Molex Earnings Call Insights: Gross Margins and Price Erosion

Molex, Inc. (NASDAQ:MOLX) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Gross Margins

Amit Daryanani – RBC Capital Markets: Couple questions. One, just on the gross margin side, I hope you could just talk about on a sequential basis, it looks like sales were up 3.5%, the mix I suspect was favorable given, you had less mobile devices sales, but gross margin remained flat on a sequential basis. So, maybe you could talk, what is the offset in the gross margin line to better revenues and mix in the quarter?

David D. Johnson – EVP, Treasurer and CFO: The mix of aspect of the change sequentially was due to two things we talked about really the reduction of our complex Connector business, which at standard has a, of course, a lower gross margin, but the fixed costs that are embedded within that business impacted us in the quarter and the same was true for the antenna business, the antenna business was much lower than expected and the fixed costs in that business as well, even though both are lower margin than our average business that the result of those businesses being well below expectations is the mix that we’re talking about.

Martin P. Slark – Vice Chairman and CEO: Amit, I would think about it in general terms, in terms of basically, is to underutilize capacity in those two sectors.

Amit Daryanani – RBC Capital Markets: And then, maybe just on the mobile devices market, I realize some of the softness is just partially a pause ahead of some of the ramps. But could you talk about – are you seeing your order patterns pick up after June 30 because the orders look like they were down quite a bit as of June 30 in that business segment as well. And to the extent you can talk about what you are seeing within smartphones and tablets separately, that would be helpful as well…

Martin P. Slark – Vice Chairman and CEO: As I said in the commentary, the June quarter was surprisingly weak because what we normally see is customers launch new models coming out of the Chinese New Year and then start the ramp in their production, and that normally holds strong all the way through the October period. This year I can only guess a combination of number of things, one is, I think a certain amount of market saturation. Secondly, I think that it appears that consumers seem to be buying the older models and there isn’t enough new functionality in the newer ones to drive the demand of those. There seems to have been some inventory in the channel, particularly of subassemblies and things like that. I would say that, so we’ve seen that market significantly weaker. If you look at where we are today, what we’ve seen since the end of June is that the order pattern has picked up in the same way we expect that to pick-up in the March April time frame. It seems to be picking up now, so the past inventory issues have been resolved. Generally, I would tell you that the smartphone segment is better right now for us than the tablet segment.


Price Erosion

Mark Delaney – Goldman Sachs: I guess I was hoping first to follow up on the margins. If you could provide a little bit more color on your comment about seeing some increased price erosion.

Martin P. Slark – Vice Chairman and CEO: Actually, we’ve seen a tiny bit, but think about – we’ve often talked about the fact that the price erosion in our market is typically in the 3% to 5% range. And as you know, since we put in our new pricing system, we’ve been able to drive that down closer to 2%. In fact, it was under 2% for much of the year. It seems in the last quarter that was ticked up slightly, but is still below a 2% which based on historic trends is still pretty healthy.

David D. Johnson – EVP, Treasurer and CFO: And Mark, the other factor that we talked about in the prepared remarks was that we had some asset retirements also in the quarter. The impact on the quarter was about $2 million for the asset retirements, so that also had an impact on the margins for the quarter.

Mark Delaney – Goldman Sachs: And then Dave, I heard you make your comments on commodities starting to help on the margins and I would also expect weaker yen I would think would help you as well. So, how much of the commodities and weaker yen is currently your margins and then how much further beyond the September quarter, if you assume those stay constant, how much more benefit do you think you could get in terms of margin help?

David D. Johnson – EVP, Treasurer and CFO: Well, first on the currencies, yeah, you’re right. The yen has helped us somewhat. Other things have offset that. When you look at the translation and transaction impact, they offset each other and I’ll give you – they are about $4 million in each direction, so we had a transaction impact that was positive offset by the translation impact that was negative for us because of the yen. So, converting back to U.S., we have less profit from Japan because of that. So net-net, for the quarter on our gross margin, there was really no impact. We have not assumed that there will be any impact also in our guidance. On the commodities, however, we saw – as I said, about $3.5 million benefit in commodities in the quarter. We would expect that to be another $3 million to $5 billion in the next quarter sequentially. So, we are seeing the gold and copper, especially gold is quite a bit below where the average was for Q4 now and it still takes about a couple of months for that to roll into our results, but our best estimate now is maybe $3 million to $5 million of sequential benefit in the September quarter because of commodities.

Martin P. Slark – Vice Chairman and CEO: If you look at the average market price a year ago to where we are today for us, gold is down about 12% and copper is down about 9%, and it takes a while for those commodity prices to come down but that to then be reflected in what we are buying and in our material cost of what we sell. We saw some benefit of that in the back end of last quarter and it seems to be flowing through as Dave said into the current one.

Mark Delaney – Goldman Sachs: Just lastly from me on the mobile device segment, do you think that’s all weaker end market sales and inventory correction or is there any share loss that’s causing your weaker sales in that segment?

Martin P. Slark – Vice Chairman and CEO: No. We are not aware of any share losses. As you well know it has been a strong segment for us and we have a good position with each of the industry players. So, we are all aware of that. I think a lot of other people have also commented on the weakness in the antenna sector. I think you are seeing, particularly in the tablet market, that people are not putting 4G antennas on those tablets, they are just loading them with WiFi antenna. So there is a lot of moving pieces in that market, but we believe our designing position is strong. I just think the production volume this quarter were weaker than planned.

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