Molex Inc. - F2Q06 (Qtr Ending Dec 31, 2005) Earnings Conference Call Transcript (MOLX)

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Molex Inc. – (NASDAQ:MOLX)
Q2 2006 Earnings Conference Call
January 19th 2006, 5:00 PM. Executives March 1, 0000 ET

Analysts

Jim Suva, Citigroup

Carter Shoop, Deutsche Bank

Philip Meyer, ASB Advisor

Kevin Sarsany, Foresight Research Solutions

Yuri Krapivin, Lehman Brothers

Thomas Dinges, J.P. Morgan

Michael Walker, Credit Suisse

Jeff Rosenberg, William Blair

Matthew Sheerin, Thomas Weisel Partners

Alexander Paris, Barrington Research

Jim Stuber (ph), Citigroup

Steven Cox, Merrill Lynch

Operator

Good afternoon, my name is Carry and I will be your conference facilitator today. At this time I will like to welcome everyone to the Q2 Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question and answer session, if you like to ask a question during that time, press “*” then the number “1” on your telephone keypad. If you like to withdraw your question press the pound key. I would now like to turn the conference over to Neil Lefort, Vice President, and Investor Relations. Sir you may begin.

Neil Lefort, Vice President, Investor Relations

Thank you Carry. And thank you to all the 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 it’s available in telephone replay by dialing the numbers supplied in the press release. The call is also available live and in replay by accessing our website. Please note that we have added slides to our presentation. And those wishing to view the site can do so, on our website, under the investor section.

I am going to go to page 2, in the slide which is our Safe Harbor statement, for those who are not viewing the slides, I will give a condense reading of the Safe Harbor statement. Statements in this document that are not historical are forward-looking and subject to various risks and uncertainties that could cause actual results to vary materially from those stated. Forward-looking statements are based on our currently available information and include among others, the statements regarding the Company’s outlook with respect to future financial results. Other risks and uncertainties are set forth in Molex’s documents filed with the Securities and Exchange Commission, including it's Form 10-K for the year ended June 30, 2005. Molex disclaims any obligation to revise these forward-looking statements or to provide any updates regarding information contained in this document resulting from new information, future events or otherwise.

Now turning to page 3, in the slides disclosers in this conference call regarding earnings per share excluding restructuring charges which is a non-GAAP financial measure made for the December and March quarters, as well as fiscal year 2006 available in the investor section of the company’s website at www.molex.com, and in addition are included in the slides used during this call.

Turning now to page 4, which is the highlight of the second quarter. The revenues for the company were $697.3 million that’s up 7% in US dollars up 8.5% in local currency and up 5.7% sequentially, when compared to the prior September quarter. Orders were 703.4 million, up 15.7% from the prior year and 1.5%, sequentially. Earnings per share, excluding restructuring charges were $0.34. SG&A, as a percent of sales, declined to 22.9%. Gross profit margins were 34.7% up from 34.3% in the prior quarter, and on the balance sheet inventory improved by two days during the quarter.

Now I’m going to page 5, which is the financial summary. The sales were above our previous guidance, and our goals continues to be driven by our strength in the far-east zone, and especially our strength in mobile phone, and digital consumer applications. For the first time in many quarters, the currency translation impact to sales was negative. While sales in dollars increased 7%, sales in local or constant currencies grew by 8.5%. Gross profit margin improved sequentially to 34.7%, our highest since the September 2004 quarter. SG&A was 159.8 million or 22.9% of sales, our lowest rate in several quarters. The December quarter included a reduction of 2.7 million, due to the factoring of accounts receivable claim, with the bankrupt company that we have provided for in the September 2005, previous quarter. The quarter also included 2.9 million due to the adoption of the FASB 123(NYSE:R) regarding stock option cost. This cost will include in our expectation for the quarter, which should be considered when comparing the prior year SG&A amounts. Please note that these SG&A amounts, do not include the 6.5 million restructuring charge for the quarter that is reported separately in the income statement. Both interest income and equity income were fairly consistent with recent historical levels. The effective tax rate of 28.5% was consistent with our guidance for fiscal ’06 that is higher than the 27% rate used in the prior year December quarter. Including all of the items, I previously mentioned GAAP EPS was $0.31 per share. The average outstanding share accounts declined by approximately 895,000 shares, during the quarter, primarily due to our share repurchase.

I am going to go to page 6 in the slide, which is the GAAP to non GAAP reconciliation. As I said previously, the GAAP, EPS was $0.31 per share. EPS would have been $0.34 without the restructuring and $0.33 without the restructuring an AR factoring were excluded. The once that there from the AR factoring is the positive result prospects for the quarter.

Now I’m going down to page 7, which is our backlog. The backlog is above the prior year by 4.1% and is 8.4% prior on a local of constancy, constant currency basis. The backlog improved sequentially by3.3%. Now looking in our stock buyback, again we were active in the quarter we spent $45 million of our authorization in December. Our strategy, as you can see on the charts between MOLX and MOLXA, as we said previously, we are aiming towards the ratio of about 75%, MOLXA and about 25% MOLX. As we said before, we have an authorization from the below for $250 million to December 31st 2006. We have sent so far a $129.7 million. So, we therefore have a $120.3 million remaining in that authorization.

Now, I’m going to turn the call over to Martin Slark.

Martin Slark, Vice Chairman, Chief Executive Officer

Thank you, Neil and good afternoon everyone. I will now review our results by regions and by markets. Looking at Slide 9, and starting with the Americas region, you can see that we had our strongest growth in many quarters, with good growth in most sectors and most channels. In automotive, we gained share with General Motors and Ford with new products. Increasing electronic content in new car models is offsetting the reduction and production volumes in North America.

From a product prospective, we are now offering integrated copper flux assemblies into many high speed applications, coupled with this and fiber flex and fiber adapters we are seeing solid growth in networking and telecom customers. Recent fiber wins also and military account, such as Rapheon (ph) and Mercury confirm the success of our initiatives to penetrate what is a new to Molex market, of the military area. High-speed cabling continues to be strong with our new GBX, assembly starting to ramp-up at various networking customers.

