D and equipment so we are properly positioned to benefit when the business environment stabilizes, and we're very confident of further growth opportunities as the economy starts to recover.

In early October, as we previously announced, Molex acquired Affinity Medical Technologies as part of our strategy to enhance our exposure to the medical market. Affinity brings several key strengths to Molex: new manufacturing capabilities; new customers; and a strong portfolio of industry-recognized products. We'd like to take the opportunity today to welcome the employees of Affinity to the Molex family and say how confident we are that this acquisition will have a very positive impact on our results in the medical market.

Relative to prior periods, we're also very encouraged by the strength of our acquisition pipeline, and we will continue to pursue further acquisitions this year as part of our growth strategy. Our operational metrics also continue to strengthen with record on-time delivery and record quality metrics being recorded in the quarter. This performance is being recognized by our major customers, with more than 15 major customer awards over the last 12 months.

In the last quarter, we were named as Global Supplier of the Year by Cisco. As more than 50% of the Molex locations around the world support Cisco, we are particularly pleased to receive this recognition from a leading global customer which we think is great recognition of our global operational excellence and our ability to support our key customers on a global basis.

We turn now to the next page of the presentation. In total, if you look at our sequential orders and revenue results, revenue increased 7% sequentially, but declined 2% from the record September quarter in 2011. When you think back to that quarter, please remember that this was the quarter in September prior when to we saw a significant dip in October. So with the benefit of hindsight, we know that we had customers in the September month that over-ordered last year. So we clearly are comparing ourselves to what really was an inflated quarter for orders and revenue.

Orders themselves increased 5% sequentially and were up 4% from the prior year. The book-to-bill ratio for this quarter was 1.03:1. The revenue and order trend demonstrates really organic growth over the last 3 quarters in what has been a challenging environment. Orders achieved record levels this quarter. And while revenue as reported was below the record level last September, this was largely due to unfavorable exchange impacts. If you look at the same results in local currency, our revenue was actually higher than September quarter last year.

Looking at our results by region and by channel, it should come as no surprise that Europe is the most challenged region. Revenues in Europe were down 13% sequentially and 16% year-over-year, and bookings were down 9% sequentially and 11% year-over-year. Europe is clearly the most challenged region in the world today, and we don't see the economic prospects in Europe improving in the near term.

We are seeing growth in both the Americas and Asia, but frankly, it's not across-the-board, it's with select customers and select markets. All of our growth is coming from specific OEM customers and their EMS partners. Our distribution business really reflects what we believe is the underlying weakness in the economy. It's clear that distributors are being cautious in this environment. Our bookings declined 5% sequentially, and revenues declined 4% sequentially in the distribution channel. One encouraging point looking at distribution is that distribution revenues appear to be in good shape and year-over-year distribution bookings were up 1%. As such, we believe that our distribution business may have bottomed out this quarter.

Looking now at our results by end market on the next page of our presentation. The automotive market continues to grow, with revenues increasing 5% year-over-year and 1% for the June quarter. Safety products and infotainment systems were particularly strong this quarter, demonstrating the ongoing content theme in the automotive market. We believe that the electronic content in vehicles will continue to increase, and even given stable automotive volumes around the world, that should still result in ongoing market growth.

On a regional basis, demand remains strong in the U.S. and Asia, more than offsetting weakness in Europe. And the European market was particularly weak in France and Italy. We anticipate the December quarter will be roughly in line with September, with continued weakness in Europe.

Car registrations in Europe were down year-over-year, about 8% in the last quarter, and we see that trend accelerating as we move into the current quarter. There's no question the European automotive market will remain weak through the end of this year.

In Americas, the average age of vehicle is approaching 11 years, and that bodes well for future demand across the Americas. An increasing salary levels in Asia will drive increased demand for vehicles in the Asian market as well.

Looking at the infotech market, we saw revenues increased 2% from the prior year and a strong 12% sequentially. Demand for tablet components drove the increase, while the server and storage areas were basically flat both sequentially and year-over-year.

Infotech had a book-to-bill ratio of 1.05:1. We are optimistic that the December quarter will also be strong. Longer term, the need for high-speed solutions, data center upgrades, increasing storage requirements and the trend towards tablets where we are very well-positioned will continue to drive growth. We are also particularly excited about the adoption of fiber optic solutions in our market. We have a very strong product range in this area, including active optical components, and we believe that will drive a lot of Molex-driven solutions, particularly in the high-speed end of the market.

As has been quoted by several other companies, the PC market itself remains weak. Revenues in the telecom market increased 1% year-over-year and a strong 19% sequentially. Telecom infrastructure increased slightly on a year-over-year and a sequential basis, with the book-to-bill ratio for this area being approximately 1. We do not anticipate significant improvements in this area in the December quarter.

In the long run, telecom networks will need to be improved and expanded to support the proliferation of mobile devices and their growing capabilities. Short term, we believe we're seeing a holdback in CapEx spending in the telecom equipment market, but we do believe that, that could improve in the new year as there is certainly a need to improve infrastructure in certain end markets.

The mobile phone area also increased for us on a year-on-year basis. This is the segment where our new products drove significant sequential growth. As our new products are still ramping, we expect sequential growth again in the December quarter. Our microminiature products are a key enabler of the new for high-functioning cellphones that are being introduced to both consumers and businesses around the world. We'll continue to benefit from this trend as the adoption rate continues to grow.

It should be noted that in this segment, the revenue loss, that's customers that are struggling in this segment, is somewhat reducing the overall revenue gains that we're seeing with the industry leaders.

Looking now at consumer electronics, revenues decreased 15% year-over-year with all major sectors declining. On a sequential basis, revenue was flat, with strong demand in gaming systems offsetting weakness in other sectors, particularly the TV and digital camera sectors. This is a segment where we would normally expect to see sequential growth in our Q1, and the weakness in this sector reflects the weak economy. We expect that the television and camera markets will remain challenged through the March quarter, as it appears that the pre-Christmas build is winding down early in the December quarter. The gaming sector is a potential bright spot here.

