China is one of VeriFone Systems Inc.'s fastest growing markets

Mr. Hayes says that in anticipation of rising labor costs, the company will likely ramp up automation efforts in its factories in China. For instance, UTC has replaced some workers at a smoke-detector assembly factory in Guangzhou with machines that place components on boards, says Mr. Hayes. The machines, while expensive, eliminate labor and drive productivity, he says. As labor rates increase, Mr. Hayes says, automation would help in reducing the size of its work force in China.

UTC is also looking at factories in Vietnam and Malaysia as China becomes less competitive on a cost basis, he says. But moving production to other countries can be costly, can expose UTC to currency fluctuations and is a lengthy process, says Mr. Hayes. "Unless we saw a dramatic increase on labor costs, it would be very difficult to move factories," he says.

Because of competitive pressure, UTC isn't considering price increases.
Harman International Industries Inc., an audio designer and manufacturer, buys about 25% of its parts from Chinese manufacturers. As contracts expire, the cost of such items will increase, so Harman is looking at suppliers elsewhere, and its research and development team is looking at ways to substitute some of the parts, says CEO Dinesh Paliwal.

Harman is also working with its Chinese suppliers to help relocate them to other parts of China where wage inflation isn't as severe. He's already persuaded some component manufacturers and magnet makers to move to Western parts of China where costs are lower.
Still, Harman is gearing up to expand in China, opening two additional factories this summer, adding 460,000 square feet of capacity and 1,100 more employees. While labor is more expensive than in years past, and rising under a stronger yuan, Mr. Paliwal says the opportunities for revenue in China outstrip the rising costs.
Indeed, an appreciating yuan may be a boon for China's growing middle class and the multinational companies selling products to them. U.S. exports to China totaled $92 billion in 2010, more than double the $41 billion exported in 2005, according to Department of Commerce data.

China is one of VeriFone Systems Inc.'s fastest growing markets as consumers build wealth and adopt credit cards, says Doug Bergeron, CEO of the electronic-payments company.

Still, Mr. Bergeron says he's willing to raise prices to offset an increase in export costs. "There's no question we'll pass it along to preserve margins," he says.

Quiksilver's CEO Discusses Q2 2011 Results - Earnings Call Transcript

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. [Operator Instructions] I would like to remind everyone that this conference is being recorded. And now, I'd like to introduce Bruce Thomas, Quiksilver's Vice President of Investor Relations, who will chair this afternoon's conference.

Bruce Thomas

Thanks, operator. Good afternoon, everyone, and welcome to the Quiksilver's Second Quarter Fiscal 2011 Earnings Conference Call.

Our speakers today are Bob McKnight, our Chairman, President and Chief Executive Officer; and Joe Scirocco, our Chief Financial and Operating Officer.

Before we begin, I'd like to briefly review the company's Safe Harbor language. Throughout our call today, items may be discussed that are not based on historical facts and are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In particular, statements regarding Quiksilver's business outlook and future performance constitute forward-looking statements, and results could differ materially from those stated or implied by these forward-looking statements as a result of risks, uncertainties and other factors, including those identified in our filings with the Securities and Exchange Commission, specifically under the section titled, Risk Factors, in our most recent annual report on Form 10-K .

All forward-looking statements made on this call speak only as of today's date, and the company undertakes no duty to update any forward-looking statements. In addition, this presentation may contain references to non-GAAP financial information. A reconciliation of non-GAAP financial information to the most directly comparable GAAP financial information is included in our press release, which can be found in electronic form on our website at www.quiksilverinc.com.

With that out of the way, I'd like to turn the call over to Bob McKnight.

Robert McKnight

Thanks, Bruce. Good afternoon, everyone, and thanks for joining us for our second quarter conference call. I want to start by saying that we're very pleased to have exceeded expectations for the second quarter despite several natural disasters that have unfortunately, impacted the Asia Pacific region over the past few months. Our Americas and European businesses delivered very solid performance coming at ahead of plan and offsetting the near-term impact of these natural disasters.

As such, I am pleased to report solid second quarter results that were better than we expected when the quarter began. Revenues of $478 million in the second quarter exceeded our plan, and were up when compared to the second quarter of 2010. Gross profit of $262 million was up 5% this quarter compared to a year ago, demonstrating that our business is performing considerably better. Gross margins expanded 160 basis points to a Q2 record, 54.8% of revenues as we benefited from continued improvements in our U.S. retail stores and less discounting in the wholesale channel. Pro forma adjusted EBITDA was $62 million in the second quarter, in line with last year, as gross profit gains were offset by increased spend ahead of revenue generation. And finally, our net debt at April 30 was $594; million, representing 2.9x pro forma adjusted EBITDA, as down 19% over the last 12 months, reflecting the enormous progress we've made in improving our balance sheet.

Taken together, the solid second quarter performance resulted from us continuing to do what we do best: Developing and delivering exciting, innovative, authentic, quality products and connecting with our consumer base with creative and impactful marketing campaigns. Signs of improvement are evident in many areas of our business and we believe we are well positioned to capitalize on growth opportunities within our 3 strong global action sports brand and our many markets around the world.

Our European business performed better than expected in Q2, despite weaker sales in markets such as the U.K. and Spain. Our business is much better now in France and sales were strong in our emerging European markets where investments made to further develop our business are driving profitable growth in all 3 brands, Quiksilver, Roxy and DC, are doing well.

On the European retail front, we're delighted with our new concept stores. We've had great reaction and strong performance from the new store formats in these core markets of Capbreton and Hossegor in Southwest France, as well as the incredible Bercy Village store in Paris. These stores feature broad offerings from each of our brands, together with a deep stock of surfboards, wetsuits, skateboards and other products that reinforce our heritage and authenticity to the consumer in a way that other brands simply cannot.