Looking now at the Far-East North region, I would like to remind everybody looking at our slide, where it shows a 3.1% negative reduction in US dollars, that this slide only shows our sale to the third party customers. Total growth including shipments dropped close (ph), have sighted a region for resale to customers who have moved production oversea would have been approximately 11% in local currency.

The domestic markets related to digital home appliances such as flat panel TVs and 3G mobile phones have improved in this summer. Sales in the flat panel TV display market increased by approximately 60% compared with the prior year quarter. While mobile phones in Japan were up about 10% due primarily to 3G deployments in Japan. Overall growth in the domestic market in Japan is impacted as the low-end applications, such as Digital video camcoders, printers, copiers and facsimile machines continue to ship aboard. We will continue and have continued to the designing work on these applications, but most of this effort results in additional sales in our Far-East South region.

In Korea, the other country in our Far-East North region, we maintained our market leadership position, growing approximately 20% over the prior year. Sales for the flat panel display, and the Hard Disk Drive market were extremely strong. Our new products for the mobile phone market, such as our Memory Card Sockets and our 0.4 board-to-board products also show promising growth. Looking now at the Far-East South region bookings and revenues were strong across the quarter, and appear to be holding for the current quarter.

Thereby avoiding the steep dip that we experienced the year ago. There will no doubt be some seasonality, as the Chinese new-year, always had an effect with shutdowns, consuming option to approximately five days, the customer factory time. Having said that, we anticipate that the dropping revenues sequentially from Q2 to Q3 in this region will be less than half of what it was last year, when our traditional seasonal drop was compounded by the effect of mobile phones suddenly slowing.

And as you know, we saw very significant decreases in Q3 last year. This year we expect continued growth in all the regions and as a result, we expect the reduction in Far-East South to be largely offset by growth in the other regions. The Far-East South provides the good example of one strategy we are using to combat higher raw material cost. While these costs had continued to increase, we were able to offset some of this with the many new products that we released. These were priced fully at todays metal and energy cost. In this region 35% or more of our products have been released within the last three years, which is the period in which we have seen, the largest rising raw material cost. The level of new products and the decline in older products have sent the total sales have given after much richer mix and therefore, better margins. Across most markets, our business is strong in Far-East South. In particular the Mobile Phone market is very strong and we continue to benefit in a strong presence of Nokia and Motorola. We’ve also had many wins and secondary accounts like Bird, TCL and MOI. And other local phone makers, who are primarily focused on the lower end of the market. The computer and services business is continue to gain momentum in this region. We've had wins at HP, on low-end light services and we are working closely with IBM, on a new midplane server design. We‘ve already won the initial design on this application. We are starting to launch a package of new wonderful product this quarter and we anticipate that this will give us significant gains in revenues at the Taiwanese ODMs such as Quanta and Vistrom and we expect these revenue gains to rightly takeoff over the next 12 months.

Looking now at Europe, the market there remains very challenging. Our results in Europe continue to be impacted by our customer’s moving production to lower cost regions. Our strategy is to continue to work on designing opportunities, with resident customers, such as Nokia and Siemens, and then participate in the production transfers, as production moved to other regions primarily Far-East South. We have also increased our focus on market, such as automotive industrial, medical, electronics. All of which, we consider that surviving markets for local production in the long run. In addition to improve our financial results, we continue to implement that previously announced restructuring program, to reduce our manufacturing footprint and our local cost structure. On the positive side, we have seen some good wins in the automotive market in Europe and we are also doing well with the new product into satellite radio markets.

If you look now at page 10, we have introduced a new slide, this quarter in response to investor request and we are making an 10th to look at our results by market on the quarterly basis. We believe this is very useful information and we will continue to include this slide in future conference calls. This data has been derived from our SAP system and I just like to comment that obviously with some of our revenue going through distribution and contract manufactures, there is some management judgment in the allocation of those revenues back to specific markets. However, we do believe that data we are providing will give people a clear overview of where we are seeing growth by market.

Looking at each sector, the consumer market remains strong, because of increasing sales in digital consumer products, mp3 players, video game consoles and large screen TV’s were the key growth product areas in the last quarter. The Mobile phone market continue to grow with the markets split approximately 50-50, between low end new subscriber phones and higher end replacement phones, which had increased functionality and higher content to Molex. After several down years, telecom infrastructure market is clearly recovering with 35% year-over-year growth for us.

Networking and 3G applications at Cisco, Dell Labs, Ericsson, Huawei and Zungzeem (ph) drove this growth. Performance in the data market this last quarter, we believe was disappointing. We exited however, some very low margin business in this sector and that is distorted these results. We did see good growth in the server and workstation markets, but our notebook sector was flat hence our initiative to ensue to launch a number of new products in the coming year. New products, we believe will help us gain momentum in this sector in the calendar year ’06.

Automotive growth was based on increase electronics content in new car models and new product wins. We have had good growth in the GM, Ford, Renault and BMW. Our penetration of industrial market is growing slower than we would have liked and we have seen some key customer programs, particularly in Europe to like. Those revenues however, will be seen in the second half of this year. Our new focus market, such as medical, military grew at very strong rate in the last quarter and we are excited by the fact that our pipeline of new opportunities as shown in our customer relationship management system continues to strengthen, particularly in these new growth market, for us.

Turning now to the page 11, and looking at our booking trends, we exceeded for the first time in our history $700 million in revenue, in bookings. And based on this strength and strength we have seen over the last three quarters, we have increased our full fiscal 2006 guidance. We will talk about that at the end of the call.

I will now turn the call over to David Johnson, who will lead us through the financial presentation.

David Johnson, Chief Financial Officer

Thank you, Martin. Slide 12 shows our EBITDA reconciliation, staying in the top with net income of $58.5 million some tracking up net interest $2.7 million in adjusted income. Adding back income tax as $23.3 million, adding back Depreciation and Amortization of $52 million comes to EBITDA of $131.1 million for the quarter, which is 18.8% of revenue. And then adding back our restructuring cost of $6.5 million, we get to an adjusted EBITDA of $137.6 million or 19.7% of revenue, that compared the prior quarter, which was at $122.6 million and 18.6% of revenue.