Revenue in the industrial segment was down 8% from a year ago and down 4% on a sequential basis. Industrial customers including distributors are proceeding with caution as evidenced by a book-to-bill ratio that was below 1. Our industrial business was particularly weak in Europe. Despite current difficulties related to a challenging global economy, we remain optimistic that this large and diverse market will continue to grow in the long run. As global growth improves, we anticipate that the demand for additional factory automation, nonautomotive transportation and energy-related investments will return.

Finally, looking at the revenue for the military and medical markets which increased 15% year-on-year and were flat on a sequential basis. The purchase of Temp-Flex in the December quarter of 2011 contributed to the year-over-year growth. And the December quarter will also benefit from the recent Affinity Medical acquisition. Longer term, we will continue to grow our exposure to these attractive markets on an organic basis, as well as through mergers and acquisitions. Molex is still a relatively small player in these market segments, so we believe we have a lot of upside as we move forward.

So if you look at the overall picture, we have to say that we were pleased with our overall organic sequential growth in what is clearly a challenging market. Our record bookings and our strong new product pipeline will drive further sequential growth in our Q2, but there's no question that the underlying market is weak.

Let me turn the call over to Dave, who will now give you some more perspective on our actual financial results.

David D. Johnson

Thank you, Martin, and good morning, everyone. let's start with the P&L results on Slide 6. Revenue of $916.9 million increased 6.8% sequentially, driven in large part by new programs that were ramped in the quarter.

Our gross margin was 29.3%, 70 basis points lower than the June quarter, reflecting start up costs for the new programs and a mix change versus our expectations. The new programs in the telecom and infotech industries, which carry a lower gross margin due to higher material content, exceeded our expectations, while higher-margin industrial and consumer electronics business fell short of expectations.

SG&A of $163.1 million included insurance proceeds related to the March 2011 Japanese earthquake and tsunami of $9.9 million. Recall that in the June quarter, we announced the gain of $6 million for insurance proceeds. We have now closed out our insurance claim for this matter.

Other items on the P&L are relatively consistent with the sequential quarter. Our effective tax rate for the quarter was 30.8%, within our guidance range of 30% to 32%, resulting in earnings per share of $0.40.

Please turn now to Slide 7 for our balance sheet and operating metrics. Net cash increased by almost $80 million sequentially to $480 million. Free cash flow was just short of $100 million, and our $350 million revolving credit facility was unutilized at September 30. However, we have drawn down on the facility subsequent to quarter end to fund the purchase of Affinity Medical.

Both AR days and inventory days improve sequentially, AR to 69 days and inventory to 84 days. Our return on net assets declined to 18.7%. This is a trailing 12-month metric and we dropped off our record operating earnings in Q1 last year in computing this quarter's metric. Also, our higher-than-usual spending in capital for the new programs in Q4 and Q1 have impacted our RONA as well.

As the new programs ramp to full production, RONA will improve since these programs are expected to generate significantly better RONA than the company average. And R&D of $46.3 million is comparable to the sequential quarter as we continue to be very committed with design and activities for our key customers.

The slide on Page 8 compares our free cash flow to net income. Recall that our goal for free cash flow is to approximate net income, and you can clearly see from the chart that we have substantially exceeded this goal in the quarter. Cash flow from operations reached a record high in the quarter of $167.4 million due to improved working capital management. As expected, capital spending of $69.4 million due to new program launches was higher than our 6% to 7% guidance range, but we still believe that we will meet our guidance range for the full year.

These very positive cash flow numbers exclude the $16 million of insurance proceeds over the last 2 quarters that are reflected under investing activities in our statement of cash flows. Though these insurance proceeds are onetime items, they reflect a great deal of hard work by Molex's purchasing, engineering and finance groups, and helped to offset the significant disruption in business that occurred in the quarters after the March 2011 earthquake and tsunami in Japan.

And finally on Page 9, we show our outlook for the following quarter. The macro environment continues to be poor, with weakening end demand and uncertainty surrounding the election and fiscal matters relating to the U.S. and global economies.

Fortunately for Molex, our success with landing new product wins will enable us to continue to grow sequentially in the December quarter. We are guiding to revenue in the range of $930 million to $970 million, which at the midpoint is a sequential increase of 3.6%. Earnings per share are expected to be in the range of $0.36 to $0.40 per share.

This outlook implies continued progress with our new program launches, at the same time that the balance of our business remains relatively weak. This mix of business should result in gross margins in the December quarter at approximately the same level as in the September quarter.

Before turning the call over to questions, let me summarize by saying, we executed very well in the September quarter with revenue just below the midpoint of our range and EPS just above the midpoint of our range. Gross profit was impacted by program startup costs and mix, but this was offset by lower SG&A due to insurance proceeds.

Cash flow metrics were at record levels, as were delivery and other customer service metrics. We must now leverage our record level of bookings into a solid December quarter, while at the same time being very aware of the weak economic environment. We would now be pleased to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Sherri Scribner with Deutsche Bank.

Sherri Scribner - Deutsche Bank AG, Research Division

I just wanted to verify, Martin, based on the comments you made about the different segments, it sounds like you're really only expecting 2 of your segments to see sequential growth, primarily driven by the new programs in tablets and in smartphones. Is that the right way to think about it? And the other segments are either flat to declining?

Martin P. Slark

Sherri, very close. I would say the segments we feel positive about would be automotive, telecom and infotech. And the segments we feel -- the major segments we feel weaker about is obviously consumer and industrial. We obviously will see growth in medical and the military market, but that's going to be driven by our acquisitions. So if you're trying to get a feel for the underlying market trends that we are seeing, I would say automotive, telecom and infotech looks okay for us. Industrial and the consumer, clearly weaker.