On slide 13, we set forth a variety of balance sheet accounts and operating metrics starting with cash at $419.8 million down slightly from the prior quarter, the September quarter that is primarily due to our stock buyback and capital expenditures, which is then offset by a positive cash flow from operations. Free cash flow in the quarter was $61 million.

Inventory and receivables are both up slightly from the prior quarter, both are at rates that are less than the increase in revenues and we will go to some of that, in a minute. Debt is roughly $5 to $8.7 million; receivables stayed outstanding was flat at 72 days and inventory days outstanding actually came down by 2 days and we will go to that slide in a few minutes as well.

Our capital expenditures were $67.1 million for the quarter, as compared to $64.1 million for the September quarter. 80% of our capital expenditures relate to the new product introductions or to essential capacity editions based upon our current demand levels.

Depreciation and Amortization was $52 million as compared to $54.7 million in the September quarter and that compares to the $58.3 million, in the prior year quarter. This decline is due to equipment purchase during the bubble, during 2000 and 2001. We spent roughly $335 million of capital each of those years, and that capital is now coming to end of the peaceful life and we are seeing a reduction of depreciation as a result and finally R&D at $35.7 million, is just a little bit above the September level as well.

On page 14, we show our revenue trend, revenue for the quarter was $697.3 million. This is our second consecutive record level of revenues and as we’ve said before on this call 7% increases from the prior year level of $651.8 million. You can see that in the next quarter on the slide in Q3, we dropped to $612.8 million, a 6% decline that is due primarily to reduced demand and inventory adjustment, for our customers in mobile phone and computer markets and you see from that point we’ve grown by 5.1% to $643.8 million in Q4 of last year, then we grow again 2.5% sequentially to $659.8 million in the first quarter of this year and then that grown again 5.7% sequentially to the $695.3 million. In general the growth is geographically driven by our Far-East South region with the strongest market being, the mobile phone market.

Our gross margin trend is shown on page 15. Our gross margin has improved from 34% a year ago, to 34.7% in the current quarter. We have increased our margin sequentially in each of the last two quarters from 33.4% in the fourth quarter of last year to 34.3% in the first quarter of this year, and now to the current level of 34.7%. Inspite of the ongoing increase in material cost, we have improved our margins due to variety of factors, clearly one is the higher revenue volume in absorption related cost and goes that. We have introduced new products, 29% of our revenue in this quarter are related to new products introduced in the last three years. And that hasn't impacted improving our margins as we move forward, and we have included a number of targeted product tuning activities and really focused on higher margin business and that is showing some benefits, as we go forward as well.

Looking ahead, we expect a threat to slightly lower gross margin in the third quarter. And this is due primarily to our business mix as Martin mentioned this was caused by a seasonally, lower sales in our higher margin, Far-East North and South region offset by increased sales in our lower margin Americas and European region.

SG&A as a percent of revenue is shown on slide 16. The SG&A percent for the quarter was 22.9%, as compared to 23.6% in the prior year. The SG&A percent increase to 25.9% in the third quarter of last year, as you can see that increase on the chart, that is due primarily because of the decline in revenue that I mentioned previously that reflected that percent of revenue.

If we remove the impact of the Delphi bankruptcy from Q1 and Q2, the SG&A at present trend, would go as follows, it would be 24.1% in the fourth quarter of 2005, moving down to 23.6% in the first quarter and down again to 23.3% in the current quarter. So you see a very steady improvement in our SG&A percentage. In addition the expensing stock option introduced in the prior two quarters, increased the SG&A percentage in these periods by roughly 50 basis points per quarter. So, 50 basis points higher SG&A in both the first and second quarter of this year as compared to the prior year.

On page 17, we introduced a new metric from Molex. We will begin reporting return on investing capital for ROIC and we define that as annualized net income, divide by average net assets. And average net asset is defined simply as total assets plus current liabilities. And though this is flat with prior year period, ROIC has trended up from 6.3% in Q4 of last year to 8.2% in the first quarter and now up to 9.3% in the second quarter and we expect this metric to continue to increase sequentially throughout the year and with the target of getting to above 10%, for the full year.

Page 18 reflects our receivable days our outstanding trend, which has improved from 75 days, a year ago to 72 days in the current quarter. The only significant development in AR (ph) for the quarter was factoring of the accounts receivable for Delphi that we have mentioned, which resulted in a $2.7 million gain in the quarter. Otherwise, our trend is very positive in managing receivables.

Our inventory day’s outstanding trend is shown on the page 19, inventory days improved sequentially to 70 days from 72 days, in first quarter this year. And is at the same level as the prior year and as a subset of this inventory days for vendor manage inventory, which represents approximately 13% to total inventory improved as well during the period. BMI inventory days trend in the range of 30 to 35 days, which is substantially lower as you see from our overall average DSO inventory days as SG&A. And with that I will turn the call back to Martin for our forward guidance.

Martin Slark, Chief Operating Officer

Thank you Dave. Looking at page 20 and our third quarter ending March 31st, 2006. We estimate that the net revenue will be in the range of $690 million to $710 million. And that earnings per share including a pre-tax restructuring charge are estimated to be in range of $0.28 to $0.30. Excluding the restructuring charge earnings per share are estimated to be in the range of $030 to $0.32. These results assuming an effective tax rate at 28.5% and also include the impact of adopting of SFAS 123(R).

Looking now at page 21, which is our final slide and looking at the full fiscal year ending June 30 2006 based in our December quarter results in our current forecast, we are raising our guidance for the full fiscal year. We now except the revenue will be in the range of $2.725 billion to $2.8 billion compared to our previous guidance of $2.675 billion to $2.75 billion dollars. This represents an increase between 7% to 10% over fiscal 2005 and estimated increase in the second half revenue of between 10% to 15% over the same period in fiscal 2005. Based on these revenue expectations earnings per share after an estimated after tax-restructuring charge of $50 million is estimated to be in the range of a $1.15 to $1.19, this compares to our previous guidance for the $1.7 to $1.12.

Non-GAAP earnings per share that excludes the restructuring charge are estimated to be in the range of $1.23 to $1.27.

That concludes the material that we would like to present and we will open the call up to your question, thank you very much.

Question-and-Answer Session

Operator

Operator instruction Your first question comes from the line of Steven Cox with Merrill Lynch.

Q - Steven Cox

Hi, good afternoon. Martin, you mentioned that consumer would have some seasonality eventually during the year, could you talk about how you would expect ads imposed prior this year and where your particular strengths would be and if you sort of mention talk about Japan in the particular will be appreciated?

A - Martin Slark

It is an interesting question, because I think that consumer market is the market for a long time for strong end and we have been waiting for obviously more digital products to be released into the market, which we believe will give us stronger growth. And we started to see that price point of things like the flat panel displays, comedown to the point where volumes are being sold in larger volumes, and that really had a positive impact on our South Asian region in the last quarter. As we moved into the coming year, we are anticipating two things will happen. Firstly, we will continue to see growth in existing products we designed into, and then secondly, we are anticipating that there will be a number of new products released which we already designed into these products, they will be released in the March-April timeframe. We start to see a build up of those, than in our Q4, then in the next fiscal year. Talking about Japanese operation, their expectation is that the domestic growth over the digital consumer market for us in the second half, versus the first half of this year, will be somewhere to be between 16% to 20% up.

Q - Steven Cox

Thank you very much and then just a quick question Dave General D&A expense estimated for the full year, fiscal year?

A - David Johnson

Estimate for the full year is roughly in the ballpark of $210 million.

Q - Steven Cox

Thank you.

Operator

Your next question comes from the line of Jim Stuber (ph) with Citigroup.

Q - Jim Stuber

Thank you very much, could you give a little bit of color about the visibility now versus a year ago definitely having improved may be little bit colors as far as the end products or end markets of the visibility that you see?

A - Liam McCarthy

I think as we came out of last Christmas, there was some significant concern regarding the inventory that would be in the channel particularly for the cell phone market and the consumer electronics market. What we have seen now based on both interaction with customers and customer forecast is there are low similar inventory issue this year, and the number the leading customer in that market are predicting continues growth, and then also the launch of all of new models, and that particularly true in the cell phone market, where I think the number the leading players are fighting to release newer phones that will provide streaming video capability and other functionality and so, assuming no correction in the general economic climate, it appears that the consumer market some will stay strong in the next quarter. And I think we have stronger visibility of that we did a year ago. I think obviously once you get indiscernible, it is very difficult to predict sales further in that period.

Q - Jim Stuber

Okay thanks very much.

Operator

Your next question from the line of Alexander Paris, with Barrington Research.

Q - Alexander Paris

Could you just talk a little bit about the industrial area that - it looks like it was disappointing but I would presume that’s not due to the excellent way with industrial which has been pretty strong so, if it was it is disclaim, could you say where the areas that you are having trouble with are?

A - Martin Slark

Let me ask Liam McCarthy to answer that question for you, because it is a market that we are trying to increase our penetration often, we had some one time events happen in the last quarter, but there are some issues there we are trying to address as well.

A - Liam McCarthy

Yeah I think industrial area clearly we would like to see more growth in the stream. If you compare this quarter verses prior, we had some larger revenue in prior quarter, which from one particular customer, which believe in their program launch in this quarter. So, we didn’t see the revenues in this quarter, but we will see coming soon in the following quarter so, I do believe that the revenue growth we are showing in the industrial is really on the stage, it works to potential growth we have seen in the second half.

A - Martin Slark

I think your commonly both just add to that about the growth that we have seen in the industrial market in the last quarter. It is certainly not indicative of what happening in that market and I think we had some unusual events up in the current quarter that you won't to see in the third quarter, I think you’ll see year-over-year growth returning that that events.

Q - Alexander Paris

Is your industry and market is more related, you just general industrial activity or through capital spending at the factory level?

A - Martin Slark

It is a really a broad range of applications, we intend to -- what we put in that sector for example, like factory automation, we manufactured housing, is a whole bunch of end markets that, it becomes of an another category for us, things that don’t fit in to the other bracket. So, we've been more normally focused on.

Q - Alexander Paris

Thank you.

Operator

Next question comes from line Matthew Sheerin with Thomas Weisel Partners

Q - Matthew Sheerin

Yeah, thanks. I would like to ask a multi plan question regarding a gross margin of if I may, and you talked about margin coming down a little bit on lower volumes and your some of your key region in the March quarter. Could you talk about, what your expectations are for the June quarter on higher volume and also what impact is left from your ongoing restructuring? What you are seeing in terms of ASPs, are you beginning to have any success in passing along prices and then lastly just any comments on trends in material prices? Thanks.

Company Speaker

How about just try to figure out which was the following question, I think with the gross margins for on indeed, Dave.

A - David Johnson

As I said, we were expecting gross margin in Q3 and flatter down slightly from the Q2 level for the reasons we stated. We see that reversing clearly in the fourth quarter and I think for the full year, you can still expect margins to be in the 34.5% to 35% range. As we've been guiding to.

A - Liam McCarthy

The question I will take the question on restructuring also, we are seeing continue and improvement in the structuring in effect, we do that ahead in our European region and one of our plants has already been closed down. Little bit ahead of schedules. So, we’ve seen some actual impact of the restructuring in this current quarter, and we see that continue into the this third quarter and most of the impact would in fourth quarter but at the same time some of our automotive restructuring process in the US is being delayed slightly due to the time it takes to make transfers in peak pack process. And we will see some of that benefit actually pushing out into the first or second quarter of next year. So, overall we have given guidance that there is $10 million to $15 million worth of benefit in this year. I think we are at the lower end that ranges now, but it is being spread out bit more and being pushed into the next year.