Sherri Scribner - Deutsche Bank AG, Research Division

Okay. Last quarter, you gave revenue guidance for the full year of 8% to 10%. In this environment, are you still comfortable with that 8% to 10% guidance? I know a lot of that was driven by new programs, but it sounds from your commentary like the environment has worsened.

Martin P. Slark

No, I think we still feel confident about that, but it's going to probably take more leverage from the new product programs we've got. When we look at the strength of those, we think, at this point in time, that would offset the underlying business weakness that we are seeing. But clearly, we're going to have to execute on these new product programs to get that growth. But we still think that kind of growth is possible at this stage.

Amitabh Passi - UBS Investment Bank, Research Division

Your next question comes from the line of Amitabh Passi with UBS.

Amitabh Passi - UBS Investment Bank, Research Division

Dave, first question for you. Can you help quantify the impact of the startup costs in the current quarter? And then with respect to OpEx for the next quarter, should we simply assume roughly $10 million to $12 million higher now that the insurance claims are behind you? And then just one quick one for Martin. Given the strong tablet, mobile device ramps that you're seeing into the December quarter, is there any risk from your perspective that we see sub-seasonal trends as we move into the early part of 2013?

David D. Johnson

Sure. Let me start with the question about the startup costs. We roughly were impacted by about $5 million in the first 2 months of the quarter because of the start-up costs. And your thought for the SG&A is about right, we have to add back the $9.9 million. And remember that in the October timeframe, we have our global merit increases, so that would add maybe another $3 million to SG&A in the December quarter.

Martin P. Slark

I think when you think about the strong demand for mobile devices and tablets going into Christmas, which obviously is a positive right now, as is frankly electronic content in automotive vehicles. And what we're seeing in some of these high-speed products in infotech, and those, I don't think, are as impacted by consumer demand. I think the real issue, and honestly, we see a very confusing picture and you must see the same thing. In that you see announcements everyday with people pronouncing weaker results coming in the next quarter, but then you see macroeconomic data, particularly for North America, that's a little encouraging in terms of housing starts and things like that. But everybody has got this concern about the fiscal cliff potentially taking place in January. So I think the answer to your question is, how strong is the Christmas selling season? Do our customers come out of that Christmas selling season with a lot of inventory? And then, they need to make the cutback. What I can tell you now is they seem to be struggling to get enough of these new products in the stores based on the projected demand they're seeing from customers of these new items. I think it's isolated. As you well know, if you look across some of those end markets, there are clearly some customers that are doing very well, and there are some that are doing very poorly. And I think if the customers are doing well, continue to execute in those markets, it will be hard to imagine that they would come out of Christmas with excess inventory.

Operator

Your next question comes from the line of Mike Wood with Macquarie Capital.

Mike Wood - Macquarie Research

On the framework, also you discussed the last quarter with gross margins roughly similar to where you were at the end of your fourth fiscal quarter, is that again still something that holds? I see about a 70 basis points decline in gross margins, would that ramp back up throughout the year?

David D. Johnson

As we said in the comments, the mix has changed somewhat, and we think that will continue throughout the year. So I would expect gross margins to be just below the 30% for the balance of the year.

Mike Wood - Macquarie Research

Okay. And is there an SG&A offset in these -- some of the lower gross margin new product businesses? In other words, will there be cuts that would eventually be coming again towards the end of your fiscal year here?

Martin P. Slark

Not so much cuts as such. But I think the model that we see evolving as the year goes is assuming that these new programs ramp with the volumes that's been projected. As we said, the reason for the lower margin is there's a certain amount of purchase components in those margin -- in those products, which obviously drive down the overall gross margin. So you end up with fairly significant dollar value fall through. And so the SG&A on a relative basis should go up at a lower rate relative to those revenue gains. So yes, there will be some offset we think from SG&A in the second half. Particularly, as I think we get through the new product start-ups then you'll see some margin improvements on those programs.

Operator

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

Shawn M. Harrison - Longbow Research LLC

I guess the first question I had was just looking at these, the new infotech and telecom programs. Is it strong enough now to imply that you could see maybe a flattish or even growth in some of these programs into the March quarter just given what looks to be a pretty robust product set?

Martin P. Slark

As you know, Shawn, I think the -- normally, the March quarter is sequentially down, and Molex, as you know, probably has a stronger dependence on Asia than a lot of companies. And Asia, I think, seasonally, is the weakest quarter because of Chinese New Year. But I believe that if we come through Christmas without excess inventory of these items, and I think the good news is, unlike some prior years where you're seeing a very strong build going into Christmas of a lot of products. Clearly, people are being cautious because of this fiscal cliff in January. I think there's a chance that we could hold revenues flat in that quarter. But I think we'll have a better view of that when we see what December bookings look like and also what the inventory picture looks like at the end of the quarter.

Shawn M. Harrison - Longbow Research LLC

Okay. And then switching gears a bit. I guess maybe if you should give us the revenue profile of Affinity. And then just talk about how you're thinking of deploying cash toward M&A. Is there a dollar figure that you'd like to target in terms of deployment toward M&A this year, and kind of how ripe is the environment? You seem pretty enthused about the opportunities.

Martin P. Slark

Yes. We've not talked about the price of acquiring Affinity. I will tell you that just to give people a sense, it's in a kind of 8 to 10 EBITDA range, which is something we believe is appropriate for that market given that the margins in medical are clearly much stronger there than some other end segments. It's roughly $30 million of annual revenue. What we're excited about is that if you look at Affinity's top customers, they're customers that Molex doesn't sell to today. We think there's a great opportunity to leverage the Molex sales force to sell their product range to other medical customers that they don't cover and a good opportunity for Molex to sell its products into the medical customers that they're in. So this is exactly the kind of thing we're looking for when we said, we won't acquire companies just to get bigger. We'll acquire companies to give ourselves a presence in other markets and technologies we don't have. And this exactly fits that mold. And I think in terms of size, companies that are in that $30 million to $50 million range that have either good technology or presence in these markets are great for us because they're easy to tuck-in and relatively easy to get done. But we're continuing to look for some more significant opportunities that would be in the sort of $100 million range in terms of revenue, with particular strength is, I think, in the industrial market. Our focus is really medical, industrial, mobile technologies, et cetera.