A - David Johnson

Let me tackle the question about the ASP and materials and probably Liam will add to both of these comments. If you look at price erosion, which as you know in our market it is typically being in the 5% to 6% range and in the 5% to 10% range and we are able to offset that moving with productivity gains and we saw in ’03 and ’04 periods when the price erosion went up significantly. We are now actually seeing the price erosion come down and its actually closer to a 3% level for the first on a angular basis. The first six months of this fiscal year, and that’s is obviously one of things that is helping the gross margin and I think it’s a reflection of acceptance in the market place that with raw material cost going up, supplies are not able to offer price reduction. You should understand however that some of the price erosion is caused by Molex in that, when we bring out new products. We obviously try to drive the price curve both to gain market share in some cases as well. But, the general pricing environment compared to year ago is more favorable. If you look at raw material cost of year-over-year, the key components for us are gold which is up 12%, on copper which is up 37%, and oil, which is up 25%, if you look at the impact that the mix of those raw materials cause had on the quarter, it pushed up our raw material cost by about $6 million year-over-year, which is between 90 and 100 basis points.

Q - Matthew Sheerin

Okay thank you very much.

Operator

Your next question comes from the line of Jeff Rosenberg with William Blair.

Q - Jeff Rosenberg

When you talk about other regions offsetting the seasonal weakness on the Far-East South, could you talk a little bit about may be what end market you think you are going to improve sequentially in the first quarter that will offset the seasonal weakness?

A - Martin Slark

Yeah Jeff, we think that the Far-East North market is going to be strong in some of the newer consumer electronic products. We are seeing some good opportunities here in the telecom and server markets, here in North America. And some of the weakness we saw in Europe as we said was, because of our programs being delayed in the industrial market and we know they are going to come back in the third quarter. And now automated business, we think will remain strong. Also, if you look at the last quarter our distribution bookings, our distribution revenues were up about the same rate as our overall sales but our bookings were stronger than that. They are anticipating the distribution will also be strong in this quarter and we are enthusiastic about that, because when you see distribution go up like that, it’s an indication that the underlying market trend is reasonably positive.

Q - Jeff Rosenberg

Have you seen much inventory build in the channel and may be could you comment on what is your lead times have done during the course of the quarter and whether some of the booking strength is coming from better visibility your customers are giving you as opposed to volume?

A - Martin Slark

When you look at the lead-time when you look at inventory in the channel, actually our distribution bookings that we have good visibility on through the link computer systems are actually remained very low. And so, we don’t believe it any of the increase in bookings today is resulting in increased inventory in the channel, and at the OEM and CM level, certainly that’s we haven't seen any built up in inventory either and seems like people came out of Christmas, in reasonably good shape, inventory wise. And if you look at our days of our lead time, we have actually seen the lead time days expand out a little bit, because we are seeing some capacity issues, in some of the micro miniature and memory Cost type products because of the strong demand.

Q - Jeff Rosenberg

Just you don’t think that related to – has that generated extra bookings, do you think or it’s still we haven’t got any response for that?

A - Martin Slark

No, Jeff I think you went back to the pre 2000 time when people were placing double order to get secure capacity we are talking about marginal changes here not dramatic changes.

Q - Jeff Rosenberg

Great, thanks a lot.

Operator

Your next question comes from the line of Michael Walker with Credit Suisse.

Q - Michael Walker

Thanks, good evening. Just a little bit help on the guidance here for the March quarter, you were saying that revenues will be roughly flat as sequentially offsetting gross margins flat to down, a little bit, like you guiding earnings could be down about $0.02 versus $0.03, sequentially, that would imply some kind of disruption below the gross margin, might you have restructuring gains which should help you as well. I guess I am wondering if you turn us in that, it is going to be up for others that been out interested tax incurred?

A - Martin Slark

Let me do this, let me ask take Dave Johnson to walk your through the components about our guidance. As you can see from Q2 to Q3, what we anticipated will happen on the each line of income statement, so you can get a clear understanding of that.

Q - Michael Walker

Great.

A - Dave Johnson

Starting at the revenue you are right, we think the revenue will be roughly flat versus the second quarter gross margins flat to down slightly, our SG&A will increase as you know we got the $2.7 million benefit that was taken in Q2, even when you add that back you still see an increase. The percentage of revenue you know it will be in 23.5 kind of range as the percent. Our tax rate will not change, interest will probably trend a little bit just about where it is, in the second quarter and that gets us roughly the midpoint of our guidance.

Q - Michael Walker

Okay that’s helpful. My second question is again on the visibility in the handset business, a year ago when you did have the problem with inventory build up, you didn’t say anything about it until you figured Qs came out late March, which a few months away. So, the question I have is were you seeing that inventory build developing by late January, if not, could you just help us understanding your conviction around, that not happening again this year?

A - Martin Slark

So let me ask Liam to address that because there is some history attached to, why we weren't able to talk about that earlier last year.

A – Liam McCarthy

Just the complete a little bit more on ideas to, we said earlier that one of the areas that we expected to see seasonal slow down is the area that you just have to go. Mobile phone is a very profitable area from Molex. So, I think you can look at our forecast for March in that area is lower as we said, and I think that has, I think back down on the profitability line. In terms of price rise I think we identified the slowing about mid February, mid February we were in a position where we couldn’t at that time of released the December statements. We started to see as we move to the end of January in the February events are large, couple of large OEM’s in terms of sound pop business, we are just not taking, through their subcontractors the level of business that we had expected and they had forecast. And that was where we first started to see signs of what it is usually a bit of a softer period in consumer type products, one where you got companies coming out of the post Christmas slowdown turn into what was the inventory corrections. So, we did identify it I think somewhere in the mid, the beginning of February. We are not in mid February yet but I can tell you that our antenna in terms of watching for is how long it was last year. And we are spending a lot of time as Martin said with feel OEM’s, checking with them and I think Martin sighted that they continue to tell us, but their forecast are good and they have a very good sell through, which I think is a stop to build the inventory. So that is our view as we see here today.

Q - Michael Walker

Okay, thanks. And I have one last question, if I could it is more of strategic question around the use of cash. You've obviously used your hoard of past to buyback stock to dividends for quite sometime, my question is, do you some competitors that are growing and multiples of what you are right now? And I am wondering if it might make sense to start using the cash to grow faster instead of buyback stock, are do you not really see any opportunities out there, right now to get your growth back towards double digits?