Shawn M. Harrison - Longbow Research LLC

And there's -- and it seems like there's opportunities out there to be had.

Martin P. Slark

Yes. I think we're seeing some consolidation in the connector market. In that, given the global nature of the business we're all in today, I think there's a lot of family-owned and smaller companies out there that recognize it's going to be very hard to compete in the long run if you've got only a niche product range or niche geographic presence. So I do think there are -- depending on whose numbers you use, there are 2,000 companies in the connector market today. I'm sure a lot of them we wouldn't be interested in, but there certainly are opportunities out there.

Operator

Your next question comes from the line of Wamsi Mohan with Bank of America.

Wamsi Mohan - BofA Merrill Lynch, Research Division

Martin, can you remind us of your Molex's auto exposure in Europe? And are you seeing an inventory buildup in Europe? It's normally somewhat atypical, but we heard from some other companies that there is some inventory buildup. I just wanted to get your thoughts on it.

Martin P. Slark

Sure. If you take our automotive revenue, it is split roughly 1/3 in North America, 1/3 in Asia and about 1/3 in Europe. But I would say in the last year or so, the portion in Europe, given the weak market there, has actually gone down. And so the share of our business coming from North American automotive companies is now getting close to 50%, which we're obviously happy about. We wouldn't necessarily see the inventory build because obviously we don't sell directly to the automotive companies. We tend to sell to the Tier 1 suppliers that support them. But I think there's been some pretty good data out there that new car registrations in Europe have declined about 8% in the last quarter versus the same quarter last year, and that negative variance seems to be accelerating as we're going into Christmas. So it wouldn't surprise me that there is a buildup of inventory in the market, but frankly, we wouldn't see that.

Wamsi Mohan - BofA Merrill Lynch, Research Division

Okay. And Dave as a follow-up here, the 6% inventory increase quarter-over-quarter versus your 3.5% increase for the midpoint of guidance for December, is that delta all driven by the new program ramps?

David D. Johnson

Primarily, that's true.

Operator

Your next question comes from the line of Matt Sheerin with Stifel, Nicolaus.

Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division

Martin, just a question on your comments regarding infotech. You talked about relative strength in tablets with new programs and also data center offsetting the PC weakness. Could you elaborate a little bit more? We've seen comments from other suppliers that they're seeing less than seasonal demand from OEMs even in the data center enterprise space due to cautious ordering patterns and stands from customers. So how much of the strength that you're seeing is coming from tablets versus the other products?

Martin P. Slark

Tablets is clearly a big factor. And I think, obviously, I think there's a fair amount of inflation out there that one of the things that's hurting the PC market is instead of buying notebooks and laptops and PCs, people are buying tablets. And so I think the shift in the market towards tablets is one of the factors that impacted that. I would say that what we're seeing in the broader infotech market in terms of data storage and servers, et cetera, the end market for us I think is weaker, which is consistent. But I would say our share has gone up because of the number of new product wins there. So I think that helped. And I would say the peripheral end of the market, when you look at printers and things like that, is clearly weaker as well. So I think if you look at the overall market going into Christmas, I would say CapEx spending in that market has been weaker and end demand is weaker. I think what we've done is gained -- done very well on the tablet market, which is strong, and gained a little bit of share in the server and storage area.

Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And if you look at that mix, and you talk about some gross margin pressure due to mix on the mobility side, but is the margin profile in your tablet business versus other programs different? And does that drag margins down in that segment?

Martin P. Slark

No. I would say that the margin profile in our tablet products is pretty consistent with the rest of our infotech products. But if you look at some of those new programs in the tablet sector, the new ones we're launching, they have a similar profile to the things we've been doing in the mobile market and they also have this purchase component sector. So where you're seeing the margin pressure there is around the purchase cost components that are in the new product program launches. But the base business in tablets is a similar margin.

Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division

Okay, great. And then just regarding your commentary on distribution which I thought was encouraging, the fact that you think that distribution sales out, and perhaps sell-in, has bottomed. What are the signs that you're getting that gives you any confidence there?

Martin P. Slark

Actually, honestly, not a lot.

Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division

Just more a feel than anything?

Martin P. Slark

Well, I think you've seen the recent announcements from a couple of the major distributors who preannounced their results, et cetera. And what I've noticed with distributors generally is that they're much quicker versus a few years ago now to react to changes or their perceived changes in end demand. Very quick to cut orders and ramp orders up. It's interesting when I look back over the last 3 years, there's a lot more volatility in distribution business than you would think. And what I think was encouraging to us is sort of I guess you'd say it stopped going down. I mean, it certainly flattened out versus last year. And if you think about the fact that 26% of our revenue comes from distribution, how broad that customer base is, we're hoping that, that would stay fairly stable over the next couple of quarters. So if it stops going down if you like, that's really a positive.

Operator

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

Jim Suva - Citigroup Inc, Research Division

My question is, last quarter, you talked about a high-volume consumer electronic kind of Tier 1 big ramp program that was going to pressure margins for the next fiscal year. Can you just kind of update us on kind of the status and the timeline of that program as far as both the ramp. And I guess even more importantly for Molex investors is the margin profile of that ramp, is it coming in exactly how you thought? Should we think about it as the first quarter here more of a challenge, then you get more efficiencies the next few quarters out? Or these economic headwinds bringing some pressures on that margin profile? Or how is that progressing?

Martin P. Slark

Jim, thanks for the question. I think the answer to your question is as follows. First of all, there wasn't a specific program that drove our growth last quarter. It was a number of different programs. But I think what I talked about in the previous quarter was the fact that we had seen some growth opportunities, whereby we would be making more complex end products for our end customers. And the challenge with those was that those programs involve purchased components where our ability to mark those up in the final price was not as good as it was for the things that we made ourselves. And certainly, that was seen with these programs. But your other comment, which I think is absolutely true, is that whenever you ramp new high-volume programs, and we ramped several this quarter, tends to be -- the margin in the first quarter or so tends to be lower as you're trying to improve the yields of machines. It was very interesting, a couple of these programs -- I was out in Japan and in China, was -- if you look at the margins over the quarter in August, September, et cetera, they were actually improving as the yields were improving and scrap levels were going down. The other point I want to highlight is, none of these programs are in consumer electronics. The programs are actually spread across 3 end markets. They're really in the telecom sector, they're in the infotech sector, and they're in automotive. And I think as I said last quarter, those are the 3 end markets where we see the opportunity to do more of these integrated, more complex subassemblies into those markets.

Jim Suva - Citigroup Inc, Research Division

And as a follow-up, you mentioned some softness in the TV build, and I believe that is part of your segment called consumer, which is about 16% or 15% of your company sales. When will we kind of expect a build going into Christmas? It sounds like you're saying that we're seeing a slowdown in that build? But yet you'd expect with HDMI ports, smart TVs and all these other things to really increase the content for TVs? Or are we just seeing a slowdown or more of a hesitation? Can you help us understand, is this October? And we're not even in Black Friday yet for the builds. Or were you seeing kind of a tempering and caution on everybody for TVs?

Martin P. Slark

Yes. I think Jim, the latter. If you look at the major TV manufacturers around the world, I think there's been a lot of talk about 3D TVs, TVs with OLED technology, smart TVs, et cetera. But the volumes of those that are being built is still relatively small. If you look at the high-volume LCD plasma TVs, there's an enormous amount of inventory in the market, and I think a lot of caution going into Christmas. And I think if you went back a year ago, as you and I discussed once before, there are a lot of incentives that were around in Asia to encourage Asian consumers to buy TV sets. And that's really gone away. And I just spent 2 weeks out in Asia, and clearly, there's a lot of inventory in the channels in that TV market. And what we're seeing, I think, is a little bit of what we saw last year, and that is the consumer build in a strong economic year that would normally run into November really is starting to slow down at the back end of September again, as it did last year, which I think is just reflective of there being a weak economy.

Operator

Your next question comes from the line of Craig Hettenbach with Goldman Sachs.

Craig Hettenbach - Goldman Sachs Group Inc., Research Division

Martin, just following up on that comment that you're in Asia for 2 weeks. As you look out over the next 6 to 12 months, any trends that you're looking at through your customer visits in terms of from an end market areas of growth or areas that might be under some weakness?

Martin P. Slark

Yes. One of the things, I think, Craig, that we're all trying to find I think is what are some good leading indicators to tell us where this market is going because it clearly is very uncertain. And you get confusing data points even down to the point that I think normally, when we go through periods of weakness, our daily bookings are consistently weak. And when you go through periods of strength, they're consistently strong. What we've seen recently is them spiking up and down even on a daily basis, which I think is really an indication of the fact that there are a limited number of companies and a limited number of end segments that are doing well. There are a lot of companies that are basically muddling along. And as you all know better than I do, there are some well-known names that are really struggling in some key segments. I don't see that really changing certainly between now and Christmas. I think a lot has been said about the Asian economies being weaker, and that is clearly true. You can clearly see the impact of that when you're in Asia. You can see -- if you think there's a real estate bubble in North America, there clearly is one in parts of Asia as well. And I think there's some corrections that could take place there, but we're talking about even in China, modified growth that would go down to 7%, which is still -- the U.S. would kill for that kind of growth rate for a few years. And I would tell you the last thing I would look at is that we have, as you know, a global SAP system, where we're able to track our CRM pipeline. And that remains very strong, and our engineering teams have never been busier working on new programs. But the challenge with that is, we can't afford to miss out on a new design opportunity. We have no control about when those customers go into high-volume production of those things. So our view is that the market is not disastrous, it's not great, there's a lot of momentum to take it higher. We need to get through the elections in the U.S. and the change of leadership in China. And I think we're going to see a reasonable start to next year provided there is no fiscal cliff disaster in the first quarter. That's kind of our view right now, and that's how we're projecting things going forward.

Craig Hettenbach - Goldman Sachs Group Inc., Research Division

Okay. Just a follow-up for Dave. Outside of the annual merit increase, what are some of the puts and takes for OpEx as you go into next year? You guys are talking about some good growth from new products, but how are you managing OpEx in the current environment where there is a fair amount of uncertainty?

David D. Johnson

We're being careful, of course. We're going to be -- continue to invest modestly in R&D to keep up with our customers' demand and of course in sales for the same reason. But we are being very careful to watch how the bookings trends go. Our people are on kind of alert to make sure that we are not overspending in SG&A. And that's one of our key internal points over the next couple of quarters, is to make sure that we hold. We're not at a point of reducing costs, cutting costs, but we're just being very careful in terms of adding to our SG&A.

Martin P. Slark

Craig, I would say that if you look at our headcount around the world, about 25% of our headcount in our plants today, and it's kind of one of the lessons we learned from the financial crisis and the tech bubble bursting, is now temporary or contract labor. And actually in some parts of our business, plants that are building consumer products, we have been flexing down that headcount to reflect a lot of demand. We've actually been increasing it in some other factories where the demand has been higher. So I think we have a bit more flexibility in our model to flex the headcount up and down, both either by plant or on a global basis when we see the demand vary.