A - Martin Slark

I think when we looked at the cash balance, let me on answer that in two ways. First, we do believe that we need to get more of that cash back to our shareholders, I think that’s why over the last year or so, we increased the dividend and we increased the buy-back, we also continued to look for potential acquisitions and its certainly we could use the cash for that purpose. What we -- but I think that a we are saw a slowing in some of the areas that we sold into last year, I think we demonstrated over last few quarters that we are building momentum in some of our business and our goal would be to reinvest some of that cash back into the business. So, I think continue to assess how we can best utilize it.

Q - Michael Walker

Okay, thanks a lot.

Operator

Your next question comes from Thomas Dinges with J.P. Morgan.

Q – Thomas Dinges

Hi, good afternoon guys, a quick one for you Martin, where you talked about some of the things in your data market that were weighing on you little bit, are you completely through exiting the all the low margin biz that you talked or is there a little bit more of a trend here and is that also weighing a little bit on the margins and then also on the notebook side, is this likely one of the areas seeing as margins to come down for one of that customers that you serve there where, may be there still is a little bit of excess pricing pressure and therefore it is a lot more imperative on you, to introduce new products and then have another follow up question.

A - Martin Slark

Okay, let me ask Liam to address if the question generally about the product tuning that we are doing because I think it is a good example of how we had used in FAT system where we have globally to look at our margins and I think part of our intention going forward is to make sure that we are focusing our energies on the higher margin opportunities that exist within the business and then we will come back and revisit your question of the local market.

A - Liam McCarthy

Yeah, I think in the area of margin improvements it is not confined to just one particular segment that some of the opportunities cost for. Yes looking at the data there are some opportunities, I think we IP type business which that you EMEAs ignored, OEMs and gross margins which we taken some action on this quarter that might have had a little bit of an impact but overall there are margin improvements clearly the revenue growth overall helping to increase our options to restructuring efforts, is a positive impact. We continue to invest heavily in the new products and that is helping our distribution products as well spread through the different industries sectors. We are targeting some pruning, and the fact that is improving and opportunities pipe lines CRM is improving it allows us to focus and making more and some set of margin opportunities and less, under less pressure from the when you take and some pressure on the margin of business. We’re expending our operation in Asia and the output and our capacitating our revenue contribution information, is helping to improve our ODMs. But in particular then I think all regions and all plans are very much focused on looking at some specific areas of ODMs, such as in looking at the SKU and we have parliament that has been mending all the functionings, where we have high variety of part members contributing not may be not a lot to be positive situation, so we were looking at rising the MLQs and we have raised MLQs this quarter and we will continue to do so through the course of the year on lower margins, high-variety low-volume type of business. Similarly in our customer, looking at our customer profile and you have opportunities in our customer profile may be to shift more and more in you have opportunity in our customer profiles may be to shift more lower and lower volume type customers through distribution channels which should be inline with our distribution strategy and also inline with our strategy focusing more on our major customers to improve strategy (ph) etc.. Martin has already talked about the issue of slowing down price erosion which is a positive factor in terms of margin improvements as we invest in need and productivity improvements and we are also looking at some selected price decreases in some areas across the business and remote environment but we needs to get that. We have worked extensively hard to protect our customers summer increase, plus we have to face also the realities of the commodity markets and the materials so that we could pass the price increases well at this time. So, we are in the process of working through with the customs. As about much as I can see our margins, we are working aggressively in all regions and we are trying to improve the ODMs and of course margin.

A - Martin Slark

I think just that quickly adding relative to the notebook market there are clearly some commodity IO products in the notebook market that are very hard to differentiate on anything other than price, but if you look at some of the higher end notebook models and some of the newer products that are coming out our plan would be to continue to get design in the those applications with some of our new socket products, some of the new antenna products particularly with the trend towards portability of those devises and I think try and derive a better margin profile across that end market.

Q – Thomas Dinges

Okay and then real quick one a bit of a longer term question, Martin yourself has been with Molex for long time as many of the other senior members of the management team you have through a lot of different cycles with the company and more importantly you have been through a lot of consolidation in the industry we have recently seen were the largest electric company is an announce that they are going to become a new public re-trader company somewhere near in the future, you have seen the third largest company out there, change hands over the years, as you seen there have been flows in the consolidation phase in the industry, would you view these as greater opportunities for you to entrench competitors or is it a little more difficult than that, you don’t see it is too much of an opportunity good for you say over the next year or so?

A - Martin Slark

I think when I look at that, what he said over the last 30 years our industry has seen a lot of turmoil but I think if you look in the last year, we’ve seen more than we have over the last 5 or 6 years. When I look at the period we are in now I actually view it as an opportunity in that it is clearly going to be some uncertainty and instability in the number of those organization because of the changes they are going through and I believe that the stability of Molex, the fact that the market condition seem to be reasonably positive, the fact that our big strength has been in the consumer markets which seems to be growing now and also the factor we certainly have a balance sheet that would enable us to invest aggressively in new opportunities. I would not want to be sailing into the next year with now some of the debt that some of our competitors are carrying. Our culture as a company has been to be conservatively balanced and I am excited about our position right now. We obviously have a lot more work to do I would like to see it’s grow faster and I would like to see us continue to drive up that margins but I think if you look at the progress for the first 6 months of the fiscal I think we've done some good things, I think we have lot more to do and I think the uncertainties in the market creates some opportunity’s and our strength gives us the chance to hopefully exploit those.

Q – Thomas Dinges

Thank you.

Operator

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

Q - Yuri Krapivin

Good afternoon everybody, question on your restructuring program. I believe the original plan was to eliminate 1400 positions and then to hire 800 people for a net reduction by 600 positions. I am just wondering what has been done at this point, how many positions were eliminated how many people were added if you could talk little about that?

A - Martin Slark

I don’t think, we will talk about that on the this call, only because when you look at our overall headcount numbers with which we certainly looking yesterday, during that same period, we have been expanding our operations in Asia and obviously the total headcount will increase as the result of that given the growth that we were seeing there strictly the expansions we've had in China we are now at the point where over 70% of our work force is now in low cost labor countries. What I can tell you if it you look at the four locations where we were trying to reduce headcount the positions that we have planned to eliminate will be all eliminated on schedule and we are actually adding back slightly less than the number we have planned in the location where the business is being moved to but when you look at the total headcount number you really get a distorted view because we have added significant number of people particularly in China

Q - Yuri Krapivin

Okay fair enough, and then a question regarding the automotive market, could you discuss your progress there in terms of penetrating the Asian transplants to North American?