Operator

Your next question comes from the line of Anil Doradla with William Blair.

Anil K. Doradla - William Blair & Company L.L.C., Research Division

A couple of questions. On the telecom segment, what is the breakdown between the infrastructure and handset? And can you comment qualitatively on the -- any pick up on wireless infra? And Martin, if you look at this current weakness, you talked about fiscal cliff and some of the election issues. But qualitatively, how would you -- how is this different than previous sources of weakness? And what are you paying attention to in terms of where you would see the initial pick-up in the turnaround?

Martin P. Slark

Well, there's a lot in that question, Anil. I think in terms of the breakdown between the infrastructure and mobile, we'll get Steve to come back to you on that to give you an exact number. It's roughly, for us, I think today, about 60% infrastructure and 40% mobile. Although I'll get Steve to verify. Plus or minus a bit, it's in that bracket.

And then I think in terms of the infrastructure demand, what we've seen is a lot of it seems to be a caution around CapEx spending there. But you'll also see pent-up demand from the service providers because they're going to have to provide new capability to support the proliferation of mobile devices around the world. So I think as we go into next year, I don't think the CapEx cutback that you've seen in the infrastructure market, particularly in the developing world, continue forever. And we've seen a little bit of encouragement there of late, that market seems to have picked up a little bit, nowhere near where we thought it would be. But sequentially, we have seen that start to strengthen. But I would think that's an area where we've seen infrastructure as being an area of opportunity going into next year. And I think -- several people asked the question, what do you look at? I would tell you that generally speaking, the best indicators for us are really 3 things: number 1, our CRM pipeline and our quotation rate, that remains reasonably strong so we're not concerned there; number 2 is honestly, this quarter's bookings are the best indication of next quarter's revenue, so we look at that; and then lastly, I think the only market that I have said that's been a leading indicator for us tends to be the semiconductor market, seems to be like a quarter ahead of the connector market generally speaking in terms of the up and down cycles. But that's not always true and can vary based on how well you're doing in certain end segments.

Operator

Your next question comes from the line of Alina with Cross Research.

Steven Bryant Fox - Cross Research LLC

This is Steve Fox for Cross. Two questions really. First Martin, when you talked about a distribution bottom, is that also part of the industrial distributors or more to traditional guys like [indiscernible] I think you talked about those during your prepared remarks.

Martin P. Slark

More of traditional guys, Steve. I think the industrial business is -- that end market is clearly weaker. And as you know, a much higher percentage of our revenue for industrial, something like close to 70% go through distribution. So industrial distribution is weaker, and we haven't seen that bottom out. But I would say, general distribution, when you look at [indiscernible] those kind of guys seems to have flattened out.

Steven Bryant Fox - Cross Research LLC

Okay. And then secondly on the new programs, I know this is a tough question, but generally speaking, would you describe your position as being sort of sole-source now? And obviously, that doesn't -- if it is, it doesn't last forever. And how would that then -- when we do layer on sort of second sources or license [indiscernible] et cetera?

Martin P. Slark

Steve, I think -- it's a great question. As you said, a tough one in some way. I think it varies by program. There are some cases where we have sole-source position. I would say on the higher volume ones, most of these customers you talk to want to have at least 2 sources. And so -- and because of the volumes involved, they don't want to be dependent upon one single source. And so, I wouldn't see -- when I think about the risk for the second half of the year, I wouldn't see new sources being introduced on these volume programs as being a downside risk. I'm far more concerned frankly about the underlying economy.

Steven Bryant Fox - Cross Research LLC

Got it. And then just one quick clarification. You mentioned $5 million of startup costs associated with these new programs. That was as expected, is that correct?

Martin P. Slark

Yes, pretty much. I mean, we have ramped -- we expanded one of our plants to do this, added in a huge amount of new equipment in several different locations to start these programs. And if you look at historically, if you look at the yields from those programs, they're always weaker as you're training operators and you got scrap issues and things like that in the first couple of months. But the good news is, that the margins are coming up on those programs, were better in September than they were in July and August. So we believe that will continue to move in the right direction.

Steven Bryant Fox - Cross Research LLC

Okay. So it wasn't a major negative [indiscernible]?

David D. Johnson

Just to clarify that. The margins were lower than we had expected for guidance for the first quarter because of those [indiscernible] Yes.

Steven Bryant Fox - Cross Research LLC

Okay. So there was a little bit more drag from the new programs than you would have expected?

David D. Johnson

Yes.

Operator

Your next question comes from the line of James Kisner with Jefferies & Company.

James M. Kisner - Jefferies & Company, Inc., Research Division

Just real quick housekeeping first before the real question. Price erosion and BMI days, can you share those sort of figures with me?

Martin P. Slark

Yes, sure. Price erosion has ticked up a little bit from what was an all-time low last quarter. We used to talk about price erosion at 3% to 5% range on an annual basis. Last quarter, it was 2.4%. So a little higher than it was the quarter before, but still pretty good. And I think generally speaking, price erosion tends to tick up when end demand is weaker, so that is pretty consistent.

If you look at the number of BMI days we have, it's right around 31, which is contractually, we're supposed to hold right around 30 days in those 350 locations. So that -- we don't see that as an issue. And again, I guess that's another leading indicator, is that when people are pulling from the BMI inventory, then you get really concerned. We've seen periods where that has drifted up into the high 30s, and it's holding right around the 30-day target.

James M. Kisner - Jefferies & Company, Inc., Research Division

Great. Okay. So my real questions. I actually have 2. So research and development expense was flat, it was down a little bit here, and I think -- I assume it's a clean number and is not impacted by insurance. But I believe you said last quarter, you thought that R&D was going to be part of the reason why OpEx would go up. I'm wondering if there's some design expenses that got pushed out or didn't happen. And secondly, on the gross margin and end products that you are having to purchase, is there a longer-term effort here to in-source those or perhaps is that something you have to just improve by buying companies to get those components? Like what's the long-term strategy there?

Martin P. Slark

Well, I'll let Dave -- I'll answer the question about R&D. I mean, our R&D in absolute dollars was $46.7 million in June and then $46.3 million in September. So I mean $400,000, I wouldn't regard as being material. And as you know, our R&D investment as a percent of sales is in that 5% range, which compared to our competitors is still a pretty high number. So we're very, I think, committed to continue to invest in R&D and continue to drive that. And then your second question was -- could you repeat that?

James M. Kisner - Jefferies & Company, Inc., Research Division

Just the long-term strategy around gross margin, and you've got a -- you're buying more purchased components today. I mean, are you trying to design your own? Are you going to buy companies to bring those in-house or is this just something that you expect to continue for years to come like in terms of your margin on these products?

Martin P. Slark

Actually, it's a great question, and the answer is, yes. Where they -- we would expect to over time, increase our in-sourcing of those components, particularly where -- or purchase items, particularly where we see them used against multiple end products. So for example, I think part of the rationale of buying a company like Temp-Flex in the cable area was to progressively build captive cable capability so that we can help in-source some of those things. And so, yes, our goal would be to in-source more of what we're buying as one way to help those margins.

James M. Kisner - Jefferies & Company, Inc., Research Division

Okay. And to follow-up on your original answer, I just wanted to clarify my question here. I think you said that OpEx should go up sequentially and R&D was a reason, but it seems to have gone down a little. So that's what the genesis is of my question, I don't understand why R&D is basically flat quarter-over-quarter when you seemed to think that -- or you said before in the last call, you thought it would go up. Is there something to read into that?

Martin P. Slark

Yes, I would say that -- No, I don't think there's anything to read into it. I would say that we thought that there would be a start-up cost associated with these new programs which would show up in the engineering area. In fact, they showed up in the manufacturing area as start-up cost for the program. So -- and I think it's a little bit a question about where to categorize those costs. When we had process engineers that work on these new programs, that shows up in the gross margin line, whereas if you got design engineers working on the original design, then it shows up in R&D. I think we thought we would have more design work to do this quarter, that ended up not being the case. The designs were finalized, they went into production, but the cost ended up being in process engineering which is above the gross margin line.

Operator

Your next question comes from the line of Amit Daryanani.

Amit Daryanani - RBC Capital Markets, LLC, Research Division

This is Amit Daryanani from RBC Capital. I just have a couple of questions. One, I guess just the December quarter guide. You guys are talking of up 3.5% sequentially. I think, historical seasonality tends to be about 1%, 1.5%. The delta, is that all really driven by new product ramps? And could you maybe talk about x these tablets, smartphones ramps, what do you think the organic trends would have been for the December quarter?

Martin P. Slark

Yes, you're right, it's above normal seasonal growth. Frankly, it's a number of products that we think continue to grow in volume. So as far as we're concerned, they're products that we designed, we're selling them to standard customers. So that, as far as we're concerned, that is organic growth. So I mean I could separate the impact of the acquisition, and I think the acquisition probably would increase our revenues by about $6 million in this quarter, $6 million to $7 million. The rest of it though is purely organic. And so I can't separate new programs from base business. I can tell you the acquisition is about $6 million. The rest of it is organic growth across a number of different customers and programs. The growth, as we said earlier though, is really across 3 markets. It's going to be across automotive, infotech and the telecom sector.

Amit Daryanani - RBC Capital Markets, LLC, Research Division

Got it. And then maybe, Martin, on the automotive side, could you tell us why do you expect sequential growth in December when there's supposed to be less production days. And to your point, the Europe registration data would totally bode negatively, so what are the offsets that give you confidence in growth on the auto side in December?

Martin P. Slark

First of all, I think that we will see a little bit of growth, not great growth in -- but the things that give us confidence is: number 1, the U.S. market is still relatively strong, and we're seeing, believe it or not, there is a bit of a Christmas selling season for cars. And we're also seeing a bit of a recovery in some of the Asian end automotive markets. And as we said earlier in the call, our dependence on Europe, which is the real weak area, is a lot much small a percentage of our overall automotive business. We have a much stronger presence in North America and Asia. So it's our basis that we think that growth in North America and Asia will in total offset the weakness in Europe.

Amit Daryanani - RBC Capital Markets, LLC, Research Division

Got it. And just finally for me, I mean you're talking about a softer mix demand environment. The growth pocket seemed to be, I think, fairly isolated with a couple of customers, a couple of segments, with a lower gross margin profile. I'm curious, why not take a bit more aggressive stance to reduce your OpEx potentially with restructuring or something else so you can get Op margins in that 25%, 30% conversion range?

David D. Johnson

I guess the reason is, that we're looking at where the demand trend goes. If the demand drops significantly, we would make some of those activities. But at this current time, our view is that there still is reasonable demand out there, even with the programs that are more of our traditional business.

Martin P. Slark

And if you look at the midpoint of our guidance, that $950 million revenue will be an all-time record revenue number for Molex. And I would argue with your point about where that growth is coming from because frankly, it's coming from enough different end segments, enough different customers. There is a lot of work being done to get that revenue out the door. And you could imagine in this environment, you're basically fighting for market share. And it takes a lot of execution effort to get that revenue out the door. And basically, we're doing it all organically, too. We are not buying that revenue, we're organically growing the company in a very tough period.

Operator

Your next question comes from the line of Brian White.

Brian John White - Topeka Capital Markets Inc., Research Division

Dave, I'm wondering if you could just talk a little bit more on SG&A. I didn't quite understand the comments on SG&A in the December quarter. And will there be any insurance proceeds?