A - Martin Slark

Yeah, the honest answer to that question is to struggle, but we have formed as you know years ago a separate automotive division in Japan, which is headed by Dr.Harry (ph), is one of our most experienced managers there. And we are excited that we have started to get our first wins of people like Toyota and Honda, and what we have to do in those companies is as you will not get design win here in North America, we have to get win in Japan first, and then we will enjoy that business as those models are transferred overseas. We just started to scratch the surface of that market but from the zero position three years ago I think we have made some good stride.

Q - Yuri Krapivin

Okay Thank you.

Operator

Your next question comes from the Kevin Sarsany, with Foresight Research Solutions.

Q - Kevin Sarsany

Hi, good afternoon. I was wondering if you could touch on the acquisition environment out there I mean most of the big players top ten, top twenty are always looking for acquisition, I think one of the biggest hurdles has been willing seller as, can you comment on that environment and are you seeing small guys, big guys and also the evaluations that you are looking at for before purchasing these companies?

A - Martin Slark

There are still today despite the consolidation in the industry a over a thousand connected companies world wide, the top ten companies in the industry controls something like to 60% of the market, and what is happening is that the industry aside from acquisition is consolidating by itself, in that the leading OEMs are buying more and more of their products from global suppliers like Molex that can serve this band with a broad product range on the worldwide basis. All along with you is that we can don’t want to acquire of the company’s clearly to add revenue, and so our focus has been to acquire new technologies or penetration into new markets, and what we try to evaluate very often in those situations is can we develop the technology less expensively in house versus acquiring a company which offers all the world to come with it, because integrating a sizeable acquisition has a large number of challenges particularly when you are trying to integrate into a company like Molex that has unified systems around the world etc. Evaluations I can't comment on those because it various widely around the world and there is lot depending on you state of that company we are looking at. What I am trying to tell you is we look at a lot of companies but don't find too many that are very attractive.

Q - Kevin Sarsany

And I have a follow up on CapEx obviously you floating a lot of new products where is the most for that CapEx going regionally and could you also talk about the average product lifecycle, by region if you could put brackets around it?

A - Martin Slark

The vast majority of the capital expenditure as David said it was to understand is 70-80% of it is going into either capacity editions or new products as the regions that is getting the most of that capital on a pro-rata basis and would be our regions in Asia. And in addition the new product investment in Asia that is the only place where we are adding bricks and motor we have closely double the size of the factory in Shanghai and broken ground on a new plant in Cheng Du in the west of China which is actually further reduced our costing in China. I really can’t break it down in any further than that, I think that is about the level of collection we could actually spoke about over hope.

Q - Kevin Sarsany

Okay I guess quick follow up that’s related to the CapEx and the implications on longer term, which is including, can you put a dollar figure on that and kind a quantify at least describe the criteria of end market that your are focusing on or just how you go about deciding to prove something?

A - Martin Slark

Liam will give you some feedback on that.

A - Liam McCarthy

We have a product pruning process its predominantly it’s really a discipline that we have with the product management group throughout different regions to look at their products see to recognize some products coming through. On economic space at the end of life and theatrical for that process on a monthly and quarterly basis and we try to provide about a six month notice to our customers so that we can allow them to take alternative actions and put an end of live inventory in place. Our focus in really across all regions and on all products, its not confined to any one particular region.

Q - Kevin Sarsany

Are your seeing any specific trend may be more in telecom technology order or any thing like that?

A - Martin Slark

No. I think one of things you have understand with our products is very often we will introduce a new product through a major player in a given industry segment and that same product is then modified or resold to other players in same industry or in many cases it goes on to be sold in other end market so for example some of our original board to board products that started off in the camcorder ended up in notebook computers and then now ending in cell phones so when you talk about the life cycle of the product. The life cycle in an individual cell phone might only been nine months but that same product can be used in multiple applications and multiple different end markets. I would say the average cycle of one of our products is probably in the 4-5 year range but we have some products today we are selling that have been in the market for 20 plus years, so you have to do a case by case and there is no I think any simplistic answer to that question.

Q - Kevin Sarsany

Members, thank you

Operator

Your next question comes from the line Philip Meyer with ASB Advisor.

Q - Philip Meyer

Good evening I am encouraged that you have decided to put up ROIC in your presentation and I have question related to that, I am curious about what you think the appropriate or what the goal might be for ROIC over the long run and how you think you might get there between the numerator and denominator, how much is margin improvement versus capital management and then as the follow on related to that on the CapEx side I look at you versus the only sort of larger competitors out there and note that you are spending about 9% of your revenue and capital expenditures while Amphenol which branched did act acquisitive is spending 3 or 4% and Tyco is spending about 4% and your EBITDA margins are about the same as Tyco and a little bit less Amphenol so I am curious about what is different about your business that requires so much more CapEx? Thank you.

A - Martin Slark

Let me ask David Johnson to answer the question about from our ROIC metric where we see that going and then I will try and answer the question about capital intensity of our business.

A - David Johnson

As we put it out for the end of this year we believe we will be about 10% in that metric and that in this period of time is driven mostly by improvement in the top line, as we look forward though in the next several years and for a longer term goal we believe we'll get that metric up above 4% and the range for the 12% to 15%. We believe that are our cost to capital is roughly 12% and that will be a combination of both top line improvement margin improvement as well is becoming more efficient in our products, we are reviewing our new product induction process we believe that we can and will become much more efficient in that area and we believe as we've grown the lot in the past with view facilities now we are investing mostly in Asia and mostly in equipment for capacity and believe we'll see some good improvements on the denominators as well moving ahead.