David D. Johnson

First of all, no, the insurance claim is complete. No more proceeds from the insurance. Though as I said, we're very, very pleased with the effort that went into that. In the December quarter then, we would, taking the base of the September quarter, add back the $9.9 million of the onetime proceeds. And then factor potentially a $3 million increase due to our merit increase. As I think you may know, we do this around the world in October, and it's about a $3 million impact for SG&A in the December quarter.

Brian John White - Topeka Capital Markets Inc., Research Division

Great, got it. And Martin, can we talk about the infotech and also telecom sector, particularly in the mobile phone area, in the December quarter. Will the growth rate sequentially mirror what we just saw in the September quarter, and the December quarter, or will it accelerate?

Martin P. Slark

Brian, you mean in terms of if you look at the sequential growth in those 2 end market segments versus the previous quarter, will they be about the same?

Brian John White - Topeka Capital Markets Inc., Research Division

Exactly, or would they accelerate?

Martin P. Slark

No. I would think they would be about the same unless there is a pick up -- a further pick up of demand going into Christmas.

Brian John White - Topeka Capital Markets Inc., Research Division

Okay. And just finally, the TV market. What percent of your TV business do you think is with Japanese OEMs?

Martin P. Slark

I would say at least 70%. Molex has been in Japan since 1969. We have a phenomenally strong position with the likes of Sony, Panasonic, all those leading suppliers. And so clearly, that is -- you imagine, both the Japanese market and those Japanese companies are challenged in the market today.

Brian John White - Topeka Capital Markets Inc., Research Division

And do you feel like the situation in China, just the tension of China-Japan, had a negative impact on that business? Or is that just pure end market?

Martin P. Slark

No, no. I think that the tension in China has had an impact on a couple of things. I think number 1, end demand for Japanese products, both Japanese cars and Japanese TVs in the Chinese market. What it's also done, which we have seen the impact of, is accelerate some of the shifts of production out of China by Japanese companies to places like Vietnam and Thailand and things like that. So I think we're seeing some increased demand in some of our Southeast Asian factories supporting Japanese customers who are clearly nervous about the environment in China.

Operator

Your next question comes from the line of Michael Wherley with Janney Capital Markets.

Michael J. Wherley - Janney Montgomery Scott LLC, Research Division

I was just wondering if you could talk a little bit about the Japan legal cost, and what you expect for them in the second quarter and the rest of 2013?

David D. Johnson

Well, in the next quarter, we've given guidance that it would be roughly at about a $2 million level. That is $0.01 per share. We haven't made a comment for what we expect that to be out into the rest of the year because we're still at a point where we're ever hopeful that this will be resolved.

Michael J. Wherley - Janney Montgomery Scott LLC, Research Division

Okay. And when you talk about the contract labor that you have today, how does this compare to 3 years ago or 5 years ago, the percent that's contract labor of your total labor?

Martin P. Slark

It's up significantly. But I think since the financial crisis, one of the things I think we've realized like many other companies, is that we tend to be in a more volatile demand world. And we just found particularly in Asia, that having a portion of our headcount on contract with temporary labor enables us to flex that labor up and down more efficiently and also protect the core full-time headcount in periods of lower demand.

Michael J. Wherley - Janney Montgomery Scott LLC, Research Division

Okay. And then the last bit I had was I just wanted to hear a little bit more about the gaming and what you're seeing there and how big it is as a part of your consumer electronics end market today?

Martin P. Slark

Yes. If you look at the consumer sector for us, obviously, TVs are in there, white goods are in there, cameras are in there, and then the gaming market is in there. I would say games are roughly 20% of the overall consumer sector. We sell to all 3 of the companies that would be launching -- major companies that would be launching games into this Christmas season. This obviously is their big season, and you've got a couple of those companies launching new models as they go into Christmas. We also have a unique market for us, which is the Pachinko market which is very unique to Asia. And so that market has been frankly a bright spot in what generally has been a weak consumer segment.

Operator

Your next question comes from the line of Tony Kure with KeyBanc.

Anthony C. Kure - KeyBanc Capital Markets Inc., Research Division

Just wanted to follow up on a couple of brief things. Most of the questions have been answered. Can you just review the distribution numbers again, sequentially and year-over-year on bookings and sales? I didn't quite catch those.

Martin P. Slark

Okay. If you look at our sales by channels, our distribution bookings declined 5% sequentially and revenue declined 4% sequentially. But the year-over-year bookings versus the same quarter last year were up 1%, and that's where we're saying, we think at least when you look at the year-over-year comparisons, it's bottomed out. I think one of the things for us is that September quarter last year if you'll remember was kind of the bubble quarter before we had the big inventory correction. The year-over-year comparisons for us not only for distribution but for many other segments get a whole lot easier going forward. And that's why I said we feel that's at least a little bit of positive news in that we are -- we've seen it bottom out versus the prior year.

Anthony C. Kure - KeyBanc Capital Markets Inc., Research Division

Great, appreciate that. And then similarly, if you could just review the Europe numbers for me along those same lines.

Martin P. Slark

Yes. If you look at the sales by region, revenues for Europe were down 13% sequentially and 16% year-over-year, and bookings were down 9% sequentially and 11% year-over-year. And so Europe, clearly no secret or no surprise to anybody, it was far and away the weakest segment. Europe in total today only represents about 12%, 13% of our global demand. So I think with the ongoing weakness in the European economy, it's becoming a smaller and smaller portion of our business. And the other thing of course is that there are less electronics companies in Europe today that drive global demand. So it has become a less significant region for us. And obviously, the growth these days is coming out of the Americas than Europe.

Operator

There are no additional questions at this time. I would now like to turn the presentation back over to Mr. Martin Slark.

Martin P. Slark

Thank you very much, everybody, for being on the call. We'll obviously be available for follow-up discussions later today, and we look forward to talking to you next quarter. Thank you. Bye-bye.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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