A - Martin Slark

I think when you asked the question about the capital intensity of our business and compared Molex to connecter company’s, I think you are correct that some other company’s has grown faster and that growth has come in some way form acquisition \s and instead of spending money internally I bet they have gone out and acquired companies I think also this is different in terms of the end markets, that both company’s service, Amphenol in particular does a lot of business in the Military and industrial markets and with screw machines type product were the cost of tooling rose, it is less significant and in some cases between the military market the lifecycle is longer, so it ends up being less cap intensive. I think is the industry continues to shake out and start to see a smaller number of larger players I think that you are going to see a more consistent rate of reinvestment from all of those company’s in one way or another having settled with that I think certainly one of the challenges that we accept is that one of reasons we started to show this on our ROIC Metric is that we want to get more efficient with the way we speed our capital on and so I think that is certainly a reasonable challenge to pose to the one that we have to work on but I think if you look at the difference today in the level of capital investment a lot is driven by the end markets and the product that those company’s manufacture.

Q - Philip Meyer

Have you saw it about what a goal for that particular metric might be or you are satisfied with where it stands today?

A - Martin Slark

No and we not satisfied where it is today but I think our goal is as Dave said would be get it to attempt the third level this fiscal and I think part of our guidance for the following fiscal year would be will be to talk about where we think we take that longer term.

Q - Philip Meyer

Yeah, no I am sorry I meant CapEx, sorry.

A - Martin Slark

I am not sure I would really like to think about that question because I am not sure that I am our current level of reinvestment is way too high, which I think some people might think that I happen to see for a big strength of Molex today is the number of new products we bring out I think the percentage of our sales have come from new product is high a bit lot of the other people and I think our leadership position in a lot of the leading multi national company’s around the world who drive technology is a strength and I think our balance sheet, I believe to invest in that technology is a core strength to the company and our strategy as a company of our 60 history has been to reinvest in a more aggressive way so that we are competitive and be a technology leader and that’s certainly something that we don’t want to give up.

Q - Philip Meyer

Thanks very much.

A - Martin Slark

Another good news there is that as Dave said earlier 80% of this capital which we are spending is really dedicated to new product or areas where we are capacity constraint, you would not have seen a number like that 4 or 5 years ago, need much higher allocation towards infrastructures and brick and mortar and things like that so I think in the future a higher percentage higher capital is going to go into things like the new product and those are higher profitability and they are more quickly converted into revenue profits and is the entire level of cap spending.

Q - Philip Meyer

Sounds good. Thank you very much.

Operator

Your next question comes from the line Carter Shoop with Deutsche Bank.

Q - Carter Shoop

Thanks. In addition to having CapEx to sale and R&D to sales ratios that are well above your peers in many other industries, your SG&A to sales is there also and well above, I mean it appears and much higher than composite of groups and the semiconductor passes in the PCB industries, I was wondering what you guys have done over the past year to analyze that SG&A cost structure and what perhaps you are looking into take work that lower over the next three years?

A - Martin Slark

You Carter, I think we've thought about this, that we are heading towards a model that we advanced to investors out there working in a gross profit margins to say 36 type range and getting back towards of 14% operating margin and the SG&A that we are deriving to on a longer term basis is about 20%, we are not there yet, that is not something which you do over night but I think the statements you made at the beginning absolutely correct, we recognize that I think that’s what our restructuring is aimed at and that is what we are working on and some of the restructuring as you know or nearly all of it is coming US and Europe areas where we can take out SG&A because the customers have taken our business as they moved to the Far-East so we are working on it, i think we share the concerns you have said but I think on days to fight, how we are bringing the SG&A down.

Q - Carter Shoop

Even if you could get it down to 20% you are going to well above many other components factors and for a compositive semiconductor manufactures internationally, in the areas that are expanding, there are looking on SG&A sales about 15% you are targeting 20% why should we get that lower and may be it will helpful if you could break out the SG&A into different segment be it overhead, IT for structure etc.,

A - Martin Slark

I am just not prepared on this call so we will analyze are diversities in the semiconductor industry but I think we've been quite in saying what we think we can drive to and that is the 20% and…

Q - Carter Shoop

Why can't we get it lower than that, somewhere closer to where your peers are?

A - Dave Johnson

I think our view of that is that a big portion of our business comes from supporting global multiracial customer, we have an organization in place that supports those companies worldwide with locations all around the world.

Q - Carter Shoop

With your competitors do that also?

A - Dave Johnson

Second, and we think we have significant strength in the that organization I think the restructuring that we deal with price right now we would take some of the excess cost we had out in North America a year. I think our IT cost I can tell you our IT cost is a percentage of our revenue that are actually running it about 2% level so that I can tell you from comparisons with other companies it will cross I think we will have to do in a longer run look at can we move to smaller number of larger more integrated plants around the world particularly in the low cost labor areas that would help as give us a lower cost structure but I think when we look around where we are today what we are driving towards is that 20% goal I think we need to get there first and then we will talk about what we might do beyond that point.

Neil Lefort, Vice President, Investor Relations

I think we can take one more question if it is out there, I am not asking for one but if it is out there we will take one more question and then I'll be available and if anybody wants to speak to the other guys I can set that up, if you another we will take that.

Operator

Okay your next question comes from Jim Suva with Citigroup.

Q - Jim Suva

And quickly can you remind me of the normal ASP erosion that you expect to see I think it is in the neighborhood of up to 3% or 5% and kind of what you are actually seeing now which I believe meaningfully better thank you.

A - Martin Slark

The normal ASP is in the 5% to 6% range I would say that is the average we are seeing in the last 20-year in the Industry, what we have seen annualized for the last six months which is closer to a 3% level.

Q - Jim Suva

Thank you, very much.

Neil Lefort, Vice President, Investor Relations

Just in closing I wanted to remind everybody that on January 31st we are having what we termed a half year analyst meeting in New York starts at 9.00 ‘o’clock, it runs from 9.00 to11.00 if you are interest it is the 31st and you could certainly contact us and we'll make you aware of where it is. So with that we'll close for the night, thank you everybody, we think we had very very good question and I'll as I said be around for a little while if anybody has follow on questions. Thank you.

Operator

Thank you for participating today’s conference call, you may now disconnect.

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